Did you know that...
The standard mileage rate for business driving has increased to 40.5 cents per mile for the year 2005, up from 37 1/2 cents in 2004? Parking and tolls are also deductible if the standard rate is used.
Which is better, cash or accrual accounting?The IRS and Treasury Department will allow certain small businesses with gross receipts of up to $10 million to use the cash method of accounting, which is better than accrual. Previously, if your business used inventories, you were required to use the accrual method. However, the accrual method is required for all businesses if the principal business activity is retailing, wholesaling, manufacturing, mining, publishing or sound recording.
Can I deduct losses on sale of stocks?Yes, to determine the deductibility, all capital gains and losses (without distinction between long-term and short-term) incurred during the year must be totaled. Any capital losses by individuals and noncorporate taxpayers are deductible only to the extent of net loss of $3,000. For example: a taxpayer had gains of $10,000, and losses of $15,000, net loss of $5,000. The taxpayer will be able to deduct $3,000. The excess net loss of $2,000 can be carried over to next year. Individuals and other noncorporate taxpayers may carry over a net capital loss for an unlimited time until the loss is exhausted. A corporation may carry back a capital loss to each of the three tax years preceding the loss year. Any excess may be carried forward for five years following the loss year. Corporations are not allowed to deduct capital losses in excess of capital gains.
What rate is capital gains tax?The 2003 Tax Act reduced the 10% and 20% rates on the adjusted net capital gain to 5% (for individuals in the 10% and 15% tax brackets) and 15% (for individuals in the 25% and higher brackets) respectively. These lower rates apply to both the regular tax and the alternative minimum tax. The lower rates apply to assets held more than one year. The 5% tax rate is reduced to zero percent for the taxable years beginning after December 31, 2007, for individuals within the 10% and 15% tax brackets. However, the net capital gains rates will increase to 10% and 20% during 2009 and later.
How long must I keep my tax records?Roughly about 7 years. However, keep the information that supports the cost basis of your assets, such as your home, stocks, or other property until over 7 years after the sale of the property.
What is the Alternative Minimum Tax?
The Alternative Minimum Tax (or AMT) is an extra tax some people have to pay over and above the regular income tax. Originally created to prevent high-income people from using innumerable deductions and tax shelters to avoid paying income tax, the Alternative Minimum Tax (or AMT) has increasingly begun to affect middle-class taxpayers. According to a study performed by the Treasury Department (Wall Street Journal, February 2002), the number of taxpayers that will have to pay the AMT is expected to increase over the next decade, from 1.4 million taxpayers who paid it in 2000, to 21.5 million expected to pay it in 2011.
There are two main reasons the tax has begun to affect middle-class taxpayers. First, the tax cuts enacted last year by the Bush administration allowed more deductions and credits. These allowable deductions are slated to increase progressively through the year 2011. The more deductions and credits a taxpayer claims to decrease his or her tax liability, the more susceptible to the AMT they become, hence increasing numbers of taxpayers will be subject to it over this period. Second, the AMT tax brackets are rarely adjusted for inflation, so while salaries and normal income tax brackets have increased over the years since the AMT was created, the AMT brackets have not. Therefore more and more people qualify for the AMT.
There is great information available on the Internet about the AMT. To avoid plagiarizing, we'll just provide links to the sites that explain how it works best. The following sites describe the tax in layman terms, and whether you should be worried about getting hit by it.
These two articles give basic info about the Alternative Minimum Tax:
1. From Smart Money magazine:
http://www.smartmoney.com/tax/filing/index.cfm?story=smt
2. From Fairmark Press:
http:taxes.yahoo.com/guide/amt/amt101.html
Also from Fairmark Press, this article gives the top ten events that cause AMT liability:
http://www.fairmark.com/amt/topten.html
I itemize my deductions. What part of my DMV fee is deductible?
The Vehicle License Fee (VLF) is the portion of your total DMV fees that is a "personal property tax". It is the only portion of your annual registration cost that is deductible. VLF fees for all vehicles you own, including boats, are deductible. If you look at a copy of the request for payment from the DMV, there is a box to one side entitled "FEES". This breaks out the VLF fee. Currently, the DMV is offsetting the VLF fees (reducing them), so from the VLF fee listed you must subtract the amount below entitled "VLF Offset". What's left is the amount you may deduct on your tax return.
HOWEVER!
If you are self-employed and have vehicle expenses, you can deduct the rest of your DMV fees (pro-rated by the ratio of your biz miles to your total miles) on your Schedule C.
That depends upon whether you will be itemizing your deductions or taking the standard deduction. The IRS gives you a choice between these two options, and normally taxpayers choose whichever is larger.
The IRS makes the standard deduction high to keep things simpler for everyone - they'd like to avoid having most people try to itemize. Generally, therefore, there are usually only two circumstances under which you may benefit by itemizing your deductions:
1. If you are paying mortgage interest on a home loan
2. If your income is high enough such that your STATE income taxes paid during the year (added to any other itemized deductions you may have) is higher than the standard deduction for your filing status.
If neither of these things is true for you, you will most likely benefit by taking the standard deduction, rather than itemizing. In that case, you do not need to bother with saving receipts for any of the following:
1. Medical expenses
2. Charitable contributions, including items donated to organizations such as Goodwill.
3. Personal property tax paid (such as to the DMV)
How do IRS penalties work?
There are two rates of penalties charged by the IRS. The first is for late filing, and is 5% per month of your tax liability. The second is for late payment of tax, and is ½ of a percent per month of your tax due. The minimum penalty is $100.
When you owe tax and file an extension, you are extending the filing due date, but of course you cannot extend the date the tax is due. Still, by filing an extension you avert having to pay the higher penalties for late filing, and only have to pay the lower penalties for late payment of tax.
Let's say April 15th rolls around, you owe tax, and you're not ready to file. You don't file an extension or pay any tax. For filing your income tax returns after the due date, you will be assessed penalties at the rate of 5% of the amount you owe per month. This amount caps at 25% (so it maxes out in five months).
Let's say instead you file an extension, but you don't pay the tax you owe until you finally file your return. By filing the extension, you will only have to pay penalties of ½% per month for late payment of tax.
In both cases, in addition to the penalties, interest at various rates (currently at 6% per year, these may change every three months) will accrue daily on the tax and the penalties until the total tax, interest on the unpaid balance, and late payment penalties are paid in full. Therefore, while you can work out an installment payment plan* with the IRS, it is better to pay the tax sooner than later to avoid the interest charges.
*Note: there is a fee of $43 to apply for an installment plan. And again, while you are making installment payments, interest and penalties are accruing on your unpaid balance.
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