Month: November 2012
Time to Get Your Mileage Log Ready
Do you claim auto expenses for your business on your taxes? If the answer is no, you should probably skip this blog post. If the answer is yes, this is exactly the post you want to be reading.
I do a lot of audit work. Lots of audit work. Every audit that I’ve ever worked on where the taxpayer claimed mileage the IRS asked to look at the mileage log. Every single one! Small business owners are more likely to get audited than wage earners and most small business owners claim mileage. So—if you’re a small business owner, you need a mileage log.
So here is your new mileage log.
All you have to do is fill it in with the miles and the appointments. It’s all set up and formatted as an Excel spreadsheet. There’s even room for other auto expenses in case you’re using your actual costs instead of mileage.
Did you know that you have to keep track of your miles even if you are claiming your actual expenses? It’s true. Often, people come to me with their auto receipts and I can’t do anything for them without their mileage. Whether you claim mileage or actual expenses, you must have a mileage log.
In order to do your mileage log correctly, you’ll need your odometer reading from the beginning of the year and from the end of the year. I like to take my readings on New Year’s Day during the Rose Bowl Parade. I started 2012 out with 81 miles on my car (I got a new car at the end of 2011.) Now I’m up to 8903. I should reach 9700 by the end of the year. Of those miles, about 5,000 of them are for business.
If I’m claiming straight mileage, I would take the 5000 miles times the 55.5 cents per mile that I’m allowed to claim for a deduction of $2,775. (The mileage rate for 2018 is 54.5 cents per mile.)
If I’m claiming actual expenses, then I’d take the 5,000 business miles I drove and divide that by the 9610 actual miles I drove during the year to get the percentage of my expenses that I could deduct. 5,000 divided by 9610 = 51.98%. So I’d total up all my gas and maintenance expenses and figure the depreciation and multiply that all by 51.98% to get the right dollar amount.
So you see, you can’t claim your actual expenses without having the mileage to figure the percentage.
Feel free to use it. Copy it. Give it to friends. It’s okay. We left the year off so that you can use it for multiple years if necessary. We’d like you to use it when you have us do your taxes, but if you use someone else’s, that’s okay. You can always use our mileage log. The point is that it is very important to have a mileage log for your taxes that we don’t care who uses it. It’s free. We’re not even asking you to sign up for anything.
If you’re claiming auto expenses on your tax return this year, you need to use a mileage log. If you don’t already have one, here’s one for you.
What’s New with the Earned Income Tax Credit? You Need to Know This
If you usually claim the Earned Income Tax Credit (EIC) then you need to know about the new rules. Although the dollar amounts of the EIC have remained the same, the reporting requirements have changed dramatically. If you have your taxes done by a professional—then you need to be prepared for the additional paperwork.
So what’s different? It’s the new page 4 of Form 8867—Paid Preparer’s Earned Income Credit Checklist (http://www.irs.gov/pub/irs-pdf/f8867.pdf). That’s the form that tax preparers have to fill out and send in along with your tax return. The quick and dirty summary is: if a tax preparer doesn’t ask enough questions and fails to get enough information before submitting your EIC tax return, she’ll be subject to a $500 fine. Ouch. That’s $500 per tax return. A few bad tax returns can put your tax preparer out of business.
So what’s on this page 4? Well the first item is proving that the child you’re claiming EIC for really lives with you. Here’s what you can use to prove your child lives with you:
- School records or statement
- Landlord or property management statement
- Health care provider statement
- Medical records
- Child care provider records
- Placement agency statement
- Social service records or statement
- Place of worship statement
- Indian tribal official statement
- Employer statement
You don’t need to have all of these things, but you’ll need at least one thing to show your child lives in your house. The school records are probably the easiest if your child is of school age. For me, as a tax preparer, I would accept your child’s last semester report card as evidence of residency as long as the report card has your home address on it.
If you are claiming a disabled child, you’ll need to prove the disability. Here are the documents for that:
- Doctor statement
- Other health care provider statement
- Social services agency or program statement
So with a disability, you have a double issue—proving residence and the disability. Although to be quite honest, I suspect that these statements would also include a home address on them and serve a duel purpose.
And if you’re self-employed, you’re going to need to prove you really have some sort of business with the following records:
- Business license
- 1099MISC forms
- Records of gross receipts
- Income summary
- Expense summary
- Bank statements
These records are pretty standard for anyone who is self employed anyway so this shouldn’t be a burden. Bottom line here is—if you have a business, you need to run it like a business and keep proper business records.
In addition to the new paperwork requirements, of course you’re still going to have to show you and your children’s social security cards. Also, if you’re getting a bank product (where you pay for your tax preparation out of your refund) you’ll need to have a driver’s license or state ID card with your correct current address on it.
The IRS has already announced that people can expect their refunds to be delayed this year. For the fastest possible refund, you want to make sure that you’ve got all of your paperwork together before you even head to the tax office.
Be sure to check out http://www.eitc.irs.gov/central/main/ to answer any EITC questions you may have. Or call us and we would love to help.
Top Tips to Prepare 1099-MISC Forms on Your Own
The 1099-MISC form is what you need to give to a contract laborer if you pay them over $600 in the course of the year. There’s a whole new emphasis on reporting and so many more businesses are finding that they need to be issuing 1099s. But there’s a lot of confusion about how.
A few years ago I was at the IRS office near my house asking if they had any of the new 1099-MISC forms that I could have. “What do you want them for?” The IRS agent asked me. So I explained to her that I was teaching a class about 1099s and wanted to have the actual forms to hand out to the class.
“Oh thank God!” She said. Now, I work with the IRS a lot. I do audits and debt resolution, and although I genuinely like most of the agents I get to work with, I can assure you that “Oh, thank God,” is not a phrase used when the IRS is dealing with me. (Unless it’s used as “Oh thank God she’s gone now, but that’s about it.)
So I asked her why she was so excited that I was teaching a 1099 class and she told me about all the mistakes that they see and the problems they have with bad 1099s. “Somebody’s got to teach this stuff,” she told me. So I figured it would make for a good blog topic.
The Basics
Here’s a link to see the 1099-MISC form. 1099MISC If you’re the business owner, you need to issue the 1099 to the recipient by January 31. New for 2017 – you must submit the 1099 to the IRS by January 31 also.
My directions here are just an overview; here are the official IRS directions: IRS 1099 Directions If you have questions, that’s the best place to look.
The Quick and Dirty
Generally, when you prepare a 1099-MISC you’ll put the dollar amounts in box 7 for non-employee compensation. If you’re preparing a 1099-MISC for any other reason, you should check the rules to make sure you’re using the right box. I’m talking about non-employee compensation. Write in the white part of the box, not the red.
Payers name, address, etc, is you. Recipient is who you paid. I recommend using EIN numbers instead of Social Security Numbers whenever that’s an option for safety.
You put the whole amount of money you paid the person into box 7. For example, let’s say I hired Brad the Painter to do some work in my offices. I paid him $600 for the labor, $75 for the paint, and $25 for his parking. If I paid that money to Brad, even though part of it was for supplies not labor, I give him a 1099 for the whole $700. Brad will write off the $75 for paint and $25 for parking as his business expenses.
Mail your 1099MISC with a transmittal form. 1096 Transmittal Form
The filer is you (or your company.) The forms being reported is the 1099-MISC. The total amount reported on the 1096 is the total of what you paid the 1099 contract laborers. Here’s a clue—that number you put in box 5 should also go somewhere on your business tax return as a 1099 contract labor expense.
The IRS’s Biggest Complaints
- People are supposed to use the red forms. You have to use the real form; you can’t print it off the computer, even if you have a color printer. Those forms are scanned so it has to be the right paper. You can order your 1099-MISC and your 1096 transmittal from for free from the IRS. Here’s the link: IRS Forms Order
- Don’t cut the copies. Leave all the pages whole. If you only have 1 form to issue, just leave the second one blank.
- Don’t staple the returns. Don’t fold, spindle or mutilate them in any way. They have to go through a scanner so leave them plain.
- That means you have to mail them in the big envelope. I keep getting asked about that. Don’t fold means use a big envelope.
Smaller Complaints
- Do not use a $ sign when typing in the amounts. It’s already on the form.
- Do use a decimal point and cents. So I didn’t pay Brad $700 I paid Brad 700.00
- Do not put 0’s in spaces, just leave them blank.
- Do not use # signs. For example, on the form 1096 where it asks for the number of forms, I would write 1, not #1.
A note about handwritten returns: Handwritten returns are more likely to have errors than other returns. Usually it’s a Taxpayer Identification Number and name mismatch. If you are using a person’s name—use their social security number. If you are using a business name, use the EIN number. That’s a common mistake. Be sure to use block print and not script. Yes, I need to say, print neatly.
If you are typing it on a typewriter, you need to use black ink and 12 point courier font.
The 1099-MISC reporting rules have a lot of people confused, but you don’t have to do this alone. We can prepare 1099-MISC for a fee and we e-file them with the IRS.
What’s the Fiscal Cliff?
I was watching my Sunday morning news program and some talking head said the term “fiscal cliff” 10 times before I quit counting and started on the crossword puzzle instead. I really wasn’t going to write about it—I figure that plenty of more important people are talking about it and certainly plenty of better writers are explaining it.
But my son talked me into it. Not with, “Oh Mom, it will make so much more sense if you explain it,” of course not. He said, “Yeah, Fiscal Cliff sounds like a Highlights series. You know, Fiscal Cliff saves all his receipts for his taxes and, Irresponsible Andy writes bad checks.”
While I realize that everybody knows that Fiscal Cliff is not a real cartoon character (well almost everybody anyway) I guess I should spell it out just to make sure you know what’s going on.
The fiscal cliff is like a one two punch to the American economy that basically involves tax hikes and government spending cuts that are going to happen if Congress and the President don’t get off their doofusses and come up with a better plan.
First the taxes, this is what will happen starting January 1:
- Bush tax cuts expire and taxes will go up for most Americans
- The temporary 2% payroll tax cut expires
- The AMT patch is not extended
These tax issues are expected to make everybody’s taxes go up from between $2,000 to $3,000 a year.
Next, we have the immediate reduction in government spending that hits on January. Some of the budget cuts include, but are not limited to:
- a $55 billion reduction to the Pentagon’s budget
- a reduction of payments to physicians participating in Medicare
- substantial cuts to FEMA
- and substantial cuts to the Department of Education
The combination of tax increases and government spending cuts are expected to take $800 billion out of the U.S. economy. That could be devastating to us.
So—what’s next? You tell me and we’ll both know. It’s not like Congress and the President didn’t know it was coming. These issues have been in the works for quite some time. The idea of punting until after the election seems to be standard operating procedure for our elected officials. Now that the election is over, they don’t have a lot of time to fix this mess.
I don’t know what the right solution is, but I do know that this is what’s going to be the headlines for the next few weeks.
Small Business Owners: Are You Claiming Too Many Deductions?
The short answer: probably not!
This is a sentence I hear at my tax desk every year, “I bought this for my business or I did that for my business but I’m not going to claim it because I have too many deductions!” Seriously? No you don’t.
I guess I should back track a little on this—if you’re claiming stuff you shouldn’t be claiming—that’s another story. But if you own a business and you have a legitimate business expense—then claim it.
Often times, small businesses, especially in the beginning, have losses. On your tax return it’s called a net operating loss or NOL. If you have an NOL, you carry that back two years and use it to offset income that you had two years ago. If you still have a loss, you can carry it forward for another 20 years!
Now sometimes you have an expense that gets limited if your business doesn’t have enough income—like a section 179 deduction or a home office expense. That doesn’t mean that you can’t claim these things, they just get carried forward to be used to offset your future income.
Don’t skip your deductions! I can’t stress this enough. Often, at the “big box” stores, they’ll skip your home office deduction because they’re “saving you money by not claiming it” since they charge you for each form. But it’s like that old expression, “pennywise and pound foolish.” Sure, you save a few bucks by not filing the 8829 form, but you just lost the carry-forward of a few hundred dollar deduction. This is especially important this year with taxes most likely going up next year. Even if your deductions won’t help your tax return right now—do not just leave them off. Otherwise, you would have to amend your prior returns to carryforward the deductions which will cost even more money in the end!
It’s still November, you have plenty of time to round up your receipts, review your mileage log, and make sure that you’re doing everything you need to be doing to maximize all of your deductions. Obviously you can’t claim stuff that’s not a real business expense. But you can claim everything that is a legitimate expense for your business. Not only can you claim it—it’s the right thing to do.
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For those of you who do not have a home office, these posts will help get you started:
http://robergtaxsolutions.com/tag/home-office-deduction/
http://robergtaxsolutions.com/2011/07/how-to-boost-your-home-office-deduction/
Gifting Stock with Long Term Capital Gains—Helping Granny and Yourself
I recently wrote about some of the basics of capital gains taxes. Today I’m going to talk about one strategy that you might be able to use to reduce those taxes.
The old strategy to avoid paying long term capital gains tax was to gift appreciated stock to your children because they’d be in the 0% capital gains tax bracket. But now—with the kiddie tax rules—that strategy doesn’t work anymore. Children are taxed at their parent’s rate.
But there may be another way around that rule without using your kids: use your parents or grandparents instead! People in the 15% or lower income tax bracket are in the zero percent capital gains tax bracket. If you have older family members that you’re helping out financially, gifting stock could be a win/win solution for both of you.
Let’s say your mom is retired and basically living off of social security. You want to help her out by giving her $10,000 to cover some of her expenses. You can just “gift” her the money—no tax consequences for her or you, or you could “gift” her some appreciated stock. If possible, I vote for the appreciated stock.
Here’s why: suppose you have some XYZ stock that you bought years ago for $1,000, but today it’s worth $10,000. (Good for you, by the way.) If you sell it now, you’ll have to pay $1,350 in long term capital gains tax. ($10,000 – $1,000 = $9,000 capital gain. Multiply that by the 15% capital gains tax rate, then $9,000 x .15 = $1,350.)
Now if your mom’s only income is social security, then she’s in the zero percent capital gains tax bracket so her tax would be zero! See why this is a good idea?
For 2012 you can gift up to $13,000 to someone with no gift tax consequences. If you are married, then you and your spouse could each gift $13,000 to one person (although you’d have to prepare a gift tax return to show that you were gift splitting.)
This gifting of stock isn’t just limited to your parents; you can potentially gift stock to anyone that is in the zero percent capital gains tax bracket (except for your children.) Of course you don’t want to just gift stock to people you weren’t planning of giving money to in the first place. Once you make the gift, it’s not your money any longer.
This strategy may not be a viable option for 2013 so if you’re thinking about gifting stock, you should at least get your ducks in a row now so that you can do the transactions before December 31st if necessary.
Be sure to run the numbers with your parent’s first before just “gifting” stock to them. There may be other considerations that you’re unaware of where the capital gains could create a problem for them. Remember, reducing your tax burden isn’t such a great idea if it’s going to cause problems for your parents. Be sure to look at the big picture.
Income Taxes and the Stock Market—for Dummies
There are many sophisticated investment and tax strategies for individuals out there. This ain’t one of them. This is just plain tax information, what you need to know about your stock transactions and how they affect your tax return.
First—some definitions:
If you sell stock and make money—that’s a capital gain.
If you sell stock and lose money—that’s a capital loss. (I told you we were doing the basics.)
Short term—means you held the stocks for one year or less.
Long term—means that you held the stocks for over one year.
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Here’s how they affect your taxes:
1. Short-term capital gains–are taxed at your ordinary income rate which could be as high as 35%.
2. Long-term capital gains are taxed at rates of up to 15%. If your regular tax rate is 15% or less, then your long-term capital gains tax rate is zero. (Zero is a very nice tax rate if you can get it!)
3. If your personal capital losses are more than your capital gains, you can deduct up to $3,000 of losses against your other income (like your wages). The remaining losses will carry forward to offset against your capital gains in the future. If you have no capital gains in the future—you deduct another $3,000 against your other income and keep carrying it forward. You can do that for several years if necessary.
For example: let’s say your income is $50,000 a year (every year, no raises, life is boring) and you have a $10,000 capital loss. This year, your adjusted gross income (AGI) would be $47,000 and you’d have a $7,000 capital loss carry forward. (You took the $50,000 of income, subtracted $3,000 of the capital loss from the $10,000 and you have $7,000 left over for next year.) Next year your AGI would be $47,000 again and you’d have a $4,000 capital loss carry forward. After that, AGI would be $47,000 with a $1,000 carry forward. And finally in year 4 you’d have an AGI of $49,000 with no carry forward. Do you see how that works?
4. Long-term gains and losses are offset before being applied to short-term gains and losses. That means that there’s an ordering rule as to how the gains and losses are offset.
For example: let’s say you have $500 short term gain, $500 long term gain, and a $500 long term loss and you’re in the 35% tax bracket. The $500 long term loss will go against the long term gain first which would have only cost you $75 (15% * $500) in taxes. You can’t make it offset the short term gain which would cost you $175 (35% * $500) in taxes. My Dad would say, “No cherry picking.”
But—if you only had the $500 short term gain and the $500 long term loss with no long term gain in there, then you can offset the short term gain with the long term loss.
5. Selling a mutual fund is treated the same way as selling an individual stock on your tax return. Selling 500 shares of Vanguard Fund is treated the same as selling 500 shares of Coca Cola as far as the IRS is concerned. It still has to be reported.
6. Finally, watch out for something called “wash sales”. That’s where you sell a stock at a loss and buy it back again within 30 days, or buy another stock that is essentially the same like Coke and Pepsi. Let’s say you sell 50 shares of Coke on October 17 for a loss of $100 but you then buy 50 shares of Pepsi on November 3rd—you won’t get to claim that loss on your tax return.
Don’t forget, if you get a statement from your broker with stock transactions at tax time, you must report them on your tax return, even if you didn’t make any profit at all. If you don’t report it, you can be certain that the IRS will send you a notice about it.