Lowering Taxable Income After the Year is Over
Even with the year being over you can still benefit on your 2008 taxes by planning ahead. The main option available to lower taxes after the year has concluded is a contribution to a retirement plan. If you qualify you can contribute at least through April 15th or even past that in the case of certain plans. However, you have to have the cash available to make the contribution as well as pay any tax due. So, if you are in a financial position to be able to contribute to your retirement, set the money aside now to insure you have it available before you file your taxes. Depending on your tax bracket and income level even a small contribution can get you a good percentage of your money back right away in the form of reduced taxes while still having money for retirement that can be drawn out at a later date.
Refundable Vs. Non-Refundable Credits
There are two basic types of credit; those that are refundable which add to your refund regardless of your tax and those that are non-refundable which reduce the tax you pay. So just because something has a credit associated with it, such as hybrid vehicles or energy efficient building property, doesn’t mean the credit will necessarily benefit you. Both of the credits mentioned are non-refundable, so if the tax you would pay is less than the credit amount some of the credit will have to be carried over to the following year and will provide no current benefit to you. If you expect to pay taxes every year this isn’t a major concern. But if you have lower income and are being enticed to buy something just because it gives you a tax credit, be careful because the credit may not benefit someone in your situation.
Use Tax
The Use Tax may be the most frequently unpaid tax. A Use Tax is much like a Sales Tax, in that it is collected by the state and is based on the purchase price of goods. Whenever you order a product from out of state and do not get charged Sales Tax you are required to pay a Use Tax on that item. This frequently happens when ordering via phone or internet as there is often no requirement for the company you order from to charge Sales Tax. The Use Tax is paid with your individual income tax return and is based on the amount purchased and the rate your state charges. Some states have started cracking down on people who avoid this tax as it is costing them valuable revenue. So, if you want to be in compliance, keep a list of the products that you ordered from out of state that were not taxed so you know how much to report on your state tax return.
Automobile Donation
A few years ago the IRS drastically overhauled the rules for the donation of cars to charities. Previously, they were treated just as any other non-cash charitable contribution and the value was determined based on the fair market value. Currently, if the value of the automobile is over $500 a 1098-C form must be obtained from the charity in order to validate your deduction. This form should be sent to you within 30 days of the auto being sold by the charity. Your deduction will be the sales price of the auto or the fair market value on the date of donation if the car is not sold by the charity. So, be sure to follow up with the charity when you donate a car, otherwise you may be costing yourself a deduction for anything beyond the $500 minimum.
Time Value of Money
One of the critical aspects of tax planning is "Time Value of Money". What this refers to is how money has earnings potential over time, generally through investment. So, you want to have as much money around for as long as possible to maximize the value. This is key to planning, as you want to not only determine how much money something with cost you but also how much it will cost you in terms of the benefits that money could bring. For tax purposes this means you want to pay as low a tax as possible but also do so in a way to allow you to hold on to your money for as long as you can.
Not Too Late for Stimulus
If you qualified for an Economic Stimulus payment but didn't file your taxes in time to get one, don't despair. You will have the ability to get the credit on your 2008 tax return. So, you didn't cost yourself any money, you just delayed getting what was due to you for a while.
Reading Management Company Statements for Real Estate
Many people employ management companies to run the day to day operations of their real estate rental properties. Most of these companies provide you with month and yearly statements about income and expenditures for the building. When it comes time to do your taxes, these yearly statement are useful to use. However, remember that certain expenses will not be on these statements and because these statements are generally just a complete list of expenditures, some will not be deductible. Most often the entire mortgage payment is listed as an expense, but for tax purposes only the interest amount can be deducted. Also, any personal expenses you incur on behalf of the rental will not be included. So, when making use of the management company statements for taxes, be sure to have your mortgage interest statement as well as a list of any expenses you incurred personally on hand as well.
Take Advantage of Changing Income
If your income is steady each year then the same rules generally hold on how to reduce it. However, if you have a highly fluctuating income that is predictable, there are many things you can do to save you money on taxes.
On years where your main income will be down it would be best to recognize as much other income as possible. For example selling any stocks with gains or withdraw more money from your retirement would be more beneficial. This is because your tax rate will be lower in that year, so the tax you will pay on these additional income items will be less then in years when you income is at peak levels.
The reverse holds true as well; in years with high main income you want to take as many deductions are possible. Selling stocks with losses or pushing up some of your business expenses would be examples of beneficial actions during years of high income. This is because the deduction will be more beneficial due to the increased tax bracket.
Be Careful When Paying Down Your Mortgage
If you are considering paying down or completely paying off your mortgage, you have to not only consider the financial impact, but also how it affects the taxes. While not having to pay as much interest anymore is a benefit, you will be costing yourself a tax deduction. So, make sure that if you do significantly change the monthly mortgage interest you pay, you also update your tax payments to make up for the fact your mortgage interest deduction will be less than it was previously.
Adoption Credit for Foreign Children
The adoption credit is available for all children, regardless of if they are from the US or a foreign country. However, the rules for claiming the credit change for foreign children. For a child adopted from the US, the expenses incurred or paid during a year prior to which the adoption is finalized may be claimed as a credit that following year. For a foreign child, the expenses can not be claimed until the adoption is finalized. This is a subtle difference, but does make adoption of foreign children more of a financial burden because no credit can be claimed until the adoption is final. So, if timing the foreign adoption is at all possible, be sure to have it be final prior to the end of the year. That way you can claim the credit that year instead of waiting for the following one.
Health Savings Accounts
A Health Savings Account (HSA) is a tax-advantaged medical savings account available for individuals who are enrolled in High Deductible Health Plans. Funds from the HSA may be used to pay for medical expenses and unused funds carryover from year to year. The amount contributed to an HSA is tax deductible and they grow tax free. There is a penalty for withdrawal of the money for non-medical purposes of 10 and contributions are limited to amounts set by the IRS. However, keeping these limitations in mind, an HSA can be an excellent way of getting a tax deduction for medical expenses which would normally not benefit you.
Child Care Credit Limitation
For children under 13 there is a credit available for child care expenses. The amount of the credit depends on your income, but regardless of how high your income is, you still receive some credit. But, if you are married, your credit is also limited by the income each of you earns. So, if either of you has no earned income (salary, business income) then you are not eligible to take the credit. There are cases where it can be a large benefit to create earning income for someone in order to be able to take the credit.
First-Time Homebuyers Credit
This new credit applies to all home purchased between April 8, 2008 and July 1, 2009. The maximum credit is $7,500 or 10 of the purchase price. But, the credit must be paid back over a period of 15 years in equal installments. So, this credit is really an interest free loan from the government. However, with planning, that loan can generate income for you by investing it. I you are sure to consider the consequences, this new credit can be a large boon if you qualify.
Expiring Long-Term Capital Gain Tax Rate?
The current long-term capital gain tax rate is 15 for most people. However, after 2010 this rate is scheduled to go up to 20. But, there is some belief that this increase could be brought about sooner, or that the favorable treatment for long-term capital gains could go away all together. If you have highly appreciated property that you are waiting to sell, it may be best to sell in 2008 while the rate of tax is certain. If you wait until 2009 and the rate is adjusted up, you may end up gaining more on the sale but paying more in tax, thus netting you less money.
Milage Rate
The IRS sets the standard mileage rate by looking at several factors, chiefly the price of gas. The rate can sometimes be changed during the year as was the case for 2008. The rate will increase to 58.5 cents a mile for all business miles driven from July 1, 2008, through Dec. 31, 2008. This is an increase of eight cents from the 50.5 cent rate in effect for the first six months of 2008. It is important to determine what the mileage rate is, because if it is used to reimburse employees for their mileage, it would be best to use the most current rate.
Living Trusts
Living Trusts are useful entities that allow assets to be transferred at the time the individual passes away while avoiding probate. One of the great things about them is that they don't need to file their own tax return; all their income and deductions are reported on your personal return. So, if you have significant assets and are concerned about their distribution after your passing, a living trust can be an effective and hassle free way of making that happen.
Limits on Capital Losses
In general, the amount of capital loss you may deduct from your tax return is limited to $3,000 a year, with the remaining losses carrying forward until they are used up. However, there are special cases where you can take more than a $3,000 loss. If you are a day trader that has made the mark-to-market election you can deduct all your losses against your income. If you own stock in a closely help corporation that goes out of business your loss has much higher limits. It is important to know your specific situation, so if you have any doubts about if the limits don't apply to you consult with a tax advisor.
Be Careful Removing Property from a Corporation
Shareholders of corporations that hold property that has gone up in value may have a very unpleasant surprise coming to them when they try to remove that property from the corporation. Property removed from a corporation is valued at the fair market value not the value that it had while within the corporation. This can have some nasty tax consequences, so consult with your tax advisor prior to removing any property that has appreciated sense being contributed to the company.
Structuring Business Sales
When you buy or sell a business there are generally some physical assets that are included with the sale (computers, autos, etc). For tax purposes, those physical assets must be assigned a dollar value as their tax treatment is different than the treatment for the rest of the business. Be sure to come to an agreement of value in the sales contract and consult beforehand with a tax advisor to determine how to most beneficially value these assets and structure the deal.
Inventory Tracking
While real time tracking of inventory often isn't practical, it is important to periodically take a count of your on hand inventory in order to accurately determine your profit. Your inventory directly correlates to your Cost of Goods Sold, which partially determines your net business income. So, be sure you have a method for determining remaining inventory as this, at minimum, need to be done at the end of each year. It is often a good idea to take inventory monthly or quarterly, so you can accurately determine your profit in the business during the course of the year.
Section 179
Section 179 of the tax code allows you to effectively expense items purchased for a business so long you have income in excess of the amount expensed. What this really means is that so long as you have profit in your business you can deduct the full out of any equipment or furniture purchased for your business during the year. There are restrictions as to the amount that can be expenses but most small businesses are well under the limits. The ability to expense equipment regardless of the date purchased means you can pretty drastically reduce your business income by making major purchases at the very end of the year. Unless you plan on having your income situation be significantly different in the future, it gives you the most benefit to use Section 179 to the full extent possible, writing off the full cost in the year of purchase.
Foreign Cash Transfers
When you receive a foreign inheritance or any other cash transfer from a foreign source you may need to file a form with the IRS. On an inheritance of over $100,000 a Form 3520 must be filed by the date your income tax return is due for that year. No tax is due on the filing of the form. However, if there is no form filed and the IRS finds out about the transaction, there is a penalty of up to 35 of the amount transferred. So, be sure you file if you need to; it costs you nothing and can end up costing you a lot if you don't do it.
Don't Forget the Personal Property Tax
One of the most common omissions from an itemizing tax return are the personal property taxes paid on cars, boats, or other large items paid to either the state or the county. Roughly two thirds of states have some sort of personal property tax that they collect. So, be sure to keep track of the tax amount you paid if you state is one of those that charges a tax. Remember that stamps or other general fees are not deductible, it is only the tax paid, which is usually based on the type of vehicle owned.
Deducting Sales Tax on Your Personal Return
For the last few years you have had a choice on your personal tax return when itemizing; you can either deduct sales taxes or state income taxes. If you don't want to save all your receipts the IRS has a table that you can use when determining your sales taxes paid. It is based on your income and number of exemptions claimed. You can also add to the table amount any sales taxes paid on cars and home renovations.
For most people their state taxes are more than their sales tax, however if you live in a state with no income tax you will obviously be better of deducting sales taxes. So, if you live in a state with no or low income tax either keep all your receipts or at least those for major purchases, so you can take full advantage of the deduction on your taxes.
Business Bad Debts
Many people think that if you are in business and someone refuses to pay you, you can take a tax deduction for the amount of the unpaid bill. While this may be true for those that use the accrual basis of accounting, for anyone using a cash basis of accounting you are out of luck. This is because you don't have to claim the income you would have received should they have paid you. If you try to claim it as a deduction you would be double dipping, by both not claiming the income and claiming a loss. So, while it is good to keep track of any unpaid bills, they don't generally help you on your taxes.
Contributing Cash to Your Corporation
If you have a corporation, there are two ways to put money into your company; through a capital contribution or through a loan to the company. It is important to document what sort of transaction is taking place. If it is a loan then there must be a loan agreement in place with clear repayment terms and in most cases interest must be paid. If you want to be able to take the money out of the company again, then a loan is the best option. Money that is contributed as capital generally can only be withdrawn when the company is dissolved.
Do Not Ignore Notices
In general, people don't like dealing with tax issues. Many people get notices from the IRS or their state and just file them away without reading them. This is dangerous and can lead to some very bad situations. Most notices require little work to respond to, but if left unresolved can lead to major problems down the road. So, when you get a notice read it over and see what it is about. If there are issues then forward it to your tax professional. Avoid the temptation of ignoring it and hoping it just goes away, because chances are one day it will come back to haunt you.
Deducting Medical Expenses
For most people, medical expenses are not deductible. This is because your medical expenses have to exceed 7.5 of your personal income in order to give you any deduction. So, unless you have low income or a lot of medical expenses in any one year, chances are you won't see any benefit. For people with high income and serious recurring medical expenses, it may be beneficial to form a corporation. Your expenses could be made deductible by the corporation through a medical reimbursement plan. This would allow you to turn normally non-deductible expenses into a tax benefit, saving you considerable money in the process.
Business or Hobby?
Lately, the IRS has been looking very closely to see if an operation is a business or a hobby. If you have a business you can take losses associated with it as a deduction on your tax return. However, hobbies are not allowed to deduct losses. The best way to prove you have a business is to have net income, but obviously that isn't always possible. If you find you have losses, make sure to document your business intent. You don't want the IRS to disallow your losses because they say that it was a hobby and not a "real" business.
Reimbursement Plans
No matter if you are an employee or you own your own business, chances are you will at some point have expenses you will need to be reimbursed for. If you are an employee it is especially important to take advantage of your jobs reimbursement plan, because if you are eligible for reimbursement and fail to take it you may not be able to deduct the costs on your taxes. If you run your own business make sure you have reimbursements plans that cover expenses not directly billed to the company, such as vehicle use. Without these plans in place your deduction could be disallowed if you get audited.
Corporate Shareholder Salary
If you have a corporation with a profit that you provide services to, you must take a reasonable salary. This has become a major issue with the IRS in recent years as people have been avoiding paying payroll taxes on their earnings. If you don't take a reasonable salary you risk audit, which will result in you paying the taxes and having a huge headache IRS too.
The Importance of Filing By the Deadline
Many people put off their taxes until the last possible moment. But even worse are those whom don't file at all. Penalties are partly based on the date the return was filed, so often the longer you wait the more you will have to pay. You even risk possibly loosing your refund if you wait too long. So, be sure you file by the deadline to minimize cost to you, or if getting a refund, to make sure you get your money back.
Is the LLC Right for You?
When starting a business it is very important to choose the correct type of entity. If you have a small business without any partners and are worried about liability, then the LLC just might be for you. Single Member LLCs are disregarded for tax purposes by the IRS and many states. They effectively act as an insurance policy sold to you by the state. They limited your liability without altering your tax consequences. Of course circumstances vary, so it is generally best to consult with a tax advisor prior to starting any new business.
State Tax Refunds
When the state gives you a refund, they generally send you a 1099-G the following year. This form reports the amount of your refund to the IRS. However, the refund isn't always taxable income to you. If you didn't itemize your deductions, you deducted sales instead of state tax on Schedule A, or you were subject to Alternative Minimum Tax chances are that your refund isn't taxable. Make sure to analyze last years return before automatically including your state tax refund as income.
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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