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Tax Planning Strategies

Obviously, the tax code is a complex system and every element deserves its own book. We don’t have room for that here, but have highlighted several topics that many of our clients ask us questions about. We hope the information here is helpful. If you don’t find the information you’re looking for, don’t hesitate to contact us. We’re ready to help with whatever you need!

Checking on Your Refund

The IRS has a convenient “Where’s My Refund” tool on their website which allows taxpayers to check on the status of their federal income tax refunds seven days after e-filing. Taxpayers who filed a paper return may check their refund status four to six weeks after mailing their return.

Taxpayers can use the “Where’s My Refund” tool to verify their refund status online 24 hours a day, 7 days a week, worldwide. The system requires taxpayers to enter their SSN, filing status, and the exact amount of their refund in order to log into the secure system.

Taxpayers who chose direct deposit can split their refunds among up to three accounts held by up to three different U.S. financial institutions.


Learn more about maximizing your benefits with deductions.

Your charitable gifts don’t just impact the recipient; they also affect your taxes. When you give away cash or goods to qualified nonprofit organizations, a tax deduction is one reward you reap for your generosity. However, the IRS rules for deducting charitable contributions are actually quite complex. Below are a few issues you should consider.

Qualified Charitable Organizations
In order for your donations to be tax deductible, they must be given to a “qualified U.S. organization.” Unfortunately, not all nonprofit organizations qualify, but in general the qualifying groups can be categorized as:

– certain nonprofit cemetery companies
– fraternal societies and lodges
– governmental bodies
– nonprofit groups organized for religious, educational, scientific, or literary purposes
– war veterans’ groups

Limits on Charitable Deductions
Deductions on charitable gifts are usually limited to 50% of a taxpayer’s AGI and can be as low as 20%.

Gifts That Return a Benefit to You
You cannot claim deductions on voluntary donations made as payment for services provided by a charitable organization. In certain situations, only a partial benefit may be received on the gift; in this case you may deduct the amount of the gift that is over and above the value of what is received.

Volunteering Your Time
Unfortunately, the value of your time itself is non-deductible, but expenses related to volunteer work (such as travel) are. Other out-of-pocket costs incurred on behalf of the charity are also deductible.

Travel Away From Home for Charity
You may take a deduction for travel expenses (including meals and lodging) incurred while performing services for a charity in an out-of-town location. Keep in mind that you must perform these services in an official capacity and that no “significant element of personal pleasure” must be connected with the travel. This simply means the primary purpose of your travel must be related to your charitable duties.

Non-Cash Donations
You can deduct the fair market value of donated items like used clothing, furniture, and appliances.

Condition of Contributed Items
Except as noted below, tax law does not permit a charitable contribution for clothing or household items unless the contributed items are in at least good condition.
However, you may claim a deduction for clothing and household goods that are not in good condition provided that the amount claimed as a deduction is greater than $500.00, and you include a qualified appraisal of the property in your return.

Large Donations
Certain types of non-cash contributions including limitations, appraisal requirements, and deduction recapture are subject to special rules.

Valuing Your Donation
Determining the value of the goods being given away is one of the biggest challenges faced in claiming charitable deductions on goods. The decision about value is left to you, and while there are no concrete formulas, there are some general guidelines.

– Consider the condition of each item and categorize everything according to condition (poor, good, excellent, new.)
– Research what the item you are donating would sell for in the current market by checking out local thrift shops, newspaper classified ads, or neighborhood garage sales should provide you with a an idea of the prices of goods like yours.

*Check out publications of commercial firms or trade organizations to find out the value of property like equipment and machinery.

Determining the value of antiques, jewelry, artwork, and other items that may have actually gone up in value is best done by a qualified appraiser. In fact, if an item’s current value is more than $5,000, a professional appraisal is mandatory for claiming a deduction.

Donating Used Vehicles to Charity
If the value of your vehicle deduction exceeds $500, the deduction will be limited to the gross proceeds from the charity’s sale of the vehicle. Be sure to obtain a written acknowledgement from the charity including your name, your tax ID number, and the VIN number.

Record of Non-Cash Donations
Keep a list of the donated items. Make note of:

– The description of the property
– The cost and Fair Market Value of the property (as well as how you determined the FMV)
– When and how the property was acquired

If the value of donated items is $250 more, in addition to the information noted above, obtain a written statement from the organization on whether they provided any goods or services in return for the gift, and if so, a good faith estimate of the value of the goods and services provided.

If the property has appreciated in value, get an appraiser’s report and be sure to request a receipt at the time of the donation which includes the date and the organization’s name and address.

Recordkeeping for Cash Donations
When keeping track of monetary gifts, regardless of the amount, you must have a canceled check or a written communication from the donee showing:

– The name of the organization
– The amount of the contribution
– The date of the contribution

Most organizations take the responsibility of providing receipts to their donors, but it should be noted that the IRS actually places this responsibility on the donor.

Deduction Bunching

Do your deductions often fall short of itemizing? Or are you able to itemize, but only marginally? You could benefit from the “bunching” strategy.

Itemized deductions usually consist of medical expenses, home mortgage and investment interest, charitable deductions, property taxes, state and local income taxes, unreimbursed job-related expenses, and casualty losses. The “bunching strategy” is usually used on medical expenses, tax payments, and charitable deductions, but there are other circumstances that call for this strategy.

Medical Expenses
Let’s say your dentist offers you an up-front lump sum payment or a payment plan for taking care of your child’s braces. If you make a lump sum payment, the entire cost will be credited in the year paid, dramatically increasing your deductible medical expenses for that year. Only the amount of the total medical expenses that exceeds 7.5% of your income is actually deductible. If you are affected by the AMT tax, only the amount that exceeds 10% of your AG Iis deductible.

If your income is abnormally that year, you might choose to delay making medical expense payments until the subsequent year when the 7.5% (10%) threshold is less.

Most property taxes are billed annually at mid-year, and you are typically allowed to pay in semi-annual or quarterly installments. This means you have the option of paying it all at once or paying in installments. You can bunch the tax payments by paying 1½ times your yearly tax liability in one year and only paying ½ your liability the next year. This allows you to make a bigger deduction in a single year.

Charitable Contributions
Charitable contributions are great for “bunching” since they are entirely payable at the taxpayer’s discretion. As an example, if you are in the habit of tithing, you could make your normal contributions throughout the year; then, prepay the next year’s tithes in a lump sum in December, thereby doubling your church contribution and having no deduction for charity in the next year.

Can we help you implement a “bunching” strategy?

Establishing Installment Agreements

You end up owing a tax liability- so what happens if you can’t pay it? The IRS offers an installment agreement option for those who are unable to pay all their taxes at once. You’ll need to fill out Form 9465 to request a monthly installment plan and may be granted up to 60 months to pay off the liability. The IRS may investigate your ability to pay before granting an installment agreement.

In order to be eligible, you must file all returns that are required and be current with estimated tax payments.

If you owe $25,000 or less (including tax, penalties, and interest), you can request an installment agreement using the web-based application called Online Payment Agreement at Or, you can mail the Installment Agreement Request (Form 9465) along with your bill in the envelope the IRS sent you. You should hear back within 30 days that you have been approved, denied, or if additional information is needed.

If the amount you owe is $25,000 or less, you must specify the monthly amount you wish to pay.

A one-time user fee will be charged if an agreement is approved. The user fee for a new agreement is $105 ($52 for agreements where automatic withdrawal from your bank account is used). A reduced fee of $43 will be charged for eligible individuals with incomes at or below certain levels. The interest the IRS charges on these agreements is generally higher than those charged by financial institutions.

We recommend you consider other less costly alternatives (such as a bank loan or home equity loan) before requesting an installment agreement.

How to Avoid Tax Penalties

Penalties can be assessed for a variety of reasons, such as taxpayer’s carelessness or inattention to tax details, such as failure to report income, missing documentation, overstatement of deductions, negligence, procrastination, or (of course), intentional acts of fraud. Tax penalties can be substantial and may dramatically increase your tax bill.

Congress recently added penalties for filing frivolous tax returns or making excessive claims. The following is a brief overview of federal penalties that may be imposed on a taxpayer.

Late Filing/Payment
Applicable when a taxpayer fails to file on time or doesn’t pay the taxes owed, taxpayers can pay 5% of the unpaid tax for each month or part of a month the return is late, not to exceed five months.

If a taxpayer fails to file their return within 60 days of the due date, the minimum penalty is $135 or 100% of the balance of the tax due on the return, whichever is smaller.

Underpayment of Estimated Tax
Because we use a “pay-as-you-go” system, the IRS has provided several ways for taxpayers to meet the requirements, including:

• Payroll withholding for employees;
• Pension withholding for retirees; and
• Estimated tax payments for self-employed individuals and those with other sources of income not covered by withholding.

If a taxpayer fails to prepay the required amount, they may incur the underpayment penalty, which is 2% higher than the prime rate and is computed on a quarter-by-quarter basis.

If the underpayment is less than $1,000, no penalty is assessed. In addition, the law provides two safe harbors (minimum payments), outlined below:

1. Determined by the tax owed in the current year; if a taxpayer’s payments equal or exceed 90% of what is owed in the current year, he or she may not be penalized.
2. Determined by the tax owed in the immediately preceding tax year, typically 100% of the prior year’s tax liability. Wealthier taxpayers who’s AGI exceeds $150,000 ($75,000 for married taxpayers filing separately), the prior year’s safe harbor is 110%.

Dishonored Check
Assessed for returned checks or insufficient funds. Checks of $1,250 or more will be assessed a penalty is 2% of the check amount. Checks less than $1,250 will be assessed a penalty of the lesser of $25 or the amount of the check.

Paying Late
½% of the unpaid tax for each month or part of a month the tax is unpaid. If the IRS issues a Notice of Intent to Levy and the taxpayer does not pay the balance within 10 days, the penalty increases to 1% per month. The penalty cannot be more than 25% of the tax paid late. The late payment penalty is reduced to ¼% per month for those paying in installments.

Missing ID Number
This penalty is charged when a taxpayer does not provide a social security number (SSN) for himself, a dependent, or another person and is assessed at $50 for each missing number.

Penalty on Tips
Assessed if an individual does not report tips to their employer, equal to 50% of the social security tax on the unreported tips.

This penalty is assessed if any part of an underpayment of tax is due either to negligence or disregard of rules or regulations without the intent to defraud. The penalty is 20% of the portion of the underpayment attributable to the negligence, etc.

“Negligence” refers to failure to exercise ordinary and reasonable care in preparing a tax return, failure to keep adequate books and records, failure to substantiate items properly, or any failure to comply with the law. “Disregard” includes any careless, reckless, or intentional ignorance of the law.

This penalty applies if any part of a tax underpayment is due to fraud, and the penalty equals 75% of that portion of the taxpayer’s underpayment attributable to fraud. This is one of the IRS’s most powerful tools, and although the IRS must prove fraud by clear and convincing evidence, the entire underpayment is treated as attributable to fraud if that proof is made.

These is no time limit on the assessment and collection of tax if a fraudulent return is filed and a return subject to the civil fraud penalty is treated as fraudulent for bankruptcy purposes.
Some courts have defined civil fraud it as an actual and deliberate, or willful, wrongdoing with specific intent to evade a tax believed to be owed.

Fraud-Late Filing Penalty
The IRS may increase the penalty for filing late if a taxpayer did not file on time because of fraud of 15% of the amount of tax that should have been reported on the tax return and an additional 15% for each additional month or part of a month the taxpayer didn’t file a return. The penalty may not exceed 75% of the unpaid tax.

“Excessive” Claim Penalty
If a claim for a refund or credit for income tax is made for an “excessive amount,” that taxpayer is usually liable for a penalty of 20% of the excessive amount. This penalty does not apply if the claim for the excessive amount has a reasonable basis or if any portion of the excessive amount or credit is subject to an accuracy-related or fraud penalty.

Frivolous Return
A frivolous return lacks the information necessary to compute the correct tax or shows a substantially incorrect tax because the taxpayer takes a frivolous position or desires to delay or interfere with the tax laws, including altering or striking out the preprinted language above the space where the taxpayer signs. The IRS assesses a penalty of $5,000 for filing a frivolous return in addition to other penalties.

Some of the above listed penalties may be reduced or removed if the taxpayer is able to demonstrate reasonable cause. The IRS handbook says “Reasonable cause relief is generally granted when the taxpayer exercises ordinary business care and prudence in determining their tax obligations but is unable to comply with those obligations.” It also states that “Each case must be judged individually based on the facts and circumstances at hand.”

Interest Income: Tax-free vs Taxable

Which provides the greater after-tax return- tax-free or taxable interest income? The following are issues related to this choice.

Municipal bond interest
Interest earned from general purpose obligations of states and local governments are typically tax-exempt at the Federal level. There are two categories of municipal bonds: tax-free Federal and state, and tax-free Federal only. Individuals may invest in municipal bonds by purchasing a bond or through funds that invest in municipal bonds. Certain funds invest in bonds issued in one state only, so taxpaying residents of that state may exclude that income on their state return.

Tax-free bonds tend to attract higher bracket taxpayers because they receive a greater benefit from excluding interest from income. Lower-bracket taxpayers may not receive enough tax benefit from excluding interest from income to make up for the lower interest rate generally paid on this type of bond.

Municipal bond interest must be shown on your return even though it isn’t taxable since tax-exempt interest is taken into account when determining the amount of social security benefits that are taxable. This kind of interest may also affect the alternative minimum tax computation and the earned income credit, investment interest deduction, and sales tax deduction.

Tax-deferred retirement accounts
It doesn’t make much sense to buy and hold municipal bonds in your regular IRA, Keogh, or 401(k) plan account. Income on these accounts will be taxed once you begin withdrawing from it, thus the entire amount withdrawn is likely to be taxed even though it includes income from tax-free sources. It is generally advisable to invest your retirement funds in higher-yielding taxable securities.

Effect of exempt interest on taxation of Social Security benefits
Part of your Social Security benefits are taxable if your adjusted gross income exceeds specified amounts. Thus, if you receive Social Security benefits, investment in municipal bonds might increase the amount of tax you have to pay on those benefits. The end result is the same as though a portion of that interest were taxable. Taxpayers may invest in tax-deferred, rather than tax-free, investments in order to solve this problem.

No deduction for interest on obligations incurred in connection with tax-exempt investments
You can’t deduct the interest expense from borrowing money for the purpose of investing in municipal bonds. Even if the proceeds of borrowing aren’t directly connected to tax-exempt investments, if the IRS could establish that you continued the borrowing in effect for the purpose of acquiring or carrying the municipal bonds they may disallow the interest deductions.

If your deductions are itemized, you can deduct the certain costs related to investment as long as your total miscellaneous deductions exceed 2% of your income. Any expenses connected to the account from which you receive tax-exempt income from municipal bonds or bond funds are non-deductible.

Sale, call or redemption of bond
The sale, call before maturity, or redemption of a municipal bond is treated the same as a taxable bond. Capital losses can be used to offset other capital gains, and up to $3,000 of any remaining losses can be applied against other income. Any gain is taxed at favorable rates if you held the bong long enough.

Itemized deductions
When you itemize deductions, the state income tax you pay is included as a deduction on your Federal return. Because state tax-free income reduces your state tax, the reduced state tax lowers your itemized deductions and increases your Federal tax.

Municipal bond funds
If you want diversity and professional management for your municipal bond holdings, consider purchasing shares of a fund that invests in tax-exempt municipal bonds. These funds are treated essentially the same as municipal bond interest. However, if an investor buys fund shares, receives an exempt-interest dividend, and then sells the shares at a loss within six months after the purchase, the loss is disallowed to the extent of the exempt-interest dividend.

Receiving an IRS Notice

It’s fair to say that most taxpayers dread receiving a letter from the IRS that isn’t a refund check. But don’t panic; many of these letters are no cause for alarm and can be handled simply and painlessly.

The IRS sends millions of letters and notices every year to taxpayers for a variety of reasons, such as requesting payment of taxes, notifying of a change to their account, or requesting additional information. Each letter and notice is related to a specific issue with your tax return and offers specific instructions on what you need to do to satisfy the inquiry.

What you should do: Mail or fax the correspondence to us immediately so we can review this information and help you respond to it in a timely manner.

What you should not do: Set it aside until later. If you fail to respond, the IRS will send additional notices piling additional complications onto the issue.

The majority of notices are computer-generated after discrepancies arise when the income items reported on your return are compared with those reported by the payers. On occasion, you may receive an income item that appears to be taxable income, but it isn’t. The IRS is becoming more willing to let taxpayers use substitute forms to report income, causing some confusion for taxpayers and, in some cases, causes those discrepancies. Here are some frequently encountered situations:

Sold a security with no profit: When you sell a security, the brokerage house will report the gross proceeds of sale to the IRS, so the IRS knows what you sold it for, but no idea what you paid for it. This means you have to report the sales on Schedule D on your tax return. The IRS will treat the entire sales price as a profit if you fail to report it. This is common when taxpayers overlook or omit a transaction because there was no profit. If this is what caused the IRS to contact you, you’ll have to respond to the IRS to provide verification of the stocks’ original cost.

Rollovers: Another frequent issue is related to IRA, 401(k), etc. rollovers from one plan to another or one trustee to another. If you don’t report the distribution rollover on your tax return, the IRS will treat the entire amount as taxable. If you take possession of the funds and then redeposit them into another IRA, a 1099R will be issued and the rollover must be accounted for on the return. On the other hand, if funds are transferred between trustees, a 1009R is not supposed to be issued, but they are sometimes issued accidentally. In either case, you’ll need to explain the mistake to the IRS and provide a verification of the rollover (if necessary).

Shared accounts: Banks and other financial institutions usually have the capability of having only one taxpayer ID on an account as the primary owner even if it is a joint account. Thus, any 1099s and other reporting documents they issue to the IRS will be connected with the SSN of the primary owner. When responding to an IRS notice, make sure you provide the names, addresses, and SSNs of the other account owners and a statement to the fact that they each reported their appropriate share.

These are just a handful of the more common computer mismatches that can cause computer generated notices. The IRS feels their notices are easy to understand, but many taxpayers find them confusing and worrying. The experienced eye of a tax professional can be a major benefit in these situations, and we strongly suggest having us take a look at them before taking any action or responding.

Reducing Effects of the Alternative Minimum Tax (AMT)

The Alternative Minimum Tax (AMT) was originally enacted to ensure that wealthier taxpayers with large write-offs and tax-sheltered investments pay at least a minimum tax. The AMT computation adds certain tax preferences back into income and eliminates some deductions. Taxpayers use both the regular and AMT computations and pay the higher amount. Unfortunately, the AMT does not account for inflation and, over the years, many more taxpayers are being affected by the AMT.

Although it is not always possible to avoid the AMT, we can help you minimize the impact of the AMT.

The AMT includes a myriad disallowances of certain deductions that are otherwise perfectly legal and allowed in calculating regular income tax. There are far too many to discuss, but there are a few notable AMT issues which frequently affect taxpayers. We’ve listed them below along with actions that might be taken to mitigate their effects.

Personal Exemptions
Every taxpayer, spouse and dependent on a tax return generates an exemption deduction for regular tax purposes, but under the AMT, these deductions are not allowed. If both you and your spouse can claim the deduction, consider having the spouse who is not subject to the AMT claim the deduction.

Itemized Deductions
The itemized deductions allowed for the AMT are much more restrictive than those allowed for regular tax purposes. You should engage the help of a tax expert to make sure you put yourself in the most beneficial position and minimize the effects of the AMT tax. The following are itemized deductions that you should discuss with your tax advisor:

– Charitable Contributions
– Foreign taxes
– Home and investment real estate taxes
– Home mortgage interest
– Medical deductions
– Nonconventional home mortgage
– Personal property tax
– State income tax
– Miscellaneous Itemized Deductions (Gambling losses, investment expenses, employment-related expenses, union dues, certain legal fees)

Depletion Allowance
Whether using the regular or AMT method of tax calculation, taxpayers are permitted to claim a deduction for depleting an asset such as interest in an oil well. Once the total depletion on the asset exceeds the basis, the depletion allowance is only allowed for regular tax purposes.

Excess Depreciation
With regular tax calculation, equipment that a taxpayer acquires for use in business is depreciated using the 200% declining balance method, but for AMT tax purposes, taxpayers may not use a declining balance method more than 150%. The difference creates AMT preference income.

The issues relating to the AMT are complicated, and we’re happy to help you think through the refinancing of a home mortgage, exercising incentive stock options, prepaying taxes, or any other option that may affect your AMT status.

Take Advantage of the Economic Downturn

These are tumultuous economic times for many of us, but there are some things you can do to benefit in the current economic conditions.

• Make Gifts – When values are low and expected to rise, the stage is set for making a gift. Under current law, a gift is valued at its fair market value at the date given. If the value of a planned gift has been depressed by the current market and the value is beginning to recover, it might be a good time to make a gift and minimize the gift tax while reducing your estate for any future tax.

If you are helping a loved one through the economic downturn, you can give him or her appreciated property, which he or she recipient may sell for cash. Thus, you transfer the gain to the recipient who will likely be taxed at a lower rate than you, or may not even owe any taxes.

For 2011, you can gift up to $13,000 of value ($26,000 if married and both spouses make a gift) to as many individuals as you would like without affecting your lifetime gift tax exclusion, paying any gift tax, or even having to file a gift tax return.

• Traditional IRA to Roth IRA Conversions – If your marginal tax rate is very low, your taxable income is negative, or you have tax credits that are not being fully utilized – consider converting some or all of your IRA funds into a Roth IRA. When you convert a conventional IRA into a Roth IRA, the conversion is taxed at the individual’s marginal tax rate and is not subject to penalties. The benefit is not immediate, but when you’re ready to retire, the Roth IRA withdrawals (unlike traditional IRA withdrawals) will be tax-free.

• Use Up Capital Loss Carryovers – If you’ve benefited during the recent market upswing, you have unused capital loss carryovers, and want to reduce your position in a security or realign your portfolio, consider selling some of your existing holdings with gains. By taking advantage of the unused capital loss carryovers to offset those gains, you may pay little or no tax on the profits.

• Relinquish Dependency Rights – If you are the custodial parent of a child and claim the child as a dependent, but do not need the tax benefit this year, you may relinquish the exemption to the child’s other parent. Form 8332 is used for this purpose, and make sure you fill it out correctly lest you release the exemption for more tax years than intended.

• Exercise Options – When employee stock options are exercised they produce either ordinary income (non-qualified options) or alternative minimum tax preference income (qualified options) equal to the difference between the exercise price and the market value of the shares at the time of exercise (purchase). If you have stock options with a non-publicly-traded company where the value is depressed because of the current economic climate but is expected to recover in the near future, consider exercising your options while the stock value is low. In doing so, the employees will be able to acquire the stock at a preferential price and hold it for future appreciation with a minimum, or perhaps zero, current tax bite.

• Deduct IRA Losses – A traditional IRA account often contains only contributions that were previously deducted, so if the account’s value declines, no additional loss deduction can be claimed. However, if you have made nondeductible contributions to a traditional IRA and the value of all of your IRA accounts combined is less than the sum of your nondeductible contributions, you can take a loss. However, this loss is beneficial only if your deductions are itemized and the loss exceeds 2% of your income (AGI) for the year.

• Cash in Savings Bonds – Two options are available for tax reporting of interest income from certain U.S. savings bonds, such as EE Bonds and I Bonds: include the increase in redemption value each year as interest, or postpone reporting any of the interest until the return for the earlier of the year the bonds mature or are cashed in. Most people choose the latter method.

• Variable Annuity Losses – Variable annuities typically invest in a variety of stock funds and money market accounts. The annuity may have declined in value over time and will be worth less today than it was originally. If the annuity is sold, the loss can be taken as a miscellaneous itemized deduction.

These are just a few examples of some of the many tax strategies that can be employed during depressed economic times to provide both current and future tax benefits. Let us know if we can help you take advantage of any of these strategies.

Tax-Advantaged Employer Plans

Dependent Care Benefits
If you have child care expenses because you work, ask your employer if they offer a dependent care program. If they do, you may be able to exclude up to $5,000 ($2,500 if Married Filing Separately) of child care expenses from your wages, providing a better tax benefit than the child care credit.

401(k) or Similar Retirement Plans
If your employer offers a 401(k) plan, you can choose to defer a maximum of $16,500 or a maximum of $22,000 for taxpayers 50 and older. These plans are particularly beneficial if the employer provides a matching contribution.

Flexible Spending Accounts
Some employers provide flexible spending accounts. FSAs allow employees to make contributions on a pre-tax salary reduction basis to cover qualified medical and dental expenses. Medical expenses paid for or reimbursed through pre-tax plans cannot be deducted as part of itemized deductions.

Education Assistance Programs
If you receive educational assistance benefits through a program provided by your employer, up to $5,250 of those benefits can be excluded from your taxable income each year.

Stock Purchase and Option Plans
There are many plans available to employers which allow their employees to invest in company stock. The most common are:

– Employee stock ownership plan (ESOP)
– Non-qualified stock option
– Incentive Stock Options (ISOs)

Tax-Free Employee Fringe Benefits
The law permits you to claim an exclusion from taxable income for the following benefits:

– $230 (in 2011) per month for transit passes, and commuter transportation
– $230 (in 2011) per month for qualified parking
– $20 per month for bicycle commuting expenses
– The cost of up to $50,000 of group term life insurance

Tax Calendar

Make sure you’re doing everything necessary to be ready for tax season while complying with tax laws.

Weekends & Holidays: The due date is automatically extended until the next business day (that is not itself a legal holiday) whenever a due date falls on a Saturday, Sunday or holiday.

Tax Organizer

Our Tax Organizer is specifically designed to help you maximize deductions as well as minimize possible issues in the preparation and filing of your tax return. It is revised every year to stay compatible with frequently changing and evolving tax laws.

We’ve provided our organizers in three configurations. The organizers can be downloaded to your computer where you can fill in and save the information. When you’ve completely filled it out, please send the organizer (printed or in digital format) to our office for immediate service. If you have an office appointment, you may print it out and bring it with you to the meeting. A word of caution: you can fill out the organizers online and print, but if you close the file, your data will not be saved unless the form is saved to your computer.

Once we receive your completed organizer, we will contact you with any questions, comments, or suggestions.

Basic Organizer – This organizer is appropriate for those who are not itemizing deductions and DO NOT have rental property or self-employment expenses.

Basic Organizer plus Business & Rentals – This organizer is designed for those who not itemizing their deductions and DO have rental property or self-employment expenses.

Full Organizer – This organizer includes the information from the basic organizer, plus entries for itemized deductions, rental properties and self-employment expenses.

Business Organizer – This particular organizer is for utilization by partnerships and incorporated business entities.

Prior Year Individual Organizer – If you are filing last year’s return late, please use this organizer.

Tax Time! Planning Ahead for your Appointment

Are you ready for tax season? Make sure you have everything you need by preparing all documents and questions.

Many taxpayers find themselves with an intimidating stack of “homework” as tax time approaches. Unfortunately, the task of compiling all your records for your tax appointment is never easy, but the effort will pay off in the form of tax savings! By arriving fully prepared at your appointment, you’ll be better able to:

– Evaluate all possible options for reporting income
– Consider every possible legal deduction and determine which best fit your situation
– Learn about current tax laws that affect your status

Where to Begin?
– Begin preparing for your tax appointment in January of the current tax year.
– At the beginning of the year, set up a safe storage location such as a safe or a file drawer, and file pertinent records immediately as you receive them, before they’re forgotten or lost. Divide your records according to income and expense categories. For example, keep separate folders for medical expenses, interest payments, charitable donations, etc. Keep your annual income statements (such as W-2s and 1099s) separate from your other documents. Be sure to take all these documents with you to your appointment. With practice good filing will become habit, making your job simpler when it’s time for your appointment.
– Make note of any questions you may have as your think of them so you’ll be sure to remember to ask them at the appointment.
– Review your return from the previous year and compare your income to your income for the current year. For example, a dividend from a certain stock on your previous return could remind you that you recently sold that stock and will need to report the sale.
– The IRS carefully check the social security numbers you list for your dependents and may deny deductions for returns filed without them, so make sure you the correct numbers for all of your dependents.
– Compare your deductions on your previous year’s return with your records for this year. Have you forgotten anything?

Accuracy for the Smallest Detail
To ensure the greatest accuracy possible, review every name(s), address, social security number(s), and occupation(s) on last year’s return and make note of any changes for this year. Your telephone number isn’t required on your return, but it is helpful to have current home and work numbers should questions occur during return preparation.

Marital Status Change
If your marital status changed during the year, if you lived apart from your spouse, or if your spouse died during the year, you will need to list dates and details. You’ll also need to bring copies of any documents including prenuptial, legal separation, divorce, or property settlement agreements to your appointment.

You’ll need to provide the following for each of your qualifying dependents:

• First and last name
• Birth date
• Social security number
• Number of months living in your home
• Their income amount (both taxable and nontaxable)
• Length of time as full-time student, if applicable (only if child is over 18 years old)

Special Circumstances

Car Expenses: If you use one or more vehicles for business you’ll need to list the expenses of each, including total mileage, business miles, and commuting miles separately. If you were reimbursed for mileage through an employer, bring record of the reimbursement amount.

Charitable Donations: Cash contributions to charity organizations have to be substantiated with bank records or written communication from the charity including the name of the charitable organization and the date and amount of the contribution.

Gifted or Inherited Property: If you sell property that was given to you, you need to figure out when and for how much the original owner purchased it. If the property was inherited, you must the date of the decedent’s death and the property’s value at that time.

Home Energy-Related Expenditures: If you made home modifications to conserve energy use or installed solar, geothermal, or wind power generating systems, you may qualify for a substantial energy-related tax credit. Bring the details of those purchases and the manufacturer’s credit qualification certification to your appointment.

Reinvested Dividends: If you sold stock or mutual funds in which you participated in a dividend reinvestment program, you must provide records of each stock purchase made with the reinvested dividends.

Ponzi Scheme or Bank Failure Losses: Losses incurred as the result of a Ponzi scheme or bank failure are eligible for special tax treatment. If you find yourself in this unfortunate situation, please be prepared with the details and amounts of your losses.

Sale of Home: There are special breaks for gain on the sale of a home. You may be allowed to exclude part of all of a gain provided you meet certain ownership, occupancy, and holding period requirements. Spouses filing jointly who have a gain from the sale of a home in excess of $500,000 (or $250,000 for individuals) need to provide records of expenses on improving the property. This tax breaks applies only to a primary home. Bring a copy of the sale documents (usually the closing escrow statement) with you to your appointment.

Sales of Stock or Other Property: Even if you had no profit or loss from the sale of stocks, securities, bonds, real estate, or any other type of property, you still must report each sale on your return. Each sale must be listed individually and be backed up with the purchase and sale documentation.

Standard Deduction: A portion of your property taxes, certain vehicle sales taxes, and disaster casualty losses are deductible as part of your standard deduction, even without itemizing your deductions. Bring your property tax statements, car purchase statements, and records relating to any losses incurred in a federally declared disaster area.

Vehicle Purchase: Sales tax on the purchase a new car(s) is deductible. You may qualify for an additional credit if the car was a hybrid vehicle or if it qualifies as a lean burn vehicle. Make sure you bring the purchase statement to the appointment with you.

To be deductible, clothing and household contributions need to be in at least good condition and records of each item indicating the name and address of the charity, date and location of the contribution, and a reasonable description of the property are necessary.

Tips on Filing Your Tax Return

Meet the Due Date
Individual tax returns and payment of taxes are due on the 15th day of the fourth month after the close of your tax year, falling on April 15 for virtually all taxpayers. If the due date falls on a Saturday, Sunday, or legal holiday, the due date is delayed until the next business day.

If you are a U.S. citizen who is out of the country (traveling, living, or serving in active duty) on the April due date, you may qualify for a two-month extension. Military taxpayers serving in a combat zone or qualified hazardous area or hospitalized for injury during service have generous deadline extensions available to them and should talk with a professional to find out about their options.

Provide Proof of Filing
Your paper return is considered filed on time if it is properly addressed, has sufficient postage, and is postmarked by the due date. You should consider obtaining a proof of mailing if there is a balance due on your return, especially if the amount of balance due is large and the returns are mailed close to the due date. If you send your return by registered mail, the date of the registration is the postmark date and the registration is proof that the return was delivered. If you send your return by certified mail, the date on the receipt is the postmark date, and the postmarked certified mail receipt is proof that the return was delivered.

There are two forms of extensions available, but the one used by most taxpayers is Form 4868. The other option, Form 2350, is for taxpayers living and working overseas. You may file for an extension in the following circumstances with no consequences. This is not an exhaustive list, but a few of those more common reasons for filing extensions.

– Waiting for a K-1 Distribution Form from a partnership or estate
– Need additional time to fund certain self-employed retirement plans
– Taxpayer suffered a casualty and the tax documents were lost
– Taxpayer or spouse is ill
– Taxpayer or spouse is deceased

These are extensions of_ time to file your return_, not time to pay your tax liability. Even if you file for and are granted an extension of time to file, interest and late payment penalties may still be assessed to any balance due on the return from the original due date.

Attorneys, CPAs, and Enrolled Agents may file an extension for a taxpayer without a power of attorney, as well as anyone in a close personal or business relationship with the taxpayer who has valid power of attorney may file an extension for the taxpayer.

Late Penalties
We do not recommend filing late because you owe taxes. A better strategy would be to file the return without payment and avoid the late filing penalty. Having a valid extension will help you avoid the late filing penalty, but not the late payment penalty.

– A Late Filing Penalty is charged if on tax returns filed after the due date or extension date and on late returns without a valid extension or the extension due date has passed. This penalty is 5% of the total tax due for every month (or part of a month) the return is late.
– The Maximum Penalty imposed is 25% of your total tax due.
– The Minimum Penalty on returns more than 60 days late is $135 or the full balance of the tax due, whichever is smaller.
– A Late Payment Penalty is typically .05% of the unpaid balance and is charged for each month (or part of a month) the tax remained unpaid. If at least 90% of your actual tax liability is paid before the regular due date of their return through withholding or estimated tax payments, you may qualify for a Reasonable Cause automatic extension.
– The IRS will not assess the late filing penalty or late payment penalty if you can prove Reasonable Cause for not paying on time by showing you used ordinary business care and prudence in preparing and filing their returns and were still unable to meet the due date.

What If You Can’t Pay?
Pay by Credit Card: These payments are made through a third party service designated by the IRS. If you choose to pay with a credit card, you’ll be responsible for a fee of 2% to 2.5% of the tax due.

Establish an Installment Payment Plan: If the amount you owe is less than $25,000 and you can pay it within a 5-year period, you probably qualify for an installment agreement. To be approved for an installment plan, you must agree to make full and timely payments, file all future tax returns on time, and pay all future tax balances when due. Refunds due from future years will be applied to the outstanding balance. The IRS does charge a fee for setting up the agreement. The late payment penalty will apply at half the regular amount and the IRS will continue to charge interest on the unpaid balance. If a taxpayer defaults on the terms of the agreement, the IRS has the right to take enforcement actions to collect the entire amount owed.

Options for Receiving Refunds
If you are entitled to a refund and do not have other outstanding liabilities for prior year taxes, past due child support or student loan payments, you have the following options for payment of your refund amount:

Direct Deposit – The refund is deposited into your specified savings or checking account. This process is much faster than having your refund issued by check. Taxpayers who use direct deposit for their federal refunds will be able to divide their refunds and make deposits into a maximum of three different financial accounts.

Issued a Check – If a direct deposit is not specified, then the refund amount will be paid by check.

Applied to Subsequent Year – Any portion of your refund can be applied to next year’s estimated taxes and the balance paid to you by check or direct deposit.

When to Amend Your Return

You and your tax consultant might try as hard as you can to file an accurate and timely tax return by the due date, but certain circumstances might keep you from doing so, such as:

– Waiting for corrected 1099 forms and annual statements from your investment firm
– Waiting on late 1099 forms
– Forgetting to report details such as an IRA rollover or the sale of stock at a loss
– Overlooking a significant deduction, a common mistake given the increasing complexity of our tax code
– Receiving an unexpected K-1 on an estate that you were unaware of

Amending your return to reflect the correct information or amounts is common and reasonably simple to do; and, will result in either a refund or in additional tax liability.

If you are amending for a refund, you must file your amended return before the statute of limitation expires, typically three years from the April due date of the return. If you file your amended return after the statue has expired, you will not receive a refund.

If your amended return results in tax being owed, file it as soon as possible to minimize the interest and penalties that can pile up.

Does Amending Increase the Audit Liability?

Filing an amended return does not, by itself, increase your chances of being audited, and may actually reduce your chances, particularly if you are addressing an issue that they’re likely to discover anyway. However, it’s vital you provide full documentation to justify the changes being made.

Taxation Solutions, Inc.

12250 Queenston Blvd Suite H, Houston, TX 77095