Tax Help Plus

Have you ever noticed the variety of taxes collected by local, county, state and federal governments.

There is a local tax on every manner of utility-from sewer to cable to the telephone. There are local taxing districts that you scratch you head on who they are accountable to and really what do they do?

The state tax load in not only high with sales and income taxes but there seems to be a variety of exemption’s. No politican or group wants to step up and simplify things.

Yet in everyday business life we see that if something is simplified the business prospers. For example, Chrysler on one of its smaller cars offers over 16,500 possible different cars (with changes in options) coming off the assembly line. Honda on the other hand in one of their smaller cars offers only about 200 possible different cars coming off the line. Which process do you think is easier to manage?

The same thinking should apply to taxes. Simplify and everyone benefits.

If the state or federal government have a targeted deduction that few qualify for, it may be after some study that the conclusion is it is costing the government more to include the item in the tax form than the benefit to the few taxpayers.

However, it may be to much to ask that the politicans do an ongoing cost-benefit analysis on each item in the tax code.

One last thought, here in Missouri we have mandatory emission control procedures that cost up to $35 every two years before you can get your car or trucks license plates. Yet cars and trucks that are three years old or newer over 99.9% pass the test.  Recently the state legislature made some changes in the law; ie: exempted some newer cars and trucks from cost of the emission test requirement. This is only one item but with some digging there are numerous opportunities at every level of the tax system to simplify and reform the tax code along with the costs we all pay to comply with outdated and poorly designed government rules and regulations.

Tips to Managing Business Entertainment Expense Deductions Correctly

The key to staying out of the IRS’s grasp and still get the maximum allowable deduction for your business entertaining your is to be organized about them. 

When the IRS begins to look at the expenses related to your business that you have written off, entertainment is one of the most likely targets that they will zero in on.  Many businesses write off expenses here that are not proper or they do not have adequate documenation to properly claim the deduction. 

Remember that you can write off 50 percent of entertainment costs for your businesses in terms of impressing the client or other such activities.  Yet, the burden of proof, according to the IRS, is on you.  This means that if you take them out, you need to walk home with a receipt in hand. And this is only half of the story. 

And, you must show that it was somehow related to your business.  The best way to do this is to keep a log and record when, where and why you went out to dinner.  Include some personal details in the log, for example, the items discussed related to your business. Then, include the relationship with the person.  This way, you clearly show why this is a legitimate business expense.

As always, if you wander into a gray area get professional advice, you’ll be happier in the long run.

If you are a small business owner, you probably go through plenty of office supplies.  Things like paper for the printer, ink for your printer (have you ever noticed they almost give the printers away and really hit you with the cost of the printer ink),  pens to keep on your desk, and even the endless amount of paper clips that you keep in your drawer are all likely tax deductions.

Office supplies qualify as long as they are purchased to be actually used in your  business. 

You can claim office supplies as a business expense even if you do not claim a home office.  In order to do so, keep a small file in your drawer for receipts of items that you purchase.  Then, total them up use them as expenses against your gross receipts on your taxes at the end of the year. These expenses although small sums can and do help to offset the taxable business income that you have.

Organization The Key To Successfully Avoiding The Tax Man

Since most people and businesses that are audited by the IRS because of missing records, not because of dishonesty, the key to avoiding the tax man is to have organized, efficient systems to keep your business and personal income and deduction records.

Here’s a idea for you.  Organize all of your documentation by categories.  You may want to consider categories for advertising, travel, auto expenses, utilities, rent or mortgage payments, professional fees, etc.  Keep all receipts, documentation, credit card receipts and canceled checks in the appropriate folder. 

It’s up to you to establish the proper deductions and documentation.  What’s more, if you run a small businesses you are more likely to be audited three times as much as individuals.  The IRS target is often reported business expenses such as your travel expenses and your entertainment expenses. This should not be a problem for you if you have all of your expenses documented, such as keeping a log of your activities. 

Stay organized month to month and you will see the overall process is very straightforward and even simple.

Politicians seem to be a nutty group. They get into office and they promptly forget the “Three Irrefutable Laws,” and try to pass laws to get around what everyone with any common sense knows cannot be done.

The first is the law of gravity. Politicians keep trying to make up down and down up. But calling a pig a swan doesn’t make the pig fly. One tip: whenever a proposed bill is called “comprehensive” you’ve got to be against it. Sure as the sun coming up in the morning higher taxes are on the way, or some of our freedoms will disappear.

The second law that is commonly ignored by politicians is if you subsidize something you’ll have more of it. Do we really need a subsidy for ethenol? Not only is our tax money going to convert food into fuel in our gas tanks-but lo and behold our cost of food is going up. So we are being taxed two ways-one to subsidize ethenol and the other the higher cost of food as that chicken farmer who now has to pay more for feed raises the cost of chicken. A great system.

Lastly, politicians commonly forget that if something is taxed there will be less of it. Raise the taxes on capital gains and the amount of tax revenue will go down. However, when pointed out to the politicans, that each of the three times the capital gains tax was reduced in the past 60 years, the government in the next year, took in more tax money.

The politican then does a verbal dance by not arguing the merits of reducing capital gains taxes but rather it should be increased to make it more “fair.”  Somehow it’s not the American way for someone who has the vision to invest their money and reap substantial rewards, but rather the government should determine how much income they should keep. I think they tried that in the Soviet Union, and it was a complete failure.

Recycling many things we use and throw away is generally a good thing.

Have you thought about what a great job the federal government does in recycling? The answer was brought home to me this week when I got a notice from the IRS regarding the “Economic Stimulus Act of 2008.”

Let me see if I got it straight. I send in my taxes to the IRS (and some people that may file a return but pay no taxes), then the IRS sends some of it back to me. Of course I don’t get it all back because there has to be some money sent to people who do not pay taxes.

And if I work hard, am single and have an adjusted gross income of over $75,000 (married filing jointly over $150,000) I get nothing except some of my taxes go to people who were not required to pay anything to begin with.

All this recycling of our money is supposed to “stimulate” the economy. It’s great the IRS with the help of their friends in Congress have jumped on the recycle bandwagon. But I’ve never known a relatively poor person that created a job. All this recycling is going to do is motivate a lot of people to figure out how to file tax return for those who are not required  to file and reap the benefits. This adds to the IRS workload, which probably mean more jobs at the IRS. But creating jobs in the private sector will never happen.

As with many government tax programs which are supposed to direct our behavior this move looks like a flop from the start.

If we carry the logic for this “stimulus” to it’s conclusion why doesn’t the federal government just reduce taxes across the board. 

A business would now pay less in taxes, more money would be invested in the business and jobs would be created. The person hired would then pay taxes and so it goes.

Recycling in general is a great program, but recycling our money through the IRS is not a green idea but one where a lot of American’s will end up seeing red.

Recently I was talking with an unlikely self-employed individual. She was married, a stay at home mom with three children-the oldest was 6.

In order to bring in some extra money into the family she started a couple of years ago selling unwanted items in her home on ebay. This evolved into her specializing in lamps. Lamps of all kinds.

On Saturdays she combed area garage sales and bought lamps. Her biggest coup was buying lamps at a deep discount at an upscale design center. She would go to the store about once a week and pick through the marked down lighting products. Many times she bought designer lamps for under $15 that orginally sold for $189.

She had a “photo studio” in her basement. Took pictures, wrote the ad copy and sold many $15 lamps for $60 or more. Needless to say her first full year in business (2007) was very profitable. She estimates she had net income of over $15,000 in 2007.

Now comes the creative part regarding taxes. She is putting away $3000 in a Roth IRA. It will not help her tax picture for 2007 but the funds will grow free of tax and are not taxable when taken out after age 59 1/2. She then opened a SEP plan (she can put up to 20% of her net into this plan) and started with the full $3000 or 20% of her net income. This reduced her tax bill as her taxable income was now $12,000.

Over  time she doubts if she will ever have any employees but her activity now is about right. She normally works about 20 hours a week in her business.

If she continued on this path until retirement, working part-time, contributing about the same to her Roth IRA and SEP she could have over $500,000 in her retirement accounts at retirement (about 28 years). For now she said she’s having too much fun learning her business that the extra investment is just icing on the cake.

Well congress has again put a band aid on a broken leg. And for good measure has thrown in some aspirin. Any informed observer of how the body (read economy) works know this is not the way to heal a broken leg.

The so called recently passed stimulus package of sending our tax dollars back to individuals who were not required to pay taxes in the first place defies all logic. At the very least it rewards those who have not achieved sufficient income to pay taxes. Not the message that should be sent.

Also, isn’t this an admission by congress that to stimulate the economy we should be able to keep more of our own income. So the logical next step would be to reduce taxes so we could decide how to spend our own money.

The biggest drag on the economy is not government spending, but rather the mischief caused by the unintended consequences of government programs. A recent example are the government subsidies for the production of ethanol. One well reasoned analysis show it costs over $1.20 in energy to produce $1.00 of ethanol. Wow, what a great deal. With corn being burned out our tail pipes, the price of wheat goes up, the price of meat goes up, the price of milk goes up, and so on.

The two irrefutable law of economics are if something is subsidised we’ll have more of it and if it is taxed we’ll have less of it. We know we’ll be in worse trouble when instead of marijuana being grown in the attic we find corn being grown in the back yard. 

Tax Law Changes for 2007-Do they affect you?

Each tax year it seems our friends in congress work hard to complicate the tax code. Throw in IRS regulations and court rulings and we have a proper mess that we have to sort through every year.

So before you send in your tax return for 2007 here are a few changes you should check before you send in your return.

If you closed on a home loan after December 31, 2006 until January 1, 2011 you can deduct the mortgage insurance premiums for the first time. If your adjusted gross income is in excess of $100,000 and you file jointly, the allowable deduction is reduced by 10% for each $1000 over the base or $100,000.

If you used your personal vehicle in job related mileage the rate increased to 48.5 cents per mile. In addition, medical and moving expense mileage is 20 cents a mile.

Teachers are allowed to deduct up to $250 in un-reimbursed classroom expenses. If you are repaying a student loan you are allowed to deduct up to $2500 in interest. Also, in the education area if you are going back to school or taking continuing education courses related to your job the cost can be deducted if your employer does not reimburse you. However, be careful you can’t take the deduction if the education is training you for a change in careers.

If you deduct charitable contributions you should have a record or receipt from the charity showing the date and amount of the donation. Other donations like in-kind donations should also be documented. An excellent method of documenting the donation is to take a picture of the items to show their condition.

The earned income tax credit for 2007 for families rose to $2853 for one child, $4716 for two children and $428 for taxpayers who can claim the credit without qualifying children. The income ceiling also increased. Review the IRS form 596 for further information. And don’t forget your state earned income tax credit, the DC and 20 states currently have a program similar to the federal model.

The standard deduction in2007 rose to $5350 for single taxpayers or married filing separately. For head of household it is now $7850. For married filing jointly or qualifying widows or widowers the standard deduction is now $10,700.

For taxpayers 65 or older the additional deduction rose to $1300 for single or head of household and to $1030 for married filing jointly married filed separately and qualifying widows and widowers.

Before you start on your returns it pays to get organized. Do you have all your W-2s and 1099’s? Get all the documentation together and if you are hiring some to do your return they will thank you. If you are using a software program it will go smoother if you have all the information in front of you. And if you are still using the tried and true method of pen and calculator it will go easier with all the preliminaries completed ahead of time.

For more details on tax help, tax planning and tax savings go to tax help plus.

Tax Issues for Self-Employed Individuals

Have you ever noticed how many small businesses and entrepreneurs there are? There are millions of Americans who are self-employed and enjoy pursuing their dream. Others have a dream of starting and owning their own business. Through it all the one thing no one enjoys in owning their own business is the paperwork and tax issues that arise from being self-employed.