Standard Mileage Rates go up for the Second Half of 2008

Rates increased due to rising gas prices

Rates effective January 1 through June 30, 2008: 50.5 cents per mile for business miles driven; 19 cents per mile driven for medical or moving purposes; and 14 cents per mile driven in service of charitable organizations. Rates effective July 1 through December 31, 2008: 58.5 cents per mile for business miles driven; 27 cents per mile driven for medical or moving purposes; and 14 cents per mile driven in service of charitable organizations. These rates apply to cars, as well as vans, pickups and panel trucks. Posted on 2008-06-25 20:44:14

Health Savings Account Contribution Limits

2009 HSA Limits Released (IRS Rev. Proc. 2008-29)

If you have a high-deductible health plan, you are eligible to open a Health Savings Account (HSA). Amounts contributed are deductible for all taxpayers (even those taking the standard deduction) and funds may be withdrawn tax-free to cover out-of-pocket medical expenses, including deductibles (but not premium payments). If you open your account part way through the year, you can still contribute the calendar year maximum for a full tax deduction. Maximum HSA Contributions (this is a tax deduction) 2009: $3,000 for individuals with self-only coverage, $5,950 for individuals with family coverage 2008: $2,900 for individuals with self-only coverage, $5,800 for individuals with family coverage 2007: $2,850 for individuals with self-only coverage, $5,650 for individuals with family coverage 55-and-up Catch-Up Contributions (again a tax deduction) 2009: $1,000 ($2,000 for family coverage where both spouses are 55 ) 2008: $900 ($1,800 for family coverage where both spouses are 55 ) 2007: $800 ($1,600 for family coverage where both spouses are 55 ) "High-Deductible Health Plan" Definitions 2009: Deductible of at least $1,150 for self-only coverage and $2,300 for family coverage; Out-of-pocket maximum of $5,800 for self-only coverage and $11,600 for family coverage 2008: Deductible of at least $1,100 for self-only coverage and $2,200 for family coverage; Out-of-pocket maximum of $5,600 for self-only coverage and $11,200 for family coverage 2007: Deductible of at least $1,100 for self-only coverage and $2,200 for family coverage; Out-of-pocket maximum of $5,500 for self-only coverage and $11,000 for family coverage Posted on 2008-05-28 17:00:04

A Letter to New Day Care Providers

Dear Family Child Care Provider:

I am an Enrolled Agent in private practice since 1995. Previous to that I had a career as a software engineer. Enrolled Agents are tested and licensed by the Department of the Treasury. We prepare tax returns and also represent taxpayers before the Internal Revenue Service. I specialize in working with California family child care providers. I do this because I enjoy it and because people in your profession have a need for specialized care. Most tax professionals (even experienced ones) are unfamiliar with the nuances of day care taxes. I see many tax returns with both large and small errors that cause the provider to pay more tax than she should or leave her in a risky position in case of an audit. New day care providers have much to learn about managing their businesses. From a tax perspective, your main focus should be getting a good record keeping system into place and taking time to process your receipts and other paperwork either weekly or monthly. I highly recommend Minute Menu Kids software which is designed specifically for family child care providers. I also encourage you to do a household inventory this year. This will allow you to take a tax deduction based on the value of your household furnishings and other personal property owned at the time you started your business. It is worth using the Inventory-Keeper from Redleaf Press to help you do a complete inventory and save the most tax. I work with child care providers in a comprehensive fashion to prepare your tax returns for the current year and get you set up with estimated tax payments for the coming year. Business owners must generally make estimated tax payments during the year to cover their tax liability or risk ending up with a large balance due at tax time and potentially also an “underpayment penalty.” The underpayment penalty is in place because the government believes in a “pay-as-you-go” system and does not want you to wait until April 15 next year to pay your income and self-employment tax. Sometimes the income tax withholding from a spouse’s wages will cover a provider’s taxes, but usually it does not. See my Day Care Tax Return Overview for more information regarding the taxes that apply to your income and making estimated tax payments. Please let me know if you need help in projecting your tax for this year and calculating quarterly payments. Effective client communication is a high priority for me. I work in partnership with child care providers to arrive at the best tax return result and keep you in compliance with all tax laws and free from audit worries. My fees (usually between $400 and $500; sometimes less) are not the lowest around, but neither are they the highest. I believe you would find my fee well spent in terms of tax savings, errors prevented and time taken to answer your questions and educate you on day care tax issues. I take a $200 deposit at the time I start work on a tax return and collect the reminder of the fee on completion. I accept cash/check and also debit/credit cards though my Payments page. I work with clients all over California. I am not interested in being a "hard sell," as I know that not everyone who contacts me will become a client. Wherever you go for tax preparation, I encourage you to find a tax professional who understands your business. See my post on How to Find a Tax Preparer. And remember, the cost of preparing your business tax forms can be deducted as a business expense! Please visit my Newsletter page and sign up to receive the day care tax news emails I send out a few times per year. Every email gives you the ability to alter your subscription or opt-out altogether. If I can be of service now or in the future, please do not hesitate to email me or call me toll-free at 800-616-1268. (Outside California call 510-745-7275.) Sincerely, Alison T. Jacks, E.A. P.S. Here is some additional information which you may find helpful: Day Care Record Keeping 101, a quick reference guide for family child care providers. (This full color graphical document takes a minute or so to download. Contact me if you would like me to send you a printed hard copy.) Day Care Tax Return Checklist, a list of the information needed to prepare a family child care tax return. Day Care Tax Return Overview (already mentioned above) Day Care Tax Deductions Day Care Time-Space Percentage Calculation Posted on 2008-05-06 00:10:37

IRS Rebate Payment Schedule Available

Find out when your rebate will arrive

The Internal Revenue Service has published a rebate payment schedule for tax returns that are received and processed by April 15. The payments will be mailed based on the last two digits of a taxpayer's social security number. The IRS will begin delivering rebate payments May 2, starting with those that are directly deposited into a bank account, and will continue through the summer. View the Rebate Payment Schedule Taxpayers filing after April 15, 2008 will receive their rebate checks later in the year. For help in calculating your expected rebate, visit the online IRS Economic Stimulus Calculator. Thanks to the National Association of Tax Professionals for this helpful information. Posted on 2008-03-25 23:39:16

Tax Rebates Are Coming Thanks to the Economic Stimulus Act of 2008

You might get a check in the mail or a direct deposit into your bank account

This is a quick missive on the subject of those federal tax rebates due to the Economic Stimulus Act of 2008. These "stimulus payments," as the Internal Revenue Service refers to them, will go out through the late spring and summer. You must file a 2007 federal income tax return. Otherwise, no rebate. Be sure to pass this information on to folks you know whose income is so low that they don't normally file a tax return. They should probably do so this year. Seniors receiving social security benefits should definitely file a tax return, even if it's not otherwise required. From IRS Fact Sheet FS-2008-16: Some low-income workers and recipients of Social Security, certain veterans’ benefits and certain Railroad Retirement benefits may qualify for economic stimulus payments this year from the federal government. Don't worry if you file your tax return after April 15. From IRS News Release IR-2008-18: To accommodate taxpayers who file tax returns later in the year, the IRS will continue sending payments until December 31, 2008. The IRS also cautions taxpayers that if they file their 2007 tax return and then move their residence that they should file a change of address card with the U.S. Postal Service. Most taxpayers will receive a rebate of $300-600 for single persons and $600-1,200 for married persons filing a joint return. The higher amounts should apply if you pay at least $600/$1,200 in federal tax for 2007. There is an additional rebate of $300 for each dependent child. Children must be under the age of 17 in 2008 to qualify. On the other hand, children and others who can be claimed as a dependent are not eligible for the rebate, even if they are required to file a tax return for 2007. Payments to "higher income taxpayers" will be reduced. Reductions affect individuals with tax returns showing income over $75,000 and married persons with joint tax returns showing income over $150,000. My calculations show rebates reduced to zero for single taxpayers when income hits $87,000 and for joint filers when income reaches $174,000. The reductions are based on "adjusted gross income," line 37 on Form 1040. You can relax knowing the rebates will be sent out automatically. From IRS Fact Sheet FS-2008-15: The vast majority of Americans who qualify for an economic stimulus payment will not have to do anything other than file their 2007 individual income tax return to receive their payment this year. They will not have to complete applications, file any extra forms or call the Internal Revenue Service to request the payment, which is automatic. The IRS will determine eligibility, figure the amount and issue the payment. Note that if you have direct deposit on your 2007 federal income tax return, your rebate will be wired directly into your bank account. You may want to choose direct deposit of your refunds this year, even if you haven't done so in the past. You will get your money faster that way. If you expect a check and your address changes after filing your tax return, follow the IRS suggestion to file a change of address form with the U.S. Postal Service. I recommend that you also prepare and submit Form 8822 Change of Address to the IRS. California residents should also submit Form 3533 Change of Address to the Franchise Tax Board. Posted on 2008-02-17 01:47:09

Standard Mileage Rates

See rates for 2007 and 2008 below

2007 standard mileage rates for the use of a car (including vans, pickups or panel trucks): 48.5 cents per mile for business miles driven; 20 cents per mile driven for medical or moving purposes; and 14 cents per mile driven in service to a charitable organization. 2008 standard mileage rates for the use of a car (including vans, pickups or panel trucks): 50.5 cents per mile for business miles driven; 19 cents per mile driven for medical or moving purposes; and 14 cents per mile driven in service of charitable organizations. Posted on 2008-02-04 17:24:41

Day Care Providers: Should You Give a 1099 to Your Home Service Providers?

You bet! And it's not too late to send them for 2007.

If you're a day care provider and other home business owner, you may not think you hired any independent contractors, but what about your lawn service? Your window washer? Your handy man? The guy who shovels your driveway? Etc? These folks usually don't provide services directly to your business, but if you are taking a home office deduction, they do indirectly. You deduct a percentage of what you pay them on your tax return. Giving 1099s to home service providers According to Tom Copeland, of the Redleaf National Institute, child care providers should give 1099s to home service providers paid $600 or more during the year. This advice applies just as well to all other self-employed home business owners. The idea of giving 1099s to home service providers was new to me when I first corresponded with Tom on this subject about a year ago. Tom believes that this is the best practice to follow and the best way to safeguard your tax deduction. For second opinion, I recently brought this issue to the attention of "TaxMama" Eva Rosenberg. She agrees with Tom: From the standpoint of the compliance audits IRS is doing now, I can see an aggressive auditor disallowing a deduction because there was no 1099 or W-2. And frankly, if you were to appeal, you'd probably lose - since you're taking these expenses (even if only part of the expense) as a business deduction. IRS wants to close that tax gap. And these maintenance-type workers are often a big part of the unreported economy. Great! More paperwork. Let's not panic, but rather consider our options. I myself have not given a 1099 to my house cleaning service in all the years I have been using them. I am thinking of changing that, however. Maybe for 2007 and maybe for 2008. I'm not sure yet. As TaxMama points out above, the IRS is in a "compliance mode" and aiming to reduce the "tax gap." These are code words for auditing more and grabbing more of our tax dollars. The tax gap is the difference between what taxpayers are paying and what the IRS believes we should be paying. The potential cost of doing nothing An aggressive auditor could disallow the portion of my house cleaning costs deducted as a business expense on my home office form. I would immediately owe additional income and self-employment tax, plus penalties and interest. The final bill would depend on the size of my original house cleaning deduction. Considering the size of my home office, losing this deduction could easily cost me $150. Closer to $300 if I had the home office percentage of a typical day care provider (30-35%). Even more than that for a business with a higher business percentage. 1099s are easy Or are they? The good part is that 1099-MISC forms are not at all complicated or expensive to prepare. I am confident that you will agree and perhaps you've already prepared some yourself. It takes only a few minutes to fill out a 1099-MISC and the 1096 transmittal form and you can get the forms free from the IRS. The real problem isn't filling out the forms, is it? It's getting your service worker's tax id number and address information. Some workers insist on being paid in cash. In that case, you do the math (or have your tax pro do it for you) to see how much it would cost you to lose the deduction in an audit. Then you ask yourself if it's worth continuing to use the person's services or if you are better off looking for someone else. Don't forget direct service providers Most workers providing services directly to your day care business are considered employees, but double check to see if you may have hired a tutor, puppeteer, storyteller or other professional activity-provider. You may also occasionally hire someone to provide substitute child care services. You should definitely give these folks a 1099-MISC if they were paid $600 or more during the year. Direct (100%) business expenses give you the biggest tax savings and they're well worth protecting. Observe the situation carefully if you hire a substitute caregiver. To be an independent contractor, such a person should advertise to the public, give you a tax id number, provide services to multiple providers, and have a business contract for you to sign. This is rare. In general, the caregivers you hire will be considered your employees. Ready to file a Form 1099-MISC? Follow this link to my blog entry providing Step By Step Instructions for Preparing 1099s. Posted on 2008-02-02 23:31:05

1099-MISC Forms are a Snap to Prepare, but Act Quickly

Here's a step by step for small business owners

1099s are supposed to be sent to recipients no later than January 31, but the true deadline is February 28. That is the deadline for mailing your 1099s to the IRS. If you're a business owner, you must give a Form 1099-MISC to any independent contractors you paid $600 or more for services provided to the business during 2007. Don't bother if the contractor's own business is incorporated. (An exception applies in that case.) If your business used the services of an attorney, however, always send a 1099, incorporated or not. If you have a home office for tax purposes, refer to a related blog post on the subject of 1099s for Home Service Providers. Sending 1099s is not optional. When you pay for services, you want to deduct the cost on your tax return. If you neglect to prepare a 1099 and later get audited, your deduction will automatically be disallowed. That's an immediate increase in tax for you, plus interest and penalties. Important: 1099s cannot be used for workers who should properly be treated as your employees. You must provide them with a Form W-2 instead. Refer to the IRS website for help in determining how to treat your workers: Independent Contractors vs Employees. If you need payroll forms guidance, refer to my Small Business Payroll Tax Guide. Ready to file a 1099-MISC? Here's what you do. Immediately. (This is February, so time is of the essence.) Determine how many 1099-MISC forms you need to send. (One for each service provider paid $600 or more.) Call the IRS forms number at 800-829-3676. Have them send you 3 copies of Form 1096 and one copy of Form 1099-MISC for each of your 1099 service providers. This is enough so that you can mess up a few up a few forms and still be okay. You only need to prepare one final Form 1096 and, in fact, the 1099-MISC forms you just ordered have two forms per page (so you're getting twice as many as you really need). You need to call immediately because it will take 7-14 days for the forms to arrive. These forms cannot be downloaded from the Internet because they are special, red, scannable forms. There's still time to file 1099s for 2007 if you act now. You can also buy 1099 forms at your local office supply store. But why do that when you can get them for free? Also, I find that the stores tend to run out of forms around the end of January. If you do go shopping for forms, be sure to buy the 1099-MISC forms labeled "4-part continuous," so that you can fill them out by hand. (Other types of 1099 forms are sold for use with software.) A few 1096 forms will be included in the package. Talk to your service providers Next call your service providers. Let them know that you will be sending them a 1099 for 2007 and apologize for it being late. If possible, tell them how much income will be shown on the form. That way, the delay in receiving your form will not hold up their tax preparation. If you don't have the service provider's tax id number, now is the time to get it. Get their full legal name and mailing address, too. If the worker refuses to cooperate, you should document this in your records. You should also send them a Form W-9, since that's the official way to request someone's tax id number. Document sending the W-9, too. Such documentation will help to protect your deduction in case you can't prepare a 1099 and you later get audited. It won't help you if you continue to hire the person year after year, however. So decide how much it's worth to you and look for a new service provider if you want to be able to prepare a 1099 next year. Have the new worker fill out Form W-9 right when you hire them. Preparing Form 1099-MISC This is a 4-part carbonless form. Press hard so that what you write is legible all the way through. Enter your name, address and phone number is the PAYER'S box at the top. Enter your tax id number in the PAYER'S federal id number box. This means your Employer ID Number (EIN) or your social security number. If you are a sole proprietor without an EIN, be aware that it only takes a few minutes to get an EIN using the IRS EIN Online Application. It is best to use an EIN on your 1099s and protect the privacy of your social security number. Enter the worker's information in the RECIPIENT'S id number, name and address boxes. That's about it. All that's left to do is enter the dollar amount paid to the person during 2007 in box 7, labeled "nonemployee compensation." Fill out one 1099-MISC for each of your service providers. Preparing Form 1096 This is a single sheet transmittal form. You send one 1096 with however many 1099-MISC forms you have. Enter your name and address in the FILER'S box at the top. Enter your name as "person to contact" and enter your phone number in the appropriate box. Include an email address or fax number if you want to. If you have an EIN, enter it in box 1. If not, enter your social security number in box 2. Enter the number of 1099-MISC forms you prepared in box 3. This means the number of individual 1099-MISC forms prepared, not the number of 1099-MISC pages. (Remember? There are two 1099-MISC forms on each page.) Finally, total up the amounts shown in box 7 of all your 1099-MISC forms and enter it in box 5 on the 1096. Enter an "X" in the box for "1099-MISC," from among all the checkbox choices shown. Sign and date the Form 1096 and enter "owner" as your title. Preparing the forms for mailing Now it's time to separate the four parts of each 1099-MISC form. Do not cut the top red forms apart. Set them aside. Separate all the carbonless copies. Send Copy B to the recipients (your workers). Keep the other copies with your records. If they are at all hard to read, I suggest that you make a copy of the red 1099-MISC for your records, but this should not be necessary. It is a good idea to make a copy of the 1096 form for your records, however. Put the red 1096 and the red 1099-MISC forms in a large envelope. Do not fold, staple or mutilate them! Don't even use a paper clip. Send them flat to the Internal Revenue Service Center address for your state, as shown under "Where To File" in the 1096 instructions printed on the bottom of the form. The forms must be postmarked no later than February 28. You'd think they'd give us an extra day for leap year, but the instructions say the 28th. Here is a link to the 1099-MISC instructions for additional guidance. Posted on 2008-02-02 23:24:19

Are you a Child Care Provider looking for a Tax Preparer?

Here's some help with your search

The fact of the matter is that there are not nearly enough tax professionals out there specializing in child care taxes. Not enough to meet the demand for sure. If you are a child care provider looking for help at tax time, this can be very frustrating. I work with day care providers all my home state of California, so if you also call California home, feel free to contact me. Many people are initially shocked at the idea of working with a tax person located many miles (maybe hundreds of miles) away, but it is surprisingly easy. In fact, there are a good number of my local clients whom I never see! They find it much easier to send me their information via US mail, fax or email. I am contacted all the time by providers from other states who have not been able to locate a local tax professional who specializes in day care taxes. I do prepare a few out-of-state tax returns for California clients who have moved, but the fact is that I have my hands full keeping up on California tax law (which differs more and more from Federal tax law every day). I cannot possibly keep up on the myriad of state and local tax laws throughout the United States. This article is an attempt to help these other state providers find help. Here are the steps you can take: Start looking for a local tax professional at the website of the Redleaf National Institute: RNI Tax Preparer Directory Tax pros in this directory claim to have experience with day care taxes. While you are there, check out this RNI article on Choosing a Tax Preparer. Next I recommend that you look for an Enrolled Agent using the web directory of the National Association of Enrolled Agents: NAEA Enrolled Agent Directory Also try the web directory of the National Association of Tax Professionals: NATP Member Directory NATP is made up of Enrolled Agents, CPAs and other tax professionals. It is not absolutely essential that you work with an Enrolled Agent. You may even find a non-EA who specializes in day care taxes. The advantage of working with an EA (or a CPA) is that if you ever have an audit or just want your tax pro to deal with an IRS notice for you, these folks can get a Power of Attorney from you and deal directly with the IRS on your behalf. Other tax professionals can't do this. Other tax pros have also not been tested as EAs and CPAs have in order to get their credential. That said, the fact is that there are a great number of excellent non-EA, non-CPA tax professionals out there . Many have college degrees and years of experience. Unfortunately, for you as the consumer, the expertise and professionalism of the various types of tax professionals varies greatly no matter what the credential or none. Interview several people, if you can. It may be hard to get much time with these folks, because most of us are extremely busy already. Still, one of the most important things is finding someone who communicates and will give you some time and answer your questions. In the end, you will probably wish you knew more about the person, but you will have to decide to go with someone for this year and hope for the best. Remember that you can find someone else (during the non-busy time after the "tax season") if you are unhappy with the person you choose. Too many people stick with their tax pro even when they are dissatisfied (sometimes very dissatisfied!). If your gut says change, then you should do so. Look for a tax pro who prepares many self-employed home office tax returns every year (ask how many). You may find someone with experience preparing child care tax returns (ask how many per year), but the next best thing is a professional who deals with home office tax returns frequently (for other types of home businesses). It will be your job to know enough to work with the person you choose and educate them on day care tax quirks, if necessary. You should be prepared to do this no matter who you work with, even if they are familiar with child care taxes. In the end, you are responsible for the contents and accuracy of your tax return (because you sign it) and it's up to you to look out for your own best interest. Use the Family Child Care Tax Companion and other Redleaf Press tax publications to educate yourself. The Tax Companion by Tom Copeland is specifically geared to helping you work with a tax professional and feel confident that they are handling your tax issues correctly. If there are ever any Tom Copeland workshops, or other tax workshops, in your area, be sure to attend. Also, you should know that Tom makes himself available and is happy to answer questions from providers, tax professionals and others. If you ever want to double check something your tax pro is doing and can't find the answer yourself, I recommend that you Ask Tom. Good luck! It really is important to find a good person to work with on your taxes. You'll have peace of mind today and down the road. Posted on 2008-01-31 16:36:55

IRS Warns of E-mail Scam Soliciting Donations to California Wildfire Victims

The IRS does not initiate contact with taxpayers through e-mail

There seems to be a constant barrage of bogus emails nowadays which appear to come from the Internal Revenue Service (and eBay and Bank of American and you-name-it, I know!). Exercise extreme caution should you receive an email which looks like an official IRS communication. It is all to easy to click on a link without thinking first, so beware. No matter how official looking, the email is probably bogus and intent on tricking you into providing personal and financial information that can be used to gain access to your bank or credit card accounts. Do not give out any personal information or click on the links contained in these messages. Recipients of the scam e-mail can help the IRS shut down this scheme by forwarding the e-mail to an electronic mail box, phishing@irs.gov, using instructions found in How to Protect Yourself from Suspicious E-Mails or Phishing Schemes�. This mail box was established to receive copies of possibly fraudulent e-mails involving misuse of the IRS name, logo or Web site for investigation. Recipients of questionable e-mails claiming to come from the IRS may also call Treasury Inspector General for Tax Administration (TIGTA)'s toll-free hotline at 1-800-366-4484. The IRS has come across numerous schemes in which e-mails claim to come from the IRS. More information on these schemes may be found at www.irs.gov by entering the term "phishing" in the search box. Below are summaries some of the most recent scams: Updated Nov. 7, 2007 - In a variation, an e-mail scam claims to come from the IRS and the Taxpayer Advocate Service (a genuine and independent organization within the IRS whose employees assist taxpayers with unresolved tax problems). The e-mail says that the recipient is eligible for a tax refund and directs the recipient to click on a link that leads to a fake IRS Web site. The IRS recommends that recipients do not click on links in, or open any attachments to, e-mails they receive that are unsolicited or that come from unknown sources. Updated Nov. 2, 2007 - A new scam e-mail that appears to be a solicitation from the IRS and the U.S. government for charitable contributions to victims of the recent Southern California wildfires has been making the rounds. A link in the e-mail, when clicked, sends the e-mail recipients to a Web site that looks like the IRS Web site, but isn't. They are then directed to click on a link that opens a donation form that asks for personal and financial information. The scammers can use that information to gain access to the e-mail recipients' financial accounts. The IRS does not send e-mails to taxpayers soliciting contributions to a charitable cause. Updated Sept. 19, 2007 - Another recent e-mail scam tells taxpayers that the IRS has calculated their "fiscal activity" and that they are eligible to receive a tax refund of a certain amount. Taxpayers receive a page of, or are sent to, a Web site (titled "Get Your Tax Refund!") that copies the appearance of the genuine "Where's My Refund?" interactive page on the genuine IRS Web site. Like the real "Where's My Refund?" page, taxpayers are asked to enter their SSNs and filing status. However, the phony Web page asks taxpayers to enter their credit card account numbers instead of the exact amount of refund as shown on their tax return, as the real "Where's My Refund?" page does. Moreover, the IRS does not send e-mails to taxpayers to advise them of refunds or to request financial information. Updated Aug. 24, 2007 - The Internal Revenue Service today warned taxpayers of a new phishing scam, in which an e-mail purporting to come from the IRS advises taxpayers they can receive $80 by filling out an online customer satisfaction survey. The IRS urges taxpayers to ignore this solicitation and not provide any requested information. The IRS does not initiate contact with taxpayers through e-mail. Updated June 19, 2007 - In another recent scam, consumers have received a "Tax Avoidance Investigation" e-mail claiming to come from the IRS' "Fraud Department" in which the recipient is asked to complete an "investigation form," for which there is a link contained in the e-mail, because of possible fraud that the recipient committed. It is believed that clicking on the link may activate a Trojan Horse. Posted on 2007-11-19 19:14:19

Retirement Plan Contribution Limits

2008 cost-of-living increases

Traditional and Roth IRA Contribution Limits 2008: $5,000 ($6,000 for taxpayers age 50 and over) 2006-2007: $4,000 ($5,000 for taxpayers age 50 and over) 401(k) Plan Contribution Limits 2007-2008: $15,500 ($20,500 for taxpayers age 50 and over) 2006: $15,000 ($20,000 for taxpayers age 50 and over) Simple IRA Contribution Limits 2007-2008: $10,500 ($13,000 for taxpayers age 50 and over) 2006: $10,000 ($12,500 for taxpayers age 50 and over) Simplified Employee Pension (SEP) Plan Contribution Limits 2008: $46,000 (based on maximum compensation of $230,000). 2007: $45,000 (based on maximum compensation of $225,000). 2006: $44,000 (based on maximum compensation of $220,000). Posted on 2007-10-29 01:23:40

Day Care Tax Tip: Bad Debt

From Tom Copeland at the Redleaf National Institute

RNI's October 2007 Tax Tip If a parent leaves owing you money, you cannot deduct this as a business expense. You can't deduct what you don't get, but your taxable income for the year will be lower. A "bad debt" is only deductible if you previously reported the money as income. So if you reported as income $100 that a parent paid to you in December and then the check bounced in January, you could deduct the expense in January. www.redleafinstitute.org Posted on 2007-10-04 01:11:10

Government Loses Billions as Sole Proprietors Underreport Their Income

A Newslink Article from the Redleaf National Institute

RNI's October 2007 Newslink Newsletter A large percentage of sole proprietors underestimated their income and overestimated their business deductions, resulting in over $93 billion dollars in unpaid taxes for 2001. This is the conclusion of a July 2007 report, "Tax Gap: A Strategy for Reducing the Gap Should Income Options for Addressing Sole Proprietor Noncompliance" issued by the Government Accounting Office for the US Senate. This fact is probably behind the increase in IRS audits of family child care providers and is likely to continue. The report said that an estimated 39 percent of sole proprietors who file a Schedule C underreported their business income, 73 percent overreported their business expenses, and 61 percent underreported their net income. The misreporting of expenses on Schedule C occurred across all expense categories, but the biggest errors were found in four categories: car and truck (50% of returns with an error), depreciation (42%), supplies (41%), and the Other expense line (55%). We don't know how many of these errors were accidental and how many were deliberate. However, the number of errors identified in this report is staggering. The IRS and Congress are considering what actions to take to close this tax gap, but no single course of action seems imminent. For family child care providers, this report could spell trouble. There has been an increase in the number of IRS audits of family child care providers over the past year, and this report could put more pressure to increase them further. From my experience, the four expense categories identified above are often scrutinized in family child care audits. To protect themselves, providers should pay particular attention to keeping accurate records for these expenses. If providers use a tax preparer, they should ask about the amounts shown on these lines of their Schedule C to make sure they are correct. www.redleafinstitute.org Posted on 2007-10-04 01:06:41

Day Care Providers: Help with Form SS-4

But it's better to get your EIN online or over the phone

It is easiest to apply for an Employer Identification Number (EIN) using a just launched IRS website interview-style online EIN application. The new process is quicker, with fewer questions, and a simpler format than the old Form SS-4 EIN application. For more information, read my companion Get an EIN blog entry. You can also get an EIN over the phone by calling the IRS at 1-800-829-4933. If you prefer, you can still fax or send in a paper application using the old Form SS-4. You will receive your EIN immediately if applying online or by phone. Receive your EIN within four business days for faxed applications and within 4-5 weeks for mailed applications. Below I give some line-by-line guidance to help sole proprietor child care providers without employees** fill out the Form SS-4, Application for Employer Identification Number. You can also consult the SS-4 Instructions. Fill in only the line numbers listed below. Leave all of other lines blank. Line 1 = Your name Line 2 = Business name (if you have one) Lines 4a & 4b & 6 = Your address Line 8a = Check "No" Line 9a = Check "Sole proprietor" and enter your social security number Line 10 = Check the "Other" box and write "Identity Theft" Line 11 = Enter the date your business started (approximate okay) Line 12 = Write "December" for your closing month Line 13 = Enter zero in each box Line 16 = Check the "Other" box and write "Family Child Care" Line 17 = Write "Child Care Services" Line 18 = Most providers will heck "No" **If you actually are hiring employees, check the "hired employees" box on Line 10 and properly fill out Lines 13, 14 and 15. Sign and date and enter your phone number at the bottom of the form. If faxing your application, also enter your fax number. Once you complete the SS-4 form, you can: - Fax the SS-4 to the IRS at 1-859-669-5760 (fax number for CA residents*), or - Mail the Form SS-4 to: Internal Revenue Service, Attn: EIN Operation, Philadelphia, PA 19255 (address for CA residents*). *Residents of other states can find the appropriate fax number or address in the SS-4 Instructions. Posted on 2007-10-04 00:50:04

Day Care Providers: To Incorporate or Not?

There are huge drawbacks. Read Tom Copeland's discussion below.

Are you a day care provider considering incorporating your business for increased liability protection? If so, please review the following two-part discussion of this topic by Tom Copeland of the Redleaf National Institute. Once you do, I think you see that the increased costs to you, and especially the loss of your home-related expenses as a deduction on Form 8829, Expenses for Business Use of Your Home, are huge drawbacks. If you decide to proceed with incorporation, get the advice of a tax professional and a legal professional well versed in the business of family child care. As an alternative to setting up a corporation, Tom also hits on the fact that a Limited Liability Company (LLC) is another business entity available to child care providers. The amount of such additional liability protection provided by an LLC is unclear and there are increased costs with this option, too. Still, it is a better and simpler option than incorporating, as long as the provider is the sole member of the LLC. As far as tax reporting is concerned, a single-member LLC still functions as a sole proprietorship. The provider continues to report her business income on a Schedule C attached to her individual income tax return. In California, she also must file a shortened version of Form 568, Limited Liability Return of Income and pay an $800 LLC tax to the state annually. California also has an annual LLC Fee, starting at $900, which most day care providers are unlikely pay. It does not kick in until gross day care income (meaning parent and subsidy income without considering expenses) hits $250,000. If a family child care business is structured as an LLC with more than one member, things get much more complicated. An LLC with multiple members generally functions as a partnership for tax purposes. This requires an expensive business tax return to be prepared every year and may cause the provider to lose her home-related deductions. Multiple-member LLCs can also make an election to be taxed as a corporation, but that brings us right back to the drawbacks covered by Tom Copeland below.......   August 2007 Redleaf National Institute Tax Preparer Update This Tax Preparer Update was sent to you from Redleaf National Institute, the national center for the business of family child care. This message contains information for tax preparers who work with family child care providers. TO INCORPORATE OR NOT? I attended a roundtable meeting this week sponsored by the IRS and spoke with an attorney who assists with businesses who want to incorporate. He told me that all family child care providers should be incorporated, a sentiment that I have heard repeated by other attorneys. Is this good advice? Providers do get some personal liability protection if they incorporate, but incorporation does not protect business assets. In a typical situation, a provider might have a Time-Space Percentage of 40%, which means that 40% of their home is not protected if they incorporate. (The same would go for all household furniture and appliances.) When I pointed this out, the lawyer responded that a provider could have their corporation pay the provider rent and thus shield their home from a lawsuit. This answer brings up a problem I see in the general discussion of whether or not it makes sense for a provider to incorporate. Lawyers understand the legal implications of incorporating, but not necessarily the tax consequences. Tax professionals understand the tax consequences of incorporating, but not necessarily the legal issues. In this case, the lawyer doesn't realize that it will cost the provider more money if her corporation pays her rent. Let's look at an example. Let's say that a provider who is a sole proprietor has $30,000 of Schedule C income and $15,000 of Schedule C deductions (food, toys, supplies, etc.). She is also entitled to deduct $5,000 of house related expenses on her Form 8829. Her total business expenses are therefore $20,000, and her Schedule C profit is $10,000. If she is in the 30% tax bracket (15% federal income tax and 15% Social Security tax), her taxes are $3,000 and her take home pay is $7,000. Now, what happens if she incorporates and the corporation pays $5,000 rent to her and deducts this rent as a business expense? The corporation still has $20,000 of expenses, and if all the profit is reported by the provider as income, the provider still ends up with $7,000 at the end of the year. But now she must report $5,000 as income on Schedule E and pay 15% federal income tax (or $750) on this amount. So it has cost the provider $750 to pay herself rent. Note: The provider can't claim any home office deductions as an employee of the corporation if she is not using any rooms on an "exclusive" basis for her landlord business. Only family child care providers can use the "regular use" test when deducting expenses for using their home in a business. If the provider was using one or more rooms in her home exclusively for her business, then she would be limited to deducting only the business portion of her mortgage interest and property taxes. Such home office expenses would be taken as a miscellaneous itemized deduction on Schedule A. [Note from Alison: Tom admits this is incorrect in Part Two below. Even home-related expenses for exclusive-use rooms are lost.] In this example, we have left out the possible tax benefits of incorporating and shielding some of the income from Social Security taxes. But these tax benefits are not automatic and carry with them their own costs (higher tax preparation fees for a corporation). Incorporating also carries other costs (fees to incorporate, possible annual corporate fees, workers' compensation, etc.). In summary, whether to incorporate or not is a complicated question that needs the input from both a lawyer and a tax professional.   September 2007 Redleaf National Institute Tax Preparer Update This Tax Preparer Update was sent to you from Redleaf National Institute, the national center for the business of family child care. This message contains information for tax preparers who work with family child care providers. TO INCORPORATE OR NOT? PART 2 Following my last month's email update on incorporation, I received several comments from tax professionals that I want to respond to: Tom Jemison, an Enrolled Agent in California, wrote, "I think the home office deductions are even worse than what you spelled out. If an employer (the corporation) pays rent for a portion of an employee's (provider's) residence, the employee is not allowed the corresponding deduction for business use of the home - period [IRC 280(A)(c)(6)]. That means not even for an exclusive use area. This comes up a lot for small non-provider corps." This is true, and my previous email was not accurate on this point. When an employee rents her home to her employer, the employee (family child care provider) cannot claim any home office deduction on Schedule E (or Form 8829), even if the provider is using one or more rooms in her home exclusively for business. The homeowner can still claim mortgage interest and property taxes on Schedule A. The only time a person can claim home office expenses on Schedule E is when the homeowner is renting her home to someone who is not her employer. Tom also pointed out that there is a tax benefit for a C-Corporation paying rent to a family child care provider employee. Although there is no home office deduction benefit, there is the tax benefit of moving income to a Schedule E where no payroll taxes are paid. This benefit may be offset some by the lower Social Security earnings for a provider. Several tax professionals commented that family child care providers could set up a single person LLC (Limited Liability Company) to reduce their personal liability. The advantages of an LLC are that the provider can still file Form 8829 and claim all of the regular home office expenses in the same way that a sole proprietor can. In fact, the tax return of a single person LLC looks no different than a sole proprietor. Therefore, there would be no need for the corporation to pay rent to the provider. However, although it's probably the least complicated of all corporation entities, there are some drawbacks of a single person LLC. Most states charge annual fees for an LLC; a lawyer should be consulted to set up an LLC properly; the business formalities of an LLC must be followed; and business and personal records must be kept separate. The biggest benefit of an LLC is the potential for additional personal liability protection. After consulting with other lawyers on this point, I am somewhat skeptical that this is true to the extent that providers may think. The LLC is a relatively new business entity, and we don't have much in the way of court rulings to determine how well it will protect the owner. The part of the home that is used for business purposes would not be protected from a lawsuit; the same is true for furniture and appliances used in the business. Because many providers struggle to keep business records in a professional manner, I am also concerned that those who form an LLC would fail to follow all of the record keeping requirements of an LLC and therefore would risk losing the corporate protection in a lawsuit. My advice is for providers to purchase a lot of professional business liability insurance (at least $1 million per occurrence and $2 million aggregate). Although an LLC may indeed provide some additional personal liability protection, I don't believe it is a simple solution to this problem.   That's the final word from Tom Copeland on this issue. www.redleafinstitute.org Posted on 2007-09-28 14:47:43

Lessons in Back-to-School Tax Breaks

Teachers, Parents, and College Students Benefit From Available Deductions and Credits for 2007

National Association of Tax Professionals (NATP) Appleton, WI – With children and teachers back in school, the National Association of Tax Professionals (NATP) reminds educators, parents, and students that the IRS has various education-related deductions and credits that can benefit them when filing their 2007 federal income tax return. “The start of the school year is a good time to remind parents, students, and teachers to save all receipts related to tax-advantaged education expenses,” said IRS Acting Commissioner Linda Stiff. “Good recordkeeping makes sense because it can help avoid missing a deduction or credit at tax time.” The educator expense deduction allows teachers and other educators to deduct the cost of books, supplies, equipment, and software used in the classroom. Eligible educators include those who work at least 900 hours during a school year as a teacher, instructor, counselor, principal, or aide in the public or private elementary or secondary school. For 2007, educators can deduct up to $250 for supplies, whether or not deductions are itemized on their Schedule A. According to a study prepared by the Quality Education Data, Inc., teachers nationally spend an average of $475 of their own money on classroom supplies and materials each year. Currently, this deduction is scheduled to expire at the end of this year. College Cost Deductions and Tax Credits Help Students and Their Parents The IRS presently has three key tax breaks including the tuition and fees deduction, the Hope Credit, and the Lifetime Learning Credit, all designed to help parents and students pay for the cost of post-secondary education. The Hope Credit is a tax credit for college students in their first two years of college. It provides a tax credit of up to $1,650 on the first $2,200 of college tuition and fees. The Lifetime Learning Credit is a tax credit for any person who takes college classes. It provides a tax credit of up to $2,000 on the first $10,000 of college tuition and fees. Unlike the Hope Credit, you only need to be enrolled in at least one course to qualify. Income limits and other special rules apply to each of these provisions. “Generally speaking, a tax credit is worth more than a tax deduction,” explained Cindy Hockenberry, EA, NATP Tax Information Analyst. “A tax credit reduces your tax liability dollar for dollar, while a deduction reduces taxes on a percentage basis depending on your marginal tax bracket.” Eligible parents and students looking for more information about these education tax breaks should refer to the IRS Publication 970, Tax Benefits for Education. It can be found on the web at IRS.gov, or can be requested, free of charge, by calling the IRS at 1.800.TAX.FORM (820-3676). Members of NATP work at offices that assist over 11 million taxpayers with tax preparation and planning. The average NATP member has been in the tax business for over 20 years and holds a tax/financial designation and/or a college degree. NATP has more than 18,000 members nationwide. Members include individual tax preparers, enrolled agents, certified public accountants, accountants, attorneys, and financial planners. Learn more at www.natptax.com. NATP is a nonprofit professional association founded in 1979 to serve professionals working in all areas of tax practice through professional education, tax research, and products. The national headquarters, located in Appleton, WI, employs over 40 staff members. Posted on 2007-09-24 22:30:04

Day Care Record Keeping 101

A colorful quick reference guide

This colorful two-page document highlights the most important record keeping chores for child care providers and contains tips to prepare you for tax time, let you pay the lowest tax and help you avoid audit problems. Click here to download - Day Care Record Keeping 101.pdf (Document may take a minute or more to download) Contact me with your name and mailing address if you would like me to send you a two-sided hard copy. Day Care Associations, Resource and Referral Services and others are welcome to request larger quantities for distribution. Posted on 2007-09-24 22:20:49

Day Care Tax Return Checklist

A list of information your tax preparer will need

This document lists the information that I ask my day care clients to provide at tax time: Click here to download - Day_Care_Tax_Return_Checklist.pdf Posted on 2007-09-11 22:12:46

Day Care Providers: Standard Meal Rates

Optional rates for computing food cost

Family Child Care Providers may deduct actual grocery cost or use the standard meal rates shown below to calculate their deduction. These rates are published every year by the US Department of Agriculture. Rates published on July 1 apply to the next calendar year. Standard Meal Allowance Rates for 2008 (in the continental U.S.) $1.11 for each breakfast $2.06 for each lunch or dinner $0.61 for each snack (up to 3 per day)  Standard Meal Allowance Rates for 2007 (in the continental U.S.) $1.06 for each breakfast $1.97 for each lunch or dinner $0.58 for each snack (up to 3 per day)  Standard Meal Allowance Rates for 2006 (in the continental U.S.) $1.06 for each breakfast $1.96 for each lunch or dinner $0.58 for each snack (up to 3 per day)  Standard Meal Allowance Rates for 2005 (in the continental U.S.) $1.04 for each breakfast $1.92 for each lunch or dinner $0.57 for each snack (up to 3 per day)   Accurate records must be kept of attendance and meals served: Click here to download the Redleaf Calendar-Keeper Meal Form Posted on 2007-09-09 01:59:12

Day Care Providers and other Sole Proprietors: Get an EIN

Protect the privacy of your social security number

Self-employed business owners, including day care providers, need an Employer Identification Number (EIN) if they have employees. Day care providers, with or without employees, have another reason to obtain an Employer Identification Number: IDENTITY THEFT PREVENTION. Parents will often request your tax id number for the purpose to claiming the federal Dependent Care Credit on their income tax return. It is much safer to give them an EIN, rather than revealing your social security number. Not a day care provider? Do you provide other services as a sole proprietor? Anyone ever ask for your social security number or give you a W-9, Request for Taxpayer Identification Number, to fill out? You, too, should protect your social security number and get an Employer Identification Number. Give your EIN to clients to use in preparing their 1099-MISC forms at the end of the year. You can get an EIN quickly and easily using a just launched IRS website interview-style online EIN application. The new process is quicker, with fewer questions, and a simpler format than the old Form SS-4 EIN application. Day care providers and other sole proprietors should follow this advice from an October 2007 Redleaf National Institute Newslink article: In the past, providers sometimes had difficulty getting an EIN number because previous IRS regulations stated that a taxpayer could only get this number if they were required to by law. The old Form SS-4 asked for the reason you were applying for the EIN. It required providers to fill in an answer such as "identify theft." The new online process asks: "Why is the Sole Proprietor requesting an EIN?" You are asked to choose from one of the following choices: "Started a new business," "Hired employee(s)," "Banking purposes," " Changed type of organization," or "Purchased active business." You should always answer, "Started a new business" to this question, unless you are hiring employees. This may seem like a strange answer if you have been in business for a long time, but the instructions say to choose an answer that is closest to your situation. In the past, if you gave this answer, the IRS may have assumed that you were a new employer and started sending your payroll forms to file. This problem will no longer happen because the online application also asks you if you have employees. If you are having trouble completing the online application, or you would rather talk to the IRS directly about getting your EIN, call the IRS at 800-829-4933 where you can get your number over the phone. Once you have your EIN, give it out to parents/clients and protect the privacy of your social security number. Posted on 2007-09-08 20:44:03

Day Care Tax Tip: What's Not Deductible

From Tom Copeland at the Redleaf National Institute

RNI's August 2007 Tax Tip Although there are hundreds of items that a family child care provider (or other small business owner) can claim as a business expense, not everything is deductible. Here are some items that are considered personal expenses by the IRS and may not be deducted: * parking or speeding tickets * the cost of the first phone line into your home * the cost of personal clothing (children's clothing would be deductible) * pet care (it may be possible to deduct expenses for animals other than a dog or cat if you can show how they help children learn) * assessments on your property tax statement (for sidewalks, sewers, or other land improvements) * mortgage insurance * the purchase of land www.redleafinstitute.org Posted on 2007-08-03 21:40:03

Here’s a Tip – All Tips Are Taxable

NATP gives advice to food & beverage workers for accurate tip income reporting.

National Association of Tax Professionals (NATP) Appleton, WI – If you wait tables, bus tables, park cars, tend bar, serve cocktails, deliver food, or entertain, and you received $20 or more in tips in any one month – you must report all your tips to your employer. This includes cash tips, charge-card tips, and any tips you get from other employees, minus what you ‘tip out’ or share with colleagues. The IRS requires that federal income tax, social security, Medicare taxes, and, in some cases, state income tax be withheld from income earned through tips. “There is an ongoing myth that employees only have to report 8% of their total sales as tips,” explains Cindy Hockenberry, NATP Tax Information Analyst. “The 8% allocation rule is a requirement placed on the employer, not the employee.” The IRS requires that the employer determines if the employees have reported tips in the aggregate of at least 8% of the establishment’s gross sales subject to tipping. This rule applies only to large food and beverage establishments. According to the IRS, keeping records of your tip income is critical. You must keep a running daily log of all your tip income. You can use Publication 1244, Employee’s Daily Record of Tips and Report to Employer, to record your tip income for one year. Publication 1244 includes Form 4070, Employee’s Report of Tips to Employer, and Form 4070A, Employee’s Daily Record of Tips. These forms have space for you to keep track of all necessary information for the tax year. In addition to complying with the U.S. tax law, there are many good reasons to report all your tip income, including: * Increased income may improve financing approval when applying for mortgage, car, and other loans. * Increased worker’s compensation benefits should you get hurt on the job. * Increased unemployment compensation benefits. * Increased social security and Medicare benefits – the more you pay the greater your benefits. * Increased employee pension, annuity, or 401K participation. Check with your employer for other increased benefits, based on pay, your company may offer, such as life insurance, disability, and the right to purchase stock options. For more information on reporting tip income, or any tax topic, please contact the experts at the National Association Tax Professionals at 800.558.8002, ext. 3. Members of NATP work at offices that assist over 11 million taxpayers with tax preparation and planning. The average NATP member has been in the tax business for over 20 years and holds a tax/financial designation and/or a college degree. NATP has more than 18,000 members nationwide. Members include individual tax preparers, enrolled agents, certified public accountants, accountants, attorneys, and financial planners. Learn more at www.natptax.com. NATP is a nonprofit professional association founded in 1979 to serve professionals working in all areas of tax practice through professional education, tax research, and products. The national headquarters, located in Appleton, WI, employs over 40 staff members. Posted on 2007-08-03 18:11:56

Plan Now, Avoid High Taxes Later

An NATP Press Release for July 19, 2007

National Association of Tax Professionals (NATP) Appleton, WI – National Association of Tax Professionals (NATP) Appleton, WI – What is more exasperating than having to pay taxes? Understanding the constantly changing legislation affecting them! Yet, not fully understanding rights and how provisions work together costs taxpayers significantly every year. A mid-year tax review with an expert will help you. Here is why. Following are some common areas fraught with complex rules that cause taxpayers to miss valuable opportunities to leverage their options and lower their tax bills. Financial advisors and tax preparers are experts in these areas so you don’t need to be. Call your tax advisor for your mid-year review soon to discuss your financial plans and learn how you can save on your next tax return. 1) Overpayment or underpayment of taxes. Did you receive a big refund last year? If so, you overpaid and the government kept your money as a tax-free loan while you could have invested it and earned interest. Did you owe? Worse, were you stuck paying Alternative Minimum Tax? A mid-year review will help determine where you are and allow you to adjust your withholding now to avoid penalties later. 2) Saving for retirement – IRAs, 401(k)s, profit-sharing, pensions, employer-sponsored plans, etc. Many changes have taken place in the last few years regarding retirement savings plans. The plan you originally began with may have been advantageous when you started it, but it might not be anymore. So much has changed with these plans that it’s important to review them to see if they are still performing as you intended, and to find out if there are new products available that you are not taking advantage of. Many taxpayers do not have an Individual Retirement Account (IRA) and are missing an opportunity to defray their taxes and save for their own future. One of the primary reasons for not having an IRA is not starting one. Begin now, even if it is only a few dollars a paycheck. The government has increased the amounts IRA holders can save, and those over age 50 can place additional catch-up amounts into their IRAs. 3) Medical savings accounts and health savings accounts. Try comparing your high premium medical insurance plan against a high-deductible plan combined with a health savings account (HSA). You may be surprised at not only which one is less expensive, but reap tax savings besides. And are you using any available flexible spending accounts through your employer? They are another way to reduce taxable income. 4) Estimated tax payments. Adjusting these payments now will avoid underpayment penalties at year-end. 5) Take advantage of deduction bunching. Some itemized deductions must meet certain thresholds before you can claim them. By being aware of these and managing your expenditures to fall primarily in one year, rather than spread over two years, you may realize significant tax savings. This applies to several expenditures, especially to medical expenses, property tax payments, and charitable donations. 6) Getting married? Or divorced? These life-changing events have very significant tax implications. A divorce or change in child custody arrangements can mean tax implications in several areas. Attempting to reach a divorce settlement or filing taxes without expert financial advice will most likely not be to your advantage. 7) Beneficiary designations, Powers of Attorney, wills, estate planning. Are these working advantageously for you? Do you even have them in place? This is the time to get your plans in order and be sure that tax changes have not changed how you intended these contracts to work. 8) Buying or selling stocks, bonds, real estate, or other investments. Many tax rules apply to all of these transactions. For example, a real estate like-kind exchange may work to your advantage. If you’re selling a residence, perhaps the exclusion for selling a principal residence applies to you. There are capital gains and losses, wash sale rules, long-term gains and losses, and a whole array of other rules when it comes to stocks and bonds. And don’t forget, investment expenses count as miscellaneous itemized deductions when used for the production of income. Handling these transactions wisely, rebalancing, and making changes are the name of the game with investments. Your financial adviser is worth his or her weight in gold here. 9) Financial planning is important when you have children and teens. Coverdell Education Savings Accounts (ESAs) and Section 529 plans are two ways to begin tax-deferred savings for a child’s education. Children grow up quickly, so begin these accounts early, and know how much you can add to them. Discipline yourself to save, and you help both yourself and your child. Self-employed parents can hire their children or grandchildren and lower the overall family tax bill. The business also may benefit from hiring children under age 18, as their wages are exempt from social security and unemployment taxes paid from a parent’s sole proprietorship. Teens with earned income can make IRA contributions as well. However, if children plan to attend college, it is important to structure savings carefully to best work with college financial aid programs. When children are in college, remember to claim the education credits or the tuition and fees deduction. 10) Self-employed taxpayers and those with small businesses have many ways to plan for tax savings. This is another area where tax preparers prove their value. Several changes in recent years allow flexibility with carrybacks, carryforwards, employee benefit plans, expense deductions, etc. Certain small businesses that start retirement plans for their employees may even qualify for a tax credit to help recover the costs of starting up. The number-one rule-of-thumb here is to carefully document, backup, and substantiate all expenses in order to claim them on tax returns. If you have not done that, you will miss deductions. Timing of purchases and assets can make big differences on your tax return, and some of these things need to take place before year-end to qualify. Work closely with your tax preparer and plan carefully, using his or her advice. The result of the calculated tax burden on your annual income tax return is not due to a few transactions, but is instead the result of how you’ve planned, invested, and leveraged your financial dealings throughout the year. Make this the year when you start taking a more deliberate and informed approach. Call now for that mid-year review. For more information on this and other tax issues, consult a reputable tax preparer. Selecting the right tax professional will save you time, headaches, and oftentimes money. To find a professional tax preparer, look to NATP. NATP maintains a listing of professionals in your area at www.taxprofessionals.com. Members of the National Association of Tax Professionals (NATP) strive to assist taxpayers with information and knowledge. NATP is a nonprofit professional association founded in 1979 and is committed to excellence in the tax profession. NATP’s national headquarters, located in Appleton, WI, employs over 40 professionals and 25 instructors. NATP exists to serve professionals who work in all areas of tax practice and has more than 18,000 members nationwide. Members include individual tax preparers, enrolled agents, public accountants, accountants, attorneys, and financial planners. Learn more at www.natptax.com. Posted on 2007-08-01 15:14:41

E-mails From the IRS? Be Skeptical

NATP offers warning and suggestions for dealing with e-mail scams claiming IRS origin

National Association of Tax Professionals (NATP) Appleton, WI – Fraud perpetrators have found the perfect means to intimidate taxpayers into filling out legitimate-looking, but phony, Internal Revenue Service (IRS) forms – using the threat of government action or loss of tax refunds if you don’t respond. In the latest e-mail scam, consumers have received a “Tax Avoidance Investigation” e-mail claiming to come from the IRS’ “Fraud Department” in which the recipient is asked to complete an “investigation form,” for which there is a link contained in the e-mail. It is believed that clicking on the link may activate a Trojan Horse that has the potential to take over a person’s computer hard drive and allow someone to have remote access to the computer. “Everyone should beware of these scam artists,” said Kevin M. Brown, Acting IRS Commissioner. “Always exercise caution when you receive unsolicited e-mails or e-mails from senders you don’t know.” The IRS reminds taxpayers that it does not send out unsolicited e-mails and it never e-mails requests for personal and financial information including PIN numbers, passwords or similar secret access information for their credit card, bank, or other financial accounts. If you do receive a questionable e-mail claiming to be from the IRS – do not open any attachments or click on any links contained in the e-mail. The IRS encourages you to forward those e-mails to phishing@irs.gov. The term “phishing” describes the activity of sending e-mail that claims to be from some well-known organization to trick the recipient into revealing information for use in identity theft. Since the IRS established the e-mail fraud mailbox last year, it has received more than 17,700 e-mails from taxpayers reporting more than 240 separate phishing incidents. The Treasury Inspector General for Tax Administration (TIGTA) has currently identified host sites in at least 27 different countries, as well as in the United States. Fraudulent form information should be faxed to TIGTA at 202.927.7018, or mail to TIGTA Hotline, P.O. Box 589, Ben Franklin Station, Washington, D.C. 20044-0589. TIGTA’s website is www.ustreas.gov/tigta, and their phone number is 800.366.4484. “To protect yourself from having your identity stolen, guard your personal information, and always verify the validity of any forms or correspondence requesting you to divulge personal information,” advises Cindy Hockenberry, enrolled agent and tax information analyst with the National Association of Tax Professionals (NATP). “If you have any question at all, look up the number and call the organization that sent the correspondence BEFORE supplying any information. Do not rely on phone numbers or e-mail addresses provided with correspondence. Be suspicious of any unsolicited correspondence that requests the following types of information: - Date of birth - Social security number - Passport number - Bank name - Credit card information - Account number, type, and date opened - E-mail address - Occupation - Daytime phone number - Frequency of U.S. visits - Information about spouses, children, and parents.” Any website that collects personal information should contain “https” in the URL address at the top (the s indicates that it is a secure site). It should also have a padlock in your browser’s status bar. Double-click on the padlock to see the website’s security certificate. Certificates show the owner of the website in the “Issued to” line. An @ sign, “under construction,” or “cannot be located” in this line is reason for suspicion. The certificate should also show dates with a range of only a few years in the “Valid from” line (such as 7/29/05 – 7/29/07). Another way to view this information is by going to File, Properties on your menu bar. If there is ANY question in your mind about any website, do not use the link. Instead, login to the website directly (such as www.irs.gov), and find phone numbers to call. Be safe, not sorry. Tax professionals are experts who keep current on tax law changes. They can save you time and offer insight on how to use the tax breaks available to you. To find a professional tax preparer, look to NATP whose members subscribe to a strict code of ethics and standards of professional conduct (read them in the Press Room at www.natptax.com). NATP maintains a listing of professionals in your area at www.taxprofessionals.com. To receive a FREE brochure on finding the right tax professional for you, visit the NATP Press Room at www.natptax.com and download a copy. Members of the National Association of Tax Professionals (NATP) assist over seven million taxpayers with tax preparation and planning. The average NATP member has been in the tax business for over 20 years and holds a tax/financial designation and/or a college degree. NATP has more than 18,000 members nationwide. Members include individual tax preparers, enrolled agents, certified public accountants, accountants, attorneys, and financial planners. Learn more at www.natptax.com. NATP is a nonprofit professional association founded in 1979 to serve professionals working in all areas of tax practice through professional education, tax research, and products. The national headquarters, located in Appleton, WI, employs over 40 staff members. Posted on 2007-08-01 15:04:27

Day Care Tax Tip: Food Expenses

From Tom Copeland at the Redleaf National Institute

RNI's July 2007 Tax Tip One of the most important records to track throughout the year is the number of meals and snacks that you serve the children in your care. If you are on the Food Program, keep a copy of your monthly claim form. But you should also be recording on a daily basis the additional meals and snacks you serve for which you are not reimbursed by the Food Program. Such snacks do not have to be nutritious, and you don’t need to keep a menu. Keeping an accurate count of meals and snacks will make a big difference when you deduct food expenses on your tax return using the Standard Meal Allowance. If you serve one un-reimbursed snack to one child per day, this is equal to $150 in food deductions for the year. www.redleafinstitute.org Posted on 2007-07-06 17:45:10

Payroll Tax Guide for Daycare Providers and Other Small Business Owners

Federal and California Payroll Tax Forms

Recently a day care provider asked me for guidance in preparing her own payroll tax returns. Many small business owners use a payroll service to generate paychecks, W-2s and their quarterly payroll tax returns. Some of you also have the payroll company make your payroll tax deposits. Payroll service fees generally depend on the number of employees and whether you want full or partial service. Let me be clear: Using a payroll company is the best way to go for most small business owners. It can be a real headache to deal with the many payroll tax forms yourself, especially since the penalties can be high when you miss a deadline. I sent the California client who contacted me the summary of the payroll forms and filing deadlines shown below. She is paying $10/month to have an online service print her paychecks and calculate the withholding and says that full service would cost her three times as much. Therefore, this day care provider prefers to make her own payroll tax deposits, prepare the quarterly payroll tax returns herself and send out the annual forms, including providing a W-2 to her employee. If she is detail-oriented this is all very do-able, but it is time consuming. Most of the day care providers I know are too busy already to even consider it! You can fill out most of the forms below online before you print them. Some of the forms can be saved to your computer in electronic form, as well. Always print and save a copy for yourself. FEDERAL & CALIFORNIA PAYROLL TAX FILING GUIDE Note: This guide provides instructions for commercial employers (businesses). If you are a household employer, consult the two publications below for instructions specific to you. Complete employer information can be found is these two publications: IRS Pub 15 (Circular E) Employer's Tax Guide California Employer's Guide First you will need a Federal Employer Identification Number (EIN). If you don't already have one, follow the steps described in this blog post: Apply for an Employer Identification Number Apply for a California employer id number after you receive your Federal EIN. Submit a DE-1 to the Employment Development Department (EDD) within fifteen (15) days after paying over $100 in wages for employment in a calendar quarter: CA EDD Form DE-1, Registration Form for Commercial Employers When you hire someone, you must determine if the person is legal to work in the US. Complete Form I-9, Employment Eligibility Verification from the Department of Homeland Security and keep it in your files. You must also notify the California EDD within 20 days of hiring: CA EDD Form DE 34, Report of New Employee(s) PAYROLL TAX RETURNS At the end of every quarter, you have one month to file your quarterly payroll tax returns. You can also PAY the taxes quarterly if your total tax owed for the quarter is less than $2,500 (Federal) and $350 (California). If your payroll is larger than this, refer to the Employer's Guides to see whether you must pay monthly or semi-weekly. Some small employers are asked by the IRS to file and pay annally, instead. Such employers must still file their California payroll tax returns quarterly, however. The quarters end on these dates: March 31 June 30 September 30 December 31 Payroll tax returns and quarterly deposits are due on these dates (or the first business day thereafter): April 30 July 31 October 31 January 31 Quarterly Payroll Tax Forms: IRS Form 941, Employer's Quarterly Federal Tax Return IRS Form 941 instructions EDD Form DE 6, California Quarterly Wage and Withholding Report EDD Form DE 88, California Payroll Tax Deposit Annual Payroll Tax Forms (due January 31): IRS Form 944, Employer's Annual Federal Tax Return (The IRS will notify you if they want you to file this annual form, rather than the quarterly Form 941.) IRS Form 944 instructions IRS Form 940, Employer's Annual Federal Unemployment (FUTA) Tax Return IRS Form 940 instructions EDD Form DE-7, CA Annual Reconciliation Statement ELECTRONIC PAYMENTS Instead of paying by check when filing your quarterly and annual payroll tax returns, you can pay electronically by registering at these sites. I like the convenience of EFT payment and have been very happy using these services. Note that if you are filing the annual Form 944, you may still want to make payments quarterly or more often. That way you will avoid being confronted with a large payroll tax bill at the end of the year. You can make payments as often as you like, but must pay in full no later than January 31. Electronic Federal Tax Payment System - Go here to register or make Federal payments. (Register under your EIN to make Form 941 and Form 940 payments. If you also want to make estimated tax payment electronically, then register a second time under your Social Security number.) California Electronic Funds Transfer Authorization Agreement - Use this form to register. Specify Section II, the ACH Debit method. California State Agency EFT Menu - Go here to make California payments. Select the Employment Development Department link. W-2 FORMS (due January 31) You cannot download W-2 forms from the Internet. You must obtain the official red scannable forms from the IRS (1-800-829-3676) or by purchasing them at a local office supply store. You need both the W-2 form (which contain two forms per page) and the W-3 transmittal form. The office supply W-2 packages include W-3 forms. Provide W-2 forms to your employees no later than January 31. Send W-2s to the Social Security Administration, along with the W-3 transmittal form, no later than the last day of February. IRS W-2, Wage and Tax Statement IRS W-2 and W-3 instructions Better yet, forget the scannable forms and go to the SSA's Business Services Online. Here you can register, create, save, print and submit W-2s online. I've been using the service for years and love it. LASTLY Consider paying 100% of the payroll taxes yourself. This technique could simplify your payroll. In the case of my day care client above, she would save the $10 per month she is paying to have her withholding calculated, but she would be paying her employees' share of social security and Medicare taxes herself. Posted on 2007-07-06 03:15:04

When an Employer Pays 100% of Payroll Taxes

Simplification for Day Care Providers and other Small Business Owners?

Tom Copeland describes this method in detail in a Redleaf National Institute article. Payroll taxes include taxes paid by the employer (half of Social Security and Medicare, CA unemployment insurance, and the CA employer training tax) and taxes normally paid by the employee (the other half of Social Security and Medicare and California State Disability). Employers using this method choose to pay the employee's taxes as well as their own. This method simplifies things on payday because you no longer have to calculate or withhold Social Security, Medicare or SDI when writing out paychecks. You write each paycheck for the employee's full hourly wages, without deductions. Then you wait and pay the taxes yourself when you file your quarterly payroll tax returns (assuming you are a quarterly payer). You will pay somewhat more in taxes, but you may save time and/or payroll service fees. The tax amounts are usually not large for small employers. I like this method and use it for my own payroll. There are two things to be aware of, however: (1) You must withhold federal and state income taxes from your employee's wages if their income is high enough. Use the tables in the IRS Employer's Tax Guide and California Employer's Guide to determine if income tax withholding applies to your employee's paycheck. (2) Paydays will be simpler, but preparing your quarterly payroll tax returns will be a bit more complicated. When you pay the employee's taxes yourself, this is considered as additional taxable wages to the employee. Therefore, the wages that you report quarterly and on the employee's W-2 will include their cash wages and something extra. You must do some math to "gross up" your employee's wages and determine their taxable wages. In Scenario Two of Tom Copeland's article he divides the employee's wages by 0.9235 to arrive at taxable wages. This takes into account only federal payroll taxes, however. For 2007, California employers should divide by a factor of 0.9175. For Math whizzes and other curious types, this number is arrived at by adding together the employee tax rates (Social Security, Medicare and California State Disability) and subtracting that total from one: 2007 California "Gross Up" Factor = 1 - (0.062 + 0.0145 + 0.006) = 0.9175 You may find this "gross up" calculation to be the exact opposite of simplification! If so, this method is not for you. Posted on 2007-07-06 03:10:37

IRS Warns Taxpayers of New E-mail Scams

June 2007

The IRS is alerting taxpayers to a new scam involving fictitious e-mails from the IRS Criminal Investigation function that state the person is under a criminal probe for submitting false returns to the California Franchise Board. The e-mail link and attachment are actually a Trojan Horse that can take over the person's computer hard drive and allow someone to have remote access to the computer. Variations of this scam suggest that a customer has filed a complaint against the taxpayer, but the IRS can act as arbitrator to settle the matter. The IRS is reminding taxpayers that they do not send out unsolicited e-mails or ask for detailed personal and financial information. Additionally, the IRS never asks people for the PIN numbers, passwords, or similar secret access information for their credit card, bank, or other financial accounts. Posted on 2007-07-05 00:08:34

Day Care Tax Tip: Saving and Marking Receipts

From Tom Copeland at the Redleaf National Institute

RNI's June 2007 Tax Tip Now is a good time to review your record keeping practices since we are in the middle of the year. Your goal is to have a receipt for every item you use in your business: supplies, cleaning supplies, toys, furniture, household items such as toilet paper, light bulbs, detergent, etc. If you don’t have a receipt for all purchases, take a photograph of the item and write a note describing where you bought it and how much it cost. Estimate if you have to. Save any cancelled check or credit card statement as well. Make a note on the receipt as to whether the item was used 100% for your business or was used partly for business and partly for personal purposes. Your ability to sort out these two categories on your receipts will make a big difference come tax season because the more items you identify as 100% business instead of shared, the lower your taxes will be. For details, see the Family Child Care Record Keeping Guide. www.redleafinstitute.org Posted on 2007-06-20 17:30:43

Tax Realities of Renting Your Vacation Home

An NATP Press Release for June 19, 2007

National Association of Tax Professionals (NATP) Appleton, WI – With the arrival of summer, many of you are packing up and heading to your vacation homes. For some, the time you are not there is an opportunity to make some extra income by renting out your property. The National Association of Tax Professionals (NATP) reminds you that if you receive income from renting your vacation home to others, you may deduct certain expenses. These expenses, which may include interest, taxes, casualty losses, maintenance, utilities, insurance, and depreciation, will reduce the amount of rental income that is taxed. “The major message to taxpayers is - keep all records - we’ll handle the computations,� said tax professional Marilyn Meredith, EA, NATP member. “All records mean every expense for the property for the year. Additionally, records should show the days of use by the owner or family members, and the days the property was rented for profit.� The Internal Revenue Service (IRS) Tax Topic 415 explains that the amount of your deductible expenses depends on how many days you personally use the vacation home. If you are renting to make a profit and do not use the dwelling as a home, your deductible rental expenses can be