Whether you are an individual needing a few pointers on filling out your 1040, or a small business owner looking for tips on how to lower you tax liability, you will find tips here to help you out. Keep in mind, if you can’t find an answer to your question on this website, you can always give us a call, or fill out the short form on the right side of the page.
Tax Tip Topics
» Filing your tax return online
» Record keeping – what to keep and for how long
» Home office deduction– do you qualify?
» Looking for a job, and saving money
» FSAs, 401ks, and other fringe benefit plans
» Casualty loss: when disasters happen, every penny counts.
» Understanding Self Employment Tax
» Mileage Logs– a business owners best friend
Expecting a refund? Get it faster, by filing your tax return online.
If you are still filing your tax return by mail, you are prolonging the wait time for your refund check by 3 to 6 weeks.
Filing online offers the following 3 advantages:
1. It is safe & secure
You don’t have to wonder if the IRS received your return on time
2. It is convenient
The IRS will deposit your refund check directly into your bank account
3. It is faster
Get your refund in as little as 3 weeks
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Record keeping, what to keep & for how long...
Ever wondered how long to keep your mortgage statements or travel receipts? Well, you are not alone. Each year thousands of Americans throw away important documents they needed to keep, and store documents they could have thrown away!
As a general rule, most tax related records should be kept for 3 years. However, some documents such as bill of sales, documents relating to the purchase/sale of stock, buy/sell agreements for real estate should be kept longer.
If you are interested or have questions as to which records to keep or for how long, the IRS actually has a very helpful publication dedicated just to record keeping (see IRS Publication 552).
Are you reading this article from a home office?
If you are, then you might be a candidate for the IRS home office deduction.
The IRS has a special deduction for people that work from home either for themselves or remotely for a company. This is an area where you can really capitalize on some tax savings, but you need to first make sure that your situation fits within the guidelines laid out by the IRS.
For example: you must use the space regularly/exclusively for business use, and your deduction is directly related to the actual percentage of your home used for business purposes.
If you work from home and are self employed, you will need to file IRS form 8829 with your 1040 Schedule C.
To learn more about the home office deduction, take a look at IRS Publication 587, and talk with a tax professional to see if you qualify.
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Out of work? Looking for a job?
You might be able to write off some of your job search expenses.
If you are or were recently one of the millions of Americans out of work, and seeking a job, there are special deductions available to you by the IRS. The IRS does allow you to deduct certain job-hunting expenses in some cases. But, before you get too excited, there are stipulations as to what and when they apply.
To qualify as a job hunting expense, you have to incur the expense while looking for a job in your “current occupation”. For example: if you are in a high-paying profession or skilled labor, then you can deduct some of the employment agency fees you incur – as long as the agency is trying to place you in a job in your current field of work
If you prefer to mail out hard copies of your resume, then the IRS allows some of the preparation, printing, and associated mailing cost, if you are seeking a job in your current occupation.
You can even deduct travel related expenses in some cases, but you have to be able to prove that the travel is directly for the purpose of seeking a job in your current occupation, and that the majority of the time & resources involved were for that purpose.
To get a better understanding of what expenses qualify as job seeking deductions, talk with your tax professional or download and read IRS Publication 529.
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Did you know that Uncle Sam is willing to contribute to your health & retirement plan?
Does your employer offer fringe benefit programs like an FSA or 401k? If they do, you should think about participating in them if you don’t already. They offer great tax savings for you. Think of it like having a program setup where Uncle Sam contributes to your health or retirement plan.
Here are 2 quick examples:
FSA (Federal Savings Account)
If you are participating in an FSA, then you can have your employer set aside part of your salary, wage, etc to pay for out of pocket medical expenses and prescription medications. Why would you do this?
Because, you can turn around and spend this money on medical expenses you were going to incur anyways but with the one caveat, that you won’t have to pay tax on the money you set aside!
The 401k, a retirement savings account, can give you two distinct advantages over ordinary savings accounts. First, your employer has the option of matching a portion of your contributions. And second, the IRS allows you to deduct your contributions from your federal taxable income. This can add up to a big tax savings…To learn more about what your company may offer in terms of FSA, 401ks, and other fringe benefit programs, talk with your human resources department. To explore options of how to maximize your tax savings using programs like this, speak with a tax professional.
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Casualty loss: when disasters happen, every penny counts.
One of every homeowner’s fears is coming home to a flooded house. The older a home gets, the more we worry that a pipe burst is just around the corner – especially come winter time! When disaster does happen, like a flood, it can be devastating to your everyday life and have a huge impact on your personal or business finances. If you experience a personal disaster such as a flood, then the IRS does have some deductions in place to help. Normally, the IRS allows you to deduct casualty and theft losses relating to your home, household items and vehicles on your Federal income tax return. You may not deduct casualty and theft losses covered by insurance unless you file a timely claim for reimbursement, and you must reduce the loss by the amount of any reimbursement.
What is a casualty loss?
The IRS defines casualty loss as loss due to the result from the damage, destruction or loss of your property from any sudden, unexpected, or unusual event such as a flood, hurricane, tornado, fire, earthquake or even volcanic eruption. A casualty does not include normal wear and tear or progressive deterioration.
The IRS defines a casualty as damage, destruction, or loss of property resulting from an identifiable event that is sudden, unexpected, or unusual.
The IRS defines theft as the taking and removing of money or property with the intent to deprive the owner of it. The taking of property must be illegal under the law of the state where it occurred and it must have been done with criminal intent.
How do I claim a casualty loss?
If you think you will qualify for a casualty loss, you can do so by filling out and filing IRS form 4684. In addition to filing IRS form 4684, you are required to claim your casualty and theft losses as an itemized deduction on IRS form 1040, Schedule A.
How do calculate casualty loss?
For property held by you for personal use, once you have subtracted any salvage value and any insurance or other reimbursement, you must subtract $100 from each casualty or theft event that occurred during the year. Then add up all those amounts and subtract 10% of your adjusted gross income from that total to calculate your allowable casualty and theft losses for the year. In some cases like a federally declared natural disaster, the 10% limitation can be waived.
Casualty loss example
Each personal casualty or theft loss is limited to the excess of the loss over $100. In addition, the 10%-of-AGI (Adjusted Gross Income) limit continues to apply to the net loss. To illustrate how this works, let’s use the following example:
You earn $50,000 a year, you are in a 15% tax bracket, and your house floods and causes $5,500 in damage.
Income: $50,000 X 10% = $5,000
Losses: $5,500 – 5,000 = $500 - $100 = $400 tax deduction.
Result: $400 X 15% = $60 tax savings
To learn more about the casualty loss deduction, take a look at IRS Publication 547, and talk with a tax professional to see if you qualify.
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Understanding Self Employment Tax
What is Self Employment Tax?
Regardless if you work for a company as an employee or work for yourself, your wages are subject to income tax. When you work for a company, these taxes are taken out of your paycheck and paid to the federal government for you. But if you are self employed, the responsibility falls to you to ensure the appropriate taxes are withheld and paid on time. This is where self employment tax (SE Tax) comes into play. As an employee, you are only responsible for 7.65% of the tax, and your employer pays the other 7.65%. As a self employed individual, you pay both the employee & employer portions for a total of 15.3%.
When do I pay self employment tax?
Taxes are normally withheld from your paycheck on a weekly or biweekly basis, but as a self employed individual, you are still required to make regular timely payments to the IRS. This is usually done through estimated quarterly tax payments. To learn more about estimated tax payments, review IRS Publication 505.
Who has to pay self employment tax?
The IRS states that anyone who is self employed, and has net earnings of $400 a year is subject to self employment tax. To determine your net earnings subject to self employment tax, use IRS form 1040, Schedule SE.
Do I get a deduction for paying self employment tax?
The IRS does allow you to deduct half of your self employment tax in calculating your adjusted gross income (AGI). Be careful though, that figure does not affect your self employment net earnings or your self employment tax.If you are self employed or recently started a business, it is a wise to decision to speak with a tax professional about tax planning, and ways to maximize your tax savings.
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Mileage logs - the small business owner's best friend!
As a general rule, most tax deductions allow you to receive a “dollar for dollar” exchange. In other words, if you spend a dollar on an item, you get to deduct one dollar on your tax return.
Vehicle mileage is an exception to this rule. As a small business owner you have the choice of deducting the greater of actual money spent operating your vehicle, or the IRS allowable rate ($.51 for 2011) for every business mile driven. For most vehicles the small business owner will come out way ahead by deducting the $.51 per mile. This means that you may actually get a tax deduction that's better than a dollar for every dollar you spent.
Now, before you get too excited, the IRS is wise to this, and mileage is one of the areas where the IRS is most likely to audit you. Your defense for this type of audit is going to be a contemporaneous mileage log. Contemporaneous means that you keep notes everyday as events are occurring, instead of trying to go back at the end of the year and figure out how many miles you think you drove.
The ideal mileage log will have the following pieces of information for every single trip:
1. Reason for the business trip
2. Odometer reading at the beginning of the trip
3. Odometer reading at the end of the trip
4. The date (activity log)
Many small business owners are guilty of making these numbers up as they go along and the IRS knows this. By keeping a contemporaneous mileage log you are insured that you maximize your tax deduction and if the IRS ever wishes to audit you, you will be prepared to prove that you are entitled to the money.
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If you are interested in speaking with a tax advisor or would like to schedule a free consultation, please call our office today (888) 918-8121, or fill out the short form on the right side of this page.