Toss this. Not that – Post tax filing record retention
With a sigh you are relieved that yet another tax return has been sent off to the government. Another 12 months before you need to do this again. But before you close that tax file, there is still some work to do. If the IRS or state revenue department selects your return for review, you will need to be prepared. Here is what you need to know:
Record Keeping Tips
- Normally three years. Normally tax records should be kept for three years from the later of the tax filing due date, the date you filed your taxes, or the date you paid your tax in full.
- Some documents should be saved indefinitely. This includes things like:
- Your tax return
- Records related to a home purchase or sale
- Stock transactions
- Business/Rental records
- The IRS does not require any special record keeping system. You just need to keep all documents that can support information on your tax return.
- Here are common records worth retaining:
- Canceled checks
- Invoices
- Other proof of payment for claimed deductions
- Bank and credit card statements
- Mileage logs
- Receipts with time; place; and purpose noted
- Be mindful of other record retention requirements
- State record retention requirements are often 6 months to 1 year longer than Federal requirements
- Social Security records often need to be proofed to ensure they match your pay stubs
- Insurance, banking, and estate management may require other records
- Federal retention requirements become 6 years if your return understates your tax obligation by more than 25%, and the record retention period is indefinite if fraud is involved.
Keep a good system
So the build up of paperwork does not overwhelm your attic, at the end of the tax year rotate your records. Decide how many years of records must be retained. Then count back from your current tax return filing year and shred unneeded, older documentation. Create new empty files for the current tax year to save receipts for the coming year. Consider scanning records to keep digital copies. A final word of caution. If you are unsure whether to retain or shred, keep it unless you know the document can be replaced.
Tax Surprises for Newly Retired – 5 surprises to know about
Rebalancing your portfolio when you get older makes sense. So does anticipating for these possible tax surprises during your retirement years.
You’ve got it all planned out. Your retirement savings plans are full, you have started receiving Social Security benefits, and your Pension is ready to go. Everything is planned, what could go wrong? Here are five surprises that can turn your plan on a dime.
1. Health emergency and Long-term Care. When a simple procedure could cost thousands, health care costs can put a huge dent in your plan. Long-term care can cost thousands per month. Have you planned for this? If your health insurance is not adequate you may need to pull money out of your retirement plan to pay the bills. While this withdrawal may not be subject to a penalty, it might be subject to income tax if the funds are from a pre-tax account.
Tip: Look into creative ways to enhance your health insurance coverage including supplemental health insurance and prescription drug cost coverage. Consider long-term care insurance and other alternative ways to reduce your potential living needs.
2. Taxability of Social Security benefits. If you have excess earnings, your Social Security benefits could be reduced. Even worse, if you are still working, your benefits could be subject to income tax.
Tip: If this impacts you, consider conducting a tax planning session to better understand your options including the possibility of delaying the receipt of Social Security benefits.
3. Your pension plan. Understand if your pension is in good financial health. Often pensions will offer a lump-sum payout option for you. Should you take it?
Tip: Review your pension plan’s annual statement. How solid is it? If there are risks, consider cash out alternatives and planning for the potential drop in future income.
4. Minimum Required Distribution (RMD). Forgot to take your minimum required distribution from your retirement plans this year? The tax bite could be quite a surprise as the penalty on the amount not withdrawn is 50%!
Tip: Select a memorable date (like your birthday) to review your RMD and take action so this tax surprise does not impact you.
5. Future Tax Rates. The federal government is spending over $1 trillion more than it brings in each year. Cash starved states are looking for new tax revenue. Don’t be surprised when future tax rates continue to rise during your retirement.
Tips:
- Create a retirement plan with higher state and federal tax rates
- Plan for increases in health care costs through Medicare
- Plan for more tax on Social Security benefits
- Plan for higher capital gain and dividend taxes (now 20% versus 15%)
Is Being Effective Better Than Being Marginal? – Understanding the difference
What is the difference between a Marginal Tax Rate and an Effective Tax rate? Who cares? You might if you add a second job and see some of your tax benefits disappear. Here is what you need to know.
The tax code is filled with terms we rarely use in everyday conversation. Two of the more common are Marginal Tax Rates and Effective Tax Rates. Knowing what they mean can help you think differently about your potential tax obligation.
Definition
Marginal Tax Rate: This is the tax rate applied to the “next” dollar you earn. Since our income tax rates are progressive, the next dollar you earn could be taxed at as little as zero or as high as 39.6%!
Effective Tax Rate: This is the tax rate you actually pay. This is simply taxes you pay divided by your total taxable income. Said another way, after taking your income and then applying taxes, deductions, credits, exemptions, and other adjustments you are left with your true tax obligation. This obligation is a percent of your income.
A Simple Example
Consider two people; Joe Cool who earns $50,000 and Chuck Browne who earns $500,000. If we had a flat tax of 10%, Mr. Cool would pay $5,000 in tax and Mr. Browne would pay $50,000 in tax. Both of their Effective Tax Rates would be 10% AND their Marginal Tax Rates would also be 10% because each additional dollar they earn would be taxed at the same 10%. However it is a different picture when you apply our progressive tax rates:
If we use the 2013 U.S. tax table for a single filer, Joe Cool pays $6,608 and Chuck Browne pays $151,065 in federal tax. This is because tax rates applied to Joe Cool’s income are (10 – 25%) while Chuck’s income over $50,000 gets Marginal Tax Rates of (25 – 39.6%). Ignoring other tax factors, our two taxpayers’ tax rates are:
|
Why Care?
- Calculating Returns. The true return you receive on any taxable investment will be determined by your Marginal Tax Rate. A $500 profit from a new investment could cost Joe Cool 15% in federal tax, but it could cost Chuck Browne 39.6% in federal tax.
- Phase-outs can provide a dramatic impact on Effective Tax Rates. The simple examples above do not account for income limits applied to many tax benefits. Additional income could have a very dramatic impact on Joe Cool if it triggers losing things like an Earned Income Credit, or Child Tax Credit. This could increase your Effective Tax Rate while not touching your Marginal Tax Rate.
- Extra work can help the taxman more than you. There have been cases where adding a second job can actually cost you money by not understanding the impact of the income on your Effective Tax Rate. This is especially true for retired workers receiving Social Security Retirement Benefits. That extra job may make your Social Security benefits taxable.
- It’s not that simple. In addition to all the different income phase-outs for credits and deductions, your Effective Tax Rate could be impacted by the elimination of itemized deductions, reduction of exemptions, the Alternative Minimum Tax, and the marriage penalty.
It is a good idea is to understand your Effective Tax Rate and your Marginal Tax Rate. Look at last year’s tax return and calculate your Effective Tax Rate. Then look at your income and determine what your Marginal Tax Rate is if you earn additional income. If you anticipate an increase in earnings, consider forecasting the impact on your Effective Tax Rate.
Often Overlooked Medical Expense Deductions – Avoid taking the easy way
Because of the paperwork required and the Adjusted Gross Income threshold required prior to taking a medical expense deduction, many taxpayers do not keep track of their medical expenses. This approach could be costing you money. Here are some oft overlooked items.
To take your medical expense deduction in 2012 your allowable expenses must exceed 7.5% of your Adjusted Gross Income (AGI). In 2013 and beyond, unless you are 65 or older, this amount goes up to 10% of AGI. So why bother? You might be surprised at how much this expense might be. Here are some tips:
- Don’t take the easy way out. So many think itemizing deductions is such a pain, that they forego the work of collecting valid receipts. Don’t let this happen to you. Collect the receipts and determine if you may be giving away money to Uncle Sam by not itemizing your deductions.
- Insurance Premiums. Many insurance premium payments are deductible, including long-term care insurance. Many seniors omit their Medicare Part B premiums because they are automatically deducted from their Social Security benefit check.
- Look to your face. Eye care and Dental care are allowable deductions. This includes overlooked expenses for:
- Eye care: exams, glasses, contact lenses, laser eye corrections, and insurance premiums
- Dental care: exams, fillings, fluoride treatments, crowns, dentures, orthodontics, and related premiums
- Travel expenses. Parking fees, tolls, and mileage to and from appointments also count. So keep a travel log.
- Get a prescription. While over the counter purchases are not deductible, if the doctor prescribes the medicine or service it is. So get a prescription for your acid reflux versus buying over the counter meds. Get a prescription for a weight loss program and that could be deductible as well.
- Other missed opportunities. Some other commonly overlooked items include; smoking cessation programs, alcohol and drug treatment programs, home remodeling for handicap access, and visits to other health providers (acupuncture, chiropractor, and podiatrist to name a few).
Medical care is very expensive these days, and it won’t be getting any cheaper. It does not take much to make your expenses meaningful tax deductions, but only if you keep track of them.
Avoid Common Tax Filing Mistakes
Avoid Common Tax Filing Mistakes Want to ensure your refund gets to you in the shortest amount of time? Want to avoid a letter from the IRS? Here are some of the most common Tax Filing Mistakes: Forgetting a W-2…
With the backlog of tax return filing due to late changing tax laws, want to ensure your refund gets to you in the shortest amount of time? More importantly, how can you avoid receiving a letter from the IRS? Here are some of the most common tax filing mistakes:
Forgetting a W-2 or 1099: The IRS does an effective job in comparing W-2s and 1099s they receive from organizations to the amounts you claim on your tax return. If they do not match, rest assured you will receive a notice in the mail asking for clarification.
Duplicate dependent reporting: If more than one tax return claims the same person as a dependent, the second return will be rejected. The IRS does not try to determine which tax return is correct. They leave that up to you.
Forgetting a name change: If you fail to change your name with Social Security after marriage and you file a tax return with your “new” last name, be prepared for either a rejected tax return or an adjusted tax return.
Other missing information: When preparing your tax return, often the return is held up because key information is missing. These missing items range from property tax and mortgage interest statements, to 1099s and W-2s.
Signing the e-file authorization form: Your tax return cannot be e-filed without proper authorization. After reviewing your return, a properly signed Form 8879 must be received.
Don’t Die Here – Estate tax surprises at state level
So you think you will avoid federal estate taxes? That may be so, but 21 states and the District of Columbia are also looking to tax your estate, your inheritance, or both. Where you live could make a big difference.
Recently passed federal legislation increased the exemption amount before your estate pays taxes on your assets when you die. The amount for 2013 is $5.25 million. This makes most of our estates tax-free when we die. Or does it?
Where you live could cost you a bundle in inheritance and estate taxies since 21 states have some form of estate taxes, inheritance taxes, or both. To make matters worse, this state tax landscape is constantly changing making it tough to stay current. Here is useful information on which states want a cut of your money when someone passes away.
8 states currently tax your inheritance. The following states charge inheritance tax: Iowa, Nebraska, Indiana, Pennsylvania, Kentucky, New Jersey, Tennessee, and Maryland. The tax rate can be as high as 20% and start with inheritance as low as $1 if you are unlucky to inherit money and live in Pennsylvania or Iowa.
Some states have estate taxes starting at lower amounts than the federal $5.25 million. Noted here are these states’ estate tax exemption amount and their maximum estate tax rate (in parentheses).
|
|
|
|||||||||
|
|
|
|||||||||
|
|
|
|||||||||
|
|
|
|||||||||
|
|
Some states match the federal exemption amount. These states match the current federal estate tax exemption, but charge their own estate tax as well.
|
|
|
Two states charge both. New Jersey and Maryland currently charge both an estate tax and an inheritance tax.
What can you do?
- Understand inheritance consequences. If you have a relatives mentioned in your will that live in Iowa, Nebraska, Indiana, Pennsylvania, Kentucky, New Jersey, Tennessee or Maryland, you may wish to conduct some planning activities.
- Move before it is too late. 29 states have no estate taxes (or inheritance tax). Many of them (Florida, Texas, Alaska, South Dakota, Nevada, and Wyoming) also have no state income taxes. But prior to packing your bags, review other tax implications within your target “move to” state.
- Set up a trust. If you live in one of the states with estate taxes, consider setting up appropriate trusts to help protect your assets from the state tax man.
- Gifts? Remember you can also use gifts as a means of transferring some of your assets tax-free. Just make sure you understand the limits on tax-free gift giving.
- Want more information? Visit each state’s respective web site and review their estate and inheritance laws.
Are My Social Security Benefits Taxable? – Don’t be surprised at tax time
The taxability of Social Security Benefits can be confusing. In fact the taxable nature of your benefits should include a discussion of benefit reductions when you decide to receive these benefits prior to your full retirement age. Here is what you need to know.
When it comes to retirement many Americans believe they can count on their full Social Security benefits as a core element of income. You can imagine the surprise at tax-time when some of these same benefits are returned to the Federal Government in the form of benefit reduction and taxation. Here is what you need to know.
- Social Security and Retirement Benefits can be “REDUCED” as well as taxed. The benefit reduction calculation is separate from the taxability of your benefits. If you start drawing retirement benefits prior to reaching your full retirement age (65 if born prior to 1938, and it gradually increases up to age 67 if born in 1960 or later) in 2013 your benefits could be reduced $1 for every $2 of earnings over $15,120. This calculation is less punitive if it occurs during the year of retirement, but you should forecast this potential benefit reduction prior to deciding to start taking your benefits.
- If you do not work, your Social Security benefit will probably not be subject to tax.
- Your Social Security Benefits can be taxed no matter how old you are. There is not an age threshold that protects your Social Security Benefits from federal taxation. If you have excess income, your benefits could be taxed.
- If you have other income your Social Security benefits may be taxed. The taxability of Social Security benefits depends on two things; your qualified total income and your marital status. If your total income surpasses certain thresholds (called base amount), some of your benefits could be taxed.
- Can you estimate whether your benefits will be taxed? Yes. Per the IRS, here is a quick calculation to determine if your benefits may be taxable:
1st: Calculate 1/2 of your annual Social Security benefit
2nd: Add the 1/2 benefit total to all your other estimated income. (Use income from all sources including tax exempt interest.)
3rd: Compare your calculated total to the base amount for the year. If it exceeds the base amount, some of your Social Security benefit will be taxed.
2013 Social Security Base Amounts:
$25,000: Single, Head of Household, Widow or Married Filing Separately:
$32,000: Married filing Joint
- Are all your Social Security benefits taxable? No, a maximum of 85% of your Social Security benefits is subject to federal tax.
Note: To qualify as married filing separately, you must also be living apart for the entire year. The base amount if you lived together is $0. There is also a significant marriage penalty in the taxability of your Social Security benefits as the joint amount is only $32,000 instead of $50,000 (or 2 times the single “base” amount).
Time to Think About Commuting – Don’t leave this benefit on the table
With the high price of gas, wouldn’t it be nice to see a tax benefit to help reduce the cost to get to and from work? Perhaps there is, you may just need to check with your employer.
$3.40 to $4.00 per gallon gas prices are quickly becoming the new norm. Congress and the President appear to be doing very little to control this inflationary cost. What can you do? Thankfully there are commuting benefits that can lower your cost of getting to and from work during 2013.
Transit Passes: up to $245/ month Van Pooling: up to $245/month Parking Allowance: up to $245/month Bicycle Commuting: up to $20/month
How it works
Your employer can provide you the benefits listed above and you do not have to report the benefit on your income tax return. Because the benefit does not hit your W-2, you pay no federal tax, no state tax, no Social Security or Medicare.
Some tips
- Transit AND parking. Transit passes are good for the train, subway and bus systems and can be used in addition to parking passes. So you can park at the train station, receive a parking allowance AND receive the transit pass benefit.
- Employer-provided. Remember these benefits are employer-provided benefits. Check with human resources to see if your employer provides these benefits.
- The salary-reduction alternative. If your employer does not provide these benefits they might allow you to reduce your take-home pay instead. If allowed by your employer, you set aside money from your wages to pay for the passes or parking allowance. This salary-reduction would then allow you to pay for your commuting costs up to the limits in pre-tax dollars. You may not use this method to pay for bicycle commuting.
- Bicycle commuting only. You may use the $20/ month benefit to help pay for the repair and maintenance on your bike, however you may not receive this benefit in any month that you also receive other transit benefits.
Many employees are unaware that their employer provides a transit benefit, so check it out. Even if they do not, perhaps they’ll consider creating a salary-reduction alternative instead.
Educational Credits Fail IRS Test – More return processing delays
Hold onto your hats, the processing of tax returns in 2013 will be a bumpy ride. Here is another delay in the processing of Federal Tax returns impacting those filing for educational tax benefits.
If you have a tax return that will utilize a number of common educational credits, your tax return cannot be processed by the IRS until mid-February. Affected tax returns include any provisions found on Form 8863 and include:
- The American Opportunity Tax Credit
- The Lifetime Learning Credit
This delay does not impact tax returns with other educational tax benefits like student loan interest deductions or the higher education tuition and fees deduction.
What you need to know
- The IRS testing discovered processing errors with Form 8863, which is causing this additional delay for those who have education credits.
- Clients who have these credits often want to file tax returns early for timely submission of their Free Application for Federal Student Aid (FAFSA). If this is your situation, consider filing your FAFSA application using the “will file” status. Then go back into the FAFSA form and update the figures as soon as possible. If this impacts your situation please call.
- You should still submit your tax information as soon as it is available. That way your tax return can be processed as soon as the IRS says it is ready to accept your tax return.
- If this impacts you, you are not alone. This delay is expected to impact 3 million tax returns.
New Safe Harbor for Home Offices
Do you have a home office? Are you interested in saving time filing keeping track of your expenses? A new safe-harbor rule effective in 2013 might just make tracking your home office expenses a lot easier. Outlined here are the new rules.
Beginning in 2013 there is a simplified way to take a home office expense for a portion of your home. This new ‘safe-harbor’ option greatly simplifies how to record valid expenses for business use of your home. Here is how it works.
- You may opt to take your office space square feet times $5 and use this as a valid home office expense up to $1,500 (300 sq. ft.).
- This replaces the cumbersome allocation of valid home expenses like electricity, heat, depreciation, and other home expenses that are allocated by a % of the home devoted to your office space.
- You may still take property taxes, mortgage interest deductions and casualty losses as itemized deductions on your personal tax return. Better still, you no longer need to allocate these expenses between personal and business use.
- Your home office must still qualify for the deduction using current home office standards in the tax code. Foremost among these is that your home office must be used regularly and exclusively by the business.
- The deduction may not be taken in excess of available business revenue.
- You may still take other qualified business expenses unrelated to the home. This “safe-harbor” calculation is meant to simplify the household expense allocation process only.
What you should know
- The IRS estimates 3.4 million taxpayers used 1.6 million hours to calculate the home office deduction’s 43 line form to allocate their home office use.
- If the IRS reviews these returns in the future it hopes to save a tremendous amount of time and effort used in prior years to confirm the accuracy of the old home office allocation.
- Since 2013 is the first year of this new provision, you will probably need to conduct the home office use calculation using the old method to ensure the safe-harbor opportunity makes sense for you.
- One of the nice benefits of this new safe-harbor rule is that your home value (basis) is not reduced by depreciation. This should help reduce risk of a tax surprise from depreciation recapture calculations when you sell your home.