Take a Look Before Filing Your Taxes

Posted by Patty Manko on Tue, Mar 10, 2015 @ 01:49 PM

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Before filing your tax return, check your preparation by reviewing the 3 section checklist below.

I.   Organizing Your Paperwork for Tax Season

II.   FAQs

III.  Common Deductions Taxpayers Overlook

I. Organizing Your Paperwork for Tax Season

If you haven’t done it, now’s the time.

How prepared are you to prepare your 1040? The earlier you compile and organize the relevant paperwork, the easier things may be for you (or the tax preparer working for you) this winter. Here are some tips to help you get ready:

As a first step, look at your 2013 return. Unless your job, living situation or financial situation has changed notably since you last filed your taxes, chances are you will need the same set of forms, schedules and receipts this year as you did last year. So open that manila folder (or online vault) and make or print a list of the items that accompanied your 2013 return. You should receive the TY 2014 versions of everything you need by early February at the latest.

How much documentation is needed? If you don’t freelance or own a business, your list may be short: W-2(s), 1099-INT(s), perhaps 1099-DIVs or 1099-Bs, a Form 1098 if you pay a mortgage, and maybe not much more. Independent contractors need their 1099-MISCs, and the self-employed need to compile every bit of documentation related to business expenses they can find: store and restaurant receipts, mileage records, utility bills, and so on. And, of course, there’s the Affordable Care Act; if you got coverage through your state or federal marketplace, Form 1095-A is needed to fill out Form 8962.1

 

In totaling receipts, don’t forget charitable donations. The IRS wants all of them to be documented. A taxpayer who donates $250 or more to a qualified charity needs a written acknowledgment of such a donation. If your own documentation is sufficiently detailed, you may deduct $0.14 for each mile driven on behalf of a volunteer effort for a qualified charity.1

Or medical expenses & out-of-pocket expenses. Collect receipts for any expense for which your employer doesn't reimburse you, and any medical bills that came your way last year.

If you’re turning to a tax preparer, stand out by being considerate. If you present clean, neat and well-organized documentation to a preparer, that diligence and orderliness will matter. You might get better and speedier service as a result: you are telegraphing that you are a step removed from the clients with missing or inadequate paperwork.

Make sure you give your preparer your federal tax I.D. number (TIN), and remember that joint filers must supply TINs for each spouse. If you claim anyone as a dependent, you will need to supply your preparer with that person’s federal tax I.D. number. Any dependent you claim has to have a TIN, and that goes for newborns, infants and children as well. So if your kids don’t have Social Security numbers yet, apply for them now using Form SS-5 (available online or at your Social Security office). If you claim the Child & Dependent Care Tax Credit, you will need to show the TIN for the person or business that takes care of your kids while you work.1,3

 

II.  FAQs

How long should you keep tax returns? The IRS statute of limitations for refunds is 3 years, but if you underreport taxable income, fail to file a return or file a claim for a loss from worthless securities or bad debt deduction, it wants you to keep them longer. You may have heard that keeping your returns for 7 years is wise; some tax professionals will tell you to keep them for life. If the tax records are linked to assets, you will want to retain them for when you figure out the depreciation, amortization, or depletion deduction and the gain or loss. Insurers and creditors may want you to keep federal tax returns indefinitely.4

Can you use electronic files as records in audits? Yes. In fact, early in the audit process, the IRS may request accounting software backup files via Form 4564 (the Information Document Request). Form 4564 asks the taxpayer/preparer to supply the file to the IRS on a flash drive, CD or DVD, plus the necessary administrator username and password. Nothing is emailed. The IRS has the ability to read most tax prep software files. For more, search online for “Electronic Accounting Software Records FAQs.” The IRS page should be the top result.5

How do you calculate cost basis for an investment? A whole article could be written about this, and there are many potential variables in the calculation. At the most basic level with regards to stock, the cost basis is original purchase price + any commission on the purchase.  Here' a basic example:

So in simple terms, if you buy 200 shares of the Little Emerging Company @ $20 a share with a $100 commission, your cost basis = $4,100, or $20.50 per share. If you sell all 200 shares for $4,000 and incur another $100 commission linked to the sale, you lose $200 – the $3,900 you wind up with falls $200 short of your $4,100 cost basis.5

Numerous factors affect cost basis: stock splits, dividend reinvestment, how shares of a security are bought or gifted. Cost basis may also be “stepped up” when an asset is inherited. Since 2011, brokerages have been required to keep track of cost basis for stocks and mutual fund shares, and to report cost basis to investors (and the IRS) when such securities are sold.

 

III.  Common Deductions Taxpayers Overlook

Make sure you give them a look as you prepare your 1040.

Every year, taxpayers leave money on the table. They don’t mean to, but as a result of oversight, they miss some great chances for federal income tax deductions.

While the IRS has occasionally fixed taxpayer mistakes in the past for taxpayer benefit, you can’t count on such benevolence. As a reminder, here are some potential tax breaks that often go unnoticed – and this is by no means the whole list.

Expenses related to a job search. Did you find a new job in the same line of work last year? If you itemize, you can deduct the job-hunting costs as miscellaneous expenses. The deductions can’t surpass 2% of your adjusted gross income. Even if you didn’t land a new job last year, you can still write off qualified job search expenses. Many expenses qualify: overnight lodging, mileage, cab fares, resume printing, headhunter fees and more. Didn’t keep track of these expenses? You and your CPA can estimate them. If your new job prompted you to relocate 50 or more miles from your previous residence last year, you can take a deduction for job-related moving expenses even if you don’t itemize.1

Home office expenses. Do you work from home? If so, first figure out what percentage of the square footage in your house is used for work-related activities. (Bathrooms and other “break areas” can count in the calculation.) If you use 15% of your home’s square footage for business, then 15% of your homeowners insurance, home maintenance costs, utility bills, ISP bills, property tax and mortgage/rent may be deducted.2

State sales taxes. If you live in a state that collects no income tax from its residents, you have the option to deduct state sales taxes paid the previous year.1

Student loan interest paid by parents. Did you happen to make student loan payments on behalf of your son or daughter last year? If so (and if you can’t claim your son or daughter as a dependent), that child may be able to write off up to $2,500 of student-loan interest. Itemizing the deduction isn’t necessary.1

Education & training expenses. Did you take any classes related to your career last year? How about courses that added value to your business or potentially increased your employability? You can deduct the tuition paid and the related textbook and travel costs.3,4

Those small charitable contributions. We all seem to make out-of-pocket charitable donations, and we can fully deduct them (although few of us ask for receipts needed to itemize them). However, we can also itemize expenses incurred in the course of charitable work (i.e., volunteering at a toy drive, soup kitchen, relief effort, etc.) and mileage accumulated in such efforts ($0.14 per mile, and tolls and parking fees qualify as well).1

Armed forces reserve travel expenses. Are you a reservist or a member of the National Guard? Did you travel more than 100 miles from home and spend one or more nights away from home to drill or attend meetings? If that is the case, you may write off 100% of related lodging costs and 50% of meal costs  and take a mileage deduction ($0.56 per mile plus tolls and parking fees).1

Estate tax on income in respect of a decedent. Have you inherited an IRA? Was the estate of the original IRA owner large enough to be subject to federal estate tax? If so, you have the option to claim a federal income tax write-off for the amount of the estate tax paid on those inherited IRA assets. If you inherited a $100,000 IRA that was part of the original IRA owner’s taxable estate and thereby hit with $40,000 in death taxes, you can deduct that $40,000 on Schedule A as you withdraw that $100,000 from the inherited IRA, $20,000 on Schedule A as you withdraw $50,000 from the inherited IRA, and so on.1

The child care credit. If you paid for child care while you worked last year, you can qualify for a tax credit worth 20-35% of that amount. (The child, or children, must be no older than 12.) Tax credits are superior to tax deductions, as they cut your tax bill dollar-for-dollar.1

Reinvested dividends. If your mutual fund dividends are routinely used to purchase further shares, don’t forget that this incrementally increases your tax basis in the fund. If you do forget to include the reinvested dividends in your basis, you leave yourself open for a double hit – your dividends will be taxed once at payout and immediate reinvestment, and then taxed again at some future point when they are counted as proceeds of sale. Remember that as your basis in the fund grows, the taxable capital gain when you redeem shares will be reduced. (Or if the fund is a loser, the tax-saving loss is increased.)1

As a precaution, check with your tax professional before claiming the above deductions on your federal income tax return.

1 - bankrate.com/finance/taxes/7-ways-to-get-organized-for-the-tax-year-1.aspx [2/18/15]

2 - bankrate.com/finance/taxes/premium-tax-credit.aspx [1/6/15]

3 - irs.gov/Individuals/International-Taxpayers/Taxpayer-Identification-Numbers-%28TIN%29 [2/2/15]

4 - irs.gov/Businesses/Small-Businesses-&-Self-Employed/How-long-should-I-keep-records [1/27/15]

5 - irs.gov/Businesses/Small-Businesses-&-Self-Employed/Use-of-Electronic-Accounting-Software-Records;-Frequently-Asked-Questions-and-Answers [2/9/15]

6 - turbotax.intuit.com/tax-tools/tax-tips/Rental-Property/Cost-Basis--Tracking-Your-Tax-Basis/INF12037.html [2014]

Material for this blog was compiled from material prepared by MarketingPro, Inc., and does not necessarily represent the views of the presenting party, nor their affiliates. This information has been derived from sources believed to be accurate. Please note - investing involves risk, and past performance is no guarantee of future results. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment.  

   

 

Tags: Taxes and special needs families

Tax Tips for People with Special Needs and Their Families

Posted by Patty Manko on Fri, Mar 21, 2014 @ 12:32 PM

tax time resized 600April 15th is right around the corner, which means that it is time to file yet another personal income tax return. Although some people with disabilities may not have enough income to necessitate an income tax filing, most people will need to file a return based on their earned and unearned income. Beneficiaries and trustees of special needs trusts may have additional filing requirements. If you or a loved one think that you need to file a return, here are several tax tips to keep in mind that could save you time and money.

Not All Income Is Taxable

Although the rules about taxable income can be complicated, several provisions affecting people with disabilities are easy to understand. First, Supplemental Security Income (SSI) benefits are not considered taxable income. Second, if a beneficiary receives only Social Security Disability Insurance payments (SSDI), and no other income from any other source, then those SSDI benefits are probably not taxable either. Third, funds paid through a qualified Dependent Care Assistance Program are not included as taxable income, up to certain limits. Finally, Veterans Administration disability benefits do not count as taxable income for the beneficiary.

Special Deductions for People with Disabilities Are Available

For starters, taxpayers who have visual impairments may qualify for a higher standard deduction than the average taxpayer, depending on their level of impairment. All other taxpayers with disabilities who itemize their deductions may be able to take advantage of deductions for medical expenses, including deductions for special telephones for people with hearing impairments, wheelchairs and motorized scooters, guide dogs or other animals that aid people with disabilities, the cost of some schools that provide special education services for relieving mental or physical disabilities, and premiums on long-term care insurance, up to certain amounts. People with disabilities who require special goods or services in order to work may also be able to deduct these expenses as business expenses, provided the good or service has not already been counted as a medical expense.

Tax Credits Can Help People with Disabilities and Their Relatives

Several types of tax credits apply to people with disabilities. If you care for a child or other dependent person with disabilities, you may qualify for a child and dependent care tax credit for up to 35 percent of your expenses related to his or her care. People under 65 who have retired with a permanent disability can also claim a special tax credit that is also available to the elderly. Many people with disabilities who work and who do not have children who qualify for an Earned Income Tax Credit may still qualify for the credit themselves. If they obtain a tax refund due to an Earned Income Tax Credit, the refund will not count against the taxpayer for purposes of determining SSI or Medicaid eligibility. Also, parents of a child with disabilities may also be able to claim an Earned Income Tax Credit, depending on the family's income.

Special Needs Trusts Have Special Rules

Tax season can be especially difficult for the trustees of special needs trusts because the tax rules for trusts vary greatly depending on the type of trust created. As a very general rule, income generated by a first-party special needs trust (a type of trust designed to hold a person with special needs' own funds) is typically considered to be taxable income attributable to the trust beneficiary, regardless of whether the income is actually distributed from the trust. On the other hand, a third-party special needs trust established by a friend or relative for a person with special needs may generate taxable income for the grantor of the trust, the beneficiary of the trust, the trust itself, or all three at once, depending on the circumstances. Furthermore, in certain situations, trustees have to file income tax returns for the special needs trust itself, and other, more complicated forms pertaining to distributed income may have to be prepared for the beneficiary.


Because tax time often creates more problems than solutions, it is best to consult with your qualified special needs planner about these complicated questions, even if you or your family are already working with a good accountant.


This material was prepared by the Academy of Special Needs Planners
This information is not intended to be a substitute for specific individualized tax advice. We suggest that you discuss your specific tax issues with a qualified tax advisor.

 Contact us for  further information

 

Tags: Taxes and special needs families

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