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Archive for August, 2011

Keep Good Records Now to Reduce Tax-Time Stress

August 26th, 2011

You may not be thinking about your tax return right now, but summer is a
great time to start planning for next year. Organized records not only make
preparing your return easier, but may also remind you of relevant transactions,
help you prepare a response if you receive an IRS notice, or substantiate items
on your return if you are selected for an audit.

Here are a few things you should know about recordkeeping.

1. In most cases, the IRS does not require you to keep records in any
special manner. Generally, you should keep any and all documents that may have
an impact on your federal tax return. It’s a good idea to have a designated
place for tax documents and receipts.

2. 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

3. 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

Nine Tips for Charitable Taxpayers

August 22nd, 2011

If you make a donation to a charity this year, you may be able to take a
deduction for it on your 2011 tax return. Here are the top nine things the IRS
wants every taxpayer to know before deducting charitable donations.

  1. Make sure the
    organization qualifies
    Charitable contributions must be made to qualified
    organizations to be deductible. You can ask any organization whether it is
    a qualified organization or check IRS Publication 78, Cumulative List of
    Organizations. It is available at www.IRS.gov.
  2. You must itemize Charitable
    contributions are deductible only if you itemize deductions using Form
    1040, Schedule A.
  3. What you can deduct You generally can
    deduct your cash contributions and the fair market value of most property
    you donate to a qualified organization. Special rules apply to several
    types of donated property, including clothing or household items, cars and
    boats.
  4. When you receive
    something in return
    If your contribution entitles you to receive
    merchandise, goods, or services in return – such as admission to a charity
    banquet or sporting event – you can deduct only the amount that exceeds
    the fair market value of the benefit received.
  5. Recordkeeping Keep good records of
    any contribution you make, regardless of the amount. For any cash
    contribution, you must maintain a record of the contribution, such as a
    cancelled check, bank or credit card statement, payroll deduction record
    or a written statement from the charity containing the date and amount of
    the contribution and the name of the organization.
  6. Pledges and payments Only contributions
    actually made during the tax year are deductible. For example, if you
    pledged $500 in September but paid the charity only $200 by Dec. 31, you
    can only deduct $200.
  7. Donations made near the
    end of the year

    Include credit card charges and payments by check in the year you give
    them to the charity, even though you may not pay the credit card bill or
    have your bank account debited until the next year.
  8. Large donations For any contribution of
    $250 or more, you need more than a bank record. You must have a written
    acknowledgment from the organization. It must include the amount of cash
    and say whether the organization provided any goods or services in
    exchange for the gift. If you donated property, the acknowledgment must
    include a description of the items and a good faith estimate of its value.
    For items valued at $500 or more you must complete a Form 8283, Noncash
    Charitable Contributions, and attach the form to your return. If you claim
    a deduction for a contribution of noncash property worth more than $5,000,
    you generally must obtain an appraisal and complete Section B of Form 8283
    with your return.
  9. Tax Exemption Revoked Approximately 275,000
    organizations automatically lost their tax-exempt status recently because
    they did not file required annual reports for three consecutive years, as
    required by law. Donations made prior to an organization’s automatic
    revocation remain tax-deductible. Going forward, however, organizations
    that are on the auto-revocation list that do not receive reinstatement are
    no longer eligible to receive tax-deductible contributions.

Back-to-School Tips for Students and Parents Paying College Expenses

August 16th, 2011

Whether you’re a recent graduate going to college for the first time or a
returning student, it will soon be time to get to campus – and payment
deadlines for tuition and other fees are not far behind. The Internal Revenue
Service reminds students or parents paying such expenses to keep receipts and
to be aware of some tax benefits that can help offset college costs.

Typically, these benefits apply to you, your spouse or a dependent for whom
you claim an exemption on your tax return.

  1. American Opportunity
    Credit 

    This credit, originally created under the American Recovery and
    Reinvestment Act, has been extended for an additional two years – 2011 and
    2012. The credit can be up to $2,500 per eligible student and is available
    for the first four years of post secondary education. Forty percent of
    this credit is refundable, which means that you may be able to receive up
    to $1,000, even if you owe no taxes. Qualified expenses include tuition
    and fees, course related books, supplies and equipment. The full credit is
    generally available to eligible taxpayers whose modified adjusted gross
    income is below $80,000 ($160,000 for married couples filing a joint
    return).
  2. Lifetime Learning
    Credit 

    In 2011, you may be able to claim a Lifetime Learning Credit of up to
    $2,000 for qualified education expenses paid for a student enrolled in
    eligible educational institutions. There is no limit on the number of
    years you can claim the Lifetime Learning Credit for an eligible student,
    but to claim the credit, your modified adjusted gross income must be below
    $60,000 ($120,000 if married filing jointly).
  3. Tuition and Fees
    Deduction

    This deduction can reduce the amount of your income subject to tax by up
    to $4,000 for 2011 even if you do not itemize your deductions. Generally,
    you can claim the tuition and fees deduction for qualified higher
    education expenses for an eligible student if your modified adjusted gross
    income is below $80,000 ($160,000 if married filing jointly).
  4. Student loan interest
    deduction

    Generally, personal interest you pay, other than certain mortgage
    interest, is not deductible. However, if your modified adjusted gross
    income is less than $75,000 ($150,000 if filing a joint return), you may
    be able to deduct interest paid on a student loan used for higher
    education during the year. It can reduce the amount of your income subject
    to tax by up to $2,500, even if you don’t itemize deductions.

For each student, you can choose to claim only one of the credits in a
single tax year. However, if you pay college expenses for two or more students
in the same year, you can choose to take credits on a per-student, per-year
basis. You can claim the American Opportunity Credit for your sophomore daughter
and the Lifetime Learning Credit for your senior son.

You cannot claim the tuition and fees deduction for the same student in the
same year that you claim the American Opportunity Credit or the Lifetime
Learning Credit. You must choose to either take the credit or the deduction and
should consider which is more beneficial for you.

Ten Tax Tips for Individuals Who Are Moving This Summer

August 15th, 2011

Summertime is a popular time for people with children to move since school
is out. Moving can be expensive, but the IRS offers 10 tax tips on deducting
some of those expenses if your move is related to starting a new job or a new
job location.

  1. Move must be closely
    related to start of work
    Generally, you can consider moving expenses incurred
    within one year from the date you first reported to a new location, as
    closely related in time to the start of work.
  2. Distance Test Your move meets the
    distance test if your new main job location is at least 50 miles farther
    from your former home than your previous job location was.
  3. Time Test You must work full time
    for at least 39 weeks during the first 12 months after you arrive in the
    general area of your new job location, or at least 78 weeks during the
    first 24 months if you are self-employed. If your income tax return is due
    before you’ve satisfied this requirement, you can still deduct your
    allowable moving expenses if you expect to meet the time test in the
    following years.
  4. Travel You can deduct lodging
    expenses for yourself and household members while moving from your former
    home to your new home. You can also deduct transportation expenses,
    including airfare, vehicle mileage, parking fees and tolls you pay to
    move, but you can only deduct one trip per person.
  5. Household goods You can deduct the cost
    of packing, crating and transporting your household goods and personal
    property. You may be able to include the cost of storing and insuring
    these items while in transit.
  6. Utilities You can deduct the
    costs of connecting or disconnecting utilities.
  7. Nondeductible expenses You cannot deduct as
    moving expenses: any part of the purchase price of your new home, car
    tags, drivers license, costs of buying or selling a home, expenses of
    entering into or breaking a lease, security deposits and storage charges
    except those incurred in transit.
  8. Form You can deduct only
    those expenses that are reasonable for the circumstances of your move. To
    figure the amount of your moving expense deduction use Form 3903, Moving
    Expenses.
  9. Reimbursed expenses If your employer
    reimburses you for the cost of the move, the reimbursement may have to be
    included on your income tax return.
  10. Update your address When you move, be sure
    to update your address with the IRS and the U.S. Postal Service to ensure
    you receive refunds or correspondence from the IRS. Use Form 8822, Change
    of Address, to notify the IRS.

Ten Tips for Taxpayers Who Owe Money to the IRS

August 7th, 2011

While the majority of Americans get a tax refund from the Internal Revenue
Service each year, there are many taxpayers who owe and some who can’t pay the
tax all at once.   The IRS has a number of ways for people to pay
their tax bill.

The IRS has announced an effort to help struggling taxpayers get a fresh
start with their tax liabilities. The goal of this effort is to help
individuals and small business meet their tax obligations, without adding
unnecessary burden.  Specifically, the IRS has announced new policies and
programs to help taxpayers pay back taxes and avoid tax liens.

Here are ten tips for taxpayers who owe money to the IRS.

  1. Tax bill payments If you get a bill this
    summer for late taxes, you are expected to promptly pay the tax owed
    including any penalties and interest.  If you are unable to pay the
    amount due, it is often in your best interest to get a loan to pay the
    bill in full rather than to make installment payments to the IRS.
  2. Additional time to pay Based on your
    circumstances, you may be granted a short additional time to pay your tax
    in full. A brief additional amount of time to pay can be requested through
    the Online Payment Agreement application at www.irs.gov
    or by calling 800-829-1040.
  3. Credit card payments You can pay your bill
    with a credit card. The interest rate on a credit card may be lower than
    the combination of interest and penalties imposed by the Internal Revenue
    Code. To pay by credit card contact one of the following processing
    companies: Link2Gov at 888-PAY-1040 (or www.pay1040.com),
    RBS WorldPay, Inc. at 888-9PAY-TAX (or www.payUSAtax.com),
    or Official Payments Corporation at 888-UPAY-TAX (or www.officialpayments.com/fed).
  4. Electronic Funds
    Transfer

    You can pay the balance by electronic funds transfer, check, money order,
    cashier’s check or cash.  To pay using electronic funds transfer, use
    the Electronic Federal Tax Payment System by either calling 800-555-4477
    or using the online access at www.eftps.gov.
  5. Installment Agreement You may request an
    installment agreement if you cannot pay the liability in full. This is an
    agreement between you and the IRS to pay the amount due in monthly
    installment payments. You must first file all required returns and be
    current with estimated tax payments.
  6. Online Payment Agreement
    If
    you owe $25,000 or less in combined tax, penalties and interest, you can
    request an installment agreement using the Online Payment Agreement
    application at www.irs.gov.
  7. Form 9465 You can complete and
    mail an IRS Form 9465, Installment Agreement Request, along with your bill
    in the envelope you received from the IRS.  The IRS will inform you
    (usually within 30 days) whether your request is approved, denied, or if
    additional information is needed.
  8. Collection Information
    Statement

    You may still qualify for an installment agreement if you owe more than
    $25,000, but you are required to complete a Form 433F, Collection
    Information Statement, before the IRS will consider an installment
    agreement.
  9. User fees If an installment
    agreement is approved, a one-time user fee will be charged.  The user
    fee for a new agreement is $105 or $52 for agreements where payments are
    deducted directly from your bank account.  For eligible individuals
    with lower incomes, the fee can be reduced to $43.
  10. Check withholding Taxpayers who have a
    balance due may want to consider changing their W-4, Employee’s
    Withholding Allowance Certificate, with their employer. A withholding
    calculator at www.irs.gov can help
    taxpayers determine the amount that should be withheld.