The period of limitations is the time in which you as the taxpayer can amend your tax return to claim a credit or refund, or the IRS can assess additional tax.  Unless otherwise noted, the years refer to the period after the return was filed.  Returns filed before the due date are treated as filed on the due date.  Also note that you should retain copies of your previously filed tax returns.  They help in preparing future returns and make computations if you need to file an amended return.

1. If you owe additional tax and situations (2), (3), and (4), below, do not apply to you, keep records for 3 years.

2. If you do not report income that you should report, and it is more than 25% of the gross income shown on your return; keep records for 6 years.

3. If you file a fraudulent return, keep the records indefinitely.

4. You do not file a return, keep the records indefinitely.

5. You file a claim for credit or refund after you file your return; keep the records for 3 years from the date you filed your original return or 2 years from the date you paid the tax, whichever is later.

6. You file a claim for a loss from worthless securities or bad debt deduction, keep the records for 7 years.

7. Keep all employment tax records for at least 4 years after the date that the tax becomes due or is paid, whichever is later.

The following questions should be applied to each record as you decide whether to keep a document or throw it away.

Records Connected to Assets
Keep records relating to property until the period of limitations expires for the year in which you dispose of the property in a taxable disposition.  You must keep these records to figure any depreciation, amortization, or depletion deduction and to figure the gain or loss when you sell or otherwise dispose of the property.  Any assets still noted on your tax return as property should retain their records until the end of the statute of limitations.

When the Records are No Longer Required
If your records have exceeded their value for tax purposes, verify it with your insurance company, creditors, etc. to determine if they are required longer than the IRS does.

Final Answer
Scan all of your documents, have at least 2 back-up copies stored, and keep your hard copies stored in a secure location indefinitely if possible.  Although this information does set limits, you must use these guidelines for your own decision-making purposes.

—-
Dwayne J. Briscoe, Owner
Bookkeeping-Results, LLC
Dwayne@bookkeeping-results.com

Photo credit: stock.xchng.

Travel: All of your travel costs should be kept separated for travel, lodging, and meals.  Travel costs include: car rental, airline, fuel, taxis, tips, etc.  However they should not be categorized together as one large amount but separated out into separate subcategories.  Part of the key in keeping accurate expenses is the date/time that you left for your trip, as well as the location to/from, as well as any other destinations in between.  Finally, what was the purpose of the trip, which is essential in determining whether or not it was considered for business or personal purposes.

Entertainment: Regarding the cost of entertainment, this is only available at a 50% tax deduction, however when tracking for accounting purposes, it is charged at a 100% expense.  As with travel, entertainment expenses must be more detailed to include not only the date, amount, location, what the expense was for, but also the purpose of the expense, i.e. you were having a meal with a potential client, as well a what type of business was discussed.  Note that for business meals, the business owner or employee must have been present.

Gifts: With gifts, the cost of the gift, date of the gift, the gift’s description, the recipient’s information, as well as how the recipient relates to the purpose of doing business.

Transportation: Transportation constitutes the cost of the vehicle and any improvements, the date you started using it for business, the mileage for each business use, and the total miles for the year.  You should be prepared to utilize the general day-to-day purposes that the vehicle was used for business, i.e. deliveries, meeting with clients, etc.  Going back and forth between your office and home is not considered a business deduction, so please also keep that in mind.

An example of the business use of transportation is as follows per the IRS: “You use your car to visit the offices of clients, meet with suppliers and other subcontractors, and pick up and deliver items to clients. There is no other business use of the car, but you and your family use the car for personal purposes. You keep adequate records during the first week of each month that show that 75% of the use of the car is for business. Invoices and bills show that your business use continues at the same rate during the later weeks of each month. Your weekly records are representative of the use of the car each month and are sufficient evidence to support the percentage of business use for the year.”

Destroyed Records: If your records were destroyed beyond your control through casualty, i.e. fire, flood, vandalism, show proof of your deductions by reconstructing your records or expenses to the best of your abilities.

—-
Dwayne J. Briscoe, Owner
Bookkeeping-Results, LLC
Dwayne@bookkeeping-results.com

Photo credit: stock.xchng.

• the camp is essentially providing child care so that you and your spouse can work (or look for work),
• it is a day camp (sleepover camps are considered a luxury), and
• the child is under 13.

You can claim expenses of up to $3,000 for one child or $6,000 for two or more children.

The expense claimed is limited by the lesser of the earned income of the two spouses. For example, if one spouse’s annual income is $5,000, you cannot claim the full $6,000 expense for two children.

The claim is made on line 48 of the 1040. You must include IRS Form 2441: Child and Dependent Care Expenses.

The tax credit received is 20% of the dependent care expense if your Adjusted Gross Income is greater than $43,000. The percentage credit rises if the AGI is lower.

Alternatively, some employers have a dependent care benefit plan which enables you to use pre-tax dollars to pay for summer care. If your tax bracket is higher than 20%, then the pre-tax route is the better bang for the buck. In addition, the dependent care benefit plan allows up to $5,000/year per family, whether it is for one or more children. Also, if you have two (or more) children and your childcare expenses exceed the $5,000 allowed under your employer’s benefit plan, you can claim the remaining $1,000 under the dependent care credit (for a total of the $6,000 allowed expense).

If Uncle Sam doesn’t recognize your marriage, then you might be able to increase your tax savings.  For example, if a gay couple has two children, and both parents work, then each parent could claim one child.  This enables each parent to file as head-of-household, which is favorable over filing as single. Furthermore, if both employers offer a dependent care benefit plan, then the family could have up to $10,000/year in allowable pre-tax dependent care expenses.  That’ll pay for a lot of s’mores.

IRS Publication 503: Child and Dependent Care Expenses

Photo credit: stock.xchng

By day, Helen engineers new materials to make computer chips cheaper, better, and faster. When the son goes down (pun intended), she writes about personal finance at Affine Financial Services.

Regarding the donation and household items, they must be in good used shape at a bare minimum.  That means that you could still wear them or use them regardless of whether you think someone less fortunate would find value in them.  However if you are claiming an item to be of at least $500 in value, it must be accompanied with a qualified appraisal for documentation purposes.

When donating cash of any dollar amount, you must have a receipt on behalf of the organization receiving the funds.  If you write a check, then the cancellation copy of that check will suffice, with the date, amount, and the name of the charity associated with the donation.  The same for credit card donations.  However, it’s important to remember that the charity should also acknowledge your donation in writing for your tax filing.

When donating large ticket items such as vehicles, boats, etc., the allowable amount is limited to the actual amount received from the sale of the item and no more, if it’s valued at more than $500.00.  The charity is therefore required to submit a Form 1098-C to the donor so they can attach it to their tax return.

Finally, always remember that any contributions are deductible in the year made. Thus, donations charged to a credit card before the end of the year count for 2008. This is true even if the credit card bill isn’t paid until next year. Also, checks count for 2008 as long as they are mailed this year.  Remember, the more often you do it and the earlier it’s completed, the bigger deduction as well as goodwill you’ll receive in the end.

——–
Dwayne J. Briscoe, Owner
Bookkeeping-Results, LLC
Dwayne@bookkeeping-results.com

Photo credit: stock.xchng.

1. The area in your home must be your principle where conduct your business and not used for ANY other purpose.

2. You see clients, patients, customers, etc. during your normal business hours at this location.  The location doesn’t have to be a separate building but must be used in connection with your business.

3. You utilize the location for storing inventory, product samples, etc.

4. The location is used as a rental property, home day care facility, etc.

How do you claim your home office deduction? It’s all based upon the percentage of the home that you use for business purposes only.  Also your deduction is limited if your gross income from the business is less than your total business expenses.  Such expenses that are available for deduction include: utilities, property taxes, and dedicated telephone line(s) which can be deducted at 100%.

Fortunately since less than half of the estimated home business owners take the home office deduction, Representatives John McHugh, R-NY and Kurt Schrader, D-Ore, have introduced legislation which would create a standard $1,500 deduction compared to itemizing through the Form 8829.  Will it pass is unclear, however the National Association for the Self-Employed estimates it will be about a $500 tax savings for those who aren’t using it currently.  Until then, document, document, document.

For further information, review Publications 587, Business Use of Your Home, for which relate to Form 8829 of your Schedule C, Form 1040.

——–
Dwayne J. Briscoe, Owner
Bookkeeping-Results, LLC
Dwayne@bookkeeping-results.com

Photo credit: stock.xchng.

When paying federal taxes, it can pay to be gay.

The IRS doesn’t recognize gay marriage because of the Defense of Marriage Act. Even if you’re officially married in one of the states that allows it, you still have to file as single for your federal taxes.

This unequal treatment, however, lets gay couples take advantage of their single-filer status by using tax-avoidance techniques that married straight couples, who have to file jointly, can’t use.

Today I’m going to focus on just one of these techniques: deferring the recognition of gain on the sale of your property.

What happens when you sell property
Normally, when you sell property, you have to recognize as income how much the property has increased in value. So if you buy a house for $50,000 and sell it later for $100,000, you must recognize and pay taxes on $50,000 of income.

Alternatively, you could sell the $50,000 house to someone who promises to pay you $100,000 in 10 years. In that case, you won’t have to recognize the income until the buyer pays you 30 years from now. This is called an installment sale.

Deferring income by selling to your spouse
A married couple might think to defer the recognition of gain on their property by combining these two ways of selling property.

Consider a married couple: Amy and Bob. Amy gives a house she bought for $50,000 to her husband Bob in exchange for a promise by Bob to pay Amy $100,000 in 30 years. Bob now owns the house.

Then, Bob sells the house (now worth $100,000) to some third party for $100,000 in cash. Bob has no income on this sale because he gave up something worth $100,000 (the house) in exchange for the same amount in cash.

Taken together, the couple has gotten rid of their $50,000 house for $100,000, but doesn’t have to recognize the $50,000 of income until 30 years from now.

Sound too good to be true? It is. The IRS prevents married couples like Amy and Bob from doing this kind of transaction. Specifically, the IRS doesn’t recognize any gain or losses in transactions between married couples.

So what actually happens is that when Amy gives Bob the house, Amy never reports any income on it, and Bob will own a house still worth $50,000, not $100,000. When Bob sells the house to that third party for $100,000, he must recognize $50,000 in income immediately. The end result is the same as if Amy had just sold the house herself to the third party.

But what if you’re a gay couple?
Gay couples can exploit the tax code to defer recognition of property gain. Because the IRS treats gay couples as unrelated people, the rules that prevent married couples from using the above technique don’t apply to them. Therefore, gay couples can structure their property transactions to defer income tax on any property one of them owns that has increased in value. In the $50,000 house example, the couple could sell the house for $100,000 without recognizing the $50,000 of income for years.

Photo credit: Gay Couples Law Blog.

8. Pay too much in taxes on investments. Are you investing in a tax-sheltered 401(k) or Roth IRA? If you’re not maxing out those accounts before you invest in a taxable account, you’re spending too much.

Now I’ve seen this suggestion a hundred times before and, in fact, as a financial coach, I’ve probably given this suggestion a few dozen times. For many people this is fine advice. But it presupposes a number of important things.

1. It is actually possible TO max out your 401k AND contribute to a Roth IRA.
2. There are no options for tax efficient investing in a taxable account.
3. You are making so much money that item 1 is possible and you are in a high tax bracket.
4. You won’t be wanting to use that 401k money until you are “retired” at the age of 59 ½ or older.

There was a time when I was working full time with a nice salary, suitable business wardrobe, a new car, a house full of new furniture, 2 weeks vacation, little time to cook and the means to eat out. I did max out my 401k for a few years and I’m glad I did. Of course I was also miserable, exhausted and sick frequently.

My life today is nearly the opposite of this. One of the reasons that is possible is that I started to ignore this advice and contribute to my taxable accounts in earnest when I knew I wanted a way out. As I’ve mentioned before, I am obsessed with financial independence. So much so that I am willing to lead a very frugal lifestyle and continue to find ways to reduce costs. I am, of course, looking for that convergence point where income from investments meets or exceeds personal expenses. Here’s the point. I have quite a few years to go before reaching the age of 59 ½, otherwise known as the age when withdrawals from IRAs (assuming you’ve rolled from your 401k) are penalty free. So if all my money was tied up in IRAs, I would not have easy access to the income generated. And I’m using that income. Right now.

Further, because my expenses are low, my income needs are low so my tax burden is somewhere between non-existent and very small. My wife makes more than I do and we are able to (legally) shift some of her income to me for the management of her portfolio and other administrative services so as to minimize our tax burden as a couple. (An example of an “expense” I don’t try to reduce!) This is one area where we same sex couples actually have some advantages.

There is an exception to this age restriction on IRA withdrawal (IRS rule about 72t) but it is complicated. You can take your principal out of a Roth IRA at any time without consequence (because you’ve already paid taxes) but careful accounting of your basis and more conservative than a typical retirement asset allocation would be important factors if you wanted to access these funds before age 59 ½.  I’m skimming the surface of this topic and there are other issues to consider but the intended take-away is that this conventional advice is geared toward the typical employee who plans to work to near typical retirement age. As with many of these recommendations, it may not be right for you. Ask yourself if you fit the mold.

Photo Credit: Previously Purchased Image from iStockphoto.

Specifically, ask yourself these questions provided by the IRS:

• Does the time and effort put into the activity indicate an intention to make a profit?
• Do you depend on income from the activity?
• If there are losses, are they due to circumstances beyond your control or did they occur in the start-up phase of the business?
• Have you changed methods of operation to improve profitability?
• Do you have the knowledge needed to carry on the activity as a successful business?
• Have you made a profit in similar activities in the past?
• Does the activity make a profit in some years?
• Do you expect to make a profit in the future from the appreciation of assets used in the activity?
• Did it make a profit in at least 3 of the last 5 tax years including the current year?  This definition is expanded if it’s been 2 years for the last 7 years that are primarily related to: breeding, showing, training, or racing horses.

Now getting back to the hobby deduction.  If your hobby is not-for-profitt, then you have the potential of deducting the expenses when it’s for individuals, partnerships, estates, trusts, and S corporations.  Your losses cannot be greater than the amount of the total receipts you also spent on the activity also.  To count on this deduction, it is completed on a Schedule A, Form 1040.  For more information, please consult your tax consultant or review it on the http://www.irs.gov web site.

—–
Dwayne J. Briscoe, Owner
Bookkeeping-Results, LLC
Dwayne@bookkeeping-results.com

Photo credit: stock.xchng.

July 14, 2009: The Internal Revenue Service today announced a series of public forums at which individuals and representatives of diverse constituent groups will be able to provide input on the development of tax preparer performance standards. The public forums, a crucial part of an effort launched in June by IRS Commissioner Doug Shulman to help ensure tax preparers are qualified, ethical and provide a high level of service, will kick off on July 30 in Washington, D.C.

“These public meetings will be an important part of the dialogue as we move toward a set of comprehensive recommendations by the end of this year,” Shulman said. “We want an open discussion on how to strengthen the overall integrity of our tax system.”

Knock wood. Tax preparation isn’t an occupation known for deceptive practices. Sure there are problems but nothing as scandalous as “investment advisors” like Madoff, Harkless, or Stanford. Nevertheless, tax preparers have your social security number and all of your investment account information. Someone with bad intentions could do a lot of damage quickly.

Presently only three states require licenses for tax preparation: California, Oregon, and Maryland.

I think a little accountability (no pun intended) would go a long way to increase consumer confidence. Having a national standard would improve the overall quality of services delivered, even if the federal government leaves the responsibility of oversight to the individual states.

What do you think? What qualifications do you look for in a tax preparer?

Tip ‘o the green shade to Kay Bell at Don’t Mess with Taxes for pointing out the IRS initiative.

By day, Helen engineers new materials to make computer chips cheaper, better, and faster. When the son goes down (pun intended), she writes about personal finance at Affine Financial Services.

Image credit: BeckyKP at Flickr.

While I cannot control the eyes of my adoptive children (which are lovely by the way), the shape their teeth take as adults is something I can shape (and their teeth really do need some serious help). I will mold their teeth with the help of some very expensive orthodontics.

According to the Canadian Association of Orthodontics, having a nice smile is only one benefit of braces.  It can also help alleviate health problems and social/psychological issues that crop up when one is not comfortable in one’s own skin.

While I initially wanted my kids to get braces for purely aesthetic reasons, visits with our dentist and the orthodontist revealed that we had bigger problems than initially thought.  Two of our daughter’s adult canines hadn’t descended and she needs some serious bite realignment.  Some of our son’s adult teeth aren’t appearing on x-rays and at 11 years he still has more baby teeth than adult teeth in his mouth.

Social impacts have also appeared.  My son briefly stopped smiling with his mouth open.  He came home crying from school because his classmates were making fun of his teeth.  The current state of his teeth has caused him to feel really bad about himself.

Braces are expensive. The average cost for a two-year treatment is $5,000 (2004 data in USD).  Because my kids have additional surgical needs, it will cost us approximately $10,000 for our daughter and $7,000 for our son to undergo orthodontic treatment.

Orthodontics in our case is part want and part need.  I blame it on my mother and my own maternal instincts, but when faced with the choice of having to come up with money to buy a second family car, or braces, I’m choosing braces for my kids.

Here are some tips to hopefully make it a little less painful on your pocketbook.

Find an orthodontist who offers interest-free payment plans. One of my biggest concerns about braces was figuring out how to finance them. If we pay for the entire treatment upfront, the orthodontist offers a 5% discount on the entire bill.  While this would save us $375, we don’t have $7,500 sitting in our bank account and we didn’t really want to dip into our line of credit.  As an alternative, our orthodontist offers a monthly payment plan.  After the initial down payment, we get to pay a monthly interest-free installment for 24-months.

Your benefits package matters. The benefits package that accompanies your job can help with some of the costs of braces.  Check your plan for orthodontic coverage.  My wife’s plan provides a lifetime fixed amount which will cover 1/3 of the total cost of braces for both kids.  The surgical preparation for both kids, approximately $2,500, was covered entirely from a different pocket of money in the benefit plan.

Tax credits are available. The Canadian Revenue Agency offers a medical tax credit for the cost of your orthodontics. I don’t know how much it will amount to in the end, but it’s something worth saving my receipts for.

Get your kids onboard, again. After our daughter completed the first stage of treatment (this involved some dental surgery to attach chains to her canines to try to bring them down), she was given a very specific list of what, and what not, to eat.  Within the first two weeks she had eaten items on the forbidden list which caused the chains to break and sent us back for a unscheduled appointments with fees.  While she had initially expressed a desire for braces, it was time to sit her down and have a serious talk.  She had a choice to make:  Did she, or did she not, want braces?  We were happy to drive her to appointments and pay for braces, but she needed to take care of her mouth with proper brushing and observe the rules of not chewing gum and what kinds of food to eat.  We’re moving forward with the treatment plan.

Location matters. Orthodontists are not conveniently located in my city.  We like in an urban area and there are no orthodontists in the downtown core.  Every time my child has an appointment or an issue crops up, this means I need to pick up my child from school, drive them out to the orthodontist in the suburbs, have the 10 minute appointment, drive them back to school and then get myself back to work.  Getting your kid braces means that you should factor in the cost of time and gas money.

Class discomfort. Moving forward with braces had caused some interesting class issues to arise.  We live in a low to lower-middle income area and our kids attend schools with a very diverse socioeconomic range.  The majority of our kids’ friends, and their classmates, are low-income families and braces aren’t likely to be in their futures.  Were I grew up, everyone had braces.  It was odd for kids not to.  You had braces whether or not your parents could actually afford it.  My kids are experiencing the reverse as they will be one of a handful in their classes who have braces.  The teasing has already started because there is something again different about my kids (in addition to being adopted and having two moms).

I think this is more my sensitivity than that of my kids, but I am conscious that the expense of braces and the fact that my kids have something that may not be an option for other kids.  I don’t want to be the parent who sparks a want/need in another kid.  As a parent, there’s nothing worse than hearing, “So-and-so has INSERT ITEM, so why can’t I?” Especially when the reason why your child can’t have this is not because you don’t want with your whole being to give it to them, it’s because you can’t afford it.

Did you have braces as a kid?  Are braces in your child’s future?  How are you going to pay for this?

Photo credit: stock.xchng.