IRS Is Focusing on Schedule C Filers
By Earnest Young
In the last few tax years IRS has been paying more attention to taxpayers who file a schedule C. These taxpayers are basically those who operate small, incorporated businesses.
According to Mark Everson, the IRS commissioner, the increase focus will be on those individuals who are filing 1040s and are operating businesses that are not incorporated. He Said, "the biggest portion (of unpaid tax) is in underreporting of income by individuals. Typically, that's individuals who are filing Schedule C."
Evidence has shown that some of these IRS audits can be pretty in depth in respect to reviewing bank records, computer files, and receipts. It is believed that Schedule C filers are more likely than the average taxpayers to overstate expenses and understate income. In many cases Schedule C filers claim personal expense, such as gas mileage, as business expense and the IRS is very much aware of these underpaid taxes. However, taxpayers are better off having expense on a Schedule C than having it on a Schedule A as an itemized deduction.
One reason why it is prudent for small business owners to prepare for a tax audit is the question of Social Security taxes. New business owners must remember that essentially the net income that they are going to report on the Schedule C is going to be treated as self-employment income and subject to the self-employment tax, says, Mel Schwarz of Grant Thornton. It is possible that you will be subjected to Social Security tax on the first $94,200 of wages in 2006 or $97,500 in 2007.
In view of this focus by the IRS, Schedule C filers should try to keep a good record of business income and expense receipts and prepare their documents in the case of an audit. If you are claiming deduction on items such as office supplies, organize you records regarding that purchase. In the case of a vehicle used for business purposes, keep an updated log including the dates the mileage was incurred and the destination driven.
The IRS will focus on issues such a whether an equipment or supply should be classified as a personal expense or business expense depending on what it is used for and for what percent of the time. To qualify for the deduction one has to use the item for at list 50 percent of the time. For example, a computer that is used 55 percent of the time for personal reasons cannot be claimed on Section 179 to write off the cost of that asset. Section 179 is a tax rule that permits companies to deduct up to $108,000 for the cost of assets that are used in their business which was bought during the tax year. It is important to note that not all assets are covered under Section 179. Real estate, for instance, can not be covered. Section 179 is geared towards small businesses and is used in the place of having to maintain depreciation records.
Small business owners have a host of options that they can select in minimizing their tax liability and increasing their tax return. They can purchase office equipment and supplies, computer, and other business expenses before the end of the year. It is recommended that all business expense get paid prior to year end for them to be deductible. 100 percent of certain business expenses can be written off in the first year. In addition, in the case of a vehicle, you are limited to a first-year depreciation of $3060. However, you can deduct up to $25,000 for some SUVs.
Defer billing customers and postponing income until early January or to bill clients so late in December that you would not be in receipt of income until January is a common way of reducing your income for the year, thus reducing your adjusted gross income (AGI). Before small business owners attempt to take advantage of tax deductions it is recommended that they consult a tax/accounting professional.
Earnest Young is an accounting and tax writer for http://accentaccounting.net
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Take Time to Trim a Few Bucks of Your Taxes
By Earnest Young
It’s prudent taxpayers to plan ahead for credits and deductions
Thanks to the 2006 federal tax credit many people are able to buy their dream car. This credit applies to a variety of hybrid vehicles, but unfortunately it begins to phase out after the manufacturer sells more than 60,000 vehicles. After that the credit shrinks, and then it just phase-out. Research shows that hybrid owners can save up to $40 of gas cost a week.
Among taking such measures like making charitable donations, contributing to 529 college savings and 401(k) plans, and pruning the stock portfolio, buying a hybrid car is another way taxpayers can take before the end of the year to reduce their tax bills come April. “Just because you aren’t rich doesn’t mean it’s not worth it to sit down to see what you’ve done during the year, and to see what you can still do to save yourself some money,” said Harris Abrams, ‘RIA tax analyst with Thomson Tax & Accounting.
December is a good time to calculate your likely tax liability for 2006 and come up with an estimate for 2007, too. Once you are finished with your 2006 estimates, consider whether your income and deductions are likely to change in the coming year. Here are some other steps to help you reduce your April tax bill.
Make charitable donations:
You will have to keep records of what you donate, and according to Internal Revenue Service, the items have to be in good condition.
Spend flexible spending accounts:
Now is the time to use the funds in your flexible spending accounts or lose them.
Prune portfolio:
If you find yourself with more capital gains than you anticipated, see whether you have any losing investments you can sell.
Donate to 529 plan:
If you have opened a 529 plan and are married, you can deduct up to $10,000. If you are a student, you can deduct up to $5,000. For more information, see nysaves.org.
Contribute more to 401(k) plan:
Employees can sock away up to $15.000 ($20,000 if they are 50 or older) to a 401(k). If you have a little cash left over, consider increasing your contribution this month.
Prepay mortgage as well as state and local taxes:
Consider prepaying your mortgage, state income taxes or local property taxes so you can add to your deductions for 2006.
Pay spring semester tuition:
Those planning to take classes in the spring should consider paying their tuition this month and claiming the Lifetime Learning credit.
Adjust withholdings:
If you’ve estimated your tax liability and found it much different from what you’ve paid, you may want to change your withholding.
Taking these steps now can make a big difference on April 15, experts said. According to Earnest Young of Accent Accounting and Taxes "when you get to April it is too late to do any planning."
Accent Accounting & Taxes: (http://accentaccounting.net) Accounting for small businesses and individual tax
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Financial Planning Advice: 401(k) Rollover Information Your Financial Planner May Be Hiding From You
By James Lange
The recent Pension Protection Act offers good news for the non-spouse beneficiary of a 401(k). It is now possible to arrange a trustee-to-trustee transfer of an inherited 401(k) to an inherited IRA. This is great news for the consumer, and represents a significant change from the old law.
The new law basically offers inherited 401(k)s the same tax treatment as inherited IRAs. The 401(k) owner should now make the decision to rollover or not to rollover based on investment reasons, not tax reasons.
401(k) Rollover Distribution Background
Under the old tax laws, leaving money in a 401(k) to an heir other than your spouse carried the potential for a tax nightmare. Rules governing 401(k)s vary according to a particular company’s plan documents. Often plan documents stipulated that if you left your 401(k) to an heir, other than your spouse, he or she would have to take distribution of the inherited 401(k) and pay income taxes on the entire distribution the year after the death of the original owner.
On a $1M inherited 401(k) this would mean paying $350,000 in taxes immediately, and the remaining $650,000 would be outside of the tax-deferred environment. Inherited IRAs did not have that limitation. An heir with a $1M inherited IRA could take the necessary minimum required distributions and maintain the money in the tax-deferred environment—stretching the IRA’s life. And the “stretch IRA” would continue to grow tax-deferred, and could be worth $1M or more over time for the non-spouse heir.
Therefore, the best tax advice used to be “roll the money into an IRA.”
The Roll The Money Into An IRA Problem
The reason people resisted the advice and rolling the 401(k) into an IRA is that many of these old 401(k) plans have a great fixed income fund as one of their components. Many of these old fixed income funds are paying returns in excess of today’s fixed income or bond funds and many of the old timers continue to have money in these fixed income funds of their 401(k) 10 years or more after they retire.
The old law forced a choice between offering the non-spouse heir the tax benefits of the stretch IRA and the owner’s interest in keeping the money in the better-than-average fixed income fund in the 401(k). Maybe some hotshot investor could show me a much better investment than these old funds, but with my experience, I would rather have money in many of these fixed income funds (including TIAA for the 403(b) crowd) than other bond or fixed income funds.
The New Law and My Solution: Make the Best of Both Options
I am still in favor of managed money if you find a low fee, ethical advisor with a great track record. Now, however, I would likely recommend retaining the fixed income portion of the portfolio in the 401(k). The stock and growth portion of the 401(k) could be rolled into an IRA to take advantage of the broader spectrum of investment options offered through IRAs. In either case the non-spouse heir will not have to worry about the tax consequences if he or she is lucky enough to inherit either the IRA or the 401(k).
As one of the country’s top IRA experts and author of Retire Secure!, James Lange, can keep you from jeopardizing your family’s security. He has developed tax-savvy retirement and estate plans for over 800 U.S. citizens with appreciable assets in their IRAs and 401(k) plans. Your family’s future depends on you signing up now for his monthly Retire Secure newsletter at http://www.paytaxeslater.com
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Federal Income Tax Filing Online
By Frank W Ellis
It's time to get started on your Federal income tax return, and get your tax refund on its way into your bank account. You would be surprised at how fast you can get your refund by doing your Federal income tax filing online. Filing online is the easiest and fastest way to prepare and file your taxes.
Electronic income tax filing is a fast, accurate and convenient way to file your tax return with the IRS over the internet. Over 70 million taxpayers are expected to file their Federal income tax online this year. From tax calculators, to all the forms you're likely to need, tax filing online has it all.
Here are a few Federal income tax filing tips:
1. Look for a tax filing website that offers a free trial of their services so that you can see if their program is right for you.
2. Look for a tax filing website that has tax information and help you can access, if you have questions about a particular deduction or credit.
3. Look for a tax filing website that has an easy to follow interview system for obtaining your information.
4. If you have a tax refund due, be sure to have the funds direct deposited into your bank account. You can usually have your money in 10 to 16 days from the time you file
Whether you are filing a 1040ez or a more complex tax form, most online tax filing programs will be able to handle all of your needs. Whatever the case, I'm sure you'll find that Federal income tax filing online, is the best way to do your taxes. Happy Filing!
You can do your Federal income tax filing at Turbo Tax Online. They have all the tools you need for a larger, faster and easier tax refund. Prepare & file taxes online with the help of Turbotax and see how much bigger and faster your tax refund can be.
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Tax Planning Tip for 2007 - Income
By Richard Chapo
The beginning of a new year is a time for contemplation, reflection and doing a little planning. As 2007 quickly approaches, you need to give some thought to your tax planning for the year.
Tax Planning Tip for 2007 – Income
If you complain because you feel you are paying far too much in taxes, you may be right. So, is the government giving you the once over when it asks for that check in April? Well, it is probably is. On the other hand, there is a person you know much better who is often also to blame. Who? YOU!
The key to minimizing your taxes is to take the time to do tax planning. This planning should be done in January for the upcoming year. “Tax planning” is not sitting down with your accountant on April 14th and trying to reduce your tax bill. If you act proactively, and ahead of time, you can do a lot to keep your money out of Uncle Sam’s hands.
As we enter 2007, you should begin to contemplate your tax planning for the year. At this point, I would typically go into a long spiel about maximizing deductions, retirement accounts and so on. While you should still do all of these things, the 2007 tax year is shaping up to be something a bit different. Why? Politics, my friend.
As you well know, the recent elections resulted in a major political change in Washington. Out went the Republican majority and in came the Democrat majority. In both houses! Regardless of your politics and whether you think this is a good or bad thing, the tax change winds are beginning to blow in the wind.
If you have been watching the fiscal figures for the federal government, you know our national debt has been expanding at an alarming rate. While there are a variety of reasons for this, the combination of tax cuts and an expensive war are certain two of the primary ones. Now that President Bush does not have a friendly Congress and is a lame duck, you should expect an effort to address the red ink. Since no exit from Iraq seems to be on the horizon, it is reasonably to suspect we will see taxes raised. This probably will not happen until later in the year or 2008, but you should be planning for it now.
When putting together you tax plan for 2007, you need to consider how you can best take advantage of the current low income tax rates. Assume you have some source of revenues or assets that trigger income tax payments when you receive the money or sell them. If any of these are going to occur in 2008 or beyond, you might consider trying to move them forward into 2007. By doing so, you can take advantage of the current rates instead of getting caught with your pants down when rates go up.
Richard A. Chapo is with BusinessTaxRecovery.com - providing free href="http://www.businesstaxrecovery.com/tax-tips">tax tips.
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Tax Planning: Legal And Savings Issues
By Alexander Gordon
Tax planning has been in the eye of the storm recently, owing to the many corporate scandals that have shaken the market. If you’re small business has franchisees in another country that makes tax planning even more difficult. To avoid problems with tax authorities, tax planning should be made as a part of corporate planning.
There are two aspects to corporate tax planning; legal and tax breaks. While every business owner wants tax breaks, tax planning should always be done, keeping the legality of it in mind.
Legal Tax Planning;
How to ensure that the tax breaks you are applying for are legal? How to ensure that your corporate tax planning strategies are not crossing legal boundaries? These are important issues in corporate tax planning, and here are some ways to address them.
1) Appoint A Tax Advisor
Your tax advisor should be able to guide you in tax planning, while ensuring that you unintentionally do not do anything illegal.
2) Detailed Report
Make a detailed report about your income to the tax advisor. This will help him or her take informed decision regarding tax-planning strategies for your business.
3) Customization
Tax strategies that fit another business may not fit yours. Customized tax planning enhances your business.
4) Records
Keep proper records of the tax-planning document so that you can revise them and go through them whenever you need to.
5) Ensure legality
Hire a lawyer and experience tax consultant when you draw up tax plans. You do not want the authorities knocking on your door for implementing aggressive tax schemes.
Once you have taken care of the legal issues of tax planning, you need to come up with a good tax plan. Here are some ways to save on taxes without crossing the legal barrier.
Tax planning: How to Save Taxes;
1) Capital Losses
If you suffer capital losses, then the tax will be calculated against capital gains in the next financial year. If you still suffer capital losses, then you can reclaim the taxes paid when you had capital gains on your business.
2) Share your income with a lower paid partner, so that he or she can invest his or her income and earn investment profits. Your partner will then need to pay just the investment tax.
3) Tax Breaks
Utilize all possible tax breaks. Most businesses are not aware of the taxes breaks that are available to them. Tax breaks are especially aimed towards the growth of small businesses.
The government has many special schemes and tax breaks for the benefit of small businesses. This reduces the need for aggressive tax measures that fall into the grey area. The best tax planning method is to keep it legal and utilize all the tax breaks that the tax authorities allow. If you need to know more about tax planning for your small business, you should consult a tax advisor who specifically counsels small business owners.
Alexander Gordon is a writer for www.smallbusinessconsulting.com - The Small Business Consulting Community. Sign-up for the free success steps newsletter and get our booklet valued at $24.95 for free as a special bonus. The newsletter provides daily strategies on starting and significantly growing a business.
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Estate Tax Planning
By Max Bellamy
Estate tax is the levy by the government against the taxable estate of a deceased person. Taxable estate means gross estate reduced by allowable deductions. Gross estate means total estate comprising the value of all assets owned by the deceased at the time of death. IRS determines taxable estate by subtracting from gross estate certain allowable deductions like funeral expenses paid out of the estate, debts outstanding at the time of death, estate administration expenses, charitable, marital, and deductions
The assets are valued at their ‘fair market value’, or the price they would fetch if sold in an open market. The personal representative of the benefactor can choose the valuation date for ascertaining the value of the assets. It can be either the date of the death of the benefactor, or six months later. This alternate valuation date is allowed only if it results in lower tax incidence.
The estate becomes liable for tax with the death of the benefactor and is usually paid out of the estate before distributing the property to the beneficiaries. Unless an extension is obtained, the estate tax is payable within nine months from the death of the benefactor. The personal representative of the benefactor should file Form 706 in evidence of the assets comprising the estate, and Form1041 to report the income generated by the estate.
For the year 2005, there’s no estate tax on the first $1.5m of the net estate. This basic exemption limit will be increased to $3.5m in 2009. The estate tax will be totally abolished in 2010 and reinstated to an exemption of $1m in 2011.
Estate tax can be reduced by following certain techniques. One is gifting the assets during one’s life time. From 2006, Federal tax law permits each individual to gift $12,000 per year to as many people as one wants without incurring gift tax. Instead of giving a lump sum after death, one can give such annual gifts when alive and reduce the taxable estate. One can also gift stocks, a percentage of ownership in real estate, or business as long as it is below $12,000.
Any transfer of assets to spouse during life time is free from estate and gift tax irrespective of the amount. But the surviving spouse must remarry and transfer the entire estate to the new spouse to enjoy fresh unlimited marital deduction. Also it is customary to create bypass trusts, wherein property is held in trust for children while still providing for the surviving spouse, life insurance trusts, irrevocable trusts handling the property outside the estate, and donations to qualified charities.
Estate Planning provides detailed information on Estate Planning, Estate Planning Attornies, Will Estate Planning, Estate Tax Planning and more. Estate Planning is affiliated with Filing Chapter 11 Bankruptcy.
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The Seven Deadly Tax Sins: Commonly Missed Deductions
By Sandra N. Salter
It's that time again, the April 15 tax deadline is looming large. If youre like most people, you havent gathered all of your tax records, let alone filled your return.
Before you dig in and get started, take this opportunity to first review a list of a few tax deductions to which you may be entitled if you itemize deductions but most people overlook. Many of these deductions are subject to various limitations, so consider getting professional help from your tax advisor and accountant to determine which deductions you qualify for and which items apply to your specific circumstances. Remember, there are hundreds of deductions throughout the tax laws; many of them can be quite obscure but also quite lucrative. Here are seven commonly missed deductions to keep top of mind:
About The Author
Sandra N. Salter, Personal Finance Expert, is an American Express Financial Advisor and owner of American Express Financial Advisors Branch Office in Newark, NJ. She focuses on providing comprehensive financial planning services paying close attention to the long-term financial health of their clients, building customized financial plans that help clients achieve both short-term and long-term goals. The types of services she offers clients include: Income Tax Planning, Saving and Investing for Retirement, Working with Retirees, Financial Strategies for Small Business, Domestic Partner Planning, Risk Protection Planning, Estate Planning, Charitable Giving , Investment Strategies for Education , Asset Allocation and Comprehensive Financial Planning, among other areas. They can be reached at sandra.n.salter@aexp.com.
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