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Newsletter

March 2010

Feature Articles

Tax Tips

QuickBooks Tips

Financial Tips


 

This newsletter is intended to provide generalized information that is appropriate in certain situations. It is not intended or written to be used, and it cannot be used by the recipient, for the purpose of avoiding federal tax penalties that may be imposed on any taxpayer. The contents of this newsletter should not be acted upon without specific professional guidance. Please call us if you have questions.



Homeowner Records: What To Keep and How Long

Keeping full and accurate homeowner records is vital for determining, not only your home deductions, but also the basis or adjusted basis of your home. These records include your purchase contract and settlement papers if you bought the property or other objective evidence if you acquired it by gift, inheritance, or similar means.

You should also keep any receipts, canceled checks, and similar evidence for improvements or other additions to the basis. Here's some examples:

  • Putting an addition on your home
  • Replacing an entire roof
  • Paving your driveway
  • Installing central air conditioning
  • Rewiring your home
  • Assessments for local improvements
  • Amounts spent to restore damaged property

In addition, you should keep track of any decreases to the basis. Here's some examples:

  • Insurance or other reimbursement for casualty losses
  • Deductible casualty loss not covered by insurance
  • Payment received for easement or right-of-way granted
  • Value of subsidy for energy conservation measure excluded from income
  • Depreciation deduction if home is used for business or rental purposes

How you keep records is up to you, but they must be clear and accurate and must be available to the IRS. And you must keep these records for as long as they are important for the federal tax law.

Keep records that support an item of income or a deduction appearing on a return until the period of limitations for the return runs out. (A period of limitations is the limited period of time after which no legal action can be brought.)

For assessment of tax, this is generally three years from the date you filed the return. For filing a claim for credit or refund, this is generally three years from the date you filed the original return or two years from the date you paid the tax, whichever is later. Returns filed before the due date are treated as filed on the due date.

You may need to keep records relating to the basis of property (discussed earlier) longer than the period of limitations.

Note: Technically, basis is needed to determine gain on home sale (loss is not deductible). That need has diminished for most homeowners now that gain up to $250,000 ($500,000 in some sales by married couples) is tax-exempt.

Basis is still important, however, in figuring casualty loss, on conversion of the home to business use, or where there's a gift of the home (in this case, important to the donee).

Keep those records as long as they are important in figuring the basis of the property. Generally, this means for as long as you own the property and, after you dispose of it, for the period of limitations that applies to you.

Tip: If you have any questions as to what items are to be considered in determining basis, please give us a call.

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Getting The Most From Auto Expenses

If you use a car for business, you have two choices for claiming deductions:

  1. Deduct the actual business-related costs of gas, oil, lubrication, repairs, tires, supplies, parking, tolls, drivers' salaries, and depreciation.

  2. Use the standard mileage deduction and simply multiply 55.0 cents for 2009 travel. (2008's rate was 50.5 cents for first six months and 58.5 cents for the last six months of 2008) by the number of business miles traveled during the year. Your actual parking fees and tolls are separately deductible under this method.

Which method is better?

For some taxpayers, the standard mileage rate produces a larger deduction. Others fare better tax-wise by deducting actual expenses.

Tip: The actual method allows you to claim accelerated depreciation on your car, subject to limits and restrictions not discussed here.

The standard mileage amount includes an allowance for depreciation. Opting for the standard mileage method allows you to by-pass the limits and restrictions and is simpler, but often less advantageous in dollar terms.

Caution: The standard rate may understate your costs, especially if you use the car 100% for business, or close to that percentage.

Caution: Once you choose the standard mileage rate, you cannot later use accelerated depreciation if you opt for the actual cost method in a later year. You may then use only straight line.

Generally, the standard mileage method benefits taxpayers who have less expensive cars or who travel a large number of business miles.

How To Make the Most of Your Auto Deductions

Keep careful records of your travel expenses. We won't be able to determine which of the two options is better for you if you don't know the number of miles driven and the total amount you spent on the car.

Furthermore, the tax law requires that you keep travel expense records and that you give information on your return showing business versus personal use. If you use the actual cost method, you must keep receipts.

Tip: Consider using a separate credit card for business, to simplify your record-keeping.

Tip: You can also deduct the interest you pay to finance a business-use car, if you're self-employed.

Note: Self-employeds and employees who use their cars for business can deduct auto expenses if they either (1) don't get reimbursed, or (2) are reimbursed under an employer's "non-accountable" reimbursement plan. In the case of employees, expenses are deductible to the extent that auto expenses (together with other "miscellaneous itemized deductions") exceed 2% of adjusted gross income.

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How Children Lower Your Taxes

Got Kids? They may have an impact on your tax situation. Here are the top 10 things to consider if you have children.

  1. Dependents: In most cases, a child can be claimed as a dependent in the year they were born. For more information see IRS Publication 501, Exemptions, Standard Deduction, and Filing Information.

  2. Child Tax Credit: You may be able to take this credit on your tax return for each of your children under age 17. If you do not benefit from the full amount of the Child Tax Credit, you may be eligible for the Additional Child Tax Credit. The Additional Child Tax Credit is a refundable credit and may give you a refund even if you do not owe any tax. For more information see IRS Publication 972, Child Tax Credit.

  3. Child and Dependent Care Credit: You may be able to claim the credit if you pay someone to care for your child under age 13 so that you can work or look for work. For more information see IRS Publication 503, Child and Dependent Care Expenses.

  4. Earned Income Tax Credit: The EITC is a benefit for certain people who work and have earned income from wages, self-employment or farming. EITC reduces the amount of tax you owe and may also give you a refund. For more information see IRS Publication 596, Earned Income Credit.

  5. Adoption Credit: You may be able to take a tax credit for qualifying expenses paid to adopt an eligible child. For more information see the instructions for IRS Form 8839, Qualified Adoption Expenses.

  6. Children with Earned Income: If your child has income earned from working they may be required to file a tax return. For more information see IRS Publication 501.

  7. Children with Investment Income: Under certain circumstances a child's investment income may be taxed at the parent's tax rate. For more information see IRS Publication 929, Tax Rules for Children and Dependents.

  8. Coverdell Education Savings Account: This savings account is used to pay qualified educational expenses at an eligible educational institution. Contributions are not deductible, however, qualified distributions generally are tax-free. For more information see IRS Publication 970, Tax Benefits for Education.

  9. Higher Education Credits: Education tax credits can help offset the costs of education. The American Opportunity and the Lifetime Learning Credit are education credits that reduce your federal income tax dollar-for-dollar, unlike a deduction, which reduces your taxable income. For more information see IRS Publication 970.

  10. Student Loan Interest You may be able to deduct interest you pay on a qualified student loan. The deduction is claimed as an adjustment to income so you do not need to itemize your deductions. For more information see IRS Publication 970.

Got kids? and need more information, contact us. The forms and publications on these topics can also be found on IRS.gov or by calling 800-TAX-FORM (800-829-3676).

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You Can Still Make a 2009 IRA Contribution

If you haven't contributed funds to an Individual Retirement Arrangement for tax year 2009, or if you've put in less than the maximum allowed, you still have time to do so. You can contribute to either a traditional or Roth IRA until the April due date for filing your tax return for 2009, not including extensions.

Be sure to tell the IRA trustee that the contribution is for 2009. Otherwise, the trustee may report the contribution as being for 2009 when they get your funds.

Generally, you can contribute up to $5,000 of your earnings for 2009 or up to $6,000 if you are age 50 or older in 2009. You can fund a traditional IRA, a Roth IRA (if you qualify), or both, but your total contributions cannot be more than these amounts.

Note: IRA Contributions limits remain the same in 2010 at $5,000 or $6,000 if age 50 or older.

Traditional IRA: You may be able to take a tax deduction for the contributions to a traditional IRA, depending on your income and whether you or your spouse, if filing jointly, are covered by an employer's pension plan

Roth IRA: You cannot deduct Roth IRA contributions, but the earnings on a Roth IRA may be tax-free if you meet the conditions for a qualified distribution

You can file your tax return claiming a traditional IRA contribution before the contribution is actually made. However, the contribution must be made by the due date of your return, not including extensions. If you report a contribution to a traditional IRA on your return, but fail to contribute by the deadline, you must file an amended tax return by using Form 1040X, Amended U.S. Individual Income Tax Return. You must add the amount you deducted to your income on the amended return and pay the additional tax accordingly.

Maximizing your retirement savings is a critical goal for an individual's financial plan. Review of your financial retirement plan should be completed annually allowing for maximum savings. Each year, the IRS announces the cost of living adjustments and limitation for retirement savings plans. In 2010, however, the contribution limits for defined benefit and defined contribution plans did not change as the Consumer Price Index did not meet the regulatory thresholds.

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Itemizers Can Deduct Certain Taxes

Did you know that you may be able to deduct certain taxes on your federal income tax return? You can receive these deductions if you file Form 1040 and itemize deductions on Schedule A. Deductions decrease the amount of income subject to taxation.

There are five types of deductible non-business taxes:

  1. State and Local Income or Sales Taxes
    You can choose to claim a state and local tax deduction for either income or sales taxes on your return. You can deduct any estimated taxes paid to state or local governments and any prior year's state or local income tax as long as they were paid during the tax year.

    If deducting sales taxes instead, you may deduct actual expenses or use the optional tables provided by the IRS to determine your deduction amount, relieving you of the need to save receipts.

    Sales taxes paid on motor vehicles and boats may be added to the table amount, but only up to the amount paid at the general sales tax rate.

  2. Real Estate Taxes
    Deductible real estate taxes are usually any state, local or foreign taxes on real property. If a portion of your monthly mortgage payment goes into an escrow account and your lender periodically pays your real estate taxes to local governments out of this account, you can deduct only the amount actually paid during the year to the taxing authorities.

    Your lender will normally send you a Form 1098, Mortgage Interest Statement, at the end of the tax year with this information.

  3. Personal Property Taxes
    Personal property taxes are deductible when they are based on the value of personal property, such as a boat or car. To be deductible, the tax must be charged to you on a yearly basis, even if it is collected more than once a year or less than once a year.

  4. Foreign Income Taxes
    Generally, you can take either a deduction or a tax credit for foreign income taxes, but not for taxes paid on income that is excluded from U.S. tax.

  5. New Vehicle Sales and Excise Tax
    If you bought a new vehicle in 2009, you may be entitled to a special tax deduction for sales and excise taxes on your purchase. State and local sales and excise taxes paid on up to $49,500 of the purchase price of each qualifying vehicle are deductible.Qualified motor vehicles generally include new cars, light trucks, motor homes and motorcycles. To qualify for the deduction, the new cars, light trucks and motorcycles must weigh 8,500 pounds or less. New motor homes are not subject to the weight limit. Purchases must occur after Feb. 16, 2009, and before Jan. 1, 2010.

Call us for more information on non-business deductions for taxes, or see IRS Publication 17, Your Federal Income Tax, under Chapter 22, Taxes.

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Estimated Tax Payments - Q&A

Question: How do I know if I have to file quarterly individual estimated tax payments?

Answer: If you owed additional tax for the prior tax year, you may have to make estimated tax payments for the current tax year.

You must make estimated tax payments for the current tax year if both of the following apply:

  • You expect to owe at least $1,000 in tax for the current tax year, after subtracting your withholding and credits.
  • You expect your withholding and credits to be less than the smaller of: 90% of the tax to be shown on your current year's tax return, or 100% of the tax shown on your prior year's tax return. (Your prior year tax return must cover all 12 months.)

There are special rules for:

  • Certain taxpayers with higher adjusted gross income
  • Farmers and commercial fishermen Aliens
  • Estates and Trusts

Contact us if you are unsure of your need to make an estimated tax payment. The first estimated payment for 2010 is due April 15, 2010.

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Two New Tax Credits to Lower Your Tax Bill

Two special tax credits offer taxpayers an opportunity to lower their tax bill or increase their refunds this filing season. Both credits are claimed on new Schedule M, Making Work Pay and Government Retiree Credits.

The making work pay credit helps millions of workers and self-employed individuals, while the government retiree credit especially targets former government workers who aren't receiving Social Security benefits. Income limits apply to the making work pay credit but not to the government retiree credit. Both credits are refundable,meaning that those eligible can get them even if they owe no tax. Here are further details on each of these credits.

Making Work Pay Credit

Most eligible taxpayers qualify for the maximum making work pay credit of $800 for a married couple filing a joint return or $400 for other taxpayers. The credit equals 6.2 percent of earned income up to the maximum amount. Thus, any eligible couple whose earned income is $12,903 or more qualifies for the $800 maximum credit. Other taxpayers qualify for the $400 maximum if their earned income is $6,451 or more.

For most workers, the credit is based on the taxable wages reported to them on Forms W-2. Self-employed individuals figure the credit using the net profit or loss they receive from a business or farm. Additional calculations are necessary for some taxpayers, including those who have net business losses, wages from work performed while a prison inmate or foreign earned income. More information, including a worksheet, can be found in the instructions for Schedule M.

Some taxpayers are not eligible for the making work pay credit, including:

  • Joint filers whose modified adjusted gross income (MAGI) is $190,000 or more.

  • Other taxpayers whose MAGI is $95,000 or more.

  • Anyone who can be claimed as a dependent on someone else's return.

  • A taxpayer who doesn't have a valid social security number.

  • Joint filers, if neither spouse has a valid Social Security number.

  • Nonresident aliens.

Other taxpayers qualify for the credit but must reduce the amount of the credit they claim, including:

  • Joint filers whose MAGI is more than $150,000 but less than $190,000.

  • Other taxpayers whose MAGI is more than $75,000 but less than $95,000.

  • Taxpayers who received an economic recovery payment. This special $250 payment was made during 2009 to recipients of Social Security benefits, supplemental security income (SSI), railroad retirement benefits or veterans disability compensation or pension benefits.

  • Taxpayers who claim the government retiree credit.

  • See Schedule M and its instructions for details.

Though all eligible taxpayers must file Schedule M to claim the making work pay credit, most workers got the benefit of this credit through larger paychecks, reflecting reduced federal income tax withholding during 2009.

Government Retiree Credit

This credit is designed to provide a benefit equivalent to the economic recovery payment to those government retirees who did not qualify for these payments. Retired federal, state or local government employees who receive pensions in 2009, based on work not covered by Social Security, are eligible to claim this credit. The credit is $250. For joint filers the credit is $500 if both spouses are retired government employees who receive pensions based on work not covered by Social Security. The credit cannot be claimed by an individual if he or she received an economic recovery payment during 2009. See Schedule M and its instructions for details.

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Getting QuickBooks Ready for Tax Preparation

Seems like you just finished doing your taxes, and here they come again. Whether you prepare them yourselves, hand them off to an accounting professional, or send data to a tax preparation product, QuickBooks can help you get ready.

Here's how. This is not a comprehensive list of tasks you'll need to undertake to prepare for taxes. Rather, it's an overview of QuickBooks' most tax-specific tools. QuickBooks supports many business tax forms, including the 1040, 1120, and 1065, and the steps outlined here apply to all small business tax filers using QuickBooks Pro, Premier, and Enterprise.

If you haven't already (and you should have), order your W-2 and 1099 Kits

These forms must be filed at the beginning of each year; they report employee wages and salaries to Federal, state, and local agencies. Data is printed directly from QuickBooks onto the correct line in the forms. You can purchase these kits (shown in Figure 1) directly from Intuit, and you must have a Standard Payroll or Enhanced Payroll subscription in a supported version to process them.

Figure 1: Intuit sells kits that help you print QuickBooks tax data directly on the correct forms.

Check the Company Information window to make sure it reflects the right tax form

This is crucial no matter who is preparing your taxes. You should have been thinking ahead to tax time when you set up your company in QuickBooks, but you can take this step prior to starting your prep.

Make sure you've specified the appropriate tax form for use in QuickBooks. Go to Company|Company Information, as shown in Figure 2. At the bottom of the window, find the Income Tax Form Used line, and make sure it's set to the correct form.

Figure 2: On the Company Information window, be sure that the Income Tax Form Used line is pointing at the correct form.

In this same window, check the fiscal year dates to make sure they're correct, and that other tax-related fields are filled out accurately.

Make sure your tax-related accounts are assigned to the correct tax line on the form

If you used the EasyStep interview for setup, QuickBooks automatically assigned some accounts to the correct tax line. You can change these at any time, and add your own accounts. This Tax-Line Mapping will be important down the road if you export data to an Intuit tax product and/or run tax reports.

Warning: Altering the Chart of Accounts is a precise operation, and affects many parts of QuickBooks. You may want to consult with an accounting professional.

Click Lists|Chart of Accounts. Select an account, like Interest Expense, and right-click on it. Click Edit Account, and the window shown in Figure 3 appears.

Figure 3: QuickBooks lets you do Tax-Line Mapping, which specifies the relationship between accounts and tax form lines.

If you want to change the tax line, click the arrow to the right of the current selection and choose the correct one from the drop-down list. To add an account, click Lists|Chart of Accounts. In the bottom left of the screen, click the arrow in the Account button. Click New, and follow the instructions in the wizard that opens.

Run tax-related reports

QuickBooks provides three reports that you'll need whether you or your accountant is preparing your taxes. To find them, click Reports|Accountant & Taxes.

The first report is the Income Tax Preparation Report. This lays out a list of your accounts and the tax line each is assigned to. If any that need to be assigned are unassigned, double-click on them to get to the Tax-Line Mapping window, as shown in Figure 4.

Figure 4: The Tax Preparation Report illustrates how your accounts have been assigned to tax form line items.

Two other reports are available: Income Tax Summary and Income Tax Detail, which are just what they sound like. They provide detailed and summarized lists of transactions and their totals. You can drill down on these to see the underlying transactions.

Warning: When you run Income Tax Summary, look for a line that says Tax Line Unassigned (income/expense). Double-click on any total there to see accounts that need to be assigned to a tax line, as shown here in Figure 5.

Figure 5: You can quickly check your accounts in the Income Tax Summary.

QuickBooks lets you modify these reports to include additional columns, and memorize them for easy access later. Click the Modify Report and Memorize buttons in the upper left corner to do so.

You can't avoid taxes, but you can sure take a lot of the pain out of their preparation by using QuickBooks throughout the year to get ready. And you may get a smile out of your accountant when you hand over your carefully created records.

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Financial Tips for March 2010

College Planning
If you have young children, review their college planning. Determine the amount you will need to accumulate by the time they enter college. Based on this estimate, establish or review your savings plan. Consider one or more of the tax-favored higher education programs.

Mortgage review
Review your home mortgage. Are you paying too much interest? Consider the savings you could obtain by refinancing. Also look into the possibility of making mortgage payments twice a month or adding some principal to each payment to save on the interest cost. If you have other debt at higher interest rates, and the interest is non-deductible, consider paying off these debts with a home equity loan.

Required Minimum Distribution
If you were age 70-1/2 last year, and did not take the required minimum distribution from your retirement plans, prepare to take a withdrawal before April 1. Professional guidance will be helpful here.

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

Estimated Tax Payments
Total up your taxable income, capital gains and deductions for the first quarter. This information can be used to plan your estimated tax payments and perhaps avoid or minimize any underpayment penalties.

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Tax Due Dates for March 2010

March 1

Businesses - File information returns (Form 1099) for certain payments you made during 2009. These payments are described under February 1. There are different forms for different types of payments. Use a separate Form 1096 to summarize and transmit the forms for each type of payment. See the 2009 Instructions for Forms 1099, 1098, 5498, and W-2G for information on what payments are covered, how much the payment must be before a return is required, what form to use, and extensions of time to file.

If you file Forms 1098, 1099, or W-2G electronically (not by magnetic media), your due date for filing them with the IRS will be extended to March 31. The due date for giving the recipient these forms will still be February 1.

Payers of Gambling Winnings - File Form 1096, Annual Summary and transmittal of U.S. Information Returns, along with Copy A of all the Forms W-G2 you issued for 2009. If you file Forms W-G2 electronically (not by magnetic tape), your due date for filing them with the IRS will be extended to March 31. The due date for giving the recipient these forms remains February 1.

Employers - File Form W-3, Transmittal of Wage and Tax Statements, along with Copy A of all the Forms W-2 you issued for 2009.

If you file Forms W-2 electronically (not by magnetic media), your due date for filing them with the SSA will be extended to March 31. The due date for giving the recipient these forms will still be February 1.

Employers - with employees who work for tips. File Form 8027, Employer's Annual Information Return of Tip Income and Allocated Tips. Use Form 8027-T, Transmittal of Employer's Annual Information Return of Tip Income and Allocated Tips, to summarize and transmit Forms 8027 if you have more than one establishment. If you file Forms 8027 electronically (not by magnetic tape), your due date for filing them with the IRS will be extended to March 31.

Farmers and Fishermen - File your 2009 income tax return (Form 1040) and pay any tax due. However, you have until April 15 to file if you paid your 2009 estimated tax by January 15, 2010.

March 10

Employees who work for tips - If you received $20 or more in tips during February, report them to your employer. You can use Form 4070.

March 15

Employers - Nonpayroll withholding. If the monthly deposit rule applies, deposit the tax for payments in February.

Employers - Social security, Medicare, and withheld income tax. If the monthly deposit rule applies, deposit the tax for payments in February.

Corporations - File a 2009 calendar year income tax return (Form 1120 or 1120-A) and pay any tax due. If you want an automatic 6-month extension of time to file the return, file Form 7004 and deposit what you estimate you owe.

S Corporations - File a 2009 calendar year income tax return (Form 1120S) and pay any tax due. Provide each shareholder with a copy of Schedule K-1 (Form 1120S), Shareholder'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, file Form 7004 and deposit what you estimate you owe.

Electing large partnerships - Provide each partner with a copy of Schedule K-1 (Form 1065-B), Partner's Share of Income (Loss) From an Electing Large Partnership. This due date is effective for the first March 15 following the close of the partnership's tax year. The due date of March 15 applies even if the partnership requests an extension of time to file the Form 1065-B by filing Form 8736 or Form 8800.

S Corporation Election - File Form 2553, Election by a Small Business Corporation, to choose to be treated as an S corporation beginning with calendar year 2010. If Form 2553 is filed late, S treatment will begin with calendar year 2010.

March 31

For information about filing Forms 1098, 1099, or W-2G electronically, see Publication 1220, Specifications for Filing Forms 1098, 1099, 5498 and W-2G Magnetically or Electronically.


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