Unofficial Tax Guide

If you have been donating to charity you should let the tax agencies know, and take advantage of the charitable tax deduction that becomes legitimately due to you. Your contributions to charitable organizations can add up to a sizeable deduction if you itemize them on IRS Form 1040, Schedule A.

But before you make the donations you must carry out a few checks. You must remember that only donations made to organizations that are recognized by tax agencies are eligible for tax deduction. You can refer to Publication 78, published by the IRS that lists all such organizations. This list is available online and in several public libraries too.

You cannot get tax benefits on donations to individuals, political organizations or political leaders nor can you claim benefits for spending time raising money for organizations by holding raffles, bingo or any game of chance. Charitable donations given to religious organizations and educational organizations are usually acceptable.

Tax deduction is also available on contributions made in the form of merchandise, products or services. However, this deduction can be claimed on the fair market value of these goods or services. For instance, you may decide to make a donation by gifting stocks of your company. In this case the value of the stocks will be calculated as the average of the highest and the lowest traded price on the date of valuation.

You can also donate your car. Its value will be calculated as the resale value at the time of donation. Planes and boats can be donated a well. However, if the claimed value of the donated motor vehicle, boat or plane exceeds $500 and the item is sold by the charitable organization, the taxpayer is limited to the gross proceeds from the sale.

If you are donating a household or personal item then the deduction can be claimed on the amount that the item would have fetched in a garage sale or at a flea shop. All charitable contributions over $250 need a proper receipt to qualify for tax deduction.

You must remember that only contributions physically made during the tax year are up for deduction. If you have used a credit card or issued a check, it does not matter when the transaction shows up in your account. You can claim deduction only in the tax year that you used the instrument.

Comments(0)

LLC tax deductions are not recognized by the federal government as deductible tax and because of that all entities who term themselves LLC or limited liabilities companies must figure out how to pay their federal taxes. The LLCs have three options, they can choose from. They can either file returns either as a corporation, a partnership or sole proprietorship. Typically the federal government classifies LLCs as corporations and taxes them likewise.

LLCs are companies that have been formed under a State or Federal statute or under the statute of a federally recognized Indian tribe wherein they have been described either as a corporation, body corporate or body politic or a joint stock association. The same is true of businesses owned by state, foreign governments or entities described in section 1.892.2-T. Any association formed under regulations section 301.7701-3 is also seen as a corporation by the federal government, just as are insurance companies.

If the LLC filing is not a corporation then it can file Form 8832 and elect to conduct business either as a corporation or a partnership. Any business with at least 2 members can choose to file as an association taxable as a corporation or a partnership. Similarly, a business entity with a single member can choose to be classified as an association taxable as a corporation.

If the LLC doesn’t use file Form 8832, there are default rules come into play. The default rules provide the LLCs that have at least two members and do not specify itself as a corporation then by default it will be considered to be a partnership, and will be required to file taxes as one. This applies similarly to an LLC that has only one member. They will have to file taxes as a sole proprietorship.

Therefore it’s very important for all LLC’s to file Form 8832, and to receive the tax benefits that accrue to them. Just as important, to get the maximum benefits the LLC’s should use the assistance of tax consultants.

Comments(0)

This car tax deduction enables owners of a hybrid vehicle – those vehicles that are powered by a gasoline-powered engine and an electric motor — the ability to claim a one-time tax relief on their income tax returns. This deduction is a one-time deal. This deduction has been provided under the Working Families Tax Relief Act of 2004.

This deductible can be used by those who bought their cars in 2004 and 2005 and are still the car owners. The deduction limit for these two years is a handsome $2,000. However, the law is going to provide for a measly $500 deduction for hybrid cars that will be bought in 2006. After that there is currently no further benefit.

Due to a revised energy bill hybrid cars have even more lucrative incentives. The great incentives will come into effect from January 1, 2006. Theses will supersede the limitations of the law previously created in 2004. The new incentives will provide for full dollar tax credits, instead of tax deductions.

It would be wise to wait little longer for the purchase of their hybrid vehicle to 2006. This will provide them with the tax credits. This tax credit will be available only on the first 60,000 hybrids sold by the carmaker. Therefore we recommend that if you are going for a popular vehicle such as Honda or Toyota, you shouldn’t hold off your purchase for too long.

Currently the existing law says that the value of the tax break depends on the tax bracket you fall into due to it being a tax deduction. People who bought hybrid cars in 2004 and 2005 can claim a $2000 reduction on their 2004 or 2005 tax returns. What this means is that if you are in the 33% tax bracket, the deduction will lower your tax bill by $600, while if you are in the 15% tax bracket, you will be able to save up to $300.

Hybrid cars were bought and have been driven prior to 2004 can also claim tax reduction. For this, the owners must amend the tax return that was filed to claim a reimbursement. This must be done within three years after the initial return date or within two years after the tax was paid.

Comments(0)

Student loan interest deductions allow a deduction of up to $2,500 on interest that you have paid for a student loan. If the student loan isn’t allowed because of nullification, you are allowed to exclude the amount from your income.

Student loans are eligible for deduction if the loan was solely to pay for a qualified higher education program. Loans can be taken for yourself, your spouse or your kids, or anyone who is dependent upon you for further studies.

Tax deductions are claimable on the student loan if you use the money from the loan on college or vocational school expenses such as tuition, fees, books, supplies, equipment, room and board, transportation. Some other requirements necessary to use the benefit are: you or your dependent should be at least a half-time student in a degree, certificate, or other qualified program; and you should be legally obligated to make the repayment.

Tax deductions on the student loan are not claimable in the case that:
• More than one taxpayer claims an exemption for you as a dependent.
• The person claiming the deduction is married and is filing a separate return from a spouse.
• The person claiming is not legally allowed to clear the loan.
• Initially the loan was made by a relative.

Also, the costs you incur have to be reduced by:
• Non–taxable distributions from a Coverdell education savings account
• Non-taxable distributions from a qualified tuition program
• Interest from US Savings Bond that is non–taxable because it is used to pay qualified higher education expenses,
• The part of scholarships and fellowships that is non-taxable
• Veterans educational assistance, and
• Any other non–taxable payments (other than gifts, bequests, or inheritances) received for educational expenses.

Always remember that if you are paying your student loans after 2002, the “first 60 months” requirement on interest paid is discontinued, and deductions are permissible for voluntary interest payments, rather than only required payments as in the previous years. Additionally, make the deduction on either Form 1040 or Form 1040A.

Comments(0)

Not very many people are fully aware of the different laws which the medical expense tax deduction is available. The people who know make full use of it to cover a lot of their medical bills. The thing that they know is that they can deduct medical costs as long as it is more than 7.5 percent of their adjusted gross income. All people need to make sure to use the medical tax deductions by using the following guidelines:

1. First off is the need to reach 7.5 percent of their adjusted gross income owed in medical bills. People should make sure to use the medical expenditure of not only themselves, but all those who are listed on your tax return. All dependents can be included in this including your spouse. People are even allowed to include the medical and dental bills of a family member who may have passed away during the course of the year.

2. Also costs like transportation from your residence to the place of treatment can be included. Costs can be calculated by making use of the cents-per-mile allowance given by the IRS. Even more costs can be added. In fact there are several others like long term care insurance, uninsured treatments such as an extra pair of eyeglasses or set of contact lenses, false teeth, hearing aids and artificial limbs. Some weight loss programs too have been added to this list.

3. Special medical needs such as the use of wheelchairs, crutches, hearing aids, these are also tax deductible. If you have had to remodel your house — on the doctor’s orders of course — by adding a ramp or widening the doors, then these costs are partially deductible.

4. Miscellaneous claims: Don’t forget miscellaneous deductions. These can include: costs made on legal abortion, acupuncture, eye surgery, drug rehabilitation, prescription drugs and insulin, nursing home and nursing services, ambulance service, hospital costs, laboratory fees, health insurance premiums, dependent fees paid to physicians, surgeons, specialists, dentists, psychologist, and other medical practitioners. All of these when added up to any figure beyond the 7.5 percent mark is tax deductible.

Comments(0)

Buying a home is can give you more than a place to live. It can be a means to get tax deductions on the mortgage interest and the real estate tax. Mortgage tax deduction can be availed as long as the loan amount for the primary residence and second home is less than $1.1 million. This makes this deduction one of the best ways to trim taxes.

Since October 14, 1987, all home loans taken before this date are exempt from new rules. Taxpayers are allowed to deduct the full interest paid on these loans, regardless of its size and the purpose for what it was used. Additionally, any refinanced debt incurred before October 14, 1987, is rolled into the total acquisition indebtedness.

For those who are new to mortgage tax, acquisition indebtedness is the money that you borrow to buy, build, or improve your home. The tax code is complex when it comes to this debt. Broadly, it lays down that that you can deduct mortgage interest up to an acquisition indebtedness of 1.0 million on all loans taken after October 14, 1987.

The limit for capital indebtedness is $100,000. This means that you can borrow up to $100,000 of the capital in your home and use it for whatever you want. This again is a huge improvement on the pre-1987 years where you could use this money only for home improvements, medical and education expenses

In the past many homeowners refinanced mortgages on their appreciating properties to draw on their capital. They used this sum to buy new cars or take expensive vacations. This benefit has been withdrawn under the new tax laws. Homeowners can no longer make unlimited mortgage interest deductions when drawing on capital.

A second mortgage, or “junior lien”, allows the homeowner to make use of part of the capital that has built up in the home over time. Getting a second mortgage is very much like taking out your first mortgage in terms of closing costs.

A home owner can also use the use the capital in their home like a credit card and borrow against it as and when they need. The lender will charge interest only on the portion of the capital borrowed against. Then this borrowed amount becomes the amount on which the homeowner can claim tax deduction.

Comments(0)

Real estate tax deduction is a deduction given to those who own a piece of property like your house and gives you many tax advantages.

These deductions include:

1. Interest paid on mortgage: The mortgage interest you incur on your house is deductible from your income tax. Joint tax holders can deduct the entire interest amount up to a maximum of $1 million in mortgage liability paid on a first and possibly second house.

2. Fee points: Points connected to a home acquisition mortgage are completely deductible. Usually one to three points is charged on home loans by your mortgage lender. Since each point is 1% of the principal amount, these points can add up to thousands of dollars.

3. Equity loan interest: Interest you pay on a home equity loan is partially deductible. However, there are certain rules imposed by the Internal Revenue Service regarding this policy.

4. Home improvement loan interest: The interest on loan taken to make capital improvements is tax deductible. Such improvements include constructing a fence, driveway, swimming pool, patio, garage, a new roof, landscaping and so on. This policy does not include minor repairs.

5. Home office deduction: Using a part of your house as an exclusive workplace also entitles you to certain deductions on insurance, repairs and depreciation.

6. Selling Expenses: You can use this clause to reduce your taxable capital gains when you sell your home. Selling expenses include real estate broker’s commissions, title insurance, legal fees, advertising expenses, administrative expenses, and inspection fees.

7. Capital gains exclusion: If you sell your house that you have occupied for two of the last five years then you need not pay capital gains tax. This benefit has been granted under the Taxpayer Relief Act of 1997. Married taxpayers, who file jointly, can keep up to $500,000 in profit on the sale of a home while single and married taxpayers, who file separately, can keep up to $250,000 apiece tax free.

8. Home moving expenses: If you shift your home because your job takes you to another city then you can deduct part of the expenses incurred in shifting home. However, the IRS has slapped several limitation clauses on this benefit, and it is not easy to avail.

9. Property Tax: Finally, the real estate tax that you pay to your local government is completely deductible from your federal income tax.

Comments(0)

If you own property that you are renting then you must make sure that you take advantage of the full benefits that rental property tax deduction provides. Its surprising to know the number of heads under which you can avail these benefits. Some of these include rent, payment to cancel a lease, expenses paid by the renter and so on.

Some common deductible expenses follow:

1. Interest: Deductible interest include mortgage interest payments on loans used to acquire or improve rental property and interest on credit card payments made to purchase goods or services for rental purposes. In fact, interest is the biggest deductible expense for the owners of rented property.

2. Depreciation: The cost of rental property can be recovered through depreciation. This benefit becomes available from year two. A renter can continue to claim depreciation over a period of 27.5 years.

3. Repairs: Repairs such as repainting, tiling the floor, fixing leaks, plastering and replacing broken windows in a rented property are fully deductible in the same year in which the expenses are incurred. These repairs should be ordinary, necessary, and reasonable in amount and not capital improvements.

4. Travel: The renters can avail a tax deduction on expenses they incur when they travel to their rented property to talk to tenants or carry out repairs. These expenses also include the expenses that the renter may incur while visiting plumbing or electrical fault fixing companies. If the renter happens to be staying in another city then he can even use his airfare and hotel bills to claim tax deduction. Smart renters use this clause to mix business with pleasure

5. Home Office: If renters use a part of their houses solely for activities for their rental business, then they may deduct their home office expenses from their taxable income.

6. Losses: Losses that result from fires or floods also qualify for tax deduction. This deduction may be on a part of the loss or full loss. However, the actual deduction also depends on the amount of insurance that a renter may claim.

7. Insurance: Renters can deduct the premiums they pay for any insurance for their rented property. This includes fire, theft, and flood insurance for rental property, as well as renter liability insurance.

8. Services: Fees paid to attorneys, accountants, property management companies, real estate investment advisors, and other professionals are deductible provided their services are used for work related to rental activity.

Comments(0)

What are small business tax deductions? They are a means to diminish the amount of tax paid by deducting some of the expenditure incurred while running a business. According to Code 162 of Internal Revenue Service these deductions are allowed for “all the ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business”.

These expenses include traveling expenses, entertainment expenses, rentals and allowances paid to employees. The IRS has its own way to decide what constitutes ‘ordinary and necessary’ expenditure. It is important to remember that your expenses should not be ‘unreasonably large’. On the other hand they should be in direct proportion to the circumstances under which they are made. Additionally, never make the mistake of putting personal expense as business expense. Severe consequences will follow if you are caught.

Avoid making payments to relatives, even if they are bona fide businessmen. This is something that tax auditors are extremely suspicious of. Any payments made to a business in which a family member has a direct or indirect commercial interest are paid very close attention too.

What kinds of expenses qualify for tax deduction? First off all, there are expenditures made on vehicles in running the business. Vehicle tax deductions can be determined in two ways. First there is the standard mileage method whereby the sum is deducted on the per mile formula devised by IRS. Second is the actual expense method under which you deduct the actual costs you have incurred in operating the vehicle. If using the actual expense method you can also include depreciations charges, plus your gas and maintenance bills.

One of the other big deductions is for entertaining clients. Fifty percent deduction on total expenses incurred on entertaining clients can be deducted. Eligible business entertainment consists of taking a client to a ball game, a concert, or dinner at a good restaurant, or just inviting a few of your customers over for a Sunday barbecue at your home. There must some verification that the entertainment expense was related to business, in case the IRS does an audit. Therefore it is good to file all bills carefully, mentioning the purpose of the bash against each bill.

Deducting current expenses that are incurred during the course of the year can be done also. Everyday expenses that you incur to keep the business going, and include expenses like rent, office supplies, electricity, etc fall into this category.

File all your bills carefully. When filing there should be separate folders to keep bills pertaining to vehicle expenses, rent, utilities, advertising, travel, entertainment, and professional fees. This will make it easier since all of these things are needed at the time of filing returns.

Comments(1)

What is self-employment tax deduction? It is for those who run their own business or are planning to set up their business. Several tax benefits on their expenses — benefits that were note available to them when they were working as employees can be deducted. Self-employed professionals can use their Social Security number as their business tax identification number and file taxes under Schedule C or Schedule C-EZ.

It is handy knowledge to understand the two schedules, because each provides a different benefit. The Form Schedule C-EZ should be used by those whose business expenses are small, who end up the year with a profit, which run the business without any employees, who have no need to claim a home-office deduction and who do not report any depreciation.

The Form Schedule C is for business enterprises that are more elaborate. In addition to asking your gross income, you are quizzed in detail about your business expenditure. Differences between the two forms are that with Schedule C it is possible to report a loss, and make a tax saving.

Here are some of tax deductions that you can claim if you are self-employed:

Equipment Expenditure: Section 179 is a deduction that helps you subtract the entire cost of equipment purchased for your business in the same year. This includes costs incurred on purchasing a computer or filing cabinet or any other item relevant to your business requirements. However, there is a limit to this claim. The best place to check the amount is IRS Publication 946 because this amount is changed frequently.

Travel, to include mileage and a percentage of meal and entertainment expenses also are deductible. To claim these benefits you have to produce receipts and explain the purpose of the expenditure.

Health Insurance and Social Security Taxes: You can avail deductions on health insurance premiums paid for yourself and your family members. Similarly, a part of the payment you make as social security tax can be retrieved from your total income. This deduction is available on Form 1040 form and not on Schedule C.

Self-managed retirement benefits: You can open a Keogh or a Simplified Employee Pension plan. The contribution that you make to either of these plans from your earnings can be subtracted from your adjusted gross income when you file Form 1040.

Home Offices: Those of you who use a part of your houses merely for book keeping and file storage can now claim a home office deduction. Now this is possible even if you spend a lot of time doing business outside of your house office.

Comments(0)