The Tax Club Report

Start Preparing for your 2010 Taxes Now

It’s hard to believe this but October 15 is the midpoint between filing yearly tax returns.  Rather than wait until March or April of next year to get organized, you might want to begin your preparation now to ensure a timely and accurate filing of your tax returns and before time pressure builds.  Here are a couple of tips to keep in mind.

Create an Expanding File for Income

Create an accordion file with tabs to store statements you will get in January. Label the sections for W2 and Wage Statements, Investments, Mortgage, and so on. If you receive a monthly statement, such as from your brokerage account, or your pay stub, put in the most current statement and set aside the previous one.  Always keep the December statement because you will need it to check the full year-end statement you will receive later.  Make sure to continue to update these files throughout the year so you don’t find yourself frantically searching for documents when it comes time to file.

Employee and Independent Contractors – If you are an employee, your W-2 needs to be issued to you by January 31.  Check it against that last pay stub to make sure the W-2 data is correct. If you are an independent contractor, you should receive a form 1099-Misc by the same date.

Investments - You will have to keep track of interest income, dividends, and capital gains or losses. All brokerage firms will issue a year-end statement usually around the end of January that will show interest (1099-INT), dividends (1099-DIV) and Gross Proceeds (1099-B).  The 1099-B will show the amount you received when you sold stocks or bonds.  Look closely to see if the report also shows what your “basis”, or cost of those investments was.  Brokerage firms are not yet required to report that information, although some do so.  But it is necessary to calculate gains or losses and if that information is not reported, or it is incorrect, it will be up to you to prove what you paid for an investment and that may mean hunting down prior year statements.

Retirement distributions – Distributions from pensions, 401Ks and IRAs are reported on form 1099-R, so file them in a separate section of your folder.

Rental Property – If you had rental property, you should be maintaining a monthly record of income and expenses so they can be combined for a year-end summary.  You will receive a mortgage statement from the bank and a real estate receipt from the city, so check them with your numbers. Most other expenses will normally be paid through your bank account and you need to go through those bank statements and pull the checks that relate to the property.   These expenses can be used to offset your rent income, and that means less of your investment property earnings are taxable.  However, the IRS will disallow claimed expenses that you can not substantiate.

State Refunds and Unemployment Compensation – If you received a state tax refund or collected unemployment, those amounts will be reported on  Form 1099-G.  The form is sent to the IRS so hang on to your copy and report it.  Depending on the amount of unemployment and your prior year’s tax refund, all or a portion of those amounts may be taxable.

Create an Expanding File for Deductions

Next, create a deductions folder.  This folder is going to include all of your deductions for property taxes, charitable giving and mortgage interest.  There can certainly be more, but you get the idea.

Mortgage Interest – For most itemizers, the mortgage interest is the largest deduction on Schedule A.  Your bank will send you a form 1098.  If you made an extra mortgage payment at the end of last year to increase that interest amount, make sure it’s counted. Sometimes lenders use automatic reporting programs that overlook extra payments. You can still claim the extra interest; just make sure you document it in case the IRS follows up.

Mortgage interest isn’t limited to your primary residence. If you have a vacation home that serves as your second home, interest on that loan will be on a separate Form 1098.

And don’t forget the interest you paid on a home equity loan.  That will be another 1098.

Real Estate and Property Taxes – Real estate taxes may be reported on your 1098 from the bank or it may be a separate bill from the city or county.  If your state or county charges a personal property tax, keep that receipt. Most often, this tax is on autos, so if you pay, make sure the collecting tax agency sends you a statement showing how much so you can put it on your Schedule A.

Medical expenses - Keep tabs on the receipts and fees for all things medical. This includes (but is not limited to) your out-of-pocket health insurance premiums, dentist visits, and eyeglasses and co-pays.  Your expenses have to exceed 7.5% (10% beginning in 2013) of your adjusted gross income before they give you any tax benefit.  But even if you may not be able to use it on your tax return, you will need the receipts if you have a Flexible Spending Account through your employer.

Education Credits – For your children who are enrolled in college, you will receive a form 1098-T for the tuition and fees you paid.  They can be used to claim a credit for college expenses if they meet the requirements established by the Internal Revenue Service.

Work Expenses – Did you look for a new job this year? Kept your job, but had to shell out for work-related items and never got paid back? Move to take a new job?

All of these situations can help reduce your tax bill provided you have the documentation. In the case of job searches, find those receipts for anything related to your hunt — as long as you are looking for work in the same field.

If you kept your current job but had to pay for some items that your boss did not reimburse you for such as travel expenses, uniforms, union dues, tools, equipment and professional subscriptions, these can be deducted as miscellaneous items on Schedule A. As with medical expenses, there is a limit of 2% of adjusted gross income that has to be exceeded before it provides a tax benefit. Again, you will need the receipts so go through your paperwork collection carefully.

Casualty and Theft Losses – If you suffered an economic loss from a casualty or theft, you will need to prove your loss in order to claim a deduction.  Collect records of the current fair market value of the property and keep insurance records if you are reimbursed.

Gambling Losses – These can be used to offset your gambling winnings.  Generally, if you win more than $600 from gambling, $1,200 or more from bingo or slots or $1,500 or more from Keno, you will receive form W-2G by January 31.  You can reduce the amount of taxable income if you have receipts for losses up to amount of winnings.

Cancelation of Debt – If all or a portion of your debt is forgiven by a lender, the amount is reported on Form 1099-C. The amount forgiven should be reported as taxable income. However, if the debt is related to your primary residence, you are insolvent or you filed bankruptcy, all or a portion of the amount forgiven may be excluded from tax.  Especially if you are insolvent, it will be important to have documents to prove that point.

Child Care – If you paid a child care provider, you will need receipts for those payments as well as the name, address, and social security number of the provider.

Charitable donations – Cash donations can be deducted but you need a receipt from the organization.  Non-cash charitable contributions, such as clothes, books, house ware and furniture can also be deducted but you will need a detailed description of the items that are donated and a fair market valuation.  Since Goodwill and other organizations will not value your donations, simply getting a pre-printed receipt is not sufficient to sustain the deduction. Non-cash donations of $5,000 or more will need to be valued by a qualified appraiser.  So if you do not have those receipts, this would be a good time to track them down.

If you drove your automobile for a charitable purpose, that too can be deducted but you would need to maintain a mileage log that shows the miles traveled and the purpose.

Miscellaneous deductions – Any money you spend on financial planners, tax advisers and tax preparation (even computer programs) can be a tax write-off. Safe deposit rentals and IRA custodial fees, if paid separately and not deducted from your account, are also allowed. Legal fees and expenses are deducible if they are related to producing or collecting taxable income. So be sure to keep track of these items as well.

Important Records to Keep

These are the papers you need to keep — and how long you need to hold on to them:

• ATM receipts and receipts for purchases — until you get the monthly bank and credit card statements and make sure these reconcile; then keep the monthlies and throw out the individual slips.
• Bills and bank and brokerage statements, including cancelled checks — until you get the year-end statement, check it over, and make sure everything reconciles; then throw out the monthlies and keep the annual statement.
• A list of credit cards, the account numbers, and the 800 numbers you’d use to report a loss or theft — indefinitely.
• A list of items in your safe deposit box, with a running account of what you put in and take out — indefinitely.
• Tax returns — generally, three years after the filing; six years, if you underreported your income by 25% and indefinitely if they include information on the purchase or sale of a home or if you did not file a tax return for that year.  Insurance companies or creditors may require you to keep them longer than the IRS.
• Receipts for appliances and home improvements — until you sell the home.
• Warranties — until they expire.
• Employment records, including letters of recommendation — indefinitely.
• Receipts for large purchases — indefinitely, for insurance purposes in case of a fire or other home emergency.
• Year-end brokerage statements or other documents relating to buying and selling stock — indefinitely, you may need them to account for your cost basis.
• Insurance policies — as long as you own the policy.
• Deed to your home — as long as you own the home.
• Wills, trusts, and other estate-planning documents — indefinitely.
• An inventory of where important documents are kept and a list of phone numbers (doctors, lawyers, accountants, neighbors, children) to be called in case of emergency — indefinitely.

Check out The Tax Club here! http://www.spoke.com/profiles/TaxClub

This entry was posted on Friday, October 29th, 2010 at 4:25 pm and is filed under Tax News. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.