The W-2s and 1099s are done so it is time to gather your information and actually prepare your tax return. Here are some items to remember as you get everything together.
Charitable contributions require a receipt this year. No longer can you deduct your small cash contributions without a receipt, bank statement or canceled check. You should also beware of the more strict limits on non-cash contributions.
For mortgages closed or refinanced in 2007, you can deduct any Private Mortgage Insurance (PMI) premiums paid during the year.
The residential energy credits are still available. If you made some improvements this year, get those receipts and take advantage of these credits that expired at the end of 2007.
You can still contribute to your IRA and take advantage of the Saver’s credit. This can significantly reduce your tax due and let you keep your money.
This year you are also eligible to deduct either your state income tax or sales tax paid. There are standard amounts for sales tax deductions if you did not save all of your receipts. Generally, for Indiana and Kentucky the income tax will be the higher of the two, but if you built a house or made other significant purchases, your sales tax deduction may be the larger of the two. It is definitely worth checking out.
Teachers can still take advantage of the credit for supplies purchased for the classroom. Store those receipts and take advantage of this credit.
There are still several of the energy conservation credits available. If you added new windows, doors or other energy saving home improvements you should determine if it qualifies for the credit.
The last post gave you some information on how to deduct business mileage. Along with those deductions come record keeping requirements. The IRS requires that you log all business miles in a timely manner. There are many court cases that the IRS has won simply because the taxpayer did not keep adequate records. This is an area that requires discipline. Unfortunately, business owners are usually busy running the business and do not always have time to “jot down” the odometer reading every time they run to the post office. How can you maintain adequate records without pulling your hair out?
Like me, I am sure that many of you were not “born organized”. We have to work at it. So, I have done some searching and tried to come up with some tips to keep your mileage logs simple, yet sufficient.
Write down the beginning odometer reading. This is the beginning of the year (so do it now!)
Keep a calendar or some kind of notebook where you can write down the business trips you make. This does not have to be a separate formal log. You can write things on your regular calendar or store it on your PDA. Just keep it somewhere convenient so that it is easily accessed.
When you make a trip for your business, jot down the place you went. You do not necessarily have to set your trip meter and mileage every single trip at the time. Just note the “to” and “from” locations on your calendar.
Periodically, tally up the miles you have driven from your notebook. These can be logged right there in your notebook. You can get mileage to your locations easily using the internet these days, it is just a click or two away. I would suggest you set a time to do this once per week. Put it on your schedule and set aside a few minutes to get everything up to date, otherwise it will probably become overwhelming if you do any significant traveling. If you are not into details, maybe you ask your spouse or another person who does the details to perform this step.
Make a copy or back it up! If you store this information on paper, make copies periodically as well. Maybe you can do this weekly or once a month depending on the volume. If it is stored on your PDA or computer, do I even need to say back it up?!
Periodically write down your odometer reading or keep your maintenance records which will probably provide that information. Maybe you do this when you get an oil change. Just make sure you get a reading for the end of the year.
Finally, keep your receipts for your actual expenses. One idea might be to put a coupon organizer in your glove compartment and toss in receipts as you get them. Keep your insurance bills and other information in a special file in your office.
Whether you own a business or are an employee, there is a good chance that you will use your car for business at some point. If you are not reimbursed by your employer, these are deductible expenses on your income tax return. I think many make the mistake of doing and then planning. The key to getting the most out of your auto expense deduction is to first determine the method that will save you the most money and then keeping the appropriate records as you go. In addition to both of these methods, you can also deduct costs for parking, tolls and the business portion of finance charges.
Standard Mileage Method
If you use your car for business, you can simply track the business miles and claim a tax deduction for those miles which is multiplied by the IRS mileage rate (48.5 cents/mile). The mileage rate is a combination of depreciation, maintenance and fuel expenses.
Actual Expense Method
The actual expense method uses just that. You will deduct the business portion of the fuel, maintenance, repairs, tires, insurance, registration and any other auto costs. This method requires keeping all of the receipts and tracking all of your expenditures. If you do not have good records for your auto expenses, you will have to use the standard mileage method. There can be problems with taking the accelerated depreciation and your business use falls below 50 percent.
Depending on the circumstances, either one of these methods might provide a better deduction. Your tax preparer can calculate it both ways and determine which is better for you. It may vary from year to year so it is best to keep complete records so that you can take advantage of the method that gives you the largest deduction.
Here are some interesting tidbits from around the web today.
Do you remember the $300 or $600 tax rebate check that you got a few years ago? President Bush is proposing similar rebates once again as fears of an economic slow down dominate the news. It also looks like there are plans for some tax incentives for small businesses as well. Will Congress approve another Bush tax cut after bashing them all of these years?
Keeping with the tax relief theme, the Indiana Congress is right in the thick of determining what can be done to provide property tax relief. The Governor’s plan as detailed in today’s Indianpolis Star focuses on property tax caps for homeowners and shifting some local spending to the state (but don’t forget that 1% increase in the state sales tax). Governor Daniels’ plan seems to be on a fast track in the house.
Many taxpayers often wonder if they should itemize deductions or not. The standard deduction has increased significantly in the past few years but it is always worth it to add up those deductions to see which will get you the smallest tax bill. Here is a handy summary of the differences between the two methods.
As a “crazy right wing conservative”, I am more and more offended that Mike Huckabee is holding himself out to be a conservative. Please tell me that my party will not nominate someone who thinks the Constitution is a “living, breathing document.” Don’t we have enough of that on the Supreme Court already?
January 10 — Employees who work for tips. Previous Months Tips Due to Employer if more than $20.
January 15 — Individual estimated tax payments due using 1040-ES. Indiana estimated tax due also. Individuals may file return by January 31 in lieu of this 4th quarter estimated payment. Farmers and Fisherman must pay estimated tax or file return by March 3, 2008 in order to avoid estimated tax penalty. .
January 31
All Businesses - Give annual information statements to recipients of certain payments you made during 2007. See my notes in “1099, 1098..Blast off into 2008!” for informational return details.
File Form 941 for 4th quarter 2007 or Form 944 (Annual employer taxes) if applicable.
Farm Employers - File Form 943 - Employers Annual Tax Return for Agricultural Employees.
File Form 940 to report Federal Unemployment Taxes. If amount due is less than $500 and deposit is made on time, you have until February 11 to file the return.
Here we are ready to ring in the new year. The year 2008 should bring lots of excitement including a crazy presidential election. However, before we get to all of that we must file and deal with what the IRS calls “Information Returns”. Let’s just review some of the more common forms and what you might need to know as we enter the tax season.
Form 1098 - You will receive one of these if you paid mortgage interest during 2007. When filing your tax return, remember to deduct any mortgage insurance premiums (PMI) for any home you bought or refinanced in 2007. These premiums are only required on the 1098 if more than $600, but are still deductible in 2007.
Form 1098-E - You will receive one of these for any student loan interest you paid in excess of $600.
Form 1099-B - Brokers use this form to report sales of stocks, bonds, etc.
Form 1099-DIV - Corporations primarily issue these forms for each person to whom they paid $10 or more in distributions including dividends, capital gains, or nontaxable distributions on stock. S-Corporation shareholders will receive this form for any distributions made during the year out of accumulated earnings and profits.
Form 1099-G - You should get one of these if you received $10 or more from a government entity. Some common examples include tax refunds and unemployment benefits.
Form 1099-R - This form is used to report distributions of $10 or more from retirement or profit-sharing plans, IRAs, SEPs, annuities or insurance contracts.
Form 1099-MISC - If you own or run a business, you will need to file this form for each person you paid at least $10 in gross royalty payments, or $600 for rents or services in the course of a trade or business.
Form W-2 - Your employer will file this form for each employee. Employers use this form to report wages, tips and other compensation as well as withholdings for income taxes.
You should expect to receive your forms before or around January 31. The forms are due to the IRS by the end of February. W-2 forms are also due to the Social Security Administration by February 29, 2008 (Happy Leap Year)!
Well, Congress has been busy doing.. well.. nothing much. They did finally pass a patch that will keep 200,000 Hoosiers from being hit with the Alternative Minimum Tax this year. The last minute change will cause filing delays or refund delays for some but only those who are claiming any of the following credits.
Form 8863, Education Credits.
Form 5695, Residential Energy Credits.
Form 1040A’s Schedule 2, Child and Dependent Care Expenses for For 1040A Filers.
Form 8396, Mortgage Interest Credit.
Form 8859, District of Columbia First-Time Homebuyer Credit.
If you file the AMT form, you can still file electronically starting January 14. Those claiming the previous credits should be able to send completed returns to the IRS by February 11. Taxpayers who are unsure if they are impacted by the AMT should seek the advice of their tax preparer.
Finally, here is the Indianapolis Star’s summary of what Congress did and did not do in 2007 for Hoosier’s. I could add my own commentary, but I will save that for another day!
Wow, it is November already. The stores are already filled with Christmas decorations and gifts ready to be purchased and sometimes we feel like there really is a Grinch stealing all of our joy by straining our finances. Here are some tips to avoid busting your budget during the holiday season.
Write out a budget. List each person and how much you plan to spend on each of them.
Include a budget for non-gift items like gift wrap, cards, pictures, postage, food, entertaining, decorations and any other seasonal purchases you might make.
Decide how you will fund your budget. If you haven’t already put money away, you will need to determine how much to take out of each paycheck in the next two months.
Use CASH! I can hear you groaning, but if you stop spending when your budgeted cash is gone, you will NOT go over budget!
If you feel that you are more disciplined, I would set aside the money in your checking account and track every expense right beside your budget. I like to start with my budget, subtract each purchase and keep a running total of the money I have left to spend on each person and item. This is a good method for online shopping as well.
Make adjustments as you go! You will always find that you spend more in some areas than you originally planned or you forgot some items entirely. I encourage you to get creative. The best gifts are those from the heart and not necessarily the most expensive.
Include some giving in your plan. The Christmas season is a great time to help others who need it most. Add these items on your budget because it really helps keep our spending in perspective and it will give you the freedom to give when you find a worthy cause.
Whatever you plan for your spending this year, do not finance Christmas on credit cards. Each year, Americans find themselves paying for Christmas for much of the new year. Beat the real “Grinch” this year and start the new year free from holiday debt!
Employers Income Tax Withholding. Ask employees whose withholding allowances will be different in 2008 to fill out a new Form W-4.
Employers Earned Income Credit. Ask each eligible employee who wants to receive advance payments of earned income credit during the year 2008 to fill out a Form W-5. A new Form W-5 must be filled out each year before payments are made.
November 12
Employees who work for tips. If you received $20 or more in tips during October, report them to your employer. You can use Form 4070.
November 15
Social security, Medicare, and withheld income tax. If the monthly deposit rule applies, deposit the tax for withholdings for October.Nonpayroll withholding. If the monthly deposit rule applies, deposit the tax for payments in October.
Employers Social Security, Medicare, and withheld income tax. File form 941 for the third quarter of 2007. This due date applies only if you deposited the tax for the quarter in full and on time.
November 30
Employers Indiana Withholding Tax - Pay any tax collected in October.
The IRS has decided to find all of those people who lie about how much they give to the Salvation Army in front of Walmart each Christmas season by requiring receipts for every donation. In the past, you were able to deduct cash contributions that were less than $250 without a receipt. However, this year you need to have a receipt, bank statement, credit card statement or canceled check for every penny you drop in the bucket if you want to deduct it on your tax return. Bank statements and credit card receipts must have the name of the charity, amount and the date posted. For contributions in excess of $250 you must have a receipt from the charity just as in prior years.
If you give by way of payroll deduction, keep your W-2 and a pledge card with the name of the charity. For payroll deductions of $250 or more, the pledge card or other document prepared by the donee organization must also include a statement that the organization does not provide goods or services in whole or partial consideration for any contributions made to the organization via payroll deduction.
In addition, they have also cracked down on the non-cash contributions of clothing and household items. As of August 17, 2006, any clothing or household items donated must be in “good or better condition”. How are we supposed to prove that our old sweaters were in “good or better condition”? One man’s junk is another man’s treasure, right? This standard allows the IRS to deny ALL clothing and household goods deductions. It has made it almost impossible for a taxpayer to sustain this deduction in an audit, even if it is legitimate. If you plan to deduct donations for these types of goods, you might want to take pictures of what you donate or get an appraisal, but who would do an appraisal on someone’s old jeans? It is quickly becoming apparent that these types of donations are just not going to be deductible. According to the IRS, American’s deducted $9 billion for these items on their 2003 tax returns. While some of that might be overstated, I assume that most of it is legitimate and much more is given that isn’t deducted. There are many people like myself who don’t even bother to keep track of these items. I would venture to say that these unreported donations would offset any fraudulent claims anyway.
I am pretty sure the deduction for contributions was put in place to encourage donations to charitable organizations. Will this new law discourage people from giving that $5 to the Salvation Army or prevent someone from giving a $10 bill to the American Red Cross? Perhaps, but I don’t think America is the most generous nation on earth because it is deductible on our tax returns. Keep giving but maybe you just need to write more checks!
UPDATE: For those who might doubt my last comment about the generosity of the American people, read this story about the donations for the people in California displaced by the wildfires… “Donations Pour in for Calif. Fire Victims”
