Understanding Tax Terms: Basis – Covering the bases on basis

Understanding Tax Terms: Basis – Covering the bases on basis

This commonly used tax term is anything but common to most of us. Knowing the basics of basis can serve to lower your tax obligation when you sell property.

Basis is a common IRS term, but probably does not enter into your everyday conversation. This IRS term is important because it impacts the taxes you pay when you sell, exchange or give away property.

What basis is

The IRS describes basis as:

The amount of your capital investment in a property for tax purposes. Use your basis to figure depreciation, amortization, depletion, casualty losses, and any gain or loss on the sale, exchange or other disposition of the property.

In plain language, basis is the cost of your property as defined by the tax code.

There are a few different types of basis that apply to different situations, including “cost basis,” “adjusted basis,” and “basis other than cost.”

Types of basis

Cost basis. Your basis usually starts with what the item cost. Cost basis also includes sales tax paid, freight, installation, testing, legal fees and other fees to purchase the property. If you acquire a business you must often allocate the purchase price to each of the assets to establish their basis.

Tip: Retain records of any major transaction. Ensure the documentation includes all allowable costs that could be applied to your basis. This will help reduce taxes when you sell or dispose of the property.

Adjusted basis. When you sell, exchange or dispose of property you may have to adjust its basis to account for changes to the property since you acquired it. This is known as its adjusted basis. A common example of adjusted basis is when you add the costs of capital improvements to property that have a useful life for more than one year.

Adjusted basis can decrease the value of property as well. This is the case when property is affected by things such as casualty or theft losses, depreciation and other deductions.

Home tax tip: Adjusted basis applies to many home improvements. These could include a full roof replacement, adding a room to your home, or even special assessments for local improvements. Create a folder and retain all documentation that could add to your home’s basis. It may lower your capital gain when you sell your home.

Basis other than cost. What is the basis when you inherit property, receive property for services or receive property as a gift? In most cases, the basis is the fair market value of the item. This is the price a willing buyer would pay for the item and a willing seller would be willing to receive for that item. But there are also special basis rules for:

  • Inherited property
  • Like-kind exchange of property
  • Involuntary conversions
  • Property transferred to a spouse

Should any of these situations apply to you, please ask for a review of your circumstances, as establishing basis can become fairly complex.

 

Reminder. 4th Quarter Estimated Taxes are Now Due – Now is the time to make your estimated tax payment

Reminder. 4th Quarter Estimated Taxes are Now Due – Now is the time to make your estimated tax payment

Plan now to make your 4th quarter estimated tax payment

If you have not already done so, now is the time to review your tax situation and make an estimated quarterly tax payment using Form 1040-ES. The fourth quarter due date is now here.

Normal due date: Tuesday, January 17, 2017

Remember you are required to withhold at least 90% of your current tax obligation or 100%* of last year’s federal tax obligation. A quick look at last year’s tax return and a projection of this year’s obligation can help determine if a payment might be necessary. Here are some other things to consider:

Underpayment penalty. If you do not have proper tax withholdings during the year, you could be subject to an underpayment penalty. The penalty can occur if you do not have proper withholdings throughout the year. While a quick payment at the end of the year may not help avoid the underpayment penalty, it can help reduce the amount of the penalty.

W-2 withholdings have special treatment. A W-2 withholding payment can be made at any time during the year and be treated as if it was made throughout the year. If you do not have enough to pay the estimated quarterly payment now, you may wish to change your W-2 withholdings to address this problem in the future.

Self-employed. Remember to account for the need to pay your Social Security and Medicare taxes as well. Creating and funding a savings account for this purpose can help avoid the cash flow hit each quarter to pay your estimated taxes.

* If your income is over $150,000 ($75,000 if married filing separate), you must pay 110% of last year’s tax obligation to be safe from an underpayment penalty.

Tips to Organize Your Tax Records – Creating order out of chaos

Tips to Organize Your Tax Records – Creating order out of chaos

Looking for some ideas to make filing your taxes less cumbersome? Here are some tips

As important tax records start filling mailboxes, how can you make sure your tax preparation goes smoothly and efficiently this year? Here are some tips.

1. Keep it all in one place. It seems obvious, but how often have you found yourself going through piles of paper looking for that elusive 1099 tax form or charitable deduction receipt? If you only do one thing, this is it.

2. Time to sort. Now that everything is all together, best practice is to sort your information into the same buckets used in your tax return. At a minimum, sort the information into the basic categories below. If you have a lot of one category, sort that stack into the following sub-categories.

Organize Tax Records 2016

3. “Not sure” bucket. There may be things you receive that you are not certain about needing for tax filing purposes. These items should be gathered in one place for review.

4. Sum it up. Once the information has been categorized, create a summary of the information. This summary can be a printed copy of an organizer or it could be a simple recap you create.

5. Is something missing? Pull out last year’s tax return and create a list of things you needed last year. Use this as a checklist against this year’s information. While this process will not identify new items, it will help identify missing items that qualified in prior years.

6. Finalize required documentation. Certain deductions require substantiation and/or logs to qualify your expense. Common areas that require this are: business mileage, charitable mileage, medical mileage, moving mileage, non-cash charitable contributions, and certain business expenses. These logs should be maintained throughout the year, but now is a good time to make sure they are complete and ready to go for tax filing.

It is very easy to overlook something given the lengthy list of taxable income items, deductions and credits. By following these tips you can greatly reduce that risk.

Those Darn Kids – The risk of having kids file their own tax returns

Those Darn Kids – The risk of having kids file their own tax returns

One of the worst surprises you can have at tax time is discovering a dependent files their own tax return. It can create a tax filing mess. Here’s why

Those Darn Kids 

If you have children younger than 19 years old (or 24 if a full-time student) coordinate the filing of their taxes with yours. How they file is a matter of tax law.

The problem

Your child is away for college. You try to file your tax return on April 14th after finally receiving all the required documentation. Unfortunately, your e-filed tax return is rejected because your college student filed their own tax return and received a nice refund. Now you have a mess on your hands. You must file an extension, file an amended tax return for your child, return a refund, and paper file your tax return.

A matter of law

The dependency rules and kiddie tax laws are clear and must be followed. If you have a dependent child as determined by the tax code, you will need to conduct the tax calculations to determine what is taxed at your child’s tax rate and what will be taxed at your higher rate. The same is true for which tax return receives exemptions and standard deductions. This requires coordination of your tax filings with that of your dependent children.

Suggestions

  • Remind your independent minded kids to hold off filing their tax return until consulting with you.
  • Claiming oneself as a dependent is not a choice, it is a matter of law. Remind your child there are rules that must be followed before making this tax decision.
  • Plan for a dependency shift. Sometimes arranging for a shift in dependent from a parent to a student makes financial sense. If you think this might be true, conduct a tax planning exercise prior to making the change.

Consider using the tax filing process to introduce your young adult to the benefits of tax planning. You never know, it could save you money as well as the hassle of undoing an improperly filed tax return.

File that Tax Return! – October extension deadline fast approaching

File that Tax Return! – October extension deadline fast approaching

The Form 1040 extension filing deadline is fast approaching. If you have not already done so, please consider filing your 2015 tax return in the next few weeks.

File that Tax Return!

Monday, October 17th marks the extension deadline for filing your 2015 Form 1040 Tax return. While most taxpayers have this event in the rearview mirror, if you have not filed a tax return, you still have a few weeks to get this done. Think you do not need to file a tax return? Here is a quick checklist of cases when filing one might make sense.

  • You are due a refund. Without filing, the government could end up keeping these funds.
  • You wish to start your audit time clock. Remember the audit time-frame never starts if you do not file your tax return.
  • You are eligible for Health Insurance Premium Credit. Be aware of this possible benefit if you use the market exchange to purchase your health care insurance.
  • You have withholdings, but owe no tax.
  • You are eligible for a refundable credit. This is true with the popular Earned Income Tax Credit, the Additional Child Tax Credit, and a portion of the American Opportunity Tax Credit.
  • Your state requires a federally filed tax return.
  • You want the filed tax return for your records.

Many taxpayers have trouble gathering accurate and complete information necessary to file their tax return. When they cannot get all the necessary information, they get stuck. Should this be your situation, please ask for help. Even a reasonably close tax filing that is later amended when more information becomes available can be a better alternative than not filing at all.

Tips to Organize Your Tax Records

Tips to Organize Your Tax Records

If your tax records are a bit of a mess, here are some ideas to help to get better organized.

The time to organize your tax records is now. Waiting until the end of the year or, even worse, waiting until you are audited can lead to headaches. Here are some tips to get on top of your tax records.

Storage Hints

Organize your records by tax year. At the start of each year create the current year’s files. Here are some filing suggestions.

  • Tax return and support. Create a file with copies of your signed tax return(s) for the year. Include any support documents provided with your filed tax return.
  • Files in tax return order. Create your annual files to match the flow of your 1040 tax return. Here are some suggestions.
    • Income. Copies of W-2s, 1099s, Social Security statements, interest income, K-1s, and investment activity go in this file.
    • Charitable Donations. Create a separate file for cash donations and one for non-cash donations. Include a copy of your charitable mileage log in this file.
    • Medical and Dental. Create a file for all your medical related expenses. Include a copy of your medical related mileage log in this file.
    • Other itemized deduction file. In this file include all other proof of itemized deductions. This includes tax statements, mortgage interest, state income tax documentation, casualty and theft loss information and unreimbursed business expenses.
    • Business activity. Have a file for each hobby and business activity. Include a copy of your business mileage log in this file.
    • Education. Create a file for all documents related to educational expenses. Include in it copies of invoices, tuition and fees. Include invoices for music lessons, instruments and any materials required to purchase for your student.
    • Other. Put all your miscellaneous receipts into this file. This includes receipts you are unsure about. Include receipts for daycare, educational expenses, dues, unreimbursed business expenses and any other tax related items.
  • Statement file. Sort all your statements by vendor, then by month. Create a separate file for these statements. This can include bank statements, credit card statements, and investment account statements. Consider creating a digital back up copy of these statements and store them on a CD or USB drive.

The Digital Alternative

If more of your records are in digital format, consider creating a tax folder for each year on your computer and then place your digital records into sub-folders using the same sort as noted above. Create password protection for each folder.

Rotation idea

Finally, at the end of each tax year place a note on the tax return to confirm the date your tax return was sent into the federal and/or state government. Note on the outside of this file when you can toss the support documentation. Go back to old tax years and shred the old documents that are no longer needed. Do not take this action unless you know the length of time you will need to save these records.

How to Get a Copy of Your IRS Transcripts – Need to see what the IRS has in your file?

How to Get a Copy of Your IRS Transcripts – Need to see what the IRS has in your file?

Getting copies of the information you have on file at the IRS is not too difficult. Here is how to go about making a request.

There are now a number of ways to obtain information filed with the IRS for your tax return. Use the method that works best for you.

  • Online. You can get a copy of most line items on your tax return online at irs.gov using their “Get Transcript” application. The transcript will include originally filed information and any math error corrections. It will not include amended returns or later adjustments.
  • By mail. Using the same “Get Transcript” application, you can request a copy of your information be sent to you via mail. The IRS says these requests are sent with 5 to 10 days of the request.
  • Other methods. Fill out a Form 4506T-EZ and send it in to receive your tax return transcript. This form can be sent in by mail or via fax. You can also call in your transcript request.
  • Special financial aid IRS import. If you have a student who is required to fill out an annual FAFSA to receive financial aid, you can use the on-line FAFSA tool to get your required IRS tax information imported into the application. The IRS data retrieval import tool is built into the online FAFSA application form.

Should you need assistance please do not hesitate to ask for help.

Receive Copies of Fraudulent Tax Returns – What did thieves try to steal?

Receive Copies of Fraudulent Tax Returns – What did thieves try to steal?

Taxpayers who are IRS identity thief victims have been long frustrated by their inability to see what thieves have filed under their Social Security Number. In a recent announcement, the IRS is now allowing taxpayers to obtain copies of these fraudulently filed tax returns

Along with tax season comes the season of tax identification theft. Those who have become victims know how frustrating the experience can be.

The frustration

Until now, if you were a victim of tax identity theft, you would be unable to receive information from the IRS about the depth of the fraud. Many frustrated taxpayers have tried to get copies of the fraudulently filed tax returns. The IRS has repeatedly refused freedom of information requests to get these copies.

What’s new?

In a recent announcement, the IRS has changed course on requests to get copies of fraudulently filed tax returns. As long as you follow their instructions, you are now able to get copies of what thieves attempted to do with your tax information. But be forewarned. The IRS may black out information on the requested return that does not pertain to you. They will try to present you with enough of the falsely filed tax return to allow you to determine the depth of the data that has been stolen.

Why the theft information may be important

  • You can see what personal information the thieves have. What has been compromised? Name, address, and Social Security Number? Do they have your dependent’s or spouse’s information? Perhaps they also have your income and withholding data. Knowing this will help you plan the extent of data protection you will need.
  • There may be clues as to where the identity theft occurred. Of the information stolen, who had access to it? Did the data breach of your identity happen through the IRS or somewhere else?
  • There may be more tax years impacted than you thought. Request information from the year you first became aware of the identity theft at the IRS. But you may wish to request information in a prior year and in the year following the theft. The IRS has access to up to six years of tax returns. Try to determine whether the theft is ongoing is a one-time occurrence.

The request requires specific information. Here is a link to the IRS announcement: Instructions for Requesting Copy of Fraudulent Returns

Thankfully, the IRS’ recent decision to share this fraudulent information is allowing victims to take some action to protect themselves.

 

Contractor or Employee? Knowing the difference is important

Too many small businesses have been taxed and penalized for having independent contractors that the IRS believes should be employees. This is even more critical given the requirement to have health insurance.

Is a worker an independent contractor or an employee? This seemingly simple question is often the contentious subject of numerous IRS audits. As an employer, getting this wrong could cost you plenty in the way of Social Security, Medicare taxes, and other employment related taxes. Here is what you need to know.

The basics

As the worker. If you are the worker and you are not considered an employee you must;

  • pay self-employment taxes (Social Security and Medicare related taxes)
  • make estimated federal and state tax payments
  • handle your own benefits, insurance, and bookkeeping

As the employer. You must ensure your employee versus independent contractor determination is correct. Getting this wrong in the eyes of the IRS can lead to;

  • payment and penalties related to Social Security and Medicare taxes
  • payment of possible overtime including penalties for a contractor reclassified as an employee
  • legal obligation to pay for benefits

Determining the answer: things to consider

When the IRS recharacterizes an independent contractor as an employee they look at the business relationship between the employer and the worker. The IRS focuses on the degree of control exercised by the business over the work done and they will assess the worker’s independence. Here are some tips.

  • The more the employer has the right to control the work, when the work is done, how the work is done, and where the work is done, the more likely the worker is an employee.
  • The more the financial relationship is controlled by the employer the more likely the relationship will be seen as an employee and not an independent contractor. To clarify this, an independent contractor should have a contract, have multiple customers, invoice the company for work done, and handle financial matters in a business-like manner.
  • The more business-like the arrangement the more likely you have an independent contractor relationship.

While there are no hard set rules, the more reasonable your basis for classification and the more consistently it is applied, the more likely an independent contractor classification will not be challenged.hrll

Double Check the Check

Double Check the Check – An idea to keep your tax life simple

Following these tips when you receive a check from the Federal or State government can save you more head-aches than you can imagine.

Tip: Double check the dollar amount of your refund check before you cash it. Make sure it matches the amount on your tax return.

Tip: If you have a direct deposit of your refund, only deposit it into one account. This makes matching the dollar amount easier to do.

Tip: Never cash a check received from the IRS or State tax departments that you cannot tie back to a specific reason or tax filing.

The reason for caution

  • Wrong amounts usually mean errors. The error could be yours, or the error could be from the IRS. For example, if the IRS mis-applies a quarterly payment or modifies your tax return, they often will send back an amount that does not tie to your filed tax return.
  • No explanation. Often checks received from the government have little to no description to help you figure out what the check is for and why is has changed from the amount you expected.*
  • Owed money can create penalties and interest. Once cashed, the door is open for a future IRS bill with interest and penalties. For example, a small businessman sent in his quarterly payroll filing. The IRS misapplied the funds, determined the account they applied the money to had no tax, and then sent a check back to the taxpayer. The taxpayer cashed the check. Two years later the business received an underpayment notice along with substantial interest and penalties. The service even applied liens on the taxpayer’s bank account.
  • It may mean identity theft or missing forms. A check with an unusual dollar amount could mean the IRS does not have the corresponding tax form on record. It could also mean your taxpayer account has been compromised.

Should you receive a payment that does not make sense to you, please review your tax return and call for assistance. An un-cashed check received in error can often be returned to avoid confusion and hassle when the IRS finally corrects the problem.

*Note: Sometimes the memo line will include interest paid to you from the IRS. This interest will need to be reported on next year’s tax return.