By Robert Loe | Published: January 8, 2011 – 3:25 pm

Whether you’re rich or poor, Congress was thinking about you when they passed the Tax Relief Act of 2010.

There is something in this act for all income levels. Uncertainty remains over future tax rates which will return in two years when the Bush tax cut extension expires.

• A one-year 2% reduction in the employee portion of Social Security (FICA) tax from the previous 6.2% to 4.2% took effect on January 1, 2011. It is not subject to any phase-out based on income and will benefit all wage earners. This is the first time that Congress has ever lowered the FICA tax rate.
• The investor-friendly 15% tax rates on dividends and long-term capital gains that were to have ended on December 31, 2010 have been extended for an additional two year for all income levels.
• A temporary 13 month extension of unemployment benefits was included in the bill.
• The Act extended the tax rates that were in effect during 2010 for two additional years. The rates had been scheduled to revert from their 2010 levels of 10, 15, 25, 28, 33 and 35% 15, 28, 31, 36, and 39.6% on January 1, 2011.
• The issues of the national debt and budget deficit were not addressed by the Act and will likely be addressed by future legislation.

For a more detailed summary of the Tax Relief Act of 2010, please go to this link:   www.paychex.com/regulations/

Filed under: Changes in Federal Taxes

By Chelsea Minogue and Robert Loe | Published: October 14, 2010 – 2:22 pm

It may seem obvious that those envelopes marked “Important Tax Documents Enclosed” contain something you want to bring to your accountant.  There are many other items, however, that may be necessary to complete your tax return, even if it doesn’t seem very complex.  The following is a suggested list of documents that will help make compiling your important tax information easier.

Income:

W-2: This popular form reports wages, tips, and other compensation from your employer.

1099-INT and 1099-DIV: These forms report interest and dividend income.

1099-B: If you trade stocks or mutual funds, your brokerage firm should provide you with the proceeds from the sales on a Form 1099-B.  However, this is only half of the transaction.  To determine the gain or loss, you must also know the cost or other basis.  Your brokerage firm should be able to provide this information to you in the form of a gain and loss report.

 1099-MISC: This form reports income that you may have earned as a non-employee.

1099-G: Reports unemployment benefits or other government payments received.

1099-R: Reports distributions from pensions, annuities, retirement accounts, etc. which may or may not be taxable and/or subject to penalties.

SSA-1099: Reports social security benefits received, of which the taxable amount is figured based on a calculation using your adjusted gross income.

1099-Q: Reports distributions from qualified education programs.  Also necessary is the amount spent on qualified expenses, which for this purpose include tuition, fees, books, supplies, equipment, room and board.

1099-SA: Reports distributions from a health savings account.

K-1: This form reports income or loss from partnerships, S-corporations, estates or trusts.

Business (Schedule C):  A summary of business income and expenses is necessary for taxpayers who operate sole proprietorships.  See http://loecpa.com/deducting-auto-expenses/ for information about auto deductions.

Rental Property (Schedule E): A summary of rental income and expenses is necessary to complete this schedule.

Real Estate Transactions: If you bought, sold, or refinanced real property during the year, the escrow company should have provided a Closing Statement, also known as a Settlement Statement or HUD-1 Statement.  These transactions may have tax implications, so it is important to provide the closing statements to your tax preparer.

Other Income: Any other income received during the year is probably taxable and should be reported on your tax return, even if you did not receive a form.  If you are not sure whether something is taxable, ask your tax preparer.

Above the Line Deductions:

Form 5498: This form reports IRA contributions made during the year and the account’s value at the end of the year.

1098-E: Reports student loan interest paid.

Moving Expenses: Certain moving expenses may be deductible depending on the distance and purpose of the move.

Schedule A Itemized Deductions:

Medical Expenses: These include medical, dental, vision, health and long term care insurance premiums.  Over the counter items are not deductible.  It is important to note that medical expenses must be significant to make an impact on an individual’s tax return, as only those expenses above 7.5% of adjusted gross income may be deducted.  Self-employed individuals, however, may deduct the entire amount of their health insurance premiums as a business expense.  IRS Publication 502 provides detailed information about what qualifies as a medical expense.  http://www.irs.gov/publications/p502/ar02.html

Taxes Paid: Foreign, Local, or State Income taxes; Real Estate Taxes; Personal Property Taxes; State and Local Sales Taxes (particularly for large ticket items, such as vehicles or home improvement materials); and motor vehicle taxes.

Form 1098: This reports the amount of mortgage interest paid during the year, which may be taken as an itemized deduction.

Charitable Contributions: See http://loecpa.com/deducting-charitable-contributions/ for information about this topic.

Miscellaneous Deductions: Several other items may be listed as itemized deductions on the Schedule A.   These include:

• Unreimbursed employee expenses, such as travel, education, required uniforms or equipment
• Union dues
• Investment expenses
• Tax preparation fees

Credits

Child Care Credit: You may be able to claim this credit depending on the age of the children and your employment status.  To claim the credit, you must provide the names, addresses, and employer identification numbers or social security numbers of the providers, and the amounts paid.  If the child care provider will not provide receipts, you cannot claim the credit.

First Time Homebuyer Credit: Taxpayers who have not owned a home for the last 3 years may qualify for an $8,000 credit.  Taxpayers who have occupied the same home for 5 consecutive years of the last 8 may qualify for a $6,500 credit.  A binding contract for the sale of the home must be entered into by April 30, 2010, and the sale closed no later than September 30, 2010.  One of the following is necessary to take this credit:

• Settlement statement
• Certificate of Occupancy
• Statement that certificate of occupancy is not available, home construction documentation, and proof of occupancy, such as a utility bill
• For taxpayers who must prove five consecutive years of occupancy, mortgage interest or homeowners’ insurance records for that period.

Qualified Higher Education Expenses: Tuition and fees paid are reported to the taxpayer on a form 1098-T.  There are several different education credits and deductions available.  Depending on which credit the taxpayer is eligible to take, books, equipment, and materials may also qualify.  Educational institutions frequently prepare these forms incorrectly, so check the amounts reported against your own record of tuition and fees paid.

Residential Energy Credit: Taxpayers may receive 30% of the cost of energy efficiency improvements to their homes as a credit, not to exceed $1,500 in 2009 and 2010 combined.  The cost of materials qualifies for the credit, but installation costs do not.  If you think an expenditure may be eligible for one of the energy credits, ask the retailer to provide documentation at the time of purchase.

There may be other income, deductions, or credits that apply to taxpayers with unique or unusual circumstances.  This list includes the most common.  If you have questions about whether certain tax provisions apply to you, do not hesitate to contact your tax professional.

Filed under: Getting Organized

By Chelsea Minogue and Robert Loe | Published: October 13, 2010 – 11:06 am

Of all small business owners that use accounting software, more of them choose Quickbooks than any other.  Perhaps you already use Quickbooks, or are considering investing in the software.  We have compiled a list of the advantages of using Quickbooks for small business accounting.  Additionally, we have listed the disadvantages of the software, as well as practical solutions for overcoming them.

What are the advantages?

1)      The price is right!  The continued popularity of Quickbooks software is largely due to its relatively low price.  Quickbooks software that will fit the needs of many small businesses is available for between $100 and $300.

2)      Ease of use.  No accounting background is required to begin using Quickbooks, although some knowledge is helpful.  The software’s user-friendly input screens resemble actual documents, making the process very intuitive.  To ensure that the software is used most efficiently and effectively, however, it is recommended that a new user first go through a tutorial with an experienced Quickbooks user or accountant.

3)      Quickbooks is available in several different versions, ranging from simple to complex.  A relatively simple small business may choose a basic version to avoid paying for unnecessary features.  A business requiring more complex accounting may choose a premium version of the software, or an industry-specific version that focuses on unique issues such as manufacturing or construction contracts. 

4)      Preparing a tax return using the information from a well-maintained Quickbooks file is frequently easier than dealing with manually prepared reports.  An Excel spreadsheet summarizing all of your business income and expenses for the year can be produced and given to your accountant, who can then prepare your return in a reasonable amount of time.  If it is necessary to delve deeper into your data, your accountant will likely be able to open your company file on his or her own version of Quickbooks.

What are the disadvantages?

1)      It is very easy to make entries in Quickbooks that affect prior years, which creates a problem if the business tax return for that year has already been filed.  Quickbooks allows company files to be closed and password protected as of a certain date, providing an easy solution to this problem. 

2)      Quickbooks allows transactions to be deleted or changed after they have been entered.  The software does create a sort of “audit trail” for each transaction, but any mildly tech savvy user would easily be able to manipulate or remove the audit trail from the system.  Business owners must be aware of the ease with which fraudulent activity can be covered up by dishonest employees.  This can be overcome, however, by the implementation of regular procedures to oversee the business’ accounting system, which help to prevent and/or detect such activities.

3)      The maker of Quickbooks only supports each version for about two years, forcing users to frequently upgrade their software.  Additionally, some services, such as payroll and direct deposit, are not included in the price of the software.

4)      A business may reach a size where Quickbooks is no longer suitable for its needs.  At this point, a more advanced software with additional capabilities from another provider may be necessary.

Overall, Quickbooks provides a basic, yet practical solution for maintaining accounting records for small businesses.  If properly implemented and maintained, the software can prove to be a valuable tool for small business owners.

Filed under: Getting Organized

By Chelsea Minogue and Robert Loe | Published: September 23, 2010 – 4:22 pm

For Cash Donations

No cash donation should be deducted without a receipt, and donations of $250 or more require an acknowledgement letter from the recipient organization. 

Some cash donations result in the donor receiving something in return, such as purchasing an item at a charity auction or buying tickets to a benefit dinner.  In such cases, the deduction is the donation amount less the fair market value (FMV) of the item received.  The organization hosting such an event will usually provide you with an itemized list of your bids and the FMV of the items you received.

For Noncash Donations

When total noncash donations exceed $500, a Form 8283 must be attached to the tax return.  This form lists details about property donated, how and when it was acquired, the method used to assign value, and other details.  For items with a FMV exceeding $5,000, an appraisal must be included with the Form 8283.  Household and clothing items with a FMV exceeding $500 require an appraisal.  

Many taxpayers have a tendency to overestimate the value of noncash donations.  It is important to remember, for household goods and clothing especially, that once used, an item loses much of its value.  The IRS offers some guidance on how to assign a FMV to noncash donations in Publication 561, which can be found at: http://www.irs.gov/publications/p561/ar02.html#d0e545

Limitations on Deductions

A deduction for charitable contributions may only be taken if the taxpayer elects to itemize their deductions, that is, fill out a Schedule A.  Additionally, donations must be made within the tax year to be deductible.  If a donation is pledged in December 2010 but paid in January 2011, it is deductible in 2011.

Charitable contributions that exceed 50% of a taxpayer’s adjusted gross income (AGI) for the year are not deductible.  For contributions to private foundations and certain other types of organizations, the deduction is limited to 30% of the taxpayer’s AGI.  However, amounts that are not deductible in one year may be carried over to future years.

Only contributions made to qualifying organizations are tax deductible.  Contributions made to political and other types of organizations may not be deducted.  The IRS maintains an exhaustive list of approved organizations, which may be searched at: http://www.irs.gov/app/pub-78/

Filed under: Tax Deductions

By Chelsea Minogue and Robert Loe | Published: September 21, 2010 – 8:48 am

One of the most common tax deductions taken, especially by self employed individuals, is the deduction for business miles driven.  This deduction is calculated one of two ways:

(1)  Standard Mileage Rate: This method is based on the number of business miles multiplied by the IRS standard rate per mile, which changes each year.  The 2010 rate is 50 cents per mile.

(2)  Actual Expenses: This method is based on the full cost of operating the vehicle multiplied by the business use percentage (i.e. business miles divided by total miles driven for the year).

The IRS tends to be skeptical of these deductions, largely because they know that most taxpayers do not have sufficient records or proof for them.  There are two simple steps to take to help get the maximum deduction you are entitled to, as well as ensure that your documentation would stand up to the IRS’ rigorous standards in the event of an audit.

1)  Keep Track of All Auto Related Expenses for the Year

In most cases, taxpayers can elect to deduct a percentage of actual auto expenses if this yields a larger deduction.  These expenses include depreciation, lease payments, registration fees, gas, insurance, repairs, oil, garage rent, tires, tolls, and parking fees.  Keeping receipts for these items will keep the ‘actual expense’ option open and potentially increase the allowable deduction.

2)  Create and Maintain a Log of Business Miles Driven

Keeping a log of all miles driven for business is required whether the actual expense method or standard mileage rate method of calculating your deduction is used.  The IRS does not care about your non-business miles, and will disallow your deduction if your business miles figure is arrived at by subtracting non-business miles from total miles, or by the use of any estimation method.  The log should include the date, number of miles driven, and purpose of each trip.  It is also important to record the total (business and non-business) number of miles driven during the year, in order to calculate the business use percentage. 

It is important to have documentation of business mileage if your return is selected for audit, because the IRS takes a dim view of deductions not clearly supported by facts.  By following these two easy steps you can maximize your auto expense deduction, and rest easy knowing that it is fully supported.

For more details, refer to IRS Publication 463: Travel, Entertainment, Gift, and Car Expenses.

http://www.irs.gov/publications/p463/index.html

Filed under: Tax Deductions