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1. I did not
work this year. Do I have to file a tax return?
Maybe. A U.S. citizen or resident alien must file a tax return for
each year his or her worldwide gross income exceeds a certain amount
specified by IRS. Gross income means all income from whatever
source. If you did not work but received income such as interest,
rent, or gain from sale of property, you have gross income. If your
gross income is below the income level, you should file a return
whenever a refund of tax or the earned income credit is available.
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2. What should
I do if I haven’t filed tax returns for the last three
years?
You should file all tax returns that are due, regardless of whether
or not full payment can be made with the return. If you owe taxes
a delay in filing may result in penalty and interest charges that
could increase your tax bill significantly. Depending on your
circumstances, you may qualify for a payment plan. All payment plans
require continued compliance with all filing and payment responsibilities
after the plan is approved.
If you are claiming a refund, there is no penalty for failure to
file a tax return. But by waiting too long to file, you can lose
your refund. In order to receive a refund, the return must
be filed within 3 years of the due date. If you file a return,
and later realize you made an error on the return, the deadline for
claiming any refund due is three years after the return was filed,
or two years after the tax was paid, whichever expires later.
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3. I work in my home
part time. Can I take the home office tax deduction?
In certain circumstances you might be able to claim a home office
deduction if your home is used (1) exclusively and regularly as your
principal place of business; (2) exclusively and regularly as a place
where you meet or deal with patients, clients, or customers in the
normal course of your trade or business; (3) in the case of a separate
structure which is not attached to your home, in connection with
your trade or business; (4) on a regular basis for certain storage
use; (5) for rental use; (6) is a daycare facility.
Additional tests for employee use. If
you are an employee and you use a part of your home for business,
you may qualify for a deduction for its business use. You must meet
the tests discussed above plus (1) your business use must be for
the convenience of your employer, and (2) you must not rent any part
of your home to your employer and use the rented portion to perform
services as an employee for that employer.
If the use of the home office is merely appropriate and helpful,
you cannot deduct expenses for the business use of your home.
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4. Who can
I claim as dependents?
All five requirements must be met to claim a person as a dependent.
(1) The claimed dependent must be a U.S. citizen or resident at some
time during the calendar year. (2) With exception, gross income of
the claimed dependent must not exceed certain amounts specified by
the IRS. (3) The taxpayer must provide over half of the dependent’s
total support for that calendar year. (4) The claimed dependent must
be related to the taxpayer by blood or by marriage, including an
adopted or a foster child. (5)
The dependent must not file a joint return with his spouse.
There are exceptions to the above requirements. Our firm can help
you determine if your situation meets any of those exceptions.
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5. Who gets
to claim the children as dependents after a couple divorces?
There is a special rule for children of divorced or separated parents,
which usually gives the dependency exemption to the custodial parent.
Under the special rule, generally the parent who had custody of the
child for the greater part of the year is treated as the parent who
provided more than half of the child's support. This parent usually
is allowed to claim the exemption for the child if the other exemption
tests are met.
There is one major exception. If the custodial parent consents to
give up the exemption, the noncustodial parent can claim the child.
The exemption can be released for one year, several years, or all
future years. The custodial parent formally must sign away the exemption
on Form 8332, Release of Claim to Exemption for Child of Divorced
or Separated Parents. This signed form must be attached to the noncustodial
parent's tax return.
In some divorces, the agreement specifically allows the noncustodial
parent to claim the exemption. Instead of attaching Form 8332, the
noncustodial parent can attach copies of the agreement that show
(1) the custodial parent's name and Social Security number; (2) a
statement that the noncustodial parent can claim the dependent; and
(3) the custodial parent's signature and date.
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6. How do
I decrease my tax burden?
Recordkeeping is the main key to keeping your taxes lower. By
setting aside those receipts and documents as soon as you receive
them, you won’t forget to claim your rightful deductions when
it comes time to prepare your income tax returns.
Some other ways you may be able to lower your taxes might be (1)
Purchase a residence, if you are renting but can afford to own a
home. You would be surprised how much money the tax savings
of home ownership could mean in money in your pocket each month. (2)
Make charitable contributions. Don’t forget you can donate
unwanted items to charities and qualify for a tax deduction, usually
equal to the current value of those donated items. But be sure
to get a receipt at the time of the donation. If the value
of a single item is greater than $5,000, you may need to get an appraisal. (3)
If you employer requires you to use special tools, or pay union dues,
you may be able to deduct those amounts as well.
Each taxpayer has a unique situation; we can help you identify tax
saving tips that are specific to you.
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7. What personal
expenses are tax deductible?
Most personal expenses are not tax deductible. Certain personal expenses
could be deducted as itemized deduction subject to limitation, and
the deductions are reported on Schedule A of Form 1040. Examples
of deductible personal expenses are mortgage or investment interest,
certain types of taxes, personal casualty losses, charitable contributions,
medical and dental expenses, tax consulting and preparation fees.
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8. What should
I know about exercising stock options? Do I need a plan?
The most important information you will need to know is what type
of stock options you are about to exercise (ISO or Non-qualified). Each
type of stock option is taxed differently when exercised. ISOs
are not taxed upon exercise. However, you may be subjected
to the alternative minimum tax (AMT), if the market value is greater
than your exercise price. Non-qualified stock options are taxed
immediately upon exercise, to the extent of the gain you recognize. That
gain is included in your W-2 wages. You are responsible for
the payroll taxes at the time of the exercise.
We recommend you have a plan for exercising stock options, so that
you can establish your target market price, determine whether you
can minimize your tax liability through exercise timing, and to make
sure that AMT won’t cause you to pay tax on income you might
never realize. (Do you remember the “Tech Wreck” of
2000 and 2001?)
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9.
If I don’t exercise or sell Stock options do I need to
be concerned about alternative minimum tax (AMT)?
Yes, you do need to be concerned about AMT. There are other
items that may contribute to AMT. For example, high income,
state and local taxes including property and state income taxes,
long-term capital gains, tax-exempt interest, medical expenses, various
credits, to name a few. Each item is unique and needs detail
explanation. We will be happy to assist you in tax planning
to minimize your AMT exposure.
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10. How
will a “wash sale” at year-end affect my tax liability?
A wash sale is when you sell stock at a loss and then repurchase
that same stock within 30 days before or after the date of sale. When
you have a wash sale, your loss is not allowed as a deduction until
you sell the repurchased shares. For example, if you sell 100
shares of IBM stock on December 30, realizing a $10,000 loss, but
on January 10 of the next year you buy 100 shares of IBM stock, then
you are not able to deduct the $10,000 loss until you sell the new
shares of IBM stock.
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11.
I want to start my own small business. What do I have to
do to keep out of trouble with the IRS?
To start a small business, you should apply for an Employer Identification
Number (EIN) if applicable. You also should choose your business
structure, tax year, and accounting method. Pay your business taxes
and file all necessary forms with IRS on time. Keep good records
and supporting documentation.
Our firm can assist you in identifying what your particular business
must do in order to satisfy your management and planning needs, as
well as any taxing authority requirements.
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12. Are
medical expenses deductible?
Medical expenses paid during the tax year for the taxpayer, the taxpayer's
spouse, and the taxpayer’s dependents are deductible to the
extent that such expenses exceed 7.5% of adjusted gross income (AGI). These
expenses are reported on Schedule A of Form 1040. Medical expenses
include amounts paid for the diagnosis, cure, mitigation, treatment,
or prevention of disease or for the purpose of affecting any structure
or function of the body. The deduction covers expenses that
have not been reimbursed by medical insurance or other sources. Expenses
incurred for cosmetic surgery are not deductible.
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13. How
does selling my home affect my tax return?
If the home you are selling is your primary residence and you have
lived in it for more than two of the past five years, you may qualify
for an exclusion of the first $250,000 of the gain you realize if
you are single, or the first $500,000 of the gain you realize if
you are a married couple. You are under no obligation to reinvest
that tax-free income in a new home. Any additional gain you
realize is taxed as long-term capital gain.
Certain other rules may apply if you ever have used your home as
a rental or business property. We are able to help you determine
how those uses may affect your tax return.
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14. Why
is it better to have an Accountant prepare my taxes than doing
them with tax software?
For some people a tax software program may be adequate, since they
may not have a complex state of affairs. But a tax software
program assumes you understand the questions it asks you to answer. Additionally,
the software doesn’t understand your situation and can’t
give you the guidance you may need, especially if your taxes are
complicated.
However, an accountant will listen to your concerns and give you
an opportunity to ask questions. It is the accountant’s
duty to make sure that you understand your tax situation. That
doesn’t mean that we expect you to know everything we do, tax
laws are very complex, and ever changing. Just as you wouldn’t
try to perform surgery on yourself using the television or a book
as your guide, you shouldn’t trust a software program to assess
your tax situation.
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15. When
should I consider a 1031 Tax-deferred exchange?
If you have an asset used for business purposes (i.e. rental property,
business vehicle, business equipment, etc.) which, when sold, will
present you with a gain, you may be eligible for a §1031 tax-deferred
exchange. It allows you to defer the gain by exchanging the
asset to be sold for another like-kind asset. By doing so,
you are able to defer recognition of the gain until you sell the
new asset, as long as it is not exchanged also.
You should consider a §1031 exchange if you want to purchase
a similar asset, but currently don’t want to pay tax on the
gain you would recognize upon sale. We can assist you in determining
whether you qualify for a §1031 exchange and will be able to
meet all of the requirements by the deadlines imposed by the tax
laws.
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16. If I
continue to work after I start receiving Social Security and
Medicare benefits will my employer still have to withhold social
security and Medicare tax?
Yes, your wages are subject to Social Security and Medicare taxes
regardless of your age or whether you are receiving Social Security
benefits.
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Estate and Gift Tax
17. Will
my estate have to pay taxes after I die?
Your estate may be subject to estate tax. Presently, your estate
will have to pay tax only if the total of your taxable estate and
lifetime taxable gifts exceeds the unified credit of $2,000,000 (for
years 2006 through 2008).
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18. Is having
a Living Trust better than having just a Will?
That Depends. The initial cost of setting up a living trust
usually is more than that of setting up a will. However, those
costs usually are a small percentage of the amount saved through
the avoidance of probate costs at the time the grantor (you) dies.
Since probate is a court proceeding, your Will and the valuation
of your assets are open to public inspection. However, a living trust
is confidential and the transfer of assets from the living trust
is kept from public view.
If confidentiality and continuity of ownership are important objectives,
then the living trust is a better choice. But, if confidentiality
and continuity are not important objectives and if the initial cost
and constant administration of a living trust outweigh the potential
savings through the avoidance of probate, then just will should suffice. In
any event, you should have a Will.
But, it always is advisable that you consult with an attorney, as
this is a legal matter.
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19. What
benefits does a Trust offer?
As the grantor of a trust you are can designate how you want the
beneficiaries to receive income or principle. Depending upon
the type of trust you create, you can achieve many goals. For
example, if you know that you will have a taxable estate, you may
have a life insurance trust (ILIT) so that the beneficiaries of your
estate will have enough money available to pay the estate tax upon
your death.
If you have minor children, but you want to give them annual gifts,
you might consider a children’s trust. The trust document
will determine when the children may receive distributions as well
as protect their money until they reach the age or ages of distribution
you establish when you create the trust.
These are just a couple examples of trusts. There are many
types of trusts, each having a specific purpose. Trusts are
legal documents that should be prepared by an attorney. We
can work with you and your attorney to determine what trusts you
may need and how to administer them.
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20. What
is Gift Tax and when should I file a return?
The gift tax applies to the transfer by gift of any property. It
is a gift if you do not expect to receive something of at least equal
value in return. You should file a gift tax return for any calendar
year you have taxable gift. Any gift is taxable with the following
exceptions: (1) gifts that are not more than the annual exclusion
for the calendar year ($11,000); (2) tuition or medical expenses
you pay for someone; (3) gifts to your spouse, to qualified charities,
or to a political organization for its use. A separate annual exclusion
applies to each person to whom you make a gift.
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21. If a
relative gives me $50,000 how much gift tax will I have to pay?
You do not need to pay any gift tax or file a gift tax return. Your
relative will have to file a gift tax return and may or may not have
to pay the taxes on the gift.
Generally, each year you can give up to the annual exclusion amount
($11,000 in 2005) to another person, without owing any gift taxes,
and without the recipient owing an income tax on the gifts. In your
lifetime you can give up to $1,000,000 in gifts, total, before you
are subject to gift tax.
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22. I’m
expecting a large inheritance. How much tax will I have
to pay on that?
None. The decedent’s estate is responsible for all taxes
owed by the estate.
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