Tax Tips

Contents At A Glance

• Year End Tax Planning
• 2009 Tax Law Updates
• Commonly Missed Business Tax Deductions
• Late Filer Q&A

Year End Tax Planning

For additional IRS news, tips and updates, visit our blog site

1. Live energy efficient

The government is keen towards those who build green. If you're going to make your home more energy efficient within the next two years, you can get up to $500 in tax credits. If you're going to build a home that uses 50 percent less in heating and cooling costs than other homes, you can get up to $2,000 in tax credits if it is completed after August 8, 2005.

2. Do a tax projection

The Alternative Minimum Tax (AMT), that vestige of the tax system passed in 1970, was meant to target only high income individuals who were subject to many exemptions. But as incomes rise, the Congressional Budget Office estimates that soon one in five taxpayers will be forced to pay it. To figure out if you'll be hit, do a full tax projection and you'll be able to see whether you should pick up the pace of deductions - or defer them. (The Alternative Minimum Tax: What you should know)

3. Figure out your income and deductions

The most basic year-end move is to adjust the timing of income and deductions, says the IRS. If your income is expected to come in high, you can delay some of it until the next calendar year to save taxes. You can also accelerate payment of deductible expenses like job hunting costs or dues of professional organizations.

4. Postpone that bonus

If you know you've got a bonus coming, look into having your boss postpone the big check until January. You can't defer the bonus being taxed by simply not depositing the check until later. The IRS says if you expect you're going to be forced to pay the AMT this year, consider accelerating the current year's income to mitigate the negative aspects of the tax.

5. Sock away some for retirement

A great way to put money away for the future is a deductible Individual Retirement Account (IRA). A conventional IRA will defer taxes as your investments grow, while a Roth IRA is actually tax-free. You have until April 15 to open an IRA and make a deductible contribution for the prior year. And if you have a 401K plan at work, put in as much as you're allowed to.

6. Pay off those deductible expenses before year's end

If you pay off your state taxes or property taxes early, that accelerates your federal deductions. You can make an extra mortgage payment (the interest is deductible), or go for that dental work or surgery before year's end.

7. Give it to charity

If you give cash to a charity, you can deduct it for the current year. If you give property, you are usually allowed to deduct the full market value. For more expensive donations, look into getting an appraisal to determine the fair value of your property.

8. Give gifts to children

If you give that gift to children or other relatives before the year is out, make sure to have that check clear by December 31st. Gifts up to $12,000 per person need not be reported.

9. Offset your capital gains

Take a long look at your investment portfolio to determine whether you should sell some losers before year's end to offset your capital gains this year. Capital losses are put together with capital gains, but are also deductible against up to $3,000 in income a year.

10. Marriage helps

Even if you get hitched at 11:59 p.m. on December 31st, the government considers you married for the whole year. Look at your new spouse's income, or lack thereof, when doing your tax projections. Many of the calculations the IRS makes are based on the taxpayer's marital status

Planning may be useful for educators who may claim up to $250 for out-of-pocket classroom expenses, students who may deduct interest on college loans and spouses who make alimony payments. These items are among the tax deductions that can reduce taxable income.For many families tax planning means locating the IRS for the Advance Child Tax Credit. For teachers, it means keeping those receipts for school supplies they purchase with their own money. For investors, it may mean deciding which stocks should be sold or purchased.Some taxpayers may benefit more by itemizing their deductions on Schedule A of Form 1040. Taxpayers should consider using Schedule A if their itemized deductions exceed the amount of the standard deductions. On average, approximately 1/3 of the nation's taxpayers itemize their deductions.

Among common deductions itemized on Schedule A are state and local income taxes, real estate taxes and mortgage interest. Charitable donations also are deductible on expenses, such as laser surgery or obesity weight loss programs, are deductible if the total medical expenses exceed 7.5% of gross income.

2009 Tax Law Updates

Commonly Missed Business Tax Deductions

• Auto Expenses - While the cost of commuting to and from work is not deductible, business miles are deductible. Be aware of luxury auto limitations, and do the math when deciding whether to lease or buy.

  Bad Debts - Bad debts are only deductible for businesses that employ an accrual basis of accounting. Personal bad debts, such as loaning money to a family member, may be deductible if you made an unsuccessful attempt to collect.

  Start-up Expenses - Your business should reimburse you at fair market value, for items that you contributed to start the business.

  Education Expenses - The IRS helps subsidize your education, as long as you can prove that the education helps your business.

  Meals and Entertainment - Documenting expenses, and keeping good records is instrumental in proving your entertainment deductions.

• Home Equity Loans - Interest on home equity loans of less than $100,000 is deductible as an itemized personal deduction. This is so regardless of how the money is spent.

Late Filers Q&A

We never filed our state tax return last year. Can we still do it this year?

If you are required to file a state tax return, you must do so even if it is late.

I can't believe that I forgot to file a return last year. What's the best way for me to proceed? What kind of penalties can I expect to see from the IRS? What if I am due a refund?

First of all, get the tax forms for last year and file your return as quickly as you can. If you have a balance due, late-filing and late-payment penalties will be imposed. If you have a refund, there should be no penalties or interest. Some states impose a penalty for late filing even if you have a refund. If you have specific tax questions, you can visit a Diamond Tax Consultants office and let one of our tax consultant’s help.

What kind of penalty should I expect for filing 1day late? I'm single and will be filing Form 1040EZ with wages of about $4,000.

Because your income is below the filing requirement for single individuals, there is no penalty for late filing. If you had tax withheld, you will receive a refund of the entire amount. You also may be eligible for the Earned Income Credit. Note: If you are required to file a state return, the state may impose a penalty for late filing even if you are getting a refund.

I am self-employed and did not make estimated tax payments. Can I file for an extension?

Yes. Your extension must be postmarked by midnight April 15. You must pay at least 90% of the tax shown on your return by April 15 to avoid a late-payment penalty. Form 4868 gives you an extension of time to file, not time to pay. If your tax is $1,000 or more, you generally will owe a penalty for underpayment of estimated tax. See Form 2210 and its instructions for more information.

If it's already after April 15, it's too late to file an extension. Instead, file your return as soon as possible to minimize your penalties.

I electronically filed my state tax return but am unable to deliver the payment to the post office by midnight on the due date of the return. What will happen?

The state taxing authority may impose a penalty and/or charge you interest on the late payment.

Immediately after mailing my return I realized I forgot to sign the return! Will it be treated as filed late? I am expecting a refund.

When the IRS receives your return, they will contact you about your failure to sign it. Because you are receiving a refund, you do not have to worry that the return is technically late. However, you will not receive your refund until the IRS receives your signature.

I didn't file my return by the due date and I didn't file for an extension. What should I do?

You need to file your tax return as soon as possible. If you owe any tax, pay it with your return to minimize any penalty and interest.

I didn't file my return by the due date. I'm expecting a refund. Will a late-filing penalty be charged?

If there is a refund due to you, no penalty for late filing or late payment will be charged. The penalty is based upon the amount of unpaid tax as of the due date of the return. However, some states impose a late-filing penalty even if you have a refund.

Can I still file a tax return after April 15?

Yes. If you are required to file, you must file the return even if it wasn't filed on time. If you owe the IRS, penalties and interest will be imposed. If you have a refund coming, penalties and interest will not be imposed. To get the refund, you generally must file the return within 3 years of the due date of the return.