Medical and Dental Expenses and Your Taxes

Having significant medical or dental costs in 2011, may allow you deductions when you file your tax return. Below are eight facts you should know when evaluating medical and dental expenses and other benefits for tax deductions.

You must itemize. You can deduct qualifying medical and dental expenses only if you itemize on Schedule A on form 1040.

The Deduction is limited. You can deduct total medical care expenses that exceed 7.5 percent of your adjusted gross income for the year.

The Expenses must have been paid in 2011. You can include medical and dental expenses you paid during the year, regardless of when the services were provided. Be sure to save your receipts and keep good records to substantiate your expenses.

You cannot deduct reimbursed expenses. Your total medical expenses for the year must be reduced by any reimbursement. Normally, it makes no difference if you receive the reimbursement or if it is paid directly to the doctor or hospital.

What expenses qualify. You may include qualified medical expenses you pay for yourself, your spouse and your dependents. Some exceptions and special rules apply to divorced or separated parents, taxpayers with a multiple support agreement, or those with a qualifying relative who is not your child.

You can deduct expenses primarily paid for the diagnosis, cure, mitigation, treatment or prevention of disease, or treatment affecting any structure or function of the body. For drugs, you can only deduct prescription medication and insulin. You can also include premiums for medical, dental and some long-term care insurance in your expenses. Starting in 2011, you can also include lactation supplies.

Some Transportation costs may qualify. You may deduct transportation costs primarily for and essential to medical care that qualifies as a medical expense, including fares for a taxi, bus, train, plane or ambulance as well as tolls and parking fees. If you use your car for medical transportation, you can deduct actual out-of-pocket expenses such as gas and oil, or you can deduct the standard mileage rate for medical expenses, which is 19 cents per mile for 201

Health Saving Plans for medical expenses. Distributions from Health Savings Accounts and withdrawals from Flexible Spending Arrangements may be tax free if used to pay qualified medical expenses including prescription medication and insulin.

Please give us a call if you need help - Executive Resources FSI - 530-888-6691

When Can I Take the Child Tax Credit?

You may be able to take the Child Tax Credit if you have a qualifying chil under the age of 17. Here's what you need to know.

You may be able to reduce your federal income tax by up to $1,000 for each qualifying child under age 17.  To qualify for this credit, the child must meet the qualifying criteria of seven tests: age, relationship, support, dependent, joint return, citizenship and residence.

Age test. To qualify, a child must have been under age 17 -- age 16 or younger -- at the end of 2011.

Relationship test. To claim a child for purposes of the Child Tax Credit, the child must be your son, daughter, stepchild, foster child, brother, sister, stepbrother, stepsister or a descendant of any of these individuals, which includes your grandchild, niece or nephew. An adopted child is always treated as your own child. An adopted child includes a child lawfully placed with you for legal adoption.

Support test. In order to claim a child for this credit, the child must not have provided more than half of his/her own support.

Dependent test. You must claim the child as a dependent on your federal tax return.

Joint return test. The qualifying child can not file a joint return for the year (or files it only as a claim for refund).

Citizenship test. To meet the citizenship test, the child must be a U.S. citizen, U.S. national or U.S. resident alien.

Residence test. The child must have lived with you for more than half of 2011. There are some exceptions to the residence test, found in IRS Publication 972, Child Tax Credit.

There are limitations to be aware of -  The credit is limited if your modified adjusted gross income is above a certain amount. The amount at which this phase-out begins varies by filing status. For married taxpayers filing a joint return, the phase-out begins at $110,000. For married taxpayers filing a separate return, it begins at $55,000. For all other taxpayers, the phase-out begins at $75,000. In addition, the Child Tax Credit is generally limited by the amount of the income tax and any alternative minimum tax you owe.

Additional Child Tax Credit. If the amount of your Child Tax Credit is greater than the amount of income tax you owe, you may be able to claim the Additional Child Tax Credit.

Questions about the child tax credit? Give us a call today.

Executive Resources FSI - 530-888-6691  Serving Auburn, CA and Placer County

Taxes You Can Deduct if You Itemize

Certain taxes are deductible on your federal income tax return if you file Form 1040 and itemize. Deductions decrease the amount of income subject to taxation.

There are four types of deductible non-business taxes:

1.      State and Local Income or Sales Taxes
Choose to claim a state and local tax deduction for either income or sales taxes on your return. You can deduct any estimated taxes paid to state or local governments and any prior year's state or local income tax as long as they were paid during the tax year.
If you are deducting sales taxes instead, you may deduct actual expenses or use the optional tables provided by the IRS to determine your deduction amount You will not have to save receipts if you use the tables..
Sales taxes paid on motor vehicles and boats may be added to the table amount, but only up to the amount paid at the general sales tax rate.
2.      Real Estate Taxes
Deductible real estate taxes are usually any state, local, or foreign taxes on real property. If a portion of your monthly mortgage payment goes into an escrow account and your lender periodically pays your real estate taxes to local governments out of this account, you can deduct only the amount actually paid during the year to the taxing authorities. You will usually receive a statement from your lender with total taxes paid out.
3.      Personal Property Taxes
Personal property taxes are deductible when they are based on the value of personal property, such as a boat or car. To be deductible, the tax must be charged to you on a yearly basis, even if it is collected more than once a year or less than once a year.
4.      Foreign Income Taxes
Generally, you can take either a deduction or a tax credit for foreign income taxes, but not for taxes paid on income that is excluded from U.S. tax.

For more information on non-business deductions for taxes, just give us a call.

Executive Resources FSI - 530-888-6691 - Serving Auburn, CA and Placer County.

When Is it Too Late to Make an IRA Contribution?

Haven't contributed funds to an Individual Retirement Arrangement for tax year 2011, or  put in less than the maximum allowed??  You still have time to do so. You can contribute to either a traditional or Roth IRA until the April due date for filing your tax return for 2011, not including extensions.

Be sure to tell the IRA trustee that the contribution is for 2011. Otherwise, the trustee may report the contribution as being for 2012 when they get your funds.

Generally, you can contribute up to $5,000 of your earnings for 2011 or up to $6,000 if you are age 50 or older in 2011. You can fund a traditional IRA, a Roth IRA (if you qualify), or both, but your total contributions cannot be more than these amounts.

Note: IRA contribution limits remain the same in 2012 - $5,000, or $6,000 if age 50 or older.

Traditional IRA: You may be able to take a tax deduction for the contributions to a traditional IRA, depending on your income and whether you or your spouse, if filing jointly, are covered by an employer's pension plan.

Roth IRA: You cannot deduct Roth IRA contributions, but the earnings on a Roth IRA may be tax-free if you meet the conditions for a qualified distribution.

Each year, the IRS announces the cost of living adjustments and limitation for retirement savings plans. In 2011 and 2012, however, the contribution limits for defined benefit and defined contribution plans did not change as the Consumer Price Index did not meet the regulatory thresholds.

Saving for retirement should be part of everyone's financial plan and it's important to review your retirement goals every year in order to maximize savings. If you need help - give us a call.

Deborah Sandbank - Executive Resources FSI - 530-888-6691 Serving Auburn CA and All of Placer County.

What Are the Tax Deductions for Using a Car for Business?

Self-employed or an employee, if you use a car for business, you get the benefit of tax deductions.

There are two choices for claiming deductions:

1.      Deduct the actual business-related costs of gas, oil, lubrication, repairs, tires, supplies, parking, tolls, drivers' salaries, and depreciation.

2. Use the standard mileage deduction in 2012 and simply multiply 55.5 cents by the number of business miles traveled during the year. Your actual parking fees and tolls are deducted separately under this method.

Which Method Is Better?

For some taxpayers, using the standard mileage rate produces a larger deduction. Others fare better tax-wise by deducting actual expenses.

Tip: The actual cost method allows you to claim accelerated depreciation on your car, subject to limits and restrictions not discussed here.

The standard mileage amount includes an allowance for depreciation. Opting for the standard mileage method allows you to bypass certain limits and restrictions and is simpler-- but it's often less advantageous in dollar terms.

Caution: The standard rate may understate your costs, especially if you use the car 100% for business, or close to that percentage.

Generally, the standard mileage method benefits taxpayers who have less expensive cars or who travel a large number of business miles.

How to Make Tax Time Easier

Keep careful records of your travel expenses and record your mileage in a logbook. If you don't know the number of miles driven and the total amount you spent on the car, we won't be able to determine which of the two options is more advantageous for you.

Furthermore, the tax law requires that you keep travel expense records and that you give information on your return showing business versus personal use. If you use the actual cost method for your auto deductions, you must keep receipts.

Tip: Consider using a separate credit card for business, to simplify your recordkeeping.

Tip: You can also deduct the interest you pay to finance a business-use car if you're self-employed.

Note: Self-employed individuals and employees who use their cars for business can deduct auto expenses if they either (1) don't get reimbursed, or (2) are reimbursed under an employer's "non-accountable" reimbursement plan. In the case of employees, expenses are deductible to the extent that auto expenses (together with other "miscellaneous itemized deductions") exceed 2% of adjusted gross income.

We will help you determine the best deduction method for your business-use car. Let us know if you have any questions about which records you need to keep.

Executive Resources FSI - 530-888-6691 - Deborah Sandbak, serving Auburn and Placer County.

7 Common Small Business Misconceptions about Taxes

One of the biggest hurdles you'll face owning your own business is staying knowledgable about your numerous obligations under the federal, state, and local tax agencies. Tax codes are always changing.

The adage, "ignorance of the law is no excuse" is most often applied in tax settings and it is safe to assume that a tax auditor presenting an assessment of additional taxes, penalties, and interest will not look kindly on an "I didn't know I was required to do that" claim. It is important to note, it is surprising how many small businesses actually overpay their taxes, neglecting to take deductions they're legally entitled to that can help them lower their tax bill.

Preparing your taxes and strategizing as to how to keep more of your hard-earned dollars in your pocket becomes increasingly difficult with each passing year. Your best course of action to save time, frustration, money, and an auditor knocking on your door, is to have a professional accountant handle your taxes.

When it comes to tax planning for small businesses, the complexity of tax law generates a lot of folklore and misinformation that also leads to costly mistakes. With that in mind, here is a look at some of the more common small business tax misperceptions.

1. Are All Start-Up Costs Immediately Deductible?

Business start-up costs refer to expenses incurred before you actually begin operating your business. Business start-up costs include both start up and organizational costs and vary depending on the type of business. Examples of these types of costs include advertising, travel, surveys, and training. These start up and organizational costs are generally called capital expenditures.

Costs for a particular asset (such as machinery or office equipment) are recovered through depreciation or Section 179 expensing. When you start a business, you can elect to deduct or amortize certain business start-up costs.

For tax years beginning in 2010, you can elect to deduct up to $10,000 of business start-up costs paid or incurred after 2009. The $10,000 deduction is reduced (but not below zero) by the amount such start-up costs exceed $60,000. Any remaining costs must be amortized.

2. Does Overpaying The IRS Make Me "Audit Proof"?

The IRS doesn't care if you pay the right amount of taxes or overpay your taxes. They do care if you pay less than you owe and you can't substantiate your deductions. Even if you overpay in one area, the IRS will still hit you with interest and penalties if you underpay in another. It is never a good idea to knowingly or unknowingly overpay the IRS. The best way to "Audit Proof" yourself is to properly document your expenses and make sure you are getting good advice from your tax accountant.

3. If I incorporate, can I take more deductions?

Self-employed individuals (sole proprietors and S Corps) qualify for many of the same deductions that incorporated businesses do, and for many small businesses, being incorporated is an unnecessary expense and burden. Start-ups can spend thousands of dollars in legal and accounting fees to set up a corporation, only to discover soon thereafter that they need to change their name or move the company in a different direction. In addition, plenty of small business owners who incorporate don't make money for the first few years and find themselves saddled with minimum corporate tax payments and no income.

4. Is claiming the home office deduction a red flag for an audit?

While it used to be a red flag, this is no longer true--as long as you keep excellent records that satisfy IRS requirements. Because of the proliferation of home offices, tax officials cannot possibly audit all tax returns containing the home office deduction. In other words, there is no need to fear an audit just because you take the home office deduction. A high deduction-to-income ratio however, may raise a red flag and lead to an audit.

5. If I don't take the home office deduction, are business expenses deductible?

You are still eligible to take deductions for business supplies, business-related phone bills, travel expenses, printing, wages paid to employees or contract workers, depreciation of equipment used for your business, and other expenses related to running a home-based business, whether or not you take the home office deduction.

6. If I request an extension on my taxes does that give me an extension to pay taxes?

Extensions enable you to extend your filing date only. Penalties and interest begin accruing from the date your taxes are due.

7. If I am a part-time business owner, can I set up a self-employed pension?

If you start up a company while you have a salaried position complete with a 401K plan, you can still set up a SEP-IRA for your business and take the deduction.

A tax headache is only one mistake away, be it a missed payment or filing deadline, an improperly claimed deduction, or incomplete records and understanding how the tax system works is beneficial to any business owner, whether you run a small to medium sized business or are a sole proprietor.

And, even if you delegate the tax preparation to someone else, you are still liable for the accuracy of your tax returns. If you have any questions, don't hesitate to give us a call today. We're here to assist you.  Executive Resources FSI - 530-888-6691 - Serving Auburn CA and Placer County.

How Can Children Lower Taxes - 8 ways?

Got kids? They may have an impact on your tax situation. Here are the top 8 things to consider if you have children.

1.      Dependents: In most cases, a child can be claimed as a dependent in the year they were born. Be sure to let us know if your family increased this year and we'll take a look at whether you can claim the child as a dependent this year.

2.      Child Tax Credit: You may be able to take this credit on your tax return for each of your children under age 17. If you do not benefit from the full amount of the Child Tax Credit, you may be eligible for the Additional Child Tax Credit. The Additional Child Tax Credit is a refundable credit and may give you a refund even if you do not owe any tax.

3.      Child and Dependent Care Credit: You may be able to claim this credit if you pay someone to care for your child under age 13 so that you can work or look for work. Be sure to keep track of your child care expenses so we can claim this credit accurately.

4.      Earned Income Tax Credit (EITC): The EITC is a benefit for certain people who work and have earned income from wages, self-employment, or farming. EITC reduces the amount of tax you owe and may also give you a refund.

5.      Adoption Credit: You may be able to take a tax credit for qualifying expenses paid to adopt a child.

6.      Coverdell Education Savings Account: This savings account is used to pay qualified expenses at an eligible educational institution. Contributions are not deductible; however, qualified distributions generally are tax-free.

7.      Higher Education Credits: Education tax credits can help offset the costs of education. The American Opportunity and the Lifetime Learning Credit are education credits that reduce your federal income tax dollar for dollar, unlike a deduction, which reduces your taxable income.

8.      Student Loan Interest: You may be able to deduct interest you pay on a qualified student loan. The deduction is claimed as an adjustment to income so you do not need to itemize your deductions.

As you can see, children can have an impact on your tax profile. If you're a parent, we'll go over your situation with you to make sure you're getting the credits and deductions you're entitled to.

Do you have more question?  Are you maximizing your deductions?  Give us a call for all your Bookkeeping and Tax Preparation Needs!  Serving Auburn and Placer County.

Executive Resources FSI  Deborah Sandbank - 530-888.6691  Auburn, Ca