My CPA says.....

2011-10-06T16:25:00.001-04:00

From the IRS WEBSITE - a charitables refresher:

Recent Tax Law Changes May Affect People Giving to Charity: IRS Offers Tips for Year-End Donations

IR-2006-192, Dec. 14, 2006

WASHINGTON — Individuals and businesses making contributions to charity should keep in mind several important tax law changes made last summer by the Pension Protection Act.

The new law offers older owners of individual retirement accounts a new way to give to charity. It also includes rules designed to provide both taxpayers and the government greater certainty in determining what may be deducted as a charitable contribution. Some of these changes include the following.

New Tax Break for IRA Owners

An IRA owner, age 70 ½ or over, can directly transfer tax-free, up to $100,000 per year to an eligible charitable organization. This option is available in tax years 2006 and 2007. Eligible IRA owners can take advantage of this provision, regardless of whether they itemize their deductions. Distributions from employer-sponsored retirement plans, including SIMPLE IRAs and simplified employee pension (SEP) plans are not eligible.

To qualify, the funds must be contributed directly by the IRA trustee to the eligible charity. Amounts so transferred are not taxable and no deduction is available for the amount given to the charity.

Not all charities are eligible under this provision. For example, donor-advised funds and supporting organizations are not eligible recipients.

Transferred amounts are counted in determining whether the owner has met the IRA’s required minimum distribution rules. Where individuals have made nondeductible contributions to their traditional IRAs, a special rule treats transferred amounts as coming first from taxable funds, instead of proportionately from taxable and nontaxable funds, as would be the case with regular distributions.

Rules for Clothing and Household Items

To be deductible, clothing and household items donated to charity after Aug. 17, 2006, must be in good used condition or better. However, a taxpayer may claim a deduction of more than $500 for any single item, regardless of its condition, if the taxpayer includes a qualified appraisal of the item with the return. Household items include furniture, furnishings, electronics, appliances, and linens.

Guidelines for Monetary Donations

To deduct any charitable donation of money, a taxpayer must have a bank record or a written communication from the charity showing the name of the charity and the date and amount of the contribution. A bank record includes canceled checks, bank or credit union statements and credit card statements. Bank or credit union statements should show the name of the charity and the date and amount paid. Credit card statements should show the name of the charity and the transaction posting date.

Donations of money include those made in cash or by check, electronic funds transfer, credit card, and payroll deduction. For payroll deductions, the taxpayer should retain a pay stub, Form W-2 wage statement or other document furnished by the employer showing the total amount withheld for charity, along with the pledge card showing the name of the charity.

Prior law allowed taxpayers to back up their donations of money with personal bank registers, diaries or notes made around the time of the donation. Those types of records are no longer sufficient.

This provision applies to contributions made in taxable years beginning after Aug. 17, 2006. For taxpayers that file returns on a calendar-year basis, including most individuals, the new provision applies to contributions made beginning in 2007.

The new law does not change the prior-law requirement that a taxpayer get an acknowledgement from a charity for each deductible donation (either money or property) of $250 or more. However, one statement containing all of the required information may meet the requirements of both provisions.

To help taxpayers plan their holiday-season and year-end donations, the IRS offers the following additional reminders:

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Contributions are deductible in the year made. Thus, donations charged to a credit card before the end of the year count for 2006. This is true even if the credit-card bill isn’t paid until next year. Also, checks count for 2006 as long as they are mailed this year.
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Check that the organization is qualified. Only donations to qualified organizations are tax-deductible. IRS Publication 78, available online and at many public libraries, lists most organizations that are qualified to receive deductible contributions. The searchable online version can be found on IRS.gov under, “Search for Charities.” In addition, churches, synagogues, temples, mosques and government agencies are eligible to receive deductible donations, even though they often are not listed in Publication 78.
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For individuals, only taxpayers who itemize their deductions on Schedule A can claim a deduction for charitable contributions. This deduction is not available to people who choose the standard deduction, including anyone who files a short form (1040A or 1040EZ). A taxpayer will have a tax savings only if the total itemized deductions (mortgage interest, charitable contributions, state and local taxes, etc.) exceeds the standard deduction. Use the 2006 Schedule A, available now on IRS.gov, to determine whether itemizing is better than claiming the standard deduction.
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For all donations of property, including clothing and household items, get from the charity, if possible, a receipt that includes a description of the donated property. If a donation is left at a charity’s unattended drop site, keep a written record of the donation that includes a description of the property and its condition.
*
The deduction for a motor vehicle, boat or airplane donated to charity is usually limited to the gross proceeds from its sale. This rule applies if the claimed value of the vehicle is more than $500. Form 1098-C, or a similar statement, must be provided to the donor by the organization and attached to the donor’s tax return. See IRS Publication 526, Charitable Contributions, for more information.

Related Items:

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Search for Charities
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Publication 526 , Charitable Contributions
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Schedule A
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Schedule A Instructions
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Form 1098-C, Form 1098-C Instructions

Subscribe to IRS Newswire

Page Last Reviewed or Updated: November 23, 2009

Financial infidelity can be as damaging as an affair

2011-09-30T11:41:00.000-04:00

Financial infidelity can be as damaging as an affair

Third Party Verification Letters

2011-09-19T14:06:00.002-04:00

http://www.cpai.com/show-article?id=141

Don't be financially foolish - April is Financial Literacy Month

2009-04-01T11:41:00.003-04:00

Get started for free here: Feed the Pig

We will be offering financial bootcamps throughout the year to help our friends and clients get fiscally fit.

Call us to discuss your fiscal fitness plan.

Let's hold one another accountable -

2008-11-10T11:54:00.001-05:00

If you really believe, then consider staying involved.

http://www.change.gov

I've submitted my vision - tax reform. Simplify, simplify, simplify along with some other specifics.

What's your vision?

Angry Active Agitators ...

2008-07-17T18:42:00.001-04:00

.... watch out city hall. IAF is coming to a community near you. (and you thought POG cramped your style)

Attended an interesting meeting last night that was organized by several local communities of faith in town - primarily All Saints Episcopal Church and St Matthew's Trinity Lutheran Church. Representatives from all the local communities of faith were invited and many attended both the lay members and the clergy. The purpose was to introduce the interested members to the Industrial Areas Foundation, Inc. and its mission of organizing diverse local communities to BUILD RELATIONSHIPS, DEVELOP LEADERS and EXERCISE POWER.

After the introductions and an invitation to share "what makes you angry about living in town", the attendees learned about various IAF initiatives around the state and the country. In fact, a local operation exists currently, Interfaith Community Organization.

There is a lot of passion and a little bit of anger here in town. Harnessing that anger and channeling it for positive change seems to be one way to address the problems we face which many in the the group suggested were as follows: excessive govt spending, flooding and street crime, dismissive leaders, parking, affordable housing and health care. It appears our wants truly are unlimited.

Some questioned the strategy of organizing for the sake of "relationships" versus the more traditional approach of rallying around "issues" or "problems". The point as clarified appears to be build the relationships, create the consensus and the power and that as a united force both locally and regionally, we have a greater chance of influencing those in power. The audience was invited to a follow up meeting that is planned for August 4th at 7:30 at the Waterfront Hall under Saints Peter and Paul Church (4th and Hudson)

Although the purpose was not what I originally expected it to be, the opportunity to bring diverse communities of faith and neighbors together makes sense if not only for purposes of fellowship and connecting but adds heft at those times when one united clear voice needs to be heard.

Good luck.

My mattress is lumpy already....

2008-07-15T09:34:00.000-04:00

is the main reason I rely on FDIC and not my mattress for the safe keeping of the cash.

Did you know that the saftey net of the FDIC has limits. For the first time in my adult life, I actually asked my banker at HSBC Direct if my accounts were insured. They are and they aren't.

Its important to pay attention to the dollar amounts and the account ownership and titling to make sure your accounts are insured. Generally deposits up to 100k are insured by the FDIC. What does that mean? If the bank fails (like the recently seized IndyMac Bank your covered up to that limit (at least).

As taxpayers we may all be on the hook since the federal govt steps in as the final backstop.

If you are worried a bit, the FDIC has a useful online tool for checking out your coverage.

As with all relationships, your bank should be strong and reliable and trustworthy - and the FDIC is in the wings in case the relationship sours.

Happy banking.

Tony

Illusions of wealth?

2008-07-11T09:59:00.000-04:00

Walking to work today I could not help but notice all the nice cars driving around.

Its seems every other car is a nice Mercedes coupe or a BMW SUV. Are these illusions of wealth or tangible proof that we are RICH?

What's in your garage?

Me, I'm partial to Fords and Toyotas - main stream middle class transportation. What happens when the Mercedes, BMW, Audi's and Range Rovers become as common as Chevy's and VW's?

Now, a day like today, a nice convertible would be fun to tool around in - Eos or TT or Miata.

Tony

Running with purpose ...

2008-07-11T09:46:00.000-04:00

Its time. JULY 15TH, ON THE WATERFRONT 5K AT 7 PM, KIDS RUN EARLIER

Party With Purpose's annual 5K and kids run is coming up next week.

If you have not registered, its not too late. Running not your thing? How about volunteering!

Elsewhere next week? I bet there are lots of good things going on near you too.

Giving back in time and talents makes a difference and helps those in our community.

I'll be helping out and running post race along the course. Hope to see you there.

Tony

Exit the bear?

2008-07-09T15:20:00.002-04:00

How is your portfolio holding up? Where is the market headed?

Received a great link today from my client and friend, Larry Schwartzman, over at Wachovia Securities, Top 10 Reasons Why this Bear Market Won't Last.

The linked article provides some interesting insight that we all can consider as we decide what our next market moves will be.

Thanks Larry for allowing me to share this on the blog.

Tony

Uncle Sam extends a helping hand ...

2008-07-02T09:33:00.000-04:00

I received this email from my good friend Bob Du Val of UCI the other day and thought you would benefit:

"On July 1, 2008 the federal government will start providing an additional 13 weeks of emergency unemployment benefits, payable to individuals who have exhausted regular state unemployment compensation benefits at any time after May 1, 2007. Please note that these benefits will be federally funded and available in all states. They will not be charged to employer accounts."

Whether you are an employer looking to help your laid off employees and manage your unemployment costs or whether you are an employee currently enduring a cut back, the new federal extension of benefits will help out.

Please pass this along to someone you know who may need the extra help.

Thanks,

Tony

Budget Talk and Waste get you down?

2008-06-29T18:10:00.000-04:00

Do all the headlines about budget shortfalls and tax increases get you down on a Summer Sunday afternoon? Kind a messes with your financial mojo knowing that our elected officials are running our municipal and state services into the ground. You know who's gonna bail them out don't you? Yeah, you and me when we have to cough up higher property taxes, a larger sales tax or some of that always easy to increase payroll tax. Or some of the honest hardworking civil servants will lose their jobs or see there work cut back. The elected officials and the highly paid appointees need to contribute too.

Now, I'm not sure what you do at your household when things start to go red, but at some point you think, cut that expense or take those extra hours at work.

Speaking of elected officials and government appointees - when was the last time you attended a council meeting, a special commission meeting or some other government function where real and important decisions were made? I know I've attended a few and have often felt that on one hand our elected officials work hard and deal with a lot of issues; yet at the same time I can't help but feel there's something in it for them beyond serving you and me.

Every time I read about missing parking receipts, free EZ passes for life and special privileges, I get irritated. Do you try to beat em or join em?

Well this rant got me no where. Its dinner time so I will think some more about what I can do to fix my corner of the world.

Second Life - is it for real?

2008-06-28T14:26:00.001-04:00

How many of you are familiar with "Second Life"?

I recently read an article in the CPA Journal about this site and how the Maryland Association of Certified Public Accountants have built a new office there in this virtual world. Yes, Second Life, is a virtual world for those who are unfamiliar with it.

CPAs are needed everywhere - even in the cyber world. And in the Second Life world, Linden Dollars (the currency of commerce) must be accounted for and taxed. If the cost of gas and the rising rents on Main Street are getting you down, expanding your business virtually may be just the answer.

Whether you chose to supplement your traditional website for your business or expand beyond the bricks and mortar; now you have a new venue to consider. Perhaps you too can open a location in Second Life - many businesses and individuals are there already.

When you get there, look me up - I'm "Tax Quandry".

How are you enjoying yourself today?

Section 1031 Exchanges - Real Estate Transfers

2008-06-28T13:10:00.000-04:00

We've been helping several clients structure and report their Section 1031 exchanges this year.

With the proper planning and structuring, you can reduce your current tax liabilities on real estate exchanges through a Section 1031 exchange. Although not a permanent tax reduction, the 1031 process defers tax to a future date.

There are clear and important criteria to meet in order for the tax savings to be accomplished.

Give us a call before you say, "SOLD", and we could help you save thousands of dollars.

We recently helped a client save over $3 million of federal and state taxes by properly structuring and reporting the exchange of a New York apartment building.

How can we help you keep more of what you earn?

IRS says - here's some help for your gas woes

2008-06-26T11:22:00.001-04:00

From the IRS website courtesy of NJSCPA's:

IRS Increases Mileage Rates for Remainder of 2008

The Internal Revenue Service has announced an increase in the optional standard mileage rates for the final six months of 2008. Taxpayers may use the optional standard rates to calculate the deductible costs of operating an automobile for business, charitable, medical or moving purposes.The rate will increase to 58.5 cents a mile for all business miles driven from July 1, 2008, through Dec. 31, 2008. This is an increase of 8 cents from the 50.5 cent rate in effect for the first six months of 2008, as set forth in Rev. Proc. 2007-70.In recognition of recent gasoline price increases, the IRS made this special adjustment for the final months of 2008. The IRS normally updates the mileage rates once a year in the fall for the next calendar year."Rising gas prices are having a major impact on individual Americans. Given the increase in prices, the IRS is adjusting the standard mileage rates to better reflect the real cost of operating an automobile," said IRS Commissioner Doug Shulman. "We want the reimbursement rate to be fair to taxpayers."While gasoline is a significant factor in the mileage figure, other items enter into the calculation of mileage rates, such as depreciation and insurance and other fixed and variable costs.The optional business standard mileage rate is used to compute the deductible costs of operating an automobile for business use in lieu of tracking actual costs. This rate is also used as a benchmark by the federal government and many businesses to reimburse their employees for mileage.The new six-month rate for computing deductible medical or moving expenses will also increase by 8 cents to 27 cents a mile, up from 19 cents for the first six months of 2008. The rate for providing services for charitable organizations is set by statute, not the IRS, and remains at 14 cents a mile.The new rates are contained in Announcement 2008-63 on the optional standard mileage rates.Taxpayers always have the option of calculating the actual costs of using their vehicle rather than using the standard mileage rates.

Mileage Rate Changes

Purpose
Rates 1/1 through 6/30/08
Rates 7/1 through 12/31/08

Business
Rates 1/1 through 6/30/08 - - 50.5
Rates 7/1 through 12/31/08 - - 58.5

Medical/Moving
Rates 1/1 through 6/30/08 - - 19
Rates 7/1 through 12/31/08 - - 27

Charitable
Rates 1/1 through 6/30/08 - - 14
Rates 7/1 through 12/31/08 - - 14

June 24, 2008

© Copyright 2008. All Rights Reserved. New Jersey Society of Certified Public Accountants425 Eagle Rock Avenue - Suite 100 Roseland, NJ 07068973-226-4494 Fax 973-226-7425Contact Us Disclaimer

Hey its already May

2008-05-04T14:19:00.000-04:00

The Art's festival is blasting outside my window. The sounds of spring and happy people - enjoying the foods and stores on Washington Street.

I'm working on a few things for some of the 5/15 clients. Did you know that there are tax filings almost every month? I know, boring trivia.

Now that you've filed your returns, maybe its time to start planning for the next round. Starting very soon we will be offering a couple of new services to help our valued clients focus on the future rather than merely complying with their past tax filing requirements.

Stop by and ask us about these new services or shoot us an email to see what's in store.

Enjoy the good weather and grab a zeppole for me!

Dependent Care Credit and/or Flexible Spending

2007-11-11T17:35:00.000-05:00

Many parents must work today. The cost of child care can be expensive. Did you know there are tax breaks that could help ease the burden?

You may qualify for the child care credit. In addition, you may want to compare the child care credit and a dependent care flexible spending account offered by your employer.

For an expense to qualify for the credit, it must be an “employment-related” expense, i.e., it must enable you and your spouse to work, and it must be for the care of your child, stepchild, or foster child, or your brother or sister or stepsibling (or a descendant of any of these), who is under 13, lives in your home for over half the year, and does not provide over half of his or her own support for the year. Or it can be for the care of your spouse or dependent who is handicapped and lives with you for over half the year. The cost of household services, e.g., domestic help, can also qualify as long as the cost at least in part goes towards the care of the individual.

The typical expenses that qualify for the credit are payments to a day-care center, nanny or nursery school. Sleep-away camp doesn't qualify. The cost of first grade or above doesn't qualify because it's primarily an education expense. Surprisingly, the rules on kindergartens aren't clearly defined. Apparently, if the school offers a program similar to a nursery school's (more play than education) it can qualify. If it offers more of an educational program, it may not.

To claim the credit, you and your spouse must file a joint return. Further you must provide the care-giver's name, address, and social security number (or ID number if it's a day-care center or nursery school). A day-care center must be in compliance with state and local regulations.

You also must include on the return the social security number of the children who receive the care. There's no credit without it. Omission of the social security numbers while still claiming the credit will result in a summary assessment of tax liability against you.

Several limits apply. First, qualifying expenses are limited to the income you or your spouse earns from work, using the figure for whoever of you earns less. Under this limitation, if one of you has no earned income, you won't be entitled to any credit. However, under certain conditions, when one spouse has no actual earned income and that spouse is a full-time student or disabled, that spouse is considered to have monthly income of $250 (if the couple has one qualifying child) or $500 (two or more qualifying children). This means the income limitation is essentially removed for a spouse who's a student or disabled.

Next, qualifying expenses can't exceed $3,000 per year if you have one qualifying child, or $6,000 per year for two or more. In most cases, this dollar limit will set the ceiling for you. Note that if your employer has a dependent care assistance program under which you receive benefits excluded from gross income, the dollar limits ($3,000 or $6,000) are reduced by the excludable amounts you receive.

Finally, the credit will be computed as a percentage of your qualifying expenses—in most cases, 20%. (If your joint adjusted gross income is $43,000 or less, the percentage will be higher, but not above 35%.)

Example: Lyle and Ellen both work and place their son in a day-care center. Lyle earns $85,000 but Ellen earns only $6,000. They spend $8,500 on day care. The earned income limitation discussed above limits the qualifying expenses to $6,000, Ellen's earned income. The dollar limitation limits them further to $3,000. Twenty percent of this amount is $600 and that's their child care credit. (If the expenses were for two or more children, their credit would be $1,200, 20% of the $6,000 dollar limit.)

Note that a credit reduces your tax bill dollar for dollar. Thus, in the above example, Lyle and Ellen pay $600 less in taxes by virtue of the credit.

If your employer offers a dependent care flexible spending account (FSA), you may wish to consider participation in the FSA instead of taking the child care credit. Under a dependent care FSA, you may contribute up to $5,000 on a pre-tax basis. The money is withheld by your employer from your paycheck and placed with a plan administrator in a non-interest bearing account. As you incur dependent care costs you submit a statement with the plan administrator substantiating the cost and receive reimbursement.

If your marginal tax rate is more than 15%, participating in the FSA is more advantageous than taking the child care credit. This is because the exclusion from income under the FSA gives a tax benefit at your highest tax rate, while the credit rate for taxpayers with adjusted gross income over $43,000 is limited to 20%.

Example: As in the example above, and assuming the maximum $5,000 contribution to a dependent care FSA, we find the following: Lyle and Ellen's combined gross income ($91,000) reduced by the $5,000 contribution to the FSA is $86,000. Assuming a $10,700 standard deduction (for 2007, married filing jointly), and three $3,400 (for 2007) exemptions totaling $10,200, Lyle and Ellen have taxable income of $65,100 (($86,000 − $10,700) − $10,200), placing them in the 25% rate bracket. The tax on $65,100 for married taxpayers filing jointly for 2007 is $9,123 (using the tax rate schedule for 2007). The tax on $70,100 (Lyle and Ellen's taxable income if they hadn't excluded $5,000 under the dependent care FSA) would be $10,373 for 2007. By using the FSA, Lyle and Ellen save $1,250 in federal income taxes ($10,373 − $9,123). That's $650 more than the $600 that they would save if they took the child care credit (see above).

In addition to a federal income tax savings, participating in a dependent care FSA will result in savings on FICA (social security) taxes, because the amount contributed to the FSA isn't included in wages for FICA purposes. Consequently, you may save up to 7.65% of the amount contributed to the dependent care FSA, depending upon your income and the FICA tax wage base for the year in which the contribution is made.

If you have more than one child who qualifies for the child care credit, so that the limit on expenses qualifying for the credit is $6,000, you can exclude the full $5,000 under the dependent care FSA and also claim a child care credit for $1,000 ($6,000 − $5,000) of expenses.

Example: If Lyle and Ellen had two qualifying children, their credit would be $1,200: 20% of the $6,000 dollar limit. Using the FSA would still be more advantageous, because they would have a $1,250 income tax savings from the exclusion, plus a $200 credit (20% × $1,000) for the additional $1,000 of qualified expenses ($6,000 dollar limit − $5,000 exclusion). They would also have a FICA tax saving if they used the FSA.

If your marginal rate is 15% or less, taking the credit may be more advantageous than participating in the FSA. In making the choice, you must consider the effect of the earned income credit, the refundable child credit, and Social Security tax.

It should also be noted that residents of some states can save on their state income tax by taking advantage of the child care credit or an employer's dependent care flexible spending account.

There are three drawbacks to dependent care FSAs. First, money is deposited in an FSA on a “use it or lose it” basis. If you don't incur dependent care expenses that equal or exceed the amount you deposit in the FSA, you forfeit the surplus. In addition, once you elect to participate in an FSA, and elect the amount withheld, with limited exceptions, you may not change your election. Finally, it often takes several weeks to receive reimbursement for the expenses submitted.

I hope the above clarifies the essential elements of the child care credit and dependent care flexible spending accounts for you. If your employer offers a dependent care FSA, I would be more than happy to prepare a comparison of the savings the FSA would afford you with the tax savings afforded by the child care credit.

If you have any questions or would like to discuss the subject further, please call your accountant or our office.

Tony

Time to Get Ready For Year End

2007-11-11T17:05:00.000-05:00

Start early this year and file early.

Gathering records for year end taxes:

1. payroll filings for your business or household employees
2. information filings such as 1099's for certain vendors you use and other reportable transactions
3. ask for a data organizer early this year so you can begin
4. reconcile your accounts - do you know how many deductions are overlooked because your bank records have not been reviewed or updated - Quicken or Money programs can help you here
5. call your accountant this month - he or she is probably not as busy and will have time to review changes for this year

We will be sending out our tax letters and data organizers earlier this year - in December rather than February or March. We know many of our clients would like to start and finish sooner. Beware that your banks and brokers may send corrected tax filings to you as late as March or April. Calculating your qualified dividends and capital gains sometimes takes a second look by them.

Did you know that the IRS and state authorities are digging deeper too? Prepare your business milage logs every trip not just with every expense report.

Charitables are scrutinized too more so than ever. You must maintain documentation for more gifts than ever before. Call us to review the rules if you are not sure.

Good luck getting started. AND happy Veteran's Day to all our clients and friends and family who have served, are serving or have family that are serving. WE APPRECIATE YOUR SACRAFICE!

Tony

Record Retention Considerations as you Prepare for your Tax filings

2006-02-16T22:03:00.000-05:00

Have not posted in awhile. As you can guess, clients are ready to file their 2005 tax returns and we have been working diligently on reviewing their records and running the numbers. Speaking of records, many are asking us, "How long should I keep my records?"

Good question. The answer depends on what the records support.

Some records may have to be produced if IRS (or a state or local taxing authority) was to audit your return or seek to assess or collect a tax. In addition, lenders, co-op boards, or other private parties may require that you produce copies of your tax returns as a condition to lending money, approving a purchase, or otherwise doing business with you.

Keep returns indefinitely and the supporting records usually for six years. In general, except in cases of fraud or substantial understatements of income, IRS can only assess tax for a year within three years after the return for that year was filed (or, if later, three years after the return was due). For example, if you filed your 2003 individual income tax return by its original due date of April 15, 2004, IRS would have until April 15, 2007 to assess a tax deficiency against you. If you filed your return late, IRS generally would have three years from the date you filed the return to assess a deficiency.

The problem with the three-year rule is that the assessment period is extended to six years if more than 25% of gross income is omitted from a return. In addition, the assessment period doesn't begin to run until a return is filed. Therefore, if IRS claims that you never filed a return for a particular year, it can assess tax for that year at any time (even beyond three or six years), unless you can prove that you did file. Proving that you filed would, of course, be impossible after you have discarded your returns.

While it's impossible to be completely sure that IRS won't at some point seek to assess tax, retaining tax returns indefinitely and important records for six years after the return is filed should, as a practical matter, be adequate. If you file your returns electronically, be sure to get copies from the company that prepared and/or filed your return; it is required to provide you with a paper copy of the return.

Records relating to property may have to be kept longer. Keep in mind that the tax consequences of a transaction that occurs in one year may depend on things that happened in earlier years—and that the period for which you should retain records must be measured from the year in which the tax consequences actually occur. This may be significant, for example, where you sell property that you bought years earlier.

For example, suppose you bought your home in 1985 for $100,000 and made an additional $20,000 of capital improvements in 1992. To determine the tax consequences of the sale, it's necessary to know your basis (i.e., original cost plus later capital improvements). For example, if you sold your home in 2004, and your return for that year is audited, you may have to produce records relating to the purchase in 1985 and the capital improvement in 1992 to be able to show what your basis is. Therefore, those records should be kept for at least six years after your 2004 return has been filed instead of just six years after the transactions they relate to occurred. (Even though as much as $250,000 of home-sale gain can escape tax—up to $500,000 for joint return filers—you should still retain all records relating to home purchases and improvements. There's no telling how much the home will be worth when it's sold, and there's no guarantee that the home-sale exclusion will still be available when the future sale takes place.)

When new property takes the basis of old property, records relating to the old property should be kept until six years after the sale of the new property is reported. For example, suppose you bought a car for business use in 1998 and you traded it in on a new car for business use in 2001. If you sold the new car in 2004, your basis in the new car will determine whether you have a tax gain or a tax loss on the sale, and your basis in the new car is determined, at least in part, by your basis in the car you traded in 2001. Accordingly, records relating to your old car should be kept until 2011 (i.e., for six years after your 2004 return is filed in 2005).

Similar considerations apply to other property which is likely to be bought and sold—for example, stock in a business corporation or in a mutual fund, bonds (or other debt securities), etc. In particular, remember that if you reinvest dividends to buy additional shares of stock, each reinvestment is a separate purchase of stock, and the records of each reinvestment should be kept for at least six years after the return is filed for the year in which the stock is sold.
Because the calculation of the casualty and theft loss deduction is determined in part by your basis in the damaged or stolen property, you'll need to have records to support that basis, until six years after you file the return claiming the loss deduction.

In case of separation or divorce. If separation or divorce becomes a possibility, be sure you have access to any tax records affecting you that are kept by your spouse. Or better still, make copies of the tax records, since in such situations, relations may become strained and access to the records difficult.

Your records should include a copy of the divorce decree or agreement of separate maintenance, which may be needed to substantiate alimony payments and distinguish them from child support or a property settlement. Copies of all joint returns filed and supporting records are important, since the liability for tax on a joint return is joint and several and a deficiency may be asserted against either spouse. Your records should also include agreements or decrees over custody of children and any agreements as to who is entitled to claim an exemption for them. Retain records of the cost of all jointly-owned property. Also, get records as to the cost or other basis of all property your spouse or former spouse transferred to you during your marriage or as a result of the divorce, because your basis in that property is the same as your spouse's or former spouse's basis in it was.

Loss or destruction of records. To safeguard your records against loss from theft, fire or other disaster, you should consider keeping your most important records in a safe deposit box or other safe place outside your home. In addition, consider keeping copies of the most important records in a single, easily accessible location so that you can grab them if you have to leave your home in an emergency.

If, in spite of your precautions, records are lost or destroyed, it may be possible to reconstruct some of them. For example, a paid tax return preparer is required by law to retain, for a period of three years, copies of tax returns or a list of taxpayers for whom returns were prepared. Most preparers comply with this rule by retaining copies (sometimes for a longer period than the legally required three years) and can furnish a copy if yours is not available. (In the case of my own clients, I retain copies of returns for a period of 10 years.) Similarly, other professionals who assisted you in a transaction may retain records relating to the transaction. For example, a stockbroker through whom you bought securities may be able to help you to determine the basis of the securities, and an attorney who represented you in the purchase of your home may retain records relating to the closing. Nonetheless, because you can never be sure whether those persons will actually have the records you need, the safest course of action is to keep them yourself, in as safe a place as possible.

If you have any questions or wish to discuss this matter further, feel free to give me a call.

All the best,

TC

Cars; donations; and doing the right thing!

2006-02-08T11:50:00.000-05:00

Its not always easy to be a nice guy, especially when it comes to giving your car away. Clients have been asking so here goes - more than you need to know about giving that car to a charity.

One of the negative aspects of buying a new car is the annoyance involved with getting rid of your old car. Many individuals find the trade-in allowance offered by dealers (if any) to be well below the car's true value. But the alternative of selling the car on your own involves the expense of advertising as well as the commitment of time needed to meet with potential buyers, accompany them on test drives, negotiate a fair price, etc.

For these reasons, some taxpayers consider a different option for their old cars: donating them to charity. An increasing number of charities have turned to car-donation programs. You may have seen ads from some of these organizations in your local newspaper urging individuals to donate their old cars. The donation approach saves you the trouble of trying to sell the car. Many charities offer the added convenience of picking up the car at your home.

In taking this approach, however, bear in mind that the amount of the deduction you will be allowed to claim is subject to special limitations. In many cases, the deduction you can claim is less than your view of the car's value. If you compare the tax savings from a donation with a dealer's trade-in offer, the offer may not seem as small.

For cars worth over $500, the deduction will be the amount for which the charity actually sells the car, if it sells the car without materially improving it. This limit applies to any motor vehicle designed for road use, including vans and trucks, as well as to boats and airplanes.

Since most charities do sell the cars they receive, it's likely that your donation will be limited to the actual sale price. Furthermore, these sales are often at auction or in bulk and typically result in sales below "Blue Book" value. Also, you won't know the amount of your deduction until the charity has sold the car and reported the sale proceeds to you (see below).

Only if the charity uses the car in its operations or materially improves the car before selling it will your deduction be based on the car's fair market value at the time of the donation. In that case, fair market value is usually set according to the "Blue Book" listings for used cars published by the National Automobile Dealers Association. IRS will accept the value in the "Blue Book" or another established used car pricing guide if the guide lists a sales price for a car that is the same make, model, and year, sold in the same area, and in the same condition, as the car you donated. In some cases, this value will exceed the amount you could actually get on a sale. You can get a good idea of how these values are supported by visiting www.nadaguides.com.

However, if the car is in poor condition, because it needs substantial repairs or is unsafe to drive, and the pricing guide only lists prices for cars in average or better condition, the guide won't set the car's value. Instead, you must establish the car's true market value by any reasonable method. Many used car guides show how to adjust value for items such as accessories or mileage.

In any case, you must itemize your deductions to get the tax benefit; you can't take a deduction for a car donation if you take the standard deduction.

Making sure the charity qualifies and is legitimate. You won't be entitled to a charitable deduction unless you donate your car to an eligible charitable organization. In some cases, the transaction is more complex because private fund-raisers may be operating car donation programs on behalf of charities. This is legitimate as long as the private company is acting as the agent for a qualified charity. I can help if you have any doubts about the qualification of any donee you are considering. Or for those do it yourselfers out there, the IRS offers a good tool at http://apps.irs.gov/app/pub78. This site allows you to search for charities to see if they are on the Internal Revenue Service's qualified list. Of course, if your organization is not listed, you may need to follow up to understand why.

Proving your right to the deduction. If you donate your used car to charity, make sure you take the steps needed to substantiate your tax deduction.

If the charity sells the car, you will need a written acknowledgement from the charity containing your name and tax ID number, the vehicle ID number, a certification that it was sold at arm's length to an unrelated party, the gross proceeds of sale, and statement that the deduction cannot exceed the proceeds. The charity should provide you with this acknowledgement within 30 days of the sale.

If, instead, the charity will use (or materially improve) the car, the acknowledgement needs to certify the intended use (or improvement) and the intended duration of the use, along with a statement that the car will not be sold before completion of the use or improvement. In this case, the acknowledgement should be provided within 30 days of the donation.

If you'd like to discuss the pros and cons of a car donation further, please call. By the way, we tried to donate a 20 year old Toyota in December, had the paper work ready, made the call and scheduled the appointment, the driver came to pick up the car - would not take. We accidentally dropped the title in the gutter that morning as we prepped the car and the title was torn/damaged. Damaged title = no go. Guess what, now my 17 year old son is driving that car although begrudgingly. When he goes to college in the fall perhaps we will try again for a charitable donation! Better luck with your gift.

All the best,

More on the benefits of home ownership

2006-02-07T16:31:00.000-05:00

One of the main reasons people purchase a home is the psychological satisfaction in owning a home. Not only can owning a home be rewarding in its own right, owning a home can provide many tax benefits. Home ownership is one of the best tax planning strategies taxpayers can undertake.

In the year of purchase several items paid through escrow may be tax deductible. Points paid on the purchase of a new home are fully deductible in the year of purchase or if purchased lat in the year, the points may be amortized in subsequent years. These points are generally identified on the escrow statement as “Loan Origination” fees. Other escrow items may also be tax deductible in the year of purchase. These may include real estate taxes or mortgage interest paid through escrow. Generally, the points and the mortgage interest paid through escrow are reflected on the annual Form 1098. (see prior post on deciphering the RESPA/HUD)

Because every year there are two items that may be deducted when itemizing deductions, owning a home will generally decrease the amount of income tax liability. Real estate taxes and mortgage interest are tax deductible, and can be quite substantial depending upon the cost of the home and the amount of the mortgage. Every year the mortgage company will issue a Form 1098 reporting the amount of mortgage interest and/or real estate taxes paid for that year. Form 1098 will include property taxes paid if those taxes are paid by the mortgage company out of an impound account. Whether impounded or paid separately, real estate taxes can be deducted as an itemized deduction each year.

Because these tax deductions lower a taxpayer’s overall tax bill every year, some taxpayers may decide to have less tax withheld from each paycheck. Depending on whether larger refund is desired or not, a tax advisor can calculate the proper number of withholding allowances to claim.

Although it is never a good idea to withdraw funds from retirement savings before reaching retirement age, first-time homebuyers can take advantage of an exception to the 10% early withdrawal penalty (before age 59 ½). First-time homebuyers can withdraw up to $10,000 from an IRA account without incurring the 10% early-withdrawal penalty. However, income taxes must still be paid on the funds withdrawn. Although never recommended, while 401(k)s do not qualify for the exception to the 10% penalty, certain plans allow borrowing from a 401(k) to help purchase a home.

While history demonstrates that real estate tends to be a sound investment, buying a home is rarely profitable unless the home is owned long-term. Over time, if real estate appreciates, the equity in a home increases. When it comes time to sell a home, if certain criteria are met, there are special tax breaks if there is a gain from the sale. Taxpayers are allowed to exclude tax-free up to $250,000 ($500,000 if married) of the gain on the sale of their home. The seller(s) must live in the home for two out of the previous five years (there are certain exceptions to this rule).

The tax information explained here is a brief overview of the tax advantages of owning a home. Since there are many complicated tax issues involved, you should always consult with me before buying, selling, or refinancing a home. As always, feel free to call our office if you have any questions.

All the best,

TC

Deciphering your HUD a.k.a. the RESPA or settlement sheet

2006-02-05T21:31:00.000-05:00

So you bought that home this year?

Now the fun part starts. Gathering the data that will allow you to claim some of the tax benefits of home ownership.

Owning a home provides many other benefits of course. But a key motivating factor are the current and deferred tax benefits. The current tax benefits include deductions for real estate taxes and mortgage interest. Deferred tax benefits include the future gains (hopefully and most likely a portion of which will be non taxable) that come from appreciation over your cost basis. Current IRS rules allow single taxpayers to exclude up to 250k of gain as non taxable and married taxpayers can exclude up to 500k of gain. Determining cost basis is an important task for you to minimize future taxable gains. With the strong appreciation in the real estate market, it has become common for many tax payers to use all of their 250k/500k exclusions and still have some gain left over (subject to tax).

So what is cost basis. Basically what you paid for your home, certain capitalizable costs from settlement and future improvements. I recommend new home owners read IRS publication 530 for more detailed info.

A link attached for your convenience: http://www.irs.gov/pub/irs-pdf/p530.pdf.

Also, in deciphering your settlement sheet, see the attached Excel spreadsheet for a simplistic analysis to help you adjust your purchase cost basis: http://www.msnusers.com/HobokenCPA/documents.msnw?fc_p=&fc_a=0 (see Documents for "Tax Analysis Settlement Sheet")

Your accountant will love you for taking a stab at this and for providing some of the key info. Remember to include your HUD/RESPA/Settlement sheet along with all your other tax return data that you will be providing to your CPA. Don't have a CPA, consider interviewing a few. You should be building a team of advisors for future deals, transactions and opportunities.

By the way, if you are looking to sell that new purchase or perhaps you want to add to your portfolio with a purchase, consider using a professional realtor - they will help you save time and money by filtering out the noise and focusing your search. A good start is by visiting the following www.judymarcianos.blogspot.com Judy can help you whether your are looking to buy, looking to sell or just looking.

Whatever your specific tax benefits - enjoy your home and the safety and comfort it provides.

All the best,

TC

Re post for Good Kleen Fun

2006-02-05T20:12:00.000-05:00

Like I said in earlier post, what would you sell? What would you offer?

For that matter, what is missing from the Hoboken Business scene? We'd love to hear from you - the consuming public. What do we need in town to supplement our fine selection of bars, restaurants, nail salons and real estate offices - oh and Banks.

What else would fly? What do you go for out of town to purchase.

Back to Good Kleen fun. Visit the store on Washington Street or visit their website at

www.goodkleenfun.com

PS, my wife love the baseball size bath salts! She said they were great - the smell and the soothing lotion. Will definitely be back for more.

Hoboken CPA: This is the first post. Just Testing for now, come back soon.

2006-02-05T19:54:00.000-05:00

Hoboken CPA: This is the first post. Just Testing for now, come back soon.

This is the first post. Just Testing for now, come back soon.

2005-11-11T17:06:00.000-05:00

So, like so many others, I decided that a blog might be a good way to keep you informed of what's going on in the tax, accounting and financial world that is Hoboken NJ.

We are a small and dynamic residential and business community. I hope that you enjoy the news and information that we will post here. In fact, if you don't see something that you need or would like to see, let us know. If it is possible, we will post info on the topics of interest to you.

Hoboken is a unique experience for business owners, young or old, established or start up. With our close proximity to Manhattan, we are truly the gateway to a 7 million plus market place - not even counting the growth and opportunities in our own backyard. Whether you are new to Hoboken or well established here, there are still so many opportunities. As your local CPA advisor, I help my clients succeed by giving them the peace of mind and freedom to focus on the fun parts of their businesses or their careers. Leave the tax, accounting and financial worries to us. The clients who benefit the most from my expertise and my roll as their trusted advisor, treat me like a member of their financial team. With my contacts and work in town, I know many of the lawyers, insurance specialists, investment gurus and other advisors that should and do play an important roll in each of our financial lives.

You'll be able to contact us directly if you have questions or problems that you don't see addressed in the blog dialog. We are debating the merits of permitting interactive posts from users and visitors. Email us your thoughts on that.

Check back soon after we add some real content.

Your CPA Advisor,

Tony Cunningham , CPA

Email us at: thefolks@acunninghamcpa.com

Visit our website at: www.acunninghamcpa.com