This entry was posted on 1/25/2007 12:32 PM and is filed under uncategorized.
From the SSA/IRS Reporter: "One of the challenges of the year-end payroll process is the correct collection and treatment of information about any and all taxable fringe benefits so that they are reported on Forms W-2 and taxes are withheld and deposited.
A good resource, which includes the rules on valuing and taxing various benefits, is IRS’ Employer's Tax Guide to Fringe Benefits (Publication 15-B, http://www.irs.gov/pub/irs-pdf/p15.pdf)."
I am David Greenslit, an active licensed CPA in Mound, Minnesota. Since 1989 I have helped people with their Federal form 1040 income tax returns at my firm, Tulberg & Greenslit, CPAs.
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Your Tax Questions
If you have a question you would like answered, send me an email or just comment on one of my entries. Though I am busy this time of year, I'll see what I can do, and Thank You for visiting this blog. : )
College Students
If you have children in college, it is important that their and your returns are done to save you as a family, the most money. Who claims the child’s exemption, can cause a big difference in total taxes paid. Education Deductions and Credits generally follow the child's exemption. The parent’s tax rate will usually be higher, meaning that they will benefit more by claiming the exemption. Full time students under 24 can usually be claimed by their parents.
Family Wages
"Payments for the services of a child under age 18 who works for his or her parent in a trade or business are not subject to social security and Medicare taxes if the trade or business
is a sole proprietorship or a partnership in which each partner is a parent of the child." - The IRS
If you are disabled and have expenses which are necessary for you to be able to work, you can take a business deduction for these expenses, rather than a medical deduction. For employees, this means deduct them on schedule A, without reducing them by 2% of your adjusted gross income.
Residential Telephone Service
You cannot deduct any charge for basic local telephone service for the first telephone line to your residence, even if it is used in a trade or business.
Annual Gift Exclusion
The annual gift exclusion for 2006 and 2007 is $12,000. You can give an individual up to this amount each year and not have to file a return.
Hobby Losses
Losses resulting from a Hobby are not deductible. A taxpayer can take the position that if they made money at their "hobby" in 3 of the last 5 years, the losses in other years are
allowed. But this "3 of 5" test is not the final word. The IRS may look at other factors as well. For horse breeding, racing, training, or showing, the test is for profits in 2 of the past 7 years.
Taxable Refunds
"None of your state income tax refund is taxable if, in the year you paid the tax, you either (a) did not itemize deductions, or (b) elected to deduct state and local general sales taxes instead of state and local income taxes." - from the IRS
IRA Rollovers to HSAs
The Tax Relief and Health Care Act of 2006 allows a one time, once in a lifetime, rollover of funds from an IRA into an Health Spending Account, for tax years beginning after 12/31/06.
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Musical Works
Under the Tax Increase Prevention and Reconciliation Act of 2005, Musicians can now treat the sale of their self created compositions as falling under the capital gains rates. This is generally better than having the income taxed as ordinary income.
Client Confidentiality
A CPA cannot release confidential client information without the specific consent of the client unless the CPA receives a subpoena or summons.
Credit Card Rewards
It is generally accepted by most CPAs that Credit Card Rewards and their Cash Rebates are not taxable income if they relate to personal purchases. Rewards relating to the use of a
Business Credit Card would generally result in either taxable income, and/or a reduction of business deductions.
Employer Provided Cars
If an employer provides a car to an employee, the personal use of the vehicle is usually a taxable noncash fringe benefit.
Education Credits
If you claim an exemption on your tax return for an eligible student who is your dependent, you can treat any expenses paid by the student as if you had paid them when calculating either the Hope or Lifetime Learning Credit.
How long to keep tax records?
You must keep your records for as long as they are important to federal and state tax law. For most cases that is 3 years from when the return is filed, or 2 years from when the tax is paid, whichever is later.
Most states expect you keep them longer so you should add on another year to cover that. The statute of limitations is longer still if you materially understate your income.
Certain records relating to costs should be kept as long as you own the asset. Examples of these types of assets are: Personal residences (improvements too), Stock and mutual fund costs (after tax accounts), investment and rental real estate, and business assets.
Depreciating Horses
"Racehorses more than 2 years old, and breeding horses more than 12 years old, are depreciated using a three-year recovery period. Racehorses 2 years old or less, breeding horses and
other horses 12 years old or less, are depreciated using a seven-year recovery period." - from: USTrotting.com
Hiring Your Children
If you are self employed, consider hiring your children and deduct their wages from your generally higher income, and have it taxed at their generally lower rate. You can also use their wages as a basis to contribute to a Roth IRA of theirs.
A surrender of stock by a dominant shareholder who retains control of a corporation is treated as a contribution of capital rather than as an immediate loss deductible from taxable income.
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Charitable Uniforms
You can deduct the cost and upkeep of uniforms that are not suitable for everyday use and that you must wear while performing donated services for a charitable organization.
Donating Appreciated Stock
If you donate appreciated stock to charity instead of selling it first and then donating the cash you'll generally come out ahead on your taxes. You get a charitable deduction for the fair market value of the donated stock but do not have to pay tax on the appreciation of the stock.
Health Spa Expenses
You cannot deduct health spa expenses, even if there is a job requirement to stay in excellent physical condition, such as might be required of a law enforcement officer.
Q and A
Q. What is the difference between tax avoidance and tax evasion?
A. Jail.
The Earned Income Credit
The earned income credit, or EIC, is a refundable credit for workers who meet certain requirements and file a tax return. Persons with or without a qualifying child may claim the EIC. The maximum credit you can get will depend on whether you have no qualifying children, one qualifying child, or more than one qualifying child. Additionally, the maximum credit possible can change each year due to inflationary adjustments.
Direct Deposits
If you are getting an income tax refund, a direct deposit makes sense. We simply enter your bank routing and account numbers onto your return. The refunds are then deposited into your bank account rather than being mailed. On average this gets you your refunds a week earlier. There are no fees or charges associated with a direct deposit for our clients. Many of our clients use direct deposit and they have been pleased with the security, convenience, and faster refunds.
Review Courses
Review courses to prepare for a certified public accountant (CPA) examination are not qualifying work-related education expenses. They are part of a study that can qualify one for a new profession.
Giving Appreciated Securities to Children
You might be able to gift stock or other securities to your children or grandchildren and not be taxed on the gain. Under the Kiddie Tax rules, your child or grandchild can hold the stock until they are 18 and then sell it, and perhaps use the lowest 5 percent tax bracket.
Employee's Health Insurance
Our clients who are employees often ask us if they can deduct their health insurance premiums? If your premiums are deducted from your wages, the answer is often no. Most larger employers have in place a plan that in effect gives you your deduction upfront, and this is what you want. Employers with qualified benefit plans have done the extra paper work that gives you the best tax deal.
Flexible Spending Accounts
Probably the best tax break invented is the Flexible Spending account (FSA). If your employer offers you this option, take it. Money is set aside from each paycheck to pay for such things as medical and child-care costs. This same money is then reimbursed to you throughout the year. The tax saving can be dramatic. For someone in the 25% federal tax bracket, the total savings can amount to 39%. In other words, the government picks up almost 40% of the cost for you. Of course there are dollar limits on how much you can put into an FSA each year. And FSA’s biggest drawbacks are their use it or lose it requirement.
Six months to live
A patient was at her doctor's office after undergoing a complete physical exam. The doctor said, "I have some very grave news for you. You only have six months to live." The patient asked, "Oh doctor, what should I do?" The doctor replied, "Marry an accountant." "Will that make me live longer?" asked the patient. "No," said the doctor, "but it will SEEM longer."
Lost Refund Checks
From the IRS: "Call the IRS at (800)829-1954. If your refund check has not been cashed, we can normally provide a replacement within six to eight weeks. If your refund check has been cashed, the Financial Management Service (FMS) will provide a copy of the check and a Form 3911 (PDF) Taxpayer Statement Regarding Refund, to initiate a claim. The signature on the cancelled check will be reviewed before determining whether another refund can be issued."
Missing W-2 or 1099
All taxable income is required to be reported on form 1040. If someone fails to send you a W-2, 1099, or any other similar document, you are still required to report the income.
