1 2009 TAX DATA ORGANIZER RileyAccounting.net CPA, never under estimate the value. 415 308-0678, Fax 415 704-3238 PO Box 1146 Sausalito, California 94966 Robert Lee Riley, CPA, MBA-tax Lee@RileyAccounting.net Certified QuickBooks Pro Advisor * FILL THIS FORM OUT ON YOUR COMPUTER THEN EMAIL ME THE EXCEL FILE.* Index Section Click on the underlined link to access the section. 1 Important Notes 2 General Questions 3 Dependent Children and Other Dependents 4 Estimated Tax Payments 5 Interest and Dividend Income 6 Other Income and Expenses 7 Sale or Exchange of Property 8 Contributions to Retirement Plans 9 Moving Expenses 10 Itemized Deductions 11 Unreimbursed Business, Employee, and Career Expenses 12 Travel Expenses Away From Home Overnight 13 Auto Expenses - Taxpayer 14 Auto Expenses - Spouse 15 Income and Expenses from a Business 16 Rental Property Income and Expenses 17 Rental Property Income and Expenses, part 2 Copyright; Robert Lee Riley, CPA, MBA-tax. See tax return engagement disclosures. Page 1 of 19. Important Notes Click here to return to index. 1 …every time you spend money use plastic, or on-line Bill Pay. Enter all transactions into QuickBooks directly off credit card and bank statements, whether tax deductible or not - this discipline will prevent lost tax deductions. Keep a yellow legal pad next to your telephone, and keep a diary of everything, do not throw it away - this will help back up your auto and entertainment expenses. ...all enclosures should be photocopies. I no longer need original W-2's. Do not mail original documents. ...please keep me informed if your income increases significantly next year. Failure to pay estimated taxes may result in large penalties. …please be aware that you must pay 90% of your taxes by 4/15/0x of the subsequent year, and, if your tax return is filed after 10/15/0x, then the penalty on any tax due is close to 100%. ...expenses paid for with a credit card are deducted in the year of purchase, not the year of payment. Do not forget to review your credit card statements for January 2008 for 2007 deductions. …IF YOU SEND ME AN EMAIL WITH AN ATTACHMENT, PLEASE EMAIL ME AFTERWARDS TO CONFIRM THAT YOU SENT AN EMAIL WITH AN ATTACHMENT; FOR LARGE FILES USE www.SendThisFile.com ...I set up QuickBooks for free for anyone interested. …let me know if you bought a hybrid car, you may qualify for tax credits. …I prefer that you fill out this form in Excel and send it to me as an email attachment. Please EMAIL, or, fax to me all documents such as W-2's, 1099's, etc. Email me to confirm receipt of your fax. Please number each page of your fax, and make sure your fax machine confirms the number of pages sent. If it is not possible to send a fax, then mail photocopies (never original documents) to my secure mailing address; PO Box 1146, Sausalito, CA 94966-1146 (FedEx and UPS are not accepted). I PREFER EMAILS RATHER THAN FAXES. …when ever you send me a fax, please send it twice, and number each page. …here are some useful web based tax planning calculators. Click here. …here is a web link to some of the recent tax law changes. Click here. …more questions? Here's a link to popular IRS Publications. Click here. … you may qualify for energy tax credits. Click here. …caution! If you submit a QuickBooks file I will assume all deductions are tax deductible unless categorized in the "Other Expenses" category. Copyright; Robert Lee Riley, CPA, MBA-tax. See tax return engagement disclosures. Page 2 of 19. General Questions Click here to return to index. 2 Yes No Did you make energy improvements to your home, please fax me the cost details. Did your employer reimburse you for child care costs? Did your address, marital status, or the number of household members change? Did any of your children have investment income? Did you refinance your main or second homes and is the total debt more than $100,000 greater than the total cost (including improvements)? Is the total debt on your main, and second, homes greater than $1,000,000? Did you, or your spouse, make a gift in excess of $12,000 during the year? Were you involved, in any way, with foreign bank accounts, or trusts? Did you have foreign earned income, or pay taxes to a foreign country? Do you have more than $250,000 in a pension plan? Form 5500 may be due. Did you pay $10,000, or more, in cash to any payee? Did you buy a home this year, if so, please fax me the escrow? Click here. Did you pay $600, or more, to any individual, for services performed? Did you have any casualty or theft losses? Have you faxed to me all W-2's, 1099's, and K-1's for the year, and confirmed the fax with an email to me? Yourself Spouse Name and Occupation * see below * Social Security Number * * Date of Birth Daytime Phone Evening Phone Fax Cell Phone (important I have this) Email Address Address * Leave blank if I already have this information. Copyright; Robert Lee Riley, CPA, MBA-tax. See tax return engagement disclosures. Page 3 of 19. Dependent Children and Other Dependents Click here to return to index. 3 Social Months lived Did you provide Security Relation- in your more than 1/2 Full Name Birth Date Number ship home Income Support? NOTE! Your live in parents may qualify if you support them. Child care Amount was provided by ID number Paid Address Note; employment tax returns are required if you paid for services provided in your home. P Hire your children to help you with; job hunting, marketing, or simply to do work for your business. Pay them under $400 and no tax return is required. Their work must be "meaningful and substantive" according to the IRS. Click here for more information on employment taxes for household help. Estimated Tax Payments Do not include W-2 withholdings Click here to return to index. 4 Federal State Amount Date Amount Date 2009 1st Quarter 2009 2nd Quarter 2009 3rd Quarter 2009 4th Quarter 2008 overpayment applied to 2009 Balance due with prior year return; 2008 4th quarter 2008 state estimate due 1/15/09 P Pay your state FTB taxes in December for a current year itemized deduction. Interest and Dividend Income Click here to return to index. 5 Please fax all of your 1099's, it is not necessary to list all interest and dividend income. Fax to 415 704-3238. Name Relationship Your childrens' 1099 information is entered in this section. Interest/dividends received by you on behalf of another. Interest/dividends received by you on behalf of another. P Tax free bonds are generally good investments only if your taxable income is quite high. Other Income and Expenses Click here to return to index. 6 Amount Home energy saving improvements State income tax refunds Unreported tip income Unemployment compensation Penalty on early withdrawal of savings Social security benefits - taxpayer Lottery winnings, awards Social security benefits - spouse Gambling income Alimony received * Casualty loss, damage, theft, etc. Alimony paid Tuition and fees for college * Please describe your casualty loss in the margin to the right. Copyright; Robert Lee Riley, CPA, MBA-tax. See tax return engagement disclosures. Page 4 of 19. Sale or Exchange of Property Click here to return to index. 7 Date Date Sales Gain or Description Bought Sold* Cost Price (Loss) Fax me broker's statements, etc., to 415 704-3238. P When you sell shares of stock, or a mutual fund, notify the stock broker, or fund company, and tell them that you wish to sell the most recently purchased shares. Those shares will probably have a higher cost basis - thus the taxable gain will usually be less. Contributions to Retirement Plans Click here to return to index. 8 Taxpayer Spouse Amount Date Amount Date IRA, regular* IRA, regular* IRA, Roth IRA, Roth SEP-IRA SEP-IRA Keogh Keogh CAUTION! IRA contributions are due April 15th. SEP/Keogh amounts are due by the extension due date. Roth IRA verses regular IRA - here is a good calculator. Click here. The rules for IRA's are complex. Please consult me, or a financial planner, prior to making an IRA contribution. Moving Expenses Click here to return to index. 9 Mileage Miles from former residence to new job location Click here for more information Miles from former residence to former job location about moving expenses. Amount Expenses of moving household goods and personal effects Travel and lodging in traveling from old to new residence Employer reimbursements. Please include the statement from your employer Copyright; Robert Lee Riley, CPA, MBA-tax. See tax return engagement disclosures. Page 5 of 19. Deductions Click here to return to index. 10 Medical and Dental Click here for more info about medical deductions on the web. 0.00 Medicine, drugs Doctors Click here for more information Medical insurance Other - from the IRS on medical Medical auto miles Other - deductions. Glasses and Dental Long term care insurance premiums paid HSA Health Savings contributions Medicare withheld from Social Security Cash Contributions Noncash Contributions show at 25% of cost House of worship Goodwill Click here Other - Salvation Army for more Other - Auto and travel mileage charitable Other - Other - contribution Other - Other - info on the Other - Other - web. 0.00 = Total Other - ...if you make a charitable contribution, you must have a cancelled check, or receipt from the charity. ...you can donate shares of stock you own to a charity. You avoid paying capital gains tax on the appreciation, and, you take a charitable contribution for the fair market value of the stock. These rules apply only to shares that you have owned for more than one year. ...itemized deductions, continued from previous page P Interest on Taxes Paid Interest Paid a boat or Real estate, main home Home mortgage, first loan mobile Real estate, second home Home mortgage, 2nd home may DMV Points be Sales tax on boat/vehicle/etc. Home equity credit line * deductible. State income tax, prior years Other - Other - Other - P * Interest on up to $100,000 home equity debt is deductible and the Put your Miscellaneous Expenses proceeds of the debt may be used for any purpose. credit card Investment seminars Tax return preparation fees & auto loan Investment related travel IRA fee, if paid by separate check balances Safe deposit box Gambling losses on your Legal fees Other home Click here for info on income and deductions for investors. equity line. P Home equity interest not used to improve your home may be subject to Alternative Minimum Tax. Copyright; Robert Lee Riley, CPA, MBA-tax. See tax return engagement disclosures. Page 6 of 19. Unreimbursed Business, Employee and Career Expenses Click here to return to index. 11 P Deduct expenses for your business, job hunting, networking, and career advancement beyond the duties of Yourself Spouse your current job. Here is a web link to help you find more deductions. Click here Entertainment for business promotion, networking, job seeking, 50% deductible Meals as advertising expense, see tax tip... P If you offer meals to Education, seminars, books tuition the general public and the Computers and equipment business nature of your talk is Office expenses and supplies meaningful and substantive. Photocopy Then, within limitations, the meal Job hunting costs, typing, etc. may be classified as advertising Postage and delivery and is 100% deductible for the Fax and overnight mail cost of the recipients meal. Telephone, local and long distance Telephone, auto Click here for more information Telephone answering machine or service on entertainment expenses. Business gifts @ $25 per recipient P Tools, equipment, and specialized supplies If your gift is used by many, such Costs of attending business functions as a fruit basket, then you may Renting facilities for meetings deduct more than $25. Casual labor Payments to family members such as children for business work done Dues, subscriptions, and professional publications Clothes cleaning if work conditions are dirty, and clothes damaged on the job. Cable TV, videos, DVD's, CD's if related to your work Safety clothes and uniforms P Employment agency fees Even if you have no receipts, you Word processing, typing, typesetting can take a tax deduction if; Printing, business cards/promotional items the amount is less than $75, Taxi cabs and vehicle rentals for business you know the amount, date, Union dues payee, and the notation is Business use annual credit card fee reliable and not based upon Other - guess work. P If much of your time is spent on work, networking, job hunting, information gathering, 0.00 0.00 and career advancement, if you "live to work" then many expenses which may at first appear to be personal in nature, may in fact be perfectly legal tax deductions. P If you have a boat or swimming pool, deduct the variable costs as entertainment or networking. Costs would include your daily out of pocket expenses for food, drinks, gas, etc. If four of ten people are business contacts, then deduct 4/10ths of your costs. Copyright; Robert Lee Riley, CPA, MBA-tax. See tax return engagement disclosures. Page 7 of 19. Travel Expenses Away From Home Overnight Click here to return to index. 12 Yourself Spouse Meals P Meals eaten alone when traveling are deductible. 0 Auto gas and oil P Auto rentals Have you lost your receipts for travel meals? Auto repairs and supplies Then take the daily meal allowance of $30 Bridge tolls to $46 per day - let me know the number of Parking days and the city. Hotels and motels P Telephone Travel for investment purposes, such as Clothes cleaning looking at real estate to buy, is Haircuts deductible if you spend six hours or more Tickets for transportaion of the day looking at properties to buy.* Tips to baggage handlers, etc. P Magazines and newspapers Travel for charitable purposes is tax Equipment deductible. Volunteer for a charitable event Photocopies or work such as a troop leader, archeological Gifts dig, nature study, or church program, etc.* Postage and delivery *Caution; your efforts must be meaningful and Fax substantive. Tools and supplies Casual labor Other - 0.00 0.00 TAX RULES - VACATION AND BUSINESS TRAVEL Is your trip for business or for pleasure, or a little of both. Here are the guidelines. General theory; if you are an employee then you are job hunting and networking - if you are self employed or in outside sales then you are developing strategic business relationships - or you may simply be an investor looking at real estate or a business to buy. If you have no restaurant receipts, then use the standard meal allowance of 30 to 46 dollars a day (call me). Gather business cards, brochures, newspapers, advertisements, names, addresses and telephone numbers of people you meet. Save the Sunday real estate section of the local newspaper. Volunteer for local charity events, show up at Chamber of Commerce mixers. Look for a business to buy. Talk to employment agencies, bankers, stock brokers and Realtors. Take pictures of real estate properties that you look at. Participate in events with local fraternal organizations or yacht clubs. Look for a conference room to rent by the hour. Buy a map and trace your route around town. Go to an educational seminar. Use the Internet for research before you go. If your presence is required at a specific event, then count the entire day as a business day. Otherwise, you must spend a good portion of the day conducting business activities in order to count the entire day as a business day. Business activities must be meaningful and substantive. Other; ...a cruise ship convention may be deductible on your tax return but the rules are complex. ...if you take a trip overseas for less than 7 days, e.g. to Europe, the rules are less stringent if you want to deduct the trip as a business trip. Copyright; Robert Lee Riley, CPA, MBA-tax. See tax return engagement disclosures. Page 8 of 19. Auto Expenses - Taxpayer Click here to return to index. 13 Auto #1 Description Date acquired Cost Date sold Gas, oil, insurance, etc. Yes / No *Weight of car over 6,000 pounds? See below Repairs Business miles P 75% business DMV Commuting miles is normal for Lease payments Personal miles many people. Interest* 0.00 =Total miles driven during the year Parking, tolls, etc. Average daily round trip commuting distance Yes / No Did you purchase this car with a home Auto #2 equity line of credit? Description Date acquired Cost Date sold Gas, oil, insurance, etc. Yes / No *Weight of car over 6,000 pounds? See below Repairs Business miles DMV Commuting miles Lease payments Personal miles Interest* 0.00 =Total miles driven during the year Parking, tolls, etc. Average daily round trip commuting distance Yes / No Did you purchase this car with a home Yes / No Did you buy a hybrid vehicle this year? equity line of credit? Auto Expenses - Spouse Click here to return to index. 14 Auto #1 Description Date acquired Cost Date sold Gas, oil, insurance, etc. Yes / No *Weight of car over 6,000 pounds? See below Repairs Business miles P 75% business DMV Commuting miles is normal for Lease payments Personal miles many people. Interest* 0.00 =Total miles driven during the year Parking, tolls, etc. Average daily round trip commuting distance Yes / No Did you purchase this car with a home Auto #2 equity line of credit? Description Date acquired Cost Date sold Gas, oil, insurance, etc. Yes / No *Weight of car over 6,000 pounds? See below Repairs Business miles DMV Commuting miles Lease payments Personal miles Interest* 0.00 =Total miles driven during the year Parking, tolls, etc. Average daily round trip commuting distance Yes / No Did you purchase this car with a home equity line of credit? P *Due to the Luxury Auto rules it can take 20 or 30 years to depreciate some expensive cars. But a car that weighs 6,000 pounds or more can be depreciated faster. For example, a Chevy Astro weighs between 5,900 pounds and 6,100 pounds depending on the model. P Your Day Planner or Palm Pilot often will be the basis for reconstructing your auto miles. So post; people, places, phone numbers, and your shopping lists. Oil change receipts show mileage and are used by the IRS to calculate miles driven. P If possible, your auto loan should go on your home equity credit line so the nonbusiness portion of the interest is deductible. Copyright; Robert Lee Riley, CPA, MBA-tax. See tax return engagement disclosures. Page 9 of 19. Income and Expenses From a Business Click here to return to index. 15 Business name 0.00 Address Address Main business activity Penalties! Do not forget the San Francisco annual Business Registration; http://www.sfgov.org/site/treasurer_index.asp Income/Sales (you must be able to reconcile gross bank deposits to this number) P Delay your year end income and billings and put taxable income into January of next year. Beginning inventory Ending inventory Tax ID number Merchandise purchases Here is a web link to help you find more tax deductions… Click here for a description of business deductions. Expenses, also use unreimbursed employee expenses and travel schedules Advertising 0.00 Bad debts Assets acquired Bank service charges Computers and printers Commissions Computer modem Dues and publications Cell phone Freight P Audio visual equipment Gifts @ $25 per recipient Charge Equipment Health insurance credit card Furniture and fixtures Insurance expenses Library Interest prior to Software Casual labor 12/31 for Leasehold improvements Cleaning a current Commercial trucks Legal and professional year Other - Meals and entertainment deduction. Other - Office expense Other - Pension and profit sharing Other - Rent Other - Repairs Other - Supplies CAUTION! Computer monitor, printer, briefcase, etc. go under assets acquired. Taxes; property Taxes; other Office or storage in home* Telephone Business use of home in % Travel, see the page for travel expenses Rent Utilities Home maintenance Wages Utilities and insurance Pension plan bank fees and startup costs P Taxi cabs Deduct office in home expenses if Internet you are using your home for storage of Other - inventory, supplies, or business records. Other - Click here for more home office info on the web. Other - Assets sold Other - Other - Other - Other - Other - Other - Other - Other - *** If your business is in an Enterprise Zone, you may qualify for a payroll tax credit. I do not check for this unless you ask me. *** Very important. If you have an S Corp., whenever you incur corporate expenses using personal money, you need to submit an expense reimbursement form to the corporation and be reimbursed for it. Caution! If you submit a QuickBooks file, I will assume all deductions are deductible unless put in the "Other Expense" category. Copyright; Robert Lee Riley, CPA, MBA-tax. See tax return engagement disclosures. Page 10 of 19. Rental Property Income and Expenses Click here to return to index. 16 Property #1 Repairs with a useful life less Property address than one year - deducted in full Property address Electrical Number of days of personal use during the year Structural Number of days rented Painting Rental income Roof Plumbing Advertising expense Landscaping Auto miles driven Equipment Cleaning and maintenance Other - Commissions Other - Condo fees 0.00 Insurance Repairs with a useful life more Legal and professional fees than one year - depreciated Mortgage interest, first loan Electrical Mortgage interest, 2nd Structural Supplies Painting Property taxes Roof City license Plumbing Telephone Landscaping Utilities, gas, electric Equipment PMI private mortgage insurance Other - Other - Other - 0.00 Property #2 Repairs with a useful life less Property address than one year - deducted in full Property address Electrical Number of days of personal use during the year Structural Number of days rented Painting Rental income Roof Plumbing Advertising expense Landscaping Auto miles driven Equipment Cleaning and maintenance Other - Commissions Other - Condo fees 0.00 Insurance Repairs with a useful life more Legal and professional fees than one year - depreciated Mortgage interest, first loan Electrical Mortgage interest, 2nd Structural Supplies Painting Property taxes Roof City license Plumbing Telephone Landscaping Utilities, gas, electric Equipment PMI private mortgage insurance Other - Other - 0.00 Other - P Move into your rental property for 2 years - you qualify for the $250,000/500,000 gain exclusion. P Major repairs may be deducted in full if they are; documented separately as smaller independent, individual jobs, that are done separately, over more than one year, and, documents are worded as repairs, Tax Court memo 1956-261. Copyright; Robert Lee Riley, CPA, MBA-tax. See tax return engagement disclosures. Page 11 of 19. Rental Property Income and Expenses, part 2 Click here to return to index. 17 Property #3 Repairs with a useful life less Property address than one year - deducted in full Property address Electrical Number of days of personal use during the year Structural Number of days rented Painting Rental income Roof Plumbing Advertising expense Landscaping Auto miles driven Equipment Cleaning and maintenance Other - Commissions Other - Condo fees 0.00 Insurance Repairs with a useful life more Legal and professional fees than one year - depreciated Mortgage interest, first loan Electrical Mortgage interest, 2nd Structural Supplies Painting Property taxes Roof City license Plumbing Telephone Landscaping Utilities, gas, electric Equipment PMI private mortgage insurance Other - Other - Other - 0.00 Property #4 Repairs with a useful life less Property address than one year - deducted in full Property address Electrical Number of days of personal use during the year Structural Number of days rented Painting Rental income Roof Plumbing Advertising expense Landscaping Auto miles driven Equipment Cleaning and maintenance Other - Commissions Other - Condo fees Insurance Repairs with a useful life more Legal and professional fees than one year - depreciated Mortgage interest, first loan Electrical Mortgage interest, 2nd Structural Supplies Painting Property taxes Roof City license Plumbing Telephone Landscaping Utilities, gas, electric Equipment PMI private mortgage insurance Other - Other - 0.00 Other - P Move into your rental property for 2 years - you qualify for the $250,000/500,000 gain exclusion. P Major repairs may be deducted in full if they are; documented separately as smaller independent, individual jobs, that are done separately, over more than one year, and, documents are worded as repairs, Tax Court memo 1956-261. Copyright; Robert Lee Riley, CPA, MBA-tax. See tax return engagement disclosures. Page 12 of 19. Tax Preparation Engagement Disclosure As required by the American Society of Accountants This disclosure is intended to confirm the terms of my agreement to provide tax preparation services to you. Based upon the information you furnish to me I will prepare a federal income tax return, and a state income tax return for the state of your residence. Please note that my services will be limited to the preparation of the foregoing tax returns, and I will not be preparing other tax returns which you may be required to file, such as returns for sales, unemployment, city taxes such as city payroll and gross receipts tax, city business license taxes, workers' compensation, payroll, and excise taxes. Nor will I be preparing tax returns and related filings for your pension plan(s), or forms 1099. In preparing your returns, I will not audit or verify the data you submit to me, although I may ask that you clarify certain items. Because I will not be preparing an audit, my services cannot be relied upon to detect thefts or embezzlements of your assets. Under the Internal Revenue Code and state tax laws, taxpayers are required to maintain records supporting their returns, including receipts and canceled checks for all deductible expenditures. You will be responsible for maintaining all necessary tax records and for the veracity and completeness of the information submitted to me in connection with the preparation of the above referenced returns. Please let me know if you would like me to advise you regarding your record keeping obligations. In order for me to complete your returns on a timely basis, I will need your supporting data no later than one month prior to the due date of the returns. As a Certified Public Accountant, I am technically obligated to call to the attention of the taxing authorities any positions taken in your tax return which the IRS has not expressly accepted. However, I will resolve all questions involving the application of tax rules in your favor, provided, there is a reasonable justification for it. Your returns are, of course, subject to review by the taxing authorities; and any items resolved against you by the examining agent are subject to certain rights of appeal. In the event of an examination, I will be available to represent you for an additional fee. Except as set forth below, my engagement to prepare your taxes ends upon delivery of your tax returns. Any follow up services that are required (such as representing you in an IRS audit) will be deemed a separate engagement and will be governed by the terms and conditions of a subsequent engagement. ALTHOUGH I AM AVAILABLE TO PROVIDE YOU WITH TAX PLANNING ADVICE, I AM NOT OBLIGATED TO DO SO UNLESS YOU SPECIFICALLY REQUEST IT. MOREOVER, IT IS MY POLICY TO PUT ALL TAX PLANNING ADVICE IN WRITING; AND YOU RELY AT YOUR OWN PERIL ON ANY ADVICE THAT HAS NOT BEEN FULLY REVIEWED AND PUT IN WRITING BY ME. The completed tax return is for government and your internal use only. Because it will not be prepared in accordance with generally accepted accounting principles (but rather according to principles specified in the tax code), it could be misleading and therefore may not be quoted from or copied and provided to any other person without my written consent. As a result of my prior, or future, services to you, I may be required or requested to provide information or documents to you, or a third party, in connection with a legal or administrative proceeding in which I am not a party. If this event occurs, my efforts in complying with such requests or demands will be deemed a part of this engagement and I shall be entitled to compensation for my time and reimbursement for my reasonable out of pocket expenditures (including legal fees) in complying with such request or demand. This statement is not intended to relieve me of my duty to observe the confidentiality requirements of my profession. Any information we collect and maintain in the course of responding to you will be handled in accordance with the access and privacy protection requirements of the Privacy Act, and the Internal Revenue Code. We will not share the information you give us with anyone unless required by law. We also will not sell your information. I may prepare an annual pension or profit sharing plan reporting statement for you such as form 5500, or 5500EZ - nevertheless, I am not the Plan Administrator and am not responsible for the Plan terms, administration, employee accounts, employee qualification, or IRS Plan qualification issues. You, the tax payer are ultimately responsible for all your tax filing due dates, and extensions, and, I will need your complete and final tax information well in advance of any tax filing deadline. Kindest regards, Robert Lee Riley Copyright; Robert Lee Riley, CPA, MBA-tax. See tax return engagement disclosures. Page 13 of 19. Tax Notes... Click here to return to index. 18 CAUTION! Never trade in a car. It is better to sell and buy in separate transactions. You want to write off the remaining depreciation on the old car. A trade in qualifies as a like kind exchange and you lose the deduction for the undepreciated cost basis. Remember, a car that weights less than 6,000 lbs. may take 20 years, or more, to depreciate. The dealer can write up separate transactions for the buy/sell. Furthermore you cannot take section 179 bonus depreciation on any roll over. ...IF YOU ROLL OVER PENSION FUNDS TO AN IRA, DO SO WITH A CHECK MADE OUT TO THE IRA ACCOUNT, NOT TO YOURSELF INDIVIDUALLY. THIS PROCEDURE WILL AVOID BACKUP WITHHOLDING. Backup withholding will require you to make up the difference using personal funds. ...rental property that you own and manage yourself is still one of the best tax shelters for households with income of about $100,000 or less. You may deduct up to $25,000 per year. Disallowed losses offset any gain on sale. ...if you have a business, the IRS will require that you be able to reconcile the total of the deposits made into all of your bank accounts, with your income as reported on your income tax returns. So keep good records of any transfers into your bank accounts that are not taxable income. ...in some cases, you can borrow from a 401k to purchase a home or second home, such as a house at Lake Tahoe. SALE OF YOUR HOME ...the sale of your home may be tax free, up to a point. You still need to keep records of all improvements and major repairs. ...you can rent out your home for three years, and still sell it tax free sometimes. You qualify for the $250,000/$500,000 exemption if you lived in the house 2 of 5 years prior to sale. You must recapture the depreciation if any. ...if you hold title to your home as community property. Then if one spouse dies the entire cost basis steps up to the fair market value as of the date of death. ...if you own a home, but have room mates, try to adjust the personal and rental portions of the house to best take advantage of the $250,000/500,000 home sale deduction. IRA'S ...if you are in a pension plan at work you can make a nondeductible IRA contribution, or a Roth. ...you can use funds from an IRA to purchase your first home. Also, you may use funds from a 401k in certain circumstances. Roll over funds from a 401k into an IRA and then purchase the home. $10,000 only. ...Roth IRA. Contributions are not deductible, benefits are tax free. Often they are a good idea if you qualify. You can contribute each year. For joint filers, if your Modified Adjusted Gross Income is above a cetain amount then your Roth contribution is limited. The limit is varies each year. You can make a spousal Roth IRA contribution, subject to the spousal IRA rules, and you can make a Roth contribution if you are in a pension plan at work. ...as a general rule, if you expect to be in a high tax bracket when you retire and do not expect to need the money for 10 to 15 years then you may come out ahead with a Roth IRA. ...taxpayers age 50 and older can make annual catch-up contributions to a Roth or traditional IRA. Copyright; Robert Lee Riley, CPA, MBA-tax. See tax return engagement disclosures. Page 14 of 19. Tax Notes... Click here to return to index. 19 AUTOMOBILES ...Interest on car loans. If you are an employee, you cannot deduct any interest paid on a car loan. This interest is treated as personal interest and is not deductible. If you are self-employed and use your car in business, then part of the interest is deductible. Always, if possible, put the auto loan on your home equity line of credit. ...if you write off your car using the standard mileage rate, you may still have a tax loss upon the eventual sale. The IRS publishes a table of depreciation per mile. ...sometimes, if you have an inexpensive car that you drive many miles, it may be more advantageous to use the standard mileage rate. This also applies to leased cars. ...if you lease a car and pay a large up front fee, that fee must be written off over the life of the lease. Caution, do not let the salesperson tell you that you are getting a big tax break. NET OPERATING LOSS ...if you are starting a business, you may be able to carry back your net operating loss to a prior year when you have income. Carry it back 2 years and forward 20. The carry back period for a farming loss (e.g. a vineyard) is 5 years. ACCOUNTING METHODS ...if you have an inventory the IRS requires you to use the accrual method of accounting. A common misconception is that you must use the full accrual method, which means that you pay tax on your accounts receivable even though you have not yet collected the money. Actually, all you are required to do is to accrue the inventory - thus, you cannot deduct the cost of your inventory until it is sold. This method of accounting is called a hybrid-accrual accounting method. S CORPORATIONS ...deductions are allowed for accident and health plans, and the first $50,000 of group-term life insurance. Meals and lodging furnished for the convenience of the employer, are only available to employees owning less than 2% of the corporations stock. ...CAUTION! If the business borrows, and loses, money. Your losses will be limited to your basis. Basis is limited to the amount of money you have invested in the corporation not including debt assumed. Thus S Corps are often not suitable for real estate, and start up ventures that borrow a lot of money. ...nonresident aliens cannot be owners. …contact a lawyer to follow the corporate formalities if you want the corp. to shield you from liabilities. C CORPORATIONS …contact a lawyer to follow the corporate formalities if you want the corp. to shield you from liabilities. ...CAUTION! Do not have the corporation own your car. Instead rent your car to the corporation. If the corporation owns the car, the IRS will often classify personal use as dividend to the stockholder. Thus, there is no deduction to the corporation, and taxable income to the stockholder. ...C Corporations are not usually suitable for professional service businesses, due to the increased tax rate. ...often, stockholders will try to adjust the C Corp. earnings to zero each year. Often, a small loss is incurred. Federal loss carryovers may apply to the subsequent years, but California loss carryovers are permanently reduced by 45%. ...if net income is realized by the corporation, then you will be double taxed, once at the corporate level and then once again when the money is distributed out of the corporation to the shareholders. ...often, the sole reason someone will use a C Corp. is to gain the deduction for health insurance. Now that 60% of health insurance deductions are available to all self employed taxpayers, this advantage is somewhat diminished. Copyright; Robert Lee Riley, CPA, MBA-tax. See tax return engagement disclosures. Page 15 of 19. Tax Notes... Click here to return to index. 20 LIMITED LIABILITY COMPANY P Should you switch from an S Corp to a LLC? If you expect the corporation to accumulate substantial assets, the answer is generally yes. Also, if you expect losses from operations, or from real estate, then the answer is probably yes. ...with a LLC, you are still liable for your own malpractice, but you may be shielded from liabilities that arise from the errors of your business associates, co-owners, employees, etc. Under California Law you are jointly and severally liable if your are anywhere in the chain-of-production. A LLC might protect you from errors of others, or at least limit your liability to the assets in the corporation. ...a corporation may make your services more marketable to employers. For example, if you are working on a time consuming job, the employer may be required by law to classify you as an employee, but if you are incorporated you are exempt from payroll taxes, pension requirements, some labor laws, etc. ...there are no tax free reorganization provisions applicable to changing from a C or S corporation to a LLC. If you are considering changing your corp. to a LLC, the timing of the transaction is important. ...in general terms, the advantage of the LLC is that losses flow through from the corporation to your personal return in excess of your basis, or the original amount you invested in the LLC. Thus, LLC's are often the preferred choice for a startup business that may lose money in the initial years, or, for a business that might someday invest in real estate, or, for any business that may have a loss year. ...distributions of assets in the LLC to shareholders are generally not taxable to the LLC, similar S Corp distributions can be taxable. Thus, if a shareholder wants to sell his, or her interest in a LLC the tax may be less than what you might pay with an S Corp. ...your liabilities are limited to the assets of the corporation. There must be sufficient assets in the corporation to meet the reasonable financial needs of the business - if not the LLC offers you no protection. ...an LLC allows special allocations of income and deductions to the owners - big advantage over S-corps. ...LLC's are often used in real estate because the real estate loans are included in your basis, so depreciation deductions may flow through. The LLC is taxed like a partnership. ...a LLC allows you to give away shares of stock to employees and family members. LIMITED LIABILITY PARTNERSHIP ...an LLP is designed for a professional practice. ...LLP's are often subject to specific state laws, such as a requirement for malpractice insurance. SEP PLANS ...simple. You can make contributions for yourself and your employees without a lot of complicated paperwork. ...you can make contributions to an annuity within the SEP. ...each account is owned and controlled by the employee. ...eligible employees are generally those who have reached age 21, and have worked for you 3 years. ...the contribution limits are 25% of W-2 income or 20% of self employment income, up to the limit. ...SEP contributions are not included on the W-2. ...these plans must be set up by the due date of the return, including extensions. ...retirement plans, continued. Copyright; Robert Lee Riley, CPA, MBA-tax. See tax return engagement disclosures. Page 16 of 19. QUALIFIED PLANS ...sole proprietorships use a qualified plan called a Keogh. Corporations use corporate qualified plans. ...Money Purchase Plans. Contributions are not flexible. Generally they are 10% of income or compensation within limitations. You may, of course, terminate the plan if it is not possible to fund the plan. ...Paired Pension and Profit Sharing Plans. These are popular. Contributions are 10% and 15%. There is a netting effect so the contribution is limited to 20% up to certain limitations. ...one participant plans with assets less than $100,000 are not required to file form 5500. …Profit sharing plan contributions are now 25% of W-2 income or 20% of self employment income. ...eligible employees are over age 21 and have at least one year of service. ...Defined Benefit Plans. These allow you to make large contributions, if you are older. INCENTIVE STOCK OPTIONS ...if you sell your options via a cashless transaction, then you will generally pay tax at the highest rate. You want to pay tax using the capital gain rates verses the ordinary income rates. TAX TIP AND CAUTION! It is tempting to simply cash in your options via the cashless trans- action method. Try to avoid that method because you are paying tax at the highest rate. ...you can make the Section 83(b) election for restricted shares - shares that have not yet vested, or are still in a lockup period. The election will trigger a tax bill. You pay tax on the difference between the current value of the shares, less the price you pay for the shares under the terms of the option. ...CAUTION! If you are holding shares in a brokerage account, do not change the name of that account to that of a revocable trust - the stock broker will send a 1099 to the IRS as if you had sold those shares. ...you need to know if it is possible to exercise your unvested options. ...your employer will have a booklet that explains the nature of your options - I need to see that book. ...the first issue is whether you have Qualified ISO's (quals) or Nonqualified Options (nonquals). ...if you are short of cash, then cash in some of your options via the cashless transaction method. Use that cash to purchase stock under the terms of the option. ...if you have qualified options, then you may exercise your options, but you do not pay the full capital gains tax until you sell the stock in later years. ...generally, if you have nonqualified options, exercise those first and generate some cash. Use the cash to purchase the qualified options. Hold the "quals" in your stock brokerage account and pay the long term gains tax in later years. ...exercising your options can be very risky. If the stock falls below your purchase price under the option agreement, you sustain a loss. ...there are three main issues; 1) you expect the stock to appreciate after the exercise, 2) you expect to hold the shares you bought for at least a year, and 3) there is little chance that the stock price will crash. ...nonquals; ordinary income, compensation, is the difference between what you paid for the stock and the fair market value at the date of exercise. For example, you paid $1 per share under the terms of the option and the FMV is $12 on the exercise date, then you have $11 of income taxed at ordinary income rates. The 83(b) election helps you here - you exercise your options now, for tax purposes, even though they are not yet fully vested, or the lockup period still is in effect. You pay the tax on the difference between the price paid and the FMV on the 83(b) exercise date. Hold for a year and pay only 20% federal tax. It is possible to see your tax bill cut in half. Caution, do not quit your job before your shares have vested. You have paid the tax already. ...alternative minimum tax. ISO's can be subject to ATM. I have a computer program that calculates the rate at which you can exercise the ISO's, per year, in order to minimize the ATM. ...Incentive Stock Options. When you exercise, it is a nonevent for tax purposes, except for ATM. The 83(b) election does not apply. You must have the money to buy the stock under the option agreement. ...incentive stock options, continued. ...AMT, on "ISO-quals" applies to the difference between the FMV when restrictions lapse and the exercise price (the price you paid for the shares). You can avoid the AMT by making the 83(b) election. Try to exercise when there is little, or no, difference between the FMV and the exercise price, and then make the 83(b) election. Regular tax is normally zero and the AMT income is small enough to have no effect. ...it is necessary to file the election statement before, or within 30 days, of the date of transfer of the shares. You must also give a copy of the election statement to your employer. Copyright; Robert Lee Riley, CPA, MBA-tax. See tax return engagement disclosures. Page 17 of 19. LIFE INSURANCE Life insurance is used to provide for your children, or spouse, pay estate tax, provide cash for your small business after your death, and to supplement your retirement income. TERM INSURANCE. Generally only about 2% of term policies ever pay off. After the term expires, the cost of continuing the coverage is often prohibitive. Term insurance has no cash surrender value so it will not supplement your retirement. Often term insurance is used by banks to guarantee a bank loan. FINANCIAL PLANNING TIP! Some will say "buy term insurance and invest the difference yourself." Often though, you spend it instead of save it. Then the policy expires and it is prohibitive to obtain a new one. You may never see any of your money again. FINANCIAL PLANNING TIP! Buy term with a rider that allows conversion to whole life. WHOLE LIFE INSURANCE. It has a cash surrender value that you can access tax free when you retire. The policy lasts your whole life and will pay for itself after a while. You are given a guaranteed rate of return plus a percentage of the profits/dividends of the insurance company. FINANCIAL PLANNING TIP! If you are married you may be drawing a pension over your life or the joint life of you and your spouse. For example, the single life pension may pay $5,000 per month, and the joint life pension may pay $3,000 a month. It may be best to elect the single life pension and then buy a whole life policy that will provide money to the spouse who lives longer. VARIABLE UNIVERSAL LIFE VUL. You can select the investments in the policy to a certain extent. Use the cash surrender value to supplement your retirement income. You borrow against the cash surrender value and pull the money out tax free. That loan is then paid off upon the death of the insured. FINANCIAL PLANNING TIP! The problem facing many people is that they will outlive their savings. An annuity will keep paying monthly for as long as you live. SPLIT DOLLAR LIFE. The employer and the employee both pay the premium. The employer pays most, or all, of the policy. The employee receives a fringe benefit of life insurance coverage. LONG TERM CARE ...the Health Insurance Portability and Accountability Act of 1996 set the standards for long term care. ...43% of Americans will spend some time in a nursing home over age 65 (Journal of Financial Planning). ...the cost of long term care is $40,000 to $100,000 per year (The Wall Street Journal). ...Medicare does not pay for custodial care which is what most seniors need. ...Medicaid will not pay until virtually all of your assets have been wiped out. ...the biggest threat to your financial security is the cost of long term nursing home care (Modern Maturity). ...look for a policy that will allow you to stay in your own home. ...look for an inflation provision. ...make sure Alzheimer's is covered. Copyright; Robert Lee Riley, CPA, MBA-tax. See tax return engagement disclosures. Page 18 of 19.
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