May 24, 2013

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Ten Amazing Ways to Convert Your Bucket List into Tax Deductions

May 23, 2013 By

There are many things we would like to cross off your “bucket list” before we “kick the bucket,” such as visiting all the continents, jumping out of an airplane, or just trying new things. What most taxpayers don’t know is that they can deduct some costs of the common items on their bucket list or even take them as credits on their income tax returns.

1. Purchase Your Own Boat and Cruise Around the World: Your main home’s mortgage interests and estate taxes can be itemized and deducted on the Schedule A. It is also possible to claim costs linked to a second home, which in this case, includes a boat, so long as it has sleeping, bathroom, and cooking facilities. This means that your mobile home mortgages can also be deducted from your income tax, but under some limitations. Go ahead, own a boat and make it your second home-Uncle Sam will help you out.

2. Volunteer for a Charity in Exotic Locations: Out-of-pocket expenses incurred when offering voluntary services to a qualified tax-exempt charity organization are deductable. Therefore, you can travel to Costa Rica’s rain forests to clear trails and deduct your trip’s costs, so long as the primary objective of the trip is charity work.

3. Learn A Foreign Language: Do you know that you can learn a foreign language for fun and claim up to $2,000 of Lifetime Learning tax credit? The nonrefundable credit amounts to up to 20% of higher education tuition and fees paid by qualified students. Note that this credit starts to phase out once your AGI hits $102,000, or $51,000 for couples and singles respectively.

4. Pop the Question: No, you cannot deduct the costs of your fancy marriage ceremony. However, most married taxpayers who mark the “married filing jointly” box on the IRS Form 1040 realize reasonable savings in taxes.

5. Participate or Win a Marathon: The IRS expects all winnings, be it in a race or gambling, to be reported as “other income,” which is taxable. However, you are free to claim related costs such as entry fees, appropriate gear, and associated expenses, as “miscellaneous itemized deductions” on Schedule A. Keep in mind that these deductions are only but limited to the amount of your winnings.

6. Take a Business Trip Down Route 66 or Pacific Coast Highway: Business trips don’t have to be boring. You can have fun by taking a much more exciting or scenic route and claim basic business travel deductions like airplane tickets, bus, train, or car mileage. Never lose these documents, because the IRS will demand verification.

7. Go Gambling in Vegas: Other than business deductions, you can also deduct loses as a result of gambling up to the amount of your winnings if you itemize. Losses must be properly documented as well as the receipts, tickets, and log of bets. Go roll the dice in Vegas or Atlantic City and claim a deduction from Uncle Sam if things don’t work out in your favor.

8. Enjoy Your Hobby: There are two ways in which your hobby can be tax beneficial. First, you may want to write a book or sell your pieces of art and deduct the costs if you realize any associated income. Note that only deductions up to the limit of the income are allowed; losses cannot be deducted. Alternatively, turn your hobby into a legitimate business and deduct qualified business expenses. All you have to do is run the business professionally, and not as a hobby to qualify.

9. Adopt a New Baby: You can claim dollar for dollar tax credits in child adoption expenses of up to $12,650. These expenses include court charges, fees paid to your attorney, travel costs, amongst others. It is possible to carry the credit to the following year if you cannot use the whole of it in a year. Ensure that you have all necessary records in place, including final decree, certificate of adoption, and even costs incurred in establishing the child’s special needs. This credit starts to phase out the moment your AGI surpasses the $189,710 threshold.

10. Improve Your Home: Any home acquisition debts secured by the home, including a mortgage taken to construct or immensely perk up your primary or second home are deductable. You can also choose to use part of your home for business and deduct the business use expenses of your home.

There are many things you can do for fun and self fulfillment that allows you to claim a deduction or credit from the IRS. You can get your college degree, go golfing, horseback riding or even surfing with business partners, start a scholarship fund, etc. Just ensure that you understand the requirements lest you end up with a huge avoidable bill.

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Writing Off the Business Use of Your Vehicle on Your Tax Returns

May 21, 2013 By

Taxpayers are always on the lookout for ways to cut their tax burdens. The IRS offers a variety of tax deductions and credits that are tailored towards the realization of this objective. For small business owners, a vehicle deduction is very important, as it helps in not only lowering the cost of doing business, but also the tax bill.

Just like any other deduction, you are expected to present up-to-date documentation to successfully write this off. To be safe, ensure that the documents you present are originals and not copies or reconstructed. Reconstructed documents can easily be rejected and your deductions thrown out altogether, so don’t risk your money.

Do you use your personal car for business? Well, if the business use of your personal car is under 50%, you can take a deduction depending on the rate of mileage times the number of miles covered transacting business. You can only deduct the real expenses if your vehicle’s business usage exceeds 50% of the total time. Note that you are required to choose the standard mileage rate for a car if you select this option the very first year of owning the vehicle. However, you are free to swap between actual expenses and the standard mileage rates in future years.

Regardless of the method you opt for, make sure that the total mileage and business miles covered are tracked. For 2012, the mileage rate stood at 55.5 cents for every mile, this has shot to 56.5 cents in 2013.

The IRS is a revenue collection agency, and doesn’t like the idea of dishing out money in the name of deductions or credits. In this regard, you must make all claims as viable as possible by properly keeping all documents safe. See to it that the beginning odometer reading on Jan 1 and the ending reading on Dec 31 are accordingly recorded in your appointment book. The total mileage for the year is the difference between the two. To those who find it tricky to carefully keep mileage log, try marking your business miles and personal mileage for a number of weeks every quarter to establish the percentage of business expenses that will be claimed from the tax return.

You can also check your car repair or maintenance files for your odometer readings as they are usually recorded by your mechanic after every visit. Go through the receipts from the beginning of the year to the end. If you service your car regularly, you stand a high chance of making a very accurate estimation.

For taxpayers who work from their homes, your business mileage sets in the moment you hit the driveway. Trips to the supply store, meeting clients, attending business conferences, or meetings are all deductible. You can also use Googlemaps or any related apps to establish your mileage if you forgot to record them.

Actual expenses deductions covers fuel, repairs, car washes, vehicle registration, insurance, interest on car loan, upgrades: almost any amount spent on your car. Understanding the business use of your car will go a long way in helping you establish the most accurate deduction and spare you any troubles with the IRS as you lower your tax bill.

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Above the Line Deductions-Lower your Overall Tax Bill

May 14, 2013 By

Above the line deductions bring down your taxable income, which brings down your taxes. These deductions include alimony, expenses related to work, student loan interests, health insurance deductions for the self-employed, retirement contributions, and bank charges on early withdrawals from saving accounts.

These deductions are officially referred to as adjustment to one’s income; but they are commonly called deductions because they are deducted from your earnings to arrive at the final Adjusted Gross Income.  These deductions are optional, but claiming them goes a long way in reducing your taxable income.

On the IRS Form 1040, three main deductions are included.  These deductions include educator expenses, business expenses, and health savings account deductions.

Educator Expenses Deduction: This gives teachers the opportunity to have the amount spent on classroom supplies to go untaxed. This deduction also includes repayment of student’s loans. It is possible to claim up to $250 of the educator expenses. These are untaxed funds that eligible taxpayers, mostly educators, can claim.

Business Expense Deductions: This does not cover all business expenses but applies to some.  On the Schedule A, it appears as a miscellaneous deduction and not necessarily as a business expense.  It can be claimed by filling either the IRS Form 2106-EZ or the IRS Form 2106.  Both forms are available online and can be filled online too. This deduction does not carter for all taxpayers, but for a selected few including performing artists, military reservist, and fee-basis government officials. 

Health Savings Account Deduction: This is like a health insurance policy where those that participate therein are allowed to put aside some money which is tax-free, for medical bills.  It functions in the same fashion as a retirement fund.

Generally, the above the line deductions have a positive effect on taxpayers as they give funds that are tax exempted.  However, there also are deductions below the line; whatever deduction that follows below the gross income are taxable. If there is a deduction of $1,000 above the line, it gives you $1,000 tax exempted income, which reduces your gross taxable income.

The above line deductions can easily be claimed directly on the IRS Form 1040; the taxpayer doesn’t have to go through the hassle of filling out a Schedule A. The secret to claiming deductions is to understand how they work; this will go a long way in lowering your tax bill.

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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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Various Ways to Pay Your Tax Debt with the IRS

May 2, 2013 By

Every eligible taxpayer is expected to pay taxes and file tax returns annually. You might be facing a mountain of financial challenges, which is understandable. However, Uncle Sam expects you to abide by the law and pay; but if you cannot clear your tax debt by the due date, there are other legally viable options you can resort to.

Typically, the IRS is supposed to collect taxes due within 10 years from the date of filing tax returns. Upon negotiation, the IRS may structure the payment amounts in a way you can pay off within the collection period. If you choose to ignore the tax obligations, the IRS has all the rights to move in on your assets and recover the tax amount owed. IRS officials may slap a lien on your house, freeze the bank accounts, seize tax refunds which you were otherwise eligible to, or even garnish your wages.

All you have to do is to plan your tax payments well and you will never have to worry about any aggressive IRS collections methods. 

The determination of the tax amount outstanding is the first thing you should do, since payment options vary based on the amount. Also, if you want to save yourself from a lien, ensure that the tax due does not exceed $10,000. If you have an untainted tax-compliance history, the IRS may relax the amount to be paid immediately and accept any proposed tax payment plan.

Offer-In-Compromise: This is an agreement between IRS and the tax payer to settle the tax debt at a lower amount than what is actually owed. This will however, depend on the debt amount and your income. The IRS scrutinizes your ability to pay, income, expenses, assets equity, amongst other factors before approving any OIC applications. You will be required to fill the IRS Form 433-A and Form 656 plus a $150 non refundable fee.

Credit card payment: The IRS penalties and interests are pretty high compared to some credit card rates. To evade paying nominal interests on your tax debt, the credit card payment might be ideal. Find out the rates from your credit card company and weigh the two options.

Grab A Fresh Start: The IRS is always coming up with a variety of options to enable as many taxpayers as possible to pay their taxes. The Fresh Start Program is available for taxpayers who owe less than $50,000 and your fail-to-file penalty can be waived up to six months by filing the IRS Form 1127-A

Installment Agreement Online: If you owe less than $25,000 and have up-to-date tax returns filed, then online payment agreement is a great solution. You can decide how much to pay per installment if you owe less than $25,000. However, if it exceeds $25,000, you will have to apply by filling a form 433-F to work out an Installment Agreement payment arrangement.

Installment Agreement For Large Balance Due: In case the tax due exceeds $50,000, you will have to apply for an Installment Agreement by filling the form 9465-FS and form 433-F plus the collection statement and sending them to the IRS via mail. Your financial information will be reviewed before the IRS approves your application. Upon approval, you may have to pay a fee that is totalled up based on the income, and the type of plan you may qualify.

Important Tips

That tax code is complicated, and most of the provisions contained may be confusing. It is for this reason that you might want to consider help from a professional, CPA, tax attorney, or enrolled agent who can negotiate with the IRS on your behalf. You must also keep up to date with changes in your life that might affect your taxes and proper estimation of your taxes; use the IRS Form 1040-ES for this.

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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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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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Five Myths about Selling Your Home and the Truth Behind Them

April 11, 2013 By

Selling a house, especially one you have lived in for years, can get emotional, especially if you have many fond memories of the house. However, you should not lose focus on the financial and tax implications of selling your home. You should keep in mind, how you will gain the highest profits from the sale and dealing with Uncle Sam, who is definitely eager to claim a share of the gains.

However, there is a lot of conflicting and confusing information surrounding the sale of personal property. Falling for any of these myths might result in miscalculated moves on these types of sales; here are some quick facts for you:

1. You Have to Be Living in the House at the Time of Sale to Claim Capital Gains Exemptions

Most taxpayers believe that they have to be living in the house at the time of sale to claim an exemption. This is misleading because the exemption only requires that you must have owned and lived in the house for at least two out of five years prior to the sale. Furthermore, the years don’t have to be chronological. For example, you can live in the house during the second and fourth year and still be eligible for the exemption that amounts to $250,000 and $500,000 for single and married taxpayers respectively.

2. You must be Over 55 to Claim the Capital Gains Exemption

Initially, the exclusion could only be claimed by taxpayers aged 55 or older and the amount was capped at $125,000. However, this was changed with the enactment of the Taxpayer Relief Act of 1997 that scrapped the age factor. So long as you meet the other requirements, age should be the least of your worries.

3. You Have to Invest the Gains from Your Home Sale into a New House to Claim the Exemption.

Yes, this used to be the case for houses sold before May 7, 1997 in what used to be referred to as “rollover rule.” This rule is no more, and the IRS is less concerned about how you spend your money (but your spouse may definitely be interested).

4. The Exclusion is Available for Any Number of Homes

No, the IRS only allows exclusions for one house at a time, and it has to be your primary residence. Your primary home is the one you spend most of your time. You can however, move into another home and if you meet the criteria, claim exclusion, when the time comes, on the new one as well.

5. If You Lose Money on the Sale of Your Home, You Can Claim a Capital Loss

Just like any other transactions, selling your home can result in a gain or loss. However, if you encounter a capital loss, you unfortunately, cannot claim the loss with the IRS.

Other important facts;

·         You don’t have to counterbalance capital gains with losses from the sale of another house; a gain is a gain, and so is a loss.

·         Home improvement expenses like painting are not deductable, but can increase the basis of working out capital gains and losses

·         The Obamacare 3.8% medical tax will only be imposed on unearned income or investment if the income exceeds $200,000 and $250,000 for single and married joint filers respectively. You don’t have to worry if your income is below threshold.

·         Only work-related moving expenses are deductable, not just any relocation.

There you have it. If you are contemplating selling your home, you now know what to expect. However, if you need more information, don’t just consult anyone. Instead, talk to a tax professional.

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Should Your Claim Your Adult Children as Dependents on Your Tax Return

April 5, 2013 By

If you are a parent of adult-aged kids, then you must be wondering whether or not to claim them as dependents on your tax returns. The main objective of claiming tax deductions for dependent kids is to lower the overall cost of bringing up a family. The deductible amount varies but in 2011, taxpayers were allowed to claim $3,700 in exclusion for every eligible child. If you are a family falling in the 25% tax range, then you could save approximately $925 for every child.

Before making up your mind whether or not to claim a child as a dependent, there are a few factors that you have to consider. This shouldn’t however, be a problem, especially for the purposes of tax deductions, as it is always safer to claim your kids as dependents for as long as possible. In fact, tax experts argue that they can be claimed as dependents on your return forever unless of course, they earn a lot of money or you are barred by the law from claiming them. Consider the following factors to decide whether you qualify and if it is economically feasible to retain your kids as dependents.

Age Factor: Legally, any child aged 19 and below can be claimed as a dependent kid. If they go to college, the age limit is extended to 24. Even if they finally hit 24 years or older, get employed, but earn less than $3,700 annually, they can still be claimed as “qualifying relatives” where the parent saves more in taxes than the child.

Your Children’s Education: If you have a child in college, then you may find it beneficial to claim, since you are likely to realize better tax benefits like the $2,500 education credit plus tuition and fees deduction until they turn 24, get married, graduate with a bachelors degree, etc.

Medical Expenses: If you still have a child living under your roof, then you can deduct medical costs as itemized deductions. This includes out-of-pocket child care. Please note that your kids automatically qualify for your medical insurance benefits until they turn 26, whether they are claimed as dependents on tax returns or not. This is as per the Affordable Care Act.

You must consider these factors when filing your tax return and go for the option that makes the best tax sense.

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