May 19, 2013

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Writing Off Bad Debts on Your Taxes

May 10, 2013 By

Writing off bad debts is always an inevitable part of any business operation. Whether one likes it or not, there are points in business when you are forced to write off a debt, especially when a client fails to pay for a service rendered. A typical case could be where you agree with a client that you will undertake a service at an agreed fee only for the client to fail in meeting his or her side of the agreement.

Writing off debts in a business needs a business operation that is genuinely honest. Your accounting needs to be spot on and you must keep good track of any profits and losses. If you incur a loss of $1,000 when using the cash basis model of accounting, it is only logical to say that you cannot deduct a loss twice. This means that you will not report a sale because the value of the sale or service you have given is zero.

On accrual basis, you only have the sum lost recorded in accrued revenue, thereafter you write it off. The difference in this case is zero.

For example, assume that you had provided the service based on a contract worth $2,000, and had hired somebody to do it for let’s say $600 while using office equipment worth $400. These expenses you incurred while undertaking the contract will be deducted from the $2,000. In this case, it means you might have had a profit of $1,000. The IRS does not allow anyone to deduct their profits from a bad debt. Your taxable income would have been $1,000 but in this case, it is a loss of $1,000 but you cannot deduct it from your taxable income.

In any contract, say one involving offering a service, you must’ve spent time. If you had spent a total of 2 hours while your hourly rate is $200 per hour, it means that you might have walked away with $400. The next mind boggling question that you might ask is; how do you treat the $400? You cannot write off the value of time that you spent working on your contract.

IRS does not recognize time that anyone spent doing a job for a client. If you incur bad debts with your time, then you are the sole bearer of the losses that you have incurred. The same principle applies in cases where individuals might have chosen to volunteer their services in a community project. The value of time you spend in services means nothing to the IRS. The IRS will only consider the value of the supplies that you might have used to perform such services. For example, the cost of gas that you used in the vehicle used while engaging in a volunteer service delivery.

Bounced checks that are never redeemed by clients should also be treated as bad debts using the same procedure. When using the accrual accounting model, the same procedure of writing off bad debts applies. For sole proprietors or those who are filing tax returns for corporate businesses, your bad debts will be handled in Schedule C when you are filing tax returns.

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Money Saving Tips with Your Taxes

April 30, 2013 By

Taxes can be burdensome, especially if you are unable to pay. You can trim down taxes using a number of tax strategies, which can best be realized with high levels of tax knowledge. Some of the strategies to lower or even evade paying taxes are discussed below:

Contribute to an IRA: Your retirement should be secured at all times, and when you invest in a 401k, you can tremendously bring down your taxable Adjusted Gross Income. This means that the more you invest into your 401K, the more likely you can cut on the taxes you owe the IRS. The deposited amount in the IRA grows year after year for which you don’t have to pay taxes. Ultimately, upon your retirement, you will be eligible to withdraw the net amount in the IRA at a lower income tax bracket.

Don’t Pay Your Student Loans Too Quickly: Do you have an education loan? Not paying it off immediately may benefit your taxes. Yes, conventional loans like credit card debts with no tax benefits must be paid off as soon as possible. But in this case, paying the interest of the student loan reduces the gross income that is taxable by the IRS.

Purchasing A House: Everyone wants a home and the IRS is willing to support you in realizing this dream. An investment made on a house can help you deduct taxes payable to the government. The loan interests paid for the house is considered as mortgage interest, which is tax exempt. Every year you pay interest, a large chunk of tax may be evaded. The amount paid for points are also charged on mortgage and is completely beneficial for mortgage related deductions.

Selection of Marital Status: If you are married, you have 2 options while filing tax returns; either married filing jointly or married filing separately. Single parents can file as head of households. The marital status plays a major role in determining the tax rate and standard deduction rate, which is higher for a single parent compared to couples.

Take Classes: College classes qualify you for the Lifetime Learning Credit. And if your income is beyond the range for the credit, you may have to opt for deductions in tuition and other fees.

Philanthropy: Each time you make a donation, save the receipts if you plan to claim a tax deduction. Also, you may keep records of health-related expenses and work related expenses.

Old Paid Tax Returns: In case you missed out of tax refunds from missed deductions, you have up to three years to amend your 1040 and claim a redund by filing a Form 1040X.

Talk to a Tax Pro: A professional will help you with right suggestion and offer best deals for maximum tax deductions, lessen tax fees, and also help you if you intend to claim tax deductions.

Ensure you choose a right tax attorney to do your taxes or use right tax prep software to prepare the taxes and e-file the tax returns. The IRS allows online filing of tax returns at no extra cost. Note that your economical progress will impact on your taxes. You may end up paying more taxes than you should if you don’t try to identify all possible tax saving options.

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Can You Claim Your Other Half as a Dependent?

April 23, 2013 By

Dating is a principal step that prepares couples for their future together as husband and wife. This brings in the question of sharing responsibilities, especially if one partner acts as the primary breadwinner for the pair. Taking care of your significant other is an extra expense to you, which could leave you wondering if your boyfriend or girlfriend can be claimed as a dependent for tax purposes. Well, there is no right or wrong answer to this, for there are many factors that must be met to have this happen.

Dependent Defined

According to the IRS, there are two “common” types of dependents; qualifying children or eligible relatives. A boyfriend or girlfriend is neither a child nor a relative. Does that mean that it is not possible to claim him or her as a dependent? Not necessarily. A relative doesn’t necessarily have to be blood-related, but can be through marriage or a legal decree. Non-related persons can still be considered as eligible relatives if they satisfy four other four crucial criteria:

·         Didn’t earn over $9,200 in the year (the amount changes annually with inflation)

·         Cannot be claimed as a qualifying child

·         Depends on you for more than 50% of overall annual support

·         Must have been a member of the household (lived with you) for at least 6 months

This means that if your boyfriend or girlfriend, or any other person meets the above criteria, then he or she could be treated as a relative and a qualifying dependent. Relatives, like parents in adult homes for seniors don’t have to meet the residency rule.

Other than the test, they have to be U.S citizens, aliens residing in the United States or should have partly stayed in Canada or Mexico for the year. However, one individual cannot be claimed by more than one taxpayer as a dependent.

If within a full fiscal you housed a girlfriend or boyfriend and you provided half of or more than their overall upkeep over the year, then they can qualify as dependants. However, this will only apply based on the limits of earnings as stipulated in the criteria.

You probably don’t have much to worry about if you are supporting your boyfriend or girlfriend. Single status of the person you are claiming is important, unless they are claimed by other persons who also pay taxes to the U.S government.

In some states, the law will reject dependency claims on your tax returns if the state’s law prohibits your type of relationship. It would be wise to check up on your individual state’s dependency laws.

You can also choose to talk to a tax pro to gather more information regarding claiming dependents.  

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Claiming Work Related Moving Expenses

April 15, 2013 By

With the currently high unemployment rate, it is very unlikely for most people to be able to pick and choose where they find employment, especially when securing employment somewhere near their homes. This means that you may have to move across the country to take up a job offer. As a result, you may have to hire a moving service or some other form of transport to transport you, your family, and your belongings to your new home. You can deduct these expenses from your tax return so long as the relocation is work-related and meets the set IRS requirements.

Mileage

You can take away gasoline costs for all the vehicles you are travelling with or use the standard mileage rate of 23 cents for every mile. Example; if you drive about 1,500 miles, and for every fifteen miles you consume a gallon of gasoline, each costing $4.5, then your overall cost for the journey will be $450. In this case, the mileage deduction based on the mileage rate amounts to 1,500 x 0.23= $345. You must however, keep the receipts because the IRS will only accept deduction claims that are backed by appropriate documents.

For the safety of your assets on transit, rent a closed vehicle with very strong locks. Also, you might want to insure the load but before you set off, record the content of the truck, cars, or trailer on video. You can deduct the insurance cover costs and video expenses, but don’t purchase a new camera for this hoping to claim a deduction for the camera itself, since you will still be able to use it after the move.

Hotel and Meals Expenses

Since you cannot drive nonstop, you may want to spend the night in a hotel before resuming the trip the following day. You can deduct the accommodation expenses, and if you have to use more than one hotel room, say for kids, spouse, or even domestic staff, just keep the records. This can even include friends who helped in the packing and unpacking of your household stuff to the truck and if you use air fare, you must justify that indeed it was the most affordable means of transport available as opposed to hiring a moving company.

You may also deduct the cost of meals based on the IRS per diem rates of $65 per day, for each individual in your entourage for expensive localities and $52 each day for other areas. Try to keep your rates low because outrageous figures are usually received with a lot of skepticism by the IRS.

To deduct moving expenses, you must meet the following requirements:

·         The relocation must be work related.

·         Distance test: The distance between your new job and your old home must be at least fifty miles further than your preceding job is from that home

·         Time test: If employed, you must work for 39 weeks out of the year (and 78 weeks for the self employed in 24 months) after relocation

You might want to find out more about this deduction from the IRS Publication 521, visit the IRS website or talk to a tax pro.

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Why You Need to File Your 2012 Tax Return

March 4, 2013 By

The IRS expects all individuals who earned any form of income in 2012 to file tax returns in 2013. This will however, depend on various factors like your age, the amount of income earned in 2012, the received income type, as well as the filing status. Even though you may not be required to file, you still might find it beneficial to go ahead and file. Filing a tax return makes it possible for you to claim some tax credits you are eligible for or even refunds if too much federal income tax was withheld from your pay by your employer.

Discussed below are five main reasons you might still find it necessary to file the annual return even if you are not obliged to.

1. Claim Refunds: Did you make any estimated tax payments? Was your federal income tax withheld by your employer? Did you have a tax overpayment the previous year that applied to the current year’s tax? If you answered yes to any or all of the above questions, then you sure will want to file your return to claim a refund from the IRS.

2. The EITC: You might be eligible for Earned Income Tax Credit if you earned less than $50,270 in 2012. This is reimbursed tax credit given to eligible taxpayers as a tax refund. Furthermore, you can be entitled to up to $5,891 if you have qualifying children. To claim this credit, you must file a tax return; find out if you qualify by using the EITC Assistant.

3. Health Coverage Tax Credit: To meet the requirements for this credit, you should be receiving payment benefits from the pension benefit guarantee corporation, alternative trade adjustment assistance or the reemployment trade adjustment assistance. Eligible taxpayers can get a 72.5% tax credit of the amount paid for your qualified health insurance premiums. Dependents and spouses can also qualify.

4. American Opportunity Credit: Are you, or do you support someone who is a student? The American Opportunity Credit is a partially refundable credit that benefits students in their first four years of post secondary education. You can get up to $2,500 via this credit, and even if you don’t owe any taxes, you may be eligible for as much as $1,000 for every qualified student. To claim, file the IRS Form 8863, Education Credits which should be submitted alongside the tax return.

5. The Extra Child Tax Credit: Parents with not less than one eligible child but don’t receive the complete value of the Child Tax Credit can be eligible for the extra refundable credit. To claim, file the new Schedule 8812.

For a comprehensive list of all income tax filing requirements, visit the IRS website. At the site, you will find filing requirements and guides on how to file crucial IRS tax Forms 1040, 1040A or 1040EZ.

 

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Deductable Moving Expenses

February 25, 2013 By

Summer is usually characterized with relocations that start immediately when school is out. If you are moving with your family to take up a new job or even the same job but in a different location, you may not have to worry about most of the moving expenses, as they can be deducted from your tax return. Before you make that move, understand the following tips from the IRS;

1. Time Factor: You can only deduct moving expenses if you moved around the same time you reported to your new job station, normally one year after the date you first reported. You are also required to work full time for not less than 39 weeks in the first year at the new job to qualify for the deduction. Self employed taxpayers must not only meet the above requirement, but also work fulltime for not less than 78 weeks in their first two years at the new job location to claim this deduction. If by the time of filing your tax return, you haven’t fully satisfied this requirement, but you anticipate meeting it in the near future, you can still go ahead and deduct. Read the IRS Publication 521-Moving Expenses for more information and special requirements and rules.

2. The Distance: The new job location must be equal to or greater than fifty miles away from the previous home than your last job location was from the former home. Example; assuming that your previous main job was located five miles from your previous home; your current main job location shouldn’t be less than 55 miles from your old home.

3. During the Trip: You are allowed to deduct lodging costs for yourself and the members of your household, but not meals. Furthermore, airfare, parking fees, tolls and vehicle mileage can also be deducted. Please note that you are only allowed one trip per person.

4. Household Goods: You can deduct the expenses incurred in packing, crating, and moving your personal possessions and household goods and even family pets’ shipping expenses. Also deductible, are storage and in-transit insurance expenses.

5. Utilities: Utility disconnecting and connecting expenses can also be deducted.

Note that you can only deduct expenses strictly incurred during transit. To work out how much you can take away, use the IRS Form 3903, Moving Expenses. If you are refunded the costs by the employer, you shouldn’t claim a deduction but if you do, include the refunded money as taxable income on your return when filing.

Finally, don’t forget to inform the IRS as well as the U. S. Postal address about your change of address. Use the IRS Form 8822 Change of Address to do this.  

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How to Claim Medicare B for the Self-Employed

February 12, 2013 By

If you are self employed, a partner in a partnership, or a qualified S-corporation employee, and you file a Schedule C or F with the 1040, you can claim health insurance premiums as an adjustment to your income. Most taxpayers include their out-of-pocket health insurance premiums to other medical costs incurred on Schedule A. To claim medical expenses refunds from your return, you have to meet the set 7.5% AGI-Adjusted Gross Income threshold.

All other above-the-line expenses are added to the other itemized deductions. The resulting sum of these deductions is compared to the standard deduction of the return where the taxpayer claims the higher amount. The choice between standard and itemized deductions is usually hard, even though there are some requirements that taxpayers have to meet to itemize. Note, medical expenses must be itemized to be deducted.

Self-employed taxpayers have other options they can turn to in claiming medical expenses on their returns. You are allowed to deduct health insurance if it is bought under the business name. For sole proprietors, the insurance premium has to be in your name. Prior to 2010, such individuals were barred from including the Medicare B premiums that normally deducted from Social Security. The instructions on the IRS Form 1010 and Publication 535 were changed in 2010 to create room for Medicare B deduction with little clarification on the changes.

Just like other alterations and legislations by Congress that are passed over to the IRS and other government agencies for implementation, this very change caused a lot of confusion and anxiety. Later, the Office of the Chief Counsel sought to clear the air on these changes. Initially, it was argued that Medicare B plan is a Federal program and not taxpayer’s insurance and therefore, had not been established under a trade or business. 

However, Chief Counsel ruled and qualified Medicare B as an authentic insurance under Sec 162(l). It therefore, qualifies for the Self-Employed Health Insurance (SEHI) deduction, joining other medical plans like the Medicare D (the drug plan), which has always been eligible to the special deduction.

Self-employed taxpayers who meet the SEHI qualifications can consequently enjoy additional medical deduction and lessen their tax burdens. Other than the medical deductions, self employed individuals can take advantage of other qualified deductions and tax credits they qualify for. For more information on this and other credits, talk to the IRS or a tax expert and claim the deduction if you qualify.

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Claiming the Educator Expenses Refunds

February 4, 2013 By

The IRS reimburses most work-related expenses to employees who submit reimbursement requests and expenditure reports when filing their taxes. The refund goes a long way in lowering the workers’ tax liabilities. It is unfortunate that most teachers, unlike other workers miss out on the luxury of claiming refunds for out-of-pocket expenses. This means that all expenses they incur in their line of duty are never refunded; neither by the schools they work for nor the IRS. But they do it anyway, for the love of their jobs and their learners.

Eligible educators and teachers are however, entitled to some breaks. It may not be much, but in the current economic times, every coin counts. Any qualified educator can deduct up to $250 of any costs incurred towards purchase of supplies, books, computer supplies, class supplementary materials, among others that were not refunded by the school. Only expenses incurred during the tax year can be claimed. Those with spouses who sustain out of pocket expenditures and file jointly can claim double the amount-$500.

Child maintenance expenses (alimony) are above-the-line deductions where you don’t necessarily have to itemize to qualify for the deduction. It is located on Federal Form 1040’s line 23 or line 16 of Form 1040A. It is possible to claim work-related expenditures over the set $250 threshold on Schedule A but they have to be subjected to the 2% rule-i.e. expenses have to exceed 2% of your AGI-Adjusted Gross Income. Remember that you can only claim the expenses once. Proper record-keeping is paramount if you plan to claim any refunds from the IRS; keep those receipts as Uncle Sam must verify that indeed, you incurred an out of pocket expense.

You are defined as a qualified educator if you are a teacher, an instructor, counselor, and kindergarten to grade 12 aides or even a principal. Furthermore, you are required to work for not less than 900 hours in a learning institution that offers either elementary or secondary education as defined by the state law. Parents who choose to educate their kids from their homes are prohibited from claiming the refund.
This tax break was last available in 2011, but missed out on the 2012 return. There are however, possibilities that it can be extended. If you qualify, claiming it can help add an extra coin in your pockets, especially after paying and filing your annual tax return.

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Using Your Home Renovation to Lower Your Tax Bill

January 28, 2013 By

Using Your Home Renovation to Lower Your Tax Bill
Power consumption and resultant bills at home consumes a large chunk of many people’s monthly utility budgets. However, you can lower your power bill by installing some energy systems like solar, water or electricity, wind or geothermal systems for your home and take advantage of the IRS 30% home renovation tax credits on Form 5695.

State-Specific Deduction

Different states have varied requirements for the energy-related relief-find out yours by visiting energy.gov. The website not only lists state tax rebates, but also other utilities and manufacturers’ guides that have been narrowed to specific cities, counties and even communities. This way, you can access more relevant information on qualified energy systems. Furthermore, it is also possible to establish whether the utility company you have in mind is interested in repurchasing your surplus energy production. This way, you can kill two birds with a single stone; generate some income in the sides, lower your tax bill, and claim the tax relief.

The IRS incentives have been designed purposely to bring down energy systems installation costs. As much as it is not possible to lower these costs to zero, you can possibly get over 50% of your expenses back.
Related Tax Breaks

This is not the very first time Uncle Sam is offering energy related tax breaks. In 2011, for example, a limited tax relief for residential renovations exceeding $500 was introduced. The credit initially covered installation of weatherproofing like double-paned windows, insulations, amongst others. Some states discontinued this credit, while others still offer it (find out from your respective state authorities if it still exists.)

Improvements Resulting in Medical Tax Deductions

There are a number of home improvements that can lead to medical tax deductions. If you live with a disabled person and choose to install ramps and railings or get rid of any obstructions in the home/house, install special bathtubs, pools or even spas for medical reasons, the expenses can be deducted as medical costs. The claim must however, be supported by written documentation from a qualified physician explaining the need for the improvements.

Bear in mind that medical costs must exceed 7.5% of your Adjusted Gross Income to be deducted from your tax return. In some cases, the improvements or adjustments may boost your home’s market value. In such cases, you have to cut the medical costs by the increased value. There are times when such expenses are reimbursed by the medical insurance or employer-don’t claim a deduction if the expense has already been refunded.

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The Revised Standard Mileage Rates for 2013

December 25, 2012 By

Christmas is finally here, and it meas that the New Year is just around the corner. With the new year, the IRS has made some changes, indicating that Uncle Sam is willing to cut taxpayers some slack with sharply increasing cost of living. Many motorists have complained about the increased gas prices, but with the biting inflation, it is only natural for the prices of everything to aim for the sky anyway. Americans love their cars and the changes in gas prices will never compel most of them to leave their vehicles locked up in the garages and resort to public transportation.

As a result of increasing gas prices, the IRS’s standard mileage rates will slightly be increased starting January 1, 2013. This should be some great news to many individuals who are struggling to have their cars on the road, running errands, businesses, or heading to work daily. The new changes might offer some reprieve to most struggling taxpayers.

• Business travel miles have been set for 56.5 cents per mile
• Driving in service of charitable organizations, say dropping your donations set at 14 cents per mile (no change from last year)
• Driving for medical or moving reasons, 24 cents per mile

Many would have hoped for a change in mileage for charity, but sadly, the 14 cents per mile remain intact in the New Year. Changing business miles as well as medical and moving miles is straightforward, as it is done annually based on inflation. This makes it easy for the IRS to work out the rates and make them effective in time. Unfortunately for charity, it is not in the domain of the IRS to fix, but Congress. The last time the charity mileage was changed was during Bill Clinton’s time.

One last thing: the IRS doesn’t dish out any credits, refunds, or qualified deductions out of the blue; you must present necessary documents. This means that you have to keep all necessary records (such as mileage logs) and produce them whenever they are needed to substantiate your claims.

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