Organizers

Overview

The 2017 tax season is upon us and once again, as a service to our clients, we our providing Tax Organizers to help make the filing process as easy and efficient as possible. Here you will find information and tips to help you accurately complete your organizers.

Click on the menu items on the left for specific information about each topic.

If you need a blank organizer, click on the link below.

 Download your organizer in PDF format.

A letter to our clients from Mike

Dear Friends:

Have you noticed how fast stuff grows? One of our neighbors grows sunflowers that are ten feet tall after just a few months. There are now more cell phones than people in America. In fourteen years, Wikipedia has grown to the size of over 2,000 volumes of the Encyclopedia Britannica. My waistline is growing, too, but not quite that fast.

While Congress can't pass many bills, but the average size keeps getting bigger driven by bills like No Child Left Behind, the Affordable Care Act and super-sized consolidated budget bills. I'm glad Congress didn't pass a huge tax reform bill designed to cure all sins with an ambitious name like The Tax Bill to Save the Economy, Grow the Middle Class, Put Factory Workers Back to Work in the Workplace and Repairs the Darn Roads bill.

Closer to home, I tried a new method of growing mushrooms last month. Some of our friends will recall that my first attempt, a few years back, was not very successful. After a month, I'd only harvested three measly mushrooms. This year, with a new, sustainable process from the Back to the Roots Company, we harvested half a pound of mushrooms within ten days. The instructions on the box say they are ready to harvest when they are no longer doubling in size every day. They grew scary fast, and with them, Tina created terrific mushroom gravy.

Mushrooms are a metaphor for fast growth. We commonly refer to the mushrooming size of government or the mushrooming government debt, as well as the growing number of apps in the Apple apps store, bigger and bigger privacy breaches, and the mushrooming price of a movie ticket. But, we need a different metaphor for government.

The federal deficit has fallen faster than ever. Congress is slowing the pace of growth. It has passed a bare minimum number of bills. Tax reform bills are rare, particularly in an election year, but there was hope for a reform bill at this time last year. Nothing like a reform bill came close to passing. A minimal bill of "tax extenders" passed at the end of 2014. This reauthorized a series of mostly business deductions that were fairly uncontroversial and would have expired at the end of 2013. The deduction for teachers' classroom expenses was also extended through 2014.

The Affordable Care Act is phasing in over several years. Effective for 2014, nearly everyone is required to have health care coverage or pay a penalty with their 2014 tax return. This has the tax preparation community very worried. The rules are very complex and taxpayers may not even understand their own situation with respect to the law. And, as with all health care issues, there is a layer of privacy that can prohibit tax preparers from asking direct questions about matters that could determine if a penalty is due. We have added a new page to the 2014 Tax Organizer to cover the Affordable Care Act issues.

While there are still people lining up as "against" Obamacare, count me as fully for it. Our premiums dropped $700 per month for much better coverage. Economists have long pointed to health care as one of the two or three things that could cause spending to explode. But, the rate of growth slowed going into the Great Recession and has remained lower. In fact, 2013 had the lowest growth in health care costs on record.

We have been trying to get back to taking annual vacations. Lowering our health insurance and other medical costs by ten grand are big steps toward making that happen.

I've found the long work hours had taken more of a toll on me than I'd realized. We took a long weekend trip to Arizona followed soon after by five days with family in Michigan. Those were very rejuvenating. We are eager to try for a nice, long two week vacation this summer. Where did I put all those Hawaiian shirts?

I tried out a few "mindfulness" tapes from UCLA to learn relaxation techniques. After watching a few of them one evening while sitting in a hotel breakfast room, I got up to refill my coffee. As I stared at my fourth cup of coffee, a bell went off. Relaxation tapes and caffeine do not mix. Tina has convinced me to try drinking decaf, and I am developing a taste for it.

During our 4th of July weekend trip to Detroit, I left my laptop closed for three days! Admittedly, my iPad and iPhone acted as crutches during those difficult, virtually unplugged days. What helped most was hanging out with Tina and my family.

A particular treat was watching the fireworks launched from barges just off the shore in Anchor Bay. The fireworks displays around southeast Michigan start in the beginning of June and continue for a month. The Canadians on the other side of the Detroit River must wonder if they are looking at Michigan or Chinatown. We always make a point of finding a good spot to watch fireworks, so this was a huge treat for us.

After reading a bunch of 25 Best Ways to (a) be more productive; (b) avoid stress, and (c) get better life/work balance, I can pass along these words from their wisdom: Drink water, don't make lists, do make plans, exercise in the morning, get up an hour earlier, sleep more, work for an hour then take a break, repeat, don't check your email, don't answer the phone or listen to messages and ignore the news until after 5:00. It's my new plan. Wish me luck!

By Labor Day, we were starting to plan for this tax season. We'd had our business tax software crash once and the individual tax software totally crash twice. We installed the software on four different computers just to have at least one up and running. Avoiding a repeat of the computer failures was goal #1, so we changed tax prep software after ten years with the same company.

We will be using new software for personal taxes, business tax returns and payroll taxes. While the look of the new software is "old school", the tools included are state of the art. I'll have the ability to scan brokerage statements and transfer trades directly into the tax forms, and we can access online databases from ADP and others to download W2 information directly into the tax software. We also have a bar code scanner to read the bar codes printed on many W2s, dividends statements and business K-1 forms. We can now start with a large stack of client documents and finish with a fully bookmarked PDF document, arranged into the order of the tax entry screens. I can't wait to get started. Please, bring us your tax information.

In the back of the Tax Organizer, we added Random Tax Facts. They should be a good break from the hard work gathering tax papers.

We will be enormously glad to hear from you!

Refreshingly yours,

MICHAEL SCZEKAN Certified Public Accountant

2014 Highlights

The tax side of the "Fiscal Cliff" was adverted as the U.S. Senate and House of Representatives passed the American Taxpayer Relief Act of 2012 on January 1, 2013. Some of the major provisions of the act are:

Individual Income Tax Rates. The American Taxpayer Relief Act of 2012 makes permanent for 2013 and beyond the lower Bush-era income tax rates for all, except for taxpayers with taxable income above $400,000 ($450,000 for married taxpayers, $425,000 for heads of households). Income above these levels will be taxed at a 39.6 percent rate.

Marriage Penalty Relief. The American Taxpayer Relief Act extends all existing marriage penalty relief. Before the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTTRA), married couples experienced the so-called marriage penalty in several areas. EGTTRA gradually eliminated the marriage penalty in two ways. The basic standard deduction for a married couple filing a joint return was increased to twice the basic standard deduction for an unmarried individual filing a single return. The size of 15 percent income tax bracket for a married couple filing a joint return was also increased to twice the corresponding rate bracket for an unmarried individual filing a single return.

Capital gains/dividends sunsets. The American Taxpayer Relief Act raises the top rate for capital gains and dividends to 20 percent beginning in 2013, up from the Bush-era maximum 15 percent rate. The top rate will apply to the extent taht the taxpayer's income exceeds the thresholds set for the 39.6 percent rate ($400,000 for single filers, $450,000 for joint filers and $425,000 for heads of households). All other taxpayers will pay a maximum of 15 percent on capital gains and dividends. A zero percent rate will continue to apply to capital gains and dividends to the extent income falls below the top of the 15 percent income tax bracket - projected for 2013 to be $72,500 for joint filers and 36,250 for singles.

Permanent Alternative Minimum Tax relief. The American Taxpayer Relief Act "patches" the Alternative Minimum Tax (AMT) for 2012 and subsequent years by increasing the exemption amounts and allowing nonrefundable personal credits to the full amount of the individual's regular tax and AMT. Without the patch, 60 million raxpayers would have been subject to AMT on their 2012 tax returns.

Pease limitations. The Pease limitations, named after the member of Congress who sponsored the original provision, reduces the total amount of a higher-income taxpayer's otherwise allowable itemized deductions. The American Taxpayer Relief Act offically revives this limitation, which was eliminated by EGTRRA. However, higher "applicable threshold" levels apply under the new law. Certain items, such as medical expenses, investment interest, and casualty, theft or wagering losses, are excluded.

Personal exemption phaseout. The American Taxpayer Relief Act also offically revives the personal exemption phase-out rules. Under the phaseout, the total amount of exemptions that may be claimed by a taxpayer is reduced by two percent for each $2,500, or portion thereof (two percent for each $1,250 for married couple filing seperate returns) by which the taxpayer's adjusted gross income exceeds the applicable threshold level.

State and local sales tax deduction. The American Taxpayer Relief Act extends through 2013 the election to claim an itemized deduction for state and local general sales taxes in lieu of state and local income taxes.

Child tax credit. The American Taxpayer Relief Act extends permanently the $1,000 child tax credit.

Earned income credit. The American Taxpayer Relief Act makes permanent or extends through 2017 enhancements to the earned income credit (EIC) in Bush-era and subsequent legislation. This includes a simplified definition of earned income, reform to the relationship test and modification of the tie-breaking rule.

American Opportunity Tax Credit. The American Taxpayer Relief Act extends through 2017 the American Opportunity Tax Credit (AOTC). The AOTC rewards qualified taxpayers with a tax credit of the first $2,000 of qualified tuition and related expenses and 25 percent of the next $2,000, for a total maximum credit of $2,500 per eligible student. Additionally, the AOTC applies to the first four years of a student's post-secondary education.

The American Taxpayer Relief Act contains many other provisions. We would be glad to discuss any of the acts provisions with you at your convenience.

Filing Status

Dependents

In general, a taxpayer may claim a personal exemption deduction for himself or herself, for his or her spouse provided a joint return is filed, and for any dependents. Dependents are defined as qualifying children and qualifying relatives. The rules on claiming dependency exemptions apply to the taxpayer's qualifying children and to certain other individuals as well, provided they share the same principal abode as the taxpayer for more than one-half the year. A dependency exemption is not available for any child who provides more than one-half his or her own support. In addition, a taxpayer cannot claim a dependency exemption for any dependent unless the taxpayer provides a correct taxpayer identification number for that dependent.

 Qualifying Child Defined

A taxpayer can claim a dependency exemption for a qualifying child. A qualifying child is defined as a person related to the taxpayer (not only the taxpayer's child), who has the same principal abode as the taxpayer for more than one-half of the tax year, who is under age 19, or age 24 and a full-time student, and who has not provided over one-half of his or her own support for the calendar year in which the taxpayer's tax year begins. An individual who is permanently and totally disabled at any time during the calendar year is considered to satisfy the age requirements. The qualifying child must also be a U.S. citizen or resident of Canada or Mexico and not have filed a joint return with the child’s spouse for the year.

 Related to the Taxpayer

A person is related to the taxpayer if the individual is a child or a descendent of a child, or a brother, sister, step-brother or step-sister of the taxpayer or a descendant of such a relative. A child is an individual who is a son, daughter, step-son, or step-daughter of the taxpayer.

Eligible foster children and adopted children who are legally placed with the taxpayer by an authorized placement agency are also included within the definition of a qualifying child. With regard to adopted children, the agency must be authorized by a government or governmental subdivision to place children for adoption.

 Age Limitation

The qualifying individual must either be under age 19 or, if a full-time student, age 24. A student is any child who, during any five months of the year:

1. was enrolled as a full-time student at a school or educational organization; or
2. took a full-time, on-farm training course given by a school or a state, county, or local government agency.

An educational institution is one with a regular faculty, regular body of students, and an established curriculum. Educational institutions include primary and secondary schools, colleges, universities, and normal, technical, and mechanical schools, but do not include correspondence schools, employee training courses, or on-the-job training, except on-farm training.

 Qualifying Child of More Than One Individual

If an individual is claimed as a qualifying child by two or more taxpayers for a tax year beginning in the same calendar year, there are tie-breaker rules that determine which taxpayer is entitled to claim the dependency exemption.

If both of the taxpayers claiming an individual as a qualifying child are the child's parents, (e.g., when the parents do not file a joint return), the child is deemed to be the qualifying child of the parent with whom the child resided for the longest period of time during the tax year. If the child resides with both parents for the same amount of time during the year, the parent with the highest adjusted gross income is entitled to claim the dependency exemption with respect to the child.

 Qualifying Relatives

A taxpayer may claim a qualifying relative (an individual other than a spouse or qualifying child) as a dependent only if each of the following tests and specifications are met:

1. the support test;
2. the relationship test;
3. the citizenship test;
4. the gross income test;
5. the joint return test; and
6. the individual is not a qualifying child.

 The Support Test

A taxpayer must provide more than one-half of the support of a qualifying relative who is claimed as a dependent for the calendar year in which the taxpayer's taxable year begins.

 The Relationship Test

An individual (other than a qualifying child) satisfies the relationship test if the individual either has one of the specified relationships with the taxpayer or has the same principal place of abode as the taxpayer and is a member of the taxpayer's household.

1. a child, or descendant of a child;
2. a stepchild;
3. a brother or sister, by whole or half blood;
4. a stepbrother or stepsister;
5. a father or mother, or ancestor of either (grandfather, great-grandfather, etc.);
6. a stepfather or stepmother;
7. a son or daughter of a brother, sister, half brother or half sister (niece or nephew);
8. a brother or sister of a father or mother (uncle or aunt);
9. a son-in-law or daughter-in-law;
10. a father-in-law or mother-in-law; or
11. a brother-in-law or sister-in-law.

Once a relationship is established, death or divorce does not terminate it. Thus, for example, the relationship of a son-in-law and mother-in-law survives the spouse's death or a divorce.

 The Citizenship Test

An individual must be a U.S. citizen or resident to be claimed as a dependent. A person who is not a U.S. citizen can be claimed as a dependent if she is a U.S. national (e.g., an American Samoan) or a resident of the United States, Canada, or Mexico at some time during the calendar year in which the taxpayer’s taxable year begins.

 The Gross Income Test

Generally, a taxpayer cannot take a dependency exemption for an individual if that person had gross income equal to, or greater than, the exemption amount for the year ($3,900 in 2013). This test does not apply if the person is the taxpayer’s child and is either under age 19, or a student under age 24. A child attains a given age on the anniversary of the date that the child was born.

 The Joint Return Test

A taxpayer cannot claim a dependency exemption for a married individual who files a joint return for a tax year beginning in the same calendar year in which the taxpayer’s taxable year begins. The exemption may be claimed, however, if neither the married dependent nor his spouse is required to file a return, even if they do file to claim a refund of tax withheld.

 Not a Qualifying Child

To be a qualifying relative, the individual cannot be a qualifying child of the taxpayer or of any other taxpayer.

Alimony

There are basically three ways in which money or property can change hands between divorced or divorcing spouses: child support, alimony, and division of property.

Two of these methods (child support payments and division of property) are generally non-events in terms of your taxes. Child support payments don't affect your taxes at all, unless you fall behind and have your tax refund confiscated to pay child support in arrears. And property transfers from one spouse to another either during a marriage, or transfers within one year after the divorce or pursuant to a divorce or separation agreement, are not taxable events for either party.

However, alimony is a different story. Although alimony (also known as spousal support) is generally out of fashion with most divorce courts, it is still afforded favorable treatment by the IRS.

Alimony is normally deductible by the person who pays it, and is taxable income to the recipient. Because the purpose of alimony is to provide support from a higher-income person to a lower-income ex-spouse, the person paying alimony will very frequently be in a higher tax bracket than the person receiving it. Thus, a tax savings occurs that, in effect, causes Uncle Sam to pay part of the alimony.

If you paid alimony, we will need the recipient's Social Security number to deduct it on your tax return.

Auto Expenses

The most commonly deducted employee business expense is undoubtedly the cost of a car. The IRS has a large number of very specific rules about deductible costs of operating a vehicle. The rules for employees are basically the same as the rules for self-employed people.

In order to claim the deduction for car expenses, you'll have to keep records that satisfy the IRS. The best way to be sure you'll get to claim all your deductions is to keep a written record of your business mileage whenever you drive, and also keep a record of all car expenses as you pay them. It's a good idea to save all your receipts for expenses as well.

If your employer pays you a mileage allowance, you can simplify your record keeping a bit. Generally, if the mileage allowance is no higher than the government's standard mileage rate (56.5 cents per mile in 2013; 56 cents per mile in 2014) you will only be required to prove to the employer the time, number of miles, and business purpose of your car trips, and this will be enough to satisfy the IRS. If, however, your employer pays you more than the standard mileage rate (SMR), the SMR amount will be shown in Box 12 of your W-2 Form with Code L, and the excess will be reported as taxable income to you in Box 1 of the W-2 Form.

Standard Mileage Rates

Business: 56 cents per mile in 2014; 57.5 cents per mile in 2015

Medical and moving: 23.5 cents per mile in 2014; 23 cents per mile in 2015

Charitable: 14 cents per mile in both 2014 and 2015

Schedule C Business Income

Section 179 deduction increased. For property placed in service during 2013, the limit for the section 179 deduction to expense certain depreciable business property remains at $500,000. This limit will be reduced when the total cost of section 179 property placed in service during the tax year exceeds $2,000,000.

Special depreciation allowance. For qualifying property acquired and placed in service between January 1, 2012 and December 31, 2013, you may be able to take a depreciation deduction equal to 50% of the adjusted basis of the property. Qualifying property includes certain property with a recovery period of 20 years or less, certain computer software, water utility property, or qualified leasehold improvements.

Business Income

Business Deductions

• Appropriateness of the expense - was the expenditure ordinary and necessary for your business?
• Relation to a business activity — the IRS is keenly aware that taxpayers may be tempted to write off things as business expenses that are really nondeductible personal expenses. If the expense was only partly for business, you'll need to allocate it between the business and personal portion.
• Do you have adequate records — in a tax audit, the IRS agent will ask you to show that the expense was in fact paid. This is where your recordkeeping routines come into play. If you have kept good records, proving your deductions won't be a problem. Remember, on most tax matters, the IRS can require you to prove that your deduction (or other item on your personal or business return) is correct. If you can't do this, the IRS will compute your tax liability based on its view of the question under dispute.
• What are some common deductible expenses - we provide a list of some of the most frequently used deductions, and some that you may have overlooked
• What are some common nondeductible expenses - while no list can be all-inclusive, we point out some items that are generally not deductible for most business owners.

The first, most basic guideline to remember is that a tax deduction for an expense paid in connection with your business will be allowed only if the expense is "ordinary and necessary" for the operation of the business.

This doesn't mean that the IRS will attack all sorts of legitimately claimed business deductions, either on the ground that an expense would occur only occasionally (is it ordinary?), or that the expense would be helpful, but not vital to the business (is it necessary?).

In practice, the IRS is rather flexible in this regard. It defines "ordinary" as common and accepted in a field of business, and defines "necessary" as helpful and appropriate to your business.

"Ordinary" usually refers to expenses that are frequent and ongoing, such as amounts you spend on gasoline or business meals, but can also apply to something that you pay only once, such as an installation fee for a business telephone line. And an expense does not have to be indispensable to be a necessary expense.

In addition to being "ordinary and necessary," it has been held that a business expense must also be "reasonable." Whether an expense is reasonable depends upon the facts and circumstances in the particular situation. In one case, for example, a chauffeured luxury car provided to an employee was not unreasonable given the nature of the employment and the congested area in which the car was driven. Entertainment and meal expenses are not deductible to the extent that they are lavish or extravagant, given the circumstances.

List of common deductible expenses:

• advertising
• bad debts from sales or services (for those using accrual accounting)
• bank fees on business accounts
• car and truck expenses
• commissions and fees
• cost of goods sold
• depreciation
• dues for trade associations and other not-for-profit, business-related organizations
• employee benefits
• gifts to customers, suppliers, etc.
• insurance (casualty and liability)
• interest
• legal and professional services
• meals and entertainment
• office expenses
• pension and profit-sharing plans
• publications
• rent or lease expense
• repairs and maintenance
• services performed by independent contractors
• supplies and materials (not included in cost of goods sold)
• travel expenses
• utilities
• wages of employees

Child and Dependent Care

If you paid someone to care for your child or other qualifying person so you (and your spouse if filing jointly) could work or look for work in 2012, you may be able to take the credit for child and dependent care expenses. You (and your spouse if filing jointly) must have earned income to take the credit.

A qualifying person is:

• A qualifying child under age 13 whom you can claim as a dependent. If the child turned 13 during the year, the child is a qualifying person for the part of the year he or she was under age 13.
• Your disabled spouse who is not physically or mentally able to care for himself or herself. and
• Any disabled person who is not physically or mentally able to care for himself or herself whom you can claim as a dependent (or could claim as a dependent except that the person had gross income of $3,900 or more or filed a joint return.)
• Any disabled person who is not physically or mentally able to care for himself or herself whom you could claim as a dependent except that you (or your spouse if filing jointly), could be claimed as a dependent on another taxpayer’s 2013 return.

To be a qualifying person, the person must have lived with you for more than half of 2013.

Qualified Expenses

These include amounts paid for household services and care of the qualifying person while you worked or looked for work. Child support payments are not qualified expenses. Also, expenses reimbursed by a state social service agency are not qualified expenses unless you included the reimbursement in your income.

Household services are services needed to care for the qualifying person as well as to run the home. They include, for example, the services of a cook, maid, babysitter, housekeeper, or cleaning person if the services were partly for the care of the qualifying person.

Care of the qualifying person includes the cost of services for the qualifying person’s well-being and protection. It does not include the cost of clothing or entertainment.

Some disabled spouse and dependent care expenses may qualify as medical expenses if you itemize deductions on Schedule A (Form 1040). However, you cannot claim the same expense as both a dependent care expense and a medical expense.

Who Can Take the Credit

You can take the credit or the exclusion if all five of the following apply:

1. Your filing status is single, head of household, qualifying widow(er) with dependent child, or married filing jointly.
2. The care was provided so you (and your spouse if filing jointly) could work or look for work. However, if you did not find a job and have no earned income for the year, you cannot take the credit or the exclusion. But if your spouse was a student or disabled, see the instructions for line 5. Note. Child support payments received by you are not included in your gross income and are not considered as earned income for figuring this credit.
3. The care must be for one or more qualifying persons.
4. The person who provided the care was not your spouse, the parent of your qualifying child, or a person whom you can claim as a dependent. If your child provided the care, he or she must have been age 19 or older by the end of 2013, and he or she cannot be your dependent.
5. You report the required information about the care provider on line 1 and, if taking the credit, the information about the qualifying person on line 2.

Education Deductions and Credits

There are different types of incentives for higher education. Some are aimed at saving for college while others help to pay for college through tax savings. First, one should consider the tax incentives for saving for higher education.

These incentives include the following:

  Qualified tuition programs
  Coverdell ESAs
  U.S. savings bond interest exclusion

The are also many tax breaks for paying for education expenses. These include the following:

  Scholarships and tuition reduction plans
  Employer-provided education assistance
  Gift tax exclusion for direct payment of education costs
  Education credits
  Penalty-free IRA withdrawals
  Deduction for work-related education costs

Finally, there is a break for those who borrowed funds for higher education expenses:

  Student loan interest deduction

Interest and Dividends

Interest from bank accounts or accounts at other financial institutions, certificates of deposits, and bonds should be reported to you by the payor on Form 1099-INT. If you received dividends from a corporation in which you owned stock, they will generally be reported to you on a copy of IRS Form 1099-DIV. You'll also receive a Form 1099-DIV from mutual funds or real estate investment trusts (REITs) that pay dividends during the year. These forms should be sent out by the end of January.

Some of the amounts reported to you on Form 1099-DIV will not be taxable, because they are really a return of your original investment, or a return of capital. If you received this type of distribution, it will generally be reported in Box 3. Once you have received all capital you paid in to the investment, any further amounts will be taxable income.

While return of capital amounts will not appear on your tax return, you should keep a record of them, since they must be used to reduce your basis in the stock when you sell.

Dividends on an insurance policy. Occasionally, certain forms of insurance companies send "dividends" to their policy holders, generally in years when the company has taken in more premium payments than it needs for operating expenses, reserves, and benefit payouts. These dividends are treated as a rebate of premiums you paid and are not taxable as dividends on Schedule B.

If you receive an incorrect 1099 form, you should contact the financial institution involved and ask them to issue a corrected one. Copies of all 1099s are sent to the IRS and are matched with your tax return. Mix-ups are especially prone to occur if your bank completed a merger this year and, for example, your bank accounts were reported to the IRS under a different bank's name than the one you used on your tax return, or if you had multiple accounts at a single bank and they were not all reported on the same 1099.

Individual Retirement Accounts

Individual Retirement Accounts (IRAs) function as personal, tax-qualified retirement savings plans.

Anyone who works in 2014, whether as an employee or self-employed person, can set aside up to $5,500 for the year in an IRA ($6,500 if age 50 or older in 2014), and the earnings on these investments grow, tax-deferred, until the eventual date of distribution. Moreover, certain individuals are permitted to deduct all or part of their contributions to the IRA. As an alternative option, you may be able to set up a "Roth IRA," contributions to which are not deductible, but from which withdrawals at retirement won't be taxed.

IRAs are set up as trusts or custodial accounts for the exclusive benefit of an individual and his or her beneficiaries. You can set up an IRA simply by choosing a bank, mutual fund company, brokerage house or other financial institution to act as trustee or custodian. The institution will give you the necessary forms to complete. A lesser-known alternative is to purchase an individual retirement annuity contract from a life insurance company. An individual cannot be his own trustee.

IRA Transfers and Rollovers

Moving funds from one IRA trustee/custodian directly to another trustee/custodian is called a transfer. It is not considered a rollover because nothing was paid over to you. You can have as many transfers as you like each year; transfers are tax-free, and there are no waiting periods between transfers. They don't have to be reported on your tax return.

A rollover, in contrast, is a tax-free distribution to you of assets from one IRA or retirement plan that you then contribute to a different IRA or retirement plan. Under certain circumstances, you may either roll over assets withdrawn from one IRA into another, or roll over a distribution from a qualified retirement plan into an IRA. Distributions of pre-tax assets from certain qualified plans that were rolled into an IRA can generally be rolled backed to that qualified plan. If the distribution from a qualified plan is made directly to you, the payer must withhold 20 percent of it for taxes. You can avoid the withholding by having the payer transfer the funds directly to the trustee/custodian of your IRA, or having the check made out to the trustee/custodian of your IRA or other qualified plan.

To avoid tax, a distribution paid to you (including the 20% withheld) must be rolled over within 60 days of receipt of the distribution. Any portion not timely rolled over, including the 20% withheld will be subject to income taxes.

Rollovers not completed within 60 days can have horrible tax consequences. First of all, they are treated as taxable distributions. On top of the regular income tax on the entire amount, you may also have to pay a 10 percent excise tax penalty if the distribution was considered premature. If you place the amount into another IRA account, you must treat it as a brand-new IRA contribution for the tax year in which it is made, and another 15 percent excise tax penalty will apply to any portion of the amount that exceeds $5,500 ($6,500 for those age 50 and above) in 2014.

Itemized Deductions

If your deductible personal and family expenses, as defined by the IRS, add up to more than the standard deduction for your filing status, and you have the records to prove them, you should itemize your deductions instead of claiming the standard deduction. To do that, you'll have to file Form 1040, and complete Schedule A and attach it to your tax return.

The American Taxpayer Relief Act of 2012 revives the "Pease" imitation on itemized deductions. The Pease limitations, named after the member of Congress who sponsored the original provision, reduces the total amount of a higher-income taxpayer's otherwise allowable itemized deductions. Certain items, such as medical expenses, investment interest, and casualty, theft or wagering losses, are excluded.

As a general rule, most taxpayers who own their own homes will come out ahead by itemizing; those who don't are unlikely to be able to itemize unless they have extraordinary amounts of medical expenses, charitable gifts, or casualty losses during the year.

Schedule A divides your itemized deductions into six major categories:

• medical and dental expenses
• state and local taxes
• interest
• gifts to charity
• casualty and theft losses
• miscellaneous deductions

Pension Plan Contributions

Pension plans fall into two major categories: qualified (or tax-qualified) and nonqualified plans. Qualified plans come in two flavors:

Defined benefit plans. In this type of plan, an employer pays a retired employee a fixed amount, based on a formula that includes such factors as an employee's age, earnings, and years of service. Most employers fund their plans by placing money in dedicated investment funds under the control of professional money managers.

Defined contribution plans. In this plan, employees contribute to their own pension accounts and assume a share of the investment risk. In some cases, the employer also contributes to the plan, usually by matching the employee's contribution. Some of the most popular retirement plans, including 401(k) plans, fall into this category.

Contribution Limits

Pension Income

Generally, amounts distributed by a qualified retirement plan or annuity are taxable to the recipient as ordinary income in the year they are received. The big exception to this rule is that, if the taxpayer made any nondeductible or after-tax contributions to the plan, a portion of each payment will be tax-free, to reflect the amount of his or her contributions.

If you received pension or annuity payments during the year, you should receive an information return, Form 1099-R, from the plan sponsor. This form shows the gross amount of the payments in Box 1, the taxable amount in Box 2a, and the amount of federal income tax withheld (if any) in Box 4. If any tax was withheld, you'll have to attach a copy of the 1099-R to your tax return.

The taxable amount in Box 2a is generally the amount of income you must report, although in some cases you will need to modify these amounts.

The plan sponsor, insurance company, or other payer will withhold federal income tax from your pension or annuity payments unless you specify in writing that you choose not to have tax withheld. If you don't want tax to be withheld on these payments (or if you need to change the withholding amount), notify the payor. You will generally be asked to fill out a form (IRS Form W-4P, or a substitute) showing your correct address and Social Security number. If there is no withholding on your pension, you may need to make quarterly estimated federal tax payments.

Rent and Royalty Income

If you rented out residential or commercial real estate during the year, you will normally report your income and expenses from this activity on Part I of Schedule E, Supplemental Income and Loss.

Rental Property Income

Rental Property Expenses

• 50% of meals and entertainment expenses while traveling, or when entertaining business guests
• car and truck expenses or local transportation expenses, to inspect the property, collect rents, interview prospective tenants, or to call on contractors, suppliers, vendors, your insurance agent, etc; if you claim these expenses, be sure to report them on Form 4562, Depreciation and Amortization
• cleaning supplies
• credit check fees for tenants
• finance charges on a credit card used for business
• janitorial or cleaning service
• landscaping maintenance
• legal fees related to drawing up leases, resolving disputes with tenants or repair contractors, tax advice, etc.; however, legal fees incurred in connection with buying or selling the property are added to the property's tax basis
• local licenses, taxes, inspection fees, etc.
• miscellaneous repairs and maintenance
• rental fees for power tools, painting equipment, etc.
• safe deposit box rental, if you keep your deed, mortgage, or insurance policy there
• stamps, if you pay bills by mail
• stationary
• tax return preparation, if you pay someone to complete your Schedule E, associated depreciation tax forms, etc.
• telephone calls, although you can't deduct any part of the first telephone line into your residence

Remember that you must distinguish between repairs, which can be deducted in the year they are paid for, and improvements, which must be treated as a capital asset and depreciated over a time period that matches the class life of the asset.

Depreciation

Interest Expense

Passive Activity Losses

Sale of Stocks, Bonds and Other Capital Assets

If you sell property that is treated as a capital asset during the year, you'll have to report the gain or loss on your tax return. Property you sold that is treated as capital assets include:

• stocks, bonds, options and other securities
• your home or other real estate
• art, antiques rugs, jewelry, precious metals or other collectibles
• property used in a trade or business or to generate income
• capital gain distributions from mutual funds or REITS

The advantage of capital gains, as opposed to ordinary income, is that the basic maximum tax rate on capital gains for property held for more than one year is currently 20 percent through the end of 2013. In contrast, the top four ordinary income tax rates are all higher than this, with the top rate through 2013 at 39.6 percent.

Capital gains rates are, like anything else, always subject to change. This is especially true in recent years where there have been a number of tax law changes made.

In 2013, Congress raised the maximum dividend and capital gains tax rates for most (but not all) dividends and capital gains to 20 percent for qualifying taxpayers. Taxpayers in the 10- and 15-percent tax brackets are eligible for an even lower rate of five percent. In 2013, the rate for taxpayers in the 10- and 15-percent tax brackets falls to zero.

As originally enacted, these tax rate cuts were temporary and were scheduled to expire at the end of 2008. However, the Tax Increase Prevention and Reconciliation Act of 2005 extends the cuts for two more years through December 31, 2010. The Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 extended the cuts through 2012. The American Taxpayer Relief Act of 2012 raises the top rate for most (but not all) dividends and capital gains to 20 percent beginning in 2013.

So as a quick reference, keep in mind that for tax years ending on or after May 6, 2003, and through the end of 2012, up to four different rates could apply to long-term capital gains: 28 percent for collectible gain and gain on qualified small business stock, 25 percent for unrecaptured gain from the sale of certain depreciable realty, 20 percent for other gain for taxpayers in the 25 percent to 39.6 percent income tax rate brackets or five percent for other gain for taxpayers in the 10 percent or 15 percent income tax rate brackets.

For tax years 2010 through 2013, the five percent rate is reduced to zero.

Selling Your Home

Social Security Income

You should receive a Form SSA-1099 showing in box 3 the total social security benefits paid to you. Box 4 will show the amount of any benefits you repaid in 2013. If you received railroad retirement benefits treated as social security, you should receive a Form RRB-1099.

Your Social Security benefits are tax exempt on your tax return if your base amount is below the following amounts:

• $32,000 if your tax return filing status is married filing jointly;
• $25,000 if your tax return filing status is single, head of household, qualifying widow(er), or if you are married filing separately and did not live with your spouse at any time in 2013;
• $0 if your tax return filing status is married filing separately and did live with your spouse at any time in 2014.

To find out whether any of your Social Security benefits are taxable on your tax return, compare the base amount for your tax return filing status with the total of:

• One-half your Social Security benefits, plus
• All your other income, including tax exempt interest.

(Do not reduce your income by any tax exclusions for interest from Series EE US Savings Bonds, for foreign earned income or foreign housing, or for income earned in American Samoa or Puerto Rico by bona fide residents.)

If your income is more than your base amount, part of your Social Security benefits will be taxable and must be reported on your tax return.

Unemployment Compensation

You should receive a Form 1099-G showing in box 1 the total unemployment compensation paid to you in 2014. Report the amount in box 1 on line 19. However, if you made contributions to a governmental unemployment compensation program and you are not itemizing deductions, reduce the amount you report on line 19 by those contributions.

If you received an overpayment of unemployment compensation in 2014 and you repaid any of it in 2014, subtract the amount you repaid from the total amount you received. Enter the result on line 19. Also, enter “Repaid” and the amount you repaid on the dotted line next to line 19. If, in 2014, you repaid unemployment compensation that you included in gross income in an earlier year, you can deduct the amount repaid on Schedule A, line 23. But if you repaid more than $3,000, see Repayments in Pub. 525 for details on how to report the repayment.

Unemployment compensation benefits received from a union or private fund to which you contribute are taxable on your tax return only to the extent that your unemployment compensation benefits exceed your contributions to the union or private fund.

Wages

For the most part, employees have it very easy when it comes to reporting their taxable earnings.

They simply look at the W-2 forms they've received from their employers, take the number in Box 1 of the W-2, and report it on their tax return.

If they had more than one job during the year, or they are filing jointly with a spouse, they must add up all the numbers in Box 1 from all the W-2s that they (and their spouse) received.

There are numerous types of employee benefits that are exempt from federal income tax. For example, health and accident insurance, qualified retirement plan contributions, certain types of education assistance, reimbursements for business expenses, qualified transportation benefits, and group-term life insurance premiums for up to $50,000 of coverage can all be excluded if certain conditions are met. However, it will be up to your employer to determine whether or not you've received nontaxable benefits, to determine the appropriate value of the benefits, and to adjust your taxable earnings amount accordingly so that only the taxable amount is reported in Box 1.

Your employer must give you a W-2 Form by January 31, 2015, to report all taxable salary, tips, wages and other compensation earned in 2014. A copy of each W-2 you (or your spouse, if filing jointly) receive must be attached to your tax form.

If the employer makes a mistake in these calculations, you must inform the employer and ask for a corrected Form W-2. Employers send a copy of all W-2s directly to the government, and if your reported income does not match what the employer has reported, you may get a letter from the IRS asking for more tax money, plus interest, and penalties.

If you don't receive a W-2 at all, you should contact the employer to find out why not, and ask that one be sent to you. If this doesn't work and by February 15th you still haven't received a W-2, call the IRS at 1-800-TAX-1040 to ask them to help you fill out a copy of Form 4852, Substitute for Form W-2.

401(k)

A 401(k) plan allows a worker to save for retirement and have the savings invested while deferring income taxes on the saved money and earnings until withdrawal. The employee elects to have a portion of his or her wages paid directly, or "deferred," into his or her 401(k) account.

Some assets in 401(k) plans are tax deferred. Before the January 1, 2006, effective date of the designated Roth account provisions, all 401(k) contributions were on a pre-tax basis (i.e., no income tax is withheld on the income in the year it is contributed), and the contributions and growth on them are not taxed until the money is withdrawn. With the enactment of the Roth provisions, participants in 401(k) plans that have the proper amendments can allocate some or all of their contributions to a separate designated Roth account, commonly known as a Roth 401(k). Qualified distributions from a designated Roth account are tax free, while contributions to them are on an after-tax basis (i.e., income tax is paid or withheld on the income in the year contributed). In addition to Roth and pre-tax contributions, some participants may have after-tax contributions in their 401(k) accounts. The after-tax contributions are treated as after-tax basis and may be withdrawn without tax. The growth on after-tax amounts not in a designated Roth account is taxed as ordinary income.

Contribution Limits

401(k) Rollovers