Extensions Payments
Should you need to extend your income tax return, the government requires that you send in payment for what you think you will owe at the time of filing. The amount owed is often not yet determined because the return is not yet complete, so an estimate must be made. In such cases, it is always better to send in a slightly greater amount than you think you need to rather than a smaller amount. If you owe more than what you thought, you will be hit with penalties and interest. If you owe less, you only loose out on the interest the money would have made for you between the extension and the time you filed.
Education Savings Plans
You may have heard about Section 529 Educational Savings Plans, but did you know that not only do they grow tax free, but in many states you can also get a tax deduction for contributing. Like retirement accounts, Educational Savings Plans increase in value based on your investments and you don't have to pay taxes on the income. If you draw out the pay to pay for educational costs there is no tax paid at all. Check with your state or tax professional to see if you can get a tax deduction for contributing. Contributing is not only smart for the future, it can save you money now too!
Getting a Huge Refund Isn't Always a Good Thing
So, you did you finished you return and got a huge refund. This seems great, but in reality you have likely cost yourself money. Getting a large refund means that you paid the government too much money during the year through your withholding or quarterly estimated payments. The government isn't going to pay you interest on the money it is holding for you, but a bank will. In an ideal world you finish your taxes and get neither a refund or have to pay. This would mean that you are paying in exactly the right amount during the year and are making the most of your money. If you find yourself consistently getting large refunds consider raising your exemptions on your W2. Your employer will withhold less in taxes and your paycheck will be larger. You can deposit the extra money into the bank and earn interest on it, a luxury the government doesn't give you when they are the ones holding your money.
Hiring Your Spouse
There can be significant tax advantages to hiring a spouse to work for your business. So long as there is a bona fide employer/employee relationship your spouse is eligible for virtually all the benefits that you can extend to an employee. This includes medical reimbursement and paid tuition. This can be a good way to turn normally non-deductible expenses into tax deductions, but make sure you treat your working relationship as a business would.
Use the Tax Collection Statute of Limitations to Your Advantage
If you have very old outstanding tax debt, you may be paying the IRS money that they no longer have the right to collect. After ten years from the day the debt is finalized, generally the day the tax return was filed, the IRS losses the right to collect that debt. This time can be extended under certain circumstances, but generally after ten years you no longer have to pay any amount you have due. So, make sure that if you do have past due debts that are approaching the ten year mark, you are paying down the balance of the most recent debts. The older debts will expire soon, so you are not gaining benefit from paying those off.
Retirement Plans as a Way to Save Taxes
Retirement plans are not only a good way of saving for the future, but they can save you significant money in taxes too. Money put into retirement plans is generally not subject to income tax at the time it is contributed. The money is only taxed when it is withdrawn from the plan. If you assume that the money you are making now is more than what you will be making when you retire and draw the money out, you save tax money because your tax rate is likely higher now than it will be in retirement. Of course drawing out money early from retirement accounts can result in hefty penalties, so it is best avoided. If you have the cash flow and don't need the money now, then maxing out your retirement account can be a very beneficial move for you.
The Danger of Not Filing
Many people would rather do almost anything than deal with their taxes. However, this can not only get you in trouble, it can cost you money too. If you have a refund coming to you but don't file the return you may loose that refund. You must file the return within three years of the original due date in order to get any money back. After that, the IRS gets to pocket your refund. So, keep on top of your filings. It will not only save you aggravation, but could save you money too.
Inherited Property Basis
If you inherit property (real estate, stocks, collectables, etc) you have to determine a basis. This is important should you decide to sell the property as the amount of tax you have to pay is determined by the difference between the sales price and the value when inherited. Inherited property is generally given long term capital gains treatment when sold regardless of how long you keep it before selling it.
If the person that left you the property filed an estate tax return then the value of the property received is listed on that return. If they left you stock, or any other easily traded item, then the value is generally going to be the market price at the time of their death. However, it can be much harder to price real estate or collectables. An appraisal is the quick and easy way to establish value but there are other ways. You don’t want to get caught in the trap of trying to come up with a basis after many years have passed and you are now trying to sell the property. So, establish a basis when you first get the property and keep this information with your other tax documents.
Inherited Property
People often think that when they inherit property they have to pay taxes on it, however this is generally not the case. If the net value of all the assets owned by the person that passed away is over two million, then estate taxes need to be paid. These are generally taken out of the estate before it is distributed to the beneficiaries. So, when you receive the inheritance taxes have already been paid. Certain exceptions apply, such as retirement accounts, but for most people any inheritance received is tax free to them.
The Wash Sale Rule
The wash sale rule prohibits an investor from claiming a capital loss for tax purposes if the investment in which the loss originated is repurchased within thirty days. Simply put, if you sell something that has gone down in value and then purchase it again within 30 days you can’t claim the amount you lost on the sale in your taxes return. The loss can be claimed when you sell the repurchased shares but unless that is done in the same tax year, it won’t help you on current year taxes. Be careful if you are trying to claim a loss not to repurchase within the 30 day limit.
Capital Gains
The total capital gains tax you pay is determined by the length of time an investment is held. The IRS rewards long-term investors but giving them favorable tax treatment. Therefore it is very important to time things so you get the most beneficial treatment.
Appreciated assets sold for a gain after being held for one year or less receive the least favorable capital gains tax treatment. The gain will be taxed at your personal income rate, which can be up to 35. Assets held over one year get a special rate, generally 15. If you are close to the one year barrier, it can be better to hold off selling to make sure you get the lower rate.
Household Employee Taxes
If you have someone that works inside your home, you may have to pay household employee taxes. According to the IRS, a household worker is an employee if, "you can control not only what work is done, but how it is done." For people with household employees there are often payroll tax returns which must be filed and payroll taxes that must be paid to both the state and the IRS. If you have a worker that you hire in the home be sure that they either don't meet the requirements to be treated as a household employee or, if they do, insure you are in compliance.
Making Meals Deductible
Business owners often dine out with their customers or associates. So long as they meet certain requirements, they can deduct 50 of the tab. It is generally best to schedule meals to coincide with business meetings. That way, some nondeductible expenses can be converted into deductible expenses. There are two basic types of deductible meal expenses:
1. Directly-related expenses: To qualify, the meal must have arranged for business reasons, business must actually be discussed during the meal and there must be a general expectation that the cost of the meal will generate a business benefit. Taking out a customer just for goodwill isn’t enough.
2. Associated-with expenses: The meal must follow or precede a substantial business discussion. Although there’s no specific time restraint, the overall character of the events should be business related. So you can’t spend a couple of minutes shooting the breeze about vague business prospects and follow it up with a marathon lunch.
The trick to maximizing deductions is to arrange meals that are either “directly related to” or “associated with” the conduct of business. Don’t forget to record the amount, time, place, business relationship and business purpose of meals. You would also need to be sure to keep receipts for expenditures of $75 or more.
Gift Taxes
A gift tax return must be filed if you give any one person over $12,000 during any calendar year. It is possible that taxes would need to be paid because of the gift and those taxes are always paid by the person giving the gift, not the one receiving it. The $12,000 limit does not apply to gifts to Charities, Political Organizations, your Spouse, or for Tuition or Medical Expenses paid directly to the school or medical facility.
One way to get around the $12,000 yearly limit is if you are married. Then both you and your spouse can give $12,000 each to any one person; $24,000 total. If the person you want to give the gift to is married you could give their spouse $12,000 each as well.
Be careful when giving gifts of property that has gone up in value, like land or stock. You still must file a return if the current value is over $12,000 but should the person later sell your gift their basis is the amount you originally purchased it for, not the value at the date it was gifted.
Paying State Taxes Early Can Save You Money
A lot of people have to make estimated payments during the year because the taxes they have withheld aren't sufficient to cover the taxes on all the income they have coming in. These estimated payments are due in four installments during the year, the last of which is usually the January 15th of the year following the tax year the payment is for. But, for anyone not subject to AMT, they would be better off mailing the check before the end of the year. That way you can deduct that payment in your itemized deductions on your federal return for that year. If you wait until January 15th you have to wait a whole year to claim the deduction.
Paying Points on Mortgages
When buying a new property or doing a refinance, it is important to factor taxes into the equation. Generally, you can deduct the full amount of any points on a new loan taken out to acquire a principal residence. If you are refinancing the loan, buying a second home, or buying a rental property, then the deduction is usually spread out over the life of the loan.
Remember that points are basically interest you pay in advance in order to get a better interest rate. If you aren't going to have the property for a long time it is better to not pay points at all. But, if you plan to own long term then paying points to lower the interest can offer significant savings over time.
Tracking Auto Miles
A lot of people use cars for their business. If you do, here is a quick and easy way to keep track of your auto mileage. On January 1st write down your odometer reading. During the year, keep track of your business miles in a mileage log. Then at the end of the year just write down the odometer reading again. For most people this is all they have to do to record their mileage and get the deduction.
Tax Deductions for Job Seekers
When you're job searching, it's important to keep track of your expenses, because these costs may be a tax deduction when you file your income taxes. There are some restrictions as to what you can deduct and you have to itemize in order to get any benefit.
Job Searching in the Same Line of Work
If you have been looking for a job in the same line of work you are currently in, many of your are deductible. You don't have to be out of work to have some of your costs qualify as a deductible expense.
You can deduct employment and outplacement agency fees you pay in looking for a new job in your present occupation. But, if your employer pays the fees directly to the employment agency and you are not responsible for them, then you can’t take the deduction.
You can deduct amounts you spend for typing, printing, and mailing copies of a resume to prospective employers.
If you travel to an area and, while there, you look for a new job in your present occupation, you may be able to deduct travel expenses to and from the area. You can deduct the travel expenses if the trip is primarily to look for a new job. Even if you cannot deduct the travel expenses to and from an area, you can deduct the expenses of looking for a new job in your present occupation while in the area.
Local and long distance phone calls to prospective employers are also deductible.
What You Can't Deduct
You cannot deduct expenses if you are looking for a job in a new occupation; there was a substantial break between the ending of your last job and your looking for a new one; or you are looking for a job for the first time.
Keeping Good Records
You can avoid headaches at tax time by keeping track of your receipts and other records throughout the year. Good recordkeeping will help you remember the various transactions you made during the year, which in turn may make filing your return a less taxing experience.
Records help you document the deductions you’ve claimed on your return. You’ll need this documentation should the IRS select your return for examination. Normally, tax records should be kept for three years, but some documents — such as records relating to a home purchase or sale, stock transactions, IRA and business or rental property — should be kept longer.
In most cases, the IRS does not require you to keep records in any special manner. Generally speaking, however, you should keep any and all documents that may have an impact on your federal tax return:
• Bills
• Credit card and other receipts
• Invoices
• Mileage logs
• Canceled, imaged or substitute checks or any other proof of payment
• Any other records to support deductions or credits you claim on your return.
Good recordkeeping throughout the year saves you time and effort at tax time when organizing and completing your return.
Charitable Contributions
When preparing to file your federal tax return, don’t forget your contributions to charitable organizations. Your donations could add up to a sizeable tax deduction if you itemize on IRS Form 1040, Schedule A.
Starting in 2007 to deduct any charitable donation of money, taxpayers must have a bank record or a written communication from the recipient showing the name of the organization and the date and amount of the contribution. Though taxpayers are already required to keep records to support their contribution deductions, this new provision is designed to provide greater certainty, both to taxpayers and the government, in determining what may be deducted as a charitable contribution.
Here are a few tips to ensure your contributions pay off on your tax return:
You cannot deduct contributions made to specific individuals, political organizations and candidates. Nor can you deduct the value of your time or services and the cost of raffles, bingo or other games of chance.
Contributions must be made to qualified organizations to be deductible.
Only contributions actually made during the tax year are deductible.
If your contributions entitle you to merchandise, goods or services, including admission to a charity ball, banquet, theatrical performance or sporting event, you can deduct only the amount that exceeds the fair market value of the benefit received.
Donations of stock or other property are usually valued at the fair market value of the property.
Clothing and household items donated must be in good used condition or better to be deductible.
Special rules apply to donation of vehicles.
You can claim a deduction for individual contributions of $250 or more only if you obtain a written acknowledgment from the qualified organization.
If you claim a deduction of more than $500 for all contributed property, you must attach IRS Form 8283, Noncash Charitable Contributions, to your return.
Taxpayers donating an item or a group of similar items valued at more than $5,000 must also complete Section B of Form 8283, which requires an appraisal by a qualified appraiser.
Tax Rebate Checks Going Out Sooner than Previously Announced
The tax rebate checks scheduled to go out on Friday, May 2 have been moved up to Monday, April 28. This basically means that the timetable previously announced has been moved forward by about a week.
2008 Mileage Rate
The IRS recently announced that the 2008 standard business mileage rate will be 50.5 cents per mile. This is an increase of two cents over the 2007 rate of 48.5 cents per mile.
Is that Holiday Turkey Deductible?
Is that Holiday Turkey Deductible?
It has become common practice for business people to give their customers and employees gifts during the holiday season. One would think that such gifts would be allowable as a business tax deduction. However, it is a little more complicated than that, and the rules are actually quite different for customers and employees.
For Customers: The tax law allows ordinary and necessary business gifts, but it does impose an annual limit of $25 to any one individual. Seem like a small dollar amount? It is, because that amount has been the limit as far back as most can remember and has not been adjusted for inflation, thus making it difficult to keep reasonable business gifts under the limit. The law does allow an additional gift amount, not to exceed $4, for items of general distribution and on which the giver's name is clearly and permanently imprinted.
For Employees: The tax law specifically denies a deduction for gifts of any kind to employees except what is termed “de minimis fringe benefits” for promoting goodwill. This would include items of general distribution such as hams, turkeys, or other items of nominal value during holiday periods. But if the gifts are cash, gift certificates or similar items of readily convertible cash value, the value of the gifts is additional wages or salary, regardless of the value.
To substantiate business gift expenses (other than employee compensation), records must show: (1) a description of the gift, (2) the taxpayer's cost, (3) when the gift was made, (4) the occupation or other information about the gift’s recipient, including name, title, or other information to establish the business relationship, and (5) the business reason for making the gift or benefit derived or expected.
Beware Emails Claiming To Be From the IRS
The IRS does not send out unsolicited e-mails or initiate contact with taxpayers via email. The IRS also never asks people for PIN numbers, passwords or secret access information for credit card, bank or other financial accounts. If you receive a questionable email claiming to come from the IRS, do not open any attachements or click on any links conatined in the emails. Please feel free to call us if you have any questions about such an email.
Frequently Overlooked Business Deductions - Parking, Tolls, Etc.
Like some tips, parking fees and tolls usually are paid in cash out-of-pocket. Don’t overlook them, because they can become substantial throughout the course of the year.
Frequently Overlooked Business Deductions - Tips
While the tips for waiters and waitresses are generally included in the meal charge, there are a number of tips that are paid out-of-pocket in cash, and if they are paid as a part of a business event or trip, they are deductible. Don’t overlook the skycap, parking attendant, hotel bellman, taxi driver, hotel shuttle bus driver, etc.
Deductibility of subscriptions & publications
The cost of subscribing to certain trade publications related to your business is deductible. However, be careful when taking the deduction. If a check is written out for a three-year subscription today, you are allowed to deduct one-third of the cost this year, one-third the next year, and the final third the year after that.
If you have questions regarding the deductibility of specific items, please call for additional information.
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