In a past article I relayed the plight of the widow who stated:
"I didn't realize what an A-B Revocable Living Trust meant and that it had to be divided between the survivor and the deceased spouse and that I am limited as to what I can use from his share."
She told me that she only learned of this after her husband passed away. This is too late for many (there is a way to collapse an A-B Revocable Living Trust, which we'll talk about in another article).
First, what is an A-B Revocable Living Trust? I spend a great deal of time going over this in my free Multi-Media Course, available at http://www.livingtrustsecrets.com. Basically it is the splitting of a husband and wife's estate into two shares, his share and her share. The reason is to capture, or use, the estate tax unified credit amount that each spouse receives on death.
Let's explain. Since we know Uncle Sam likes to receive his inheritance too, whenever there is a death, we always need to ask "is there a tax?"
When we talk about taxes on death, we are talking about the federal estate tax (your state may also have a tax, sometimes called an estate tax or an inheritance tax. The difference is who is liable for payment of the tax? the estate or the inheritor? But let's not get side-tracked on the state tax. Let's stick with talking about the federal estate tax).
So let's say you have a "simple will." In a simple will, you will usually say "when I die, leave everything to my spouse." Very Simple.
Now, is there a federal estate tax? First, realize that the passing of property on death is a privilege and not a right. Therefore, it is taxable event. Even though it is a taxable event, however, the tax code tells us that everything that is left to our spouse is tax-free under what is called the "marital deduction." So, in our simple will example, there would be no estate tax since everything you leave to your spouse is tax free.
Uncle Sam is patient. He is willing to wait until the second spouse to die passes away. Now, he gets to collect his tax on the total of both shares: the husband's share and the wife's share.
What happened with the "simple will" is that you have wasted the federal estate tax unified credit amount (currently $1.5 million) that can be left tax free to anyone.
So, what the A-B Revocable Living Trust is designed to do is to capture and preserve the federal estate tax unified credit amount available when the first spouse dies. It does this by creating what is often called the "credit shelter" trust.
The "credit shelter" trust (the "B" trust in an "A-B" Trust) is an irrevocable trust that springs into being out of your Revocable Living Trust when the first spouse dies. This trust is designed to be managed by the surviving spouse for the benefit of the surviving spouse, without giving the survivor any "taxable incidents of ownership."
What this accomplishes is that upon the death of the second spouse to die, the assets that had been placed into the "credit shelter" trust are not considered to be owned by the second spouse to die. Therefore, they are not included in or taxed as part of the second spouse to die's estate.
This can often save hundreds of thousands of dollars, since the federal estate tax rate kicks in at 37% and goes up from there.
Good luck and until next time,
Saturday, January 27, 2007
Wednesday, January 24, 2007
Rearrange Your Affairs For Maximum Tax Savings
One way to maximize your business profits is by reducing your taxes. Frequently, income and other taxes could be lowered significantly if only the taxpayer were willing to plan ahead. By taking some simple steps to rearrange your affairs, you could save a fortune!
1. Are You Splitting Your Business Income?
You may pay reasonable salaries to spouse or children through your incorporated or unincorporated business. If you are not doing so, you may be missing out on some real tax savings.
In the Canadian Federal Budget of February 16, 1999, measures were introduced to discourage income splitting with minor children through family trusts. However, these measures do not apply to paying reasonable wages to family members. Thus, this may be one of the last ways of legally splitting income left for the small business person with minor children.
Obviously, the amounts paid must bear some relationship to the work performed. Of course, all required payroll taxes should be remitted and proper records need to be maintained.
Why not rearrange your affairs so that family members with little or no income can perform duties for and be paid by your business? Then, they can contribute out of their own income towards the operation of the household. In this way, little or no tax will be paid by your dependants and you will have successfully shifted taxable income out of your hands.
2. Should You Register For The Goods And Services Tax?
Even if your business grosses less than $30,000.00 per year in taxable sales, you may still benefit by registering your business to collect the Goods and Services Tax (G.S.T.). If you are not doing so, you may be missing out on some real tax savings.
For example, you will be paying G.S.T. on many of your business expenses. If not registered for G.S.T., you must absorb this cost. If registered, you may deduct the G.S.T. paid on such business expenses (input tax credits) from the tax collected. Many business persons expect to pay G.S.T. and it doesn`t really cost them anything since they deduct such amounts as input tax credits from the G.S.T. they collect from their customers.
In some cases, the quick method of calculating G.S.T. may actually allow you to retain more of the G.S.T. collected than you would have just claiming the G.S.T. actually paid by you.
A factor to consider also: If you are not registered for G.S.T. in Canada, you are telling your clients that you do under $30,000.00 per year in taxable sales or that you cheat. Is this the image you want your clients to have?
3. Could You Benefit From Incorporating Your Business?
Although incorporating your business may result in increased accounting and legal fees (for setup, extra tax returns, and annual minutes), the advantages of incorporation may justify this added expense. Not only will you enjoy limited liability by incorporating, but you may reap significant tax savings as well.
Corporations are often subject to lower tax rates on small business income. In Canada, sales of shares of qualifying small business corporations can obtain a lifetime $500,000.00 capital gains exemption. Certain tax incentives and government programs are only available to incorporated entities. Additionally, �orporations can be used for income-splitting and estate, retirement, and succession planning objectives.
4. Do You Engage in Tax Planning Year-Round?
Some people only worry about their taxes during tax season. However, you will save a fortune in taxes, legally, if you make tax planning your year-round concern.
Can you make some changes to turn your hobby into a moneymaking business? Can you use that extra room in your house as a home office for your business? Can you arrange to use your car more for business purposes and have you documented your business use mileage? Can you arrange for more of your entertainment expenses to be business related and have you listed the business purpose on the back of each receipt?
Do you make business and personal purchases, investments, and other expenditures with tax savings in mind. Do you document your expenses well so that you they would survive a tax audit? Whenever you are faced with a business or personal financial decision, do you consider the tax consequences?
Make year-round tax planning part of your business management mindset and, thus, enjoy maximum tax savings. Yes, by rearranging your affairs to account for tax implications, you will save a fortune in taxes.
RESOURCE BOX
J. Stephen Pope, President of Pope Consulting Inc., http://www.popeconsultinginc.com/ has been helping clients to earn maximum business profits for over twenty-five years.
For valuable Work at Home Small Business Ideas, visit: http://www.yenommarketinginc.com/
1. Are You Splitting Your Business Income?
You may pay reasonable salaries to spouse or children through your incorporated or unincorporated business. If you are not doing so, you may be missing out on some real tax savings.
In the Canadian Federal Budget of February 16, 1999, measures were introduced to discourage income splitting with minor children through family trusts. However, these measures do not apply to paying reasonable wages to family members. Thus, this may be one of the last ways of legally splitting income left for the small business person with minor children.
Obviously, the amounts paid must bear some relationship to the work performed. Of course, all required payroll taxes should be remitted and proper records need to be maintained.
Why not rearrange your affairs so that family members with little or no income can perform duties for and be paid by your business? Then, they can contribute out of their own income towards the operation of the household. In this way, little or no tax will be paid by your dependants and you will have successfully shifted taxable income out of your hands.
2. Should You Register For The Goods And Services Tax?
Even if your business grosses less than $30,000.00 per year in taxable sales, you may still benefit by registering your business to collect the Goods and Services Tax (G.S.T.). If you are not doing so, you may be missing out on some real tax savings.
For example, you will be paying G.S.T. on many of your business expenses. If not registered for G.S.T., you must absorb this cost. If registered, you may deduct the G.S.T. paid on such business expenses (input tax credits) from the tax collected. Many business persons expect to pay G.S.T. and it doesn`t really cost them anything since they deduct such amounts as input tax credits from the G.S.T. they collect from their customers.
In some cases, the quick method of calculating G.S.T. may actually allow you to retain more of the G.S.T. collected than you would have just claiming the G.S.T. actually paid by you.
A factor to consider also: If you are not registered for G.S.T. in Canada, you are telling your clients that you do under $30,000.00 per year in taxable sales or that you cheat. Is this the image you want your clients to have?
3. Could You Benefit From Incorporating Your Business?
Although incorporating your business may result in increased accounting and legal fees (for setup, extra tax returns, and annual minutes), the advantages of incorporation may justify this added expense. Not only will you enjoy limited liability by incorporating, but you may reap significant tax savings as well.
Corporations are often subject to lower tax rates on small business income. In Canada, sales of shares of qualifying small business corporations can obtain a lifetime $500,000.00 capital gains exemption. Certain tax incentives and government programs are only available to incorporated entities. Additionally, �orporations can be used for income-splitting and estate, retirement, and succession planning objectives.
4. Do You Engage in Tax Planning Year-Round?
Some people only worry about their taxes during tax season. However, you will save a fortune in taxes, legally, if you make tax planning your year-round concern.
Can you make some changes to turn your hobby into a moneymaking business? Can you use that extra room in your house as a home office for your business? Can you arrange to use your car more for business purposes and have you documented your business use mileage? Can you arrange for more of your entertainment expenses to be business related and have you listed the business purpose on the back of each receipt?
Do you make business and personal purchases, investments, and other expenditures with tax savings in mind. Do you document your expenses well so that you they would survive a tax audit? Whenever you are faced with a business or personal financial decision, do you consider the tax consequences?
Make year-round tax planning part of your business management mindset and, thus, enjoy maximum tax savings. Yes, by rearranging your affairs to account for tax implications, you will save a fortune in taxes.
RESOURCE BOX
J. Stephen Pope, President of Pope Consulting Inc., http://www.popeconsultinginc.com/ has been helping clients to earn maximum business profits for over twenty-five years.
For valuable Work at Home Small Business Ideas, visit: http://www.yenommarketinginc.com/
Monday, January 22, 2007
Seven Key Tax Deductions for the Self Employed
As a sole proprietor, it's wise to familiarize yourself with the some key deductions that may reduce your tax bill for 2007.
Small-business consultants generally recommend that you hire an accountant to prepare your tax returns, payroll and financial statements. But you should also meet with your accountant well before the year-end rush to discuss such matters as tax planning, and record keeping for tax deductions.
Seven common small business tax deductions:
1. Employee Benefit Plans - You may deduct contributions to employee benefit plans (such as health insurance plans and retirement plans). Depending on your circumstances the maximum contribution that you may deduct per employee in a qualified retirement plan can go up to:
$100,000 or more For a Defined Benefit Plan
$44,000 For a 401(k) plan
$41,000 For a SEP-IRA or Keogh
2. Automobile Expenses- You can elect to deduct the actual expenses incurred (including gas, oil, tires, repairs, insurance, depreciation, and rent or lease payments) for the business-related portion of your car or truck expenses, or simply take the 2004 standard mileage rate of 37.5 cents per business mile.
3. Taxes - You may deduct Social Security and Medicaid taxes paid to match required withholdings on employee wages, federal unemployment taxes, sales taxes and real estate or personal property taxes paid on business assets.
4. Home Office - Depending on whether you use your home or other real estate for business purposes, you may deduct some or all of any mortgage interest paid, as well as some or all of the maintenance and repair expenses associated with the property. The cost of utilities and business supplies associated with business use are also deductible.
5. Depreciation - Depreciation may be taken on passenger cars, equipment used for entertainment or recreational purposes (i.e., photographic equipment, cell phones and computers), as long as these items are used solely for the business.
6. Professional Fees - You may deduct professional fees, such as those paid to a lawyer or accountant.
7. Meals and Entertainment - You may deduct 50 percent of meal and entertainment expenses directly associated with the conduct of your business Remember to keep on file the records and documentation necessary to substantiate all of your deductions.
Daniel Lamaute, of Lamaute Capital, Inc. specializes in setting up retirement plans for small business owners. http://www.InvestSafe.com
Small-business consultants generally recommend that you hire an accountant to prepare your tax returns, payroll and financial statements. But you should also meet with your accountant well before the year-end rush to discuss such matters as tax planning, and record keeping for tax deductions.
Seven common small business tax deductions:
1. Employee Benefit Plans - You may deduct contributions to employee benefit plans (such as health insurance plans and retirement plans). Depending on your circumstances the maximum contribution that you may deduct per employee in a qualified retirement plan can go up to:
$100,000 or more For a Defined Benefit Plan
$44,000 For a 401(k) plan
$41,000 For a SEP-IRA or Keogh
2. Automobile Expenses- You can elect to deduct the actual expenses incurred (including gas, oil, tires, repairs, insurance, depreciation, and rent or lease payments) for the business-related portion of your car or truck expenses, or simply take the 2004 standard mileage rate of 37.5 cents per business mile.
3. Taxes - You may deduct Social Security and Medicaid taxes paid to match required withholdings on employee wages, federal unemployment taxes, sales taxes and real estate or personal property taxes paid on business assets.
4. Home Office - Depending on whether you use your home or other real estate for business purposes, you may deduct some or all of any mortgage interest paid, as well as some or all of the maintenance and repair expenses associated with the property. The cost of utilities and business supplies associated with business use are also deductible.
5. Depreciation - Depreciation may be taken on passenger cars, equipment used for entertainment or recreational purposes (i.e., photographic equipment, cell phones and computers), as long as these items are used solely for the business.
6. Professional Fees - You may deduct professional fees, such as those paid to a lawyer or accountant.
7. Meals and Entertainment - You may deduct 50 percent of meal and entertainment expenses directly associated with the conduct of your business Remember to keep on file the records and documentation necessary to substantiate all of your deductions.
Daniel Lamaute, of Lamaute Capital, Inc. specializes in setting up retirement plans for small business owners. http://www.InvestSafe.com
Wednesday, January 17, 2007
Correspondence From The IRS - Yikes!
It's a moment every person dreads. You pick up the mail and there is an envelope from the IRS. It's not a refund check. What do you do?
Don't Panic
Each year, the IRS sends out millions of "correspondence audits" to taxpayers to request payment of taxes, notify them of a change to their account or request additional information. These audits normally cover a very specific issue, often notifying you of additional small amounts of income for which you owe tax. Each letter and notice provides specific instructions explaining what you should do if action is necessary to satisfy the inquiry.
Most correspondence can be handled without calling or visiting the IRS. You simply follow the instructions in the letter and the matter is put to rest. Alternatively, you can contact the IRS to contest the matter. Simply call the telephone number indicated on the letter or write an explanation as to why you disagree. Make sure to include copies of any supporting documentation you want considered by the IRS. Typically, it will take the IRS between one and two months to respond. During the first quarter of the year, it can take two to three months.
Sometimes, the IRS sends a second letter or notice requesting additional information or providing additional information to you. Be sure to keep copies of any correspondence with your records. The IRS has been known to lose track of actions involving a taxpayer's account.
Worse Case Scenario
Everybody has a few really bad days in his or her life. You know, the car breaks down, you spill coffee on your shirt while driving to work?you get notice of a full blown audit from the IRS. The first step you take should not be drinking to excess or driving for the border. You have rights when the IRS comes calling and one of them is particularly important.
Representation
You have the right to be represented by an accountant or attorney at your audit. Under no conditions should you even consider going to an audit by yourself. Doing so would be like throwing red meat to a lion. Instead, spend the money to get representation and let them handle the audit. In most cases, you won't even have to go to the audit.
Nightmarish tax audits are generally a thing of the past. A letter from the IRS should not cause you to faint. Usually, the news isn't that bad. If it is, hire representation and let them handle it
Don't Panic
Each year, the IRS sends out millions of "correspondence audits" to taxpayers to request payment of taxes, notify them of a change to their account or request additional information. These audits normally cover a very specific issue, often notifying you of additional small amounts of income for which you owe tax. Each letter and notice provides specific instructions explaining what you should do if action is necessary to satisfy the inquiry.
Most correspondence can be handled without calling or visiting the IRS. You simply follow the instructions in the letter and the matter is put to rest. Alternatively, you can contact the IRS to contest the matter. Simply call the telephone number indicated on the letter or write an explanation as to why you disagree. Make sure to include copies of any supporting documentation you want considered by the IRS. Typically, it will take the IRS between one and two months to respond. During the first quarter of the year, it can take two to three months.
Sometimes, the IRS sends a second letter or notice requesting additional information or providing additional information to you. Be sure to keep copies of any correspondence with your records. The IRS has been known to lose track of actions involving a taxpayer's account.
Worse Case Scenario
Everybody has a few really bad days in his or her life. You know, the car breaks down, you spill coffee on your shirt while driving to work?you get notice of a full blown audit from the IRS. The first step you take should not be drinking to excess or driving for the border. You have rights when the IRS comes calling and one of them is particularly important.
Representation
You have the right to be represented by an accountant or attorney at your audit. Under no conditions should you even consider going to an audit by yourself. Doing so would be like throwing red meat to a lion. Instead, spend the money to get representation and let them handle the audit. In most cases, you won't even have to go to the audit.
Nightmarish tax audits are generally a thing of the past. A letter from the IRS should not cause you to faint. Usually, the news isn't that bad. If it is, hire representation and let them handle it
Tuesday, January 16, 2007
Filing Your Tax Return.
We all work so hard for our money that the thought of parting ways often makes us restless, yet everyone knows that our government was designed to function with our tax paying dollars. Many of us out there feel as though the only thing you can count on is death and taxes. Often times we ask ourselves, "Would the government know if I didn't pay my taxes?" Yes, the Internal Revenue Department is adamant that we all do our part to keep the country economically viable. Ever heard of Al Capone? The FBI tried for years to convict him of his many heinous crimes. Who finally got him and trotted him off to jail where he died? Yes, the IRS tried him for income tax evasion and put him in prison. Finally, one of the most notorious criminals of the Twentieth Century went to jail because he didn't pay his taxes. Obviously, we all need to understand the basics of Income taxes or we can join all of those other criminals sitting in jail because they thought they could beat the IRS.
According to federal and most state laws, if you made some sort of an income last year, than you must file an income tax return. Income tax returns are required regardless if you had income tax withheld or not; while all businesses except partnerships must file an annual tax return. For the individual, when determining whether you must file or not, the IRS takes into account your income, filing status, and age.
We must understand that the requirement of filing an income tax return is not voluntary, rather mandatory and extremely important. The Internal Revenue Service has clearly stated out the requirements for filing in the following codes §§ 6011(a), 6012(a), et seq. If you fail to file an income tax return it is considered a Class A misdemeanor with a maximum penalty of one year in jail and a $10000 fine. While the penalty for filing a frivolous income tax return is only $500, the penalty.
Thanks to modern technologically we now have the option of filing our taxes faster than before. The fastest way for you to file is electronically or you may still prefer to file the old fashion way via the mail. Whether your return is complicated or easy, both these methods will work. The primary form for the income tax return is either the 1040 NR or 1040 NR-EZ. The average time to process an accurate tax return is between six and eight weeks. Your tax return is due on April 15th. If the income tax return is late (even one day), there is an automatic tax due of 25% of your tax return. If you know that you're going to be late, file an extension, taxpayers are granted an automatic six month extension for filing an individual income tax return.
Filing an e-turn can be very beneficial to you, especially if you are waiting to receive money back from the government. If you should choose to e-file your tax return you then have the option to use direct deposit, this allows you to receive your return in as little as 10 days. Even if you do not choose the direct deposit option, you will usually receive your tax refund in half the time by e-filing.
Keep in mind that one of the most important things when filing your federal or state tax return, if filing by mail, is remembering to sign it. In some cases you may need to get a hold of your previously filed tax return. You can obtain this information in a written request to the IRS.
It is extremely important to file an income tax return. There are several non-profit organizations with trained volunteers who provide basic income tax return preparation and free tax counseling for senior citizens. If you need help, contact the IRS or a tax service. Tax returns leave no room for mistake.
by Kenneth L Myers
According to federal and most state laws, if you made some sort of an income last year, than you must file an income tax return. Income tax returns are required regardless if you had income tax withheld or not; while all businesses except partnerships must file an annual tax return. For the individual, when determining whether you must file or not, the IRS takes into account your income, filing status, and age.
We must understand that the requirement of filing an income tax return is not voluntary, rather mandatory and extremely important. The Internal Revenue Service has clearly stated out the requirements for filing in the following codes §§ 6011(a), 6012(a), et seq. If you fail to file an income tax return it is considered a Class A misdemeanor with a maximum penalty of one year in jail and a $10000 fine. While the penalty for filing a frivolous income tax return is only $500, the penalty.
Thanks to modern technologically we now have the option of filing our taxes faster than before. The fastest way for you to file is electronically or you may still prefer to file the old fashion way via the mail. Whether your return is complicated or easy, both these methods will work. The primary form for the income tax return is either the 1040 NR or 1040 NR-EZ. The average time to process an accurate tax return is between six and eight weeks. Your tax return is due on April 15th. If the income tax return is late (even one day), there is an automatic tax due of 25% of your tax return. If you know that you're going to be late, file an extension, taxpayers are granted an automatic six month extension for filing an individual income tax return.
Filing an e-turn can be very beneficial to you, especially if you are waiting to receive money back from the government. If you should choose to e-file your tax return you then have the option to use direct deposit, this allows you to receive your return in as little as 10 days. Even if you do not choose the direct deposit option, you will usually receive your tax refund in half the time by e-filing.
Keep in mind that one of the most important things when filing your federal or state tax return, if filing by mail, is remembering to sign it. In some cases you may need to get a hold of your previously filed tax return. You can obtain this information in a written request to the IRS.
It is extremely important to file an income tax return. There are several non-profit organizations with trained volunteers who provide basic income tax return preparation and free tax counseling for senior citizens. If you need help, contact the IRS or a tax service. Tax returns leave no room for mistake.
by Kenneth L Myers
Tax Records - What You Should Keep And For How Long
Many taxpayers are confused about how long they should keep tax records. The term "tax records" refers to your tax returns and the documents that support the information in the returns. These documents can include receipts, bank statements, 1099s, etc. If you are one of the unlucky few to be audited, these records will be vital to fending off the IRS.
Tax Returns
To protect yourself from a nasty audit, you should keep all of your tax returns indefinitely. The IRS has been known to lose or misplace tax returns. While conspiracy advocates argue that this is evidence of a nefarious scheme, the simple fact is that the IRS receives millions of returns over a three-month period and lost returns are inevitable. So how do you protect yourself? You keep copies of every single tax return.
A quick word on the IRS e-file program. If you file your returns electronically, make sure you get copies from the company that filed your return. All such entities are required by law to provide you with paper copies.
Records Supporting Tax Returns
You should keep supporting tax records for a period of six years from the date the returns were actually filed. In general the IRS only has three years to audit you from the filing date. For example, if you filed your 2000 tax return on April 15, 2001, the IRS would have to start an audit by April 15, 2004. Keep in mind that if you filed an extension, the IRS will have three years from the date you submitted the return. As is always case with taxes, there are exceptions to this general time period.
If your tax return looks like the great American novel, the running of the three-year audit period may not save you. Failure to report more than 25% of your gross income gives the IRS an additional three years to pursue you. Using the previous example, the IRS would have until April 15, 2007 to audit your 2000 tax return.
Property Records - Get A Filing Cabinet
You may need to get a filing cabinet if you hold property for an extended period of time. For example, assume that you purchased a home in 1980 for $100,000 and made $50,000 in improvements over the years. You need to keep the purchase records, mortgage statements and receipts that relate to the improvements. When you sell the home, you will need the records to determine the tax consequences of the sale, to wit, your basis (original cost plus improvements) and profit. If the IRS decides to take a closer look at the reported profit, you will need to provide your tax records to support your claims. Once you actually sell the property, it is recommended that you keep all of the tax records for an additional six years.
Divorce
Make sure you keep copies of all of your financial documents, tax returns and supporting documents if you get divorced. You should also keep copies of all divorce agreements and court orders that cover property and financial issues. When couples divorce, the tax and credit consequences can be nightmarish. If you don't keep records, you will have to ask your ex-spouse for them. Get the records now to avoid doubling your misery!
Hopefully, you will never need to show your tax records to the IRS. If you are one of the unlucky few that is audited, your tax records should keep your feet out of the fire.
Richard Chapo is CEO of http://www.businesstaxrecovery.com - Obtaining tax refunds for businesses by finding overlooked tax deductions and credits through a free tax return review.
Tax Returns
To protect yourself from a nasty audit, you should keep all of your tax returns indefinitely. The IRS has been known to lose or misplace tax returns. While conspiracy advocates argue that this is evidence of a nefarious scheme, the simple fact is that the IRS receives millions of returns over a three-month period and lost returns are inevitable. So how do you protect yourself? You keep copies of every single tax return.
A quick word on the IRS e-file program. If you file your returns electronically, make sure you get copies from the company that filed your return. All such entities are required by law to provide you with paper copies.
Records Supporting Tax Returns
You should keep supporting tax records for a period of six years from the date the returns were actually filed. In general the IRS only has three years to audit you from the filing date. For example, if you filed your 2000 tax return on April 15, 2001, the IRS would have to start an audit by April 15, 2004. Keep in mind that if you filed an extension, the IRS will have three years from the date you submitted the return. As is always case with taxes, there are exceptions to this general time period.
If your tax return looks like the great American novel, the running of the three-year audit period may not save you. Failure to report more than 25% of your gross income gives the IRS an additional three years to pursue you. Using the previous example, the IRS would have until April 15, 2007 to audit your 2000 tax return.
Property Records - Get A Filing Cabinet
You may need to get a filing cabinet if you hold property for an extended period of time. For example, assume that you purchased a home in 1980 for $100,000 and made $50,000 in improvements over the years. You need to keep the purchase records, mortgage statements and receipts that relate to the improvements. When you sell the home, you will need the records to determine the tax consequences of the sale, to wit, your basis (original cost plus improvements) and profit. If the IRS decides to take a closer look at the reported profit, you will need to provide your tax records to support your claims. Once you actually sell the property, it is recommended that you keep all of the tax records for an additional six years.
Divorce
Make sure you keep copies of all of your financial documents, tax returns and supporting documents if you get divorced. You should also keep copies of all divorce agreements and court orders that cover property and financial issues. When couples divorce, the tax and credit consequences can be nightmarish. If you don't keep records, you will have to ask your ex-spouse for them. Get the records now to avoid doubling your misery!
Hopefully, you will never need to show your tax records to the IRS. If you are one of the unlucky few that is audited, your tax records should keep your feet out of the fire.
Richard Chapo is CEO of http://www.businesstaxrecovery.com - Obtaining tax refunds for businesses by finding overlooked tax deductions and credits through a free tax return review.
Organizing Your Taxes
Does this scene sound familiar? It's April 7. You haven't seen the top of your dining room table in two weeks because of the piles of paid bills, receipts, canceled checks, and unidentified cash register receipts covering it. Your head pounds and your stomach churns as the countdown to April 15 begins.
You might hate to pay taxes, think the system is unfair, dislike the forms, and even stage a mini-tax rebellion, but in the end the tax man cometh - with penalty if you're not careful! The key to your survival is taking an organized approach to this unavoidable task.
There are really two issues here. Number one, of course, is getting the information together for this year's tax return. Number two is developing a strategy, which will eliminate the panic you're feeling now next year - and now is the easiest time to do that too. Consider these tips:
? If you use a tax advisor, make an appointment to get together well before April 15. For the future, do it before the end of the tax year, and you may be able to save on your tax bill.
? Designate a specific, easily accessible place to keep all the information relevant to your tax return.
? Pay tax-deductible items by check or credit card whenever possible. If you have many tax-deductible items, get a separate credit card for those expenses.
Now, for this year:
Step 1: Collect all the records you can find: canceled checks, credit card receipts and statements, canceled checks, cash register receipts, calendars, and any articles or other information you may have collected with information about what you can deduct. (Use Post-it? Flags to highlight important information.) If you're not sure, discuss with your accounting the critical information to include with your tax return, including documents to support any wages or other income received as well as mortgage interest paid.
Step 2: Separate all the papers into appropriate categories. Put each one into a separate container - large envelope, plastic basket or shoebox. Labeling each category with a Post-it? Note will make it easier to adjust your category names if you change your mind as you proceed. Since you will probably need more than one sitting to complete your taxes, these labeled containers make it easier to clear your work area, if necessary, and to find your place when you are ready to continue.
Step 3: Take one category at a time and eliminate (or staple together) any duplicate receipts. If you need to correlate your expenses with your calendar in order to prove tax-deductible expenses, such as in the case of entertainment, put all receipts in chronological order to speed up the process. (Use a different color Post-it? Flag for each deductible category.)
Step 4: Now you are ready to begin entering the information on the tax forms, into your computer program, or to take the information to your accountant. (Many accountants will provide a worksheet of compiling information.)
Once you've finished filing your return, the next consideration is how long to keep the material you've collected. The simple answer is to keep whatever you need to persuade the IRS that everything on your return is accurate, and hang on to the evidence for as long as the IRS has the right �o question your return. But I'm sure you wanted a more practical answer!
Ordinarily that's three years from the due date for the return, including extensions, to assess any additional tax. But a return can be audited for six years if the IRS suspects the taxpayer has neglected to report substantial income. If fraud is suspected, there is no time limit.
Your record keeping system doesn't have to be elaborate or sophisticated. What is more important is to have a system - and the discipline to keep it up to date.
Make sure to keep tax information separated by year. If you have a minimum amount of back-up material, one file folder may be sufficient. Staple together all information for each itemized deduction. Label it clearly with a Post-it? Note. Otherwise, use separate file folders or envelopes for each category. If you run a business and have a very large amount of material, use one storage box for each year. Make sure to label the outside of the box! Put all boxes together. As you put in this year's box, you can remove the box with information you no longer need to keep. Sorting your back-up materials will be easy to do right after you filed this year's return when the categories are fresh in your mind. If you are audited, it will be easy to provide documents to support your tax return.
In addition, consider these tax tips:
? If you write off the cost of a business car, keep the logbook in which you recorded your trips as well as evidence of the costs you incur.
? If you claim as a dependent someone who is not your child, keep a separate file for the evidence that shows you provide more than half of that person's support.
? Keep information that relates to the purchase of all homes at least six years after the sale of the last house. This includes your title, deed of purchase, and information about your home's purchase price, sales price, capital improvements and repairs.
© Barbara Hemphill is the author of Kiplinger's Taming the Paper Tiger at Work and Taming the Paper Tiger at Home and co-author of Love It or Lose It: Living Clutter-Free Forever. The mission of Hemphill Productivity Institute is to help individuals and organizations create and sustain a productive environment so they can accomplish their work and enjoy their lives. We do this by organizing space, information, and time. We can be reached at 800-427-0237 or at www.ProductiveEnvironment.com
You might hate to pay taxes, think the system is unfair, dislike the forms, and even stage a mini-tax rebellion, but in the end the tax man cometh - with penalty if you're not careful! The key to your survival is taking an organized approach to this unavoidable task.
There are really two issues here. Number one, of course, is getting the information together for this year's tax return. Number two is developing a strategy, which will eliminate the panic you're feeling now next year - and now is the easiest time to do that too. Consider these tips:
? If you use a tax advisor, make an appointment to get together well before April 15. For the future, do it before the end of the tax year, and you may be able to save on your tax bill.
? Designate a specific, easily accessible place to keep all the information relevant to your tax return.
? Pay tax-deductible items by check or credit card whenever possible. If you have many tax-deductible items, get a separate credit card for those expenses.
Now, for this year:
Step 1: Collect all the records you can find: canceled checks, credit card receipts and statements, canceled checks, cash register receipts, calendars, and any articles or other information you may have collected with information about what you can deduct. (Use Post-it? Flags to highlight important information.) If you're not sure, discuss with your accounting the critical information to include with your tax return, including documents to support any wages or other income received as well as mortgage interest paid.
Step 2: Separate all the papers into appropriate categories. Put each one into a separate container - large envelope, plastic basket or shoebox. Labeling each category with a Post-it? Note will make it easier to adjust your category names if you change your mind as you proceed. Since you will probably need more than one sitting to complete your taxes, these labeled containers make it easier to clear your work area, if necessary, and to find your place when you are ready to continue.
Step 3: Take one category at a time and eliminate (or staple together) any duplicate receipts. If you need to correlate your expenses with your calendar in order to prove tax-deductible expenses, such as in the case of entertainment, put all receipts in chronological order to speed up the process. (Use a different color Post-it? Flag for each deductible category.)
Step 4: Now you are ready to begin entering the information on the tax forms, into your computer program, or to take the information to your accountant. (Many accountants will provide a worksheet of compiling information.)
Once you've finished filing your return, the next consideration is how long to keep the material you've collected. The simple answer is to keep whatever you need to persuade the IRS that everything on your return is accurate, and hang on to the evidence for as long as the IRS has the right �o question your return. But I'm sure you wanted a more practical answer!
Ordinarily that's three years from the due date for the return, including extensions, to assess any additional tax. But a return can be audited for six years if the IRS suspects the taxpayer has neglected to report substantial income. If fraud is suspected, there is no time limit.
Your record keeping system doesn't have to be elaborate or sophisticated. What is more important is to have a system - and the discipline to keep it up to date.
Make sure to keep tax information separated by year. If you have a minimum amount of back-up material, one file folder may be sufficient. Staple together all information for each itemized deduction. Label it clearly with a Post-it? Note. Otherwise, use separate file folders or envelopes for each category. If you run a business and have a very large amount of material, use one storage box for each year. Make sure to label the outside of the box! Put all boxes together. As you put in this year's box, you can remove the box with information you no longer need to keep. Sorting your back-up materials will be easy to do right after you filed this year's return when the categories are fresh in your mind. If you are audited, it will be easy to provide documents to support your tax return.
In addition, consider these tax tips:
? If you write off the cost of a business car, keep the logbook in which you recorded your trips as well as evidence of the costs you incur.
? If you claim as a dependent someone who is not your child, keep a separate file for the evidence that shows you provide more than half of that person's support.
? Keep information that relates to the purchase of all homes at least six years after the sale of the last house. This includes your title, deed of purchase, and information about your home's purchase price, sales price, capital improvements and repairs.
© Barbara Hemphill is the author of Kiplinger's Taming the Paper Tiger at Work and Taming the Paper Tiger at Home and co-author of Love It or Lose It: Living Clutter-Free Forever. The mission of Hemphill Productivity Institute is to help individuals and organizations create and sustain a productive environment so they can accomplish their work and enjoy their lives. We do this by organizing space, information, and time. We can be reached at 800-427-0237 or at www.ProductiveEnvironment.com
Subscribe to:
Posts (Atom)
