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Personal F.A.Q.s
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What pieces of paper do I need to keep in order to do my taxes?
Keep detailed records of your income, expenses, and other information you report on your tax return. A good set of records can help you save money when you do your taxes and will be your trusty ally in case you are audited.
There are several types of records that you should keep. Most experts believe it's wise to keep most types of records for at least seven years, and some you should keep indefinitely.
Should I keep my old tax returns? If so, for how long?
Yes, keep your old tax returns.
One of the benefits of keeping your tax returns from year to year is that you can look at last year's return while preparing this year's. It's a handy reference, and reminds you of deductions you may have forgotten.
Another reason to keep your old tax returns is that there may be information in an old return that you need later.
One example of information you may need years later is the tax basis of your home. If you sold your home some years ago and replaced it with the one you live in now, you filed a Form 2119 with your old return. On Form 2119, you figured the tax basis of your current home. When you sell your current home, the starting point to find out what your gain (or loss) is comes from the Form 2119 for the old house.
Audits and your old tax returns
Here's a reason to keep your old returns that may surprise you. If the IRS calls you in for an audit, the examiner will more than likely ask you to bring your tax returns for the last few years. You'd think the IRS would have them handy, but that's not the way it works. Your old returns are more than likely in a computer, in a storage area, or on microfilm somewhere. Usually what your IRS auditor has is just a report detailing the reason the computer picked your return for the audit. So having your old returns allows you to easily comply with your auditor's request.
How long should I keep my old tax returns?
You may want to keep your old returns forever, especially if they contain information such as the tax basis of your house. Probably, though, keeping them for the previous three or four years is sufficient.
If you throw out an old return that you find you need, you can get a copy of your most recent returns (usually the last six years) from the IRS. Ask the IRS to send you Form 4506, Request for Copy or Transcript of Tax Form. When you complete the form, send it, with the required small fee, to the IRS Service Center where you filed your return.
What other types of tax records should I keep?
You need to keep some other types of tax records and receipts, because they tell you how much you paid for something that you may later sell.
Keep the following types of records:
- Records of capital assets, such as coin and antique collections, jewelry, stocks, and bonds.
- Records regarding the purchase and improvements to your home.
- Records regarding the purchase, maintenance, and improvements to your rental or investment property.
How long should I keep these records? You need to keep these records as long as you own the item so you can prove the cost you use to figure your gain or loss when you sell the item.
Are there any non-tax records I should keep?
There are other records you should keep, even though they don't appear to have any use for your tax returns. Here are a few examples:
- Insurance policies, to show whether you were to be reimbursed in case you suffer a casualty or theft loss, have medical expenses, or have certain business losses.
- Records of major purchases, in case you suffer a casualty or theft loss, contribute something of value to a charity, or sell it.
- Family records, such as marriage licenses, birth certificates, adoption papers, divorce agreements, in case you need to prove change in filing status or dependency exemption claims.
- Certain records that give a history of your health and any medical procedures, in case you need to prove that a certain medical expense was necessary.
- These categories are the most universal and should cover most of your recordkeeping needs. Everyone's needs are unique, however, and there may be other records that are important to you. Skimming through our Tax Library Index might highlight other categories that apply to you.
What kind of recordkeeping system do I need?
Unless you own or operate your own business, partnership, or S corporation, recordkeeping does not have to be fancy.
Your recordkeeping system can be as casual as storing receipts in a box until the end of the year, then transferring the records, along with a copy of the tax return you file, to an envelope or file folder for longer storage.
To make it easy on yourself, you might want to separate your records and receipts into categories, and file them in labeled envelopes or folders. It's also helpful to keep each year's records separate and clearly labeled.
If you have your own business, or if you're a partner in a partnership or an S corporation shareholder, you might find it valuable to hire a bookkeeper or accountant.
Do you contribute to charity?
If you donate to a charity, you must have receipts to prove your donation.
Contributions in cash, check or other monetary form in 2007 and after aren't deductible-at all-unless substantiated by one of the following:
- A bank record that shows the name of the qualified organization, the date of the contribution, and the amount of the contribution. Bank records may include: a canceled check, a bank or credit union statement or a credit card statement.
- A receipt (or letter or other written communication) from the qualified organization showing the name of the organization, the date of the contribution, and the amount of the contribution.
- Payroll deduction records. The payroll records must include a pay stub, Form W-2 or other document furnished by the employer that shows the date and the amount of the contribution, and a pledge card or other document prepared by or for the qualified organization that shows the name of the organization.
Besides deducting your cash and non-cash charitable donations, you can also deduct your mileage to and from charity work. If you deduct mileage for your charitable efforts, keep detailed records of how you figured your deduction.
Are you employed by someone else?
If you work for someone else and spend your own money on company business, keep good records of your business expense receipts. You will need these records to either get a reimbursement from your employer or to prove business-related deductions that you take on your taxes.
Do you have income from tips?
If you make tips from your job, the hand of the IRS reaches here too, and if you are ever audited, the IRS will be interested in records of how much you made in tips.
Do you own property?
If you own property, be particularly careful to keep receipts or some other proof of all your expenses, especially for repairs and improvements.
Do you hire domestic workers?
It's important to keep accurate information about who works for you, including nannies and housekeepers, when and where they worked for you, and how much you paid them for the work.
Do you have a business?
If you have a business, you must keep very careful records of all your business expenses, including vehicle mileage, entertainment expenses, and travel expenses.
If you have a business, just because you have cash in your pocket doesn't mean you're in the black on the books. Keeping up-to-date records of all transactions and costs will not only help you tax wise, it will tell you if your business is actually profitable.
Do you travel for your business?
If you travel for business, keep good receipts and logs of all your travel expenses, including those for meals and entertainment. You will need this information whether you work for yourself or for someone else.
What's the best way to borrow to make consumer purchases?
For homeowners, it's the home equity loan. Other consumer related interest expense, such as from car loans or credit cards, is not deductible.
Interest on a home-equity loan can be deductible. So avoid other nondeductible borrowings and use a home-equity loan if you plan to borrow for consumer purchases.
What special deductions can I get if I'm self employed?
You may be able to take an immediate expense deduction of up to $250,000 for 2010, for equipment purchased for use in your business, instead of writing it off over many years. Additionally, self-employed individuals can deduct 100% of their health insurance premiums. You may also be able to establish a Keogh, SEP or SIMPLE plan and deduct your contributions (investments).
Can I ever save tax by filing a separate return instead of jointly with my spouse?
You sometimes may benefit from filing separately instead of jointly. Consider filing separately if you meet the following criteria:
- One spouse has large medical expenses, miscellaneous itemized deductions, or casualty losses.
- The spouses' incomes are about equal.
Separate filing may benefit such couples because the adjusted gross income "floors" for taking the listed deductions will be computed separately.
Why should I participate in my employer's cafeteria plan or FSA?
You generally can't deduct your medical and dental expenses, since they are deductible only to the extent they exceed 7.5% of your Adjusted Gross Income. But you can effectively get a deduction for these items if your employer offers a Flexible Spending Account (FSA), Health Savings Account or cafeteria plan. These plans permit you to redirect a portion of your salary to pay these types of expenses with pre-tax dollars.
What's the best way to give to charity?
If you're planning to make a charitable gift, it generally makes more sense to give appreciated long-term capital assets to the charity, instead of selling the assets and giving the charity the after-tax proceeds. Donating the assets instead of the cash avoids capital gains tax on the sale, and you can obtain a tax deduction for the full fair market value of the property.
How can I make tax-deferred investments?
Through the use of tax-deferred retirement accounts you can invest some of the money you would have otherwise paid in taxes to increase the amount of your retirement fund. Many employers offer plans where you can elect to defer a portion of your salary and contribute it to a tax-deferred retirement account. For most companies these are referred to as 401(k) plans. For many other employers, such as universities, a similar plan called a 403(b) is available.
Some employers match a portion of employee contributions to such plans. If this is available, you should structure your contributions to receive the maximum employer matching contribution.
What can I do to defer income?
If you are due a bonus at year-end, you may be able to defer receipt of these funds until January. This can defer the payment of taxes (other than the portion withheld) for another year. If you're self employed, defer sending invoices or bills to clients or customers until after the new year begins. Here, too, you can defer some of the tax, subject to estimated tax requirements.
You can achieve the same effect of short-term income deferral by accelerating deductions-for example, paying a state estimated tax installment in December instead of at the following January due date.
Why should I defer income to a later year?
Most individuals are in a higher tax bracket in their working years than during retirement. Deferring income until retirement may result in paying taxes on that income at a lower rate. Deferral can also work in the short term if you expect to be in a lower bracket in the following year or if you can take advantage of lower long-term capital gains rates by holding an asset a little longer.
What pieces of paper do I need to keep in order to do my taxes?
Keep detailed records of your income, expenses, and other information you report on your tax return. A good set of records can help you save money when you do your taxes and will be your trusty ally in case you are audited.
There are several types of records that you should keep. Most experts believe it's wise to keep most types of records for at least seven years, and some you should keep indefinitely.
What type of records do I need to keep?
Keep records of all your current year income and deductible expenses. These are the records that an auditor will ask for if the IRS selects you for an audit.
Here's a list of the kinds of tax records and receipts to keep that relate to your current year income and deductions:
- Income (wages, interest/dividends, etc.)
- Exemptions (cost of support)
- Medical expenses
- Taxes
- Interest
- Charitable contributions
- Child care
- Business expenses
- Professional and union dues
- Uniforms and job supplies
- Education, if it is deductible for income taxes
- Automobile, if you use your automobile for deductible activities, such as business or charity
- Travel, if you travel for business and are able to deduct the costs on your tax return
While you're storing your current year's income and expense records, be sure to keep your bank account and loan records too, even though you don't report them on your tax return. If the IRS believes you've underreported your taxable income because your lifestyle appears to be more comfortable than your taxable income would allow, having these loan and bank records may be just the thing to save you.
If I e-file my Las Vegas income taxes, will I get my refund sooner?
Yes, you will receive your refund from the IRS sooner if you e-file your Las Vegas income taxes. Normally, your income tax refund is sent directly to your bank account.
Do you have the ability to e-file income tax returns?
Yes, of course. I will promptly e-file your Federal and State returns income tax return as soon as it is finished. Unfortunately, NYC Unincorporated Business cannot yet be efiled (as of April 2010) as NYC does not allow for efiling of tax returns.
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Business F.A.Q.s
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Which kinds of business organization or business entity will limit my liability to business creditors?
Leading forms are corporations, limited liability companies (LLCs), limited partnerships, and limited liability partnerships (LLPs). General partnerships and sole proprietorships don't limit owners' liability. Limited partnerships limit liability of some partners (limited partners) and not others (general partners).
What is the "corporate double tax" and how can it be avoided?
The "corporate double tax" occurs where a business corporation (or an entity treated for tax purposes as a business corporation) pays a federal tax on its income, and then a tax is paid by its owners as they collect corporate profits. The tax on the corporation is called an "entity level tax" and an entity so taxed is called a "C corporation" (C corp).
The double tax can be avoided:
- By electing to be an S corp. This doesn't change its nature under state business law, but in most cases eliminates federal tax at the corporate level.
- By postponing profits distributions to corporate owners, the second tax (on the owners) can be postponed.
Which types of business entity are best for tax purposes?
It depends, but the "passthrough" type of entity generally saves tax overall by eliminating tax at the entity level. Passthrough entity owners are taxed directly on their share of entity profits. Another passthrough advantage is that owners can take tax deductions for startup or operating losses, against their income from investments or other businesses.
What entities will let me both limit my liability and avoid the double tax?
S corps (usually), and all the following types, assuming you don't choose to have them treated as corporations: LLCs; LLPs; and limited partnerships, for the limited partners. For sole owners, the choice is limited to S corps or, in states that allow single owners, LLCs.
What are the federal tax consequences of changing your form of business organization?
This is a critical decision that should be studied carefully with professional guidance. But briefly stated:
- There's no tax on a change from C corp to S corp or vice versa.
- There is no tax on a change from LLC, partnership or sole proprietorship to a C or S corp.
- There is no tax on a change from a proprietorship or partnership to LLC or vice versa.
- There is a tax on a change from C or S corp to an LLC, partnership or sole proprietorship.
Do state business entity rules follow federal tax rules?
Keep in mind the difference between state business law and state tax law. The tax status you choose for your entity under the federal check-the-box system doesn't make it that entity for state business law purposes. So, for example, choosing corporate tax treatment for a partnership won't bring corporate limited liability.
There is a trend for states to treat the entity chosen under federal check-the-box as the entity recognized for state tax purposes-but this is optional with the state.
State law may accept passthrough status for an entity (such as an S corp or an LLC) and still impose a tax of some kind on the entity.
Who should form an LLC?
You should consider forming an LLC (limited liability company) if you are concerned about personal exposure to lawsuits arising from your business. For example, if you decide to open a store-front business that deals directly with the public, you may worry that your commercial liability insurance won't fully protect your personal assets from potential slip-and-fall lawsuits or claims by your suppliers for unpaid bills. Running your business as an LLC may help you sleep better, because it instantly gives you personal protection against these and other potential claims against your business.
Not all businesses can operate as LLCs, however. Businesses in the banking, trust, and insurance industry, for example, are typically prohibited from forming LLCs.
Should I choose an LLC or an S corporation?
While the S corporation's special tax status eliminates double taxation, it lacks the flexibility of an LLC in allocating income to the owners.
An LLC may offer several classes of membership interests while an S corporation may only have one class of stock.
Any number of individuals or entities may own interests in an LLC. However, ownership interest in an S corporation is limited to no more than 100 shareholders. Also, S corporations cannot be owned by C corporations, other S corporations, many trusts, LLCs, partnerships, or nonresident aliens. Also, LLCs are allowed to have subsidiaries without restriction.
Exceptions to Limited Liability
While LLC owners enjoy limited personal liability for many of their business transactions, it is important to realize that this protection is not absolute. This drawback is not unique to LLCs, however -- the same exceptions apply to corporations. An LLC owner can be held personally liable if he or she:
- Personally and directly injures someone
- personally guarantees a bank loan or a business debt on which the LLC defaults
- fails to deposit taxes withheld from employees' wages
- intentionally does something fraudulent, illegal, or clearly wrong-headed that causes harm to the company or to someone else, or
- treats the LLC as an extension of his or her personal affairs, rather than as a separate legal entity.
This last exception is the most important. In some circumstances, a court might say that the LLC doesn't really exist and find that its owners are really doing business as individuals, who are personally liable for their acts. To keep this from happening, make sure you and your co-owners:
- Act fairly and legally. Do not conceal or misrepresent material facts or the state of your finances to vendors, creditors, or other outsiders.
- Fund your LLC adequately. Invest enough cash into the business so that your LLC can meet foreseeable expenses and liabilities.
- Keep LLC and personal business separate. Get a federal employer identification number, open up a business-only checking account, and keep your personal finances out of your LLC accounting books.
- Create an operating agreement. Having a formal written operating agreement lends credibility to your LLC's separate existence.
A good liability insurance policy can shield your personal assets when limited liability protection does not. For instance, if you are a massage therapist and you accidentally injure a client's back, your liability insurance policy should cover you. Insurance can also protect your personal assets in the event that your limited liability status is ignored by a court.
In addition to protecting your personal assets in such situations, insurance can protect your corporate assets from lawsuits and claims. Be aware, however, that commercial insurance usually does not protect personal or corporate assets from unpaid business debts, whether or not they're personally guaranteed.
What is a corporation?
A corporation is a legal entity that exists separately from its owners. Creation of a corporation occurs when properly completed articles of incorporation are filed with the correct state authority, and all fees are paid.
What is the difference between an "S" corporation and a "C" corporation?
All corporations start as "C" corporations and are required to pay income tax on taxable income generated by the corporation. A C corporation becomes a S corporation by completing and filing federal form 2553 with the IRS. An S corporation's net income or loss is "passed-through" to the shareholders and are included in their personal tax returns. Because income is NOT taxed at the corporate level, there is no double taxation as with C corporations. Subchapter S corporations, as they are also called, are restricted to having no more than 100 shareholders.
Do I need an attorney to incorporate?
No! Having an attorney is not a legal requirement to incorporate, except in South Carolina (a signature by a SC attorney is required on articles of incorporation). In all other states, you can prepare and file the articles of incorporation yourself; however, you should be thoroughly versed in the laws of your state.
In spite of their seemingly high hourly fees, a good corporate attorney can be a valuable resource to your small business. If you are unsure of what steps your business should take and you don't have the time to research the mater yourself, even the cost of one hour's consultation can pay off handsomely later. Just remember to bring lots of questions.
Once you have decided, we can form your corporation and save you money.
What kind of records do I need to keep in my business?
Complete and accurate financial record keeping is crucial to your business success. Good records provide the financial data that help you operate more efficiently. Accurate and complete records enable you to identify all your business assets, liabilities, income and expenses. That information helps you pinpoint both the strong and weak phases of your business operations.
Moreover, good records are essential for the preparation of current financial statements, such as the income statement (profit and loss) and cash-flow projection. These statements, in turn, are critical for maintaining good relations with your banker. Finally, good records help you avoid underpaying or overpaying your taxes. In addition, good records are essential during an Internal Revenue Service audit, if you hope to answer questions accurately and to the satisfaction of the IRS.
To assure your success, your financial records should show how much income you are generating now and project how much income can you expect to generate in the future. They should inform you of the amount of cash tied up in accounts receivable. Records also need to indicate what you owe for merchandise, rent, utilities, and equipment, as well as such expenses as payroll, payroll taxes, advertising, equipment and facilities maintenance, and benefit plans for yourself and employees. Records will tell you how much cash is on hand and how much is tied-up in inventory. They should reveal which of your product lines, departments, or service are making a profit, as well as your gross and net profit.
The Basic Recordkeeping System
A basic record-keeping system needs a basic journal to record transactions, accounts receivable records, accounts payable records, payroll records, petty cash records, and inventory records.
An accountant can develop the entire system most suitable for your business needs and train you in maintaining these records on a regular basis. These records will form the basis of your financial statements and tax returns.
You should always keep enough cash on hand to cover expenses and as an added cushion for security. Excess cash should be invested in an accessible, interest-bearing, low-risk account, such as a savings account, short-term certificate of deposit or Treasury bill.
Can I deduct the cost of meals on days I call on customers or clients away from my office?
Generally not. Usually, you can only deduct costs of meals when you're away from home overnight, or as part of business-related entertainment.
Even when deduction is allowed, it's only to the extent of 50% of the meals costs and related tips.
What are the limits on deductible travel, entertainment and meals costs?
There are no dollar limits. Expenses must be "ordinary and necessary" (meaning appropriate and helpful) and not "lavish or extravagant", but this doesn't bar deluxe accommodations, travel or meals.
Deduction for business entertainment and business meals can't exceed 50% of the cost.
There are additional special limitations on skyboxes and luxury water travel.
What can I deduct for business entertainment?
There are various conditions and limits for deductions for business and entertainment.
- Generally, there should be a business discussion before, during or after the entertainment.
- Generally, deduction for entertainment and meals is limited to 50% of the cost.
- There are further limitations for club dues, entertainment facilities and skyboxes.
- Spouses of business associates, and your own spouse, can be included in the entertainment in settings where spouse attendance is customary.
What is a Federal Tax Identification Number or EIN?
Your corporation is required to have an Employer Identification Number (EIN) also known as your Federal Tax Identification Number so that the IRS can track payroll and income taxes paid by the corporation. But, like a social security number, an EIN is used for most everything the business does. Your bank will require an EIN to open your corporate bank account.
We provide two EIN services:
- Basic EIN Service - We prepare and email your SS4 (EIN application) & easy one-page instructions for obtaining your EIN. You need only review, sign and fax or call in the information to the IRS to get your EIN.
- Full EIN Service - We actually obtain your company's EIN for you.
What is a Registered Agent?
Most every state requires that a corporation have a registered agent. That agent must have a physical location in the formation state. The registered agent can typically be any person (usually a resident of the state) or any properly registered company who is available during normal business hours to receive official state documents or service of process (lawsuit).
What is a Federal Tax Identification Number or EIN?
Your corporation is required to have an Employer Identification Number (EIN) also known as your Federal Tax Identification Number so that the IRS can track payroll and income taxes paid by the corporation. But, like a social security number, an EIN is used for most everything the business does. Your bank will require an EIN to open your corporate bank account.
We provide two EIN services:
- Basic EIN Service - We prepare and email your SS4 (EIN application) & easy one-page instructions for obtaining your EIN. You need only review, sign and fax or call in the information to the IRS to get your EIN.
- Full EIN Service - We actually obtain your company's EIN for you.
I work from home but is it necessary to let the IRS enter into my house?
A: No. The only time an IRS employee has permission to come to your home is when they have an invitation from you or someone in the home. There is an exception to this rule though. IRS can enter your home if they have a court order. If a field auditor comes to your home to verify a deduction that you claimed on your taxes you still do not have to allow him or her in. Unfortunately, if they cannot verify your deduction you will not be able to claim it.
I did some work in 2009 but have been paid in 2010, so will I pay the taxes in 2010?
A: If you did not receive payment until 2010, you will need to pay taxes on that payment in 2010. You can’t count on the money until you receive it. The earnings will need to be counted on the same year that you receive the money.
How do I figure the quarterly tax as I work as a freelancer?
A: The object is to pay more then what you should so that at the end of the year, you can get money back. Estimate how much you are going to pay the IRS and divide it by 4, the number of payments you need to pay yearly. Then you can take the total and send it to the IRS as part of your tax payment.
What happens if I forget to pay any one of the quarterly payments and I work as a freelancer?
A: If you forget to make a payment then make it as soon as you think about it and get back on schedule. If it is close to the next payment when you think about it then go ahead and make two payments at one time. It’s better to pay it late then not pay it at all. Payment should be sent on April 15, June 15, September 15, and January 15.
As a freelancer, what business deductions can I make?
A: Take over a room in your home and declare it your home office. If you don’t have a particular room look into remodelling an attic or basement. You can use a portion of your utilities, mortgage payment, taxes paid, and interest paid as part of your deductions. If you purchase a new computer system, fax, furniture, office supplies, travel expenses, or business expenses you can use all of these expenses as a deduction.
What is a 1099 form? As a freelancer do I need it?
A: The 1099 form is used if you are hired as a subcontractor. You are not considered an employee though. This form will be mailed to you by the company that hired you as a subcontractor. The company is under no obligation to send you a 1099 form if you made less then $600. However it is still your responsibility to report the income you made.
Which federal deductions are freelancers eligible for?
A: you can deduct any expense used to help you run your business. Make sure you keep receipts on everything you want to use as a deduction. If you purchase something else on the same ticket, make sure you itemize what you need to deduct from your expenses so you will know during tax time.
Why do I, as a freelancer need a CPA?
A: When you run your own business, you may find it hard to keep track of your business and keep your books straight. When you hire a CPA you relieve your self from all the stress. A CPA can help you keep everything balanced and assist you in paying your taxes quarterly. They can assist you throughout the year.
I worked with more than 1 employee and the total amount of Social Security taxes withheld is more than the maximum limit allowed. So, how will I be able to get the money returned?
A: When you file your taxes this year be sure to include the amount that you paid toward social security taxes. Your CPA will assist you in reporting this so you can get your money back. It’s important to keep track of how much you paid into social security taxes so you know how much you can expect to get back.
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