Archive for Tax Information

How Will the Health Care Bill Affect Your Taxes?

Posted by: Holly | Comments (1)
Thursday, April 22nd, 2010

On March 23, 2010, President Obama signed into law the new health care legislation.  The legislation will affect virtually every individual in one way or another and will significantly impact tax returns in the future.  The following overview of the tax-related provisions of the legislation is based upon the House of Representatives’ version and the one signed by President Obama on March 24, 2010.  At the time this article was prepared, the Senate was taking up the measure, but it is expected to pass without changes since only a simple majority is required.
• Penalty For Not Being Insured – Beginning in 2014, taxpayers will be penalized for failing to maintain the minimum essential coverage.  The penalty will be phased in beginning in 2014 and the fully-implemented penalty in 2016 will be the greater of:

  • 2.5% of household income over the threshold amount of income required for income tax filing, or
  • $695 (indexed for inflation after 2016) per uninsured adult in the household ($348 if under age 18).

Maximum Penalty – The total household penalty cannot exceed 300% of the per-adult penalty ($2,085) or national annual premium for the “bronze level” health plan offered through the Insurance Exchange that year for the household size.  Penalties are based upon the months that the required insurance is not in force.

Penalty Phase-In – The maximum penalty will not be imposed until 2016.  The phase-in rates are:

2014           2015
Per-adult annual penalty                  $95            $325
% of income penalty                           1%               2%
Family maximum                              $285           $975

Taxpayers Exempt from the Penalty – Individuals are exempt from the penalty if either their employer’s sponsored coverage or the lowest cost “bronze” coverage exceeds 8% of household income.  Also exempt are individuals residing outside of the U.S., those exempted for religious purposes, and those whose income is below the threshold for having to file a return.

• Low-Income Health Exchange Participation Credits – Beginning in 2014, tax credits will be available for low-income individuals and families with incomes up to 400% of the federal poverty level that are not available for Medicaid, employer-sponsored insurance, or other acceptable coverage.  To qualify for the credits, these individuals and families would have to obtain coverage in the newly-established insurance exchange.  Based upon the current poverty levels, the credit would phase-out at $42,420 for individuals and $88,200 for a family of four.  Additionally, a cost-sharing subsidy will be provided for low-income individuals to help pay for their coverage.

• Large Employer Responsibilities – Beginning in 2014, large employers, generally those with 50 or more full-time employees in the prior calendar year, that:

  • Do not offer coverage for all its full-time employees,
  • Offer minimum essential coverage that is unaffordable, or
  • Offer minimum essential coverage where the plan’s share of the total allowed cost of benefits is less than 60%,

Would be required to pay a penalty if any of its full-time employees were certified to the employer as having purchased health insurance through a state exchange and qualified for either tax credits or a cost-sharing subsidy discussed previously.

Penalty – The excise tax penalty for any month would be $167 times the number of full-time employees in excess of 30.

• Free Choice Vouchers – Beginning in 2014, employers who offer minimum essential coverage through an eligible employer-sponsored plan and pay a portion of that coverage will be required to offer an equivalent value voucher, allowing a qualified employee the option of purchasing coverage through the Insurance Exchange.  An employee qualified to make this choice is an individual with a required contribution to the employer plan that exceeds 8%, but does not exceed 9.5% of the household income and has income that does not exceed 400% of the poverty line for the family.

• Tax Credits for Small Employers Offering Health Coverage – For tax years 2010 through 2013, qualified small employers, generally those with no more than 25 full-time employees with an average annual full-time equivalent wage of no more than $50,000, will be eligible for a tax credit of up to 35% of the cost of non-elective contributions to purchase health insurance for its employees.  The maximum credit is available to employers with no more than 10 full-time equivalent employees with an annual full-time equivalent wage from the employer of less than $25,000.

2014 and Later – In 2014 and later, eligible small employers who purchase coverage through the Insurance Exchange would be eligible for a tax credit for two years of up to 50% of their contribution.

• Dependent Coverage – Effective March 23, 2010, the exclusion for reimbursements for medical care expenses under an employer-provided accident or health plan to any child of an employee is extended to children who have not attained age 27 as of the end of the tax year, provided the child also is eligible to be claimed as a dependent for tax purposes.

• Excise Tax on High-Cost Employer-Sponsored Health Coverage – Beginning in tax year 2018, there will be a 40% non-deductible excise tax on insurance companies and plan administrators for any health coverage plan where the premiums exceed the following amounts:

Single Coverage:                                                                                             $10,200
Single Coverage, high-risk employment or retired age 55 and older:  $11,850
Family Coverage:                                                                                             $27,500
Family Coverage, high-risk employment or retired age 55 and older:  $30,950

The tax would apply to self-insured plans and plans sold in the group market, but not to plans sold in the individual market (except for coverage eligible for the deduction for self-employed individuals).  Stand-alone dental and vision plans would be disregarded in applying the tax.  The dollar amount thresholds may be later adjusted for inflation.

• Employer W-2 Reporting Responsibilities – Beginning in tax year 2011, employers will be required to disclose the value of the benefit provided by them for each employee’s health insurance coverage on the employee’s annual Form W-2.

• Taxpayers Earning Over $200,000 – Beginning in 2013, higher-income taxpayers will be subject to the following additional taxes:

  • Additional Hospital Insurance Tax – The Hospital Insurance (HI) tax rate (currently at 1.45%) would be increased by 0.9 percentage points on an individual taxpayer earning over $200,000 ($250,000 for married couples filing jointly).
  • Surtax on Unearned Income – A 3.8% surtax, called the Unearned Income Medicare Contribution, would be placed on the net investment income of a taxpayer earning over $200,000 ($250,000 for a joint return).  Net investment income includes interest, dividends, royalties, rents, gross income from a trade or business involving passive activities, and net gain from disposition of property (other than property held in a trade or business).  “Net” investment income is investment income reduced by allowable investment expenses. Distributions from qualified retirement plans and IRAs will not be subject to the surtax.

• Employer Flexible Health Spending Plan Contributions Limited – Beginning in 2013, the maximum that can be contributed to an employer’s health flexible spending accounts (FSAs) would be limited to $2,500 per year.  The amount will be indexed for inflation after 2013.

• Over-the-Counter Medication Restriction for Employer-Provided Plans – Beginning in 2011, over-the-counter medications, except for doctor prescribed over-the-counter medication and insulin will no longer qualify for reimbursement.  This restriction applies to health reimbursement accounts (HRAs), health flexible savings accounts (FSAs), health savings accounts (HSAs), and Archer medical savings accounts (MSAs).

• Increased Tax on Nonqualifying HSA or Archer MSA Distributions – Beginning in 2011, the additional tax for HSA withdrawals for other than qualified medical expenses before age 65 are increased from 10% to 20%, and the additional tax for Archer MSA withdrawals for other than qualified medical expenses is increased from 15% to 20%.

• Medical Itemized Deductions Limited – Beginning in 2013, the itemized deduction for medical expenses will be limited in the following manner:

o AGI Threshold – The AGI threshold for claiming medical expenses on a taxpayer’s Schedule A is increased from 7.5% to 10%, which is the same as the current alternative minimum tax (AMT) rate.  Individuals (and their spouses) age 65 and older will continue to use the 7.5% rate through 2016.

o Deduction for Employer Part D would be Eliminated – The deduction for the subsidy for employers who maintain prescription drug plans for their Medicare Part D eligible retirees is eliminated.

• Expansion of Information Return Reporting – Currently a business paying more than $600 per year to a noncorporate service provider who isn’t an employee is required to file an information return (Form 1099-MISC). The new law expands the return filing requirement to include both corporate and noncorporate providers of property and services, beginning with tax years beginning in 2011.

• Adoption Credit Limit Raised, Made Refundable and Extended – One of the non-health care related items included in the new law is an increase in the dollar limitation for the adoption credit to $13,170 (adjusted for inflation after 2010) and an extension of the credit through 2011. The credit also is changed from being nonrefundable to a refundable credit.

If you have questions related to taxes associated with the new health care bill, please give this office a call at 888-564-5777.

Categories : Tax Information
Comments (1)

2010 Brings Increased Deduction for Domestic Production Activities

Posted by: Holly | Comments (1)
Thursday, March 25th, 2010

The domestic production deduction was created to encourage manufacturing and production within the U.S., and it provides a substantial business deduction equal to 9% (up from 6% in 2009) of the lesser of:

  1. the taxpayer’s net income from qualified production activities or
  2. the taxable income (modified adjusted gross income for individual taxpayers) without regard to this deduction for the tax year.

The deduction is further limited to 50% of the W-2 wages of the employer for the tax year allocable to the activities eligible for the deduction.

Domestic Production Activities – Although the definition of “domestic production activity” is a little elusive, it generally does not include retail sales or purely service activities. Among the more common eligible activities are:

  • manufacturing and production activities in whole or in significant part within the U.S.,
  • construction of real property in the U.S., and
  • performance of engineering or architectural services in the U.S. in connection with real property construction projects in the U.S.

The following example, one that was used in a Congressional hearing, does a good job of defining what is and is not a qualified domestic production activity: Suppose you are a baker and in the business of producing donuts. Some of the donuts you sell retail directly to the consumers, and some you sell in bulk to hotels and restaurants. The production costs of the donuts sold at retail do not qualify for the deduction, while the costs associated with the wholesale sales to the hotels and restaurants do.

Computing the Deduction – The following is an example of how this deduction works: Suppose your business manufactures a product that you wholesale to retailers. Your net income from sales of that product for the year is $800,000, and the wages you paid to your employees to manufacture that product totaled $200,000. Your deduction for 2010 would be the lesser of 9% of the $800,000 in revenue or 50% of the $200,000 wages. Thus, the domestic production activities deduction for your business would be $72,000 (.09 x $800,000). The deduction is allowed for both regular and alternative minimum tax purposes.

Who Gets the Deduction – This deduction is allowed to all taxpayers, including individuals, C corporations, farming cooperatives, estates, trusts, and their beneficiaries. The deduction is allowed to partners and owners of S corporations (not to partnerships or the S corporations themselves) and may be passed by farming cooperatives to their patrons. And, despite the deduction’s history, it is fully available to taxpayers who do not export.
The foregoing is only an overview of this deduction. If you have questions related to how the domestic production deduction might apply to your specific circumstances, please give this office a call at 888-564-5777.

Categories : Tax Information
Comments (1)

The New Vehicle Sales and Excise Tax Deduction

Posted by: Holly | Comments (0)
Tuesday, March 23rd, 2010

If you purchased a new vehicle in 2009, you may be entitled to a special tax deduction for the sales and excise taxes on your purchase.

Here is some important information you should know about this deduction:

  1. State and local sales and excise taxes paid on up to $49,500 of the purchase price of each qualifying vehicle are deductible.
  2. If a vehicle costs more than $49,500, you still receive a deduction for a prorated amount of sales tax and excise taxes.
  3. You can deduct the sales tax for more than one vehicle purchased during the year.
  4. Qualified motor vehicles generally include new cars, light trucks, motor homes and motorcycles.
  5. To qualify for the deduction, the new cars, light trucks and motorcycles must weigh 8,500 pounds or less.  New motor homes are not subject to the weight limit.
  6. Purchases must have occurred after Feb. 16, 2009, and before Jan. 1, 2010.
  7. Purchases made in states without a sales tax — such as Alaska, Delaware, Hawaii, Montana, New Hampshire and Oregon — may also qualify for the deduction. Taxpayers in these states may be entitled to deduct other qualifying fees or taxes imposed by the state or local government.  The fees or taxes that qualify must be assessed on the purchase of the vehicle and must be based on the vehicle’s sales price or as a per unit fee.
  8. This deduction can be taken regardless of whether the buyers itemize their deductions or choose the standard deduction.  Taxpayers who do not itemize can add this additional amount to the standard deduction on their 2009 tax return.
  9. The amount of the deduction is phased out for taxpayers whose modified adjusted gross income is between $125,000 and $135,000 for individual filers and between $250,000 and $260,000 for joint filers.

If you purchased a car in 2009 and have questions about how this deduction will affect you, please give this office a call at 888-564-5777.

Categories : Bookkeeping, Tax Information
Comments (0)

Substantial Penalty for Late Partnership and S-Corporation Returns

Posted by: Holly | Comments (0)
Thursday, March 18th, 2010

Income from both partnership and S corporation returns passes through to the partners or stockholders. Therefore, filing these returns late creates hardships for the partners or stockholders to timely meet their own filing obligations. As a result, the government has imposed some substantial penalties for failure to timely file partnership and S corporation returns.

The penalty is a statutory dollar amount times the number of partners or shareholders for each month (or fraction of a month) that the failure continues, up to a maximum of 12 months. The base amount on which a penalty is computed is $195 per partner or shareholder for returns due for tax years starting in 2010. This is a substantial increase from the previous amount of $89 per partner or shareholder that applies if the entity’s tax year began in 2009. As an example, if your partnership files its 2010 return late and has four partners, the penalty will be $780 ($195 x 4) per month. The IRS may waive the penalty if there is reasonable cause for the late filing.

If you have questions relating to the above, please give this office a call at 888-564-5777

Categories : Tax Information
Comments (0)

Many Business Tax Breaks Expired at the End of 2009

Posted by: Holly | Comments (0)
Tuesday, March 16th, 2010

Although there is some talk of extension, unless Congress acts to retroactively restore them, the following business tax breaks that expired on December 31, 2009 will not be available in 2010:

  • The additional first-year 50% bonus depreciation for qualified property, generally equipment, machinery, electronics, etc.
  • The $8,000 increase in the first-year depreciation limit for passenger automobiles used in business
  • The Sec 179 expense deduction for 2010 is substantially reduced. The maximum amount that may be expensed is $134,000 (down from $250,000 for 2009). The maximum annual expensing amount generally is reduced dollar-for-dollar by the amount of property placed in service during the tax year in excess of $530,000 (down from $800,000 in 2009).
  • The five-year depreciation for farming business machinery and equipment
  • The fifteen-year straight-line cost recovery for qualified leasehold improvements, qualified restaurant buildings and improvements, and qualified retail improvements
  • The credit for construction of new energy-efficient homes (this provided a credit up to $2,000 for site-built homes and $1,000 to $2,000 for manufactured homes)
  • The enhanced (greater than cost) charitable deduction for contributions of food inventory by a non-corporate taxpayer from its trade or business of apparently wholesome food inventory for the care of the ill, needy, or infants
  • The enhanced charitable deduction for contributions of book inventories to public schools
  • The enhanced deduction for corporate contributions of computer equipment for educational purposes
  • The seven-year straight-line cost recovery period for property used for land improvement and support facilities at motorsports entertainment complexes
  • The film and television producers’ election to expense the first $15 million of production costs incurred in the U.S. ($20 million if the costs are incurred in economically depressed areas in the U.S.)
  • The credit for eligible small business employers equal to 20% of the sum of differential wage payments to activated military reservists

If you have questions relating to any of the above, please give this office a call at 888-564-5777

Categories : Tax Information
Comments (0)

Tax Breaks for Charity Volunteers

Posted by: Holly | Comments (0)
Tuesday, March 9th, 2010

If you volunteer your time for a charity, you may qualify for some tax breaks.  Although no tax deduction is allowed for the value of services performed for a charity, there are deductions permitted for out-of-pocket costs incurred while performing the services.  The normal deduction limits and substantiation rules also apply.  The following are some examples:

• Away-from-home travel expenses while performing services for a charity, including out-of-pocket roundtrip travel cost, taxi fares, and other costs of transportation between the airport or station and hotel, plus lodging and meals are allowed at 100%.  Unlike other areas of taxes, meals are not subject to the 50% limitation.  These expenses are only deductible if there is no significant element of personal pleasure associated with the travel, or if your services for a charity do not involve lobbying activities.  Any “significant element of personal pleasure” negates a deduction (i.e., not even partial deduction is allowed).  Significant personal pleasure is assumed if the taxpayer has only minor duties and is not required to perform any duties for the charity for major portions of the away-from-home stay.
• The cost of entertaining others on behalf of a charity, such as wining and dining a potential large contributor (but the cost of your own entertainment or meal is not deductible).
• If you use your car while performing services for a charitable organization, you may deduct your actual unreimbursed expenses directly attributable to the services, such as gas and oil costs, or you may deduct a flat 14 cents per mile for the charitable use of your car.  You may also deduct parking fees and tolls.
• You can deduct the cost of the uniform you wear when doing volunteer work for the charity, as long as the uniform has no general utility.  The cost of cleaning the uniform can also be deducted.

No charitable deduction is allowed for a contribution of $250 or more unless the contribution is substantiated with a written acknowledgment from the charitable organization.  To verify your contribution:

• Get written documentation from the charity about the nature of your volunteering activity and the need for related expenses to be paid.  For example, if you travel out-of-town as a volunteer, request a letter from the charity explaining why you’re needed at the out-of-town location.
• Submit a statement of expenses if you are out-of-pocket for substantial amounts and, preferably, a copy of the receipts to the charity.  Also arrange for the charity to acknowledge in writing the amount of the contribution.
• Maintain detailed records of your out-of-pocket expenses – includes receipts plus a written record of the time, place, amount and charitable purpose of the expense.

Please call us if you have questions related to your volunteer expenses or any other charitable contributions. 888-564-5777.

Categories : Tax Information
Comments (0)

Bunching Your Deductions Can Provide Big Tax Benefits

Posted by: Holly | Comments (0)
Wednesday, March 3rd, 2010

If your tax deductions normally fall short of itemizing your deductions or even if you are able to itemize, but only marginally, you may benefit from using the “bunching” strategy.

The tax code allows taxpayers to utilize the standard deduction or itemize their deductions if that provides to be a greater benefit.  As a rule, most taxpayers just wait until tax time to add everything up and then use the higher of the standard deduction or their itemized deductions.

If you want to be more proactive, you can time the payments of tax-deductible items to maximize your itemized deductions in one year and take the standard deduction in the next.

For the most part, itemized deductions include medical expenses, property taxes, state and local income taxes, home mortgage and investment interest, charitable deductions, unreimbursed job-related expenses and casualty losses.  The “bunching strategy” is more commonly associated with medical expenses, tax payments and charitable deductions; although, there are circumstances where the other deductions might be come into play.  There are many opportunities to bunch deductions, and the following are examples of the most commonly used with the “bunching” strategy:

• Medical Expenses – You contract with a dentist for your child’s braces. He may offer you an up-front lump sum payment or a payment plan.  By making the lump sum payment, the entire cost is credited in the year paid, thereby dramatically increasing your medical expenses for that year.  If you do not have the cash available for the up-front payment, then you can pay by credit card, which is treated as a lump-sum payment for tax purposes.  If you use a credit card, you must realize that the credit card interest is not deductible and you need to determine if incurring the interest is worth the increased tax deduction.  Another important issue with medical deductions is that only the amount of the total medical expenses that exceeds 7.5% of your income is actually deductible.  If you are caught by the Alternative Minimum Tax (AMT), then only the amount that exceeds 10% of your AGI is actually deductible.  So, there is no tax benefit of bunching medical deductions if the total is less than 7.5% (10% if taxed by the AMT).

If the current year is an abnormally high-income year, you may, where possible, wish to put off making medical expense payments until the subsequent year when the 7.5% (10%) threshold is less.

• Taxes – Property taxes are generally billed annually at mid-year and most locales allow the tax bill to be paid in semi-annual or quarterly installments.  Thus, you have the option of paying it all at once or paying in installments.  This provides the opportunity to bunch the tax payments by paying one semi-annual (or 2 quarterly) installment and a full year’s tax liability in one year and only paying one semi-annual (or 2 quarterly) in the other year.  In doing so, you are able to deduct 1-½ year’s taxes in one year and ½ a year’s taxes in the other. If you are thinking of being late on the property tax payments as means of bunching, you should be cautious.  The late payment penalty will probably wipe out any potential tax savings.

If you reside in a state that has state income tax, the state income tax paid or withheld during the year is deductible as a federal itemized deduction.  So, for instance, if you are making state quarterly estimates, the fourth quarter estimate is generally due in January of the subsequent year.  This gives you the opportunity to either make that payment before December 31st, and be able to deduct the payment on the current year’s return, or pay it in January before the January due date and use it as a deduction in the subsequent year.

A word of caution about the itemized deduction for taxes!  Taxes are only deductible for regular tax purposes.  So, to the extent you are taxed by the AMT, you derive no benefits from the itemized deduction for taxes.

• Charitable Contributions – Charitable contributions are a nice fit for “bunching” because they are entirely payable at the taxpayer’s discretion.  For example, if you normally tithe at your church, you could make your normal contributions during the year and then prepay the entire subsequent years’ tithing in a lump sum in December of the current year, thereby doubling up on the church contribution one year and having no deduction for charity in the other year.  Normally, charities are very active with their solicitations during the holiday season, giving you the opportunity to make the contributions at the end of the current year or simply wait a short time and make them after the end of the year.

If you think a “bunching” strategy might benefit you, please call this office to discuss the issue and set up an appointment for some in-depth strategizing.

If you have questions, please call this office at 888-564-5777.

Categories : Tax Information
Comments (0)

2010 Tax Brackets Change Little Due to Inflation

Posted by: Holly | Comments (0)
Monday, March 1st, 2010

To keep taxpayers from being pushed into higher tax brackets or from losing tax benefits simply because of inflation, the federal tax code since the 1980s has included inflation adjustments for tax brackets, exemptions, high-income phase-outs of various deductions and limitations, allowable retirement savings and the annual gift-tax exclusion, just to mention a few.  For example, indexing tax brackets lowers tax bills when there is inflation by including more of one’s income in a lower bracket, such as the 15% rather than the 25% bracket.

In 2010, for the first time ever, those inflation adjustments will be virtually nil because of a very low inflation rate.  This means that taxpayers with the same taxable income in 2010 as in 2009 will not see much of a tax savings due to inflation.  For example, joint filers with a taxable income of $100,000 will pay approximately $13 less in income taxes in 2010 than on the same income for 2009, compared with a $313 savings between 2008 and 2009.  A single filer with taxable income of $50,000 will owe $6 less next year, compared to a $156 savings due to the significantly higher inflation rate between 2008 and 2009.

The lack of change for 2010 creates a level playing field for taxpayers from all brackets, but those with high incomes actually stand to benefit in 2010 because “stealth taxes,” those that don’t involve changing tax rates, are being phased out. Among them are limits on itemized deductions and personal exemption amounts.

If you have questions, please call this office at 888-564-5777.

Categories : Tax Information
Comments (0)

It Is Tax Time! Are Your Ready?

Posted by: Holly | Comments (1)
Friday, February 26th, 2010

If you’re like most taxpayers, you find yourself with an ominous stack of “homework” around TAX TIME! Unfortunately, the job of pulling together the records for your tax appointment is never easy, but the effort usually pays off when it comes to the extra tax you save! When you arrive at your appointment fully prepared, you’ll have more time to:

• Consider every possible legal deduction;
• Better evaluate your options for reporting income and deductions to choose those best suited to your situation;
• Explore current law changes that affect your tax status;
• Talk about possible law changes and discuss tax planning alternatives that could reduce your future tax liability.

Choosing Your Best Alternatives

The tax law allows a variety of methods for handling income and deductions on your return. Choices made at the time you prepare your return often affect not only the current year, but later-year returns as well. When you’re fully prepared for your appointment, you will have more time to explore all avenues available for lowering your tax.

For example, the law allows choices in transactions like:

Sales of property. . . .

If you’re receiving payments on a sales contract over a period of years, you are sometimes able to choose between reporting the whole gain in the year you sell or over a period of time, as you receive payments from the buyer.

Depreciation. . . .

You’re able to deduct the cost of your investment in certain business property using different methods. You can either depreciate the cost over a number of years, or in certain cases, you can deduct them all in one year.

Where to Begin?

Ideally, preparation for your tax appointment should begin in January of the tax year you’re working with. Right after the New Year, set up a safe storage location – a file drawer, a cupboard, a safe, etc. As you receive pertinent records, file them right away, before they’re forgotten or lost. By making the practice a habit, you’ll find your job a lot easier when your actual appointment date rolls around.

Other general suggestions to consider for your appointment preparation include. . .

• Segregate your records according to income and expense categories. For instance, file medical expense receipts in an envelope or folder, interest payments in another, charitable donations in a third, etc. If you receive an organizer or questionnaire to complete before your appointment, make certain you fill out every section that applies to you. (Important: Read all explanations and follow instructions carefully to be sure you don’t miss important data – organizers are designed to remind you of transactions you may miss otherwise.)

• Keep your annual income statements separate from your other documents (e.g., W-2s from employers, 1099s from banks, stockbrokers, etc., and K-1s from partnerships). Be sure to take these documents to your appointment, including the instructions for K-1s!

• Write down questions you may have so you don’t forget to ask them at the appointment. Review last year’s return. Compare your income on that return to the income for the current year. For instance, a dividend from ABC stock on your prior-year return may remind you that you sold ABC this year and need to report the sale.

• Make certain that you have social security numbers for all your dependents. The IRS checks these carefully and can deny deductions for returns filed without them.

• Compare deductions from last year with your records for this year. Did you forget anything?

• Collect any other documents and financial papers that you’re puzzled about. Prepare to bring these to your appointment so you can ask about them.

Accuracy Even for Details

To ensure the greatest accuracy possible in all detail on your return, make sure you review personal data. Check name(s), address, social security number(s), and occupation(s) on last year’s return. Note any changes for this year. Although your telephone number isn’t required on your return, current home and work numbers are always helpful should questions occur during return preparation.

Marital Status Change

If your marital status changed during the year, if you lived apart from your spouse, or if your spouse died during the year, list dates and details. Bring copies of prenuptial, legal separation, divorce, or property settlement agreements, if any, to your appointment.

Dependents

If you have qualifying dependents, you will need to provide the following for each:

• First and last name
• Social security number
• Birth date
• Number of months living in your home
• Their income amount (both taxable and nontaxable)

If you have dependent children over age 18, note how long they were full-time students during the year. To qualify as your dependent, an individual must pass five strict dependency tests. If you think a person qualifies as your dependent (but you aren’t sure), tally the amounts you provided toward his/her support vs. the amounts he/she provided. This will simplify making a final decision about whether you really qualify for the dependency deduction.

Some Transactions Deserve Special Treatment

Certain transactions require special treatment on your tax return. It’s a good idea to invest a little extra preparation effort when you have had the following transactions:

Sales of Stock or Other Property: All sales of stocks, bonds, securities, real estate, and any other type of property need to be reported on your return, even if you had no profit or loss. List each sale, and have the purchase and sale documents available for each transaction.

Purchase date, sale date, cost, and selling price must all be noted on your return. Make sure this information is contained on the documents you bring to your appointment.

Gifted or Inherited Property: If you sell property that was given to you, you need to determine when and for how much the original owner purchased it. If you sell property you inherited, you need to know the date of the decedent’s death and the property’s value at that time. You may be able to find this information on estate tax returns or in probate documents.

Reinvested Dividends: You may have sold stock or a mutual fund in which you participated in a dividend reinvestment program. If so, you will need to have records of each stock purchase made with the reinvested dividends.

Sale of Home: The tax law provides special breaks for home sale gains, and you may be able to exclude all (or a part) of a gain on a home if you meet certain ownership, occupancy, and holding period requirements. If you file a joint return with your spouse and your gain from the sale of the home exceeds $500,000 ($250,000 for other individuals), record the amounts you spent on improvements to the property. Remember too, possible exclusion of gain applies only to a primary residence, and the amount of improvements made to other homes is required regardless of the gain amount. Be sure to bring a copy of the sale documents (usually the closing escrow statement) with you to the appointment.

Purchase of a Home: If you purchased a home during 2009 and you are a first-time homebuyer or a long-term homeowner after November 6, 2009, you may qualify for a substantial tax credit.  Be sure to bring a copy of the escrow closing statement if you purchased a home.

Vehicle Purchase: If you purchased a new car (or cars) this year, you can deduct the sales tax.  If the car was a hybrid vehicle or one that qualifies as a lean burn vehicle, you may also qualify for a special credit.  Please bring the purchase statement to the appointment with you.

Standard Deduction: If you usually take the standard deduction, you should be aware that a portion of your property taxes, certain vehicle sales taxes and disaster casualty losses can be deducted as part of your standard deduction this year without itemizing your deductions.  Be sure to bring your property tax statements, car purchase statements and records relating to any losses incurred in a federally declared disaster area.

Home Energy-Related Expenditures: If you made home modifications to conserve energy (such as special windows, roofing, doors, etc.) or installed solar, geothermal, or wind power generating systems, please bring the details of those purchases and the manufacturer’s credit qualification certification to your appointment.  You may qualify for a substantial energy-related tax credit.

Ponzi Scheme or Bank Failure Losses: If you suffered losses as the result of a Ponzi scheme or as the result of a bank failure, there is special tax treatment for these types of losses.  Please be prepared with the details of the losses and the amounts lost.

Car Expenses: Where you have used one or more automobiles for business, list the expenses of each separately. The government requires that you provide your total mileage, business miles, and commuting miles for each car on your return, so be prepared to have them available. If you were reimbursed for mileage through an employer, know the reimbursement amount and whether the reimbursement is included in your W-2.

Charitable Donations: Cash contributions (regardless of amount) must be substantiated with a bank record or written communication from the charity showing the name of the charitable organization, date and amount of the contribution.

Cash donations put into a “Christmas kettle,” church collection plate, etc., are not deductible. For clothing and household contributions, the items donated must generally be in good or better condition, and items such as undergarments and socks are not deductible. A record of each item contributed must be kept, indicating the name and address of the charity, date and location of the contribution, and a reasonable description of the property. Contributions valued less than $250 and dropped off at an unattended location do not require a receipt. For contributions of $500 or more, the record must also include when and how the property was acquired and your cost basis in the property. For contributions valued at $5,000 or more and other types of contributions, please call this office for additional requirements.

If you have questions, please call this office at 888-564-5777.

Categories : Tax Information
Comments (1)

Tips for Year-End Donations

Posted by: Holly | Comments (1)
Wednesday, February 24th, 2010

Individuals and businesses making contributions to charity should keep in mind several important tax law provisions that have taken effect in recent years.

One provision offers older owners of individual retirement arrangements (IRAs) a different way to give to charity. There are also rules designed to provide both taxpayers and the government greater certainty in determining what may be deducted as a charitable contribution. Some of these changes include the following.

Special Charitable Contributions for Certain IRA Owners – An IRA owner, age 70 ½ or over, can directly transfer tax-free up to $100,000 per year to an eligible charitable organization. This option, only available through 2009, applies to eligible IRA owners, regardless of whether they itemize their deductions. Distributions from employer-sponsored retirement plans, including SIMPLE IRAs and simplified employee pension (SEP) plans, are not eligible.

To qualify, the funds must be contributed directly by the IRA trustee to the eligible charity. Amounts so transferred are not taxable and no deduction is available for the amount given to the charity.

Not all charities are eligible. For example, donor-advised funds and supporting organizations are not eligible recipients.

Transferred amounts are counted in determining whether the owner has met the IRA’s required minimum distribution rules. Where individuals have made nondeductible contributions to their traditional IRAs, a special rule treats transferred amounts as coming first from taxable funds, instead of proportionately from taxable and nontaxable funds, as would be the case with regular distributions.

Rules for Clothing and Household Items – To be deductible, clothing and household items donated to charity must be in good used condition or better. A clothing or household item for which a taxpayer claims a deduction of over $500 does not have to be in good used condition or better if the taxpayer includes a qualified appraisal of the item with the return. Household items include furniture, furnishings, electronics, appliances, and linens.

Guidelines for Monetary Donations - To deduct any charitable donation of money, regardless of amount, a taxpayer must have a bank record or a written communication from the charity showing the name of the charity and the date and amount of the contribution. Bank records include canceled checks, bank or credit union statements, and credit card statements. Bank or credit union statements should show the name of the charity, the date, and the amount paid. Credit card statements should show the name of the charity, the date, and the transaction posting date.

Donations of money include those made in cash or by check, electronic funds transfer, credit card, and payroll deduction. For payroll deductions, the taxpayer should retain a pay stub, a Form W-2 wage statement or other document furnished by the employer showing the total amount withheld for charity, along with the pledge card showing the name of the charity.

The following additional reminders are offered to help taxpayers plan their holiday-season and year-end giving:

• Contributions are deductible in the year made. Thus, donations charged to a credit card before the end of the year count for 2009. This is true even if the credit card bill isn’t paid until next year. Also, checks count for 2009 as long as they are mailed this year.
• Only donations to qualified organizations are tax-deductible. IRS Publication 78, available online and at many public libraries, lists most organizations that are qualified to receive deductible contributions.
• For individuals, only taxpayers who itemize their deductions can claim deductions for charitable contributions. This deduction is not available to people who choose the standard deduction. A taxpayer will have a tax savings only if the total itemized deductions (mortgage interest, charitable contributions, state and local taxes, etc.) exceeds the standard deduction.
• For all donations of property, including clothing and household items, a receipt is required that includes the name of the charity, date of the contribution, and a reasonably-detailed description of the donated property.  A receipt from the charity is not required if a donation valued at less than $250 is left at a charity’s unattended drop site.  However, the taxpayer must keep a written record of the donation that includes the foregoing information, as well as the fair market value of the property at the time of the donation and the method used to determine that value. Additional rules apply for a contribution of $250 or more.
• The deduction for a motor vehicle, boat or airplane donated to charity is usually limited to the gross proceeds from its sale. This rule applies if the claimed value of the vehicle is more than $500. Form 1098-C, or a similar statement, must be provided to the donor by the organization and attached to the donor’s tax return.
• If the amount of a taxpayer’s deduction for all non-cash contributions is over $500, a properly-completed Form 8283 must be submitted with the tax return.
If you have questions regarding your specific situation and planned year-end contributions, please call the office for additional information.

If you have questions, please call this office at 888-564-5777.

Categories : Tax Information
Comments (1)
Next Page »

Sign Up For Newsletter

Register for our FREE eNewsletter to receive monthly small business financial tips, advice and due date reminders to keep your business books in order.

Subscribe Now!

Get the latest blog updates delivered via email.

Sum of All Numbers Categories