Did You Know?

There are deduction limitations on some autos used for business?  However, full size trucks and vans are fully deductible!

The IRS now requires a receipt, cancelled check or bank statement for every charitable donation?  Make sure you hang on to them!

You can pay estimated taxes online. Visit www.eftps.com for more details.

Estimated Payments

Have you paid or withheld enough tax this year? If your income has been changing in the last year or two, it is time to review and ensure you have paid or withheld enough tax before the end of 2008.

I have found that typically people do withhold or pay enough federal tax, but it is the state taxes that seem to “getcha” at the end of the year.  If you need me to review your current tax situation, you will just need to provide the following information:

Most recent paystubs
Other income (interest, investments, business)
Estimated deductions

I can help you determine if you need to pay any additional before the end of the year and avoid those nasty underpayment penalties!

It’s time to Save…

It has been a rough year in many segments of the economy.  During slow economic times, it makes us want to cut our costs and save as much as possible.  As with all challenges in life, we can use it as an opportunity to improve and grow.  Look at it this way, if you are looking to buy a gas gussling vehicle, now is the time to get a great deal!

Kiplinger.com gives ideas on how to Save Money on Practically Everything from food to investing.  They also point out that you should change your withholdings if you are continually getting a big refund from Uncle Sam.  You can use the IRS withholding calculator to determine what you need to withhold for the rest of the year.

Does all of the talk and spin regarding the economy and election leave your head swimming?  One of my favorite economists, Walter E. Williams makes some reading recommendations for those of us who need to understand the issues of the day.

2008 Tax Changes

The biggest impact change in 2008 is increased depreciation deductions.  When you buy property that will be used for more than one year, the IRS requires you to depreciate that property over a predetermined number of years.  However, small businesses qualify for the section 179 expense deduction.  Section 179 allows taxpayers to deduct the full amount of the purchase in the first year, but it cannot be used to create a loss.  The total amount of section 179 allowed in 2008 is increased to $250,000.

If you can’t take advantage of the section 179 deduction because of the business income limits, there is also bonus depreciation where you are allowed to deduct 50% of the total cost during 2008.  This is similar to the bonus depreciation deduction enacted after September 11, 2001.  So, if you are a business owner needing to buy property; 2008 may be the year to take advantage of these additional tax deductions.

Business mileage deduction amounts have increased to $.50.5/mile for obvious reasons.

2007 Individual Tax Tips

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.

Record Keeping Tips: Automobiles

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.

1. Write down the beginning odometer reading. This is the beginning of the year (so do it now!)
2. 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.
3. 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.
4. 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.
5. 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?!
6. 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.
7. 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.

Deduction Primer: Auto Expense Methods

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.

Links to Make You Think

Here are some interesting tidbits from around the web today.

1. 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?
2. 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.
3. 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.
4. 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?

Important January Dates

• 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.

1099, 1098… Blast off into 2008!

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)!