The Seven Deadly Tax Sins: Commonly Missed Deductions

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:


• Points on Refinancing: With interest rates so low in 2003, there was a great deal of refinancing activity. Any points you pay to refinance your home can be deducted ratably over the life of the new loan. Furthermore, all unamortized points on old refinancing are deducted in the year of the new refinancing.

• Health Insurance Premiums: Any health insurance premiums you pay, including some long-term care premiums based on your age, are potentially deductible. Medical expenses have to reach 7.5% of your adjusted gross income before they give you any tax benefit. Self-employed people can deduct 100% of health insurance premiums paid for themselves, their spouses and their dependents.

• Non-Cash Charitable Contributions: If you have used your charge card for contributions to charity, remember that the deduction is allowed in the year that you made the charge, not when you actually pay the bill. Also, you may write off certain out-of-pocket expenses related to charitable activities. Appraisal fees paid to value property donated to charities may be taken as a miscellaneous deduction subject to the 2% floor on miscellaneous deductions.

• Higher-Education Expenses: If your adjusted gross income wasnt more than $65,000 ($130,000 for married, filing jointly) in 2003, you can get an above-the-line deduction for as much as $3,000 for any higher-education tuition and fee expense you paid. For 2004, the deduction can be as much as $4,000. For those at higher adjusted gross incomes limits ($80,000 single, $160,000 married filing jointly) the deduction is limited to $2,000 for 2004. This deduction must be coordinated with other education credits and savings vehicles.

• Work-Related Expenses: You can write off many work-related and work-search expenses, such as education that maintains or improves your skills, certain business tools, dues to labor unions, cell phone depreciation, certain expenses to search for job in your present occupation, including employment agency fees, resum preparation, and travel expenses (local and out of town) and cleaning and laundry bills when on a business trip. Work-related expenses are subject to the 2% floor on miscellaneous deductions. Furthermore, if you buy a new SUV for business use that weighs more 6,000 pounds, and file Schedule C or other business tax return you may be allowed to write off the full amount (up to $102,000 in 2004) in one year as a business expense subject to limitations.

• Clean-Fuel Deduction: If you are not in the market for a large SUV for business, you still can get a deduction for your personal car, another above-the-line deduction of up to $2,000 for 2003 ($1,500 for 2004) of the cost of buying a clean-fuel vehicle or a car that uses a significant source of energy other than gasoline. That includes hybrid cars, such as the Toyota Prius, the Honda Insight and the Honda Civic Hybrid. You get the deduction in the year you start using the car, and you must be the original owner.

• Investment and Tax Expenses: In addition to forgetting to deduct tax-preparation fees and the portion of your legal, accounting or financial planner fees that relate to tax planning, many people miss deducting investment expenses. Those include certain fees paid to your financial advisor and/or broker and certain IRA fees you may pay directly. It also may include mileage for meetings and long-distance phone calls to your advisor or broker. Dont forget to include deductions for the cost of your investment publications or subscriptions, safe deposit boxes used for investment-related documents, these deductions are subject to the 2% floor on miscellaneous deductions.

Tax Time Tune Up

Every year American companies lose millions of dollars in productivity to employees who end up taking their own personal time off to do their taxes.

Whether you are filing by paper from just one W-2 or running multiple enterprises, streamlining now will pay off this year and in future.Applying these proven Tax Time Tune-Up tips will save you time, frustration and could even save you money. Even if you only reduce your stress level ? it's worth it! Start today by getting an archive box or file crate to hold all your tax related files and forms.

If you have a good filing system, but you keep getting bogged down in old records: Every January, pull last year's financial files, any business related expenses, proof of income and all tax related items. While you are taking old files out, make the replacement new file folders for all of your regular home and business or personal financial and legal documents.

If you have no functioning filing system for your home (or business) I recommend you sort out your papers for tax and archives after setting up the FileSolutions TM color-coded pre-printed file kit that fits your current filing needs (http://www.organize.com/) That way you'll have the right place to put each item as you handle it. I use the Home and Small Business FileSolutions TM kits in my own business, which makes it easy for me to guarantee your satisfaction.
Tax Preparation Software: By using tax preparation software, you can finish your federal and state returns in about 90 minutes-if you've completed the steps above. The software helps you find deductions, does the math for you and tells you what you owe or what your refund will be. Use tax preparation software matched to your situation and financial software; there are several available (TaxCut, TurboTax, etc.).

I use TurboTax (by the makers of Quicken) to do my own taxes. If I can do it ? so can you! Then, I have a tax professional check my return for way less money than it would have cost me to have my business and personal taxes done by a tax professional.
Good News/Bad News: If your Adjusted Gross Income for 2004 is less than $28,000, or you qualify for Earned Income Tax Credit ? go to http://www.taxfreedom.com/ and use Intuit's TurboTax program online for FREE!

Online tax-preparation sites keep improving their do-it-yourself tax tools, ease of preparation and regular or e-filing expertise. These offer the same process as desktop software does but, it is all done online. After the products fo through your return for errors (and suggest possible tax-savings), you can print your completed return or file it electronically.
The IRS likes electronically filed returns so much, in fact, that it's set up specific developers that provide free prep and filing to certain demographic groups. Go to http://www.irs.gov/ to see if you qualify.
Some tax-preparation web sites are cheaper than their desktop counterparts. But they don't always have the most complete version of tax help that the desktop software does. There can also be additional costs of state filing services, sometimes at more expense than the federal counterparts. A recent PC Magazine rated the top three Tax Web Sites as: TurboTax , TaxCut and Complete Tax.

Make a file tray marked Tax Stuff every January. While sorting your mail put all 1099's, W-2's, and any tax-related material into it. You can also put colored accordion file pocket folders in your 'tax box' for incoming tax documentation.
Use your credit cards to simplify your accounting. Select which cards you will use for business, travel or expensed transactions, household, personal, and use only one card for all your internet transactions. Label your cards until the usage becomes second nature to you.
At month end use your credit card statements, auto/transaction log and checkbook to track expenses for your ledger or computer program instead of chasing all the receipts.
Keep a compartment, or envelope in your briefcase where you can easily stuff any receipts or notes. Then, use it. Have a drop box in your office for the expensable receipts from your briefcase or pockets. At home make a place to put any receipts that refer to warranties or personal property records.
After April 15th, archive all tax-related files: separate the previous year from your active files into an available (but not daily use) archive box. Put in a back-up disk or CD of your accounting program for that year along with the data. Also, put your calendar and a carbon copy phone message book in the tax archive box ? it's all proof of business use.
Place prior records into garage or closet storage. Mark each box on the outside by tax year and put all related tax backup documentation into it. Include a copy of the tax return itself, as well as any 1099s, W-2s etc.
Keep a transaction log for auto mileage and miscellaneous transactions. You must have a log to deduct auto expenses, and when you maintain a transaction log the IRS does not require that you keep receipts for expenses under $75.00. This documentation goes into your 'tax box' which becomes your 'tax archive box'.
You can set up your Personal Digital Assistant (e.g., PalmPilot) to use an Expenses Notes section to easily maintain your daily business expenses.
Save yourself money and stress by using these tips to get a jumpstart on 2004 taxes. Tune-up your own file system, or if you don't have one, use the cost-effective FileSolutions TM file kits. Or you can go all the way with new electronic preparation and filing to make sure this year is better than last April 15!
Since 1988, Eve Abbott has developed productivity systems for executives, managers and business owners so their teams can work at least 25% more effectively through her programs and hands-on consultations.

The Internet Tax Man Cometh

Q: I was contacted by the city tax collector to say that my business is scheduled to be audited to see if I owe sales tax on items purchased on the Internet. Can they really make me pay sales tax on internet purchase? I thought you could buy things online tax free? -- Charlie B.

A: Sorry, but your local municipality is well within its rights to audit your business to identify items purchased online. The city can also demand payment of sales tax on those items if sales tax was not previously paid. Don't be surprised if the auditor asks for access to your books and to see purchase receipts and invoices for at least the past year.

One of my companies recently underwent such an audit and it really was not as painful as you might think. Being a software company, the majority of our online purchases were for computer equipment, technical manuals, and software development tools. Since we purchase computers from a large supplier who collects sales tax at the point of sale (ditto for the development tools), the only sales tax we ended up owing was for an inordinate number of technical manuals and books purchased at Amazon.com.

If your small business is like most, the majority of your large purchases are made locally from companies that already collect sales tax. Furniture and computer equipment are typically the largest ticket items a small business buys, so unless you bought your desks and computers off of Ebay (which is highly possible these days) you should be OK.

Internet sales taxation has been a topic of contention even before Amazon sold its first book and Priceline booked its first flight. One of the more controversial points is that no one, including our own government, seems to have a clue how to implement a fair and logical Internet taxation process. With over 7,500 different local, county and state taxation systems in the United States, you can understand the controversy.

In 1998, Congress did what it usually does when faced with a potentially explosive issue like Internet tax collection -- it decided to put off making a decision. Congress enacted a three-year moratorium on the collection of taxes to give an appointed advisory board time to come up with an acceptable solution. That moratorium ended in 2002 and opened the door for municipalities to begin collecting sales tax on their own.

Here in Alabama the state sales tax collection department has aired radio spots asking Alabamians to step up to - and toss dollars into - the proverbial collection plate. The commercial kindly suggests that if I have purchased anything from an online retailer, I am honor-bound to proclaim such purchases and submit the appropriate sales tax to the collection department right away. They thank me in advance for my cooperation.

So, Charlie, when the auditor shows up at your door the best thing you can do is smile politely and be totally forthcoming. The sales tax that you pay is a small price for the convenience of shopping online.

Or at least that's what you should tell yourself as you write the auditor a check.

How to Check the Status of Your Tax Refund Online

So, you were pleasantly surprised to learn that you are getting a refund on your taxes. Congratulations! The question for most taxpayers expecting a return is, "Where is my refund?"
Check Your Refund Status Online


The easiest way to check on your refund is to ask the IRS through IRS.gov. On the home page of the site, you will see a "Where's My Refund?" link. Using the service is fairly easy. You will need a copy of your tax return to provide the necessary information to get the status of your refund. Specifically, you need to provide your social security number, you tax filing status and the exact amount of your refund. The reason the IRS requires all of this information is purely for security purposes, to wit, the agency wants to make sure it is giving access only to the taxpayer. Again, all of this information should be on your return. If it is not, something is very wrong!

Once you submit the required information, the IRS will provide online results typically showing:

1. That the return was received and is in processing;

2. The expected mailing date or direct deposit date of your refund; or

3. Whether your refund could not be issued because of a delivery problem.

In some cases, the results may alert you to the fact that the IRS is reviewing your tax return because of errors or questionable entries. In such a case, it is highly advised that you review your return with a qualified tax professional and make absolutely sure that the return will stand up to scrutiny.

How Long Do You Have To Wait Before Checking?

If you filed your tax return electronically, you should be able to access the status of your refund within 48 to 72 hours. Since the return is coming into the database electronically, it should be assimilated into the system fairly quickly. If you do not file your return electronically, you are going to have to wait three weeks or more before the status of your return can be checked. As you can imagine, the IRS is receiving an enormous amount of paper tax returns and it takes time to organize and enter the returns into the system.

How Long Should It Take To Receive Your Tax Refund?

If you are expecting a refund, the time to issue the refund will depend upon how you filed your return. If you filed a paper return via regular mail, you refund should be issued in six to eight weeks from the date it was received by the IRS. Alternatively, if you filed your return electronically, you should expect to receive your refund in three to four weeks. If you elected to have your refund directly deposited in your banking account, you should take one week off of the above estimates.

IRS May Let Tax Preparers Sell Customers' Information

From: ConsumerAffairs.com
Proposal is a License to Plunder, Consumer Groups Argue

One of the few comforts you can enjoy about tax time is that your information -- your wages, assets, expenses, and personal data -- are shared only between you, the government, and any tax agents you may use. No third parties can use it to target you for advertising or offers.

But the IRS may be revising its rules to allow tax preparers to share or sell customer information to third parties and database brokers, as part of a sweeping change to its privacy regulations.

In Dec. 2005, the IRS announced it was planning to update Section 7216 of the tax code, which governs the usage and disclosure of information gathered by tax preparers.
The regulation was being rewritten to reflect the increasing reliance on electronic preparation of tax forms, such as the IRS' E-File system or tax software programs such as TurboTax.
Under the revised regulations, "these proposed regulations allow tax return preparers to obtain consents to use tax return information for solicitation of services or facilities furnished by any person rather than limiting solicitations to the services or facilities offered by the tax return preparer or member of the tax return preparer's 'affiliated group.'"
Put more simply, if you get your taxes done by H&R Block, under the law, the firm can offer you its other services, such as its much-maligned Refund Anticipation Loan (RAL) plan, but it can't use your information for anything outside its purview.
Under the proposed new rules, H&R Block could sell your tax information to data brokers like ChoicePoint, who in turn could sell it to any company that wanted to pitch you products based on your financial information.
The plan is drawing fire from consumer groups such as the U.S. Public Interest Research Group (PIRG), the Consumer Federation of America (CFA), and the National Consumer Law Center (NCLC).
PIRG's Ed Mierzwinski said that he was not surprised that "the same IRS that let Richard Nixon and many other Presidents run roughshod over the privacy of ordinary American citizens now wants to let powerful special interests plunder our confidential tax records for commercial gain."
Rules of the Game

In joint comments submitted to the IRS regarding the proposed rules change, the three groups argued that privacy protections for taxpayer returns should be increased, and exceptions for consent to marketing should be eliminated.

The consent exception, in the consumer groups' view, enables tax preparation firms such as H&R Block and Jackson Hewitt to take advantage of the "trust relationship" between customers and firms, enabling the multi-billion dollar growth of the RAL industry.

"Without the [consent] exception, preparers could only offer RALs to those who actively sought the loans," they said. "Thus, the consent exception is partly responsible for the ability of preparers to actively pitch these high cost, high risk loans with triple digit APRs to mostly low-income taxpayers, especially Earned Income Tax Credit (EITC) recipients. Eliminating the consent exception would reduce RAL volume tremendously, saving hundreds of millions for taxpayers."
H&R Block has been the target of several lawsuits that charge it has failed to properly inform consumers of the risks involved in taking out RALs, in order to maximize the profits they gain from loan fees and interest.

According to the NCLC's latest study on RALs, consumers took out over $12 million worth of RALs in 2004, paying $1.24 billion in RAL fees, and another $360 million in "administrative fees."
If the "consent exception" rule is broadened under the new IRS regulations, the groups charged, harried and busy taxpayers could be more easily conned into signing documents without having the time to read and understand them fully, which could lead to their information being traded among data aggregators, debt collectors, and other agencies.

"Given the recent highly publicized instances of data security breaches by information brokers, credit card processors, financial institutions, and merchants," she said in the comments, "a breach involving tax information would seriously erode public confidence in the security and privacy of sensitive tax information."

How To Get An Extension To File Your Business Tax Returns

Yes, the tax season is upon with the first filing date for some businesses being March 15. If you can't imagine getting your tax returns together by that date, you need not worry. The IRS automatically gives you an extension if your file the appropriate form. As you might expect, there are different forms for different businesses.


An Important Note

It is vitally important that you understand that an extension to file taxes is not an extension to PAY taxes. The IRS will give you a break on the filing date, but it wants the money now! If you anticipate that you will owe taxes, you need to send in the appropriate payment. Failure to do so could result in interest charges when you eventually get around to filing your returns.

Corporations

If you conduct business as a corporation with a fiscal year-end of December 31st, you are required to file your tax returns on or before March 15. You can get an automatic extension, however, by filing form 7004 before the March 15 deadline. Form 7004 applies both to "C" and "S" corporations and grants you an automatic 6-month extension to September 15.

While this automatic extension applies to "S" corporations, you should be aware of a quirk in the tax code. Since "S" corporations "pass through" taxes to your personal returns, the six-month extension is really only a five-month extension. To file your personal tax returns, you must report information from the K-1 issued from the "S" corporation. Unfortunately, the IRS only grants automatic extensions for filing personal tax returns to August 15.

Limited Liability Company

The IRS has never really figured out to how to handle limited liability companies. It has settled on a policy of avoiding the issue and simply treating the entity as a corporation or partnership.

Limited liability companies with more than one owner typically elect to be treated as partnerships for tax purposes. If this describes your situation, the LLC is required to file tax returns by April 15. You can obtain a 3-month extension by filing form 8736. Although form 8736 contains language regarding partnerships, you will still use this form since the IRS classifies you as a partnership for tax purposes.

If you are the sole owner of an LLC, you may be in for a surprise. The IRS doesn't recognize LLCs owned by one person. Instead, it simply considers you a sole proprietor and the rules for sole proprietorships apply. These are discussed below.

Partnership

If your business is a partnership, you are required to file tax returns by April 15. You can use form 8736 to obtain a 3-month extension.

Self-Employed/Sole-Proprietor

If you are not using a business entity, your business tax information should be reported on your personal tax return. The due date for filing your personal tax returns is April 15. You can obtain a four-month extension by filing form 4868.

Summary

Regardless of how your business is organized, the IRS will automatically grant you an extension to file your tax returns. By sending in the appropriate form, you can avoid a mad rush that will inevitably result in missing deductions and overpaying your taxes. Just make sure you pay any taxes you anticipate owing by the appropriate date.

Tax Trap #5 -- Ignoring The IRS (and the 5 best ways to contact them!)

We all love to criticize the IRS, don't we? And I'm just as guilty as anyone. It's easy to ridicule a huge organization of government bureaucrats who often seem to be Public Enemy #1.

Our negative attitude toward the IRS can lead to a strong desire to just ignore it altogether. But self-employed people who ignore the IRS do so at their own peril.

So when it comes to providing free information about taxes, let's not throw the baby out with the bath water. The IRS does provide some excellent resources to help us make the best of a potentially bad situation.

If you need tax assistance and prefer not to pay for it, do not overlook these five ways to obtain help from the IRS:


1. The Internet
http://www.irs.gov

There's a wealth of information just for small business owners and self-employed people at: http://www.irs.gov/smallbiz

Here you'll find everything from how to obtain a federal business tax ID to a free 6-session streaming video presentation of the "IRS Small Business Workshop." Also known as the Small Business Self-Employed Online Classroom, you can access this directly at: www.irs.gov/businesses/small/article/0,,id=97726,00.html

If you prefer to attend an IRS small business workshop in person, check here to see what's available in your state: www.irs.gov/businesses/small/article/0,,id=99202,00.html

Need tax forms and/or their instructions? Look no further than the IRS website: http://www.irs.gov/formspubs/index.html

Here you'll find a boatload of links to every tax form imaginable, available as downloadable PDF files or in fill-in format. All form instructions can also be downloaded.

http://www.irs.gov/formspubs/lists/0,,id=97817,00.html

The IRS has many free publications that explain virtually every major (and many minor) tax topics in great detail. Sure, IRS "pubs" are not always written in the most entertaining style, but, hey, remember the price. http://www.irs.gov/formspubs/lists/0,,id=97819,00.html

2. Telephone Hotlines.
Special toll-free numbers exist for the following:

-- To order forms & pubs: 800-829-3676 (in case you'd like to receive a paper copy via snail-mail)

-- To ask business tax questions: 800-829-4933

-- To ask personal tax questions: 800-829-1040 Use common sense when phoning the IRS: to avoid long wait times, don't call on Monday morning. And no matter when you call, be prepared! Write out your questions beforehand and have all relevant documentation in front of you, as well as a favorite book or magazine to read during the inevitable wait time. Stay calm; don't yell; treat the IRS employee like a human being and he/she will likely return the favor.

-- Need help with long-standing problems: 877-777-4778

-- Prerecorded messages on 140 topics: 800-829-4477
3. TaxFax Service.
You can receive most IRS forms instructions via fax by calling 703-368-9694 from your fax machine.

4. CD-ROM for Small Business.
This is known as "The Small Business Resource Guide CD-ROM", aka Publication 3207. It includes all the tax forms and publications needed to run a small business. Call 800-829-3676 to request a free copy.

5. Walk-In Offices.
Need some face-to-face tax help? For a complete list of IRS offices in all 50 states, including hours of operation and contact info, check out: http://www.irs.gov/localcontacts

Tax Trap #4 -- The Quagmire of Depreciation

If you are a Small Business Owner or Self-Employed Person, there's one especially lucrative tax break that not only puts money in your pocket, it also makes the filing of your business tax return much simpler.
What am I talking about? It's called the Section 179 deduction, and if there's one tax break you need to understand, this is it. Here's why:

The Section 179 deduction enables the Small Business Owner to "expense" (i.e. deduct in the current year) up to $102,000 of the cost of most business equipment, rather than use those stingy and complicated depreciation rules that require you to write-off the cost over five or more years.

What's so great about that?

Think about it like this: I've got a dollar and I'd like to give it to you. You have two choices -- I give it to you now, or I give it to you 5 years from now.

Which do you prefer?

Obviously, you'd rather have it now, right?

And why is that?

Because of what you learned way back in Finance 101: something your banker calls "the time value of money."

I'll spare you a boring textbook definition. Instead, let's just assume we agree on this simple point: Is a dollar worth more today or 5 years from today?

It's worth more today.

And that's why the Section 179 deduction is so valuable.

Huh?

Let's use an example to bring all this financial theory into reality.

You buy $5,000 worth of office equipment in 2004. Under normal depreciation rules, you wouldn't get to take a deduction for $5,000 in 2004. Instead, you'd write off the $5,000 over 6 years -- part in 2004, part in 2005, etc.

If you're in the 35% tax bracket, you get your $1,750 in tax savings over 6 years. Yawn. That's a long time!

You'd get your deduction, and the resulting tax savings, but you'd have to wait 6 years to realize all the benefits.

Section 179 says that if you meet certain requirements, you can deduct the full $5,000 in 2004. You reduce your taxes by $1,750 in Year 2004.

So let me repeat my rhetorical question: Uncle Sam has $1,750 he'd like to give you. When do you want it? All at once, or spread out over 6 years?

That's the beauty of Section 179.

But you have to meet certain requirements to benefit from Section 179. One requirement concerns the total amount of equipment you can deduct rather than depreciate. In 2002, the amount was $24,000. And for 2003, the amount was originally set at $25,000.

Then Congress and the President passed a new tax bill in late May 2003 that raised that amount to a whopping $100,000. And since that $100,000 gets adjusted for inflation, in 2004 the maximum Section 179 deduction is now $102,000.

Never liked depreciation? Well, you can pretty much kiss it good-bye now. If your business buys more than $102,000 of equipment in a single year, it ain't so "small" any more! So this new law should cover all small businesses. Enjoy!

One final note: A few other requirements must be met to claim the Section 179 deduction. Here's a brief, but not comprehensive, overview:

1. Most personal property used in a trade or business can be deducted via Section 179. Real property cannot. Typical examples of personal property include: office equipment such as computers, monitors, printers and scanners; office furniture; machinery and tools. Real property means buildings and their improvements.

2. The $100,000 amount (adjusted for inflation) can be used through 2007. In 2008, unless new legislation is passed, the amount goes back down to $25,000.

3. There are special rules regarding the application of Section 179 to the purchase of business vehicles. (Where there are tax breaks, there are always expections!) For example, the special "SUV rule" that allowed 6,000 LB vehicles to be fully deducted (up to the $100,000 amount) was recently changed to $25,000, effective October 22, 2004.

4. Your total Section 179 deduction is limited to the business' annual profit. In other words, you cannot use the Section 179 to create or increase a loss.

This is known as the "taxable income limitation." For "C" Corporations, this limitation is very cut and dried. But if your business is an "S" Corporation, Partnership, LLC, or Sole Proprietorship, it may not be as limiting as it seems. For these non-"C" Corp businesses, the Section 179 deduction can be used to offset both business and non-business income.

And if you're married filing jointly, the Section 179 deduction can offset your spouse's income, including W-2 income.

Example: You start a new business in 2004 that ends up with a loss for the year of $5,000 (before taking the Section 179 deduction). Your spouse has W-2 income of $60,000. Even though your business is unprofitable, you can still take the full Section 179 deduction of $5,000 (again, assuming your business is an entity other than a "C" Corporation).

Be sure to consult with your tax professional to get the scoop on all the Section 179 rules.