Organizing Your Tax Records

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Organizing Your Tax Records

April arrives and you’re scrambling through your paperwork to find your important tax documents. Did you throw away an invoice, or lose a receipt? The best way to stay away from this stressful situation is to organize your tax records now. Doing so will make preparing your tax returns much easier once filing season arrives.   It will also save you preparation fees if your tax documents arrive at our office organized and they are all there.

If you’re lost and confused about what is important and what is not, this article will provide exactly what you need to know to ensure you are heading in the right direction.


If you are an individual and want to organize your tax files there are several key steps you must take.  It is important that you identify what is important to keep a record of. Examples of important documents include

  • Bills
  • Credit card  statements
  • Receipts
  • Invoices
  • Mileage logs
  • Canceled, imaged or substitute checks or other proof of payments
  • And any other records supporting deductions or credits claimed.

These documents must be kept for at least three years.

Other important records you should keep for a minimum of three years include records relating to properties. Below lists just a few of the important ones:

  • Home Purchase or improvements
  • Stocks and other investments
  • Individual Retirement Account transactions
  • Rental property records

Small Business Owners

Small Business owners should keep all tax related documents for a minimum of four years. This includes documentation of:

  • All employment tax records
  • Records of gross receipts
  • Proof of purchases
  • Expenses and assets

In detail this includes:

  • Cash register tapes
  • Bank deposit slips
  • Receipt books,
  • Purchases
  • Sales invoices credit card charges
  • Sales slips
  • Form 1099-MISC
  • Canceled checks
  • Account statements
  • Petty cash slips
  • Real estate closing statements

Electronic records

  • Databases
  • Saved Files
  • e-mails
  • instant messages
  • faxes
  • voice messages

How to store these files?

There is no designated way to keep your files. By having a designated place for these documents and receipts it will not only help ease your tax filing process, but it allows you to have all your information on hand for personal use. In addition having organized files will make the process of an audit much easier to navigate through.

Reporting Miscellaneous Deductions

Instead of claiming the standard deduction this year on your taxes, you may be eligible for certain miscellaneous deductions. Itemizing your expenses and recording miscellaneous deductions are an often overlooked claim that will help you save money.

If your expenses qualify for the” miscellaneous deduction”  it can decrease your taxable income which in turn can decrease you tax payments for the year.  Listed below are the qualifications for claiming these expenses. Take a look to see where you can apply some of your expenses and save some money!

If you have expenses larger than 2% of your adjusted gross income they may be deductible if the expense incurred because one of the following scenarios:

  • You have incurred expenses for your job that you were not reimbursed for
  • Expenses from searching for a new job in the same profession
  • Certain work clothes and uniforms, work tools,
  • Union dues
  • Work-related travel and transportation that were not reimbursed by your employer.
  • Any fees you paid for tax preparation.
  • Expenses that you pay to:
    • Produce or collect taxable income,
    • Manage, conserve, or maintain property held to produce taxable income, or
    • Determine, contest, pay or claim a refund of any tax.
    • In addition keep an eye out for:
      • Certain investment fees and expenses
      • Some legal fees
      • Safe deposit box rental fees (on the condition that it is not used to store jewelry and other personal items)

These above deductions must be larger than 2% of your adjusted gross income to be deducted on your return, but added together they may be.  It is worth checking them out.

There are a few miscellaneous expenses that  you can use as deductions even if they are below the 2% limit.  These expenses can be applied to your tax return regardless of then being more or less than the 2% constraint.  The following expenses fall in this category:

  • Losses from income producing property.  Damage or theft of stocks, bonds, gold, silver, vacant lots, and works of art are expenses that are deductable.
  • Losses incurred from gambling losses up to the amount of gambling winnings.
  • Impairment-related work expenses of persons with disabilities.
  • Losses from Ponzi-type investment schemes.

Review your expenses and see if any of these apply to your situation.

Tax Credits for Postsecondary Education

American Opportunity Credit and the Lifetime Learning Credit

If you find yourself concerned the about cost of higher education there are two federal tax credits that may apply to you. These credits are called the American Opportunity Credit and the Lifetime Learning Credit.

The American Opportunity Credit and the Lifetime Learning Credit credits can be applied to any post-secondary student paying tuition and fees.  This includes:  you, your spouse and your dependents. Each student can claim only one of the listed credits per year.  For example if your daughter filed for the American Opportunity Credit, then she cannot claim the Lifetime Learning Credit. However, if your spouse is in graduate school or any post-secondary education, he/she has the ability to claim the Lifetime Learning Credit.

Below are important facts you should know if you are considering these credits:

  1. The American Opportunity Credit
  • The credit can be up to $2,500.
  • It is only available for students attending their first four years of higher education.
  • If you owe no taxes you may be able to receive up to $1,000 in refund (forty percent of the credit).
  • The student must be pursuing either an undergraduate degree or other recognized educational credential.
  • Any tuition, fees, course related books and equipment are qualified expense.
  • Taxpayers with an adjusted gross income of less than $80,000, or married couples filing jointly with an income of less than $160,000 can receive the full credit.
  1. Lifetime Learning Credit
  • The credit can be up to $2,000.
  • It is available for courses taken to acquire or improve job skills.
  • The credit will only reduce your tax amount but it will not grant a refund.
  • The student does not need to be degree seeking or earning any recognized education credential.
  • Tuition, fees, course related books, and equipment are qualified expense.
  • Taxpayers with an adjusted gross income of less than $60,000, or married couples filing jointly with an income of less than $120,000 can receive the full credit.

If you do not qualify for these education credits, an alternative option is qualifying for tuition and fee deduction. Tuition and fee deduction can reduce your income by $4,000. You may not claim tuition and fee deduction if you claim any of the above credits for the same year.

Facts to Know When Receiving a Letter from the IRS

If you are one of the millions of tax payers who will receive a notice or letter from the IRS it is important to act promptly and precisely to reconcile the dilemma.

Commonly notices or letters are regarding payment requests, additional information requests or account changes notifications. Each issue is specific and the letter will instruct you on what steps must be taken to solve the problem. It is important not to ignore the letter and hope the problem will go away.

If you are worried about receiving a letter there are a few things you must know.  The IRS sends letters by mail only. They do not communicate through email regarding taxpayer accounts or tax returns. Therefore, it is important that if you do receive a letter that you keep copies safe for your records because it will be your only copy.

If you have any questions when you receive a letter you can call the IRS Office whose number is located on the top right corner of the letter.  When calling, make sure you have a copy of your tax returns and the letter they sent you nearby to refer to. This will help the IRS with your call.

Receiving a Correction Notice

One type of letter you may receive is a correction notice.  The first step when receiving the correction notice is to compare the information on your tax returns to the letter.   If you accept the correction by the IRS there is no further action needed.   Unless the notice asks for additional requirements such as necessary payment due, you do not have a need to respond to the IRS.

However, if you do not accept the corrections made by the IRS you must respond to the letter in the way they outlined.   Disputing the IRS’s adjustment usually entails writing a letter on why you believe the IRS’s changes were incorrect.  Along with your letter you must include any relevant documentation and information that will support your reasoning.  Mail these two things along with the bottom tear-off portion of the notice to the IRS address listed on the top left portion of the letter.  Waiting for a response usually takes 30 days.

We advise our clients to send us copies of all correspondence they receive from the IRS.  Remember they are not always right.  Most cases are easily resolved by sending the IRS additional documentation.

Rules Affecting Investment Income for Children

In the good old days many parents put investment accounts in their children’s name to get a lower tax rate.  Not anymore!

Tax rules affect any sort of income your family may have.  Even your child’s income becomes affected by these rules. The” Kiddie” tax rule exists to regulate allocation of unearned income for children.

Children who received unearned income of more than $1,900 from interest, dividends or capital gains, may have your (the parent’s) tax rate applied to their income.  If your child meets one of the folowing three  requirements the parents tax rate will apply.

  1. Your child was under the age of 18 at the end of the year.
  2. Your child was under the age of 18 at the end of the year, and he/she’s earned income totaled less than 50% of the cost in supporting your child.
  3. Your child was a full-time student between 18 and 24 at the end of the year, and he/she’s earned income totaled less than 50% of the cost in supporting your child.

When filing your child’s investment income you have two options of where you want to allocate the money. You may file the income in your own tax returns, or under your child’s tax returns. Although these two options generally have similar results we generally feel it is better to file your child’s investment income under their own tax returns.

If you decide to go this way, and have your child file their income in their own tax returns, Form 8615, Tax for Certain Children Who Have Investment Income for More Than $1,900 must be filled out.  This form will assist in figuring the child’s tax amount using your (the parent’s) tax rate.

However, if you do decide to file your child’s taxes under your own name you must fill out Form 8814, Parents’ Election To Report Child’s Interest and Dividends.  This form includes your child’s income directly into your own tax return.

If you have any questions regarding your children’s income please contact our office.

Hiring Incentives to Restore Employment Act of 2010

The “Hiring Incentives to Restore Employment Act of 2010” (the 2010 HIRE Act), was signed into law this year. The centerpiece of which is a payroll tax holiday and up-to-$1,000 tax credit for businesses that hire unemployed workers. Here’s an overview of these new hiring incentives. We want to be sure that if you have not been taking advantage of this law that we file amended payroll tax returns and file 4th quarter payroll returns accordingly.

The new law exempts any private-sector employer that hires a worker who had been unemployed for at least 60 days from having to pay the employer’s 6.2% share of the Social Security payroll tax on that employee for the remainder of 2010. A company could save a maximum of $6,621 if it hired an unemployed worker and paid that worker at least $106,800—the maximum amount of wages subject to Social Security taxes—by the end of the year. As an additional incentive, for any qualifying worker hired under this initiative that the employer keeps on payroll for a continuous 52 weeks, the employer is eligible for an additional non-refundable tax credit of up to $1,000 after the 52-week threshold is reached, to be taken on their 2011 tax return. In order to be eligible, the employee’s pay in the second 26-week period must be at least 80% of the pay in the first 26-week period.

Workers hired after the date of introduction of the legislation (Feb. 3, 2010) are eligible for the payroll tax forgiveness and the retention bonus, but only wages paid after the date of the new law’s enactment receive the exemption for payroll taxes.

Here are some additional features of the new hiring incentive:

  • The tax benefit generally applies only to private-sector employment, including nonprofit organizations.
  • There is no minimum weekly number of hours that the new employee must work for the employer to be eligible, and there is no maximum on the dollar amount of payroll taxes per employer that may be forgiven.
  • For workers that would otherwise be eligible for the “Work Opportunity Tax Credit,” the employer must select one benefit or the other for 2010—no double dipping.
  • An employer can’t claim the new tax breaks for hiring family members.
  • A worker who replaces another employee who performed the same job for the employer is not eligible for the benefit, unless the prior employee left the job voluntarily or for cause.
  • For the hiring to qualify, the new hire must sign an affidavit, under penalties of perjury, stating that he or she has not been employed for more than 40 hours during the 60-day period ending on the date the employment begins.
  • The incentive is not biased towards either low-wage or high-wage workers. Under the measure, a business saves 6.2% on both a $40,000 worker and a $90,000 worker.
  • The payroll tax holiday does not apply with respect to wages paid during the first calendar quarter of 2010, but the amount by which the Social Security payroll tax would have been reduced under the payroll tax holiday provision during the first calendar quarter is applied against the tax imposed on the employer for the second calendar quarter of 2010.
  • The credit for retaining qualifying new hires is the lesser of $1,000 or 6.2% of the wages paid by the taxpayer to the retained worker during the 52-consecutive-week period. Thus, the credit for a retained worker will be $1,000 if, disregarding rounding, the retained worker’s wages during the 52-consecutive-week period exceed $16,129.03. However, the credit is not available for pay not treated as wages under the Code (e.g., remuneration paid to domestic workers).

I hope this information is helpful. If you would like more details about these provisions or any other aspect of the new law, please do not hesitate to contact us.

Health Care Tax Credit

With all the recent tax changes and upheaval we wanted to make sure you were aware of the tax credit available for certain  employers providing health insurance coverage for their employees.

The credit is specifically targeted to help certain small businesses that primarily employ moderate-income workers and lower-income workers. The credit can offset a taxable employer’s regular tax liability.

During the first phase of the credit (i.e., tax years beginning in 2010, 2011, 2012, or 2013), the amount of the credit is generally 35% of the employer’s non-elective contributions toward the employees’ health insurance premiums. In the second phase of the credit (i.e., tax years beginning after 2013), the amount of the credit is generally 50% of the employer’s non-elective contributions. The amount of the credit is subject to a phase-out (described below).

An employer qualifying for the credit (i.e., an eligible small employer or ESE) has to meet all of the following requirements:

  1. The employer can’t have more than 25 full-time equivalent (FTE) employees for the tax year. An employer’s FTE employees are determined by dividing the total hours worked by all employees during the year by 2,080 (rounded down to the nearest whole number).
  2. The average annual wages of the employees can’t exceed $50,000 (for tax years beginning after 2013, the dollar amount is indexed for inflation) for the tax year. The average annual wages are determined by dividing the total wages the employer pays by the number of its FTE employees and then rounding that number down to the nearest $1,000.
  3. The employer has to contribute at least 50% of the premiums for the employees’ health insurance coverage on a uniform basis. However, for tax years beginning in 2010 only, an employer can meet this requirement even if it pays differing percentages of different employees’ premiums as long as all employer payments are at least 50% of each employee’s premium based on single (employee only) coverage.

The amount of the credit gradually phases out if the number of a company’s FTE employees exceeds ten or if the average annual wages of the employees exceed $25,000. Under the phase-out, the full amount of the credit is available only to an employer with ten or fewer FTE employees and whose employees have average annual wages of less than $25,000. However, an employer with exactly 25 FTE employees or average annual wages exactly equal to $50,000 is not in fact eligible for the credit. Since the eligibility rules are based in part on the number of FTE employees, not the number of employees, in certain circumstances, a business that uses part-time help can qualify for the credit even if it employs more than 25 individuals.

For purposes of determining whether an employer is an ESE and determining the amount of the credit, self-employed individuals, including partners and sole proprietors, 2% shareholders of an S corporation, and 5% owners of the employer and certain relatives of these individuals are not treated as employees for purposes of the small employer health insurance credit. There are also special rules that apply to seasonal workers, leased employees, and employees who have more than 2,080 hours of service during a tax year.

An employer is entitled to an ordinary and necessary business expense deduction equal to the amount of the employer contribution minus the dollar amount of the credit. For example, if an ESE pays 100% of the cost of its employees’ health insurance coverage and the amount of the tax credit is 50% of that cost (i.e., in tax years beginning after 2013), the employer can claim a deduction for the remaining 50% of the premium cost. Any unused credit can be carried back for one year (but not before 2010) and forward for 20 years to offset future taxes.

Please let us know if you have any questions concerning the credit or if we can assist you in determining whether your business can benefit from claiming the credit.

Roth IRA Rollovers

We are writing to tell you about a current tax opportunity. In 2010, for the first time, you may roll over amounts in qualified employer-sponsored retirement plan accounts, such as 401(k)s and profit sharing plans, and regular IRAs, into Roth IRAs—regardless of your adjusted gross income (AGI).

In case you are not familiar with Roth IRAs here is a summary of why they can be attractive:

  • Earnings within the account are tax-sheltered (as they are with a regular qualified employer plan or IRA).
  • Unlike a regular qualified employer plan or IRA, withdrawals from a Roth IRA aren’t taxed if some relatively liberal conditions are satisfied.
  • A Roth IRA owner does not have to commence lifetime required minimum distributions (RMDs) after he or she reaches age 70 1/2 as is generally the case with regular qualified employer plans or IRAs.
  • Beneficiaries of Roth IRAs also enjoy tax-sheltered earnings (as with a regular qualified employer plan or IRA) and tax-free withdrawals (unlike with a regular qualified employer plan or IRA). They do, however, have to commence regular withdrawals from a Roth IRA after the account owner dies.

The catch, however is, that the rollover will be taxed at your current tax rate. For example, if you are in the 28% federal tax bracket and roll over $100,000 from a regular IRA funded entirely with deductible dollars to a Roth IRA, you’ll owe $28,000 of tax. So you’ll be paying tax now for the right to future tax-free withdrawals, and freedom from the RMD rules mentioned above.

Should you consider making the rollover to a Roth IRA? The answer may be “yes” if:

  • You can pay the tax on the rollover with non-retirement-plan funds. Keep in mind that if you use retirement plan funds to pay the tax on the rollover, you’ll have less money building up tax-free within the account.
  • You anticipate paying taxes at a higher tax rate in the future than you are paying now. Many observers believe that tax rates for upper middle income and high income individuals will trend higher in future years.
  • You have a number of years to go before you might have to tap into the Roth IRA. This will give you a chance to recoup (via tax-deferred earnings and tax-deferred payouts) the tax hit you absorb on the rollover.
  • You are willing to pay a tax price now for the opportunity to pass on a source of tax-free income to your beneficiaries.

Roth rollovers made in 2010 represent a novel tax deferral opportunity and a novel choice. If you make a rollover to a Roth IRA in 2010, the tax that you’ll owe as a result of the rollover will be payable half in 2011 and half in 2012, unless you elect to pay the entire tax bill in 2010.

Keep in mind that absent Congressional action, after 2010, the tax brackets above the 15% bracket will revert to their higher pre-2001 levels. That means the top four brackets will be 39.6%, 36%, 31%, and 28%, instead of the current top four brackets of 35%, 33%, 28%, and 25%.  However, the Obama administration and Congress appear likely to extend the tax cuts for at least 2011 and 2012, even for higher bracket taxpayers.  In that case, paying the tax in 2011 and 2012 might make sense.

Individuals ineligible to make deductible contributions to a traditional IRA, or to make any regular contributions to a Roth IRA, due to limitations based on adjusted gross income, may contribute to a traditional IRA and then convert this amount to a Roth IRA. So individuals who have never opened a traditional IRA because they weren’t able to make deductible contributions (and who have never rolled over pre-tax dollars to a regular IRA) should consider opening such an IRA and making the biggest allowable nondeductible contribution they can afford. If they convert the traditional IRA to a Roth IRA they will have to include in gross income only that part of the amount converted that is attributable to income earned after the IRA was opened, presumably a small amount. They could continue to make nondeductible contributions to a traditional IRA in later years, and roll the contributed amount over into a Roth IRA. However, note that if an individual previously made deductible IRA contributions, or rolled over qualified plan funds to an IRA, complex rules determine the taxable amount.

What if you convert your IRA to a Roth IRA in 2010 and the value of the Roth IRA’s investment drop?  The Roth rules allow you to “undo” the Roth conversion (called a “recharacterization”) until the due date of your 2010 tax return.  With extensions, that deadline is October 15, 2011.

We should discuss your and your family’s entire financial situation before you plan for a large rollover to a Roth IRA. There also are many details that we should go over, such as whether the amounts you are thinking of switching to a Roth IRA are eligible for the rollover (technically, they are called “eligible rollover distributions”), whether you can make rollovers from your employer sponsored plan (for example, there are restrictions on rollovers from 401(k) plans), and the tax impact of rolling over amounts that represent nondeductible as well as deductible contributions.

We look forward to your call.