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ID-100188045I remember my first graduation. We all thought it was the end, the end of the school year. We didn’t understand it was only the beginning. A new chapter in our lives was about to commence. Was it high school, trade school or college that you have completed? What is your next step? Why do you have to weave TAXES into every aspect of life? Because lets face it, taxes do impact every aspect of our lives. Maybe you are beginning a new career. Do you already have a job lined up? Will you be looking for your first job? Will you be moving to a new area? A new city? A new state? Will there be a deduction for you? When you are looking for a NEW job in a NEW trade or business, there is NO deductible job-seeking expense. Even if you get a new job, you cannot deduct any of your job-seeking expenses. When you look for a new job in your present line of work, your expenses may be deductible on Schedule A as Miscellaneous Itemized Deductions. What kind of deductible expenses might you have when looking for work?
  • Fees paid to employment agencies and executive recruiters
  • Cost of typing, printing and mailing resumes
  • Cost of assembling portfolios of work
  • Transportation costs to job interviews
  • Newspapers and business publications bought for employment ads
  • Out-of-town travel expenses, including meals, lodging, local transportation as long as the main reason for your trip is to look for a new job.
  • If you travel for personal reasons, none of the travel expenses are deducible, but out-of-pocket job hunting expenses at your destination are still deductible.
To protect your deductions, keep a log of your activities. Keep a calendar of who you interviewed with, on what dates and any follow-up phone calls you made. Do you want to claim the expenses of buying and caring for uniforms or special clothing? They must:
  • Be required as a condition of employment AND
  • NOT be adaptable to everyday, general wear
What kind of clothing qualifies as a deductible?
  • Uniforms of professional athletes, firefighters, police, nurses, jockeys
  • Special shoes, shirts, ties, hats with  a company logo or other clothing designed strictly for the workplace
  • Protective clothing such as safety boots, safety glasses, hard hats and safety gloves
  • Special theatrical clothing if not suitable for everyday general wear
So when I said congratulations graduate, welcome to your new tax bracket, it was all true. I hope you have great prospects for your future. I hope your education will allow you to make a great future and more money than before. Your tax brackets are determined by your marital status and how much money you make. The lowest tax bracket in 2014 is 10%. The highest tax bracket in 2014 is 39.6%. There are a lot of factors to consider and calculations to be made before your bottom line tax liability is known. The more money you make, the higher your tax bracket may be. I wish for you and for all of my clients, that you pay your lowest legal tax. But I also say, “I hope you have to pay a lot of tax. Because that means you will have made a LOT of money.” 🙂
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donating“Contributions” is one of the deductions the Internal Revenue Service likes to audit, examine, or verify. Why is that? Because not everyone is honest. Some people take more of a deduction than they actually give. People ask me, what is the standard? What is the average? The only standard is the standard deduction based on your filing status and your age if you are 65 or older.. If you choose to itemize your deductions, there is no automatic deduction. You are allowed to claim a deduction for what you actually gave. BUT you need to be able to prove your deduction. You must have evidence for what you are claiming. That is not difficult when you get a receipt from the qualified charitable organization. You cannot verity the cash you leave in the donation plate or collection kettle. You can show cancelled checks and credit card statements, but those are not sufficient proof for the IRS. The Tax Auditor wants to see a receipt from the charity. Too many people have cheated on their tax returns and so the IRS tightened the rules. How can you verify what you give in the form of NON-CASH contributions? Just what is a non-cash contribution? I use the technical term “Stuff”. We all have stuff that is crowding our closets or cluttering our homes. And our “trash” is often someone else’s “treasure”. Used clothing and household items must be in good condition or better to be deductible. Charities will receive anything you want to give them. What they cannot use themselves, they will give to another organization. Give, just don’t try to deduct items in less than good condition. The fair market value of used personal items is usually much less than the original cost and depends on the condition and usefulness of the item donated.  Favorite websites I recommend to help determine the fair market values are www.salvationarmyusa.org and www.goodwill.org. When you decide to give away the good stuff you no longer need or want, take these simple money saving steps to support your deduction.  1. Make a list of the items you set aside BEFORE you put them in the box or bag

            a. What are you giving away (Describe each item.)

            b. What condition is each item? (Good? Excellent? New?)

            c. What is this thing worth today? (Use garage sale or thrift store values.)

            d. How many of each type of thing are you giving away?

            e. What is the name and address of the charitable organization?

            f.  What is the date of this contribution? (Note each date you donate.)

     2. Take a photo of what you are giving away to support the list you are making. We know a picture is worth a thousand words, but you need the list, too. This list is required when your non-cash contributions are more than $500. But even if your non-cash contributions are $500 or less, the IRS can still audit your deduction. Protect yourself. Protect your wallet. Protect your deduction.  Make all the contributions you want. Don’t let the tax laws turn you into a “Grinch”. If you feel this is too much work for you, you can skip the paperwork. But if you choose to skip the paperwork, you should skip the deduction, too.
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dollar and Donation BoxThis year is almost ONE THIRD OVER! What can you do now to  be in top shape for next April 15th? Last time I covered the basic thought that Organization is the key. Do you use the “jumble” method of keeping your receipts?  Is your jumble kept in a box or a bag or an envelope? YOU are the one to sort these papers into categories. Why wait until tax day? Get a jump and do your sorting all year long. If you haven’t already started a simple way of collecting your important tax papers, begin that new habit today. Use a table, the bed or even the floor to make little piles of receipts by category. Then you can put that now neat stack of receipts into the container of your choice. This will make for easy reference come tax time. You will see how convenient it is to put things were they belong so you can find that certain document when you want to, when you need to. When a new client comes to my office with their own jumble of records, I tell them the same thing I’ve just told you. YOU know how you spent your money. I need to know how you spent your money. There are different pages to a tax return and the deductions that belong on one page usually do not also appear on another page. My job is to prepare your proper and accurate tax return. I need your help to do this. Last time I promised to talk contributions. Do you get a receipt for every contribution you make? When you make an offering to your house of worship, do you write a check? Do you just put cash in the offering plate or basket? Do you use their gift envelope system? Internal Revenue Service wants to see evidence of what you claim as your deduction or expense. I remember hearing from a fellow auditor that a taxpayer being audited was claiming substantial cash contributions. When asked for his documentation, he said that was a matter between him and God. The auditor agreed and said that his deduction would also be a matter between him and God. The auditor determined that his deduction was disallowed. That is a favorite term at the IRS. His deduction was NOT allowed. He owed tax as a result of that audit. Records are your defense in a tax audit. Not just your best defense, they are your ONLY defense. Whether this audit is by the IRS or your state department of revenue or treasury, or by the sales tax division or by the unemployment division, PROOF is what they want to see. Timely (at the time of the contribution) records are necessary and your best friend. SO many reports can be audited. Even if you do not file a report you are required to file, the agency expecting that report can file one for you. Lack of knowledge is no defense. My objective is to help you increase your knowledge and increase your defense. I want you to avoid that audit. Keep a list of personal items you donate to a qualified charity (not the corner collection box) from your closet or home. Next time I’ll spend more time discussing this favorite deduction.
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taxMedical Expenses are not the deduction I want you to have. But medical expenses are deductible if you itemize your deductions. Here are 8 tips direct from the Internal Revenue Service and one more from me.

“If you plan to claim a deduction for your medical expenses, there are some new rules this year that may affect your tax return.  Here are eight things you should know about the medical and dental expense deduction:

  1. AGI threshold increase.  Starting in 2013, the amount of allowable medical expenses you must exceed before you can claim a deduction is 10 percent of your adjusted gross income. The threshold was 7.5 percent of AGI in prior years. .
  2. Temporary exception for age 65.  The AGI threshold is still 7.5 percent of your AGI if you or your spouse is age 65 or older. This exception will apply through Dec. 31, 2016. .
  3. You must itemize.  You can only claim your medical and dental expenses if you itemize deductions on your federal tax return. You can’t claim these expenses if you take the standard deduction. .
  4. Paid in 2013. You can include only the expenses you paid in 2013. If you paid by check, the day you mailed or delivered the check is usually considered the date of payment. .
  5. Costs to include.  You can include most medical or dental costs that you paid for yourself, your spouse and your dependents. Some exceptions and special rules apply. Any costs reimbursed by insurance or other sources don’t qualify for a deduction. .
  6. Expenses that qualify.  You can include the costs of diagnosing, treating, easing or preventing disease. The cost of insurance premiums that you pay for policies that cover medical care qualifies, as does the cost of some long-term care insurance. The cost of prescription drugs and insulin also qualify. For more examples of costs you can deduct, see IRS Publication 502, Medical and Dental Expenses. .
  7. Travel costs count.  You may be able to claim the cost of travel for medical care. This includes costs such as public transportation, ambulance service, tolls and parking fees. If you use your car, you can deduct either the actual costs or the standard mileage rate for medical travel. The rate is 24 cents per mile for 2013. .
  8. No double benefit.  You can’t claim a tax deduction for medical and dental expenses you paid with funds from your Health Savings Accounts or Flexible Spending Arrangements. Amounts paid with funds from those plans are usually tax-free.”
And here’s the extra tip from Nellie. If you wonder if your disability insurance is deductible. Yes it is. But I encourage you NOT to deduct this insurance. If your disability insurance premium is about $800 each year and you have enough medical expenses to exceed your AGI threshold, you could deduct this $800. For easy math, if your tax bracket is 25%, this deduction could save you $200 of tax. But if you ever file a claim and collect on this disability insurance, those insurance benefits will be income taxable. And when you are out of work due to disability, do you want to add to your tax bill?
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your taxesThe Good, The Bad and The Ugly is a catchy phrase and makes reference to one of the most popular “spaghetti” western movies. This phrase seems to describe lots of situations we experience. In this case….Income Tax Season. In January, I talked about the different tax forms you need to watch for. Most will come to your mailbox while others will be sent to you electronically. You may even be able to download them yourself from secure websites. Some of my clients last year didn’t really understand why I couldn’t finish everything in progress by April 15th. Sometimes it is just not possible. There are only 24 hours in any one day. No one person can work well without sleep day after day.. The clock ticks away every minute. We simply run out of time. I tell everyone in my first letter of the tax season that I may file an extension for returns not completed by April 1st. What does “extension” mean? Quite simply, it is a request for more time to file a tax return. An extension is not automatic. And it is not a request for more time to PAY your taxes. It is important to know that if your taxes are not paid in full by the due date of your return, the extension will not be valid. In other words, if you owe tax on April 15th and do not pay that tax by April 15th, no request for more to time to file will be valid. In other words, your return will be considered late, or delinquent. Interest and penalties may apply to that balance paid after April 15th. How can you change this undesirable position? Even if you have given your preparer everything necessary to file a proper return, you may still want to file an extension. The key is having your tax paid in full.  You can send a payment in with your extension request. Realize this is a request, it is not automatic. An extension will only give you more time to submit your tax return. Do you need to increase your paycheck withholding? Do you need to adjust the amount you pay with your quarterly estimated tax payments? Did you have something unusual happen during the year that caused you to owe more tax this year than in earlier years? The bottom line is, if you know for certain you will not owe taxes on April 15th, you can request that extension for more time to submit your return without penalty. Be sure to mark your calendar so you remember your new extended due date. Any return filed after that date will be considered delinquent. And a late return with taxes due will cost you interest and penalties.
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irs tax auditWhen our Congress shut down the government last fall, even the program developers at the Internal Revenue Service had a couple of weeks of involuntary vacation. I say vacation because they were ultimately paid for these layoff days.  I thought these people would have been considered indispensible.

The Internal Revenue Service is the ONLY branch of the government that actually brings money IN. I thought, certainly, their tax return form designers and processing system programmers would be considered essential. The Internal Revenue Service claimed that this interruption of work made it impossible for them to be able to accept any tax returns before January 31st. We used to start filing returns electronically the second Friday of January. The government has shaved three weeks off our already time-compressed income tax season and while the start date was extended, the due date was not.  

Individual 1040 series tax returns are still due April 15th. Corporation returns are due March 15th. Partnership returns are due April 15th. What if YOU need more time? That is why we have the ability to request an extension to file. These requests are never turned down. The IRS automatically says YES to your request for more time to file, but you MUST file the paper to let them know you are extending your tax return due date. The extension only gives you more time to send in the paperwork. The extension does not give you more time to pay any tax that might be due with your tax return. So it is important that you estimate how much you expect your taxes will be. If you don’t have enough federal income tax withheld from your paycheck, you can make an Estimated Tax Payment. I’ll talk more about Estimated Tax Payments in my next blog. Who signs your tax return?  You sign your tax returns under penalty of perjury. You are swearing your return is correct. If  you paid someone money to prepare your return, they must also sign your return. They are stating they have done everything they can to apply the tax laws properly. They are attesting they have prepared an  accurate return.  If you pay them and they don’t sign the return, then they are breaking the law and you need to find a reputable advisor. The IRS will want to put them out of business because you deserve someone on YOUR side. You certainly do not want someone working to put you on the INSIDE – inside the “tax jail”, that is. Just because you pay someone to prepare your return, and just because they sign your return right under where you sign, YOU are still the one responsible for paying your correct tax.  YOU are the one the IRS will call to collect the tax. So take the time you need to collect your tax data. “Haste makes waste” and can cost you interest and penalties. Be sure to report all of your income. Take the deductions you are allowed to take. Don’t guess about your numbers. Be accurate. Double check your numbers. Review your return. File electronically.
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clockDo you hear that tax clock ticking, ticking, ticking? There are certain things to keep in mind as we come to the close of another tax year. December is the LAST month in the LAST quarter of the year. What should you do before time runs out? Tax laws change every year. Moving from 2013 to 2014, we are going to experience some major changes. Some of the deductions we are used to taking are being adjusted, changed, or even eliminated. If you are a classroom teacher, your $250 ‘above the line” or 1040 front page, deduction goes back to the Schedule A for itemized deductions.  You may or may not remember that it started there. Chances are, you’ve made your purchases already this year, but if your total is under $250, now is the time to take full advantage of that little benefit. With only a few weeks left in the year, do you have any medical expenses you need to pay for in 2013? We can include in our itemized deductions unreimbursed medical expenses that exceed 7.5% of our adjusted gross income. That’s pretty technical. What you need to know is that in 2014 that “floor” rises to 10%. That just means that we will be deducting a little less.  As I mentioned in a previous article, medical is NOT the deduction I want you to benefit from… I want you to be healthy. Speaking of healthy, 2013 is the year that the Affordable Care Act, commonly referred to as “Obamacare” kicked in. There is a provision for a Premium Tax Credit to help low income taxpayers pay for heath care coverage.  However, there is also a “Shared Responsibility Penalty” for anyone who fails to maintain a minimum essential health care coverage.  Medicare counts as qualified coverage. The IRS is charged with allowing the tax credit or imposing the tax penalty. What does that mean to your tax return preparer? We will be looking to confirm your coverage. SO, 2014 is only a few weeks away. Keep your coverage and keep track of your payments. Check into getting coverage if you don’t already have it. I’ll be learning more, too. If you are used to deducting sales tax instead of state income taxes paid, that sales tax deduction will not be a choice for your 2014 tax return. Most of the big ticket items that created a big sales tax deduction were vehicles. IF, and I say IF, you need a new car, this may be the month to buy it, but DO NOT BUY IT just to take advantage of the sales tax deduction. You are still out of pocket thousands of dollars for that new car. My parents always told me, “Watch your pennies and the dollars will take care of themselves.”  So I tell you to watch your expenditures.  Take advantage of what will benefit you, but don’t lose sight of the true cost of your deductions.  
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healthYears ago the expense of weight loss programs and stop-smoking programs were not deductible. The negative effects of smoking and being overweight were not seen as illnesses but as bad habits. Then someone in Congress realized these former bad habits lead to real health problems. Somebody must have convinced a lawmaker that we could have more productivity if people stopped smoking and made better dietary choices. Who knows. But that kind of influence is what gets laws changed and the tax laws are what we have to follow when we file our tax returns. We can deduct medical expenses after we become sick. We can deduct the cost of repairing the damage. But preventive care is not deductible. We cannot deduct the cost of our gym membership or workout equipment. The tax laws were changed to allow us to deduct expenses for programs to help end the smoking habit. When obesity became thought of as an illness, we could then deduct the cost of programs to help combat that epidemic. I promised a few weeks ago that I would tell you how I quit smoking. One of my clients said, “You smoked?!” It was many, many years ago that I did smoke. This article is more about habits than taxes, but if it can help you quit, then I will save you a lot of money, you might live longer and get to pay taxes longer. How can the IRS argue with that? Smoking was considered “cool” when I was growing up. Famous movie stars were seen holding cigarettes and blowing smoke rings. I was a teenager and I wanted to be cool like that. I can remember how awful it tasted and how awful it felt to force that stinky smoke into my lungs. I learned how to ignore the negative aspects. My hands smelled bad and an occasional spark would burn a hole in my clothing or the furniture. So I grew up smoking and then smoking became less popular. People were complaining because non-smokers didn’t want to breathe second-hand smoke.  Magazines were now carrying articles and photographs about the horrors of cancers from smoking.  Now it was becoming more important to me NOT to smoke. I didn’t want to disfigure my face from cancer of the mouth. I didn’t want to talk through a tube in my throat.  But it was not easy to stop this habit that can have such an addictive hold. I stopped several times before I learned how to quit. I read a book that said it takes only 5 days to get the chemicals from smoking out of your blood stream.  I repeated that to myself every time I thought I wanted to light a cigarette. I told myself just wait 10 minutes. If you still want to smoke then, you can. After an hour went by I realized that I had gone much longer than 10 minutes. After the first day I knew I only had four more days to go. And on day three I couldn’t start back up because I only had two more days to go. I told myself I was bigger than that little stick of tobacco.  On day six, I knew I had the chemicals out of my blood stream, but I still wanted to smoke. I realized I needed a new habit. I had to change my behavior and learn to do something else with my hands. I held a ball point pen as if it were a cigarette, then I would take a long, deep inhale as if I were taking a drag on the cigarette. Pretty soon I had that bad habit, that nicotine addiction licked. If you want to lick something, maybe this will give you the support you need to find what will help you be successful.  I quit smoking “cold turkey”. Quitting food is quite another story. I haven’t got a magic answer for that one yet. I like the way food tastes and I need to change my thinking and my behavior. So this article is not really about tax deductions or tax credits, it is about your good health. I’d rather see that for you than than a medical deduction.
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PB & JellyNovember is National Peanut Butter Lover’s Month. I grew up on peanut butter and jelly sandwiches. I still have one of these comfort, stand-by sandwiches every once in a while. And I love peanut butter cookies! .. Can you deduct peanut butter? Not if it is just your own, or your children’s meal. And chances are you’re not going to offer a peanut butter sandwich to your business client. But you could decide to serve a fancied up sandwich at a business get-together. Think about a working lunch or a special afternoon tea type theme to your business meeting. .. If you run a sandwich shop, peanut butter can be an ingredient in one of your menu items. If you run a daycare center, you will certainly be serving this staple at lunch. Cookies can become a business gift. And maybe you want to have your clients over for an afternoon celebration.  Of course, if your guest list includes someone with a peanut allergy, peanut butter will not be on the menu. But then this peanut butter could be the cause of a medical deduction. So there can be several ways peanut butter and taxes really are related. .. The IRS loves the words “ordinary and necessary”, “generally” and “usually”. To be deductible your meal or entertainment expense must be “directly related to” or “associated with” the active conduct of a trade or business. It can also be for the production or collection of income. It cannot be lavish or extravagant. It must be reasonable considering the facts and circumstances. .. Do you remember the five Ws of journalism? Who, what, when, where, why and then add how much you spent.. Who did you entertain? What did your discuss. When did you have this meal? Where did you go? What was the business purpose or what did you want to talk about at this restaurant? And how much did you spend? Your deduction can include the cost of the food, beverage and tip, but is limited to 50%. The cost of your own meal at a restaurant is not deductible. Meals with coworkers or business associates are not deductible unless you can show a clear business purpose. .. You must show that the main purpose for this meal or entertainment was for business; that you engaged in business during this meal or activity. You must also have more than a general expectation of receiving income or some other specific business benefit in the future. .. Instead of “directly related”, where you discuss business over a meal, your business discussion can be “associated with” the meal or entertainment. How much talking could possibly go on during a concert, at the theater or at a rousing sporting event or a backyard bar-b-que? If you are entertaining at your home, be sure to have a guest book for your records. Have each of your guests sign in. .. If the business discussion or transaction is substantial (and directly before or after the meal or entertainment) it can be deductible. There is no requirement that you spend more time on business than on the meal or entertainment. .. Employers have exceptions to the 50% deduction limit. If you provide meals to more than half of your employees on your business premises and for your convenience (not the convenience of the employee), those meals are a 100% deductible fringe benefit. Employer provided social or recreational expenses, like a company party or picnic, for the benefit of employees who are not highly compensated employees, are 100% deductible. .. I can’t emphasize enough your need to keep adequate records. This is for your tax audit protection.
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TaxesWe have just passed the October 15th extended deadline to file your income tax return. If you are an individual taxpayer, your next deadline might be the 4th Quarter Estimated Tax Payment which is due before January 15th for the calendar year ending December 31st. .. This can be confusing to a lot of my clients. If you think the January payment is for the current year, you are mistaken. It is for the PRIOR year. Since I work with these overlapping dates more often than you do, I have learned how to keep them straight. But if yours is the only tax return you are responsible for, these dates are often confusing. .. Who pays an estimated tax payment? Most wage earners get a paycheck. The money you take home is your “net check” after deductions are taken out. The basic deductions from most paychecks are for social security. medicare, federal and state income taxes. .. You may have income on which there is no withholding. What kinds of income might that be? Interest and dividend income, rental property profits, sales of assets, gambling winnings, spousal maintenance (otherwise known as alimony) just to name a few. .. Remember, as an American you are taxed on your worldwide income and every dollar is taxable unless it is specifically excluded. Some of the income that is not taxable includes child support, some inheritances and gifts you receive. There could be others, but I try to keep the length of these blogposts or articles to a pleasantly readable size. .. So, back to estimated tax payments. They are designed to help you pay the tax you estimate you may be liable for. The Internal Revenue Services wants you to pay this tax money evenly throughout the tax year. Taxes withheld from your paycheck are considered paid evenly through the year, even if they fluctuate from payday to payday. .. Small business owners generally do not take a paycheck. They figure their profits and make estimated tax payments to cover their income tax and their social security tax. Their tax for the year is figured when the tax return is completed. .. Estimated Tax Payments are made in four payments on Form 1040ES. The first quarter is composed of months January, February and March. The first quarter (Q1)1040ES is due April 15th. The second quarter (Q2) is for months April and May (only two months here). Q2 1040ES is due June 15th. The third quarter is back to three months, June, July and August.  with the Q3 1040ES payment due September 15th. And the fourth quarter, Q4, is the FOUR months of September, October, November and December. The 1040ES for Q4 is due January 15th of the following year. You just tell me how much you paid and when. .. It is okay to make these estimated tax payments early. If you make the payments late, the late payment penalty is figured when preparing your 1040 tax return. If you did miss a payment this year, don’t panic. Just be prepared to add a few extra dollars (depending on the amount of your estimated tax payment) to your tax bill when your tax return is prepared.
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