Continuing from last week, here are a few more questions we often hear. 

WHAT ARE ESTIMATED TAX PAYMENTS?

Estimated tax payments are amounts you pay in each quarter in order to cover the tax you think you will owe for that year.  Basically, tax law requires you to pay taxes as you earn money.  If you are a salaried employee, taxes are withheld from your paycheck and remitted to the taxing authorities.  However, if you are self-employed, or have other sources of investment income, no taxes are withheld during the year.  So you are required to pay the tax in quarterly installments on April 15^th, June 15^th, September 15^th and January 15^th.  You should estimate these amounts when you file your previous year’s return.

IS MY CAR DEDUCTIBLE?

The use of your personal vehicle in the course of a trade or business, or for medical or charitable purposes, may lead to a deduction.  Generally, the deduction consists of multiplying the number o f business miles by a rate set by the IRS each year.  For 2011, that rate was $0.51 for the first half of the year and $0.555 for the last half of the year.  The deduction for medical miles is computed at $0.19 through June 30, 2011, and at $0.235 for the remainder of the year.  For charitable use of your personal vehicle, the deduction is computed at the rate of $0.14 per mile.  

SHOULD I ITEMIZE?

The answer depends on your filing status and the amount of deductible expenses you have incurred.  The IRS offers a standard deduction of $5,950 for single and married separate filers, and $11,900 for married joint or head of household filers.  Unless your deductions exceed these amounts, there is no benefit in itemizing.  Mortgage interest is usually the largest deduction, so if you don’t have that, you probably will not itemize.  Also deductible are property taxes, charitable contributions and some medical expenses (you need enough medical expenses to exceed 7.5% of your adjusted gross income before any of them are deductible).

 Since our focus this month is on tax preparation and planning, I thought I would take the next couple of weeks to answer a few common questions.  Let me know if there is a specific topic you’d like to see addressed.  (Remember to click the title to make a comment.)

 WHAT’S A PTIN?

 It’s a Preparer Tax Identification Number, and the IRS now requires every paid tax preparer to have one.  Actually, I’ve had one for several years, but starting January of 2011, it was mandatory.  For attorneys, accountants and enrolled agents, it’s a matter of registering each year with the IRS.  All other preparers are required to complete a competency test and continuing education.  So if you are paying someone to prepare your return, make sure they have signed the return and included their PTIN.

 HOW MUCH CAN I PUT IN MY IRA?

 For 2011, the maximum contribution is $5,000.  If you are 50 or older, it increases to $6,000.  Your marginal tax rate determines how much this will save in taxes.  For example, if you are in the 15% bracket, a $5,000 contribution will reduce your federal tax liability by $750.

 CHILD SUPPORT vs. ALIMONY?

 Amounts paid out for child support are not deductible to the payer, and not taxable to the payee.  However, alimony payments are deductible from adjusted gross income (meaning you don’t have to itemize to get the deduction) and are taxable as income to the recipient.

I’m taking a detour from taxes and accounting this week to talk about marketing.  It’s a subject all business owners struggle with, trying to place limited dollars where they will be most effective.  Our firm is not immune from this struggle.  We recently ran a Business Profile article in Tuesday’s edition of the Coastland Times.  Several people have commented since that they saw my picture in the paper, or that they read and liked the article.  This lets me know several things:

1. The cost of the promotion produced a benefit.
2. The Coastland Times Business Profile is an effective way to get your business noticed.
3. There are still people who read the paper.

In these tight economic times, it is difficult to know where to spend your advertising budget.  It is also tempting to reduce that budget.  But without effective marketing, you end up relying on street presence or word of mouth to bring in new business.  And without new business, there is a very real danger of shrinking profits that are not solely attributable to hard times.

I know that marketing advice is not something you usually expect to hear about from a CPA.  But marketing and advertising are part of making your business successful, and that is something we are known for.

(Remember to click on the title to comment)

February is right around the corner, and our primary focus for the next couple of months will be on tax preparation.  For you folks at home, its time to start gathering the information necessary for filing your personal tax returns.  Every day the mailbox is full of forms and reports in all shapes and sizes.  Most people have a file (or garbage bag) where its tucked away to be sorted through later. 

One question I often hear is “What do I keep and what can I throw away?”  It’s a valid question when the paper keeps piling up year after year.  Generally, I respond with a one-year and three-year rule.  Keep everything for one year that  supports the transactions for that year.  Then when you are compiling information for your tax return, you can discard anything that doesn’t pertain to income or deductions for the return, or anything for which you have a year end statement that covers the year.  For example, personal care expenses like the hairdresser and clothing generally are not deductible.  You do not have to keep receipts for these items.  Also, some credit cards issue a year end statement that shows all expenses for the year.  Once you have that, you don’t also need to keep the monthly statements.

The three-year rule pertains to things that do impact the tax return.  The IRS can go back and audit the prior three year’s returns, and if that happens, they may want to see receipts and supporting documentation for everything claimed on the return.  But if you haven’t heard from them, and are still holding old records from say, 1995, go ahead and clean house.

Of course, neither of these rules pertain to permanent documents, like the purchase of your home, or the cost records on stocks and bonds.  Keep the acquisition documents on any assets you still own.  You will need them to establish basis in the event of a future sale.

Also, take care in disposing of personal records.  A shredder is best, but a personal bonfire could be more fun!

It’s January on the Outer Banks, and although for some it’s a time of taking down holiday decorations and beachcombing along our beautiful shore, for most business people it’s also a time of giving and receiving – W-2s and 1099s, that is.  This is the month that all those envelopes arrive with “Tax Document Enclosed” printed in bold letters.  And the deadline is soon approaching for mailing out our own envelopes, to employees, vendors and the IRS.  Remember, although you have until February 29^th to submit copies of W-2s and 1099s to the IRS, they should be in the hands of employees and vendors by January 31^st.

There are a few things to take note of before sending out your reports.  The biggest change is the new Schedule A attachment to the Form 940.  This is the form for federal unemployment tax and a lot of focus during the year was on the rate drop on applicable wages after July 1, 2011 from .8% to .6%.  But there is a potential increase in federal unemployment tax due to a decrease in the state credit.  It’s a confusing issue, but the bottom line is that for employers in North Carolina, you could owe an additional .3% on taxable wages.

In preparing and submitting W-2s, pay close attention to the new codes for box 12 of the form.  One of these is code DD, used to report the cost of group health insurance.  The amount is not taxable to the employee, but it looks like the IRS is gathering information on how much business is spending for health insurance.  Although reporting this data is not mandatory for 2011, the very fact that it’s there let’s you know that we will need to report this information in the future.

We are dealing with these and other issues daily for our clients, so if you have questions or need help, give us a call.  And remember, if you want to comment on this or any other blog post, you need to click on the title to open up the comment section.