How long should I retain my tax records?

Are you doing some spring cleaning and wondering when you can throw out those old tax documents?  Keep in mind, it is the burden of the taxpayer to provide sufficient proof and support for any tax position taken on a tax return.  Tax rules offer guidance as to minimum document retention periods. Below are some things to consider when determining whether or not to toss out those tax documents.

  • The statute of limitations for most tax returns is 3 years from the date you filed the return.
  • There is no period of limitations to assess tax when a return is fraudulent.
  • When your income is under reported by more than 25%, the time to assess additional taxes is 6 years from the time the return is filed.
  • To file a claim for credit or refund, the period to make the claim is 3 years from the date the original return was filed or 2 years from the date the tax was paid, whichever is later.

You may need to save documents for other legal reasons, such as, insurance claims or transfer of assets in the case of a passing family member.  Some documents should be kept indefinitely, such as, the  actual tax return, W-2s, life insurance policies, birth certificates, death certificates, Wills, Trust documents, residence or investment property documents.

When in doubt, preserve the documents indefinitely.

Turn Your Vacation into a Tax Deduction

Tim, who owns his own business, decided he wanted to take a two-week trip around the US. So he did–and was able to legally deduct every dime that he spent on his vacation. Here’s how he did it.

1. Make all your business appointments before you leave for your trip.
Most people believe that they can go on vacation and simply hand out their business cards in order to make the trip deductible.

Wrong.

You must have at least one business appointment before you leave in order to establish the “prior set business purpose” required by the IRS. Keeping this in mind, before he left for his trip, Tim set up appointments with business colleagues in the various cities that he planned to visit.

Let’s say Tim is a manufacturer of green office products and is looking to expand his business and distribute more of his products. One possible way to establish business contacts–if he doesn’t already have them–is to place advertisements looking for distributors in newspapers in each location he plans to visit. He could then interview those who respond when he gets to the business destination.

Example: Tim wants to vacation in Hawaii. If he places several advertisements for distributors, or contacts some of his downline distributors to perform a presentation, then the IRS would accept his trip for business.

Tip: It would be vital for Tim to document this business purpose by keeping a copy of the advertisement and all correspondence along with noting what appointments he will have in his diary.

2. Make Sure your Trip is All “Business Travel.”
In order to deduct all of your on-the-road business expenses, you must be traveling on business. The IRS states that travel expenses are 100 percent deductible as long as your trip is business related and you are traveling away from your regular place of business longer than an ordinary day’s work and you need to sleep or rest to meet the demands of your work while away from home.

Example: Tim wanted to go to a regional meeting in Boston, which is only a one-hour drive from his home. If he were to sleep in the hotel where the meeting will be held (in order to avoid possible automobile and traffic problems), his overnight stay qualifies as business travel in the eyes of the IRS.

Tip: Remember: You don’t need to live far away to be on business travel. If you have a good reason for sleeping at your destination, you could live a couple of miles away and still be on travel status.

3. Be sure to deduct all of your on-the-road-expenses for each day you’re away.
For every day you are on business travel, you can deduct 100 percent of lodging, tips, car rentals, and 50 percent of your food. Tim spends three days meeting with potential distributors. If he spends $50 a day for food, he can deduct 50 percent of this amount, or $25.

Tip: The IRS doesn’t require receipts for travel expense under $75 per expense–except for lodging.

Example: If Tim pays $6 for drinks on the plane, $6.95 for breakfast, $12 for lunch, $50 for dinner, he does not need receipts for anything since each item was under $75.

Tip: He would, however, need to document these items in your diary. A good tax diary is essential in order to audit-proof your records. Adequate documentation includes amount, date, place of meeting, and business reason for the expense.

Example: If, however, Tim stays in the Bates Motel and spends $22 on lodging, will he need a receipt? The answer is yes. You need receipts for all paid lodging.

Tip: Not only are your on-the-road expenses deductible from your trip, but also all laundry, shoe shines, manicures, and dry-cleaning costs for clothes worn on the trip. Thus, your first dry cleaning bill that you incur when you get home will be fully deductible. Make sure that you keep the dry cleaning receipt and have your clothing dry cleaned within a day or two of getting home.

4. Sandwich weekends between business days.
If you have a business day on Friday and another one on Monday, you can deduct all on-the-road expenses during the weekend.

Example: Tim makes business appointments in Florida on Friday and one on the following Monday. Even though he has no business on Saturday and Sunday, he may deduct on-the-road business expenses incurred during the weekend.

5. Make the majority of your trip days count as business days.
The IRS says that you can deduct transportation expenses if business is the primary purpose of the trip. A majority of days in the trip must be for business activities; otherwise, you cannot make any transportation deductions.

Example: Tim spends six days in San Diego. He leaves early on Thursday morning. He had a seminar on Friday and meets with distributors on Monday and flies home on Tuesday, taking the last flight of the day home after playing a complete round of golf. How many days are considered business days?

All of them. Thursday is a business day since it includes traveling – even if the rest of the day is spent at the beach. Friday is a business day because he had a seminar. Monday is a business day because he met with prospects and distributors in pre-arranged appointments. Saturday and Sunday are sandwiched between business days, so they count, and Tuesday is a travel day.

Since Tim accrued six business days, he could spend another five days having fun and still deduct all his transportation to San Diego. The reason is that the majority of the days were business days (six out of eleven). However, he can only deduct six days’ worth of lodging, dry cleaning, shoe shines, and tips. The important point is that Tim would be spending money on lodging, airfare, and food, but now most of his expenses will become deductible.

To make sure that you can legally deduct your vacation when you combine it with business, call the office before you plan your trip.

Estate Plan – Everyone Should Have One

An Estate Plan includes several elements. Most common are a will, assignment of a power of attorney, and a living will.  Take an inventory of your assets.  This would include items such as investments, real estate, business interests, retirement savings, and insurance policies.  Determine who you want to inherit your assets, who you want handling your financial affairs if you are unable, and who do you want making medical decisions for you if you become unable to make them yourself.

There are several tools to help minimize the tax on your estate and to your heirs.  For some, a trust may be a great tool.  There are options for gift giving to individuals and charities.

Regardless of your net worth, make sure you have an estate plan in place.

The Affordable Care Act and Tax Filing

Due to the Affordable Care Act, you will see some changes to your tax return.  This is the first year that you will be asked to answer basic questions regarding your health insurance.  A majority of taxpayers, approximately 75%, will only need to check a box indicating that they had health coverage in 2014.  The remaining taxpayers have health coverage through the health insurance marketplaces or decided not to enroll for coverage.

Those with coverage through the marketplace will receive a Form 1095-A which will be used to reconcile their premium cost and the financial assistance they received. Any adjustments will be reflected on their tax returns.  Individuals that can afford health insurance and chose not to will pay a fee.  Others that can’t afford coverage or meet other conditions, can receive an exemption.

Job-related Education Expenses

Job-related education expenses may be able to be deducted as an itemized deduction on your individual return. The expenses must be for education that maintains or improves your job skills or is required by your employer or by law to keep your salary, status, or job.

The education cannot qualify you for a new trade or business or be taken to meet the minimal educational requirements of your current trade or business.  Undergraduate degree costs do not qualify because they are usually incurred to meet the minimum educational requirements. Costs of obtaining a graduate degree usually qualify if the education area is related to your current job.

Expenses that can be deducted include tuition, books, supplies, lab fees, and transportation and travel costs.

Indiana’s Identity Confirmation Quiz

No, this is NOT a scam. There has been a tremendous increase in the number of victims affected by identity theft and tax fraud.  Most taxpayers do not know they are a victim until they submit a tax return and discover that someone else has already submitted a return using their name and social security number. In an effort to fight identity theft, the Indiana Department of Revenue has implemented a new identity protection program. This program went into effect during the 2014 tax season and will continue through the next season.

Taxpayers that have irregularities in their information will be asked to confirm their identities through the Identity Confirmation Quiz. At this time, only 5 percent of Indiana taxpayers have been selected. Selected taxpayers will receive an official letter from the Department of Revenue with instructions for completing the quiz.  The quiz is 4 questions and can be taken on a secure website in 2 minutes or less.

The End of Uncomplicated Health Insurance Coverage for Employees

Before 1/1/2014, small businesses had tremendous flexibility in how they compensated their employees with health insurance coverage.  Most small businesses didn’t want to establish a group health insurance plan and so would reimburse some or all employees for the employee’s individual health insurance premiums.

Various provisions of the tax code allowed small businesses to 1.) pick and choose which employees they wanted to compensate in this manner (i.e., discriminate), and 2.)reimburse the employee for their health insurance premiums on a pre-tax basis (i.e., the employer could give the employee money and the employee wouldn’t be taxed on it).

An IRS Notice issued at the end of 2013 put an end to this.  The discrimination rules have tightened up and you can no longer reimburse employees for their individual health insurance premiums on a pre-tax basis.

Starting 1/1/2014, the only way for an employer to help pay for some of the employee’s health insurance premiums in a manner that doesn’t create taxable compensation to the employee is to establish a group health insurance plan under the employer and then pay for some or all of the employee’s group health insurance premiums.

Creative Gifting

Gifting allows flexibility to shift income or deductions between individuals.  I will briefly mention 2 gifting strategies:

  • Presume that you are don’t have enough itemized deductions to itemize, and are in a low tax bracket.  If you want to make a donation to a charity but can’t benefit from the deduction, then gift the funds to a friend who can benefit from the deduction.  The friend can make the donation to the charity and utilize the deduction.  In order for the gift to be legitimate, you can have no control over the money once you make the gift to your friend.  If the friend decides not to donate it, there’s nothing you can do – except leave that friend off of your Christmas card list.
  • Presume that you want to gift money to your child to use as a down-payment on their house.  Instead of gifting cash, you can gift appreciated securities to your child.  The child will sell the appreciated securities and be taxed on the gain at their lower tax bracket.  As the stock market continues to heat up, this may be a timely strategy to get some gains off of your plate.

Congratulations to Us!

Schaaf CPA Group was just named a 2013 Angie’s List Super Service Award recipient!  This honor goes to the top 5% of accountants and tax consultants on Angie’s List.

If you are an Angie’s List customer, you can click on the Angie’s List award below to see my reviews:

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Tips for Year-End Charitable Giving

Individuals and businesses making contributions to charity should keep in mind several important tax law provisions that have taken effect in recent years. Some of these changes include the following:

Special Tax-Free Charitable Distributions for Certain IRA Owners

This provision, currently scheduled to expire at the end of 2013, offers older owners of individual retirement arrangements (IRAs) a different way to give to charity. An IRA owner, age 70½ or over, can directly transfer tax-free up to $100,000 per year to an eligible charity. This option, first available in 2006, can be used for distributions from IRAs, regardless of whether the owners itemize their deductions. Distributions from employer-sponsored retirement plans, including SIMPLE IRAs and simplified employee pension (SEP) plans, are not eligible.

To qualify, the funds must be transferred directly by the IRA trustee to the eligible charity. Distributed amounts may be excluded from the IRA owner’s income – resulting in lower taxable income for the IRA owner. However, if the IRA owner excludes the distribution from income, no deduction, such as a charitable contribution deduction on Schedule A, may be taken for the distributed amount.

Not all charities are eligible. For example, donor-advised funds and supporting organizations are not eligible recipients.

Amounts transferred to a charity from an IRA are counted in determining whether the owner has met the IRA’s required minimum distribution. Where individuals have made nondeductible contributions to their traditional IRAs, a special rule treats amounts distributed to charities as coming first from taxable funds, instead of proportionately from taxable and nontaxable funds, as would be the case with regular distributions. See Publication 590, Individual Retirement Arrangements (IRAs), for more information on qualified charitable distributions.

Rules for Charitable Contributions of Clothing and Household Items

To be tax-deductible, clothing and household items donated to charity generally must be in good used condition or better. A clothing or household item for which a taxpayer claims a deduction of over $500 does not have to meet this standard if the taxpayer includes a qualified appraisal of the item with the return.

Donors must get a written acknowledgement from the charity for all gifts worth $250 or more that includes, among other things, a description of the items contributed. Household items include furniture, furnishings, electronics, appliances and linens.

Guidelines for Monetary Donations

To deduct any charitable donation of money, regardless of amount, a taxpayer must have a bank record or a written communication from the charity showing the name of the charity and the date and amount of the contribution. Bank records include canceled checks, bank or credit union statements, and credit card statements. Bank or credit union statements should show the name of the charity, the date, and the amount paid. Credit card statements should show the name of the charity, the date, and the transaction posting date.

Donations of money include those made in cash or by check, electronic funds transfer, credit card and payroll deduction. For payroll deductions, the taxpayer should retain a pay stub, a Form W-2 wage statement or other document furnished by the employer showing the total amount withheld for charity, along with the pledge card showing the name of the charity.

These requirements for the deduction of monetary donations do not change the long-standing requirement that a taxpayer obtain an acknowledgment from a charity for each deductible donation (either money or property) of $250 or more. However, one statement containing all of the required information may meet both requirements.

What you need to know about the Federal Energy Tax Credit

One of the most-commonly claimed tax credits on an individual tax return is the Federal Energy Tax Credit.  The credit is designed to give you a tax break if you make energy-efficient improvements to your home.  Unfortunately, there are a lot of rules that you must understand before you take the credit – here are the basics of what you need to know:

There are 2 main energy credits:

The first:  A credit for installing solar water heating equipment, fuel cell equipment, wind energy equipment, or geothermal equipment.  Of these, the most-commonly claimed is the credit for installing geothermal equipment.  In this case the tax credit is 30% of the cost of the entire geothermal system including labor.  Thus, if you spent $15,000 on a geothermal system in 2013, your credit would be $4,500, meaning that you would pay $4,500 less in Federal tax in 2013.  You can take this credit for systems that you install in either a newly-constructed home or in an existing home.  There is no lifetime cap on this type of credit.

The second:  A credit for 10% of the cost of energy-efficient improvements made to your home.  Those improvements could be caulking, new qualifying windows, weather-stripping, adding insulation, new qualifying exterior doors, new qualifying storm-doors, new qualifying heat pump or air conditioning system, new qualifying hot water heaters, etc.  You will notice that I used “qualifying” often.  To determine if your energy savings improvements are qualified, you would need to obtain a certificate from the manufacturer of the item stating as much.  If you didn’t get a certificate from the manufacturer of the item, then you might go to websites such as energystar.gov to get an idea as to if your improvement is qualified.  Keep in mind that the cost of labor may or may not be included in figuring the credit, depending on what particular improvement you make to your home.  In addition, there are caps on some of the credits (such as a $150 max credit for a natural gas furnace, a $300 max credit for a natural gas water heater, amongst other caps).  Also, the maximum combined credit that you can take on all of your tax returns from 2006-2013 can not exceed $500.  This type of credit can only be used on existing homes and not on newly-constructed homes.

If you can not determine whether or not your improvements qualify for the credit, then give us a call – we have resources to help you determine if you are eligible for the credit.

How does a job change affect your taxes?

I am sure you have heard it said that the average person changes jobs 11 times in their lifetime.  There are 2 major deductions that are avaialable related to job changes – the moving deduction and the job-hunting expense deduction.

The moving deduction is the most valuable since it is directly deductible against your income for both Federal and state taxes.  You would likely qualify to deduct the costs of a move if you moved more than 50 miles for a new job.  Technically, the distance between your new job location and former house must be at least 50 miles more than the distance between the old job location and your former house.  If there is no established old job location, then the distance test is met if the new workplace is at least 50 miles from your former home…blah blah blah…just keep in mind “50 miles” and we can figure out the rest to see if you qualify.

In addition, you must work as a full-time employee at the new location for at least 39 weeks in the 12 month period following arrival in the new location and the move has to be “closely related” in time to the start of work at the new job location.

The job-hunting expense deduction is less valuable since it is a miscellaneous itemized deduction and not deductible for state taxes.  Miscellaneous itemized deductions are only deducible if you itemize, and then only to the extent that they exceed 2% of your income for the year.  Generally, you can count as a miscellaneous itemized deduction any costs that you incur so that you can earn taxable income – job-hunting expenses certainly fit this description.

Job-hunting expenses include employment agency fees, resume preparation fees, career couseling or placement fees, transportation costs to job interviews (travel, hotel, meals, mileage, flights), and publications that you purchase or subscribe to that advertise employment opportunities.  This deduction only applies to those who are seeking out work in the same field that they are currently employed in.  That means that first-time job seekers are ineligible for the tax break, as are those seeking to enter into a new industry.

Dinosaur Accountants – They Do Exist

There was one dentist in my hometown. Upon graduating from college, he bought a building in town, outfitted it with dental equipment and started accepting patients.  He must have been practicing for 20 years before I was old enough to need his services.  My mom sent me to him throughout my childhood (another 15 years).  In those 35 years since he graduated from college, he never changed a thing.  He used the same dental equipment, same 1960’s syringes (big metal things with glass tubes), same sinks and chairs, and worst of all, the same dental methods that he learned in college.

After I grew up and moved away from my hometown, I was amazed to learn that tooth-colored fillings existed!  My hometown dentist only offered analgum fillings.  I was amazed to see a digital x-ray!  My hometown dentist processed the x-ray film the old way.  My hometown dentist would wash and re-use syringes…nobody does that anymore!  The field of dentistry had advanced quite a bit since he graduated from college, but he hadn’t kept up – after 35 years, he was a dinosaur.

One might doubt that there are many industries where a professional can make a living as a dinosaur, but like small-town dentistry, the accounting industry is full of dinosaurs.

The accounting industry changes daily.  If a practitioner “takes it easy” for even one year, they are way behind.  Software changes, accounting methods change, tax rules change, IRS procedures change, technology changes, etc.  I see many tax returns come across my desk that were prepared by someone like my hometown dentist.  The accountant might have been on the cutting edge at one time, but his knowledge has since atrophied from neglect.  The results are some bad tax returns…tax returns that are off by $1,000’s.

The mentality among clients is often:  “Matt has taken care of my return for years, he knows me.”  That is true, Matt knows you and your situation, but does he still know all of the other stuff…the stuff that makes him a proficient accountant.  Sometimes it is best to get a second opinion.  Don’t worry, I won’t tell Matt.

Tax Tips for Teachers

With teachers headed back to school, we thought that it might be a good time to share some teacher-specific tax tips:

As an educator (defined as: teachers, counselors, principals, or aides who work at least 900 hours during a school year)  in the K-12 capacity, you can automatically deduct up to $250 that you spend for your classrooms with no limitation on your Federal return.

In addition, you can take a $100 credit on your Indiana return.

Of course, your need to actually spend your own money and have receipts to back it up in order to get this or any deduction.

If you spend quite a bit more than $250 for your classroom, then your might get an additional deduction if your itemize your tax return.  What is “quite a bit”?  “Quite a bit” is generally $1,000 to $2,000 depending on your situation and the income of your family.  That seems like alot of money, but once you consider that work-related mileage (at 54 cents/mile) and the work-related percentage of your cell phone bills count, then you might be closer than you think.  Keep track of all of your mileage related to purchasing supplies, going to an after-school activity that is away from your school, driving to a student’s home, etc.  The only miles that don’t count are the miles related to commuting back and forth from your home to your school.

Coaching a sport or leading an after-school activity can also create deductions.  You should track your mileage to and from the  location where the activities are held (…if the activities are not held at the same school where you regularly teach) as well as any equipment or supplies that you purchase for the activity.

Once you get to the end of the year, add up all of those miles and receipts and see where you stand.  You might get some benefit from all of that recordkeeping!