Deductions

This is the time of year that I get questions about what is deductible.

Topic 500 – Itemized DeductionsThe following topics are found in the category of Itemized Deductions. Each topic is followed by a corresponding number. To access your topic, select the three-digit number.

Should I Itemize?	Topic 501
Medical and Dental Expenses	Topic 502
Deductible Taxes	Topic 503
Home Mortgage Points	Topic 504
Interest Expense	Topic 505
Contributions	Topic 506
Casualty and Theft Losses	Topic 507
Miscellaneous Expenses	Topic 508
Business Use of Home	Topic 509
Business Use of Car	Topic 510
Business Travel Expenses	Topic 511
Business Entertainment Expenses	Topic 512
Educational Expenses	Topic 513
Employee Business Expenses	Topic 514
Casualty, Disaster, and Theft Losses	Topic 515

Why You Should Choose a Tax Professional (EA or CPA):

One of the best ways to find deductions is to make an appointment with a tax professional. A tax practitioner enrolled to practice before the Internal Revenue Service (IRS) is referred to as an Enrolled Agent (EA). Enrolled Agents and Certified Public Accountants (CPAs) have had to take extensive training and have had to under go strenuous testing to obtain their certifications. These professionals must complete up to 40-hours per year of continuing professional education just to maintain their licenses—many do more.

A good number of these professionals have the latest and most sophisticated tax preparation software, as well as, tax-research software tools and publications. The combination of professional level software, experience and training help to insure that you find the deductions you are entitled to. No single software application designed for home use can equal the power of an EA or CPA equipped with professional tax preparation software. The tax professional knows the right questions to ask and has the tools to find the answers.

If you consider the current tax situation complex and confusing keep in mind that the IRS has thousands of pages of tax code, and are even now busy adding more regulations. Most of the new regulations are distributed by the IRS to tax professionals in the form of a bulletin. Professional tax publications and journals publish information about how the new and existing rules should be applied in example situations and if there have been court rulings, those too are often published. Throughout the year many tax professionals are busy studying and preparing. They are trained to research tax questions quickly. No one person knows everything, but understanding tax law and having professional level tax research tools give a decided advantage in ensuring that you pay the minimum tax required by law.

Sorting Paperwork

When consulting on a per client basis, I find that many people face difficulty in the area of filing tools and skills. They spend a lot of time looking for important paperwork. I use a binder system with tabs that allows you to have all of your important papers in one place, supplemented by pdf back-up. The tabs include: Personal Financial, Recommendations, Auto, Business, Credit, Important, Insurance, Liabilities, Passwords, Real Estate, Retirement, Stocks,Wills, and Personal Property.
This book makes it easy to administer an estate.

Average Return

After doing taxes for over 20 years, I know for a fact that there is no such thing as an “average return”.  Each tax return is unique because each taxpayer is unique. People want to know if they are out of the “norm” and if so why? They don’t like being different from the others in their communities/workgroups.

They talk to each other and say, “What are you getting back this year?”  When they hear how much their neighbor or co-worker is getting they think they must be doing something wrong.

When you evaluate the differences in the two returns you’ll find that the one with the higher refund was supporting twice as many children, or had more deductions for donations to charity, or didn’t have the passive income mixture.

The point is you shouldn’t create unrealistic expectations of everyone being the same.  They just aren’t. If you aren’t getting as big a refund as your friends and neighbors, it means you haven’t given the government an interest free loan for as much as they have. The ideal situation would be if you could be at breakeven with no refund and not paying more tax.

If your return is too large, you may want to change your W-4 at work so your employer is withholding less each pay period. Have your tax preparer evaluate this for you to determine the right number of exemptions to claim at work.

It’s Tax Time

It is tax time again. As you are getting ready to meet with your CPA please use this checklist to assure that you have all that you need to have a productive meeting.

1. Copy of last year’s return.

2. List of dependents with date of birth, relationship, social security number, daycare and or educational expenses paid.

3. W-2s from employers

4. 1099s from customers, clients, banks, brokers.

5. Questionnaire filled out. (if you do not have one email and I will pdf this to you)

6. Signed engagement letter

7. List of Assets used in the production of income with date of purchase and description.

8. Rental expenses and income.

9. List of itemized deductions as well as 1098 showing mortgage interest and taxes paid.

10. Auto licensing fees.

11. List of charities and amounts donated.

12. Business expenses and income

13. Income list received from prizes, awards, lottery, or jury duty.

Federal Income Tax: An Introduction

There are seven major categories pertinent to federal income taxation:

1. Income

2. Adjustments

3. Deductions

4. Exemptions

5. Taxes

6. Credits

7. Payments

Who comes first?

When you file your tax return with your spouse, you should always put the same person first in order to avoid any problems in subsequent tax years.  You may receive a failure to file notice from Uncle Sam. Be careful to check your social security number and that it matches your card.

There have been cases where a return has been filed electronically and the taxpayer discovers that someone else has filed already. This happens when they fail to review the social security number before hitting send. The really sad part is the person who made the mistake in the first place doesn’t realize they haven’t yet filed.

Be sure to notify the IRS if your address changes too so they can forward any correspondence regarding your filings.

Nonresident or resident aliens would use their ITIN (individual tax identification number) to file their tax returns wherever a social security number is asked for on the forms.

Income Tax Compliance and Planning

It is important to use good tax resources to be sure that you have the latest information about tax compliance and planning. As I found out when I used an old form rather than the current one. I discovered that the rates had changed and the tax would have been less if I used a form published more recently. Another good reason to do away with paper forms completely. Digital forms are a good choice. They are more likely to be updated with current rates.

Preparing for your annual meeting with your CPA or EA

There are a few items you will need to gather before going into your tax preparer. Ensure that all forms w-2 and 1099s are available. It is important to compare the items from the previous year so that you don’t forget anything. There are many different types of 1099s. If you receive interest income you will receive a 1099-INT. If you receive dividends from stocks you own then you will receive a 1099-DIV. If you earn nonemployee compensation then you will receive a 1099-MISC. If you receive retirement income from a pension or and IRA then you will receive a 1099-R. All 1099s are needed to properly prepare your return. You will also need your social security income statement if you receive social security income. Income from partnerships, estates, trusts, and S-Corporations will come to you on a form K-1. If you receive a 1099-G that means you received unemployment benefits during the year.

You will also need all forms 1098. These are amounts you paid out that may be deductible. Such as mortgage interest or 1098-T for tuition, or 1098-E for student loan interest. Bring other items you would like to deduct such as property tax, auto tax, charitable contributions, employee business expenses, medical expenses, etc.

Also, bring your year end broker’s statements that might show sales of stocks.

If you receive a form and are not sure if it should be included in the information you provide to your accountant, bring it in and let them decide whether to include it or not.

Be certain that all of these forms have your social security number on them. Someone else who lives with you may need to file a return also.

Make a list of questions for your accountant.

If they provide you with a proforma, answer all of the questions even if you don’t fill in the rest because this helps your accountant to know which questions to ask and what forms will be required in filing your return.

For more information about selecting a tax preparer: www.etaxwiz.com

Income Planning

In the blog titled “Types of Income”, we talked about earned and unearned income. In today’s blog, I want to discuss ways to increase your earned income. Earnings come from either working for someone else or working for yourself or both. The one advantage to working for someone else is that they pay half of your social security and medicare taxes. That’s .0765 of the gross wages. This is an overlooked employee benefit.

You can increase earnings by working longer hours, getting a raise, or taking on a second job. Remember that mileage from Job 1 to Job 2 may be deductible if you otherwise qualify to itemize your deductions. You can also earn additional tips, bonuses, fees, or compensation for personal services.