lthough most people won’t be filing their tax returns for several months, the dog days of summer are actually a great time to start planning for the tax filing season by ensuring your records are organized.
Whether you are an individual taxpayer or a business owner, you can avoid headaches at tax time with good records because they will help you remember transactions you made during the year.
Here are a few things the IRS wants you to know about recordkeeping.
Keeping well-organized records also ensures you can answer questions if your return is selected for examination or prepare a response if you are billed for additional tax. In most cases, the IRS does not require you to keep records in any special manner. Generally speaking, you should keep any and all documents that may have an impact on your federal tax return.
Individual taxpayers should usually keep the following records supporting items on their tax returns for at least three years:
- 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
You should normally keep records relating to property until at least three years after you sell or otherwise dispose of the property. Examples include:
- A home purchase or improvement
- Stocks and other investments
- Individual Retirement Arrangement transactions
- Rental property records
If you are a small business owner, you must keep all your employment tax records for at least four years after the tax becomes due or is paid, whichever is later. Examples of important documents business owners should keep Include:
- Gross receipts: Cash register tapes, bank deposit slips, receipt books, invoices, credit card charge slips and Forms 1099-MISC
- Proof of purchases: Canceled checks, cash register tape receipts, credit card sales slips and invoices
- Expense documents: Canceled checks, cash register tapes, account statements, credit card sales slips, invoices and petty cash slips for small cash payments
- Documents to verify your assets: Purchase and sales invoices, real estate closing statements and canceled checks.
The IRS estimates it takes the average taxpayer almost 30 hours to get their tax paperwork together! Start now and spread it out so it will be much easier and less stressful on you. Who knows, you might even find a few more deductions!
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Every year, the IRS sends millions of letters and notices to taxpayers. Many taxpayers will receive this correspondence during the late summer and fall. Here are eight things every taxpayer should know about IRS notices – just in case one shows up in your mailbox.
1. Don’t panic. Many of these letters can be dealt with simply and painlessly.
2. There are number of reasons the IRS sends notices to taxpayers. The notice may request payment of taxes, notify you of a change to your account or request additional information. The notice you receive normally covers a very specific issue about your account or tax return.
3. Each letter and notice offers specific instructions on what you are asked to do to satisfy the inquiry.
4. If you receive a correction notice, you should review the correspondence and compare it with the information on your return.
5. If you agree with the correction to your account, usually no reply is necessary unless a payment is due.
6. If you do not agree with the correction the IRS made, it is important that you respond as requested. Write to explain why you disagree. Include any documents and information you wish the IRS to consider, along with the bottom tear-off portion of the notice. Mail the information to the IRS address shown in the upper left-hand corner of the notice. Allow at least 30 days for a response.
7. Most correspondence can be handled without calling or visiting an IRS office. However, if you have questions, call the telephone number in the upper right-hand corner of the notice. Have a copy of your tax return and the correspondence available when you call to help us respond to your inquiry.
8. It’s important that you keep copies of any correspondence with your records.
Note: If you had a tax preparer do your return, call them immediately!
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I know it’s only August, but it’s not too early… and it’s not too late!
Is your Home or Small Business saving you lots and lots of money – money you’d be paying in taxes?
That’s right – you can save buckets of money!
A Home/Small business gets extra, special, legal tax benefits from the IRS.
Here are a few of the things you must know:
- How to get a big tax credit to cover start up costs for a new business
- How your business losses can reduce your JOB income (or your spouse’s)
- Why you don’t have to earn a profit in order to deduct expenses
- How you can deduct health expenses you haven’t even thought of
- Why doing your regular errands can pay for your car
- How to get your tax savings back right now!
- And more!
You’re invited to attend a very special teleclass sponsored by Just About Perfect – the program that can show you how to live the life of your dreams! All Just About Perfect members can attend this class for free and through August, you can get a one week free membership.
You’ll be able to take advantage of all the Just About Perfect resources to get support for what’s stopping you from having your Just About Perfect life including unlimited laser coaching, live and recorded teleclasses and our exclusive Just About Perfect software.
Date: Thursday, August 27th
Time: 4:00 pm Pacific/7:00 pm Eastern
Sign up now for your free week at Just About Perfect and learn how to save Buckets of Taxes, too. Here’s the link: http://www.MendYourMoney.com/Perfect.
P.S. If you like Just About Perfect, you can let your friends know and earn referral bonuses, too!
P.S. It’s your legal right to pay as little tax as possible, and these strategies are all legal.
*This information is offered for educational purposes only. In no way is this meant as legal or tax advice. The reader is expected to contact his or her own legal or tax advisor for specific advice to his or her situation.
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]]>Anyone starting a new business this summer should be aware of their federal tax responsibilities. Here are the top seven things the IRS wants you to know if you plan on opening a new business this year.
- First, you must decide what type of business entity you are going to establish. The type your business takes will determine which tax form you have to file. The most common types of business are the sole proprietorship, partnership, corporation and S corporation.
- The type of business you operate determines what taxes you must pay and how you pay them. The four general types of business taxes are income tax, self-employment tax, employment tax and excise tax.
- An Employer Identification Number is used to identify a business entity. Generally, businesses need an EIN. Visit IRS.gov for more information about whether you will need an EIN. You can also apply for an EIN online at IRS.gov.
- Good records will help you ensure successful operation of your new business. You may choose any recordkeeping system suited to your business that clearly shows your income and expenses. Except in a few cases, the law does not require any special kind of records. However, the business you are in affects the type of records you need to keep for federal tax purposes.
- Every business taxpayer must figure taxable income on an annual accounting period called a tax year. The calendar year and the fiscal year are the most common tax years used.
- Each taxpayer must also use a consistent accounting method, which is a set of rules for determining when to report income and expenses. The most commonly used accounting methods are the cash method and an accrual method. Under the cash method, you generally report income in the tax year you receive it and deduct expenses in the tax year you pay them. Under an accrual method, you generally report income in the tax year you earn it and deduct expenses in the tax year you incur them.
- Visit the Business section of IRS.gov for resources to assist entrepreneurs with starting and operating a new business.
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Getting a tax refund this year? Want to stretch it as far as possible? Good for you…
I counsel a LOT of people about money. I see the same mistakes being made over and over again.
If you’ve made ‘em, don’t worry. I’m here to help you do it right THIS year! The fact is, moneymakers need a money coach, just like gymnasts need a gymnastics coach and Tiger Woods needs a golf coach.
As your Money Mending coach, here are the mistakes in thinking and behavior I want you to avoid:
* Don’t think of your refund as free money – or lottery winnings. It’s not! That refund is your hard-earned dollars that you loaned Uncle Sam interest free – all last year.
* Don’t spend the refund – or OVERSPEND it – when you haven’t gotten the cash in your hands yet.
* Don’t spend the whole refund to pay down debt.
OK. So now you’re Money Smart about what NOT to do with that refund in 2009.
Next, here are my EASY Money Mending moves that YOU can make to best handle your income tax refund this year.
First, divide your refund into thirds – 3 equal amounts.
Why 3 equal amounts? Because we want to use that refund – however small or large – to handle the past, the present and the future.
Use one third to handle the PAST by paying down debts. Start with your most pressing debt…either the one with the highest interest rate, or the one with the biggest consequence for not paying it down.
Use one third for something you need or want in the PRESENT. If you can, use that money to have some FUN. Do something that is NOURISHING to you – something that makes you feel GOOD. How about a mini-vacation, or an evening of fine dining and great entertainment, or a day at the spa?
***Of course, if the brakes on the car are shot, or you have some other pressing need, you’ll need to do that FIRST.***
Finally, use one third to handle some aspect of your FUTURE. Here are several Money Mender suggestions for you to think about.
*Put money in your Anti-Emergency Fund – Read more about that here: http://www.mendyourmoney.com/create-your-own-anti-emergency-fund/.
*Put money in your Sleep EZ Fund or save for your retirement through your 401(k), 403(b), IRA (traditional or Roth).
*Put money into college education funds (Coverdell IRAs or 529 plans) for your kids or grandkids.
Why is this “thirds” approach such a great idea? Because you’ll be taking care of a variety of wants and needs – AND taking several easy Money Mending steps forward towards your BIG goal of financial freedom!
THAT is how you can have MORE fun with YOUR tax refund in 2009.
As always, if you have any questions, please go to my web page www.MendYourMoney.com for contact information. I’m here to be YOUR coach, and make sure YOU succeed.
Cindy
PS…Now is also a GREAT time to “check out your paycheck”:
* Re-evaluate how much money you are contributing to your 401(k) or 403(b).
* If you got a whopping refund, remember you were just sticking YOUR money in Uncle Sam’s pocket. No point in giving Uncle Sam an interest free loan! Adjust your deductions so that you have just enough taxes withheld from your paycheck.
PPS…Get your free “A Financial Course In Miracles” sampler package including Prosperity EFT video, at www.AFinancialCourseInMiracles.com.
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There is a “hobby loss” rule that limits deductions attributable to an activity not engaged in for profit. If the activity is not engaged in for profit, the taxpayer may deduct, in the following order (Sec. 183)
Example:
Helen creates beautiful ceramics as an outlet for her personal creativity. This year, friends and family started asking her if they could buy them from her. She didn’t really want to create a business or make a profit but she does have expenses. She sold $2,000 worth of ceramics in 2008. Her expenses were $3,500 but only $2,000 is deductible (subject to the 2% of adjusted gross income limitation) because that is the amount of income she earned.
Warning: The IRS has noted taht claiming losses from hobby activities in excess of income is one of the ost common errors made on individual income tax returns.
If the activity is a “hobby,” then income is reported on page 1 of Form 1040 as “other income” and expenses are reported as miscellaneous itemized deductions on Schedule A (subject to the 2%-of-AGI limit).
If Helen wants to deduct the entire $3,500 of expenses even though she only has $2,000 of income this year, she will need to have profit in 3 out of 5 consecutive years.
Please check with your tax preparer as your situation may be different than described.
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- A place of business used for meeting clients, customers, or patients.
- In connection with the taxpayer’s trade or business if the taxpayer is using a separate structure that is not attached to the dwelling.
Additionally, if the taxpayer is an employee, the business use of the home must be for the convenience of the employer.
Hint: The home office deduction of an employee is a miscellaneous itemized deduction subject to the 2% of adjusted gross income limitation.
If the space is in a separate building, not attached to the taxpayer’s residence, it will qualify so long as it is used exclusively and on a regular basis for business purposes.
Business expenses related to space in a home used regularly (even if not exclusively) as a storage unit for inventory or sample items (or both) are deductible if the home is the sole fixed location of the business.
One exception to the exclusive use test is if the residence is the only fixed location of a trade or business engaged in selling products at retail or wholesale, provided a separate, identifiable portion of the residence is regularly used for inventory storage.
Thus, where a part of a basement is used for this purpose, the proportionate part of the expenses will qualify, even though the basement is used for other purposes as well.
Another exception is where a residence is used to provide day care services to children, handicapped individuals, and the elderly on a regular basis.
Use Form 8829 to figure out your deductions and then enter on Schedule C if you own your business. Employees use Form 2106.
You’ll need to know the square footage of the space used exclusively for business purposes. A portion of your mortgage interest, property taxes, insurance and utilities are deductible.
The first phone line into your home is not deductible although charges such as long distance calls, call waiting and equipment rentals are deductible.
Please check with your tax preparer as your situation may be different than described.
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Unreimbursed employees’ business expenses are miscellaneous itemized deductions and are deductible from adjusted gross income, together with other itemized deductions. Again, the expenses must be “ordinary and necessary” and “reasonable” in amount and exceed 2% of adjusted gross income. Such expenses include the following
- Union and trade-organization dues and convention expenses
- Work clothes, including cleaning and laundry
- Small tools (if useful life is less than one year; otherwise, a depreciation deduction is available)
- Subscription to trade and technical journals and newspapers
- Hiring of assistants and substitutes (if not paid for by employer)
The cost of work clothes and uniforms, including laundry or cleaning, is deductible if the taxpayer’s occupation is one that specifically requires special clothing that is not adaptable to general usage. The IRS lists the following as specifically deductible
- Special uniforms and/or equipment required by ballplayers, fire fighters, police officers, letter carriers, nurses, and civilian faculty members of military schools
- Theatrical clothes and accessories used by professional musicians and entertainers, if used solely in the course of their trade or employment
- Uniforms of air, rail, bus, and other transportation employees, if used solely in the course of employment
- The cost of protective clothing, including safety shoes and helmets, work gloves, oilskins, rubber boots, etc.
Note: If you can wear the same clothes when you’re not working, they’re not deductible. Last year, a Home Depot employee tried to convince me that her clothing was deductible – not. If you do deduct it and you’re audited, it will be disallowed and you’ll pay penalties and interest.
Fees paid to employment agencies for seeking or securing a job in the same line of business are deductible, as are expenses for drafting and printing of job resumes and traveling to job interviews.
Please check with your tax preparer as your situation may be different than described.
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* If you have 1 job, you cannot deduct commuting costs because it is considered a personal expense, not a business expense.
* If you have 2 jobs or 2 places of business, you can deduct the cost of traveling from the frist one to the second one.
* If you claim home office deductions for a home-based business, you can deduct the cost of going to and from home to another business location or a job since the home is also a business location. Hint: keep excellent mileage records.
* The mileage rate for 2008 taxes is 50.5 cents for the first half of 2008 and 58.5 for the second half. Hint: You’d be surprised how quickly that adds up and can help reduce your taxes. Using the standard mileage rate is usually easier than keeping track of all your expenses. It’s OK if the standard mileage rate exceeds your actual expenses. Hint: put aside some of the deducted amount in your Car Repair account because you’re “using up” your car.
* Parking fees and tolls you pay for business use are deductible. Hint: record these expenses in your mileage log.
* The expenses of using a leased car for business can be deducted using the standard mileage rate.
* Employees claim business travel and other business expenses on Schedule A. List first on Form 2106 or 2106-EZ. Expenses must exceed 2% of Adjusted Gross Income. Hint: If you don’t itemize your deductions, you won’t be able to claim any unreimbursed business expenses.
* Business owners claim their travel and business expenses on Schedule C and subtract them from Gross Revenue. They will reduce your profit and both income and self-employment (Social Security and Medicare) taxes.
Please check with your tax preparer as your situation may be different than described.
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* If you’re on the road for just a day (no overnight), the cost of your meals is not deductible. So, if you travel on businesss to a nearby city, you can only deduct the cost of transportation not the cost of meals or other traveling expenses. Hint: if you meet someone for a meal, the cost may be deductible at 50%.
* You can deduct the cost of travel only if it is an “ordinary and necessary” business expense. You can deduct travel expenses incurred in attending a trade, business, professional convention or meeting if there’s a true relationship between you trade/business and will benefit your business. If it’s for political or social purposes that don’t relate to your business, the expenses are not deductible. Hint: to deduct the costs of social events, make sure to document any business discussions and who you talked to; follow up with those people afterwards.
* If the travel is both business and pleasure, the traveling expenses may still be allowable if the trip is entirely within the United States and it can be shown that the primary purpose for the trip was to transact business. However, the cost of meals, lodging, and other expenses incurred during the pleasure portion of the trip are nondeductible. Hint: document, document, document.
* If the you travel outside the United States for business purposes and engage in both business and personal activities, the transportation expenses to the destination must be allocated in proportion to the time spent for business purposes. There are some additional rules about international travel for both business and personal that you should review with your tax preparer. Hint: keep a detailed log in your calendar because the more info you have, the better in case of an audit.
* If your spouse or other family member goes with you on a bueinss trip, the expenses are not deductible unless they also work for your business and their presence has a real business purpose, too.
* A maximum deduction of $2,000 per individual each year is allowed for conventions held on U.S. cruise ships.
Please check with your tax preparer as your situation may be different than described.
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2009 Gross Income |
$68,953 |
|
Estimated Federal Taxes |
$5,251 |
|
Marginal Tax Bracket |
15% |
|
% of Income to Taxes |
7.60% |
You can see that the marginal tax bracket is higher than the actual percentage of gross income paid to taxes. That’s because the government taxes the first money you make at a lesser rate than the later money and what that means is that the more you make, the more you pay in taxes.
But, if you are in the 33% tax bracket, it doesn’t mean that you pay 33% of your income in taxes. It does mean that each additional dollar you make over a certain threshold (that changes each year) is taxed at 33% while lower amounts are still taxed at lower percentage rates.
For a single person in 2008, taxable income (after deductions and the personal exemption) between $0 and $8,025 is taxed at 10% and income between $8,026 and $32,550 is taxed at 15%. If you had $32,551 ($1 more) in taxable income, that extra dollar would be in the 25% bracket and you’d pay an additional 25 cents in federal income tax but the lower amounts are unaffected. That’s why people look for additional deductions (retirement, charitable contributions, medical, etc.) when they move up to the next bracket.
This taxable income (estimated, of course) is at or below the $32,550 so you are in the 15% marginal tax bracket.
There’s still time in December to see your tax professional and to increase your deductions if it will reduce your taxable income and your taxes. The best ways to reduce your taxable income is through charitable contributions, medical expenses (check with your preparer on this one – it’s tricky) and retirement contributions.
This is an example and is not a guarantee of your tax bill. Please check with your personal tax preparer.
Please feel free to comment below.
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Contributions to some accounts must be completed by December 31, 2008 while other accounts can still accept contributions until April 15, 2009. Check with your employer or tax preparer regarding your situation.
Higher way earners may also phase out of some of the contributions or receive reduced tax benefits.
Retirement contributions can be quite complicated so check with your professionals to make sure you do it correctly.
If you or someone you know turned 70 1/2 last year, they’ll need to take Required Minimum Distributions (RMD). The IRS requires this because they’ll get taxes on the amounts withdrawn and they’ll charge a 50% penalty if you fail to do this.
Last year, a retired man came into my tax office on April 3rd and hadn’t taken his RMD of almost $10,000. That meant that he would have had to pay a $5,000 penalty! Fortunately, we were able to appeal it since he was only a few days past the deadline and the penalty was waived.
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]]>Question: Can I still get my 2005, 2006 or 2007 refund?
Answer: If you didn’t file a tax return in 2005, 2006 or 2007, there’s still time.
But, for 2004, it’s too late because there’s a 3 year statute of limitations on refunds from the date it was originally due.
So you have until April 15, 2009 for a 2005 refund and April 15, 2010 for 2006. But why wait? The IRS isn’t paying interest!
This is all true for state refunds, too. In most cities, you can still get in to H&R Block to have your old returns completed. (Note: I am an H&R Block tax preparer licensed by Oregon).
There’s no penalty for filing late but if you have back IRS taxes, child support or student loans, you may not get it all back. Any refund you have coming to you will be applied to those debts, first. But at least you won’t owe them any more (or your balance will be lower).
If you want to do it yourself, you can download a 2004 Form 1040 from IRS.gov. If you need other forms, you can get them from the Prior Year Forms. Instruction booklets are also there.
NOTE: the IRS won’t send you a 2005 refund if you haven’t filed for 2006 and 2007.
Your Economic Stimulus check will also be “snagged” if you have back tax debt.
What are you waiting for?
Warmly, Cindy
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