Dear Valued Client,
In this edition of our newsletter, we are covering some important information if you hold a foreign financial account, helpful record-keeping tips and much more. If you see something that you want to talk about, feel free to contact us to explore the possibilities. Please share this newsletter with family and friends.
We rely on satisfied clients as the primary source of new business, and your referrals are both welcomed and most sincerely appreciated!
HAVE A WONDERFUL AND SAFE SUMMER!
Sincerely, Franklin KatzDon’t Panic If You Receive an IRS Notice
A letter from the IRS will probablyincrease your heart rate a little. Don’t panic; many of these letters can bedealt with simply and painlessly.
Each year, the IRS sends millionsof letters and notices to taxpayers to request payment of taxes, notify them ofa change to their account, or to request additional information. The notice youreceive normally covers a very specific issue about your account or tax return.Each letter and notice offers specific instructions on what needs to be done tosatisfy the inquiry.
However, the letters also have to advise you of your rights and otherinformation required by law. Thus, these letters can become overly lengthy andsometimes difficult to understand. That is why it is important to either callthis office immediately or forward a copy of the letter or notice so we canreview and handle it accordingly.
Do not procrastinate or throw the letter in a drawer, hoping the issue will goaway. Most of these letters are computer generated and, after a certain periodof time, another letter will automatically be generated. And, as you mightexpect, each succeeding letter will become more aggressive and less easilydealt with.
Most importantly, don’t automatically pay an amount the IRS
is requestingunless you are positive you owe it. Quite often, you will not owe what isrequested and it will be difficult to get your payment back. It is goodpractice to have this office review the notice prior to making any payment.
It is important to deal with any IRS
correspondencepromptly and correctly. This office can handle these matters for you, so pleasecall for assistance.
Read this before Tossing Old Tax Records
Now that your taxes have been completedfor 2012, you are probably wondering what old records can be discarded. If youare like most taxpayers, you have records from years ago that you are afraid tothrow away. It would be helpful to understand why the records must be kept inthe first place.
Generally, we keep tax records for two basic reasons: (1) in case the IRS or a stateagency decides to question the information reported on our tax returns, and (2)to keep track of the tax basis of our capital assets so that the tax liabilitycan be minimized when we dispose of them.
With certain exceptions, the statute for assessing additional taxes is three years from the returndue date or the date the return was filed, whichever is later. However, thestatute of limitations for many states is one year longer than the federal law.In addition to lengthened state statutes clouding the recordkeeping issue, thefederal three-year assessment period is extended to six years if a taxpayeromits from gross income an amount that is more than 25 percent of the incomereported on a tax return. And, of course, the statutes don't begin runninguntil a return has been filed. There is no limit where a taxpayer files a falseor fraudulent return to evade taxes.
If an exception does not apply to you, for federal purposes, most of your taxrecords that are more than three years old can probably be discarded; add ayear or so to that if you live in a state with a longer statute.
Example - Sue filed her 2009 tax returnbefore the due date of April 15, 2010. She will be able to dispose of most ofthe 2009 records safely after April 15, 2013. On the other hand, Don files his2009 return on June 2, 2010. He needs to keep his records atleast until June 2, 2013. In both cases, the taxpayers may opt to keep theirrecords a year or two longer if their states have a statute of limitationslonger than three years. Note: If a due date falls on a Saturday, Sunday orholiday, the due date becomes the next business day.
The big problem! The problem withthe carte blanche discarding records for a particular year because the statuteof limitations has expired is that many taxpayers combine their normal taxrecords and the records needed to substantiate the basis of capital assets.These need to be separated and the basis records should not be discarded beforethe statute expires for the year in which the asset is disposed. Thus, it makesmore sense to keep those records separated by asset. The following are examplesof records that fall into that category:
For example, when the large $250,000 and $500,000 home exclusion waspassed into law several years back, homeowners became lax in maintaining homeimprovement records, thinking the large exclusions would cover any potentialappreciation in the home's value. Now that the exclusion may not always beenough, records of home improvements are vital. Records can be important, soplease use caution when discarding them.
If you have questions about whether or not to retain certain records? Give thisoffice a call first; it is better to make sure, before discarding somethingthat might be needed down the road.
Tips for Students and Parents Paying College Expenses
Whether you’re a recent high school graduate going to college for thefirst time or a returning student, paying for college can be a dauntingfinancial task. The following are some tips about education tax benefits thatcan help offset some college costs for students and parents.
American Opportunity Credit - In many cases,this credit offers greater tax savings than other existing education taxbreaks. Here are some key features of the credit:
Although most taxpayers who pay for post-secondary education qualifyfor the American Opportunity Credit, some do not. Limitations include a marriedperson filing a separate return, regardless of income; joint filers whose MAGI is $180,000 ormore; and, finally, single taxpayers, heads of household, and certain widowsand widowers whose MAGI is $90,000 ormore.
Some post-secondary education expenses do not qualify for the AmericanOpportunity Credit. These include the expenses of a student who, as of thebeginning of the tax year, has already completed the first four years ofcollege, as this credit is only granted for the first four years ofpost-secondary education.
Lifetime LearningCredit- If a student does not qualify for the American Opportunity Credit, he or shemay still qualify for the Lifetime Learning Credit. Key features of the creditinclude the following:
Only one type of education credit can be claimed per student in thesame tax year. However, if you’re the parent of two children attending college,you can claim the American Opportunity Credit for one student and the LifetimeLearning Credit for the other. Note, however, that the Lifetime LearningCredit’s $2,000 cap applies on a per tax return basis.
The credit is claimed on the return of the individual who claims the student’sexemption. For example, if a student’s parents are divorced and the father paysthe tuition but the mother claims the student’s exemption, the mother wouldreceive the credit, even though the father made the payments.
Student loan interestdeduction - Other than certain home mortgage interest, personal interest thatyou pay is generally not deductible. However, you may be able to deductinterest paid on a qualified student loan during the year. It can reduce theamount of your income subject to tax by up to $2,500, even without itemizingdeductions. However, if your MAGI exceeds $75,000($155,000 if married filing a joint return), the student loan interestdeduction is not allowed. If you’re married and filing separately, thededuction is not permitted, regardless of income level.
Determining the most beneficial education tax credit and applying othereducation expense strategies can be complicated and requires planning inadvance. For assistance with these and other tax planning issues, please givethis office a call.
Franklin Katz, ATP, PA, PB
Frank's Tax & Business Service
315 E. King St.
Kings Mountain, NC28086
704-739-4039
E-Mail: [email protected])
Web: www.prep.1040.com/frankstax
IRS Circular 230 Notice: Unless expressly stated otherwise inthis
transmission, any tax advice contained herein, forwarded with or attached to
this message was not and is not intended to be used, nor may it be relied
upon or used, by any taxpayer for the purpose of (1) the avoidance of any
tax-related penalties under the Internal Revenue Code or applicable state or
local tax law provisions, or (2) promoting, marketing or recommending to
another party any tax transaction or tax-related matters that may be
addressed herein.
In this edition of our newsletter, we are covering some important information if you hold a foreign financial account, helpful record-keeping tips and much more. If you see something that you want to talk about, feel free to contact us to explore the possibilities. Please share this newsletter with family and friends.
We rely on satisfied clients as the primary source of new business, and your referrals are both welcomed and most sincerely appreciated!
HAVE A WONDERFUL AND SAFE SUMMER!
Sincerely, Franklin KatzDon’t Panic If You Receive an IRS Notice
A letter from the IRS will probablyincrease your heart rate a little. Don’t panic; many of these letters can bedealt with simply and painlessly.
Each year, the IRS sends millionsof letters and notices to taxpayers to request payment of taxes, notify them ofa change to their account, or to request additional information. The notice youreceive normally covers a very specific issue about your account or tax return.Each letter and notice offers specific instructions on what needs to be done tosatisfy the inquiry.
However, the letters also have to advise you of your rights and otherinformation required by law. Thus, these letters can become overly lengthy andsometimes difficult to understand. That is why it is important to either callthis office immediately or forward a copy of the letter or notice so we canreview and handle it accordingly.
Do not procrastinate or throw the letter in a drawer, hoping the issue will goaway. Most of these letters are computer generated and, after a certain periodof time, another letter will automatically be generated. And, as you mightexpect, each succeeding letter will become more aggressive and less easilydealt with.
Most importantly, don’t automatically pay an amount the IRS
is requestingunless you are positive you owe it. Quite often, you will not owe what isrequested and it will be difficult to get your payment back. It is goodpractice to have this office review the notice prior to making any payment.
It is important to deal with any IRS
correspondencepromptly and correctly. This office can handle these matters for you, so pleasecall for assistance.
Read this before Tossing Old Tax Records
Now that your taxes have been completedfor 2012, you are probably wondering what old records can be discarded. If youare like most taxpayers, you have records from years ago that you are afraid tothrow away. It would be helpful to understand why the records must be kept inthe first place.
Generally, we keep tax records for two basic reasons: (1) in case the IRS or a stateagency decides to question the information reported on our tax returns, and (2)to keep track of the tax basis of our capital assets so that the tax liabilitycan be minimized when we dispose of them.
With certain exceptions, the statute for assessing additional taxes is three years from the returndue date or the date the return was filed, whichever is later. However, thestatute of limitations for many states is one year longer than the federal law.In addition to lengthened state statutes clouding the recordkeeping issue, thefederal three-year assessment period is extended to six years if a taxpayeromits from gross income an amount that is more than 25 percent of the incomereported on a tax return. And, of course, the statutes don't begin runninguntil a return has been filed. There is no limit where a taxpayer files a falseor fraudulent return to evade taxes.
If an exception does not apply to you, for federal purposes, most of your taxrecords that are more than three years old can probably be discarded; add ayear or so to that if you live in a state with a longer statute.
Example - Sue filed her 2009 tax returnbefore the due date of April 15, 2010. She will be able to dispose of most ofthe 2009 records safely after April 15, 2013. On the other hand, Don files his2009 return on June 2, 2010. He needs to keep his records atleast until June 2, 2013. In both cases, the taxpayers may opt to keep theirrecords a year or two longer if their states have a statute of limitationslonger than three years. Note: If a due date falls on a Saturday, Sunday orholiday, the due date becomes the next business day.
The big problem! The problem withthe carte blanche discarding records for a particular year because the statuteof limitations has expired is that many taxpayers combine their normal taxrecords and the records needed to substantiate the basis of capital assets.These need to be separated and the basis records should not be discarded beforethe statute expires for the year in which the asset is disposed. Thus, it makesmore sense to keep those records separated by asset. The following are examplesof records that fall into that category:
- Stock acquisition data - If you own stock in a corporation, keep the purchase records for at least four years after the year the stock is sold. This data will be needed to prove the amount of profit (or loss) you had on the sale.
- Stock and mutual fund statements (If you reinvest dividends) - Many taxpayers use the dividends they receive from stocks or mutual funds to buy more shares of the same stock or fund. The reinvested amounts add to the basis in the property and reduce gain when it is finally sold. Keep statements at least four years after the final sale.
- Tangible property purchase and improvement records - Keep records of home, investment, rental property, or business property acquisitions AND related capital improvements for at least four years after the underlying property is sold.
For example, when the large $250,000 and $500,000 home exclusion waspassed into law several years back, homeowners became lax in maintaining homeimprovement records, thinking the large exclusions would cover any potentialappreciation in the home's value. Now that the exclusion may not always beenough, records of home improvements are vital. Records can be important, soplease use caution when discarding them.
If you have questions about whether or not to retain certain records? Give thisoffice a call first; it is better to make sure, before discarding somethingthat might be needed down the road.
Tips for Students and Parents Paying College Expenses
Whether you’re a recent high school graduate going to college for thefirst time or a returning student, paying for college can be a dauntingfinancial task. The following are some tips about education tax benefits thatcan help offset some college costs for students and parents.
American Opportunity Credit - In many cases,this credit offers greater tax savings than other existing education taxbreaks. Here are some key features of the credit:
- Tuition, related fees, books, and other required course materials generally qualify.
- The credit is equal to 100 percent of the first $2,000 spent and 25 percent of the next $2,000, which means that the full $2,500 credit may be available to a taxpayer who pays $4,000 or more in qualified expenses for an eligible student.
- You may qualify for this credit even if you have previously taken the Hope or Lifetime Learning credit.
- The full credit is available for taxpayers whose modified adjusted gross income (MAGI) is $80,000 or less (for married couples filing a joint return, the limit is $160,000). The credit is phased out for taxpayers with incomes above these levels. These income limits are higher than those under the Lifetime Learning credit.
- Forty percent of the American Opportunity Credit is refundable, which means that even people who owe no tax can receive an annual payment of up to $1,000 for each eligible student. Other existing education-related credits and deductions do not provide a benefit to people who owe no tax. The refundable portion of the credit is not available to any student whose investment income is taxed at the parents’ rate, which is commonly referred to as the kiddie tax.
Although most taxpayers who pay for post-secondary education qualifyfor the American Opportunity Credit, some do not. Limitations include a marriedperson filing a separate return, regardless of income; joint filers whose MAGI is $180,000 ormore; and, finally, single taxpayers, heads of household, and certain widowsand widowers whose MAGI is $90,000 ormore.
Some post-secondary education expenses do not qualify for the AmericanOpportunity Credit. These include the expenses of a student who, as of thebeginning of the tax year, has already completed the first four years ofcollege, as this credit is only granted for the first four years ofpost-secondary education.
Lifetime LearningCredit- If a student does not qualify for the American Opportunity Credit, he or shemay still qualify for the Lifetime Learning Credit. Key features of the creditinclude the following:
- The credit is available for all years of post-secondary education and for courses taken to acquire or improve job skills.
- There is no limit on the number of years that the Lifetime Learning Credit can be claimed for an eligible student.
- The credit amounts to $2,000 maximum per eligible student.
- The credit is non-refundable; thus, the maximum amount credited is limited to the amount of tax that must be paid on your return.
- The student does not need to be pursuing a degree or other recognized education credential to qualify for this credit.
- Qualified expenses include tuition and fees, course-related books, supplies, and equipment.
- The full credit is generally available to eligible taxpayers, in 2013, whose MAGI is less than $53,000, or $107,000 for married couples filing a joint return. Above these amounts, the credit quickly begins to phase out.
Only one type of education credit can be claimed per student in thesame tax year. However, if you’re the parent of two children attending college,you can claim the American Opportunity Credit for one student and the LifetimeLearning Credit for the other. Note, however, that the Lifetime LearningCredit’s $2,000 cap applies on a per tax return basis.
The credit is claimed on the return of the individual who claims the student’sexemption. For example, if a student’s parents are divorced and the father paysthe tuition but the mother claims the student’s exemption, the mother wouldreceive the credit, even though the father made the payments.
Student loan interestdeduction - Other than certain home mortgage interest, personal interest thatyou pay is generally not deductible. However, you may be able to deductinterest paid on a qualified student loan during the year. It can reduce theamount of your income subject to tax by up to $2,500, even without itemizingdeductions. However, if your MAGI exceeds $75,000($155,000 if married filing a joint return), the student loan interestdeduction is not allowed. If you’re married and filing separately, thededuction is not permitted, regardless of income level.
Determining the most beneficial education tax credit and applying othereducation expense strategies can be complicated and requires planning inadvance. For assistance with these and other tax planning issues, please givethis office a call.
Franklin Katz, ATP, PA, PB
Frank's Tax & Business Service
315 E. King St.
Kings Mountain, NC28086
704-739-4039
E-Mail: [email protected])
Web: www.prep.1040.com/frankstax
IRS Circular 230 Notice: Unless expressly stated otherwise inthis
transmission, any tax advice contained herein, forwarded with or attached to
this message was not and is not intended to be used, nor may it be relied
upon or used, by any taxpayer for the purpose of (1) the avoidance of any
tax-related penalties under the Internal Revenue Code or applicable state or
local tax law provisions, or (2) promoting, marketing or recommending to
another party any tax transaction or tax-related matters that may be
addressed herein.