Spring Cleaning: Tax Records You Can Throw Away

Spring is a great time to clean out that growing mountain of tax and financial papers that clutters your home and office. Here's what you need to keep and what you can throw out without fearing the wrath of the IRS.

Let's start with your "safety zone", the IRS statute of limitations. This limits the number of years during which the IRS can audit your tax returns. Once that period has expired, the IRS is legally prohibited from even asking you questions about those returns.

The concept behind it is that after a period of years, records are lost or misplaced and memory isn't as accurate as we would hope. There's a need for finality. Once the statute of limitations has expired, the IRS can't go after you for additional taxes, but you can't go after the IRS for additional refunds, either.

The Three-Year Rule

For assessment of additional taxes, the statute of limitation runs generally three years from the date you file your return. If you're looking for an additional refund, the limitations period is generally the later of three years from the date you filed the original return or two years from the date you paid the tax. There are some exceptions:

• If you don't report all your income and the unreported amount is more than 25% of the gross income actually shown on your return, the limitation period is six years.

• If you've claimed a loss from a worthless security, the limitation period is extended to seven years.

• If you file a 'fraudulent' return, or don't file at all, the limitations period never begins to run. The IRS can, in fact, get you at any time.

• If you're deciding what records you need or want to keep, you have to ask what your chances of an audit are. A tax audit is an IRS verification of items of income and deductions on your return. So you should keep records to support those items until the statute of limitations runs out.

Assuming that you've filed on time and paid what you should, you only have to keep your tax records for three years, but some records have to be kept longer than that.

Remember, the three-year rule relates to the information on your tax return. But, some of that information may relate to transactions more than three years old.

Here's a Checklist Of The Documents You Should Hold Onto.

1. Capital gains and losses. Your gain is reduced by your basis -- your cost (including all commissions) plus, with mutual funds, any reinvested dividends and capital gains. But you may have bought that stock five years ago and you've been reinvesting those dividends and capital gains over the last decade. And don't forget those stock splits.

   So you don't ever want to throw these records away until after you sell the securities. And then if you're audited, you're going to have to prove those numbers. So you'll need to keep those records for at least three years after you file the return reporting their sales.

2. Expenses on your home. Cost records for your house and any improvements should be kept until the home is sold. It's just good practice, even though most homeowners won't face any tax problems. That's because profit of less than $250,000 on your home ($500,000 on a joint return) isn't subject to taxes under tax legislation enacted in 1997.

   If the profit is more than $250,000 ($500,000 on a joint return), or if you don't qualify for the full gain exclusion, then you're going to need those records for another three years after that return is filed. Most homeowners probably won't face that issue thanks to the 1997 tax law, but better safe than sorry.

3. Business records. I must warn you: Business records can become a nightmare. Non-residential real estate is now depreciated over 39 years. You could be audited on the depreciation up to three years after you file the return for the 39th year. That's a long time to hold onto receipts, but you may need to validate those numbers.

4. Employment, bank and brokerage statements. Keep all your W-2s, 1099s, brokerage and bank statements to prove income until three years after you file or longer if you need to. Don't even think about dumping checks, receipts, mileage logs, tax diaries and other documentation that substantiate your expenses.

5. Tax returns. Keep copies of your tax returns as well. You can't rely on the IRS to actually have a copy of your old returns. I recommend my clients keep tax records for 6 years.

   The bottom line is that you've got to keep those records until they can no longer affect your tax return, plus the three-year statute of limitations.

6. Social Security Records. You will need to keep some records for Social Security purposes, so check with the Social Security Administration each year to confirm that your payments have been appropriately credited. If they're wrong, you'll need your W-2 or copies of your Schedule C (if self employed) to prove the right amount. Don't dump those records until after you've validated those contributions.

   You can confirm your payments and estimate your future benefits by filing Form SSA-7004 with the Social Security Administration. You can download the form, or apply online.

While it may bring you some psychological satisfaction to review your financial journey from poverty to wealth, if you find some tax returns that were filed with Roman numerals, it's probably time to clean out your attic.

Beware of Tax Consequences of a Job Loss

Given the current economic conditions, you may be faced with tax questions surrounding a job loss and unemployment issues.

Here are some answers:

Q: What if I receive unemployment compensation?

A: Unemployment compensation you received under the unemployment compensation laws of the United States or of a state must be included in your income. It is taxable income. If you received unemployment compensation, you should receive Form 1099-G showing the amount you were paid and any federal income tax you elected to have withheld.

Note: The American Recovery and Reinvestment Act will temporarily change the taxation of unemployment benefits for the 2009 tax year only. Under the new economic stimulus law, the first $2,400 of unemployment benefits received in 2009 will not be subject to federal taxes. The exemption will be reflected on tax returns filed in 2010.

Q: What if I lose my job?

A: The loss of a job may create new tax issues. Severance pay and unemployment compensation are taxable. Payments for any accumulated vacation or sick time also are taxable. You should ensure that enough taxes are withheld from these payments or make estimated tax payments to avoid a big bill at tax time. Public assistance and food stamps are not taxable. The IRS has updated a helpful publication which lists a number of job-loss related tax issues.

Q: What if I am searching for a job?

A: You may be able to deduct certain expenses you incur while looking for a new job, even if you do not get a new job. Expenses may include travel, resume and outplacement agency fees. Moving costs for a new job at least 50 miles away from your home may also be deductible.

Q: What if my employer goes out of business or into bankruptcy?

A: Your employer must provide you with a 2009 W-2 Form showing your wages and withholdings by February 1, 2010. You should keep up-to-date records or pay stubs until you receive your Form W-2. If your employer or its representatives fails to provide you with a Form W-2, contact the IRS and we can help by providing you with a substitute Form W-2. If your employer is liquidating your 401(k) plan, you have 60 days to roll it over to another qualified retirement plan or IRA.

If you have experienced a job loss and have questions, please call us. You need to be prepared for the tax consequences.

Cash Management Tips for Small Businesses

Cash is the lifeblood of any small business. Here are some tips to help ensure that your business maintains a sufficient cash flow to meet its financial goals and keep running efficiently:

Toughen up your credit policies. Review the payment terms you offer to customers and tighten them up if slow payment is a problem area for your business. For instance, how long are customers given to pay? What action will be taken if a payment is missed? Be sure your credit terms are communicated effectively to customers before transactions are entered into.

Tip: Consider requiring advance payments 'at least in part' for new customers.

Tip: For many businesses, a routine credit check should be performed before a sales or service transaction is entered into with a new customer.

Come up with a budget - and stick to it. Surprisingly, many small businesses do not engage in the budgeting process. A budget can be extremely effective in helping you keep track of whether cost- and revenue-related goals are being met. Depending on the size and complexity of the business, the budget process might be informal or formal, lengthy or simple. Projected revenues and expenses should be broken down by months.

Tip: If you don't already do so, budget for next year's revenues and expenses near the end of each year. Review budgeted to actual results monthly.

Tighten up billing. If collecting bills has become a problem for your business, you might want to consider increasing the intervals at which customers are billed--e.g., from three months to one month, or from one month to two weeks.

Tip: Review your accounts receivable weekly or even daily to make sure slow payers are not allowed to slide.

If you have questions regarding your company's cash flow and credit/collection policies, please contact us.

Last Minute Tax Advice

It is April already and your taxes are not yet done. Here are some stress relieving ideas to help you.

• Don't Procrastinate Any More - Resist the temptation to put off your taxes until the very last minute. Your haste to meet the filing deadline may cause you to overlook potential sources of tax savings and will likely increase your risk of making an error.

• Don't Panic if You Can't Pay - If you can't immediately pay the taxes you owe, consider some stress-reducing alternatives. You can apply for an IRS installment agreement, suggesting your own monthly payment amount and due date, and getting a reduced late payment penalty rate. You also have various options for charging your balance on a credit card. There is no IRS fee for credit card payments, but the processing companies charge a convenience fee. Electronic filers with a balance due can file early and authorize the government's financial agent to take the money directly from their checking or savings account on the April due date, with no fee.

• Request an Extension of Time to File - But Pay on Time - If the clock runs out, you can get an automatic six month extension bringing the filing date to October 15, 2010. The extension itself does not give you more time to pay any taxes due. You will owe interest on any amount not paid by the April deadline, plus a late payment penalty if you have not paid at least 90 percent of your total tax by that date. Call us for a variety of easy ways to apply for an extension.

Claiming the Child Tax Credit

With the Child Tax Credit, you may be able to reduce the federal income tax you owe by up to $1,000 through 2010 for each qualifying child under the age of 17.

A qualifying child for this credit is someone who meets the following criteria:

1. Was under age 17 at the end of 2009

2. Relationship is your son, daughter, adopted child, stepchild or eligible foster child, sibling, or stepsibling or a descendant of any of these individuals

3. Is a U.S. citizen or resident alien

4. Support did not provide over half of his or her support and did live with you for more than half of 2009 (note that some exceptions to this criteria exist).

The credit is limited if your modified adjusted gross income is above a certain amount. The amount at which this phase-out begins varies depending on your filing status:

• Married Filing Jointly -- $110,000
• Married Filing Separately -- $55,000
• All others -- $75,000

In addition, the Child Tax Credit is generally limited by the amount of the income tax you owe as well as any alternative minimum tax you owe.

If the amount of your Child Tax Credit is greater than the amount of income tax you owe, you may be able to claim some or all of the difference as an 'additional' Child Tax Credit. The additional Child Tax Credit may give you a refund even if you do not owe any tax. Additional Child Tax Credit is based on earned income in excess of $3,000 in 2009 and 2010. For 2009, the total amount of the Child Tax Credit and any additional Child Tax Credit cannot exceed the maximum of $1,000 for each qualifying child.

Note: The American Recovery and Reinvestment Act of 2009 temporarily reduced the earned income floor for the additional Child Tax Credit to $3,000 in 2009 and 2010 (from the originally proposed $12,550).

You may claim the Child Tax Credit on Form 1040 or 1040A. Details on how to compute the credit can be found in Publication 972, Child Tax Credit or call us for help.

Are You Eligible for a Tax Credit?

You should consider claiming tax credits for which you might be eligible when completing your federal income tax returns. A tax credit is a dollar-for-dollar reduction of taxes owed. Some credits are refundable - taxes could be reduced to the point that you would receive a refund rather than owing any taxes. You should consider your eligibility for the credits listed below:

• The Earned Income Tax Credit is a refundable credit for low-income working individuals and families. Income and family size determine the amount of the credit. For more information, see IRS Publication 596, Earned Income Credit.

• The Child and Dependent Care Credit is for expenses paid for the care of children under age 13, or for a disabled spouse or dependent, to enable the taxpayer to work or look for work. For more information, see IRS Publication 503, Child and Dependent Care Expenses.

• The Child Tax Credit is for people who have a qualifying child. The maximum amount of the credit is $1,000 for each qualifying child. This credit can be claimed in addition to the credit for child and dependent care expenses. For more information on the Child Tax Credit, see IRS Publication 972, Child Tax Credit.

• Adoption Credit: Adoptive parents may qualify for a tax credit of up to $12,150 in 2009 ($12,170 in 2010) for qualifying expenses paid to adopt an eligible child. The credit may be allowed for the adoption of a child with special needs even if you do not have any qualifying expenses. The adoption tax credit does have income phase-out limits, starting at $182,180 in 2009 (and $182,520 in 2010). For more information, see the instructions for Form 8839, Qualified Adoption Expenses.

  Note: The adoption credit is scheduled to revert back at the end of 2010 to its pre-2001 dollar limit of $5,000, or $6,000 if a special needs child is adopted.

• Credit for the Elderly or the Disabled: This credit is available to individuals who are either age 65 or older or are under age 65 and retired on permanent and total disability, and who are U.S. citizens or residents. There are income limitations. For more information, see IRS Publication 524, Credit for the Elderly or the Disabled.

Tax Incentives for Higher Education

The tax code provides a variety of tax incentives for families who are saving for, or already paying, higher education costs or are repaying student loans.

You may be able to claim a credit for the qualified tuition and related expenses of the students in your family who are enrolled in eligible educational institutions. The types of credits available are the Lifetime Learning Credit and the American Opportunity Tax Credit.

Different rules apply to each credit. If you claim a American Opportunity Credit for a particular student, none of that student's expenses for that year may be applied toward the Lifetime Learning Credit.

You may be able to claim a tuition deduction of up to $4,000 of qualified education expenses paid during the year for yourself, your spouse, or your dependent. You cannot claim this deduction if your filing status is married filing separately or if another person can claim an exemption for you as a dependent on his or her tax return. The qualified expenses must be for higher education.

You may be able to deduct interest you pay on a qualified student loan. And, if your student loan is canceled, you may not have to include any amount in income. The deduction is claimed as an adjustment to income so you do not need to itemize your deductions on Schedule A Form 1040.

Spring Cleaning: Personalize and Tidy Up Your QuickBooks Desktop

One of the reasons the QuickBooks line of desktop products has been so successful is because of its clean, simple appearance and efficient navigational tools. But there's room for improvement and personalization. Everyone uses QuickBooks just a little differently. You can create a desktop that meets your specific needs, while maintaining the program's inherent usability. Every desktop version of QuickBooks (except for Simple Start) offers several tools to accommodate your preferences, so we'll show you some of the best.

Establish Default Windows for Startup

QuickBooks automatically opens to its default desktop (the Home page), which displays a set of the most commonly used navigational icons, separated by type. You can change this behavior so that every time you launch the program, it opens to the screen(s) you want to see first.

You'll have to tweak your Preferences to make this happen. Click Edit | Preferences. In the list on the left, click Desktop View. You'll see a window that looks like Figure 1:

Figure 1:

In the Desktop View section of your Preferences window, you can choose to have one window or multiple windows open, and save a desktop configuration that will open when you launch QuickBooks.

Note: If you want be able to have multiple windows open simultaneously, be sure that option is checked.

There are three options for preserving your desktop layout. If you click Save when closing company, QuickBooks will open with the windows that were open when you last closed the company file. If you don't want any windows to open, check Don't save the desktop. And if you have a set of favorite windows that you want to open each time you launch QuickBooks, set up that configuration and click Save current desktop. Of course, you can simply choose to have the Home page display when you load QuickBooks.

There are other desktop-related options in this same window that have to do with QuickBooks' help features. You may also want to adjust these if you commonly use those services.

Customize Your Icon Bar

This is probably the simplest thing you can do to improve navigation. QuickBooks comes with an icon bar pre-installed, a horizontal strip at the top of the screen whose icons take you to specific parts of the program. The default icon bar may serve your purposes well, but if not, you can easily modify it. Click View | Customize Icon Bar (or right-click directly on the icon bar). The window shown in Figure 2 opens.

Figure 2:

The Customize Icon Bar window contains all the tools you need to modify the navigational icons displayed in the QuickBooks icon bar.

To add, edit, or delete icons, simply click on the appropriate buttons. A new window opens containing self-explanatory tools to help you make your changes. You can also add separators (vertical lines) that can divide related groupings of icons.

Tracking Open Windows

If you've chosen to have multiple windows open simultaneously, you can easily keep track of what's open-and navigate there quickly-by using the Open Windows list. To get there, click View | Open Window List. QuickBooks will open the sidebar shown in Figure 3. This list appears to the left of the main desktop or any open windows. To close it, simply click View, then uncheck Open Window List.

Figure 3:

You can use the Open Window List to keep track of which windows are open. Clicking on one takes you there.

Customizing the Home Page

QuickBooks' Home page is one of the program's best feature. It not only serves as a navigational tool-you can click on an icon labeled, for example, Enter Bills, and QuickBooks will take you to that page-but it also illustrates the workflow of some processes.

You have some control over what appears on the Home Page. To make changes, click Edit | Preferences, then Desktop View and then Company Preferences tab to display the window in Figure 4.

Figure 4:

In this window, you can turn on or off some of the icons that appear on the Home page.

Here, you can check or uncheck icons like Sales Receipts. But in order to show or hide icons, you'll have to make sure that the actual features enabling them are active or inactive.

Your current preferences are displayed at the bottom of the window. You can easily alter them by clicking on one of the hyperlinks. So if Sales Tax is off, for example, click on it, and a window opens that lets you set up a sales tax item.

Finding Favorites

There's yet another way to isolate the functions you use most often: the Favorites list. Click Favorites | Customize Favorites to access the list of options (like Chart of Accounts and Price Level List). Highlight one, then click Add. When you're done with your list, click OK. Click the Favorites menu anytime you want to access these.

QuickBooks desktop is a powerful navigational tool, and provides simple maps to all of the program's functions. Such versatility and customizability contribute to the program's overall ease of use, and make it a pleasure to use.

Setting up Preferences correctly in QuickBooks-for elements like Items & Inventory and Payments-will make the program work the way you need it to. If you have any questions on how to do this, please call us.

Financial Tips for April 2010

Review Your Retirement Plans
How much have you accumulated so far? How much do you need to retire comfortably at the desired date? Professional advice may be helpful in determining how much you should be saving and what the best investment vehicles are.

Inventory Your Non-Financial Assets
Perform an inventory of your non-financial assets (e.g., home, furniture, cars, personal belongings). Compare this inventory to your property insurance coverage. Is your insurance adequate for your assets? You may need a rider to your policy for certain items such as jewelry. If some assets are no longer in use, consider selling them or donating them to charity. You may be entitled to a deduction based upon the fair market value of the assets.

Review Budget vs Actuals
Compare March income and expenditures with your budget. Make adjustments as appropriate to your April expenditures. Make sure you have invested your planned savings amount for March.

Schedule Estimated Tax Payments
Add the estimated tax payments for the year to your calendar so you don't overlook them later. You might want to attach the payment vouchers to your calendar with a paperclip.

Review Retirement Contributions
Review planned contributions for IRAs, SIMPLE Plans, SEPs and Keoghs for the preceding tax year. Professional advice should be sought to help you determine the maximum amounts deductible, and whether postponing return filing for the preceding year will help determine the amount and timing of the contribution.

Tax Due Dates for April 2010

April 12	Employees - who work for tips. If you received $20 or more in tips during March, report them to your employer. You can use Form 4070.
April 15	Individuals - File an income tax return for 2009 (Form 1040, 1040A, or 1040EZ) and pay any tax due. If you want an automatic 6-month extension of time to file the return, file Form 4868, Application for Automatic Extension of Time To File U.S. Individual Income Tax Return, or you can get an extension by phone if you pay part or all of your estimate of income tax due with a credit card. Then file Form 1040, 1040A, or 1040EZ by October 15. Household Employers - If you paid cash wages of $1,700 or more in 2009 to a household employee, file Schedule H (Form 1040) with your income tax return and report any employment taxes. Report any federal unemployment (FUTA) tax on Schedule H if you paid total cash wages of $1,000 or more in any calendar quarter of 2008 or 2009 to household employees. Also report any income tax you withheld for your household employees. Individuals - If you are not paying your 2010 income tax through withholding (or will not pay in enough tax during the year that way), pay the first installment of your 2010 estimated tax. Use Form 1040-ES. Partnerships - File a 2009 calendar year return (Form 1065). Provide each partner with a copy of Schedule K-1 (Form 1065), Partner's Share of Income, Credits, Deductions, etc., or a substitute Schedule K-1. If you want an automatic 6-month extension of time to file the return and provide Schedule K-1 or a substitute Schedule K-1, file Form 7004. Then file Form 1065 by October 15. Electing Large Partnerships - File a 2009 calendar year return (Form 1065-B). If you want an automatic 6-month extension of time to file the return, file Form 7004. Then file Form 1065-B by October 15. See March 15 for the due date for furnishing the Schedules K-1 to the partners. Corporations - Deposit the first installment of estimated income tax for 2010. A worksheet, Form 1120-W, is available to help you estimate your tax for the year. Employers - Nonpayroll withholding. If the monthly deposit rule applies, deposit the tax for payments in March. Employers - Social security, Medicare, and withheld income tax. If the monthly deposit rule applies, deposit the tax for payments in March.
April 30	Employers - Social Security, Medicare, and withheld income tax. File form 941 for the first quarter of 2010. Deposit any undeposited tax. (If your tax liability is less than $2,500, you can pay it in full with a timely filed return.) If you deposited the tax for the quarter in full and on time, you have until May 10 to file the return. Employers - Federal Unemployment Tax. Deposit the tax owed through March if more than $500.

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