A Week in Perspective

Posted by Bruce Mc on Nov 14, 2010 in Information, Week in review | 0 comments

The Turbo Tax defense doesn’t work in Tax Court. No Gold at the End of the Rainbow – The Court also noted that they gave plenty of opportunities for the Aus to negotiate a settlement with the IRS, and/or to consult attorneys regarding their case. They didn’t until the Court was about to render its decision. Had they asked a tax professional or an attorney familiar with tax law about their case, they likely would have been advised to settle and they would be paying less than they’ll have to.

Disability Insurance Policy To Protect Your Most Important Asset – Your Income – Ask yourself this question. What is your most important and valuable asset? Think about it for a minute. Is it your house? Your savings or your 401(k) retirement plan? Your sports car or rare memorabilia? While all of these things are both important and valuable, none of them truly represent your MOST valuable asset

Don’t Get Taken! What Passive Income Really Means

Love And Money – Love and money don’t always go hand in hand. It can be the cause of countless arguments especially since most of us have different money styles. However, with a few guidelines to promote better money communication, money can become a source of joy within a relationship rather than a stress inducer.

I like this – My “Reverse” Black Friday

ANOTHER ONLINE DEBATE – It seems the announcement of THE SCHEDULE C LETTER has re-opened the online debate of “Should a Sole Proprietor Incorporate, or A One-Person LLC Elect To Be Taxed As A Corporation, For No Other Reason Than to Reduce the Chance of an IRS Audit?” –

            The Answer is individually situational. Please see a lawyer then see you tax professional before making your choice.

Not Going To Happen – All over the tax blogs today has been coverage of the President’s Debt Reform Panel’s Tax Reform Panel options for cleaning up the American Tax Code. It looks well thought out and I intend to give it much more study over the next couple of days. But it doesn’t matter what the options suggest, it won’t happen.

Veterans Day 2010: Tax considerations for members of the military

Home Improvements That Qualify for Tax Deductions – Did you know that some home improvements may qualify for federal tax deductions or tax credits?  Knowing which renovations and improvements are eligible for tax deductions can help you decide whether or not to make the improvements, and can help you correctly claim deductions or credits for these renovations when you file your taxes.

The One Thing to Drop from Your Budget Like a Hot Potato

Financial Loopholes to Take Advantage of Now – In 2001 Congress passed a massive tax reform bill called the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA), which provided tax cuts to all Americans, in all income levels, via a multitude of changes to the tax code. These tax benefits have come to be known as the Bush tax cuts.

Tax Relief FAQ: How Does the IRS Compute Penalties For Delinquent Tax Returns? – An important step in avoiding IRS tax trouble is to understand how the IRS approaches delinquent tax return penalties.

1099s – The Good, the Bad and the Ugly  - Having a small business issue 1099s for these purchases starting in 2012 would be pointless:

• $852 of office supplies purchased from Staples
• $2,592 of airline tickets purchased directly from the airlines
• $1,300 of services from their CPA firm

Issuing a 1099 for $700 of services rendered by a web designer makes sense though and existing law already covers that.

Steve Jobs Is NOT Giving You Tax Advice (But If He Did…) – . . . , as marketing goes, it’s pretty darn clever. And despite whether you love Apple or not, you have to give them credit for consistently being above the curve on the marketing side. As a tax geek, I’m a little bit in love. Using the Tax Code as a marketing tactic is genius (so, hey Apple, call me).

How to Work a Job Fair – Before You Go to a Job Fair, It’s best to be prepared for a job or career fair. Before you go, prepare yourself to impress, and have an idea of what companies you want to talk to. As get ready to go, consider taking these actions:

So I Won a Free Trip to the Bahamas. Now, How do I Report It on my Tax Return?  - “I will not be sent a Form 1099-MISC. So how should I account for this on my tax return?”

What are the odds of an Obama compromise on Bush rates? – Tax planners got all excited yesterday when top White House aide David Axelrod hinted to the Huffington Post website that the President might be ready to extend the 2010 tax rates for top earners. Absent new legislation, the top marginal rate will rise from 35% to 39.6% in 2011 — and higher when phase-outs are counted. But if the Axelrod statements are a trial balloon, the President isn’t ready to climb aboard just yet. CNN reports on comments he made in Seoul:

Lottery winnings, charitable donations and the tax collector – By now I’m sure you’ve heard about the Nova Scotia couple who hit the lottery and then gave away most of their $10.9 million (Canadian) winnings to charities.

Allen and Violet Large are generous, but they’re no fools. They kept nearly a million for themselves. The septuagenarians say they’ll use the money for emergencies and to buy more lottery tickets.

Good for them! And doubly good for them that Canadian tax law allows them to give away so much of their windfall.

Wash Sale Rule for Investment Losses – All investors experience losses, no matter how experienced or knowledgeable they are.  The Internal Revenue Service (IRS) allows investors to deduct capital losses from investing gains in order to reduce your capital gains taxes.  Under the IRS rules, short-term capital losses can be used to reduce short-term capital gains, which is extremely beneficial because short-term capital gains tax is equal to your ordinary income tax rate.

Roth Conversion Planning Ideas

5 Ways to Make Sure that a Partnership is a Good Idea for Your Business – Ask most business people their most horrendous business story, and it will almost always involve a partner.

Lucky Number 13: 13 Financial Changes for My 23rd Birthday –  now that I’m one day away from being 23, I’ve realized it’s time to start being more financially responsible.

Itemizing deductions – Schedule A

Posted by Bruce Mc on Jan 4, 2010 in | 0 comments

Getting the Most out of Itemizing your deductions.

Itemizing deductions is an incredibly easy theory to understand, yet the strategies behind it all can be intricate and countless.

Free Quicken Online automatically categorizes your expenses.

The rule for when to itemize is simple = you do it if the total of your itemized deductions is greater than your standard deduction.

First of all, your tax is based on your “taxable income.” That’s your total income after you’ve subtracted above-the-line deductions like your Individual Retirement Account (IRA) or other qualified retirement-plan contributions, moving expenses or alimony payments, plus your personal exemption and either :

Your standard deduction or, Your itemized deductions.

Your itemized deductions are sometimes referred to as “below-the-line” deductions. (“adjusted gross income” -aka AGI- is “the line.”) Clearly, the more you can deduct, the less in tax you’ll owe.

Here are the standard deductions that apply to 2011 taxes:

Some taxpayers must itemize, even if their deductions are less than the standard deduction. You must itemize your deductions if:

• You are married, filing separately, and your spouse itemizes.
• You are a U.S. citizen who can exclude income from U.S. possessions.
• You are a nonresident or dual-status alien.
• You file a short-period return because of a change in your accounting period.
  • There are eight sections  On Schedule A. Seven of which are itemized expenses that you can deduct on your taxes:

Medical and Dental expenses.

Taxes. These include state and local income taxes, property taxes on real estate, intangible taxes (on the value of stocks and bonds you own) and on personal property taxes on such things as cars. 

Interest expenses. For most people, these are limited to home mortgage interest, points (interest that’s prepaid to buy a home), and some interest on investments and education expenses. For most taxpayers, the mortgage deduction is what lets them itemize. If you take out a 30-year, $140,000 mortgage at 6%, you will generate about $8,350 in deductible interest in the first year.

Charitable contributions.

• See also my Fair Market Value Guide. (recently updated for 2010 filing)

Casualty – Theft losses

Job & Misc. Expenses

Other Misc. Deductions

Total Deductions

The key, then, is to maximize the value of your itemized deductions. Here’s where planning can put dollars in your pocket. Ask your Tax preparer a list of deductions to see What You Can Itemize.

Dealing with the floors

Some itemized deductions — including medical expenses or miscellaneous deductions such as investment expenses, safe deposit fees, professional education, employee job-hunting expenses and tax-preparation fees — are not allowed until they exceed a certain “floor” amount.

The toughest floor to exceed is medical expenses. No medical expenses are allowed as itemized deductions except for the amount that exceeds 7.5% of your adjusted gross income. That means if you have an adjusted gross income of $100,000, the first $7,500 of your medical expenses doesn’t count. But sometimes, elective medical expenses can be accelerated or even deferred. Orthodontia payments for you or your dependents can often be extended. They always can be accelerated. These expenses are deducted in the year they are paid, not necessarily in the year the service is rendered.

If you can already pass the 7.5% test for allowable expenses or these expenses would put you over the minimum hurdle, you should consider accelerating them. If you lack the cash, consider charging the expenses.

On credit card charges, you are allowed the deduction in the year of the charge, not in the year that the charge is paid off.

Don’t automatically accelerate if it puts you over the 7.5% floor. Remember, your total itemized deductions must exceed your standard deduction before you get any real additional benefit from any of them. Allowable medical expenses are just one component of the package.

If you don’t exceed the 7.5% floor or your total itemized deductions don’t exceed your standard deduction this year, you should consider deferring your payments or any elective medical procedures. You get the use of the money — and any investment returns. In any case, you may be able to use the deductions in the subsequent year when you revisit the itemization question.

Miscellaneous itemized expenses are also deductible only after they exceed a minimum floor. In this case, it’s 2% of your adjusted gross income. So, with an adjusted gross income of $100,000, your first $2,000 of miscellaneous itemized deductions won’t count.

But here again, many of these deductions can be either accelerated or deferred. Miscellaneous itemized deductions such as those mentioned above often can be paid in the year of your choice. Many of my clients send my tax-preparation fees to me on Dec. 31 in order to get the deduction in the year the check was mailed. I don’t get the income until I receive the check — in the new year.

The rule here is the same as with medical expenses. First, qualify the expenses to be included in the deductible pot. Then, only if you expect to itemize, accelerate. If not, defer.

Interest and tax payments

Some interest and tax payments can be handled in the same way.

Let’s look at the interest you are paying. Your January payment on your mortgage includes the interest you accrued for December of the previous year.

Example: By making your January 2012 payment on Dec. 31, 2011, you have accelerated a full month’s interest deduction into 2011.

In the 25% bracket for 2011 on a $1,000 interest payment, that saves you an immediate $250 on April 15, 2012. By doing that each year, you have created an interest-free loan of that $250 in perpetuity or at least until the loan is paid off.

Unfortunately, you can’t prepay two or three months in advance because the interest deduction must relate to the year the money was used. But your Dec. 31, 2011 payment will be for the use of the money during December 2011.

You can accelerate some tax payments as well. If you don’t pay your real-estate tax in your mortgage, you have the opportunity to accelerate your real-estate tax payments. I am billed in the 4^th quarter of my real-estate taxes January of the following year. But I actually make my payment on Dec. 31 of the previous year. The technique is the same with estimated state income tax payments. I make my estimated state income tax payment, due in January in December.

Any voluntary expenditure can be accelerated or deferred. Your gifts to charity are the best example. Whether your $1,000 pledge to your church or synagogue is sent on Dec. 31, 2011 or Jan. 1, 2012 makes little difference to the charity receiving the money. However, in the 25% bracket for 2011, it can make a $250 difference to your tax bill — but again, only if your total itemized deductions exceed your standard deduction.

Personally, if I can qualify for itemizing my taxes, I want to accelerate my tax savings.

And my favorite quotes fits here:

“Not everything that counts can be counted, and not everything that can be counted counts”. – Albert Einstein