Posts Tagged ‘Taxes’

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The Tax Club Investigates: The Benefits of Incorporating and the Importance of Obtaining Sales Tax ID Numbers

Thursday, June 3rd, 2010

               Starting a business can be easy or difficult depending on the drive and responsibility of the proposed business owner. People generally do not realize how arduous turning great ideas into profitable businesses can be in a long or short period of time. Important steps must be taken by the new entrepreneur to choose the appropriate business entity and obtain the right business licenses to conduct business properly and legally. Unfortunately, ignorance during the set-up process or during the initial stages can lead to legal issues or business failure. When starting a business, owners need to have their business recognized by the state they are operating in and acquire a sales tax license to gain legal protection and to properly charge sales tax for goods.

                Most people start a business from their home by registering the business name as a sole proprietorship or partnership in the county in which they reside. The owners obtain Employer Identification Numbers (EIN) from the IRS and report information about the business on their personal tax return. This method is widely used because sole proprietorships and partnerships are by nature easy to create, maintain, and close down. Unfortunately, the characteristics of sole proprietorships and partnerships have many disadvantages to business owners. One of the disadvantages of having one of these two entities is the lack of separation of the business and the individual. If a customer files suit against a sole proprietorship or partnership, the customer can go after the possessions of the small business owner such as cars, houses, and property. Similarly if the business files bankruptcy or runs into financial hardship, banks and collectors can use the same personal property to settle debt or payment dilemmas. In this situation a failed business can not only destroy the dreams of a business owner but it can also alter their personal life in a huge way.

                Knowledgeable business owners or those who have received professional advice will form a corporation or limited liability companies to offset such a situation. These businesses are not used initially by individuals because people are unsure how to create, maintain, and dissolve them correctly. The corporation and limited liability company are created by filing Articles of Incorporation or Articles of Organization within the state the business will operate. Corporations and limited liability companies separate the business from the individual and allow flexibility on taxation. If a customer files suit against a LLC or corporation, they are generally only able to make gains on the business. Similarly if the business enters into bankruptcy or financial hardship, only personal property owned by the business can be affected protecting the personal property of the shareholders or members. Owners of these entities are also able to choose how their business will be taxed. Limited liability companies can be taxed as a sole proprietorship, partnership, s-corporation, or c-corporation while corporations can file for sub chapter “S” status or by nature stay a c-corporation. Even though these entities can be complex to create, maintain, and close down, they offer the protection and flexibility that every small business owner deserves and needs.

                Along with choosing the best business entity owners must know if they need to obtain a business license or sales tax ID number. A list of appropriate licenses and permits for businesses can usually be obtained from the county where the business operates. The sales tax ID number is usually harder to understand for small business owners. Sales tax was created in 1921 in the state of West Virginia. Today, 45 states and the District of Columbia require anyone who is physically engaged in selling taxable items to register as a retailer with their state and collect sales tax. Businesses operating E-commerce in any of the 46 areas usually need to obtain a sales tax ID while people engaging in Real Estate activities usually have no use for them.

                In most jurisdictions the sales tax license is acquired from the Department of Revenue by submitting easily accessible applications. Again, business owners must check to see if the item they are selling is taxable property. Taxability varies by state/jurisdiction so local laws need to be understood before any selling occurs. Sales tax rates are always different as well and they usually vary from county to county. Items are taxable within jurisdiction where these items are delivered to customers or where customers take delivery of the product. However, sellers are only required to be registered and collect sales tax in the states where the sellers have a physical presence. For example a seller with a physical presence in New York will be required to collect sales tax from all taxable sales delivered customers within New York. Since each county in New York State has a different sales tax rate, the amount of tax is to be based on the county where product is received by the customer. However, if the same seller sells an item to a customer in Florida, no sales tax is to be collected unless that seller has a physical presence in Florida such as a warehouse or principle office. In this scenario sales tax will not need to be collected. Instead the Florida customer will be liable to pay Use Tax to the state of Florida based on the sales tax rate of the jurisdiction where the product is acquired by the purchaser.

                New business owners must be well informed before engaging in ventures of their own. Failing to incorporate or organize a business with the state can result in the loss of personal property due to the lack of separation between the individual and the business. Failure to properly obtain a sales tax license can result in heavy fines from the IRS and the inability to properly conduct business. Professionals at The Tax Club can help you with questions you may have regarding starting your own business or obtaining the appropriate licenses to run your business legally. Contact us today for a free consultation at 888-773-7176.

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The Tax Club Investigates: 2010 Tax Planning

Thursday, May 6th, 2010

 

The most popular question that seems to be coming up post tax season is “I made the same amount on money I did the year before, so why is my refund less or why do I owe more than last year? “  The answer can be attributed to the Making Work Pay credit included in the most recent stimulus package that was passed in the early part of 2009.  People were actually bringing home more money because less money was being taken out of their paycheck for taxes.  Since the tax tables were not adjusted, the taxpayer still owes the same amount at the end of the year.  Unfortunately, many taxpayers were unaware of the effect the 2009 stimulus package would have on their tax return and were surprised when they did not receive a high refund or had to pay the government money.

Now that the 2009 tax year is history for most Americans it is time to look ahead to 2010. There will be a lot of changes that could potentially negatively affect tax payers who do not plan ahead for the 2010 taxable year. One thing that can be taken from 2009 is the importance of having a tax strategy to ensure the best possible tax return. This can be accomplished by understanding and monitoring the different tax laws as they apply to the income being made or regularly consulting with a tax professional on a quarterly basis. If proper precautions are not taken throughout the year in 2010, people will find themselves owing more money to the government or getting a smaller refund than they did in 2009.

Take a good look at your current paycheck.  Has the amount you are bringing home changed?  If not, then you are having the same amount of money taken out that was taken out last year.  Keep in mind what happened in 2009 under similar circumstances.  In 2010 the tax cuts enacted in 2001 will expire and the tax tables will increase.  In fact, the 10% tax rate enjoyed by the lowest income bracket will disappear entirely.  If your taxes go up and the same amount is being withheld, you will either get a smaller refund or actually owe more money for the next year.  If you are in the 25% tax bracket, your bracket will increase to 28% on the income between $33,950 and $82,250.  That is an increase of $1,018.50 to $2,467.50.  This is a very simplistic approach to proving that taxes will be going up for 2010 and people need to be ready.

Another change taking place in 2010 is the Child Tax Credit will be cut in half. The Child Tax Credit was designed to lessen the amount you owed as a credit towards the taxes owed. Parents can claim a credit of $1,000 for each child under age 17 from 2003 through 2010. Unless this gets extended by Congress, the credit will decrease to $500 per child in 2011 and following years.   If your tax liability was determined to be $2,000, then the full $1,000 Child Tax Credit reduced that liability to $1,000.  In 2011, under the same scenario, your tax liability would go up to $1,500.

Most people realize that what their paycheck displays is not their taxable income.  After all, the taxable income is based on formulas that include exemptions and allowable deductions.  This will determine your taxable income and which tax bracket you fall into.  Your tax is calculated by subtracting credits such as the Child Tax Credit, Education Credits, and First-Time Homebuyers Credit.  The computations can get very complicated and that’s why it is important to have an accountant or tax professional to guide taxpayers through the maze of tax laws.

Below are a few ideas of what you can do to minimize the impact of the change in the tax rates for 2010:

  1. Change your W-4 with your employer.  Take one less deduction so a little more is being withheld and confirm with your employer that they are withholding enough from your paychecks.  If you wish to keep the deductions the same, then consider a set dollar amount to be withheld per pay period.  If you are paid weekly, $10 a week will mitigate your taxes owed by almost $400.
  2. If you got a refund, don’t spend it!  Put a portion of it, if not all of it, into a retirement account as you will get a credit for this action.
  3. Keep accurate records of all your expenses that are potential deductions.  Every little bit counts!
  4. If you do not want to let the government hold onto the money until next year, then open a savings account specifically for the taxes.  The upside is that you will earn some interest on the money placed in the account. The hard part will be resisting temptation to use the money for something else.
  5. Consult with your accountant on a regular basis to make sure you are in the best possible position to not be negatively impacted by the change in the tax rates and any new tax laws. Having a good relationship with your accountant will ensure a smile instead of a frown come tax season.

 

Don’t be caught sleeping at the wheel.  The best thing you can do to mitigate the impact of the changes in the tax rates is to plan ahead.  If you need assistance with planning or have general tax questions, please contact the Tax Professionals at The Tax Club using 866-840-1829.

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The Tax Club Investigates: Investing in Tax Liens

Friday, April 30th, 2010

 

                The younger generation is banking on the economy rebounding by investing in the time to invest is here and people from the age of twenty-five to sixty-five are looking to pick the perfect strategy. stocks, bonds, and 401k plans offered by employers while older professionals are using their best judgment by investing in real estate and self directed IRAs. Choosing the correct investment strategy can be the difference between a happy or frustrating retirement. One overlooked investment strategy that is applicable in many states is tax liens. This strategy allows people to purchase liens on houses to own them outright or gain a state mandated yield to release the lien. Purchasing tax liens can be a good investment strategy that can be used by younger and older generations to take advantage of the struggling economy.

                Before one can purchase a tax lien one must understand a tax lien. When a property owner is late on paying real property taxes, the county or municipality will issue a tax lien on a person’s property. The lien allows the county or municipality to gain some of the money owed on the property since they are not gaining any money from the property’s owner. Certain states allow the tax lien to become a first lien on the property, which is then turned around and sold at auction as a tax lien certificate.  Why spend hundreds of thousands of dollars on a brand new home or property when one can spend under twenty thousand dollars on a tax lien. Most people ask “if these auctions are such a good deal then how come I have never heard of them”? Auctions are generally attended by bank representatives and upper class investors but most of the auctions are open to the public depending on the laws for the state. Unfortunately, finding the place and time for these auctions is not so easy. Attendees usually pay upwards of $150 to be placed on a mailing list for the year that releases the information or spend extensive time contacting county court houses and other avenues to obtain information. Even though research can be extensive or costly it is a small price to pay to obtain a highly valued property at a low price.

                Since the county is determined to obtain the taxes owed on the property, bids usually start below what is owed. After placing a successful bid, buyers of a government-issued tax lien certificate will then get either a state mandated yield on the lien or the title to the property. The state mandated yield must be paid by the delinquent tax payer to the release the lien and turns into a profit for the investor. If the delinquent tax payer is unable to pay the state mandated yield, in the amount of time set forth by the jurisdiction, the investor gets the title to the property. Once the investor has the title to the property they can strike a deal with the delinquent taxpayer or foreclose on the property. 75% of the auctions result in the existing owner paying the mandated yield allowing the action winner to gain substantially on their investment quickly. A fixed percentage rate mandated by a government agency or the title to property at a substantial discount are incredible benefits rarely seen with other real estate investments.

                Even though tax liens seem like a perfect investment strategy, a lot of research must go into the process. First, investors must find out which states allow citizens to attend the auctions and what are the fees and taxes assessed on the auction winner. Next, one must find out when and where these auctions will take place. You can pay to be put on mailing lists or spend time and effort obtaining information from the county of your choosing. Subsequently one should go to a few auctions to see how the proceedings work before jumping right into action. Gain an understanding of how the program is carried out so you will feel comfortable in the audience and atmosphere. Next, one must research the lots on the docket. Take time to see the properties and the neighborhoods in which they are located. This will give you an idea of the value of the property and gain a sense of what the lot may be worth down the line. The last and most important step is to be patient. As an investor you do not want to get stuck with a house or property in poor or unsellable conditions. Make the most of the research and time put into every endeavor.

                Tax liens can be a good way to get a highly valued house or property at a low price. Time and effort must be used to research the right property but the benefits can be better than any other real estate endeavor. It might be worth considering taking advantage of the economy and trying to make the most of your investment with tax liens.

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The Tax Club Investigates: When It Comes to Taxes, Don’t Bet on the Software

Wednesday, April 21st, 2010

 

            Recently, a company that makes tax preparation software sponsored a poker game on national late night television.  The contestants ended the game by opening up envelopes holding their returns and being surprised at their refunds. A man with a green visor was the dealer, and he wore the company’s logo on his shirt. The point seemed to be, “See? Doing your taxes and seeing the outcome is just like poker!” It may seem like an apt comparison. However, for these sorts of companies, the poker gimmick is not just for fun and games: it’s a necessary angle of advertising.

            Poker is a game of luck, because your odds of walking away with the money depend a whole lot on the cards you can’t possibly predict.  Anyone who figures out a way to calculate those cards reliably is banned from the game. Though professional players have devised strategies to deal with the unpredictability of the game, anyone who knows the rules can lose or win big. These software companies benefit enormously by making taxpayers think they won their return in a similar manner. After all, why try to plan next year’s refund, or get the advice of a real live accountant, when the chips could fall anywhere?

            In reality, preparing your return is a game of strategy, more like chess than poker.  It’s a game that is played during each month of the year, not in the three months of tax season following the year’s end. Now that tax season is over, here are some easy tips on how to optimize next year’s refund.

  1. Begin with making contributions into your retirement account such as a traditional or Roth IRA. An Individual Retirement Account, or an IRA, is a bank or brokerage account that allows one to set aside money each year for retirement. It’s a win-win choice, one that your accountant and your future self will much appreciate. The best part is that it is deductible “above the line”, which means you don’t even need to itemize your deductions to take advantage of the benefits.  However, consult with your accountant first and let them make the decision on how much you can contribute. Your accountant will need to consider other factors such as your income level and whether you are covered by your employer.
  2. Converting your IRA to a Roth. Generally, the goal is to defer taxes to future years but with the impending increase in the income tax rates, it makes better sense to convert your retirement account to a Roth this year. There are no income limitations to Roth conversions and you are given the option to defer the tax on this over a two-year period. However, consult with your accountant first if this action will benefit you taking into consideration your personal tax situation.
  3. Increase your itemized deductions by documenting your charitable donations. For example, if you and your family are moving, why not donate any furniture or clothes you won’t keep? Make sure you ask for a receipt from the charitable organization you made the donation to. Holding on to that receipt ensures that you will see your charity rewarded. If you are looking to buy a new car this year, consider donating your old one. In order for your contributions to be deductible, make sure the organization receiving the donation is a qualified institution accepted by the IRS.
  4. Keep track of your medical expenses. And not just the obvious ones! Glasses, fertility treatment, hospital services, lab fees, and glucometers all count. You can even deduct the cost of parking and transportation to and from your doctor’s office, or the cost of capital expenses for medically-related home improvements. Be sure to keep a mileage log to support the miles driven for medical purposes though. And speaking of home improvements…..
  5. Make your home more energy efficient. If you are thinking of updating your windows, doors, roofs, or heating/cooling systems, check out which choices will give you the most credits at EnergyStar.gov. There are some important energy tax credits available that will help you get some tax savings and they are set to expire at the end of this year. Not only will you get more money back next year when you file your taxes, you will also save more on your electric bill as well. 
  6.  Get a personalized tax plan. Schedule an appointment with your accountant and go over the strategies you can implement to save more in taxes. It is best to have a tax plan in writing so you can refer to it throughout the year. Having a written plan produces a higher probability that your goals will be achieved efficiently. More often than not, those taxpayers who owed money on their returns do not have a tax plan or strategy in place that would have prevented them from owing in the first place. Taxpayers with a written plan save money and get better refunds at the end of year.
  7. Qualifying the sale of your home for tax exclusion. Did you know you can exclude all or part of the profit from the sale of your main home?  Yes, you are reading this correct. This exclusion is up to $250,000 for individuals and $500,000 for married taxpayers filing a joint return. In addition, this is not a once in a lifetime event, the exclusion can be claimed each time you sell your main home but generally not more than once every two years.  In order to qualify, you must meet the Ownership Test and the Use test as provided for in the tax code. The ownership test requires that you must have owned the home for at least two years in the five year period ending on the date of the sale and the use test requires that you must have lived in the home for at least two years during the five year period that you have owned it. Before placing your home on the market, be sure you meet the above IRS requirements so you do not have to pay taxes on the gain from the sale.

 

So remember, your return is not a card game, and your refund is not in chips. It is a reward for carefully planning your finances throughout the year. To keep you on track, do not substitute a trained accountant with a program you install April 1st and uninstall April 16th. Now that would be a true gamble with dire consequences. There are many more ways to optimize your finances this year, and one of our professionals would be happy to talk to you about them. For a free consultation, call the Tax Club at 888-773-7176.

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The Tax Club Investigates: Who is Paying Federal Income Taxes?

Wednesday, April 14th, 2010

 

              Federal income tax is the government’s largest source of revenue making April 15th one of the most dreaded days of the year in America. With the tax deadline being tomorrow many Americans are moving swiftly to file their taxes on time to avoid penalty. Nobody enjoys paying taxes but it comes as a necessity for living in this society. “All I have to do is pay taxes and die” is a saying used by many Americans because those are two things in life that are inescapable. Even though April 15th is the most dreaded day of 2010, most U.S. households will not pay any federal income taxes for 2009 due to tax credits and tax cuts.

                Over the last few years tax credits have benefited families with low and middle yearly income. A family of four with two children under the age of 17 and a household income of $50,000 will not owe any income tax for 2009. The struggling economy from 2007 to 2008 led political leaders to assist low and middle income families get through the tax season. In 2008 and 2009 President George W. Bush and President Barrack Obama signed laws expanding and creating tax credits. President Bush signed a law in 2008 that provided millions of families with rebate checks of between $300 and $1,200. Some argue these rebate checks were to small but they did assist many families struggling toward the end of 2008. In 2009 President Obama’s economic recovery law targeted middle and low income families directly increasing chances of tax credits and refunds. In addition, President Obama continued to make strides toward creating an even playing field by providing more tax breaks for all those in need. “The Making Work Pay credit provides as much as $800 to couples and $400 to individuals”. Obama then created specific laws that assisted people with Children under the age of 17. The expanded child tax credit provides $1,000 for each child under the age of 17 and the Earned Income Tax Credit provides up to $5,657 to low income families with at least three children.

                President Barrack Obama appears to be using tax cuts and tax credits to assist the lower and middle class Americans. Many argue the moves Obama has made make him look socialist in nature as he attempts to raise the foundation of the lower classes and decrease the intake of the upper classes. Obama’s argument the whole time has been that wealthy Americans thrived during the years of President Bush with big tax breaks. Now is the time for the average American to gain assistance from a struggling economy that is trying to rise back to true form. However, Obama has laid down some laws that are beneficial to all classes. The President created tax credits for college expenses which allow people to gain some reward for sending their children to college. In an effort to boost the economy the President has also created credits for buying a new home encouraging millions of Americans to trust in the economy and rely on a stable mortgage and future. Americans with existing homes are encouraged to go green by earning tax credit for energy efficient renovations to windows, doors, furnaces and other appliances. Many of these credits are refundable which means if the credits exceed the amount of income taxes owed, the tax payer will receive a check from the government for the difference.

                According to the Tax Policy Center 49% of households did not pay federal income taxes in 2008. The increase in tax cuts and tax credits along with the struggling economy will lead to 47% of households being exempt from paying federal income taxes this year. Continued assistance to lower class families has the potential to lead to more households being exempt from paying  federal income taxes in the near future. One might ask if less people are paying federal income taxes, how will this affect the economy?a

Ohlemacher, Stephen. “47% Of Families Don’t Pay a Dime in Federal Income Tax.” Seattle Times. Seattle Times, 07 Apr. 2010. Web. 09 Apr. 2010. <http://seattletimes.nwsource.com/html/nationworld/2011551281_notaxes08.html>

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The Tax Club Investigates: What to Do When You Get an IRS Notice

Tuesday, February 23rd, 2010

The first thing most people do when they receive a notice from the IRS is freak out.  A notice from the IRS does not necessarily mean that you or your tax preparer did anything wrong.   The most important thing to remember is to not panic. 

Make sure you read the notice carefully to determine the issue.  If after reading the notice you are unsure what it says, then call the number in the upper right hand portion of the notice to speak to an IRS official who will be able to help you.  Once you determine the issue, gather all relevant documents and tax returns and review the paperwork.

The worst course of action is to do nothing.  Do not just ignore the notice—the IRS will not forget about the issue and your problems could increase. 

After determining what the notice is about, then you will have to act accordingly.  If the notice is proposing changes to your return and you agree with the changes, you do not need to respond to the IRS.  If you disagree with the changes, you should respond to the IRS by the reply by date on the notice and explain what items you take issue with.  The notice should have an address where to send your reply.  Make sure that you save any copies of correspondence with the IRS for your files. 

If you use a professional tax preparer, contact them immediately and give them a complete copy of the notice.  Most likely, the professional will be able to research and resolve the issue fairly quickly.  If you do not have a paid preparer, consider contacting one for help with dealing with any issues that you do not fully understand.

We here at the Tax Club are committed to assisting you with any or all of your tax issues. Please contact us for a free tax consultation at (866)840-1829 x5438

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The State of the Union: Taxpayer Edition

Thursday, February 4th, 2010

In January of 1790, President George Washington addressed Congress at the nation’s capital, which at the time was New York City.  He decided that with America still in its infancy, the beginning of the year was an ideal time to discuss what Congress should do in the years ahead. He read from seven pages about political topics, such as immigration and the standard of currency. Though it was not called the “State of the Union Address” until 1934, President Washington had begun a tradition that presidents still honor today.

Since that time, the State of the Union speech has obviously become longer than seven handwritten pages, and so it can be difficult to understand what particular goals are being suggested. Last week, President Barack Obama gave the 220th State of the Union address in Washington, DC, in which he mentioned taxes several times. But with other topics being covered, most people were discussing jobs and healthcare by the next day. So what new tax legislation did Obama suggest? And how does it affect our daily lives? Let’s break it down.

  1. “If these firms can afford to hand out big bonuses again, they can afford a modest fee to pay back the taxpayers who rescued them in their time of need.”
    “A modest fee” refers to a tax. The President is recommending that we tax the largest firms to regain some of the taxpayer money that went into the bailouts. Admitting that the Troubled Asset Relief Program and other government assistance to financial institutions are as popular as a root canal, he said that these bailout programs were necessary to save the economy. Taxing those institutions that benefited from these bailouts would go a long way to recouping some of the taxpayer’s money used to rescue them in their time of need.
  2. “Let’s also eliminate all capital gains taxes on small business investment, and provide a tax incentive for all large businesses and all small businesses to invest in new plants and equipment.”

  It seems that President Obama is suggesting that the capital gains tax rate for small business investment should be “0”, no matter what the income is. The purpose of this proposal is to encourage people to invest their hard-earned money in small business stocks and spur a lackluster economy to life. A capital gain is the money a person makes when they purchase something at one price and then sell it for more money. Traditionally, people are taxed for that money. An example of this would be a person buying an object for $50, and then selling it for $150. If that capital gain is short term, i.e, sold and bought within that year, then that person can be taxed over 35% for the profit. Obviously, going to 0% would be a big difference.

The President’s statement on providing a tax incentive for businesses to invest in new plants and equipment refers to extending the liberal write-offs of capital equipment that expired at the end of last year. These provisions allowed a Section 179 deduction in the year of purchase and a special depreciation allowance of 50 percent in the year of acquisition for capital investments.

  1. “And, yes, it means passing a comprehensive energy and climate bill with incentives that will finally make clean energy the profitable kind of energy in America.”

When you hear somebody on Capitol Hill use the word “incentive”, then there is a good chance they are talking about taxes. It is very likely that President Obama is suggesting that either consumers of clean energy and/or those who manufacture clean energy products will have tax incentives such as credits.

  1. “Let’s take that money and give families a $10,000 tax credit for four years of college and increase Pell Grants. And let’s tell another 1 million students that when they graduate, they will be required to pay only 10 percent of their income on student loans, and all of their debt will be forgiven after 20 years.”

This suggestion is pretty straightforward. If you or your dependent goes to college, you can get tax credits. Like the clean energy incentives mentioned above, the student tax credit would be another incentive for people to invest in their own education. Deductions and credits are the two most popular tax incentives. Unlike a deduction, which reduces your taxable income, a tax credit is a literal, dollar-for-dollar reduction on how much you owe in your taxes.

  1. “We will not continue tax cuts for oil companies, for investment fund managers and for those making over $250,000 a year. We just can’t afford it.”

President Obama is supporting extending tax cuts to those with income under $250,000.  On January 1, 2011, the tax cuts enacted under President Bush will expire, so it was expected that President Obama would mention his stance on their status during this speech. The current Administration favors the reinstatement of the pre-2001 36 percent and 39.6 percent tax brackets on income and the increase of the top tax rate on capital gains and dividends from 15 percent to 20 percent. This proposal is expected to increase income taxes for about 5 percent of all taxpayers with most of the increase geared towards those earning more than $250,000.

Of course, as enlightening as it is to see the direction that any branch of our government wants to head, the recommendations that a president makes in the State of the Union Address are just that – recommendations.  We can’t be sure of which goals the rest of our government will support or implement. If you have any questions about taxes or require a free tax consultation, please contact us at (866) 840-1829.

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Is E-Filing The Fix For A Crazy Tax Season?

Thursday, January 28th, 2010

In this age of abundant technology, corporations keep making our lives easier. We can electronically mail each other instantly; we can order and watch movies and television shows on our computers; we can even carry around our entire music collection in phones small enough to fit in a pocket. The question is, will e-filing be the next step on this ladder of progress? It seems likely.

The process is far from brand new; the IRS piloted the e-filing system 24 years ago, during the 1986 filing season. Back then, the types of returns were limited, and you could only e-file at three locations nationwide. Over 25,000 taxpayers took advantage of the system and those who used it found the system so useful that it was implemented by the next tax year. Since then, the IRS has worked on perfecting the security and the simplicity of e-filing to make sure any taxpayer can reap the benefits. 

Their efforts were so successful that in 2008, 58% of all returns that the IRS received were e-filed, and 78% of tax preparers reported that they e-filed for themselves and for their clients. The consumer has spoken: electronically filing taxes online is the most straightforward way to file. The IRS quickly learned that easier for the taxpayer meant easier for them, and so they are still working hard to make e-filing even more efficient. 

The software does not only help taxpayers fill out their usual information. It also helps them with navigating complex tax laws and discovering new deductions, as well as fixing errors and discrepancies. 

Taxpayers who use the system agree that the three biggest difficulties with filing are basically eradicated with the e-filing system.  

  1. Choosing a form is automatic. Once you input your information, the e-filing software selects the form that best suits your needs. With the forms being chosen for you, you’re less likely to lose money on mistakes and delays.
  2. Ensuring the delivery of your return is easy. The IRS acknowledges receipts of e-filed returns earlier than non-e-filed returns, since sending them is instantaneous. As mentioned earlier, last year the IRS was able to contact taxpayers within 48 hours to inform them of their return’s status. Mailed returns can take much longer, and papers can easily be lost. This speedy confirmation also means that receiving your refund no longer needs to take weeks and weeks. If you e-file and set up direct deposit with the IRS, you can get your refund in as quickly as 10 days.
  3. Messy forms and mistakes are diminished by the simplicity of typing your information, and by the software’s ability to correct errors. This doesn’t only make you look more professional, it also saves you time and money, allowing you to be more productive during tax season.

So this tax season, join the growing number of taxpayers who electronically file. Be your most professional, productive self, and spend April 15th organized with extra time and money.

If you require a free tax consultation, please feel free to call 866-840-1829 x5438

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Claiming Dependency Exemptions

Monday, January 25th, 2010

If I pay all of my grandson’s expenses, can I really save money by claiming him as a dependent? If I have three kids, how many exemptions can I claim? These are questions that every taxpayer should know the answers too. In order to fully take advantage of all tax loopholes available to you, we must first understand certain important items about this often overlooked credit.

Before we go into further details about who qualifies as a dependent, we will first visit the topic of exemptions and how one can save money on taxes from personal and dependency exemptions.  The use of exemptions in the tax system is based in part on the idea that a taxpayer with a small amount of income should be exempt from income taxation. An exemption frees a specified amount of income from tax, decreasing your tax liability (the amount we must pay in tax).  For tax years 2009 and 2010, you are allowed to take an exemption in the amount of $3,650 for you, the taxpayer, your spouse and or your dependents. These deductions are called dependency exemptions and you are allowed to deduct them for each person that you maintain and take care of, also known as your dependents. 

So how do you know if your grandmother is your dependent? How do you know if your girlfriend is your dependent? How do you know if your child who is in college and making some money from his job at the mall is still your dependent? In order for you to classify a person as your dependent, there are certain requirements that should be met. There are two types of dependents, a “qualifying child,” which is exactly what it sounds like and a “qualifying relative,” which is a somewhat misleading name to describe this type of dependents as you will find out as you continue to read this article. 

Qualifying Child

  • In order for your child to qualify as a dependent, we must first establish that this child should be under the age of 19 or under the age of 24, in the case of a student.
  • This child must be a son, daughter, adopted child, stepchild, eligible foster child, brother, sister, half brother, half sister, or a descendant.
  • The child must live with you for more than half of the year.
  • And this child must receive more than half of his support from you, the taxpayer. For students, the amount paid for school is considered support.  

If these requirements are met, the child is considered your dependent and you can claim the dependency exemption on your tax return. Now what about those people who live with you but are not related to you at all? In the midst of this turmoil that our economy is in, can you claim your boyfriend as a dependent if he loses his job and is unemployed for the whole year? The answer is yes. Although he is not a relative, he can still be claimed as a dependent, which is why the “qualifying relative” is a misleading name to describe this type of dependency. 

A “qualifying relative” is anyone who:

Is a relative – parents, grandparents, step-parents, uncles, aunts, in laws, or some one who is not related but lived with you the entire year.

  • They must not have a gross income of more than $3,650, or the exemption amount.
  • They must receive over one-half of their support from you. Support includes food, shelter, clothing, medicines and so on. 

If they are members of your household, did not make more than $3,650 and you provided for their support, they could qualify as your dependent regardless of their relationship to you. 

Of course, it goes without saying that in order for a person to qualify as a dependent, he or she must be a US citizen and have lived on US soil for at least part of the year. 

Now it is important to note that these tax exemptions are not available to all tax payers.  If you make too much money, your exemptions will decrease as you make more income. This means that if:

You are married and you make over $250,200, your exemptions will be reduced until you hit $372,700, which then completely erases the exemption.

  • If you are head of household, your phase out starts at $208,500 and is completely wiped out at $331,000.
  • If you are single, your phase out starts at $166,800 and ends at $289,300.
  • For married couples filing separate returns, phase out starts at $125,000 and ends at $186,350. 

We here at the Tax Club are committed to assisting you with any or all of your tax issues. Please contact us for a free tax consultation at (866)840-1829.

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IRS Audits on Real Estate Professionals Are on the Rise

Monday, January 18th, 2010

Over the last couple of years, a good number of taxpayers have been audited by the IRS for claiming the real estate professional election on their tax returns. It’s understandable that, like everybody else, the government is looking for ways to generate more revenue but the timing could not be worse. In this economic climate of tightened credit and the housing crisis, an aggressive IRS audit specifically targeting the people who are suffering the most cannot be good for anyone.

Why do people want to claim the real estate professional status on their tax returns? If you have real estate losses, you can only deduct $25,000 of the loss against your other income if you make less than $100,000. If you make more than $150,000, you cannot take any of the loss. Real estate professionals are not subject to this limitation and can take all real estate losses against their other income, no matter how much the loss or the income is. As long as you meet certain criteria provided by the IRS, you can reduce your taxable income and therefore, save money on taxes. This is the reason why so many people are eager to claim this designation and why the number and rapacity of the audits against real estate investors and professionals is increasing.

Requirements for Real Estate Professionals

According to the IRS, a real estate professional spends more than half of his time performing qualified real property activities. Real property development, construction, acquisition, conversion, rental operation, management, leasing or brokerage are examples of real property activities that qualify according to Section 469(c)(7) of the Internal Revenue Code. Time spent as an employee in real property activities counts only if the taxpayer is more than a 5 percent owner.

A taxpayer needs to spend more than 750 hours on an annual basis in real property businesses and rentals in which he materially participates to qualify for the real estate professional status. One materially participates in an activity if he or she works on a regular, continuous and substantial basis in the operations of a real estate business. It is possible to have a significant financial interest in a business, and yet not materially participate.

 What the IRS Scrutinizes During the Audit

The IRS has increased the number of audits on real estate investors and professionals and is taking a hard stand based on the unfavorable audit results and a few court cases that we have encountered. During the audit, the IRS will not just seek evidence of your material participation in the real estate business. They will also hone in on how active your qualified real estate activities really are. Any activity that smacks of passivity will be disallowed. Sitting at your computer looking at properties does not qualify as an active real estate activity. Nor does reviewing the monthly reports that your property manager sends you regularly no matter how frequent or how long it takes you to peruse these documents. The IRS wants to see evidence of regular physical activity in determining if you materially and actively participated in the real estate business.

Another thing that the IRS will scrutinize is the way you are holding your real property investments. If your property is held inside an LLC, they are going to require a copy of the LLC’s operating agreement to see if the appropriate verbiage is there. If the key phrases are missing or if the required special language that details your material participation is not there, you may find yourself owing a huge amount of money on taxes, not to mention interests and penalties. If you hold property in a limited partnership as a limited partner, you do not meet the material participation criterion and your losses will be disallowed.

Maintaining proper records is vital to having a positive outcome to the audit. Anyone looking to claim the real estate professional status must be keeping a detailed time log of dates, locations and activities, preferably substantiated with photographs or other proper evidence. If you feel confident that you meet the stringent requirements of the IRS and your activities will be able to withstand intense scrutiny, making sure your documentation is rock solid will serve you well in the event of an IRS audit. Please contact the Tax Club if you need more information on this topic at 866-840-1829 x5438.

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