More “Correspondence Audits” – that’s
where your favorite Uncle (Sam) sends you
a love note ‘asking’ you to ‘clarify’ one or
more items on a previously filed tax return.

If you are going to be audited, this is actually the type you hope to get.  The scope is limited to one or a few specific categories, they tell you exactly what records or documentation they want you to provide – and it’s all done
by mail.

What will these audits be focusing on?
– Earned Income Tax Credit
- Large Charitable Contributions
- Home-buyer Tax Credits
- Employee Business Expenses –
Deductions that W-2 employees claim for
business expenses that were not reimbursed
by their employer.

“To be forewarned is to be forearmed.” You’ve been forewarned, now arm yourself with RECORDS.

We at Diamond Tax Consultants encourage our clients to keep their records and receipts in a safe place in the event something like this occurs.

This is especially recommended for taxpayers who are self-employed, have a home based business, or who have rental property.

If you think record keeping is time-consuming and laborious, find out how we assist our clients all year round with bookkeeping services.

Therefore, we have devoted today’s tax tip on how much you can deduct if you invest in real estate.

Before we cover this topic, I would like to take this opportunity to remind you that our knowledge about real estate and how it impacts your taxes are based on experience.  Through our affiliate company, Innovative Real Estate Investing, we provide an assortment of services which include rentals, property management, repair services, and more… Visit us online!

Investing in real estate offers ways to offset your earned income on your tax return.

Rental Property and Your Tax Return

If you own a rental property, all expenses directly associated with it (such as mortgage interest, property taxes, maintenance and repairs, and travel to and from the rental) are tax deductible. You report these expenses on Schedule E.Plus, even though a rental property is an asset that typically appreciates over the long term, the tax code allows you to depreciate it. This creates an additional expense that may also be deducted on your tax return.

Residential rental property is depreciated over 27.5 years or roughly 3.6% per year. Only the value of the building and other improvements can be depreciated. The land cannot be depreciated because it doesn’t wear out. Let’s take an example of a house that cost $200,000. If 80% of the value is the structure and 20% is the land, the value of the structure would be $160,000. The amount you could deduct for depreciation would be $160,000/27.5 years, or a little over $5800.

Passive Loss Deductions

In many cases, the depreciation will create a passive “loss” on your tax return. Real estate is considered a passive investment and generally speaking, passive losses may only be deducted against passive income.But the tax code allows an exception: You can deduct up to $25,000 in passive losses against your active income (that is, your income from working or from dividends), if you meet the requirements for “active participation”. Ok, so what does that mean? Active participation means you must own at least 10% of the rental property and be responsible for significant decisions affecting it. Even if you use a property manager to manage your rental, you’ll meet the requirement for active participation if you make key management decisions (such as approving tenants and expenses for repairs).

Here’s an example of how the passive loss deduction works: Let’s say you’re single and your modified adjusted gross income is $50,000. And let’s say you have a $10,000 passive loss from a duplex you own and actively participate in. In this example, you could deduct the full $10,000 loss from your $50,000 earnings, reducing your taxable income significantly for that year.

Deducting Real Estate Losses

As long as your modified adjusted gross income is $100,000 or less, you can deduct rental real estate losses of up to $25,000 per year from your earned income, whether you’re single or married and file jointly.

Offsetting your active income with up to $25,000 in real estate investment losses is just one of the ways real estate can help you shelter your income from taxes.

Don’t Wait

While you may feel there is no point in sending in late documents, you absolutely need to act now. File your return as soon as it is complete. A tax professional can help you complete your filing but will be an added expense. Sign all your forms and send them via US Mail with Certified/Return Receipt services to ensure the tax office has received your paperwork.

If You Don’t Owe Taxes

When you complete your taxes and find the IRS owes you money, you will not be penalized. The only downside for you is your refund will be delayed. You can actually get refunds for taxes filed up to three years passed due but finally so late is not something you should attempt.

If You Do Owe Taxes

Send in a check for as much as you can afford. Your penalties for a late filing will depend on how much you owe in back taxes. The late filing penalty is currently at 5% of the total amount you owe to the government for each month you are late. Even if you are only one day late, the penalty for the full month is incurred. There will also be accrued interest at a rate that depends on the current market.

If you need to make payment arrangements, you will also need to include a completed Installment Agreement form with your filings. The Installment Agreement is your request to make monthly payment arrangements to pay off your total debt. It will depend on the total amount you owe and how much money you can afford to pay in each month until the debt is satisfied.

Facing the Fees

Penalties can get quit costly and the later you file, the stiffer the penalty. Even one day late will accrue penalties and interest which increases the overall amount you owe back. The penalty for filing just one day late is 5% of the original balance owed. The maximum penalty for failing to file by April 15 is 25% which is reached by September 16^th, five months after the original due date. Taxes not filed within 60 days of the due date will be penalized whichever is the lesser of $135 or 100% of the unpaid tax amount.

Fraudulent Issues

If you have not filed your taxes with the intention to commit fraud, expect a significantly higher tax penalty. The rate for penalty will be increased from 5% a month to 15% a month. The maximum amount of penalty can be 75% of the original total amount of taxes owned. This penalty is not initiated very often but the IRS will enforce this penalty if fraud is obviously being attempted.

Dealing With Penalties

The IRS has the direct authority to reduce your tax penalties or even eliminate them altogether provided you make the proper request (penalty abatement). If you can prove ‘reasonable cause’ for not filing your taxes on time, you may have your penalties reduced or waived. The type of permissible excuses varies on a case-by-case basis.

Overall, the IRS wants to work with people who want to be helped. Communication is essential in working through the process of filing late taxes. If you are upfront with the IRS and make an honest attempt to make good on your debts, you can work through the process relatively unscathed. On the other hand, if you choose to ignore your tax obligations or try to cheat the IRS on taxes, you’ll pay considerably not only in taxes but you can face possible legal consequences.

Don’t forget to share this TIP with others!

Use this link to refer a friend to Diamond Tax Consultants so they can get professional help with all their tax needs.

How can you avoid this problem?

1)       ALWAYS be sure to file all your tax returns. Never assume.

If you did not sign that tax return – and mail it in, or get a confirmation of the efiling – then your tax return has not been filed.

a.      If you’re not sure whether a certain prior year return was ever filed, just send IRS a Form 4506-T and request a free transcript. If no return was filed, you will be told.

b.      Note: Neither bankruptcy nor offers in compromise will eliminate tax debt if you have not filed a tax return.

2)       When you get notices, open them. You’d be shocked to learn how many people never open those notices! Respond to them – or hire someone else to respond to them – and get copies of any written correspondence they send.

3)       If the notices are about balances due, if you cannot pay the balance, call the tax agency to arrange an installment agreement or hardship hold. They will rarely send out garnishment notices if you are working with them to solve the problem.

4)       Both IRS and your state have Taxpayer Advocates or Ombudsman, or some office with the ability to help you when you cannot get help from your tax collector’s office.

5)       If all else fails? Contact your US or State senator, representatives or whatever passes for your political representative on a federal or state level, depending on which agency is after you. You’d be surprised. They actually can get you some relief – or some help. Remember, they are there to help you.

Whatever else you do – don’t do nothing!

Records You Need to Keep For Your Cell Phone

Cell phones and computers are considered listed property, just like automobiles. And just like automobiles, the IRS is going to want to see proof of your business use of your cell phone.

They have specifically said that it’s not enough to simply have a policy that states that you can only use the cell phone for business use. So you must keep a log, or keep track of the cell phone bills.

Highlight your personal calls and figure out the percentage of business use each month, then pro-rate your bill.

Otherwise, plan on the IRS disallowing your entire cell phone bill as a business deduction.

Records You Need to Keep For Your Computer

Where would your business be without your computer? Yet the IRS thinks the computer use needs to also be logged and divided between personal and business use.

How do you divide up your time? I’m an Accountant and provide Real Estate Investing Services, which means I am constantly searching the Internet for ideas, properties and the latest in tax law changes.

But the reality is I need to track that all and figure out how much of the computer time is spent on personal activities and on business activities.

How about you? Are you ready to produce computer and cell phone logs if asked by the IRS?

Learn how we at Diamond Tax Consultants can help you with your bookkeeping needs.

888.456.0800  or Schedule Appt Online

For a limited time, both the PA Department of Revenue (4/26-6/18/10) and the City of Philadelphia (5/3-6/25/10) are offering tax amnesty for all taxpayers with delinquent taxes.

During this limited timeframe, the taxing authorities will waive 100% penalty and half of the interest on all delinquent tax balances.  Diamond Tax Consultants can help you to identify all delinquent tax issues and implement steps to resolve these issues, which include correspondence, tax preparation, appeal, and installment payment agreement.

For additional information on this subject, click below:

City of Philadelphia Tax Amnesty FAQ

Pennsylvania Tax Amnesty FAQ

This Amnesty is good for a limited time only. Act now!

Call (888) 456-0800
Email: info@diamondtaxconsultants.com
Schedule Appt Online 

So, where is your 2009 tax information right now? Has it made its way to the basement to reside with returns from previous years? Did you store it on a secure data server? While keeping your old tax records organized is admirable, learning from them is even better. That’s why I encourage you to take another look at your 2009 return to see what might be gleaned from it—and maybe start making decisions that could benefit you in 2010.

Let’s take an obvious one. It’s not a bad time to examine your energy bills and see if something can be done to reduce both your carbon footprint and your taxes. Were you able to use the maximum $1,500 federal energy credit this year? Would this be a good time to make your home more energy-efficient by replacing windows or making other upgrades that qualify? Should you go even further, and install a geothermal heating system, which qualifies for a separate 30% federal tax credit? Federal stimulus funding is providing additional dollars for state energy rebates on top of the federal credit, so you might want to check out available sources for your state.

How about charitable giving? Ask yourself whether your giving is at the right level, and whether it’s targeted to the causes you consider important. If you contributed to Haitian earthquake relief, there was a tax credit provision for 2009 if your cash contribution was made after January 11, 2010, and before March 1, 2010 (though that deadline might be extended).

Your capital gains picture is set out right in front of you on your return. It may be worth your time to examine your gain/loss position to determine your available loss carryovers, as well as the potential for qualified dividends: their current preferred rate will soon expire. While you’re considering your investments, take a moment to think about your asset allocation. Does it make sense? Is it time to rebalance?

Why not use this opportunity to take a close look at your banking relationships and your use of credit cards? Did you keep a lot of cash in non-interest-bearing accounts or have a surprising amount of nondeductible credit card interest?

Has your mortgage interest deduction reduced to the point that an accelerated payment plan might make sense now? It may not, but you might want to consider it along with another issue: if your adjusted taxable income is high enough to be subject to the alternative minimum tax (AMT), think about speaking with a tax professional about choices that might improve your picture. Appropriate tax planning right now may allow you to make the tax system—including something as maligned as the AMT—work for you instead of against you.

If your state tax burden seems high, you might want to think about retiring elsewhere. Try vacationing in states with lower tax rates to scout out locations for a potential move. Before you book the trip, compare state tax rates using resources like the one published by the Tax Foundation (excludes estate/inheritance taxes).

There’s a wealth of data on your return and in the supporting documents. Once you’ve filed, look at your return as less of a dreaded tax form and more of a helpful planning tool!

Notes:

• Consider consulting a tax advisor for guidance on your individual situation.
• Request a free financial planning review from Diamond Tax Consultants.

Just a few weeks from now, the calendar will read April 15, which for most years is the tax return deadline. If you have already filed your taxes, take a sigh of relief…..

But for those who are putting off their taxes, there are some things they should be aware of.  Every year, there are hundreds of changes in the U.S. tax code, but only a handful that the everyday person should be aware of. But most go unnoticed, even though it could mean more money for the taxpayer.

Here are a few tax law changes that may prove helpful as you prepare for the deadline.  If you have already filed, forward this tip to someone else so that they too can breath a sigh of relief…..

• One of the most important changes is the first-time homebuyer credit, which was extended. The first homebuyers can receive a tax credit of up to $8,000, while repeat homebuyers may be able to receive a credit of up to $6,000. Repeat homebuyers must have lived in their current home for five of the past eight years. The buyer has to have entered into a contract by April 30 and close on the deal by June 30.

• Another important thing to keep in mind is that with so many jobs being lost during the recession, unemployment benefits have seen a change for the tax season.  The first $2,400 in unemployment benefits that an individual received in 2009 is tax-free. Also, if the taxpayer is unemployed, keeping track of job-search expenses, such as job-placement services or mileage, can help reduce tax liability.

• Other credits include anything that makes a home more energy-efficient, such as doors, windows, water heaters, insulation and furnaces. Taxpayers can also claim some college expenses this year. The American Opportunity Credit now applies to all four years of college, as do some other expenses. Up to $2,500 may be claimed and up to $1,000 of the credit is refundable.

• There’s also been some change with tax credits involving children, such as the Earned Income Credit. The credit was expanded to include families with three or more children. The Child Tax Credit was expanded to allow families to begin qualifying with every dollar earned over $3,000.

• People can also deduct the sales tax on the purchase of a new vehicle. However the new vehicle must have been bought between Feb. 17, 2009, and Dec. 31, 2009. The government has been taking less money out of paychecks, which can affect how much a person receives in tax refunds. They’ll see more in their paychecks, but see a lower refund. If they were close, you may end up owing money.

While people put off filing for a variety of reasons, the Internal Revenue Service says not to wait. And filing online with e-file with an authorized provider is the fastest way to submit a return, the IRS said.

To help make the tax process easier, we suggest keeping a person’s accountant up-to-date with any possible tax situation. These include things such as selling property or any major life change.

Diamond Tax Consultants offer year-round support, this way when it happens, you can plan.

Contact our office to schedule your tax appointment before the deadline at 888-456-0800 or for your convenience, schedule your appointment online.