Are You Making a Move?

If your home or business address has changed, make sure that you update this information with the IRS to ensure that you receive any refunds or correspondence from them. Since the IRS meets its notice requirements by sending notices to your last known address, it is not an excuse that you did not receive the correspondence if you have not provided the new information.

Although no one likes to receive mail from the IRS, other than a refund check, it is important that you timely receive their correspondence and respond promptly. Otherwise, the IRS will automatically escalate the inquiry, making it far more difficult to deal with. If additional tax will be owed as a result of an inquiry, penalties and interest will continue to accrue.

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If you paid someone to care for a child under age 13, or a qualifying spouse or dependent to allow you to work or look for work, you may be able to reduce your tax by claiming the Child and Dependent Care Credit on your federal income tax return. To qualify, your spouse, children over the age of 13, and other dependents must be physically or mentally incapable of self-care.

The good news is that increased child care benefits provided as part of the Bush era tax cuts have been extended through 2012. That means, instead of the credit percentage dropping to 30%, the higher 35% credit will continue for two more years. In addition, the maximum expenses qualifying for dependent care credit will remain at $3,000 ($6,000 for two or more qualifiers) instead of dropping to $2,400 ($4,800 for two or more qualifiers) as previously scheduled. The credit is a percentage of the amount of work-related child and dependent care expenses paid to a care provider.

To claim the credit for child and dependent care expenses, the following conditions must be met:

• The care must have been provided so you – and your spouse if you are married filing jointly – could work or look for work.
• You – and your spouse if you are married filing jointly – must have earned income from wages, salaries, tips, other taxable employee compensation or net earnings from self-employment. One spouse may be considered as having earned income if he or she were a full-time student or physically or mentally unable to care for themselves.
• The payments for care cannot be paid to your spouse, someone you can claim as your dependent on your return, or your child who will not be age 19 or older by the end of the year even if he or she is not your dependent. The care provider(s) must be identified on your tax return.
• Your filing status must be single, married filing jointly, head of household, or qualifying widow(er) with a dependent child.
• The care must have been provided for one or more qualifying persons.
• The qualifying person generally must have lived with you for more than half of 2010. There are certain exceptions for the birth or death of a qualifying person, or a child of divorced or separated parents.
• If you pay someone to come to your home and care for your dependent or spouse, you may be a household employer. If you are a household employer, you may have to withhold and pay social security and Medicare tax and pay federal unemployment tax.

There may be some additional limitations on the amount of credit that can be claimed. If you received dependent care benefits from your employer or the care was provided in your home, other rules will apply. Please call this office for additional details. 

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Important Facts about Dependents and Exemptions

Some tax rules affect every person who may have to file a federal income tax return; these rules include dependents and exemptions. Here are some important facts you need to know that are related to dependents and to claiming exemptions on your tax return.

• Exemptions reduce your taxable income – There are two types of exemptions: personal exemptions (one for the filer or two if married taxpayers are filing jointly) and exemptions for dependents claimed on a tax return. For each exemption claimed on the tax return for 2010, a $3,650 deduction is allowed. For example, a married couple filing jointly with two dependent children would be allowed 4 exemptions for a total deduction equaling $14,600 (4 times $3,650).
• A spouse is never considered a dependent – This is because, when filing a joint return, a couple is allowed to claim two exemptions, one for each of them. If filing a separate return, a taxpayer may claim the exemption for a spouse only if the spouse had no gross income, is not filing a joint return, and was not the dependent of another taxpayer. (This exception for separate returns usually does not apply if you live in a community property state such as California, Texas, Washington and others.)
• Exemptions for dependents – Generally, an exemption can be claimed for each of a taxpayer’s dependents. A dependent is a taxpayer’s qualifying child or qualifying relative. It is possible for a non-relative to qualify as a dependent if the person lived with the taxpayer all year as a member of the taxpayer’s household and other tests are met. The Social Security number (SSN) of any dependent claimed as an exemption must appear on the tax return. Without the SSN, the IRS will disallow the dependent exemption.
• Child of divorced or separated parents – The exemption for a child can be claimed by only one of the parents. If more than one parent claims the child as a qualifying child and the parents don't file a joint return together, the child is treated as the qualifying child of: (a) the parent with whom the child resided for the longer period of time during the tax year, or (b) if the child resides with both parents for the same amount of time during the tax year, the parent with the higher adjusted gross income. However, a child is treated as the qualifying child of the noncustodial parent if the custodial parent releases a claim to the exemption using IRS Form 8332. This is frequently a bone of contention between divorced and separated parents. It is important to understand that the law governing who has the right to claim a child’s exemption is federal tax law, and the IRS will not accept a state court’s allocation of exemptions. For example, a state divorce court cannot award physical custody to one parent and then specify that the other parent can claim the child for tax purposes.
• Dependents may still be required to file their own tax returns – Even if an individual is claimed as a dependent on someone else’s tax return, the individual claimed as the dependent may still be required to file their own tax return depending on a number of factors, including the amount of unearned, earned or gross income, marital status, any special taxes owed, and any advance Earned Income Tax Credit payments received.
• The dependent of another may not claim an exemption – If someone else – such as a parent – claims an individual as a dependent, then the individual may not claim his or her personal exemption on his or her own tax return.
• Some people cannot be claimed as dependents – Generally, you may not claim a married person as a dependent if he or she is filing a joint return with a spouse. Also, to claim someone as a dependent, that person must be a U.S. citizen, U.S. resident alien, U.S. national, or resident of Canada or Mexico for some part of the year. There is an exception to this rule for certain adopted children. Call this office for information related to the exceptions.

For more information on exemptions, dependents, and whether you or your dependent needs to file a tax return, please give this office a call.

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Small Business Expenses 101

For small business owners, tax breaks often come in the form of tax deductions – which can offer a nice little instant cash savings – if you know how to navigate tax law and claim the deductions you deserve (not what you believe you are entitled to).

Large tax deductions are a notorious red flag for the IRS, with home-based businesses, in particular, facing an increase in tax audits due to suspicious deduction activity on income tax returns.

To help you navigate the complex world of business tax deductions, here is some foundational guidance that will help you take the deductions that you deserve.

Recordkeeping - Whatever the deductible expense may be, it is essential to maintain adequate records. There are many bookkeeping and accounting computer software programs available that will provide the basics for tracking expenses. But it is also important to keep receipts, invoices, etc., to back up the numbers. Some types of expenses require additional documentation, such as a log book or diary for business use of your personal vehicle or notations as to the business purpose of the expense (see Entertainment Expenses below). Keeping these records up-to-date will be a time-saver in the long run, especially if the IRS selects your return for audit.

Business Expenses vs. Capital Expenses -One of the first concepts a small business owner needs to understand is the difference between what can be expensed and what must be capitalized.

Business expenses are expenses that can be deducted in the current year, such as: business travel, rents, utilities, supplies, insurance, wages, customer entertainment and tangible items with a useful life of no more than one year or cost less than $100. If you are a for-profit, these expenses are usually tax-deductible.

Capital expenses are those associated with purchasing fixed business assets, such as property and equipment that has a useful life of more than one year, and must be capitalized and depreciated over a period of years rather than be deducted as current year expenses. The number of depreciable years depends on the type of property. Here are some examples: office furnishings – 7 years, autos and light trucks – 5 years, computer equipment - 5 years, residential rental – 27.5 years, commercial rental – 39 years.

Sometimes even capital items can be expensed all in one year by electing to use a special provision of the tax code that allows personal tangible property, such as computers, office equipment, tools and machinery, to be deducted in full in the year the property is placed into service. The list also includes off-the-shelf software for 2011. The maximum amount that can be expensed for 2011 is $500,000 subject to certain limitations.

A special provision for 2011 permits certain real property, such as qualified leasehold improvements, restaurant property and retail improvements, to be expensed, although no more than $250,000 of the $500,000 expense limit can be applied to these real property assets.

For 2011, Congress has reinstated the bonus depreciation and increased it from 50% to 100% of the cost of most personal tangible property, qualified leasehold improvement property and certain computer software with a depreciable useful life of 20 years or less. For qualifying assets placed in service in 2012, the bonus rate drops back to 50%.

Although repairs are generally considered to be currently deductible expenses, there are occasions when that may not be true. If a repair or replacement increases the value of the property, makes it more useful, or lengthens its life, then it must depreciated. If not, it can be deducted like any other business expense.

Common Business Expenses - Below are some typical types of business expenses that qualify for deductions and special rules associated with them.

• Car Expenses – To take the business deduction for the use of your car, you must determine what percentage of the vehicle was used for business. Deductible costs can include the cost of traveling from one workplace to another, making business trips to visit customers or to attend meetings, or traveling to temporary workplaces. Be sure to maintain complete mileage records. However, commuting to and from your regular place of business is not a business expense. When it comes to claiming car expenses, there are two methods:

1. Actual Expenses – Add your annual car operating expenses (including gas, oil, tires, repairs, license fees, lease payments, interest on vehicle loans, registration fees, insurance and depreciation). Multiply the car operating expenses by the percentage of business usage to get your deductible expense. Business-related parking and road/bridge tolls are fully deductible and don’t have to be reduced by the percentage of business use. Note: the interest paid on vehicle loans is not deductible by employees who use their personal vehicles on the job.
2. Standard Mileage Rate – The standard rate changes each year. For 2011, it is 51 cents per mile for each business mile driven. Business-related parking costs, road/bridge tolls, and the business-use portion of interest paid on vehicle loans (for other than employees) are also deductible when the standard mileage rate method is used.

• Business Use of Your Home – If you use part of your home for your business, you may be able to deduct expenses for items such as mortgage interest, insurance, utilities, repairs, and depreciation. To qualify, you must meet the following criteria:
a) The business part of your home must be used exclusively and regularly for your trade or business. However, there are exceptions for daycare facilities or storage of inventory/product samples.
b) The business part of your home must be:

 - The principal place of business, or

 - A place where you meet or deal with patients, clients, or customers in the normal course of your business, or 

- A separate structure (not attached to your home) used in connection with your business.

• Entertainment Expenses – This includes any activity considered to provide entertainment, amusement or recreation. To be deductible, you must generally show that entertainment expenses (including meals) are directly related to, or associated with, the conduct of your business. Recordkeeping is essential – you will need to keep a history of the business purpose, the amount of each expense, the date and place of the entertainment, and the business relationship of the persons entertained. Entertainment expenses are usually subject to a 50 percent limit.

• Travel Expenses – These are “ordinary” and “necessary” expenses while away from home when the primary purpose is conducting business. Your home is generally considered to be the entire city or general area where your principal place of business or employment is located. Out-of-town expenses include transportation, meals, lodging, tips, and miscellaneous items like laundry, valet, etc.

Document away-from-home expenses by noting the date, destination and business purpose of your trip. Record the business miles if you drove to the out-of-town location. In addition, keep a detailed record of your expenses - lodging, public transportation, meals, etc. Always list meals and lodging separately in your records. Receipts must be retained for each lodging expense (proves you were out-of-town). However, if any other business expense is less than $75, a receipt is not necessary if you record all the information in a timely diary. You must keep track of the full amount of meal expenses, even though only 50% of the amount will be deductible.

• Conventions – It is not coincidental that most conventions are held in resort areas during the spring through early fall months. Convention planners know quite well that convention timing and location is the key to its success. If planned properly, attendees can deduct a portion of the expenses for establishing business relationships and gaining business knowledge while enjoying a mini-vacation. Even without a convention, business travel can be married with some personal relaxation while still providing a partial or complete deduction. It is important to be aware of when the deductions are legitimate as well as when they are not.

Where a companion, such as a spouse, accompanies the taxpayer, the companion's meals and travel expenses are generally not deductible. In addition, deductible-lodging expense is based upon the single occupancy rate.

There are special rules related to the deductibility of cruise ship conventions, and the meeting must be directly related to the active conduct of the taxpayer's trade or business. The cruise ship must be a vessel registered in the United States. All ports of call must be located in the U.S. or any of its possessions.

Note that a higher standard is applied to foreign conventions than to conventions and seminars held within the North American area. Various factors are considered to determine the reasonableness of the location and convention, including, but not limited to, the meeting's purpose, the sponsor's purpose and activities, the residence of the organization's members, the locations of past and future seminars.

• Marketing and Advertising Expenses - Although marketing and advertising is generally thought of in terms of print ads, flyers and radio and television advertising, they also can include marketing that is intended to portray a business positively. Such marketing creates a long-term potential for business and falls within the ordinary and normal requirements of the tax code.


Examples of such marketing include sponsoring local youth sports teams, distributing samples of your business product, and costs associated with prizes offered by your business in a contest. As long as your marketing expenses can be reasonably related to the promotion of your business, they can be deducted.

The foregoing is a brief overview of some of the many deductions available to the small business owner. However, every business is different and has its own unique expenses. If you have questions related to deductible expenses for your business, please give this office a call.

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Are You Supporting Your Parents?

If you are helping support your parents, you may qualify to claim a tax benefit if you are providing over half of your parents’ support. But you may be having difficulty showing over half of the support for both parents, thus failing to qualify for the dependency exemptions (and for the beneficial head of household filing status if you are a single taxpayer).

You may overcome this problem by designating the support to only one of your parents. This may allow you to claim at least one parent as your dependent and, if you are unmarried, permit you to file as head of household.

To qualify for the head of household filing status, an unmarried taxpayer must maintain a household that constitutes one or both of his or her parents' principal abode, and at least one of the parents must be the taxpayer's dependent, i.e., must individually have gross taxable income for the year of less than the personal exemption amount ($3,650 for 2010) and receive over half of his or her support from the taxpayer. The taxpayer himself need not reside in the household he or she maintains for the parents. The home could even be a retirement home or facility.

To accomplish this, the taxpayer must be able to provide proof that the support is for one of the parents only. Otherwise, the support will be designated as a “fund” equally allocated to both, making it harder to qualify as providing over half the support for either one. The IRS suggests a notation on a check as an acceptable designation procedure. It says, “Notations by the maker on support checks purporting to allocate funds to particular household members made payable to an individual having custody of a claimed dependent will be regarded as evidence of actual support.”

Although having no effect on filing status, when several people together provide over 50% of support, all who provide more than 10% of the support can agree about which of them will claim the dependent. Of course, the agreeing parties must also otherwise qualify to claim the dependent. Each person who is relinquishing the dependent exemption must complete an IRS form for attachment to the return of the taxpayer claiming the dependent.

If you are supporting both parents and would like to discuss how the foregoing might apply to your specific situation, please give this office a call.

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Do You Have to File a Tax Return?

Not all individuals are required to file tax returns. If your income is less than the sum of your standard deduction and personal exemptions, you are generally not required to file a tax return. There are, however, circumstances where you may have to file anyway based on certain types of income or special circumstances.

Even if you are not required to file, it may be in your best interest to do so. The following are some of the instances in which you may want to file a tax return even though you are not required to do so.

• Federal or State Income Tax Withheld – You should file to get money back if federal or state income tax was withheld from your pay, if you made estimated tax payments, or if a prior year overpayment was applied to this year’s tax return.
• Making Work Pay Credit – You may qualify for the making work pay credit if you had earned income from work. The maximum credit for a married couple filing a joint return is $800; it is $400 for other taxpayers.
• Earned Income Tax Credit (EITC) – You may qualify for EITC if you worked but did not earn a lot of money. EITC is a refundable tax credit, which means you could qualify for a tax refund even if you had no withholding.
• Additional Child Tax Credit - This refundable credit may be available to you if you have at least one qualifying child and the credit exceeded your tax liability for the year.
• American Opportunity Credit – Up to 40% of this credit, which applies to the first four years of post-secondary education, is refundable, and the maximum credit per student is $2,500.
• First-Time Homebuyer Credit – The credit is a maximum of $8,000, or $4,000 if your filing status is married filing separately. To qualify for the credit, taxpayers must have bought – or entered into a binding contract to buy – a principal residence located in the United States on or before April 30, 2010. If you entered into a binding contract by April 30, 2010, you must have closed on the home on or before September 30, 2010. If you bought a home as your principal residence in 2010, you may be able to qualify, and claim the credit even if you already owned a home. In this case, the maximum credit for long-time residents is $6,500, or $3,250 if your filing status is married filing separately.
• Health Coverage Tax Credit – Certain individuals, who are receiving Trade Adjustment Assistance, Reemployment Trade Adjustment Assistance, or pension benefit payments from the Pension Benefit Guaranty Corporation, may be eligible for a Health Coverage Tax Credit worth 80 percent of monthly health insurance premiums when they file their 2010 tax returns.

If you have questions related to whether you must file or whether you should file, please give this office a call.

 

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Do Not Mix Your Business and Personal Bank Accounts!

Whether you are working on your business part-time, operating as a sole proprietor, or starting a business with a more formal structure (such as a partnership or corporation) – it’s vital that you keep your business banking separate from your personal finances.

Keeping the two separate not only provides your business with credibility, it reduces your personal liability (a must if you are incorporating your business as a distinct and separate legal entity under its own name) and helps you to manage your taxes, bills, and other payments.

Below are some reasons why you might want to consider a business bank account and information about how to go about finding the right one for you. If you aren’t convinced that you need to separate your business and personal banking, consider the following reasons:

It Keeps Your Books in Order and the Tax Man from Your Door – From a recordkeeping and cash flow standpoint, co-mingling your finances can quickly become sticky, even for freelancers and part-time business owners. It is a risk most business owners or start-ups cannot afford to take!

For one thing, IRS recordkeeping requirements for income and tax deductions require that business and personal transactions be kept separate. While the IRS doesn’t require that you maintain a separate bank account for your business, it does require accurate record keeping – and keeping things separate makes it a lot easier to provide a clear audit trail.

It is a Must that You Maintain a Separate Business Banking Account – If your business is incorporated or you have intentions of incorporating, there is no choice in the matter since you are operating a separate tax-paying entity.

Save on Accounting Costs – Rifling through the line-by-line items in a year’s worth of bank statements can also be a headache come tax time; if you use an accountant, it will cost you more in the long run if he or she has to rummage through your messy recordkeeping.

Streamline Your Tax Payments – If you make or plan on making quarterly estimated tax payments to the IRS and your state treasury, it is always useful to have a set-aside business bank account where a percentage of each paycheck is deposited to ensure that your tax obligations are covered. This way, when it comes time for making payments, you are not scrambling with your personal finances to cover your taxes. This is particularly important for sole proprietors and independent contractors who operate under their own business names.

Even if you don’t set up a formal business account, at least maintain a separate online bank account where tax payments can easily be transferred from one bank account to another.

Give Your Business a Professional Image – Another reason, albeit superficial, why you should have a business bank account, is that when it comes to writing checks and paying bills, it will give your business more credibility and also save you plenty of headaches.

Even if your business is registered under a “doing business as” (DBA) name, such as “Creative Web Concepts,” clients will still be using your personal name when making payments unless a bank account with your business name is set up for that purpose.

This can often create problems for your customers' accounting departments when they have invoices in hand from “Creative Web Concepts” but must make checks payable to a separate individual. This can affect your ability to be paid accurately and on time. It can even attach a part-time/lack of professionalism tag to your business.

Setting Up a Business Banking Account

Once you have decided that a business bank account is the way to go, how do you find the right bank and the right account? Choosing a bank for your business can be an overwhelming and frustrating process, but it can have a big impact on your success. Unlike personal checking accounts, a business banking account is fee-based. However, the benefits gained and the headaches avoided as your business grows will outweigh the costs. An additional benefit is that these fees are tax-deductible.

If you have questions or need more information on this topic, please give this office a call.

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Does Your Paycheck Seem a Little Larger?

That is the result of a new stimulus provision included in tax legislation passed late in December last year that takes the place of the Making Work Pay credit that expired at the end of 2010.

This new provision reduces employees’ Social Security (OASDI) payroll tax withholding by a full 2 percentage points from 6.2 percent to 4.2 percent of wages paid. The reduction applies to all wage earners regardless of income. The employer’s share of the payroll tax is unaffected. For wage earners with payrolls in excess of the $106,800 payroll tax cap, their savings for 2011 will be $2,136 (2% of $106,800). The OASDI portion of the self-employed (SE) tax for self-employed individuals would also be reduced by 2 percentage points, reducing the overall SE tax from 15.3% to 13.3%. This reduced Social Security withholding will have no effect on an individual’s future Social Security benefits.

There is a potential tax trap for some individuals with multiple jobs if the income from these jobs exceeds the $106,800 payroll tax cap. These individuals will have too much withheld in the way of payroll tax, which is returned to them as a credit on their tax return for the year. Some may have become accustomed to utilizing the excess payroll tax to offset the tax on other income or to increase their refunds for the year. If this applies to you, keep in mind that you will have already received part of the expected overpayment in the form of reduced withholding during the year.

Without further Congressional action, the rates will return to normal in 2012, at which time the withholding tax will increase and take-home pay will be correspondingly reduced.

If you have questions about this article, please call our office.

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Revising Your W-4? Seek Professional Advice.

Around the beginning of the year, employers typically ask their employees to provide new W-4s. You may have already done that. If you have updated your W-4 recently and did so without knowledge of the consequences, it may be appropriate to revisit the issue and have this office assist you in completing an appropriate W-4 that suits your unique circumstances.

Owing money at the end of the year or receiving excessively large refunds while struggling to make ends meet during the year may be an indicator that your W-4 has been incorrectly completed. There are many factors to consider when completing a W-4, such as those involving individuals and couples with multiple jobs and people who are having children, getting married, getting divorced or buying homes - and the list goes on!

That is why it is helpful to seek professional assistance and have a tax projection for the year.

The W-4 form that is provided to your employer establishes the amount of income tax that is to be withheld from your payroll. It allows you to specify your filing status and the number of dependent exemptions to be claimed on your tax return. This is where frequent errors occur.

Let’s say that you are married and have two dependents. On your tax return, you claim four exemptions. The natural thing for you to do would be to claim “married” and four exemptions on the W-4. However, for W-4 purposes, the exemption for the taxpayer and spouse are automatically built into the married rates, and only two exemptions should be claimed. The result, of course, is that the taxpayer ends up claiming more exemptions than he or she actually has, which can result in under withholding if the standard deduction is used, leading to the potential that tax may be due rather than the taxpayer being entitled to a refund.

It is also common practice and acceptable for taxpayers to claim additional exemptions when they have excessive withholding. The withholding tables do not account for large itemized deductions or other situations that might reduce taxable income.

Some taxpayers increase the number of exemptions to provide more take-home pay from their payroll checks. That might seem like a good idea at the time that they do it, but it could lead to an unexpected and difficult-to-deal-with tax liability when tax time rolls around.

If you wish to change your payroll withholding amount and are unsure about the results, this office can help you determine the correct number of exemptions to produce the desired result.

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