• Maintain your records categorically, not on a monthly basis such as supplies and office expenses, because your tax returns are structured in this way.
• Utilize systematic oil changes on your automobile to provide third party substantiation for total annual miles driven.
• Maintain a diary or date book consistently to document your activities. It can provide a back-up to your expense claims.
• Write in the “memo” field on your checks to clarify expenses.A written word can prove more valuable than your memory.
• Detail all of your receipts at every opportunity with who, what where, when, why, and how much.
Gather your records in advance - Make sure you have all the records you need, including W-2s and 1099s. Don’t forget to save a copy for your files.
Best Tax Planning - The best tax planning is not so much a matter of what as it is when.Trying to do planning on April 14th is not going to cut it. Sit down in January of each year and put a plan together for the rest of the year.
Hunting Tax Deductions - Many people make the mistake of trying to prepare their taxes as quickly as possible. Don’t be one of them. Hunt for tax deductions. Each time you find one you lower the money you have to pay.
No Income Tax States - IF YOU LIVE IN ONE OF THESE STATES, consider yourself lucky. You don’t have to pay state income taxes. Arizona, Florida, Nevada, Washington, South Dakota, Tennessee, Texas, Wyoming.
Single Filing Status - If on the last day of the year, you are unmarried or legally separated from your spouse under a divorce or separate maintenance decree and you do not qualify for another filing status.
Head of Household - You must be unmarried and paid more than half the cost of maintaining a home for you and a qualifying person.
Married Filing Joint filing status - You are married and both you and your spouse agree to file a joint return. (On a joint return, you report your combined income and deduct your combined allowable expenses.)
Married Filing Separate filing status - You must be married. This method may benefit you if you want to be responsible only for your own tax or if this method results in less tax than a joint return.
Qualifying Widower filing status - If your spouse died during the tax year, you can use married filing jointly as your filing status for that year if you otherwise qualify to use that status.
Qualifying Widow with Dependent Child - you may be eligible to use qualifying widow(er) with dependent child as your filing status for 2 years following the year your spouse died.
TIP - If more than one filing status applies to you, choose one that gives you the lowest tax.
TIP - After a divorce - a woman who had taken her husband’s name and made that change known to the SSA should contact the SSA if she reassumes a previous name.
Personal Exemption - You are generally allowed one exemption for your self and, if you are married, one exemption for your spouse. These are called personal exemptions.
Dependency Exemption - You are allowed one exemption for each person you can claim as a dependent. (Even if your dependent files a return).
Qualifying Child - To be a qualifying child, the dependent must meet five tests: (1) Relation-ship, (2) Age, (3) Residency, (4) Support, and (5) Special test for qualifying children of more than one person.
Qualifying Relative - There are four tests that must be met to be a qualifying relative, they are: (1) Not a qualifying child, (2) Member of household or relationship, (3) Gross income, and (4) Support
Certain Social Security Benefits
Welfare Benefits
Non-taxable Life Insurance Proceeds - Paid to you because of the death of the insured person unless the policy was turned over to you for a price.
Non-taxable Pensions
Tax Exempt Interest Income - Interest income that is not subject to income tax. Tax-exempt interest income is earned from bonds issued by states, cities, counties and Washington, DC.
Foster Care Payments
Child Support Payments
TIP - The preceding amounts must be included when figuring total support.
• You had no tax liability for the previous year
• You were a U.S. citizen or resident for the whole year
• Your tax year covered a 12-month period
Note - If you receive salaries or wages, you can avoid having to pay estimated tax by asking your employer to take more tax out of your earnings.
You must pay estimated tax for the current year if both the following apply.
• You expect to owe at least $1,000 in tax for the current year,
after subtracting your withholding and credits
• You expect your withholding and credits to be less than the smaller of:
90% of the tax to be shown on your current year return, or
100% of the tax shown on your previous year tax return.
Your previous year’s return must cover all 12 months.
For the period: Due dates:
Jan. 1 – March 31 April 15
April 1 – May 31 June 15
June 1 – August 31 September 15
Sept. 1 – Dec. 31 January 15 next year**
If the due date falls on a Saturday, Sunday or legal holiday, the payment will be on time if you make it on the next day that isn’t a Saturday, Sunday or legal holiday.If you file return by Jan. 31 and pay the rest of the tax you owe, you do not need to make the payment due on Jan. 15.
The contribution limit to your traditional IRA for 2008 will be the smaller of the following amounts:
1. $5,000, or
2. Your taxable compensation for the year
If you were age 50 or older before 2009, the most that can be contributed to your traditional IRA for 2008 will be the smaller of the following amounts:
1. $6,000, or
2. Your taxable compensation for the year
If contributions on your behalf are made only to Roth IRAs your contribution limit for 2008 will generally be the lesser of:
1. $6,000, or
2. Your taxable compensation for the year
If you were age 50 or older before 2009, and contributions on your behalf were made only to Roth IRAs, your contribution limit for 2008 will be the lesser of:
1. $6,000, or
2. Your taxable compensation for the year
However if your modified adjusted gross income (AGI) is above a certain amount, your contribution limit may be reduced.
The IRS sets a maximum limit on how much your 401(k) max deduction, or contribution, can be each tax year. The amount for the 2007 and 2008 tax years have already been decided.The 401(k) retirement plan is named after a provision of the IRS code. It is designed for employees to have a retirement plan that they can use to put off paying income tax on a portion of their income until after their retirement age. The money is deducted from your paycheck and deposited with the 401(k) plan administrator. The money is not considered taxable income in the year it is paid into the plan. Any earnings from this money or money previously contributed to the plan are exempt from taxes as well. However, there is a 401(k) max deduction established each tax year.
It is possible for a person to receive deductions on their Federal income tax returns when they are either in an assisted living care situation or paying for another who is in it.As the population has been steadily aging and the life span increasing, assisted living care has become more common. It is possible to deduct the cost of assisted care living depending on the type of services you receive and the nature of your disability. The IRS has certain guidelines to determine your eligibility.
It is possible to deduct the cost of housing and meals when a person is in an extended care facility due to aging or the inability to care for themselves. Certain personal care services may also be deductible as well. The determining factor is generally the inability to perform at least two basic functions of living without assistance. These basic living functions include such activities as eating, toileting, moving from place to place, dressing, and bathing. A doctor must certify in writing that the patient was unable to perform these activities for at least 90 days.
If you are paying for a patient to be in an assisted living care facility for the above reasons, you may take the deduction from your return. The patient must qualify by the above criteria and in addition must be related to the payer or have lived as a member of their household for an entire year. A parent must also be a citizen of the United States or a resident. They may also be a citizen of either Mexico or Canada, and the child must have paid over 50% of their support for the year.
Supplemental Medicare Insurance Tax Deductions - Supplemental Medicare Insurance has become increasingly popular as medical costs continue to rise. The fact that Supplemental Medicare Insurance is deductible helps a lot.
Supplemental Medicare Insurance is part of a program called Medigap Insurance. Its intention is to supplement the gaps in the coverage of Medicare A and Medicare B coverage. Although these programs are offered by various insurance companies, they are all regulated by Federal and State laws. These laws dictate that all of the provisions of the various types of plans are the same from policy to policy.
State and Local Income Taxes - You can choose to claim a state and local tax deduction for either income or sales taxes on your return.
Real Estate Taxes - Deductible real estate taxes are usually any state, local or foreign taxes on real property.
Property Taxes - Taxes on property, especially real estate, but also can be on boats, automobiles (often paid along with license fees), recreational vehicles, and business inventories.
Personal Property Taxes - Personal property taxes are deductible when they are based on the value of personal property, such as a boat or car. To be deductible, the tax must be charged to you on a yearly basis.
Generally, home mortgage interest is any interest you pay on a loan secured by your home (main home or second home). The loan may be a mortgage to buy your home, a second mortgage, a line of credit, or a home equity loan.
You can deduct home mortgage interest only if you meet all the following conditions.
• You must file a 1040 and itemized deductions on Schedule A (Form 1040).
• You must be legally liable for the loan. You cannot deduct payments you make for someone else if you are not legally liable to make them. Both you and the lender must intend that the loan be repaid. In addition, there must be a true debtor-creditor relationship between you and the lender
• The mortgage must be a secured debt on a qualified home in which you have an ownership interest. (Generally, your mortgage is a secured debt if you put your home up as collateral to protect the interests of the lender. The term “qualified home” means your main home or second home.)
Homes that are purchased for investment and not used as a personal residence are treated differently.
If you give cash to a qualified charity, you can deduct it. Under new rules, you must have a receipt or bank statement to prove the deduction.
Contributions made to a specific individual.
Value of time or services (blood donations, income lost while you work as an unpaid volunteer)
Personal, Living or Family Expenses (costs of meals or lodging while performing services)
If you contribute property to a qualified organization, the amount of your charitable contribution is generally the fair market value of the property at the time of the contribution.
You cannot take a deduction for clothing or household items you donate unless the clothing or household items are in good used condition or better.
A letter or other written communication from the charitable organization acknowledging receipt of the contribution and containing the following information would serve as a receipt.
Name or charitable organization
Date and location of the charitable organization
Reasonable detailed description of the property
If you donate a qualified vehicle (car, boat, airplane) to a qualified organization and you claim a deduction of more than $500.00 you can deduct the smaller of:
• The gross proceeds from the sale of the vehicle by the organization or
• The vehicles fair market value on the date of the contribution. If the vehicle’s fair market value was more than your cost or other basis, you may have to reduce the fair market value figure.
• The car donation tax deduction requires the filing of Form 1098-C which is a form for Contributions of Motor Vehicles, Boats, and Airplanes. It is possible to use another statement from the charitable organization in lieu of Form 1098-C as long as it contains all of the information that would be found on the 1098-C form.
Self-Employment Profit - Self-employment income minus self-employment expenses, when self-employment income is greater than self-employment expenses.
Self-Employment Loss - Self-employment income minus self-employment expenses, when self-employment income is less than self-employment expenses.
Deducting Necessary Business Expenses - To deduct an expense, it must be necessary for your business. It must contribute and be helpful to maintaining and growing your business.
Deducting Ordinary Business Expenses - To be deductible, a business expense must be ordinary. Ordinary is defined by what is a normal expense in your business area, not some generic area.
Independent Contractor - Performs services for others. The recipients of the services do not control the means or methods the independent contractor uses to accomplish the work.Independent contractors are self-employed.
Loss Appraisal Fees - Assuming your business suffered some type of property loss, you may need to hire an appraiser. The fees of the appraiser are entirely deductible as professional services.
Deducting Sports Sponsorships - Many businesses will sponsor a youth sports team to help the kids make ends meet. You can deduct the total costs associated with such sponsorships.
Deducting Government Assessments - Local governments often assess costs to business for repairs of streets and the like around the business. You can deduct these in full.
Deducting Answering Services - Many businesses choose to hire answering services to make sure the phone is always answered. All costs of such services are deductible.
Deducting Property Losses - A business that has property losses due to fires, floods and such can deduct them. The deduction, however, is reduced by an insurance proceeds received.
Deducting Company Parties - As long as all employees are invited, you can deduct 100 percent of all expenses for company parties.
Deducting Parking and Mileage - You can deduct business mileage each year, and the price of parking if associated with business affairs. Paying for parking at your office is not deductible.
Deducting Parking Tickets - If you get a parking ticket while out on business, you Cannot deduct it. You can never deduct a fee associated with breaking the law.
Legal Fees for Starting A Business - Retaining a lawyer to help you start a business out right is a smart move. Unfortunately, you cannot deduct the cost the first year. It has to be amortized over five years.
Deducting Late Charges - This one is a surprise to most people. You can deduct late charges for any business oriented debt. There is one exception. You cannot deduct late charges or penalties issued by a government agency, to wit, the IRS!
Deducting Copyright Costs - Copyrighting your original works make sense for a variety or reasons. If you take this step, you can deduct all the cost of doing so if the total does not exceed $5,000.
Deducting Trademark Costs - Businesses often protect their brands and names by trade marking them. The costs associated with this can be deducted, but only if under $5,000. Anything over that amount must be amortized
Business Conference Deduction - If you travel to a conference for your business, you can deduct it. You can also deduct fifty percent of the cost of meals during the trip.
Equipment Rental Deduction - If you rent equipment for a business, you can deduct the equipment rental.
Self-Employment Tax - Similar to Social Security and Medicare taxes. The self-employment tax rate is 15.3 percent of self-employment profit. The self-employment tax is calculated on Schedule SE.
Board of Directors Fees - A corporation requires a Board of Directors to see the overall direction of the business. If the corporation pays them a fee for their services, it is entirely deductible as a commission deduction.
Employee Disability Insurance - If you buy disability insurance for your employees, you can deduct it. As an owner, you can only deduct policies for yourself if you are categorized as an employee of the business.
Deducting Employee Education - For many businesses, it makes sense to keep employees educating on the latest developments in the business field. You can deduct all of the costs of such education.
A tax credit is generally much more valuable than a deduction. The tax credit reduces the actual amount of tax that must be paid (Dollar for dollar). A deduction, on the other hand, only reduces the taxable income. Therefore, the tax deduction is subject to the variation in the progressive tax rate. A tax credit does not depend on the tax rate and so it is of equal value to a taxpayer regardless of his income level.
You may be able to claim the credit if you pay someone to care for your dependent who is under the age of 13 or for your spouse or dependent who is not able to care for him or herself. The credit can be up to 35% of your expenses. To qualify, you must pay these expenses so you can work or look for work. This credit should not be confused with the child tax credit.
There are two basic education credits available.
They are the Hope Credit and the Lifetime Learning Credit.
They are paid on expenses that are incurred by you, your spouse or your dependents.Only one of the two Credits may be taken on any individual student in any given Tax year.The actual amount of the credit is determined by using your qualified tuition and related expenses and considering the limitations based on your adjusted gross income (AGI).
Hope Credit - ONLY for 2 years per eligible student
• Must pursue an undergraduate degree or other recognized educational credential.
• Must be enrolled at least half time for at least one academic period during the year
• No felony drug conviction on student’s record
Lifetime Learning Credit - Available for all years of post-secondary education and for courses to acquire or improve job skills.
• Student doesn’t need to pursue degree, or other recognized education credential.
• Available for one or more courses
• Felony drug conviction rule does not apply
You may be able to take this credit for any of the following improvements to your main home located in the United States if they are new and meet certain requirements for energy efficiency.
• Insulation material or system primarily to reduce heat gain or loss in your home
• Exterior Windows (including skylights)
• Exterior doors
• A metal roof with pigmented coatings designed to reduce heat gain in your home
For more information See the Instructions for Form 5695
You may be able to take this credit if you paid for any of the following during the tax year.
• Qualified solar electric property for use in your home located in the United States.
• Qualified solar water heating property for use in your home located in US.
• Qualified fuel cell property installed on or in your main home located in the US.
For more information See the Instructions for Form 5695
Generally, you can take either a deduction or a tax credit for foreign income taxes, but not for taxes paid on income that is excluded from U.S. tax.
The Child Tax Credit allows you the possibility to reduce your Federal tax liability by $1000 for each qualifying child under the age of 17. In order to claim the Child Tax Credit, the child in question must be under the age of 17 as of the end of the tax year. They also must be a son, daughter, adopted child, stepchild, or eligible foster child, brother, sister, stepbrother,stepsister or a descendents of any of them (for example your grandchild, niece, or nephew). They must be citizens of the United States or resident aliens. You have to have provided at least half of the support for them and lived with you more than half of the year.
The Earned Income Credit (EIC) is a refundable credit for low-income working individuals and families. Income and family size determine the amount of the credit.
You may be able to take a credit if you place an alternative motor vehicle in service during the tax year. Alternative Motor Vehicle is a new vehicle that qualifies as one of the following four types of vehicles.
• Qualified hybrid vehicle
• Advanced lean burn technology vehicle
• Qualified alternative fuel vehicle
• Qualified fuel cell vehicle
For more Information on this credit see the instructions for form 8910
