- First, decide what records you need to keep for the current year. Generally speaking, you'll need records of income items and deductible expenses. Use your 2012 tax return as a guide.
- You'll also need to keep some items for longer periods. For example, you may need purchase records for your house and other investments years later to calculate your capital gains.
- Set up a filing place for each category. Use folders or plastic pouches for paper records, such as charitable receipts, property tax payments, and mortgage reports.
- If you manage your banking and finances online, open up a series of folders on your hard drive. Save copies of electronic statements or transaction receipts in the relevant folder. Remember to make regular data backups.
- Then stay current with your records as you go through the year. It's easier to spend a few minutes each month than to have to spend hours reconstructing everything at the end of twelve months.
- At the end of each month, highlight income and deduction items in your check register. Use one color for charitable contributions, another for work expenses, and so on. You can do this whether you keep your register on paper or on a computer. Make sure any associated receipts are filed away correctly.
- At year-end, you should know exactly what falls into each category and where the records are.
Did you spend hours pulling together your tax records in preparation for filing your 2012 tax return? It doesn't have to be that way. Avoid the problem next year by taking a few simple steps now.
Will you be among the thousands of taxpayers who get a big tax refund this year? While most Americans happily accept their tax refund checks, taxpayers should know that refunds may actually cost them money. Here's why:
To prevent losing money on tax refunds, consider reducing your withholding or estimated tax payments. For most taxpayers, withholding must equal either the prior year's tax or 90% of the current year's liability. If your annual income changes little, it's relatively easy to avoid overwithholding. You should consider filing a revised Form W-4 withholding statement with your employer if you're having too much withheld.
For taxpayers with fluctuating income or multiple sources of income, the problem is more complex. The IRS provides a worksheet with Form W-4, but many people find the form complicated. If you'd like assistance adjusting your withholding, contact our office.
The delayed passage of the American Taxpayers Relief Act of 2012 has put the IRS behind schedule. Due to several provisions of the law affecting 2012 tax returns, the IRS could not open the Form 1040 filing season for the majority of taxpayers until late January.
Starting Sunday, February 10, the IRS will start processing tax returns that contain Form 4562 (Depreciation and Amortization), and on Thursday, February 14, the IRS plans to start processing Form 8863 (Education Credits).
Those taxpayers filing Form 5695 (Energy Credit) and Form 3800 (General Business Credit) will not be able to file until late February or possibly not until March.
The IRS said that taxpayers will receive refunds faster by e-filing and using direct deposit.
The timing of taxable income and deductions for federal income tax purposes is relatively straightforward. Generally, income is taxable in the year it is earned and received. Likewise, deductible expenses incurred and paid this year can offset taxable income on this year’s return. The Internal Revenue Code is riddled with exceptions, but these basic rules usually apply, especially for calendar-year taxpayers.
The tax law also includes several provisions commonly referred to as “carrybacks” and “carryforwards” (or “carryovers”). As their names imply, the tax item can be carried back to a prior year or carried forward to a succeeding year.
Two items that are often carried forward by individuals are capital losses and excess charitable deductions. For instance, capital losses realized in 2012 offset capital gains plus up to $3,000 of ordinary income for the year. If you have an excess capital loss of $10,000, you can carry forward $7,000 to 2013 after offsetting $3,000 of ordinary income in 2012.
Similarly, your current deduction for charitable donations may be limited by one or more percentage thresholds in the law. For example, donations of appreciated property are generally limited to 30% of your adjusted gross income (AGI). If you exceed the 30%-of-AGI limit this year, you may carry over the excess for up to five years.
Carrybacks aren’t as common, but may also be available in certain situations. Take a “net operating loss” (NOL) sustained by your small business. If you have an NOL in 2012, you can carry back the loss for two years. Thus, you’re effectively able to reduce your tax liability for one or two of the previous years for a refund of taxes already paid. Then you can carry forward any remaining NOL for up to 20 years. If it suits your purposes, you can elect to waive the NOL carryback. For more information on carrybacks and carryforwards, give us a call. We can help you make the best tax return choices for your situation.
December 31, 2012, will be a very important date in the lives of taxpayers, because that is the date that many tax-saving provisions are set to expire. As it stands now, and without any further action by Congress, many tax-cutting provisions have already expired or will expire at the end of this year. Here are a few of the more important ones that could apply to you.
You only have to examine your paycheck to realize certain income is tax-free. For example, health insurance premiums paid by your employer are generally not includible in your income.
Do you know the tax status of other types of income? Here’s a short quiz to test your knowledge.
You tell your son he’ll be the sole beneficiary of your estate, and that you’ve decided to give him an advance on his inheritance. You hand him a check for $10,000. He wants to know how much he’ll have to pay in taxes. What do you tell him?
Answer: Gifts, bequests, devises, and inheritances are generally not taxable to the beneficiary. Income produced from those sources is taxable to the beneficiary.
You withdraw $20,000 of the contributions you made to your Roth IRA over the past five years, but you’re not of retirement age. Do you have a taxable event?
Answer: Unlike traditional IRAs, distributions from Roths are first allocated to amounts you contributed to the account. To the extent the distribution is a return of your contributions, it’s not included in your income and you can withdraw it penalty- and tax-free.
You may have already started to receive important tax-related documents in the mail. They serve as a reminder that the deadline for submitting your tax return is looming ahead on April 17. Here is some advice on what you can do to better ensure that your return is completed on time and accurately:
You will be receiving many of the documents we will need to complete your return within the next month or two. This may include a W-2 from your employer showing what you've earned this year, Forms 1099 reporting any additional earnings and investment income you've received and statements from your mortgage company, bank or other lender with details that will need to be reported on your return.
You may also receive other paperwork, documenting medical bills you've paid and charitable donations or financial investments you have made. We recommend that you set aside all of this material as soon as you receive it in a special folder or envelope so that you don't have to search for it when it is time to come in for your tax appointment.
Make Order Out of Chaos
Gathering your documentation is a good first step, but it's also important to put it in workable order. Take statements and papers out of the envelopes in which they were mailed so they are easier to identify and access. Sort the paperwork into different files or folders based on whether it relates, for example, to income or deductions. You might also want to make a list of the documents you have and the amounts involved in each case. We can certainly help you with this process if you have any questions.
Note: If you are a current client of our firm, we have recently sent you an organizer to assist you with the organization process.
Prepare Throughout the Year
Not all of the documents we require to prepare your tax return will come in the mail in January and February. For example, we may need credit card or bank statements and records of cancelled checks that you receive during the year that show purchases or transactions you have made. We might also use receipts that verify items you're deducting or donations you have made.
You should also set aside documents relating to major events during the last year, including the closing documents and mortgage information for a home purchase. That's why it's a good idea to create a tax file for next year today, to gather the material we'll need for next year's return now.
Please call us with any questions you may have about what is needed to prepare your 2011 tax returns.
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