May 19, 2013

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Plan for Tax Day with Proper Record Keeping

May 13, 2013 By

Most taxpayers heave a sigh of relief moments after filing their taxes, stash away related documents, look forward to their tax refunds, and wait for next year’s tax day. Though taxpayers have more than ten months to prepare for next year’s tax filing season, the majority suffer from procrastination; only remembering about tax filing a few weeks or days before the tax day. This poses the danger of missing out on important tax deductions, possible errors that could beckon an IRS audit, or even missing the tax filing deadline, which might attract hefty fines and interests.

The secret to successful tax filing lies in proper record keeping, which can best be achieved through the following three main ways:

1. What Are Your Possible Tax Deductions And Credits?

Tax payment and filing can be hectic, but they pay off if you claim tax deductions and credits you are eligible to. You must therefore, project any possible credits and deductions you are likely to be entitled for during the year. Assuming that you enroll your children to a daycare, you might qualify for a Child tax credit. Just keep an eye on your expenditures and ensure that you have the tax ID number of the childcare provider. The same applies to eligible deductions as a result of making donations to charities, use of business cars (where you have to keep track of the mileage by using a log), amongst others. You have to be informed about what will happen during the year to successfully keep necessary tax documents for easy tax filing.

2. Design a Filing System

A properly organized filing system is the gateway to stress-free tax filing. You must ensure that everything is organized by carefully labeling your files like “tax receipts” or related items. Similar documents must be filed in appropriate files, which have to be kept at an easy-to-access place like your desk or convenient drawer. In the beginning, it might appear a bit tricky and tedious, but with time, you might even start doing it without having to think about it. The same applies to tax documents like W-2s, which should be safely stored as soon as you retrieve them from your mailbox. When you finally start filing, it will be a breeze.

3. Go Digital in Record Keeping

The best way to safely keep your tax records for a very long time and for speedy future access is to store them in paperless form. This is very convenient and easy; just create a file on your computer or even in the cloud where scanned tax documents can be saved. There are some apps like the Shoeboxed that are helpful in storing digital versions of your receipts. You can even use your smartphone to capture the image of the documents and digitally file them away.

Since tax documents contain very sensitive information, taxpayers are encouraged to use passwords or encryptions. Regular back ups are also important so that you don’t lose the information. For simplified tax filing, plan in advance and keep the necessary tax documents.

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Itemized Tax Deductions and Their Limits

April 16, 2013 By

One small advantage of paying taxes is claiming tax credits and deductions; you give with one hand and take with the other one. After all, this is what Uncle Sam does, and if you get the slightest opportunity to claim some sort of tax break of relief in your overall tax liability, take it and run with it.

The availability or value of a tax credit or deduction is dependent on the value of your Adjusted Gross Income (AGI). However, most of the itemized tax deduction approval amounts are based on the percentage of your AGI. Here are some of the common expenses you must never overlook:

Medical Expenses: The medical and dental expenses are the first ones on Schedule A. But, most itemizers don’t claim this deduction because the expenses must surpass 7.5% of your AGI to claim, which is not always easy to meet. To help meet this threshold, consider the following:

·         Travel expenses to and from the medical facility or even chemists to collect your prescriptions. Find out the allowable mileage rate before calculating the expenses.

·         Payments to your insurance plans from your taxed income. This includes a percentage of your long-term premiums

·         Health-related expenses like extra glasses, hearing aids, artificial limbs and some dental treatment.

·         Alcohol or drug addiction rehabilitation and related expenses

·         Doctor-recommended weight loss program

·         Laser vision corrective surgery

This is a very broad category and might include expenses like home renovations for use if wheelchair or even a physician-recommended humidifier that you had to add to the home’s HVAC system to lessen your child’s asthma. Just remember to keep necessary documents and receipts, as it is possible the IRS will ask for them. Read the IRS Publication 502 for a more comprehensive list of eligible medical costs.

Work Related Expenses: You can deduct work-related expenses that weren’t refunded by the employer on Schedule A and miscellaneous expenses if they exceed 2% of the AGI. Qualified expenses include job search expenses, expenses linked to your investments, and even tax preparation costs. Read the IRS Publication 529 for more information on miscellaneous expense deductions.

Charitable Deductions: This is one of the leading itemized deductions but you have to be careful if you are so generous because there are some limits on how much you can donate to charities or groups. You can give up to 50% to nonprofits listed in the IRS 501(c)(3) like churches, education organizations, hospitals and other organizations that rely on the public or the government to fund their operations.

Some of these deductions are a bit complicated and you might require the professional input of a tax pro to successfully claim them on your return.

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Why You Shouldn’t Ignore Miscellaneous Deductions

February 26, 2013 By

There are some miscellaneous deductions that taxpayers (who can itemize their deductions on their tax returns as opposed to claiming the standard deduction) can claim. The purpose of a tax deduction is to bring down a taxpayer’s taxable income amount and correspondingly, lower the amount of tax one is supposed to pay. You should therefore, not overlook miscellaneous tax deductions, for they may help lower your overall tax obligation.

The 2% Limit on Deductions: You may deduct the value of some miscellaneous costs that surpass 2% of your AGI (Adjusted Gross Income). Some of the deductions that are capped at the two percent rule include;

  •      Tax preparations expenses/fee
  •      Employee costs that were not refunded like expenses for finding a new job in the same professional line, some work-related tools, uniform and clothes, payments made to unions, and work-related travel and transportation expenditures.
  •      Payments made to:
    • Either generate or collect taxable income
    • Establish, dispute, pay or claim any tax refund
    • Manage, take care of, or keep taxable income generating property you hold.

Some other very important costs include some legal expenditures, investment fees and related costs, rental charges for your safe deposit box (if you use it to store personal effects like jewelry) and hobby expenses exceeding the income you make from your hobby, amongst others. 

The 2% Limit Free Deductions: Unlike the above deductions that are capped at 2% of the annual gross income, the following deductions are not limited under that rule:

  • ·         Ponzi-related investments scheme losses.
  • ·         Losses from gambling up to the amount of winnings from gambling
  • ·         Expenses related to an impairments for individuals with disabilities
  • ·         Theft and casualty losses from an income generating asset like destruction or theft of silver, gold, stocks, bonds, works or art, etc.

To report eligible miscellaneous deductions, use Schedule A (Itemized Deductions). The IRS normally asks for proof before approving any claims for deductions or credits. You must therefore, see to it that all records of your miscellaneous deductions are well kept. Furthermore, it will simplify the tax preparation and filing process.

It is important to draw the line between what you can possibly deduct, and what you cannot, like family or living expenses. For additional information on this important deduction, read the IRS Publication 529-Miscellaneous Deductions (that is available on the IRS website and can be downloaded as a PDF), call the IRS, or talk to a tax pro.

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The Complexity of the Tax Law and Your Tax Deductions

February 19, 2013 By

The tax code is bulky and complicated. The many rules are technical and always intricate. You may assume that you have mastered a certain part of the tax law, only to realize that there is a smartly crafted and somehow, concealed rule, an exception, or an exception to the other exception, that may take you round in circles. The understanding of the tax law can get foggy and you might not be in a position to fully grasp some tax decisions you make.

Assuming that you incur expenses but you cannot trace the original receipts-or you actually don’t have them, do you go ahead and claim a deduction and wish that the IRS will not carry out an audit? What if it the IRS knocks on your door with an audit notice, do you finally give in that you lost the documents or you actually didn’t have them in the first place? What if you are fully aware that you cannot validate receipts, should you still claim a rebate? These are confusing questions whose answers may be as dim as the tax code itself.

Different taxpayers and their advisers approach various tax issues differently. You are likely to find more than one solution to a tax problem. It gets even further complicated if it involves more than one person; with a spouse, the taxpayer, professional advisers, and business partners. Each of the parties involved may have varied views on how aggressive, conservative, or 50-50 ways to treat a tax return. Irrespective of the views held by different persons, the decision should only be reached after considering all resultant consequences.

Most taxpayers don’t claim deductions they are clearly entitled to. It is even more common for business persons to ignore tax breaks that were distinctively introduced to better and sustain businesses. Most of those who pay no heed to these claims cite the hassles involved and the complexity involved when claiming.

It is an undeniable fact that some tax breaks require a great deal of records and verifications that many individuals and even established companies find tiresome to claim. Even though taxpayers are under no obligation to claim any deductions on their tax returns, it may sometimes, be worthwhile to, irrespective of their complexities. Buildings are entitled to depreciation, and even though owners can choose not to make any deduction claims, the depreciation value will still be utilized when the building is eventually sold, and might include what you could have claimed initially, but did not.

It is an incontrovertible fact that the tax system is seriously bloated and over-complicated; taxpayers can do with a more simplified version. But since that is not likely to happen, every taxpayer must try to read and understand areas that affect them most to make wise tax decisions.

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Valentine Gifts May Save You Some Money!

February 13, 2013 By

Valentine’s Day is tomorrow and couples look forward to the cake, corny cards, chocolate and candy. Here is another innovative way to sweeten valentines even more: there are gifts that can actually place you at a tax advantage. Consider the following eleven gifts that keep on giving, tax wise!

  1. Buy a vacation house. Costs incurred in purchasing a property can be deducted to reduce your tax bill. Mortgage interest and real estate taxes are deductible on a Schedule A, if itemized. Expenses associated with a second home may also be claimed subject to certain restrictions. And it doesn’t have to be the Biltmore House. A second home includes not only a house but also a condominium, cooperative, mobile home, house trailer, boat, or similar property that has sleeping, cooking, and toilet facilities. Yachts are also considered as a second home.
  1. A wedding ring also counts. People love to propose on Valentine’s Day, definitely because it’s the most romantic day of the year. The cost of the ring is not deductible; don’t get too excited! The tax break however, is there ever after. Your filing status is determined as of the last day of the year, so even if you don’t get married until December 31 this year, you can still file as married filing jointly. A lot of negative sentiment surrounds the possibility of a marriage penalty, but in truth, most married couples pay less in taxes as a result of filing jointly. Saying “I do” could actually save you some money!
  1. In the event that you have an outstanding tax debt, it is advisable that you settle it before you can get married. It’s a shame to start a life together marred by tax debts and it may cause all kinds of problems in the long run. Encourage your better half to acquire a tax relief as an ideal and thoughtful gift to yourself!
  1. If you plan to live happily ever after and sail away into the sunset, ensure that that partner is healthy. What better ways to achieve this than having regular checkups and to ensure you are well on the path to good health? The costs of all checkups regardless of age and sex, whether for heart disease, cancer, or heart disease are all deductible if itemized. It does make sense to stay healthy.
  1. Go to school, or take a loved one to school. For 2012, you may be able to claim a lifetime learning credit of up to $2,000 for qualified education expenses paid for your own education or for your spouse (or other dependents).The lifetime learning credit is available for tuition and related expenses at an eligible educational institution. Any school, music, culinary, art or vocational school! An eligible education institution includes any college, university, vocational school, or other postsecondary educational institution eligible to participate in a student aid program administered by the U.S. Department of Education. Enquire if you aren’t sure. Away with procrastinating about that culinary school dream and get with the program! Pursue your passion, and you just might improve your tax position!
  1. An unrivalled means of showing adoration for someone is making a donation in their name. Unsurprisingly, the tax laws make this a win- win situation for all. The charity wins, and you win your sweetie’s heart as well, in addition to a considerable reduction of your tax bill. So support the whales, cancer research, or even an orphanage, and you may claim a deduction for your gift.
  1. Smoking; there was no way to leave that one out. It kills, it’s costly, and is disgusting. Quit now and save loads of money! The cost of participation in a cessation of smoking program and for drugs to combat nicotine withdrawal is a deductible tax expense if itemized. Your other half will thank you, and so will your future self. So stop smoking now!
  1. Care and love is shown in many ways. One of them is by showing a direct concern for your spouse’s future. This can be done by contributing to a spousal IRA, if you are married and earn more than your spouse. If you file a joint return, you can make a contribution to a spousal IRA $5,000 (6000 if your spouse is over 50). Watch out for phase outs though.
  1. Raising a child isn’t easy. Kids are expensive, with all the bills, parties, school, and so on. The tax authorities, luckily, are in on this fact, and have gone a long way into making sure there are some perks associated with parenthood. Increased exemptions and the earned income tax credit are some of the tax breaks, and though they don’t offset the actual costs of raising kids, considering it would be a great way of moving a relationship to a higher level.
  1. Hire a tax professional. It has been statistically proven that most fights among couples are about money. Anything you can do to have a happy marriage is worth the cost, correct? Paying for a tax professional is tax deductible if itemized, and would save you a lot of time… time which you could better spend enjoying your relationship! Seek tax advice and save yourself a great deal of time.
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The Difference Between Tax Exempt Organizations and the 501(c)(3)s

January 22, 2013 By

Charitable donations to qualified tax-exempt organizations are deductible. The receiving organizations don’t have to pay taxes on what they receive, as it is not considered income. Tax exempt organizations are many and diverse, and they don’t exist to make money, some are social or business clubs or even recreation clubs. To determine which organizations are spared IRS taxes, check the IRS website; they are listed in sub-section 501 of the IRS code.

All tax-exempt organizations must be set up and abide by their state laws. They are then required to apply for IRS tax-exempt status using Form 1024. Upon approval by the IRS, they should file returns annually with the IRS using the Form 990s. The exact return filed will depend on the type of income received and the amount. These forms are mainly information-based, and taxes or profits of the organization are not necessary. However, contributions made to most of these organizations are not necessarily deductible on the returns.
For any donation made to qualify for deductions, it must be channeled towards a 501(c)(3) organization. This set of organizations is very limited and specific like churches and other religious organizations, as well as others specializing in educational, literary, scientific, public safety, animal and child protection, and national and international amateur sports. The main reason the IRS accepts deductions for donations made to such organizations is that they are channeled to the well-being of the general public while others are mostly for the good of their members. Some 501(c)(3) can also be a state corporation, but they have to apply using Form 1023 and are required to file a 990 return annually.

Due to the tax status of tax-exempt organizations, they must adhere to a number of rules, whether they qualify for deductions or not. Returns from these organizations are public and their lobbying or advocacy works are constrained. Furthermore, they may be required to pay some taxes on some incomes, especially those from sources other than their tax-exempt purposes exceeding $1,000. To understand which incomes are likely to attract an IRS tax, and how to report such, talk to a tax professional for guidance.

It must also be pointed out that the IRS reserves the right to withdraw tax-exempt status from some organizations that abuse it or fail to adhere to the set requirements. Donors hoping for some deductions from their charitable works are encouraged to verify the tax status of the organization, especially the 501(c)(3), before making the donations. You cannot just deduct any contributions made to a tax-exempt organization on Schedule A, so make sure you are aware of all the rules.

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Deducting Home-Office Expenses

January 21, 2013 By

The Office in Home Deduction was designed by the IRS for entrepreneurs who run their businesses from the convenience of their homes. There is a closely related variation of this deduction, mainly aimed at work-at-home employees as well as non-sole proprietors. The deduction allows eligible taxpayers to take some deductions against the business income for a percentage of the expenses of running their home. Eligible taxpayers however, have to meet a number of requirements:

Exclusively for-Business Office: The room you set aside must be used solely for the business. This means that, if the same room is used for any other non-work related activities like, say a room for dining with your family, then it is not deductible. The space must be identifiable as the place where you handle the administrative and management functions of your business. However, there are some exceptions to this rule, especially for day care services. If you run day care services, the business hours used are considered when working out the deduction. The same applies to inventory storage areas or demonstration material.

Regular Use: If you have a dedicated office at home, it implies that you will have to use it regularly for the same purposes. If instead, you only use it occasionally, then you may not be allowed to deduct. Please note that a business must be motivated by the profits, and therefore, hobbies and related activities don’t qualify.

The home-office expenses are calculated on Form 8829 and then moved to either Schedule C or F. The square footage of the house against that of the whole building has to be calculated to determine the value of the house that is used for running the business. Thereafter, the amount of time that is actually used in the office is also established.

Direct and Indirect Expenses: There are two types of expenses used: direct and indirect. The direct expenses are those incurred for using the very area for business like repairing a broken window or the room. However, most of the in-home-office costs are indirect. Some indirect expenses include; mortgage interests, mortgage insurance premiums, rent, utilities, repairs and maintenance, amongst others.

If you have a home office and you qualify for the home-office deduction, then you can greatly lower your operational costs. In fact, you can deduct commuting expenses whenever you leave your home office for business, as another business-related expense. Talk to a tax expert for assistance on how to claim the home-office deduction and lower your tax obligations.

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Work-Related Gift Expenses

January 17, 2013 By

The definition and classification of a gift can be confusing, but not for IRS tax purposes. If for example, you give a customer (or his or her family) an item with monetary value without expecting payments or some form of compensation in return, then it qualifies for a gift. The same applies to the exchanges made in the course of business, even though there are a few exceptions and limitations. There is a $25 cap on gifts given.

Indirect gifts can be those given to a company but intended to do good to an individual or a certain class of people, say a gift sent to the public relations department of company A. If instead, you give a gift to a member of a customer’s family, then it is considered as an indirect gift to the customer, like choosing to buy your client’s spouse a birthday gift. For purposes of establishing limits on deductibility, the gift is considered indirectly given to the client.

There are times when you and your spouse can purchase and give out a gift. Please note that the IRS will treat both of you as a single taxpayer, regardless of whether you run separate businesses, are employed separately, or are both connected to the recipient of the gift. In the same breath, a gift given by a partnership is treated as having been given by a single taxpayer and not the whole set of partners.

When establishing the cost of gift, and for purposes of the $25 threshold, some incidental expenses like engravings on jewelry, wrapping the gifts, or mailing costs, are not taken into consideration. An item that cost $4, has your name evidently and lastingly imprinted on them and is just one of the other similar items you broadly give out should be left out when calculating the totals of your gifts for the year. This means that promotional items like pens, tote bags and golf balls can be excluded.

Some gifts serve multiple purposes. Some can either be considered as gifts or entertainment like tickets to an event or performances. For tax purposes, such will be treated as entertainment if you accompany the customer to the event. If however, the customer goes alone, without you, you can either treat it as a gift or entertainment expense based on which one makes the most suitable tax sense. The IRS sometimes classifies items employers give to their employees as compensation and not gifts.

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Charitable Donations are Deductible, but Adhere to Rules

December 24, 2012 By

Today is Christmas Eve and people everywhere is in the holiday spirit. There is no doubt that Christmas is the most widely celebrated holiday in the world and is characterized by merrymaking, sharing, and thanksgiving. It is also the perfect time to contribute to charity and help those in need. To claim refunds on your qualified charitable contributions, there are a few facts that you must be aware of, plus documents you must present to the IRS.

Eligibility of the Organization: Even though there are many charitable organizations operating in the U.S. and focused on improving the lives of those they help, only select few are eligible for deductions. The IRS took this step to ensure that taxpayers are guarded against exploitative charities. You can find out which organizations are tax-exempt from the IRS website before making your donation and claiming it on your return come April next year. Some organizations may not be listed on the website, but work under others that are authorized. Therefore, confirm with them if they are a partner of an eligible organization. If you donate to a charity that is not tax-exempt, the donation will definitely be appreciated, but forget about claiming the deduction on your tax return, because the IRS will not accept it.

Write a Check or Get a Receipt: There are many small donations you might make, like cash donations into the Salvation Army bucket. However, unless you write the organization a check or receive a receipt, you will not be able deduct any non-substantiated donations. As much as you have the very best intentions, you must present some documentation of forget about deducting the contribution. For cash aid exceeding $250, you must be given a contemporary receipt to deduct. The receipt must indicate the correct date of contribution, organization details, and any received goods or services as part of the contribution. Please note that only the difference between the contributed amount and the services or goods received are deductible. If you get nothing in return, it must be stated so on the receipt.

Goods Donations: There are special rules for donating goods. You must compute a list of all items you contribute as well as their value. Ask for a receipt from the receiving organization. Non-cash donations like cars or artworks also have their set of rules that must be adhered to at all times. You must have the goods appraised by an independent appraiser as you will have to show that you donated property of the listed value at the time of donating it.

Contributing to charity is a self-rewarding deed and the IRS would like to encourage taxpayers to do exactly that as they lower their tax bill. You must however, understand and follow the set rules to deduct any charitable donations.

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Major Miscellaneous Deductions for You

December 4, 2012 By

If you itemize deductions on your tax returns as opposed to claiming the standard deduction, then you can claim some miscellaneous deductions. The main purpose and advantage of a tax deduction is that it lowers the real value of your taxable income which consequently brings down the tax amount you eventually pay. There are a few things that you need to know about miscellaneous tax deductions that will go a long way in lowering your tax obligation.

The 2% Deductions Limit: The value of some miscellaneous costs that exceed 2% of your AGI (Adjusted Gross Income) can be deducted. Some of the eligible expenses subject to this provision include tax preparation fees, costs for producing or collecting taxable income, conserve, manage or maintain assets that generate taxable income, expenses for determining, paying, contesting, or claiming tax refunds, amongst others. Furthermore, employment costs like looking for a new job in the same professional line, costs for purchasing work tools, unreimbursed work-related travel and transportation, as well as work-related uniforms and clothes are all deductible.

Other refundable expenses in this category include:
• Some investment fees and expenses.
• Hobby expenses that don’t exceed your hobby income
• Your rental fees for a safe deposit box so long as it is not used to store jewelry and other personal effects.
• Select legal costs like tax related preparation

Unsupported Deductions for the 2% Limit: The IRS has listed some other expenses that are not subject to the 2 percent limit deduction of the AGI as discussed above. These deductions include:

• Ponzi-type investment schemes and losses related to such investments
• Theft losses or casualty from income generating assets like losses or damage as a result of theft of bonds, stocks, vacant stocks, silver and works of art
• Incurred gambling losses to the value of the winnings
• Impairment-related work costs of individuals with disabilities.

Reporting of these deductions is easy, as they are reported on Schedule A-Itemized Deductions. Always keep any related records or all miscellaneous deductions as you will need them when preparing and filing the tax returns. The IRS will demand some proof that indeed, the listed costs were incurred, and if you cannot produce them, you may have to settle for standard deductions. This may not be ideal, especially with taxes weighing down and eating up many taxpayers’ incomes.

For more information, visit the IRS website or read IRS publication 529- Miscellaneous Deductions or call the IRS.

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