The Tax Diva

Unemployed? A tax break awaits you for 2009!

2009-08-06T13:48:00.000-07:00

As of mid-March, a record 5.6 million people were receiving unemployment benefits. Those benefits are taxable. However, for those drawing unemployment in 2009, the American Recovery and Reinvestment Act makes the first $2,400 of unemployment benefits exempt from tax.

For married couples, the tax exemption applies separately to each spouse. This means that if both you and your spouse claim unemployment benefits this year, you can exclude the first $2,400 of your unemployment benefits and your spouse can exclude the first $2,400 of his or her unemployment benefits received in 2009.

For unemployment benefits received beyond the first $2,400, which are subject to tax, unemployed workers can opt to have income tax withheld from those benefit payments. For further details about filling out a Form W-4V - Voluntary Withholding Request, read our article on unemployment.

Be Happy!

2009-06-14T10:52:00.001-07:00

There comes a time in your life when you have to let go of all the pointless drama and the people who create it and surround yourself with people who make you laugh so hard that you forget the bad and focus solely on the good. After all life is too short to be anything but happy!

To File or Not To File

2009-02-09T09:26:00.000-08:00

To File or Not To File

You must file a tax return if your income is above a certain level. The amount varies depending on filing status, age and the type of income you receive.

For example, a married couple both under age 65 generally is not required to file until their joint income reaches $17,900. However, self-employed individuals generally must file a tax return if their net income from self employment was at least $400.

Check the “Individuals” section of the IRS Web site at IRS.gov or consult the instructions for form 1040, 1040A, or 1040EZ for specific details that may affect your need to file a tax return with IRS this year.

Even if you don’t have to file, here are six reasons why you may want to file:
1. Federal Income Tax Withheld. If you are not required to file, you should file to get money back if Federal Income Tax was withheld from your pay, if you made estimated tax payments, or had a prior year overpayment applied to this year's tax.
2. Recovery Rebate Credit. If you did not qualify or did not receive the maximum amount for the 2008 Economic Stimulus Payment, you may be entitled to a Recovery Rebate Credit when you file your 2008 tax return.
3. Earned Income Tax Credit. You may qualify for the Earned Income Tax Credit, or EITC, if you worked, but did not earn a lot of money. EITC is a refundable tax credit meaning you could qualify for a tax refund.
4. Additional Child Tax Credit. This credit may be available to you if you have at least one qualifying child and you did not get the full amount of the Child Tax Credit.
5. First time Homebuyer Credit. If you bought a main home after April 8, 2008, and before July 1, 2009 and did not own a main home during the prior 3 years, you may be able to take this refundable credit.
6. Health Coverage Tax Credit. Certain individuals, who are receiving certain Trade Adjustment Assistance, Alternative Trade Adjustment Assistance, or pension benefit payments from the Pension Benefit Guaranty Corporation, may be eligible for a Health Coverage Tax Credit when you file your 2008 tax return.

For more information about filing requirements and your eligibility to receive tax credits, email Questions@TheTaxDiva.com.

What to Do If You Are Missing a W-2

2009-02-01T09:12:00.000-08:00

What to Do If You Are Missing a W-2

Did you get your W-2? These documents are essential to filling out most individual tax returns. You should receive a Form W-2, Wage and Tax Statement, from each of your employers each year. Employers have until February 2, 2009 to provide or send you a 2008 W-2 earnings statement either electronically or in paper form. If you haven’t received your W-2, follow these steps:

1. Contact your employer. If you have not received your Form W-2, contact your employer to inquire if and when the W-2 was mailed. If it was mailed, it may have been returned to the employer because of an incorrect or incomplete address. After contacting the employer, allow a reasonable amount of time for them to resend or to issue the W-2.

2. Contact the IRS. If you still do not receive your W-2 by February 17th, contact the IRS for assistance at 800-829-1040. When you call, have the following information:

* Employer's name, address, city, and state, including zip code;
* Your name, address, city and state, including zip code, and Social Security number; and
* An estimate of the wages you earned, the federal income tax withheld, and the period you worked for that employer. The estimate should be based on year-to-date information from your final pay stub or leave-and-earnings statement, if possible.

3. File your return. You still must file your tax return on time even if you do not receive your Form W-2. If you have not received your Form W-2 by February 17th, and have completed steps 1 and 2 above, you may use Form 4852, Substitute for Form W-2, Wage and Tax Statement. Attach Form 4852 to the return, estimating income and withholding taxes as accurately as possible. There may be a delay in any refund due while the information is verified.

4. File a Form 1040X. On occasion, you may receive your missing documents at a later date and some may have conflicting information. You may receive a Form W-2 or W-2C (corrected form) after you filed your return using Form 4852, and the information differs from what you reported on your return. If this happens, you must amend your return by filing a Form 1040X, Amended U.S. Individual Income Tax Return.

Form 4852, Form 1040X, and instructions are available on the IRS Web site, IRS.gov or by calling 800-TAX-FORM (800-829-3676).

Tax Facts About Capital Gains and Losses

2009-01-09T09:37:00.000-08:00

Tax Facts About Capital Gains and Losses

Do you have questions about reporting gains and losses on your tax return? Here are some facts from the IRS.

Almost everything you own and use for personal purposes, pleasure or investment is a capital asset.
When you sell a capital asset, the difference between the amount you sell it for and your basis, which is usually what you paid for it, is a capital gain or a capital loss.
You must report all capital gains.
You may deduct capital losses only on investment property, not on property held for personal use.
Capital gains and losses are classified as long-term or short-term, depending on how long you hold the property before you sell it. If you hold it more than one year, your capital gain or loss is long-term. If you hold it one year or less, your capital gain or loss is short-term.
Net capital gain is the amount by which your net long-term capital gain is more than your net short-term capital loss.
The tax rates that apply to net capital gain are generally lower than the tax rates that apply to other income and are called the maximum capital gains rates. For 2008, the maximum capital gains rates are 0%, 15%, 25% or 28%.
If your capital losses exceed your capital gains, the excess can be deducted on your tax return, up to an annual limit of $3,000 ($1,500 if you are married filing separately).
If your total net capital loss is more than the yearly limit on capital loss deductions, you can carry over the unused part to the next year and treat it as if you incurred it in that next year.
Capital gains and losses are reported on Schedule D, Capital Gains and Losses, and then transferred to line 13 of Form 1040.

For more information about reporting capital gains and losses, get Publication 17, Your Federal Income Tax, and Publication 550, Investment Income and Expenses, available on the IRS Web site at IRS.gov or by calling 800-TAX-FORM (800-829-3676).

Email us at Questions@TheTaxDiva.com

Happy Tax Season 2009!

What Income is Taxable?

2009-01-02T09:30:00.000-08:00

What Income is Taxable?

While most income you receive is generally considered taxable, there are some situations when certain types of income are partially taxed or not taxed at all. Some common examples of items that are not included in your income are:

* Adoption Expense Reimbursements for qualifying expenses
* Child support payments
* Gifts, bequests and inheritances
* Workers' compensation benefits
* Meals and Lodging for the convenience of your employer
* Compensatory Damages awarded for physical injury or physical sickness
* Welfare Benefits
* Cash Rebates from a dealer or manufacturer
* Economic Stimulus Payment received in 2008

Some income may be taxable under certain circumstance, but not taxable in other situations. Examples of items that may or may not be included in your income are:

Life Insurance. If you surrender a life insurance policy for cash, you must include in income any proceeds that are more than the cost of the life insurance policy. Life insurance proceeds paid to you because of the death of the insured person are not taxable unless the policy was turned over to you for a price.

Scholarship or Fellowship Grant. If you are a candidate for a degree, you can exclude amounts you receive as a qualified scholarship or fellowship. Amounts used for room and board do not qualify. All other items—including income such as wages, salaries and tips—must be included in your income, unless it is specifically excluded by law. Taxable income may be in a form other than cash. One example of this is bartering, which is an exchange of property or services. The fair market value of goods and services exchanged is fully taxable and must be included as income on Form 1040 of both parties.

These examples are not all-inclusive. For more information, visit the IRS Web site at IRS.gov to view or download Publication 525, Taxable and Nontaxable Income from the Forms and Publications section or call 800-TAX-FORM (800-829-3676).

Please email questions to Questions@TheTaxDiva.com

Forgiven mortgage debt relief in the Mortgage Forgiveness Debt Relief Act of 2007

2008-01-15T13:27:00.000-08:00

Addressing the subprime lending crisis, Congress recently passed and the President signed into law a new measure giving tax breaks to homeowners who have mortgage debt forgiven. Under preexisting law, the debt forgiven by a lender, such as for short sales and refinances, was generally taxable to the borrower as debt discharge income. With the passage of the Mortgage Forgiveness Debt Relief Act of 2007, a taxpayer does not have to pay federal income tax on up to $2 million of debt forgiven for a loan secured by a qualified principal residence. The change in the tax law applies to debts discharged from January 1, 2007 to December 31, 2009. Here are the details.

Discharge of indebtedness income: background.

For income tax purposes, a discharge of indebtedness—that is, a forgiveness of debt—is generally treated as giving rise to income that's includible in gross income. However, a discharge of indebtedness doesn't give rise to gross income if it: (1) occurs in a Title 11 bankruptcy case, (2) occurs when the taxpayer is insolvent, (3) is a discharge of qualified farm indebtedness, or (4) is a discharge of qualified real property business indebtedness.

Under pre-2007 Mortgage Relief Act law, there were no special rules applicable to discharges of acquisition debt on the taxpayer's principal residence. For example, assume a taxpayer who isn't in bankruptcy and isn't insolvent owns a principal residence subject to a $200,000 mortgage debt for which the taxpayer has personal liability. The creditor forecloses and the home is sold for $180,000 in satisfaction of the debt. Under pre-2007 Mortgage Relief Act law, the debtor had $20,000 of debt discharge income. The result was the same if the creditor restructured the loan and reduced the principal amount to $180,000.

New law relief provision.

The 2007 Mortgage Relief Act excludes from a taxpayer's gross income any discharge of indebtedness income by reason of a discharge (in whole or in part) of qualified principal residence indebtedness before Jan. 1, 2010. The exclusion applies where taxpayers restructure their acquisition debt on a principal residence or lose their principal residence in a foreclosure. For example, assume the same facts as in the example above except that the discharge occurs in 2008. Under the 2007 Mortgage Relief Act, the debtor has no debt discharge income when the creditor (1) restructures the loan and reduces the principal amount to $180,000 or (2) forecloses with the result that the $200,000 debt is satisfied for $180,000.

Here is some of the critical fine print in this new relief provision:

The tax relief applies to the original purchase price, plus improvements, of the taxpayer's principal residence. It doesn't apply to discharges of second mortgages or home equity loans, unless the loan proceeds were used to acquire, construct, or substantially improve the taxpayer's principal residence. Refinanced indebtedness qualifies to the extent it doesn't exceed the amount of indebtedness being refinanced. (Cash out from refinancing doesn't qualify for the exclusion.)
The indebtedness must be incurred with respect to the taxpayer's principal residence only. The exclusion rule doesn't apply to second homes, vacation homes, business property, or investment property, since these properties aren't the taxpayer's principal residence.
The relief provision is not a permanent fixture of the tax code. It only applies to forgiveness during 2007, 2008, or 2009.
Nontaxable forgiven mortgage debt is capped at $2 million ($1 million for married individuals filing separately).
When the relief provision applies, the basis of the individual's principal residence is reduced by the amount excluded from income. As a result of this basis reduction rule, the discharged indebtedness is, at least technically, subject to taxation at a later time, when the taxpayer sells or exchanges the principal residence. However, in many cases the reduction won't result in any additional tax, because any gain on that sale or exchange will qualify for the $250,000 ($500,000 for married couples filing jointly) home-sale exclusion.

Please keep in mind that this is only a summary of this important tax relief provision. If you would like more details about this change, or any other aspect of the new law, please do not hesitate to email me at Questions@TheTaxDiva.com.

How to trim the wait if the new tax law change affects you

2008-01-08T09:51:00.000-08:00

Shortly before the holiday Congress aprroved a change in the tax law that will prevent the AMT from affecting more than 20 million households. The revision in the tax law came too late to allow the IRS to update all the tax forms to accomodate the change before the 2008 filing season started.

While most taxpayers are not going to be affected, the IRS estimates that 3 to 4 million taxpayers will have to wait until February 11th to file their tax returns.

If you include any of the five forms listed below, the IRS won't process your return until February 11:

Form 8863 - Education credits
Form 5695 - Residential energy credits
1040A, Schedule 2 - Child and dependent care expenses credit
Form 8396 - Mortgage interest credit
Form 8859 - D.C. first-time home buyer credit

So how can you cut your wait time? Here are some simple steps:

File electronically! Taxpayers who file electronically and setup direct deposit of their refunds can expect to see their money in as little as 10 days. So if you have to wait, you can still have your refund by the end of February.
File an amended return. If you are desperate for your refund, file your return omitting the forms affected by the delay and then amend your return later to claim the remaining refund. This is not the recommened method because some taxpayers will forget or figure the additional amount is not worth the added paperwork and cost if you use a tax professional to prepare the amended return.
Use a different form to claim the child care expenses credit. The AMT-related changes affect this credit when it's claimed on Form 1040A. Most tax programs will allow you to opt for the long Form 1040.
Stop giving Uncle Sam an interest-free loan! This is what your refund represents. You are allowing Uncle Sam to hold on to your money throughout the year for FREE! Simply adjust your withholding so that less money is withheld from your paycheck.

For any questions please email Questions@TheTaxDiva.com

Happy Tax Season 2008!

Change will delay tax refunds for millions

2007-12-27T13:39:00.000-08:00

More than 3 million people will have to wait until February to get their tax refunds because of Congress' late fix to the alternative minimum tax, the IRS said today.

Congress put a one-year freeze on growth of the alternative minimum tax last week, shielding many middle- and upper-middle income taxpayers from first exposure to the tax. But Congress' late action means the Internal Revenue Service won't be able to start processing five AMT-related forms until February, delaying potential refunds for those people until that month.
Between 3 million and 4 million people filed in January of last year using those forms, with many of those people expecting a refund, the IRS said.

The average refund in 2007 was $2,324, the agency said.

"We regret the inconvenience the delay will mean for million of early tax filers, especially those expecting a refund," acting IRS Commissioner Linda Stiff said.

As many as 13.5 million people will have to wait until Feb. 11 to start filing with the five AMT-related forms, but the IRS said filing patterns show only between 3 million to 4 million of those people file during the early tax season anyhow. The IRS was able to reprogram its computers to begin accepting the seven other AMT-related forms when the tax season opens in early January. But the tax packages that will start arriving in the mail beginning after New Year's Day were printed in November, before the AMT fixes were approved by Congress. The IRS has created a special section on its Web site, http://www.irs.gov, with updated copies of AMT forms.

The alternative minimum tax was passed in 1969 and was aimed at about 155 very wealthy families who used deductions to avoid paying any federal income tax. The AMT disallows certain deductions and credits. It was not adjusted for inflation; as a result, over the years it has hit a growing number of middle-income taxpayers. More than 4 million were subject to it in the 2006 tax year. Without the congressional fix, more than 20 million families would have been faced with an extra $2,000 tax hit on average.

The five forms affected by the delay are:
— Form 8863, Education Credits.
— Form 5695, Residential Energy Credits.
— Form 1040A's Schedule 2, Child and Dependent Care Expenses for Form 1040A Filers.
— Form 8396, Mortgage Interest Credit and
— Form 8859, District of Columbia First-Time Homebuyer Credit.

Any taxpayer using those forms will have to wait until February to file their taxes, the agency said. The IRS will begin processing those forms on Feb. 14, and the first refunds for those people will start going out 10 to 14 days later.

More than 100 million people got refunds during the last tax season.

For questions or comments please email us at Questions@TheTaxDiva.com

Recording The Source For All Deposits In Your Check Register -

2007-07-30T14:42:00.000-07:00

5/1/2000 by Sandy Botkin by Sandy Botkin, CPA, Esq.

Too many times people have said at my seminars that they are worried about an audit because they do not the receipts for the documentation taken. Unfortunately, there is more to an audit than worrying about documentation for deductions. They need to worry about the income side as well.

IRS has recently instituted an extra type of audit procedure. Regardless of the type of audit, IRS now asks for all bank records and money market accounts for the year or years covering the audit. At first blush, this may seem strange. If you were being audited for your automobile or travel expenses, why would IRS want to see your yearly bank records? The answer is that IRS is now checking all taxpayers for unreported income.

IRS will match all deposits made into your bank accounts and compare the totals to your reported income. If the deposits exceed what you reported as income, you’d better have a great explanation or IRS will hit you with "unreported income" on the difference.

You might be thinking, "wait a minute, not every deposit is taxable." This is quite true. Gifts and inheritances are tax-free. Reimbursements from insurance companies and by employers for business expenses where a proper accounting was made are also tax-free. Most municipal bond interest is tax-free. I had a student who could never balance his bank account. His idea of balancing an account was to close out one account every six months and open up another one. I hope this doesn’t apply to you! None of these items mentioned are taxable. However, unless you can clearly demonstrate that the deposits came from a tax-exempt source, IRS will construe your deposits as unreported income.

It is now necessary that you record and identify the sources of all deposits in your check register. For example, if you receive a deposit as a commission checks from X Company, the check register would read," commission check from X company." If you were to receive a tax-free reimbursement from your health insurance company, the check register would read," reimbursement from X health insurance company."

Finally, for all non-taxable items, make a copy of the check that you received, and put it in a yearly file. Thus if you receive a reimbursement from your employer for business expenses that you gave an accounting for, you should copy the check.

If you follow my advice, you will certainly make any IRS audit less painful and make your life less taxing.

This tax tip came from Sandy Botkin’s Tax Strategies for Business Professionals and his Tax Advantage System. For more details or to order either Tax systems or audit proof diary, click here or contact me at www.TheTaxDiva.com.

Office at home for telecommuting employees

2007-06-21T12:29:00.000-07:00

If you're an employee who “telecommutes”—that is, you work at home, and communicate with your employer mainly by telephone, e-mail, fax, electronic data transfer, express mail services, etc.—you should know about the strict rules that govern whether you can deduct your home office expenses.

You may deduct your home office expenses if your home office is for the convenience of your employer (see below), and if you meet any of the three tests described further below: the separate structure test, the place for meeting patients, clients or customers test, or the principal place of business test.

If you do qualify, you may compute your home office deductions (described below) on a special worksheet. You report the expenses on Schedule A as below-the-line miscellaneous itemized deductions that are deductible only to the extent that they (together with all other miscellaneous itemized deductions) exceed 2% of your adjusted gross income.

Convenience of the employer requirement. The convenience of the employer requirement is satisfied if:

you maintain your home office as a condition of employment—in other words, if your employer specifically requires you to maintain the home office and work there;
your home office is necessary for the functioning of your employer's business; or
your home office is necessary to allow you to perform your duties as an employee properly.

The convenience of the employer requirement means that you must maintain your home office for your employer's convenience, and not for your own. This requirement isn't satisfied if your use of a home office is merely “appropriate and helpful” in doing your job.

Under the above rules, if your employer requires you to telecommute, and doesn't make on-premises office space available for you, your maintenance of a home office for telecommuting will probably be treated as for the convenience of the employer. Otherwise, it's not clear whether your home office will be treated as satisfying this requirement. Therefore, if you can, you should get your employer to put in writing that it's a requirement of your job to work from an office in your home.

Separate structures. You may deduct the costs of a separate structure used as a home office that is not attached to your “dwelling unit.” In other words, the “separate structure” must be an unattached structure on the same property as your home—for example, an unattached garage, artist's studio, workshop, or office building. To qualify for the deduction, the separate structure must be used exclusively and on a regular basis in connection with your activities as an employee. In addition, you must maintain the home office in the separate structure for the convenience of your employer.

Home office used for meeting patients, clients, or customers. Alternatively, you may deduct your home office expenses if you use a home office, exclusively and on a regular basis, and for the convenience of your employer, to meet or deal with patients, clients, or customers of your employer in the normal course of your duties as an employee.

Principal place of business. In addition, you may deduct your home office expenses if you use your home office, exclusively and on a regular basis, as the principal place of business for your work as an employee, and if you maintain the home office for the convenience of your employer.

While there have been many disputes between IRS and taxpayers about whether taxpayers' home offices qualified as their principal places of business, a telecommuter should have no problem establishing that the home office is his or her principal place of business—if the telecommuter does the most important part of his or her work in the home office, and spends most of his or her work time there.

Exclusive and regular use requirements. As noted above, whether the home office is in a separate structure or is a principal place of business (which doesn't have to be in a separate structure), the home office must be used exclusively and on a regular basis in connection with your work as an employee.

The exclusive use requirement means that you must use your home office solely for the purpose of carrying on your work as an employee. Any other use of the home office will result in loss of all deductions for your home office expenses.

For example, if you work in a spare bedroom that contains your desk, computer, fax, files, etc., and if you don't use that bedroom for anything but your work, that room passes the exclusive use test. But if you also use the room to sleep occasional overnight guests, it fails the exclusive use requirement. And if you use the room exclusively for work during your regular workday, but the room reverts to other uses at nights and/or on weekends, it also fails the exclusive use test.

The regular basis requirement means that you must use the home office in carrying on your business on a continuous, ongoing or recurring basis. Generally, this means a few hours a week, every week. A few days a month, every month, may do the trick. But occasional, “once-in-a-while” business use won't do.

We can help you figure out whether your home office satisfies the exclusive and regular use tests, and suggest things you might do to make sure that you do pass these tests—for example, removing non-business furniture and fixtures, not letting guests use your home office, keeping the kids out, etc.

What you get if you qualify for home office deductions. If your home office is your principal place of business under the rules noted above, the costs of traveling between your home office and other work locations in the same trade or business, regardless of whether the other work location is regular or temporary, and regardless of its distance, are deductible transportation expenses, rather than nondeductible commuting costs.

If your use of your home office qualifies under any of the above rules, you may take business expense deductions for the following:

the “direct expenses” of the home office—e.g., the costs of painting or repairing the home office, depreciation deductions for furniture and fixtures used in the home office, etc.; and
the “indirect” expenses of maintaining the home office—e.g., the properly allocable share of utility costs, depreciation, insurance, etc., for your home, as well as an allocable share of mortgage interest, real estate taxes, and casualty losses.

Amount limitations on home office deductions. The amount you may deduct as home office expenses is subject to limitations based on the income attributable to your use of the home office, your residence-based deductions that aren't dependent on use of your home for business (e.g., mortgage interest and real estate taxes), and your business deductions that aren't attributable to your use of the home office.

Example: Say your home office occupies 20% of the space in your home. This year, your salary (earned entirely from your work in the home office) is $50,000. The mortgage and real estate taxes on your home total $20,000, $4,000 of which is allocable to the home office. You have $10,000 of additional home office expenses (depreciation, utilities, etc.). And you have $5,000 of expenses that aren't attributable to the use of your home office (supplies, express mail charges, copying charges, etc.). To figure out whether you can deduct your home office expenses, you first subtract the home-office portion of the mortgage and real estate taxes, $4,000, from your salary. This leaves you with $46,000. Then, from this, you subtract your expenses that aren't attributable to your use of the home office, $5,000. This leaves you $41,000. If this figure exceeds the amount of your remaining home-office expenses, here $10,000, you can deduct all of those expenses. If this figure is less than your remaining home-office expenses, your deduction is limited. For example, if your remaining home-office expenses were $45,000 instead of $10,000, you'd only be able to deduct $41,000 instead of the full amount. And the computation gets even more difficult if you earn your salary both in your home office and at other locations, because the limitation formula only takes into account the income attributable to the use of the home office.

Any home office expenses that can't be deducted because of the above amount limitations may be carried over and deducted in later years.

Computers and related equipment. If your use of your home office qualifies under any of the rules discussed above, you may deduct the unreimbursed cost of computers and related equipment that you use in the home office, and the deductions are not subject to the “listed property” restrictions that would otherwise apply.

Effect of home office deductions on later sales of your principal residence. You should be aware that, if you claim any depreciation deductions with respect to the home office, when you sell the residence, any gain attributable to the depreciation deductions will not be eligible for the otherwise available $250,000/$500,000 exclusion for gain on the sale of principal residences. Also, the exclusion won't apply to the portion of your gain allocable to a home office that's separate from the dwelling unit.

We can help. We are prepared to assist you with advice about whether you qualify for the deduction of home office expenses, and how much of these you may deduct—as well as other tax issues that you encounter. Please call us at (800) 282-3149 if you would like to discuss these matters.

New tax law signed in May. Will it affect you?

2007-06-05T21:21:00.000-07:00

President Bush signed the Small Business and Work Opportunity Tax Act on May 25, 2007. This law is part of a larger bill that provides funds for the troops and increases the federal minimum wage over a two-year period to $7.25.

To help offset the cost of the increased minimum wage, the law provides a number of tax breaks for businesses. Some individual taxpayers may find their tax bills are increased by the revenue raising portions of the law.

Here's a brief overview of the tax changes:

* The limit for the Section 179 election to expense business equipment purchases is immediately increased from $112,000 to $125,000, with the phase-out amount increased from $450,000 to $500,000.

* The Work Opportunity Tax Credit for hiring certain disadvantaged workers was set to expire at the end of 2007. The new law extends the credit through August 31, 2011, and broadens the credit to include more veteran groups.

* The FICA tip credit will continue to be based on the old $5.15 minimum wage even though the minimum wage increases to $7.25 an hour.

* Married couples who jointly operate an unincorporated business and who file a joint return may elect not to report their income as a partnership. Instead of filing a partnership return, they can each report their income on Schedule C of Form 1040.

* The age limit for the "kiddie tax," the taxing of a child's unearned income above a certain amount at the parents' higher rate, is increased from age 18 to 19. For full-time students, the kiddie tax will apply until age 24. This change is effective for tax years beginning after May 25, 2007 - which for most taxpayers means the change will become effective in 2008.

Among other provisions in the law are tax incentives to help taxpayers recovering from Hurricane Katrina and some S corporation changes. If you would like to review how these recent changes might affect your business and personal tax planning, give us a call.

Changing the way you think about taxes!

Sincerely,

The Tax Diva

My Accountant Says Extend…What Does That Mean To Me?

2007-05-11T11:45:00.000-07:00

Why is extending good for me?
Extending your return allows you and your accountant more time to review your tax reporting and planning in a calm and less-pressured time frame. You may qualify for additional retirement planning opportunities, including some that may benefit the prior year. If you receive late information (such as corrected 1099s or 401(k) adjustments) or if you discover missing items after the return has been filed, an extension can spare you the hassle, expense and added attention of an amended return.

If I extend, will the IRS classify my tax return as “late”?
Filing an extended tax return is not filing late. With an extension, your return is on time as long as it is filed by October 15th. As long as you have properly filed for extension and you file your return by the extended date, your tax return is considered on time.

How do I get an extension — and what do I have to do?
The October 15th extension is automatic, which means you don’t have to provide a reason or wait for an approval. Your accountant can prepare Form 4868 and submit it in paper form or electronically. As long as it is filed by April 17th, 2007 (generally April 15th), the extension is granted. An extension document must be filed with the IRS by April 17th or you risk significant penalties (5% per month) and lose opportunities for various elections and tax savings.

Facts About Filing Tax Returns (compliments of the IRS)

Failure to file a return or filing late can be costly. If taxes are owed, a delay in filing may result in penalty and interest charges that could increase your tax bill by 25 percent or more.
There is no penalty for failure to file a tax return if a refund is due. But by waiting too long to file, you can lose your refund. In order to receive a refund, the return must be filed within 3 years of the due date. If you file a return, and later realize you made an error on the return, the deadline for claiming any refund due is three years after the return was filed, or two years after the tax was paid, whichever expires later.
Taxpayers who are entitled to the Earned Income Tax Credit must file a return to claim the credit even if they are not otherwise required to file. The return must be filed within 3 years of the due date in order to receive the credit.
If you are self-employed, you must file returns reporting self-employment income within three years of the due date in order to receive Social Security credits toward your retirement.

Haven't filed your taxes yet? Please contact us immediately at Quetions@TheTaxDiva.com and we can help you out.

The Home Based Business Solution

2007-04-04T08:00:00.000-07:00

There are millions of sites promoting home-based business opportunities with promises of financial freedom, more family time and high earning potential, just to name a few. Studies have shown that people who work from home are happy and less stressed out; at least most of the time. Many home-based entrepreneurs get excited about the idea of exchanging the shirt and tie for sweats and flip flops. Setting your own hours, being able to sleep in the middle of the day, taking 2 hours lunch breaks is enough to make most want to leave the corporate rat race behind. And don't think that corporations haven't begun to take notice. Corporate managers are always looking for "new" ways to keep employee attrition at a minimum by offering "flexible" schedules. As an ex-corporate member, I will tell you "flexible" is never flexible enough. The benefits of working from home far outweigh working in corporate America any day.

So now you are home, working in your own business, and hopefully making lots of money. But what happens when April 15th approaches? If you are like most home-based entrepreneurs, you haven't considered taxes until it’s too late! So now what?

CyberWize has come up with a solution to the April 15th dilemma. CyberTax is a remarkable product that simplifies the record keeping so that you aren't caught at year-end trying to gather your shoe box of receipts for your accountant. It shows you how to maximize your earnings and keep most of the money you make in your home-based business venture - in your checkbook, not Uncle Sam’s! Cyber Tax Tracker will help you maximize your deductions with minimal tax knowledge. This user-friendly software is easily edited to comply with current year tax rates with no software upgrades required! Check it out, I think you will agree it is a great value for the price.
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2007-04-03T10:55:00.000-07:00

For more information please visit our website at www.taxwize.com/4393627 or email us at Questions@TheTaxDiva.com.

Like-Kind Exchanges: The 1031 Basics

2007-04-03T08:00:00.000-07:00

Did you know you might be able to dispose of appreciated property without being taxed on the gain by exchanging it rather than selling it? You can defer tax on your gain through the “like-kind” exchange rules.

A like-kind exchange is any exchange (1) of property held for investment or for productive use in your trade or business for (2) like-kind investment property or trade or business property. For these purposes, “like-kind” is very broadly defined. As long as the exchange is real estate (land and/or buildings) for real estate, or personalty (non-real estate) for personalty, it should qualify. However, exchanges of some types of property (for example, inventory or shares of stock), do not qualify. If you are unsure whether the property involved in your exchange is eligible for a tax-free like-kind exchange, please call and we can discuss the matter.

Assuming the exchange qualifies, here's how the tax rules work:

If it's a straight asset-for-asset exchange, you will not have to recognize any gain from the exchange. You will take the same “basis” (your cost for tax purposes) in your new property that you had in the old property. Even if you do not have to recognize any gain on the exchange, you still have to report the exchange on Form 8824.

Frequently, however, the properties are not equal in value, so some cash or other (non- like-kind) property is tossed into the deal. This cash or other property is known as “boot.” If boot (cash) is involved, you will have to recognize your gain, but only up to the amount of boot (cash) you receive in the exchange. In these situations, the basis you get in the like- kind property you receive is equal to the basis you had in the property you gave up reduced by the amount of boot (cash) you received but increased by the amount of gain recognized.

Example. Ted exchanges land (investment property) with a basis of $100,000 for a building (investment property) valued at $120,000 plus $15,000 in cash. Ted's gain on the exchange is $35,000: he received $135,000 in value for an asset with a basis of $100,000. However, since it's a like-kind exchange, he only has to recognize $15,000 of his gain: the amount of cash (boot) he received. Ted's basis in his new building will be $100,000: his original basis in the land he gave up ($100,000) plus the $15,000 gain recognized, minus the $15,000 boot received.

Note that no matter how much boot is received, you will never recognize more than your actual (“realized”) gain on the exchange.

If the property you are exchanging is subject to debt from which you are being relieved, the amount of the debt is treated as boot. The theory is that if someone takes over your debt, it's equivalent to his giving you cash. Of course, if the property you are receiving is also subject to debt, then you are only treated as receiving boot to the extent of your “net debt relief” (the amount by which the debt you become free of exceeds the debt you pick up).

Like-kind exchanges are an excellent tax-deferred way to dispose of investment or trade or business assets. If you have additional questions or would like to discuss the topic further, please email to Questions@TheTaxDiva.com.

The Home Office Deduction

2007-04-02T08:00:00.000-07:00

If you're self-employed and work out of an office in your home, and if you satisfy the strict rules that govern those deductions (discussed below), you will be entitled to favorable “home office” deductions—that is, above-the-line business expense deductions for the following:

the “direct expenses” of the home office—e.g., the costs of painting or repairing the home office, depreciation deductions for furniture and fixtures used in the home office, etc.; and
the “indirect” expenses of maintaining the home office—e.g., the properly allocable share of utility costs, depreciation, insurance, etc., for your home, as well as an allocable share of mortgage interest, real estate taxes, and casualty losses.

In addition, if your home office is your “principal place of business” under the rules discussed below, the costs of travelling between your home office and other work locations in that business are deductible transportation expenses, rather than nondeductible commuting costs. And you may also deduct the cost of computers and related equipment that you use in the home office, without being subject to the “listed property” restrictions that would otherwise apply.

Tests for home office deductions. You may deduct your home office expenses if you meet any of the three tests described below: the principal place of business test, the place for meeting patients, clients or customers test, or the separate structure test. You may also deduct the expenses of certain storage space if you qualify under the rules described further below.

Principal place of business. You're entitled to home office deductions if you use your home office, exclusively and on a regular basis, as your principal place of business. (What “exclusively and on a regular basis” means is not entirely self-evident. We can help you figure out whether your home office satisfies this make-or-break requirement.) Your home office is your principal place of business if it satisfies either a “management or administrative activities” test, or a “relative importance” test. You satisfy the management or administrative activities test if you use your home office for administrative or management activities of your business, and if you meet certain other requirements. You meet the relative importance test if your home office is the most important place where you conduct your business, in comparison with all the other locations where you conduct that business.

Home office used for meeting patients, clients, or customers. You're entitled to home office deductions if you use your home office, exclusively and on a regular basis, to meet or deal with patients, clients, or customers. The patients, clients or customers must be physically present in the home office.

Separate structures. You're entitled to home office deductions for a home office, used exclusively and on a regular basis for business, that's located in a separate unattached structure on the same property as your home—for example, an unattached garage, artist's studio, workshop, or office building.

Space for storing inventory or product samples. If you're in the business of selling products at retail or wholesale, and if your home is your sole fixed business location, you can deduct home expenses allocable to space that you use regularly (but not necessarily exclusively) to store inventory or product samples.

Amount limitations on home office deductions. The amount of your home office deductions is subject to limitations based on the income attributable to your use of the home office, your residence-based deductions that aren't dependent on use of your home for business (e.g., mortgage interest and real estate taxes), and your business deductions that aren't attributable to your use of the home office. But any home office expenses that can't be deducted because of these limitations may be carried over and deducted in later years. We can help you figure out how these limitations affect your home office deductions.

Sales of homes with home offices. If you sell—at a profit—a home that contains, or contained, a home office, the otherwise available $250,000/$500,000 exclusion for gain on the sale of a principal residence won't apply to the portion of your profit equal to the amount of depreciation you claimed on the home office. In addition, the exclusion won't apply to the portion of your profit allocable to a home office that's separate from the dwelling unit. Otherwise, the home office won't affect your eligibility for the exclusion.

We can help. Proper planning can be the key to nailing down the optimum tax treatment for your office at home expenses. We are prepared to assist you with advice about any of the issues discussed above. Please email us at Questions@TheTaxDiva.com if you would like to discuss these (or any other) matters.

Can you deduct your club dues?

2007-04-01T08:00:00.000-07:00

Like many other enterprises, your business may pay club dues to one or several types of organizations. These dues may or may not be deductible, depending on the type of organization and its purpose.

Your business generally cannot deduct dues paid to a club organized for business, pleasure, recreation or other social purposes. This disallowance rule takes in country clubs, golf clubs, business luncheon clubs, athletic clubs, and even airline and hotel clubs. However, you can deduct 50% of the cost of otherwise allowable business entertainment at a club, even if the dues you pay to the club are nondeductible. For example, if you have dinner with a client at your country club after a substantial and bona fide business discussion, 50% of the cost of the dinner is deductible as a business expense.

The club-dues disallowance rule generally doesn't affect dues paid to professional organizations including bar associations and medical associations, or civic or public-service-type organizations, such as the Lions, Kiwanis or Rotary clubs. The dues paid to local business leagues, chambers of commerce and boards of trade also aren't affected. However, an organization isn't exempt from the disallowance rule if its principal purpose is to provide entertainment facilities to its members, or to conduct entertainment activities for them.

Finally, keep in mind that even if the general club-dues disallowance rule doesn't apply, there's no deduction for dues unless you can show that the amount you pay is an ordinary and necessary business expense.

For more details on the club dues question, or on the status of your other business expenses, please feel free to contact the Tax Diva at Questions@TheTaxDiva.com.

IRS Audit Protection Program

2007-03-29T11:03:00.000-07:00

Attention home-based business owners!!! The IRS is scrutinizing self-employed and home-based business tax returns now more than ever before. If your return is selected for an audit, do you know where to turn for help? If you answered NO, we can help.

Email us at Questions@TheTaxDiva.com or to sign-up visit Insulate me from the IRS!

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Do I Need to Substantiate My Charitable Contributions?

2007-03-29T10:31:00.000-07:00

While all contributions must be substantiated, contributions of $250 or more require a written receipt from the charity. If you donate property valued at more than $500, additional requirements apply.

General rules. If you claim a deduction for a charitable contribution you must maintain reliable written records regarding the contribution, regardless of the value or amount of the contribution. For a contribution of money, you generally must maintain a bank record or a written communication from the donee showing the name of the donee organization, the date of the contribution, and the amount of the contribution. It's not sufficient to maintain other written records, such as a log of contributions.

For a contribution of property other than money, you generally must maintain a receipt from the donee organization showing the name of the donee, the date and location of the contribution, and a detailed description (but not the value) of the property. You need not obtain a receipt for a donation of property other than money, however, if circumstances make obtaining a receipt impracticable. Under those circumstances, you must maintain reliable written records regarding the contribution. The required content of such a record varies depending upon factors such as the type and value of property contributed.

Stricter substantiation requirements apply in the case of charitable contributions with a value of $250 or more. No charitable deduction is allowed for any contribution of $250 or more unless you substantiate the contribution by a contemporaneous written acknowledgement of the contribution by the donee organization. You must have the receipt in hand by the time you file your return (or by the due date, if earlier) or you won't be able to claim the deduction.

The acknowledgement must include the amount of cash and a description (but not value) of any property other than cash contributed, whether the donee provided any goods or services in consideration for the contribution, and a good faith estimate of the value of any such goods or services. If you received only “intangible religious benefits,” such as attending religious services, in return for your contribution, the receipt must say so. This type of benefit is considered to have no commercial value and so doesn't reduce the charitable deduction available.

If you make separate contributions of less than $250, you won't be subject to the requirement to get a written receipt, even if the sum of the contributions to the same charity total $250 or more in a year. Also, if you have contributions withheld from your wages, the deduction from each payment of wages is treated as a separate contribution for purposes of the $250 threshold.
In general, if the total charitable deduction you claim for non-cash property is more than $500, you must attach a completed Form 8283 (Noncash Charitable Contributions) to your return or the deduction is not allowed. In general, you are required to obtain a qualified appraisal for donated property with a value of more than $5,000, and to attach an appraisal summary to the tax return. A qualified appraisal isn't required for publicly-traded securities for which market quotations are readily available. A partially completed appraisal summary and the maintenance of certain records are required for (1) nonpublicly-traded stock for which claimed deduction is greater than $5,000 and no more than $10,000, and (2) certain publicly-traded securities for which market quotations are not readily available. A qualified appraisal is required for gifts of art valued at $20,000 or more.

Recordkeeping for contributions for which you receive goods or services. If you receive goods or services, such as a dinner or theater tickets, in return for your contribution, your deduction is limited to the excess of what you gave over the value of what you received. For example, if you gave $100 and in return received a dinner worth $30, you can deduct $70. But your contribution is fully deductible if:

you received free, unordered items from the charity that cost no more than $8.90 in 2007 ($8.60 in 2006) in total;
you gave at least $44.50 in 2007 ($43.00 in 2006) and received only token items (bookmarks, key chains, calendars, etc.) that bear the charity's name or logo and cost no more than $8.90 in 2007 ($8.60 in 2006) in total; or
the benefits that you received are worth no more than 2% of your contribution and no more than $89 in 2007 ($86 in 2006).

If you made a contribution of more than $75 for which you received goods or services, the charity must give you a written statement, either when it asks for the donation or when it receives it, that tells you the value of those goods or services. Be sure to keep these statements.

Cash contribution made through payroll deductions. A contribution that you make by withholding from your wages may be substantiated by a pay stub, Form W-2, or other document furnished by your employer that shows the amount withheld for the purpose of a payment to a charity. You can substantiate a single contribution of $250 or more with a pledge card or other document prepared by the charity that includes a statement that it doesn't provide goods or services in return for contributions made by payroll deduction.

The deduction from each wage payment of wages is treated as a separate contribution for purposes of the $250 threshold.

Substantiating contributions of services. Although you can't deduct the value of services you perform for a charitable organization, some deductions are permitted for out-of-pocket costs you incur while performing the services. You should keep track of your expenses, the services you performed and when you performed them, and the organization for which you performed the services. Keep receipts, canceled checks, and other reliable written records relating to the services and expenses.

As discussed above, a written receipt is required for contributions of $250 or more. This presents a problem for out-of-pocket expenses incurred in the course of providing charitable services, since the charity doesn't know how much those expenses were. However, you can satisfy the written receipt requirement if you have adequate records to substantiate the amount of your expenditures, and get a statement from the charity that contains a description of the services you provided, the date the services were provided, a statement of whether the organization provided any goods or services in return, and a description and good-faith estimate of the value of those goods or services.

Email us at Questions@TheTaxDiva.com. Together we can make sure that you'll get all the deductions to which you're entitled come next filing deadline.