Every few years (10 years at the most) you should review your financial planning. Is your life insurance coverage still sufficient to take care of your family’s needs? Does your will recognize changes in your assets and the size of your family? Will your retirement plan give you enough income in a changing economy, or cover expenses that you didn’t anticipate until recently?

More important, certain life events should always call for a review of your estate and financial planning. It’s a good idea to give your financial, insurance and legal advisors a call on the occurrence of any of the following:

• Marriage or divorce;
• Birth or adoption, or acquiring a financial dependent such as a parent;
• Children leaving for college;
• Children moving out on their own;
• Purchase or sale of a home;
• Serious illness;
• Substantial growth or depletion of assets;
• Retirement;
• Start-up of a business.

 If we can be of any assistance in your planning for these matters, please give us a call.

As a general rule, you must pay estimated taxes in 2012 if both of these statements apply:

1. You expect to owe at least $1,000 in tax after subtracting your tax withholding (if you have any) and tax credits;
2. You expect your withholding and credits to be less than the smaller of 90 % of your 2012 taxes or 100 percent of the tax on your 2011 return.

If you are a Sole Proprietor, Partner or S Corporation shareholder, you generally have to make estimated tax payments if you expect to owe $1,000 or more in tax when you file your return.

If you are required to make estimated payments during the year, and fail to do so, you may be subject to late payment penalties, as well as having to pay the entire tax due when you file your return, instead of spreading it out over the year. 

For estimated tax purposes, the year is divided into four payment periods, or due dates. For 2012 estimated payments, those dates are April 17, June 15, September 17 and December 17 (January 15, 2013 for IRS payments).

If you expect to have significant income in 2012 that isn’t subject to withholding, please give us a call so we can discuss your situation and help you determine whether you should be making estimated payments this year.

Expenses that qualify for an itemized deduction generally include:

• Business travel away from home
• Business use of your car
• Business meals and entertainment 
• Travel
• Use of your home
• Education
• Supplies
• Tools
• Miscellaneous expenses

You must keep records to support all business expenses you deduct. Be sure to keep an ongoing log or record for ongoing expenses such as business mileage. The IRS is much more less to question a regularly maintained log, than a record compiled at the end of the year.

Here are some tips about late payment of taxes:

1. Filing an extension will not defer your tax liability. Taxes owed must be paid on or before the filing deadline, to avoid interest and penalties for late payment.

2. Pay as much as you can on the filing deadline, whether you are filing your return or an extension. These steps will eliminate the late filing penalty, reduce the late payment penalty and cut down on interest charges.

3. Consider obtaining a loan or paying by credit card. The interest rate and fees charged by a bank or credit card company will probably be lower than interest and penalties imposed by the IRS or state tax authorities.

4. Request an installment payment agreement. You do not need to wait for the tax authorities to send you a bill before requesting a payment agreement. We can help you determine if this is your best option and also assist with obtaining an installment plan.

5. Request an extension of time to pay. For tax year 2011, the IRS allows qualifying individuals to request an extension of time to pay and have the late payment penalty waived as part of the IRS Fresh Start Initiative. But hurry, your application must be filed by April 17, 2012.

6. If you receive a bill from the IRS or any state tax authority, please fax or mail a copy to us immediately, so we can review your situation and  your payment options. Ignoring a tax bill will only compound your problem, increase your interest and penalties, and could lead to collection action.

If you expect to owe on your returns this year, and can’t pay in full and on time, please talk to us now so we can help you take steps to minimize penalties and interest.

To qualify, you must meet 2 basic criteria:

1. You must file Form 1040 and itemize deductions on Schedule A. You cannot deduct contributions if you are not itemizing. 

2. Your donations must be given to qualified organizations. For example, you cannot deduct contributions made to specific individuals, political organizations or candidates. Here’s a table that shows some common types of qualifying and non-qualifying organizations:

Source: IRS

Here are a few more important points about charitable contributions:

You must keep a record of each monetary contribution that you deduct. The record can be a bank or payroll deduction record, or a written communication from the organization, that shows the organization’s name and the date and amount of the contribution. For text message donations, a telephone bill meets the record-keeping requirement if it shows the name of the receiving organization, the date of the contribution and the amount given.If you receive goods or services (such as merchandise, coupons or sports tickets) in return for a contribution, you can deduct only the amount that exceeds the fair market value of the benefit received. Keep your donation records with the rest of your tax records for each tax year.

To claim a deduction for any contribution of cash or property equaling $250 or more, your record of the contribution must show not only the organization, date and amount, but also a description of contributed property and whether you received any goods or services in exchange for the gift.

Donations of stock or other non-cash property are usually valued at the fair market value of the property (“fair market value” is generally the price at which property would change hands between a willing buyer and a willing seller). Clothing and household items must generally be in good used condition or better to be deductible.

For contributions larger than $5,000 as well as for automobile donations and some other large items, special requirements apply, such as getting a qualified appraisal for a property donation.

If you have any questions about your charitable contributions and what may or may not qualify, please give us a call.

1. Self-employment can include work in addition to your regular full-time business activities, such as part-time work you do at home or in addition to your regular job. Note that you cannot work as both an employee on payroll, and an independent contractor, for the same company.

2. If you are self-employed, you generally have to pay self-employment tax as well as income tax. Self-employment tax is a Social Security and Medicare tax primarily for individuals who work for themselves, similar to the Social Security and Medicare taxes withheld from the pay of most wage earners. You can deduct half of your self-employment tax in figuring your adjusted gross income.

3. You may have to make quarterly estimated tax payments, since self-employment income is not usually subject to withholding the way a paycheck would be. If you fail to make quarterly payments you may be penalized for underpayment at the end of the tax year, and you will most likely have a balance due when you file your return.

4. You can deduct the costs of running your business. To be deductible, a business expense must be both ordinary and necessary. An ordinary expense is one that is common and accepted in your field of business. A necessary expense is one that is helpful and appropriate for your business. As with any tax deductions, it is important to keep good records to document deductible expenses.

5. If you use your home for business activities, you may be able to deduct some expenses for business use of your home. (See last week’s post on the Home Office deduction) However, home business deductions beyond what is usual may cause the IRS to flag your return for an audit.

If you have any questions about self-employment taxes, deductions or tax planning, please give us a call.

You must use this part of your home regularly and exclusively for business. You can’t claim your family den or dining room for business use just because you sometimes prepare business reports or entertain clients there. Exceptions to the exclusivity rule are in-home day care facilities, and storing business inventory in an area of your home such as a garage.

Your home office must be one of the following:

• Your principle place of business, or at the very least, the place where you do the administrative work, as long as you have no other place to do this work.
• A place where you regularly have appointments with patients, clients and customers. Occasional meetings or phone calls conducted from home will not qualify.
• A separate structure on your property used for business purposes, such as a workshop for a finish carpenter, or a greenhouse for a floral shop.

Some kinds of home office use that will not qualify for the deduction:

• Bringing work home from a business you own, which has its principle location outside your home.
• Using your home office to manage your investments or do work for a non-profit.
• Doing work at home for an employer who provides office or work space elsewhere but sometimes allows employees to work from home.

If you have any questions about the home office deduction and business use of your home, please give us a call so we can review your circumstances.

To qualify for either credit, you must pay higher education tuition and fees for yourself, your spouse or your dependent. The credit may be claimed by either the parent or the student, but not both. If the student was claimed as a dependent, the parent must file for the credit.

For each student, you may claim only one of the credits in a single tax year. For example, you cannot claim the American Opportunity Credit to pay for part of your daughter’s tuition charges and then claim the Lifetime Learning Credit for the rest. However, you can claim one credit for your daughter’s education expenses, and the other for your son’s in the same year.

The American Opportunity Credit

• Up to $2,500 per eligible student.
• Available for the first four years of post-secondary education.
• Forty percent is refundable, which means that you may be able to receive up to $1,000, even if you owe no taxes.
• The student must be pursuing an undergraduate degree or other recognized educational credential.
• The student must be enrolled at least half time for at least one academic period.
• Qualified expenses include tuition and fees, coursed related books supplies and equipment.
• Eligible taxpayers generally have modified adjusted gross income under $80,000 ($160,000 for married filing jointly).

2. Lifetime Learning Credit

• Up to $2,000 per eligible student.
• Available for all years of postsecondary education and for courses to acquire or improve job skills.
• Non-refundable, so you cannot receive credit for more than the amount of the taxes you owe.
• The student does not need to be pursuing a degree or other recognized education credential.
• Qualified expenses include tuition and fees, course related books, supplies and equipment.
• Eligible taxpayers generally have modified adjusted gross income under $60,000 ($120,000 for married filing jointly).

If you don’t qualify for these education credits, you may qualify for the tuition and fees deduction, which can reduce the amount of your taxable income by up to $4,000. However, you cannot claim the tuition and fees tax deduction in the same year that you claim the American Opportunity Tax Credit or the Lifetime Learning Credit. You must choose to either take the credit or the deduction

If you have questions about these credits and deductions, or need help making the determination of which one to claim, please give us a call.

Here are the basics of filing status:

• Your marital status on the last day of the year determines your marital status for the entire year.
• If more than one filing status applies to you, choose the one that gives you the lowest tax obligation.
• Single filing status generally applies to anyone who is unmarried, divorced or legally separated according to state law.
• A married couple may chose to file a joint return together, or to file their returns separately. for the first, the couple’s filing status would be Married Filing Jointly. For the second, each spouse’s status would be Married Filing Separately.
• If your spouse died during the year and you did not remarry during 2011, usually you may still file a joint return with that spouse for the year of death.
• You may be able to choose Qualifying Widow(er) with Dependent Child as your filing status if your spouse died during 2009 or 2010, you have a dependent child, have not remarried and you meet certain other conditions.
• Head of Household generally applies to taxpayers who are unmarried. You must also have paid more than half the cost of maintaining a home for you and a qualifying person to qualify for this filing status.

If your family or marriage situation has changed since your last tax return was filed, please let us know so that we can help you determine the correct filing status for this year.

1. You must itemize. You deduct qualifying medical and dental expenses only if you itemize deductions on Form 1040, Schedule A.

2. Deduction is limited. You can deduct only medical expenses that exceed 7.5% of your Adjusted Gross Income for the year. Suppose you made $50,000 last year, and paid $4,000 in qualifying medical expenses. 7.5% of $50,000 is $3,750, so you can only deduct the amount in excess of $3,750, or $250 of those expenses.

3. Expenses must have been paid in 2011. You can only include the medical and dental expenses you actually paid during the year, regardless of when the services were provided. Be sure to keep good receipts or records to substantiate your expenses.

4. You can’t deduct reimbursed expenses. Your total medical expenses for the year are reduced by any reimbursement, regardless of whether the reimbursement is paid to you or directly to the doctor or hospital.

5. You can’t deduct medical insurance deducted from your paycheck. Any medical and dental premiums deducted by your employer from your paycheck are pre-tax income; in other words, you haven’t paid any income tax withholding on this amount anyway, so you can’t deduct it from your taxes.

5. Whose expenses qualify. You may include qualified medical expenses you pay for yourself, your spouse and your dependents. Some exceptions and special rules apply to divorced or separated parents, taxpayers with a multiple support agreement or those with a qualifying relative who is not your child.

6. Types of expenses that qualify You can deduct expenses primarily paid for the diagnosis, cure, mitigation, treatment or prevention of disease, or treatment affecting any structure or function of the body. For drugs, you can only deduct prescription medication and insulin. You can also include premiums for medical, dental and some long-term care insurance. Starting in 2011, you can also include lactation supplies.

7. Transportation costs may qualify You may deduct transportation costs primarily for medical care that qualifies for as medical expenses. You can deduct the actual fare for a taxi, bus, train, plane or ambulance as well as tolls and parking fees. If you use your car for medical transportation, you can deduct actual out-of-pocket expenses such as gas and oil, or you can deduct the standard mileage rate for medical expenses, which is 19 cents per mile for 2011.

8. Tax-favored saving for medical expenses Distributions from Health Savings Accounts and withdrawals from Flexible Spending Arrangements may be tax free if used to pay qualified medical expenses, including prescription medication and insulin. Expenses paid by these funds cannot be deducted again on your tax return.

If you have any questions about deducting medical and dental expenses, please give us a call.