Tax records: What should you keep, and what can you toss?

May 31, 2011

Is your file cabinet overflowing? Do you hesitate to purge tax information because you’re not sure what to keep and what to discard?

Here’s a quick guide to help you cut through the clutter.

* Assets. Keep brokerage confirmations, equipment purchase invoices, mutual fund statements, and real property closing statements a minimum of seven years after you report the final taxable sale of the asset on your return.

* Expenses. Substantiation for deductions includes charitable donation acknowledgments, receipts for employee business expenses, and automobile mileage logs. Retain these at least seven years after you file the return claiming them.

* Income. The same seven-year rule also generally applies to common tax forms such 1099s showing interest, dividend, and capital gains from banks or brokerages, and Schedule K-1s from partnerships and S corporations. However, the IRS recommends holding on to your W-2s until you start collecting social security.

Tip: Shred interim income reports once you’ve compared the totals to annual forms.

* Retirement accounts. You may have to calculate the taxable portion of distributions, so keep records detailing your contributions until you’ve recovered your basis.

* Tax returns. The statute of limitations is usually three years but can be six years if underreported income is involved. In cases of fraud or when no return is filed, the IRS has an indefinite time period for assessing additional tax.

As a general rule, keep federal and state returns a minimum of seven years.

For additional information, including how long you should store business papers and payroll reports, please call. We’ll be happy to help you establish a records retention schedule.

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Nonprofit organizations may have tax obligations

May 17, 2011

If you’re an officer or on the board of a community organization, you may wonder about the tax requirements that apply to your group. Generally, an organization will not owe taxes if two things are true:

* It has registered as an exempt nonprofit organization with the IRS, and

* It has no business income from activities unrelated to its exempt purpose.

Registration is quite straightforward. The IRS grants exempt status to groups organized for charitable or mutual benefit purposes. You must submit your application within the first 15 months of the group’s existence. The package consists of an application form, a copy of your Articles of Incorporation or similar document, and a user fee. Some groups, such as churches or those with annual receipts of less than $5,000 don’t even have to register to be considered exempt.

More questions arise on the definition of unrelated business income. Generally, you will owe tax on income from any trade or business that is not substantially related to the organization’s exempt purpose. Fortunately, the definitions are quite favorable in this area. The business really has to be quite distinct from the primary purpose of the organization before income becomes taxable. For example, a charity doesn’t pay tax if it runs a thrift shop and uses the proceeds for its charitable work. Generally, rents from leasing out real property, interest income, and dividends are not subject to tax.

Once it’s registered, an exempt organization will have to file an annual information return on Form 990 or 990-EZ unless its yearly gross receipts do not exceed $50,000. Those exempt organizations with receipts of $50,000 or less must still file an annual return electronically on Form 990-N. Just as with a tax return, there are penalties for filing Form 990 or

990-EZ late or failing to file. There is no penalty on an organization that is required to file Form 990-N but fails to do so; however, if an organizations fails to file an annual return for three consecutive years, its exempt status is revoked.

Generally, the filing deadline is the 15th day of the fifth month after the organization’s year-end. For 2010 returns, the deadline for calendar-year organizations is May 16, 2011. For assistance with this or any of your tax filings, contact our office.

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Unemployment benefits: Are they taxable?

May 13, 2011

Unemployment compensation can provide a welcome buffer while you’re transitioning to a new job. But with the help comes a tax effect, because the benefits provided under federal or state laws are usually includable in your income in the year you receive them.

As a result, depending on the amount of unemployment benefits you expect to receive, you may want to complete Form W-4V, Voluntary Withholding Request, to have federal income tax withheld from your benefits. The withholding rate is generally 10%. You can also ask the unemployment office to withhold state income tax.

Alternatively, you can adjust or begin making quarterly estimated tax payments.

The amount of unemployment compensation you report on your income tax return is also affected by benefits you have to repay. If you receive and repay benefits in the same year, you can subtract the repayment from the total you received. However, if you make repayments in a year following the receipt of the benefits, the tax treatment depends on how much you repay, and can be claimed either as an itemized deduction or a credit against your current-year tax.

Please contact us if your employment situation changes. We can help with tax and benefit related issues such as severance pay, retirement account rollovers, and deductions related to job hunting.

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There is still time to convert your IRA

April 19, 2011

If you procrastinated on converting your regular IRA to a Roth last year, you can still do a conversion in 2011. Although converting your IRA generates taxable income in the year of the transfer, later qualifying withdrawals of contributions and income from the Roth are tax-free. Converting to a Roth while income tax rates remain low could pay off big time. And your conversion opportunities are not limited to just traditional IRAs. You can also convert your 401(k), 403(b), or 457 plan to a Roth.

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Plan for a smaller refund

April 12, 2011

Did you receive a big refund check from last year’s taxes? If so, you’re not alone. Many of us deliberately pay extra taxes throughout the year so we can enjoy a nice bonus early the next year. Sometimes it’s insurance against having to come up with extra cash when you file your return. That’s a valid concern. But sometimes it’s just a form of enforced saving. Or perhaps you’ve simply never bothered to adjust your withholding. Those aren’t such good reasons. After all, when you overpay your taxes, you’re making an interest-free loan to the government.

Should you adjust your withholding? Reducing your withholding is as simple as filing a new Form W-4 with your employer. The form comes with a worksheet to figure out how many allowances you should claim. Don’t forget to allow for your other taxable income besides wages, such as dividends or investment gains.

If you’re worried about underpaying tax, there are a couple of rules you should know. Generally, you’ll escape a penalty if you pay, through withholding or quarterly estimated payments, at least 100% of last year’s taxes (110% if your adjusted gross income is over $150,000), or if you pay at least 90% of what you owe for this year.

If you reduce withholding, here are some ideas on how to use your extra take-home pay.

* Contribute more to your employer’s 401(k) plan, especially if your company matches contributions. You’ll enjoy a double benefit because the extra contributions will reduce the tax on your wages as well as provide tax-deferred savings.

* Pay down balances you’re carrying on your credit cards. That’s equivalent to earning interest on your extra payments, often at double-digit rates.

* Put the money in a tax-favored Coverdell IRA or Section 529 plan for your child’s education.

Contact our office if you’d like help figuring out your withholding level for 2011.

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Get an extension if you can’t file on time

April 8, 2011

April 18 is the due date for filing your 2010 tax return. If you won’t have all your tax information assembled in time to meet the filing deadline, getting an extension will give you an extra six months – until October 17, 2011 – to file your return.

Over the years, the IRS has made requesting an extension easier. The extension is automatic; you simply have to file Form 4868 with the IRS by the April 18 filing deadline. Be aware, however, that an extension to file does not extend your time to pay. The IRS will still assess interest on any unpaid tax balance. In addition, unless you pay at least 90% of your estimated tax liability by April 18, you may be hit with a late-payment penalty.

If you are a U.S. citizen living abroad, you have until June 15, 2011, to file your 2010 return. This does not require the filing of an extension form. This two-month extension does not apply to taxpayers who are just traveling outside the U.S. on April 18. When you file your tax return, you must attach a statement showing that you qualified for the extension. If additional time beyond June 15 is needed, Form 2350 should be filed to obtain an automatic extension until October 17, 2011. Interest will be calculated on any balance due from the April 18 due date.

Military personnel serving in combat qualify for an extension for filing returns and paying tax for the period of combat service plus 180 days.

For additional information or filing assistance, contact our office.

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Your child may have to file a return

April 5, 2011

Your child may have to file a 2010 income tax return. Generally, a return is required if the child had wages of more than $5,700, self-employment earnings over $400, or investment income (such as dividends, interest, and capital gains) over $950. If your child had both earned and investment income, other thresholds apply. Also, if your child is due a refund, a return must be filed to get it. Contact us if you need more information or filing assistance.

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Deferring taxes sounds like a good idea, but is it?

March 25, 2011

Reporting income on the installment method to defer taxes isn’t always the best strategy. For instance, say an investment property you bought years ago has appreciated. You decide to sell, agreeing to accept a down payment now, with the balance of the sales price due over the next two years. When you file your tax return, you can report the income from the sale over the agreement term. This strategy spreads the tax on the gain over the same time period.

But there may be circumstances when you’d be better off electing to recognize the gain in the year of sale and pay tax currently. In addition, there are cases when the installment method is not available, such as if you regularly sell the same type of property on an installment plan. You could be considered a dealer, meaning you’re unable to use the tax break except in special situations.

Sales of business inventory items are also generally ineligible, as are stocks traded on an exchange. Another example of a sale that doesn’t qualify for installment treatment is selling your property at a loss. Assuming the loss is deductible, you’d have to recognize the full amount in the year of sale.

When the sale does qualify for the installment method, you may still elect out. Reasons to consider doing so include the availability of capital or net operating losses that offset the gain, or credits that reduce the tax. An expectation of higher income in the future – which would put you in a higher tax bracket – may also make reporting the full gain in the year of sale a good idea.

Other items to consider include passive activity losses you’ve been unable to use in prior years and depreciation recapture. Special rules apply to both.

Understanding the tax implications before you sell can save money. Give us a call. We’re ready to help you analyze the pros and cons of reporting your sale on the installment method.

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Don’t overlook tax-saving deductions

March 4, 2011

If you itemize deductions on your tax return, every additional deduction you find will save you money. In the past, higher-income taxpayers had their itemized deductions limited. Effective for 2010, 2011, and 2012 tax returns, there is no income-based reduction in total itemized deductions. That may give higher-income taxpayers another reason to track their deductions carefully.

Here’s a sampling of often-missed deductions.

* Disaster losses not reimbursed by insurance.

* Job-hunting travel and telephone expenses.

* Employment agency and job counseling fees.

* Costs for resume preparation.

* Union or professional association dues.

* Specialized work clothing or small tools used at work.

* Points paid by you on a new home loan.

* Home mortgage points paid by a seller on your behalf.

* Points paid on refinancing your home mortgage (deductible pro rata over the life of the loan).

* Remaining undeducted points on a prior refinancing when you refinance again.

* Your actual expenses or 14¢ a mile for driving in doing charitable work.

* Gambling losses, but only to the extent of your winnings.

* Fees paid for the preparation of your tax return.

For assistance in identifying all the deductions to which you are entitled, contact our office. We are here to help you pay the lowest tax allowed under the law.

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Don’t overlook these deductions; they’re available even if you don’t itemize

February 22, 2011

You’re probably familiar with the deduction choice you must make when you file your tax return. You either have enough deductions (such as mortgage interest, charitable contributions, and medical expenses) to itemize, or you take the standard deduction, a set amount that doesn’t require you to list specific deductible items.

What you may not be as familiar with are those deductions that you are allowed to take “above the line”; that is, deductions that you can take in addition to your itemized deductions or the standard deduction.

Here’s a quick rundown of above-the-line deductions you shouldn’t overlook when you prepare your 2010 tax return.

* A deduction of up to $250 for classroom supplies purchased by teachers for use in their classrooms.

* A deduction of up to $5,000 for individual retirement account contributions if you’re under age 50. If you’re 50 or older, you can deduct up to $6,000.

* A deduction of up to $2,500 for interest paid on student loans.

* A deduction of up to $2,000 or $4,000 for college tuition and fees, depending on your income level.

* A deduction for the expenses connected with a job-related move.

* A deduction for 50% of the self-employment tax paid if you are self-employed.

* A deduction for alimony paid. (Note that child support is not deductible.)

* A deduction for contributions to health savings accounts.

Most of these deductions have qualification requirements or income limitations. Don’t overlook above-the-line tax deductions. An added benefit: These deductions decrease your “adjusted gross income,” an important number on your tax return. The lower your adjusted gross income, the more likely you are to qualify for credits and deductions subject to income thresholds. For details or assistance in finding all the deductions you’re entitled to, give us a call.

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