Homeowner Records: What to Keep and How Long
Keeping full and accurate homeowner records is vital for determining not only your home deductions, but also the basis or adjusted basis of your home. These records include your purchase contract and settlement papers if you bought the property, or other objective evidence if you acquired it by gift, inheritance, or similar means.
You should also keep any receipts, canceled checks, and similar evidence for improvements or other additions to the basis. Here's some examples:
- Putting an addition on your home
- Replacing an entire roof
- Paving your driveway
- Installing central air conditioning
- Rewiring your home
- Assessments for local improvements
- Amounts spent to restore damaged property
In addition, you should keep track of any decreases to the basis. Here's some examples:
- Insurance or other reimbursement for casualty losses
- Deductible casualty loss not covered by insurance
- Payment received for easement or right-of-way granted
- Value of subsidy for energy conservation measure excluded from income
- Depreciation deduction if home is used for business or rental purposes
How you keep records is up to you, but they must be clear and accurate and must be available to the IRS. And you must keep these records for as long as they are important for the federal tax law.
Keep records that support an item of income or a deduction appearing on a return until the period of limitations for the return runs out. (A period of limitations is the limited period of time after which no legal action can be brought.)
For assessment of tax, this is generally three years from the date you filed the return. For filing a claim for credit or refund, this is generally three years from the date you filed the original return or two years from the date you paid the tax, whichever is later. Returns filed before the due date are treated as filed on the due date.
You may need to keep records relating to the basis of property (discussed earlier) longer than the period of limitations.
Note: Technically, basis is needed to determine gain on home sale (loss is not deductible). That need has diminished for most homeowners now that gain up to $250,000 ($500,000 in some sales by married couples) is tax-exempt.
Basis is still important, however, in figuring casualty loss, on conversion of the home to business use, or where there's a gift of the home (in this case, important to the donee).
Keep those records as long as they are important in figuring the basis of the property. Generally, this means for as long as you own the property and, after you dispose of it, for the period of limitations that applies to you.
If you have any questions as to what items are to be considered in determining basis, please give us a call.
Using a Car for Business? Grab These Deductions
If you use a car for business, you get the benefit of tax deductions.
There are two choices for claiming deductions:
Deduct the actual business-related costs of gas, oil, lubrication, repairs, tires, supplies, parking, tolls, drivers' salaries, and depreciation.
- Use the standard mileage deduction and simply multiply 51 cents for 2011 travel (2010's rate was 50 cents) by the number of business miles traveled during the year. Your actual parking fees and tolls are separately deductible under this method.
Which Method Is Better?
For some taxpayers, the standard mileage rate produces a larger deduction. Others fare better tax-wise by deducting actual expenses.
Tip: The actual cost method allows you to claim accelerated depreciation on your car, subject to limits and restrictions not discussed here.
The standard mileage amount includes an allowance for depreciation. If we opt for the standard mileage method, it allows you to bypass the limits and restrictions and it's simpler - but it's often less advantageous in dollar terms.
Caution: The standard rate may understate your costs, especially if you use the car 100% for business, or close to that percentage.
Generally, the standard mileage method benefits taxpayers who have less expensive cars or who travel a large number of business miles.
How to Make Tax Time Easier
Keep careful records of your travel expenses. We won't be able to determine which of the two options is better for you if you don't know the number of miles driven and the total amount you spent on the car.
Furthermore, the tax law requires that you keep travel expense records and that you give information on your return showing business versus personal use. If we use the actual cost method for your auto deductions, you must keep receipts.
Tip: Consider using a separate credit card for business, to simplify your recordkeeping.
Tip: You can also deduct the interest you pay to finance a business-use car if you're self-employed.
Note: Self-employeds and employees who use their cars for business can deduct auto expenses if they either (1) don't get reimbursed, or (2) are reimbursed under an employer's "non-accountable" reimbursement plan. In the case of employees, expenses are deductible to the extent that auto expenses (together with other "miscellaneous itemized deductions") exceed 2% of adjusted gross income.
We will help you determine the best deduction method for your business-use car. Let us know if you have any questions about which records to keep.
Top 8 Ways Children Lower Your Taxes
Got kids? They may have an impact on your tax situation. Here are the top 8 things to consider if you have children.
Dependents: In most cases, a child can be claimed as a dependent in the year they were born. Be sure to let us know if your family increased this year and we'll take a look at whether you can claim the child as a dependent this year.
Child Tax Credit: You may be able to take this credit on your tax return for each of your children under age 17. If you do not benefit from the full amount of the Child Tax Credit, you may be eligible for the Additional Child Tax Credit. The Additional Child Tax Credit is a refundable credit and may give you a refund even if you do not owe any tax.
Child and Dependent Care Credit: You may be able to claim this credit if you pay someone to care for your child under age 13 so that you can work or look for work. Be sure to keep track of your child care expenses so we can claim this credit accurately.
Earned Income Tax Credit: The EITC is a benefit for certain people who work and have earned income from wages, self-employment, or farming. EITC reduces the amount of tax you owe and may also give you a refund.
Adoption Credit: You may be able to take a tax credit for qualifying expenses paid to adopt a child.
Coverdell Education Savings Account: This savings account is used to pay qualified expenses at an eligible educational institution. Contributions are not deductible; however, qualified distributions generally are tax-free.
Higher Education Credits: Education tax credits can help offset the costs of education. The American Opportunity and the Lifetime Learning Credit are education credits that reduce your federal income tax dollar for dollar, unlike a deduction, which reduces your taxable income.
Student Loan Interest: You may be able to deduct interest you pay on a qualified student loan. The deduction is claimed as an adjustment to income so you do not need to itemize your deductions.
As you can see, having children can make a big impact on your tax profile. If you're a parent, we'll go over your situation with you to make sure you're getting the appropriate credits and deductions.
You Can Still Make a 2010 IRA Contribution
If you haven't contributed funds to an Individual Retirement Arrangement for tax year 2010, or if you've put in less than the maximum allowed, you still have time to do so. You can contribute to either a traditional or Roth IRA until the April due date for filing your tax return for 2010, not including extensions.
Be sure to tell the IRA trustee that the contribution is for 2010. Otherwise, the trustee may report the contribution as being for 2011 when they get your funds.
Generally, you can contribute up to $5,000 of your earnings for 2010 or up to $6,000 if you are age 50 or older in 2010. You can fund a traditional IRA, a Roth IRA (if you qualify), or both, but your total contributions cannot be more than these amounts.
Note: IRA contribution limits remain the same in 2011 - $5,000, or $6,000 if age 50 or older.
Traditional IRA: You may be able to take a tax deduction for the contributions to a traditional IRA, depending on your income and whether you or your spouse, if filing jointly, are covered by an employer's pension plan.
Roth IRA: You cannot deduct Roth IRA contributions, but the earnings on a Roth IRA may be tax-free if you meet the conditions for a qualified distribution.
Maximizing your retirement savings is a critical goal for an individual's financial plan. Review of your financial retirement plan should be completed annually allowing for maximum savings. Each year, the IRS announces the cost of living adjustments and limitation for retirement savings plans. In 2010 and 2011, however, the contribution limits for defined benefit and defined contribution plans did not change as the Consumer Price Index did not meet the regulatory thresholds.
Itemizers Can Deduct Certain Taxes
Did you know that you may be able to deduct certain taxes on your federal income tax return? You can receive these deductions if you file Form 1040 and itemize deductions on Schedule A. Deductions decrease the amount of income subject to taxation.
There are four types of deductible non-business taxes:
State and Local Income or Sales Taxes
You can choose to claim a state and local tax deduction for either income or sales taxes on your return. You can deduct any estimated taxes paid to state or local governments and any prior year's state or local income tax as long as they were paid during the tax year.
If deducting sales taxes instead, you may deduct actual expenses or use the optional tables provided by the IRS to determine your deduction amount, relieving you of the need to save receipts.
Sales taxes paid on motor vehicles and boats may be added to the table amount, but only up to the amount paid at the general sales tax rate.
Real Estate Taxes
Deductible real estate taxes are usually any state, local, or foreign taxes on real property. If a portion of your monthly mortgage payment goes into an escrow account and your lender periodically pays your real estate taxes to local governments out of this account, you can deduct only the amount actually paid during the year to the taxing authorities.
Your lender will normally send you a Form 1098, Mortgage Interest Statement, at the end of the tax year with this information.
Personal Property Taxes
Personal property taxes are deductible when they are based on the value of personal property, such as a boat or car. To be deductible, the tax must be charged to you on a yearly basis, even if it is collected more than once a year or less than once a year.
Foreign Income Taxes
Generally, you can take either a deduction or a tax credit for foreign income taxes, but not for taxes paid on income that is excluded from U.S. tax.
For more information on non-business deductions for taxes, just give us a call.
Estimated Tax Payments - Q&A
Question: How do I know if I have to file quarterly individual estimated tax payments?
Answer: If you owed additional tax for the prior tax year, you may have to make estimated tax payments for the current tax year.
You must make estimated tax payments for the current tax year if both of the following apply:
- You expect to owe at least $1,000 in tax for the current tax year, after subtracting your withholding and credits.
- You expect your withholding and credits to be less than the smaller of:
90% of the tax to be shown on your current year's tax return, or
100% of the tax shown on your prior year's tax return. (Your prior year tax return must cover all 12 months.)
There are special rules for:
- Certain taxpayers with higher adjusted gross income
- Farmers and commercial fishermen
- Estates and trusts
Contact us if you are unsure of your need to make an estimated tax payment. The first estimated payment for 2011 is due April 18, 2011.
5 Tips If You Changed Your Name This Year
If you changed your name this year as a result of a recent marriage or divorce, you'll want to take the necessary steps to ensure the name on your tax return matches the name registered with the Social Security Administration. A mismatch between the name shown on your tax return and the SSA records can cause problems in the processing of your tax return and may even delay your refund.
Here are 5 tips for recently married or divorced taxpayers who have made a name change.
- If you took your spouse's last name or if both spouses hyphenate their last names, you may run into complications if you don't notify the SSA. When newlyweds file a tax return using their new last names, IRS computers can't match the new name with their Social Security Number.
- If you were recently divorced and changed back to your previous last name, you'll also need to notify the SSA of this name change.
- It's easy to inform the SSA of a name change. You just need to file Form SS-5, Application for a Social Security Card, at your local SSA office and provide a recently issued document as proof of your legal name change.
- Form SS-5 is available on SSA's website at www.socialsecurity.gov, by calling 800-772-1213, or at local offices. Your new card will have the same number as your previous card, but it will show your new name.
- If you adopted your spouse's children after getting married, you'll want to make sure the children have an SSN. Taxpayers must provide an SSN for each dependent claimed on a tax return. For adopted children without SSNs, the parents can apply for an Adoption Taxpayer Identification Number, or ATIN, by filing Form W-7A, Application for Taxpayer Identification Number for Pending U.S. Adoptions with the IRS. The ATIN is a temporary number used in place of an SSN on the tax return. Form W-7A is available on the IRS website at www.irs.gov, or by calling 800-TAX-FORM (800-829-3676).
Financial Tips for March 2011
If you have young children, review their college planning. Determine the amount you will need to accumulate by the time they enter college. Based on this estimate, establish or review your savings plan. Consider one or more of the tax-favored higher education programs.
Review your home mortgage. Are you paying too much interest? Consider the savings you could obtain by refinancing. Also look into the possibility of making mortgage payments twice a month or adding some principal to each payment to save on the interest cost. If you have other debt at higher interest rates, and the interest is non-deductible, consider paying off these debts with a home equity loan.
Required Minimum Distribution
If you were age 70-1/2 last year and did not take the required minimum distribution from your retirement plans, prepare to take a withdrawal before April 1. Professional guidance will be helpful here.
Review Budget vs. Actuals
Compare February income and expenditures with your budget. Make adjustments as appropriate to your March expenditures. Make sure you have invested your planned savings amount for February.
Estimated Tax Payments
Total up your taxable income, capital gains, and deductions for the first quarter. This information can be used to plan your estimated tax payments and perhaps avoid or minimize any underpayment penalties. Let us know if you have questions about how to do this.
Tax Due Dates for March 2011
Employees who work for tips - If you received $20 or more in tips during February, report them to your employer. You can use Form 4070.
Employers - Nonpayroll withholding. If the monthly deposit rule applies, deposit the tax for payments in February.
Employers - Social Security, Medicare, and withheld income tax. If the monthly deposit rule applies, deposit the tax for payments in February.
Corporations - File a 2010 calendar year income tax return (Form 1120 or 1120-A) and pay any tax due. If you want an automatic 6-month extension of time to file the return, file Form 7004 and deposit what you estimate you owe.
S Corporations - File a 2010 calendar year income tax return (Form 1120S) and pay any tax due. Provide each shareholder with a copy of Schedule K-1 (Form 1120S), Shareholder's Share of Income, Credits, Deductions, etc., or a substitute Schedule K-1. If you want an automatic 6-month extension of time to file the return, file Form 7004 and deposit what you estimate you owe.
Electing large partnerships - Provide each partner with a copy of Schedule K-1 (Form 1065-B), Partner's Share of Income (Loss) From an Electing Large Partnership. This due date is effective for the first March 15 following the close of the partnership's tax year. The due date of March 15 applies even if the partnership requests an extension of time to file the Form 1065-B by filing Form 8736 or Form 8800.
S Corporation Election - File Form 2553, Election by a Small Business Corporation, to choose to be treated as an S corporation beginning with calendar year 2011. If Form 2553 is filed late, S treatment will begin with calendar year 2012.
For information about filing Forms 1098, 1099, or W-2G electronically, see Publication 1220, Specifications for Filing Forms 1098, 1099, 5498 and W-2G Magnetically or Electronically.
Electronic filing of Forms W-2: File copies of all the Forms W-2 you issued for 2010. This due date applies only if you electronically file. The due date for giving the recipient these forms remains at January 31.
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