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Monthly Archives: February 2013

What Income is Taxable and Non-Taxable?

Our tax system is straightforward in the sense that you pay taxes on taxable income. How much you pay will depend entirely on the type of income you receive.

Most income is taxable income but there are some examples of non-taxable income and we’ll look at both.

Taxable Income

There are many types of taxable income. The income you earn from working as an employee is taxable, as is the income you earn when you are self-employed, or the income you receive as a business owner.

You are supposed to report income from wages, fees, commissions, tips, stock options and even fringe benefits. The fringe benefits you receive, even if you don’t receive cash, are taxable as income. Realize, too, that even if fringe benefits are given to someone else, or used by someone else, you are considered the recipient.

Investment income is also considered taxable. This includes income from the sale of investments; you pay capital gains on this income. You also pay taxes on income from interest earned on deposits, as well as from dividends paid out. Gains on collectibles sold (which includes physical metals) are also reported as taxable income.

You are also supposed to report and pay taxes on income from royalties. This includes royalties from copyrights, patents, and properties that produce mineral, oil and gas. Realize, too, that you pay taxes on bartering income. You will need to figure your gain for what you received in barter, although you can offset the income with the bartering services or items you provided.

Non-Taxable Income

There are a few income sources that aren’t taxable, here are some of them:
• Some disability insurance payments: While payments from a policy paid for by your employer are taxable, you don’t have to pay taxes on payments when you receive them from a plan that you pay for with after-tax dollars.
• Gift receipt: You don’t have to pay income taxes when you receive a gift. Taxes on gifts are paid by the giver – although the giver doesn’t have to pay taxes until the gift exceeds the exemption amount. Understand, though, that a prize isn’t a gift, and you pay taxes when you win a prize.
• Life insurance payout: You don’t pay taxes when you are the beneficiary of a life insurance policy.
• Municipal bond interest: When you invest in municipal bonds, they are most often tax-free at the federal level – and even usually at the state level (if you live in the state of issuance).

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Do I Really Need to File a Tax Return This Year?

As the tax deadline approaches, you might begin to ask yourself, “Do I really need to submit my tax return this year?”

There are many determining factors that enter into the equation when making the decision about filing a tax return. Such items as filing status, income level, age, and whether or not someone claims you as a dependent play an important role in filing taxes.

Minimums to File

A good rule of thumb to follow when approaching the task of filing taxes is this: When in doubt, go ahead and file.

An important fact to know is that dependents are not always exempt from filing income tax returns. If you happen to be under 65 years old and another person is claiming you as a dependent on their individual tax return, you must also file your own tax return if you have $950 in unearned income or $5,950 of earned income. Unearned income includes taxable interest and dividends. Earned income includes wages, tips, self-employment, taxable scholarship and fellowship grants.

Special Circumstances

The situations that follow require you to submit a tax return no matter what your income happens to be.

If you are receiving distributions from a Health Savings Account or a Medical Savings Account.
If you owe Social Security and Medicare taxes on unreported income from tips.
Alternative Minimum Tax – if this tax is owed, you must submit a return.
Retirement Plan and Health Savings Account – if you owe additional taxes on either of these accounts, you must file a return.
Self-Employment – you have to file if you have earned more than $400 (net).

Not Required, But You Should File to Get a Refund

Yes, there are people who do not meet the minimum requirements, but still find a reason to file. Sound odd? Take a look at some of the circumstances that might give you the rationale to file your tax return…despite not being required to do so.

If federal taxes were taken out of your paycheck, you can only get a tax refund if you file an income tax return.
If you happen to qualify for the Earned Income Tax Credit, you must file a return to get your refund.
You must file a return to receive the Additional Child Tax Credit, if you have children (obviously).
If you adopted a child in the previous year, you need to file a return to receive the Adoption Tax Credit.

Remember, when in doubt, go ahead and file a tax return.

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Tax Tips for New Filers

When you’re preparing to file your first tax return, it’s easy to feel overpowered and a little intimidated. But the fact that you’re reading this article at this very moment shows that you have the desire and the drive to tackle tax time.

To help motivate and educate you on your journey to the reward of filing your taxes, I’ve laid out some strategic tips and tactics that will take you from overwhelmed to empowered.

Never Give Up, Never Surrender
The best advice to offer you is this: Taxes can sound scary, but persevere and give it a shot. Reading this article proves that you want to learn, so great job!

If you fall into the category of a “new tax filer”, chances are good that you have a simple tax situation (1040EZ/A), which just so happens to be easy and free! If you’re not sure which tax form you quality for, you can write to us. Answer a few initial questions and in a few seconds we will tell you if you’re in the right place, or if you need a different product.

Help Along the Way
If you hit a speed bump along the tax highway, don’t pull over and give up on your trek. One of the benefits to using us is the abundance of assistance offered to each and every customer. If you do happen to get stuck, you can talk to an experienced tax expert on the phone, free. All tax experts are CPAs, Enrolled Agents and Tax Attorneys, so you know you are getting quality answers.

Stay Organized
Although you should be very careful to organize all of the tax information and documentation you receive leading up to April 15, good organization starts early, even at the beginning of the new year.

Make sure you keep all of your important documents related to income and expenses.

Keep them in a safe and secure place. Once you begin filing your taxes, continue to keep everything tax-related and income-related together for safe and easy access.

How Much of My Income Gets Taxed?
Now that you’ve found about your tax situation, you need to know what and how much of your income is taxable.

Here’s just a sampling of what the IRS can tax:

Pay from your job, whether you earn a salary or hourly rate, including any tips you receive.
Sick pay from your job, company bonuses, or severance pay.
Unemployment benefits.
Interest from bank accounts and dividends from investments.
Gambling and lottery winnings.
Withdrawals from IRAs and annuities.

Deductions: Should You Itemize or Take the Standard Deduction
When you start filing your taxes, you’ll soon come to realize that your new best friend is the deduction. A deduction is basically an expense that you’ve had in the past year to which the IRS has given permission to be subtracted from your overall income total.

In other words, the cost of something you had to pay for can be subtracted (or deducted) from your taxable income. Since the expense was subtracted from your income, you’ll likely owe a little less. See, I told you – new best friend.

There are two basic categories of deductions: standard and itemized.

The standard deduction is exactly that – its standard, the same for everyone across the board, depending of course on your marital status and how you’re filing.

And guess what, we walks you through this entire process with simple questions to answer and will tell which one will help you keep more of your money.

US tax law is exhaustive. But you don’t necessarily have to be a tax professional to file your own taxes. Follow these tips, continue to educate yourself, and you’ll soon be on your way to tax filing success.

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Save Money with the Child Tax Credit

If you have a child under age 17, the Child Tax Credit may save you money at tax-time. Here are some facts the IRS wants you to know about the credit.

Amount. The non-refundable Child Tax Credit may help reduce your federal income tax by up to $1,000 for each qualifying child you claim on your return.
Qualifications. For this credit, a qualifying child must pass seven tests:

1. Age test. The child must have been under age 17 at the end of 2012.

2. Relationship test. The child must be your son, daughter, stepchild, foster child, brother, sister, stepbrother, or stepsister. A child may also be a descendant of any of these individuals, including your grandchild, niece or nephew. You would always treat an adopted child as your own child. An adopted child includes a child lawfully placed with you for legal adoption.

3. Support test. The child must not have provided more than half of their own support for the year.

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

5. Joint return test. The child cannot file a joint return for the year, unless the only reason they are filing is to claim a refund.

6. Citizenship test. The child must be a U.S. citizen, U.S. national or U.S. resident alien.

7. Residence test. In most cases, the child must have lived with you for more than half of 2012.

Limitations. The Child Tax Credit is subject to income limitations, and may be reduced or eliminated depending on your filing status and income.
Additional Child Tax Credit. If you qualify and get less than the full Child Tax Credit, you could receive a refund even if you owe no tax with the refundable Additional Child Tax Credit.
Schedule 8812. If you qualify to claim the Child Tax Credit make sure to check whether you must complete and attach the new Schedule 8812, Child Tax Credit, with your return. If you qualify to claim the Additional Child Tax Credit, you must complete and attach Schedule 8812.

IRS Publication 972, Child Tax Credit, can provide you with more details. View it online at IRS.gov or request it by calling 800-TAX-FORM (800-829-3676). You can also use the Interactive Tax Assistant tool on the IRS website to check if you can claim the credit. The ITA is a resource that can help answer tax law questions.

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Tax Credits and Deductions for Families

As you prepare to file your taxes, please keep in mind some helpful tax deductions and credits that may apply to your family.

Cutting taxes What’s Better – A Tax Credit or Deduction?

First off, many families filing are a bit confused over what exactly tax deduction and credits are. While they can both help you with your tax obligation, there are differences.

Tax deductions lower your income that is eligible to be taxed. This helps you as it may lower your tax bracket. Tax credits, on the other hand, actually reduces your taxes owed, dollar for dollar.

There are two types of credits: non-refundable and refundable. A non-refundable tax credit will decrease your income tax owed and possibly eliminate it. You do not get a refund from it if your credit is more than your income tax owed. With the refundable tax credit, as the name implies, not only can you reduce or eliminate your income taxes, if it totals more than you owe, then you get a tax refund for the difference.

Tax Deductions for Families

If you’re looking at reducing how much of your income is taxed, here are some deductions you may want to check out to see if you qualify for them.

Exemptions for Dependents: If you have dependent, such as a child, then you can claim an exemption worth $3,800 with your taxes. You must provide a social security number for the dependent.
IRA Deductions: If you’ve contributed to your traditional IRA in 2012, you may receive a deduction, up to $5,000.
Charitable contributions: Many of us keep receipts for charitable donations, but did you also include the supplies you purchased to help a non-profit organization?
Personal property taxes: You may have received a state and local tax bill during the year for your personal property like a recreational vehicle. While it’s a chunk of change out of your budget, the good news is that state and local property taxes related to personal property is tax deductible.

Tax Credit for Families

While there are many tax credits available, the most common that affect families are Earned Income Credit, Child Tax Credit, and Child and Dependent Care Credit. I’ll briefly discuss the benefits of each, so you can get an idea of whether they apply to your family’s situation or not.

Earned Income Credit: Depending on your income and your family size, you may be able to take advantage of this big tax credit. For example for 2012 taxes, the maximum credit for a family with 3 or more qualifying children is $5,891.
Child Tax Credit: For parents meeting the income requirements ( currently for couples whose MAGI is under $110,000 or $75,000 for a single parent), this credit can be worth $1,000 for each qualifying child you claim on your taxes.
Child and Dependent Care Credit: If you paid for child care for your dependents (under 13) while you worked or went to school, you may use this credit to claim up to 35% of expenses up to $3,000 for one qualifying dependent or $6,000 for two or more dependents.
Adoption Credit: Those households who expanded family through adoption can use the adoption credit worth up to $12,650.

You may meet these qualifications to claim these valuable credits. Our software made it easier for you to see what credits we qualified for.

Thoughts on Tax Deductions and Credits for Your Family

By using all of the tax deductions and credits that you’re family is eligible for, you can minimize your tax obligations and perhaps increase your refund. I’d love to hear from you about which tax credits and deductions your family have used.

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Basic Bookkeeping Tips

For many small businesses, the most common bookkeeping errors are also the easiest to fix. Use these six tips to help keep your business on sound financial footing.

1. Use the right accounting system. Most businesses use either cash-based or accrual-based accounting. If you use the cash method, you count income when you receive it and expenses when you pay them. Under the accrual method, you count income and expenses when they happen, not when you actually receive or pay them.

In practical terms, this difference in timing is relevant if your company keeps inventory on hand or handles transactions on credit. In these cases, the accrual method might be a better choice for your business. And in fact, if your firm has more than $5 million in sales or keeps an inventory, the IRS might require that you use the accrual system. In other cases, however, the simpler cash system could be all you need.

2. Maintain daily records. This is one of the most basic rules: If you don’t keep accurate daily records, you don’t have an accurate way to track the financial condition of your business. Different people use different record-keeping systems; what matters is that you have one and use it every day. Once you have a good system set up, accurate record keeping will take just a few minutes a day.

3. Handle and review checks carefully. It’s easy to be on autopilot when you’re writing checks and tossing canceled ones into a filing cabinet without reviewing them. Remember: Those checks are as good as cash. And if something goes wrong, you — not the bank — will be on the hook.

Take the same care with checks as you would with cash. Sign checks using a clear, distinctive signature that won’t invite forgery. Review canceled checks before anyone else, including your bookkeeper or employees, sees them; that way you can catch unauthorized checks. And if your business is a partnership, it’s a good idea to have at least one of the partners co-sign the checks.

4. Get a bank statement with a month-end cutoff. This is another basic tip that can reap big rewards. Synchronizing your bank statement with other monthly records will make it much easier to reconcile your statement and track expenses.

5. Leave an audit trail. Your record keeping will be much more effective if you have a system that allows you to quickly and easily retrace your company’s financial activities. This means keeping your invoices and checks in numeric order, not skipping check or invoice numbers, and keeping separate bank accounts for your business and personal funds. If you can’t go back a year and reconstruct your company’s finances, you probably aren’t leaving an effective audit trail.

6. Use a computer. Computer bookkeeping software is absolutely essential for all but the smallest businesses. These applications make it easy to track income and expenses, prepare tax documents, summarize your company’s financial activities and back up records for safekeeping. If you’re working with an outside bookkeeper, make sure they know how to use a computer.

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Top 10 Bookkeeping Mistakes Made by Small Businesses

Statistics from the U.S. Small Business Administration reveal that about half of all new small businesses launched in the U.S. will fail within the first five years. What is the chief cause of small business failure? Poor financial management.

Sound financial management starts with an understanding of some basic rules of business bookkeeping, so here are 10 of the most common accounting and bookkeeping errors made by small businesses — and how you can avoid making them.

1. Using the Wrong Accounting Method
There are two main business accounting methods: cash and accrual. Cash accounting is the simpler method because it’s based on the actual flow of cash in and out of a business. The cash method is used primarily by sole proprietors and businesses with no inventory. On the flip side, accrual accounting records income and expenses as they occur, whether cash has actually changed hands or not. As they grow and become more complex, most small businesses should switch to accrual accounting, because this makes it easier to accurately match revenue to expenses.

2. Combining Personal and Business Finances
It’s critical that personal and business finances be kept separate at all times, regardless of a company’s size. That’s why one of the first things new business owners should do is open a business checking account and deposit all business income into this account. The next step is to work with an accountant to devise an earnings management strategy dictating how cash is removed from the business to meet personal expenses and savings goals.

3. Misclassifying Workers
In the eyes of the IRS, there are several different categories of workers: full-time, part-time, and temporary employees, as well as independent contractors, such as freelancers and consultants. Classifying your workers in the wrong categories can be extremely costly. The employee categories are often used to determine who is eligible for employee benefits. Full-time employees are generally eligible for all benefits offered by an employer, while part-time employees may be eligible for a pro rata share of benefits. Temps and independent contractors generally receive no benefits, and independent contractors are not covered by minimum wage, overtime, payroll tax, workers’ compensation, or unemployment compensation laws.

4. Not Performing Basic Account Reconciliation
Reconciling your business’s books with your business bank statement every month is one of your most fundamental accounting duties.

5. Being Too Nonchalant About Petty Cash
Many businesses keep an informal stash of “petty cash” that can be used by employees to cover small and incidental business expenses, such as postage stamps, snacks from vending machines, and office supplies. But just because the amounts are small doesn’t mean that petty cash shouldn’t be accounted for properly.

6. Not Knowing the Difference Between Profits and Cash Flow
A business can have positive cash flow in the short term but still be unprofitable; conversely, it can have negative short-term cash flow but still be profitable in the long term. The first scenario is common among small businesses because they often have to pay suppliers before they get paid by their customers. The second scenario is common among point-of-sale and cash-based businesses, such as retailers and restaurants, that pay their vendors on terms.

7. Using the DIY Method of Bookkeeping
Many small business owners pride themselves on their ability to wear a many different business hats, including the accounting and bookkeeping hat. However, this is one area where small business owners are usually much better off hiring a specialist rather than trying to do it themselves. Accounting and bookkeeping can get very technical and complex. The money spent to hire a trained bookkeeper or accountant, even on a part-time or contract basis, will usually come back to the owner many times over given the time savings and all the mistakes that will be avoided.

8. Not Saving Receipts for Small Purchases
The IRS requires that expenses for business travel, meals, and entertainment that are greater than or equal to $75 be substantiated with a receipt in order to be deductible. So many business owners don’t bother saving receipts for expenses less than $75.

9. Not Implementing Adequate Internal Controls
If proper checks and balances aren’t implemented in a business’s accounting system, bookkeepers may have opportunities to commit fraud and embezzlement. Losses from internal fraud can significantly cripple a small business, or even lead to bankruptcy. The best way to guard against embezzlement by a bookkeeper is to implement solid internal financial controls.

10. Relying Too Heavily on a Paperless Work Environment
To reduce expenses and be better stewards of the environment, many companies today are trying to go paperless. In the realm of bookkeeping and accounting, however, there’s simply no substitute for paper documentation and a paper trail, when needed. There are many instances in which paper documentation of financial records will come in handy or be required. An IRS audit is one example. Bookkeeping isn’t an area where you should skimp on the paper.

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Posted by on 13/02/2013 in Bookkeeping, Business

 
 
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