Archive for August, 2011

Reduce Tax Time Stress – Keep Well-Documented Records, Know the Rules & Requirements

Saturday, August 27th, 2011

The exclusive purpose for the information which is provided from this website is to disseminate  information, and not to provide tax advice.

Perhaps two of the most stressful situations in life are 1) preparing a tax return, and 2) going through a tax return audit.  You are solely responsible for your tax returns, even if someone else prepared it, and you must always be prepared to justify the amounts that you reported.  CPAs and tax preparers have an important rule which we follow – “No receipts or documentation – no deduction!”

There are several strategies that  are available to you which can easily “level the playing field” and diminish the stress levels which you may have experienced every year in the past:

  •  Keep all supporting receipts and documentation – these can be either in paper or electronic format.  Group these records by tax return category, i.e. income, interest, dividends, education expenses, medical expenses, taxes, mortgage loan interest, charitable deductions, miscellaneous deductions, etc.
  • Use software applications- Microsoft Excel and Intuit’s Quicken are both excellent.  There are also others that are available which you may prefer.   Acrobat Reader, which is free, provides an application to save and store the files on your hard disk drive.  Be sure that your files are continuously backed up.
  • Maintain your own data base – if you have decided to engage one, your tax preparer should always provide you with a complete, detailed version of your tax returns, including supporting schedules, statements, and notes.  Don’t rely on your tax preparer to maintain a data base for you.  He or she will not always be available, or you may change tax preparers, move, etc.
  • Ensure that your tax return files are always current, accurate, and complete – for example, you purchased a home in 1990.  You should begin creating your data base starting with all of the  closing documents, including the HUD-1 (Housing and Urban Development).  In 2004 you added a swimming pool, sun deck and an additional bedroom.  You now need to update your files and records to include all of these costs with the associated documentation.
  • Know the rules for record retention –  generally, you should keep all of the necessary files which ae required to support your tax return for three (four for a small business owner) years after the due date for the tax return, plus any tax return filing extension periods.  For example, your 2010 tax return was initially due on April 18, 2011.   Normally, you would be required to retain all of your tax return records until April 18, 2014.  However, since you requested an automatic six-month extension of your time to file your 2010 tax return, you will be required to retain your tax return files and records until October 17, 2014 (2015 if you are a small business owner).  There is another important rule to remember.  There is no statute of limitations for a review or audit of your tax return if you understated or misstated your income!
  • Capital assets and investments – the three-year rule does not apply for these tax items.  You’ll need to continue to keep the tax records and documents for your personal residence or second home as long as you own the assets.   The original purchase documents and records for stocks, bonds, mutual funds, etc follow the same record retention rules.  Special rules apply for both inherited assets and investments.  Consult with the trustee, executor, or your tax preparer.
  • Supporting statements and documentation -  tax auditors and tax return preparers are not clairvoyant.  They did not accompany you on your business trip to Los Angeles in October 2010.  Obtain and retain the required documentation and statements for your hotel bills, meals, travel, transportation, etc.   Whenever it is appropriate, I always encourage my tax clients to prepare a letter or memorandum for their tax records regarding the facts and circumstances for reported income or a claimed deduction that should also  include the facts and explains the rationale which was used by the taxpayer.  You should always cite the appropriate page and section of the applicable tax return instruction, and if available, the tax code.  These documents will become invaluable to you and your tax preparer or tax attorney during a tax return audit (or review)!
  • Use the Internet – almost everyone in America has access to and uses the Internet.  Identify a favorite website for tax law news information, i.e.   or use your favorite search engine (Google, Bing, Yahoo) to obtain your preliminary information.  Then go to THE authoritative sources – and your state department of revenue websites.  Each year, usually in December or January, the IRS issues Publication 553, “Highlights of XXXX Tax Changes” which summarizes the key changes in the tax laws for that year.  It is also available in HTML format, i.e.,,id=120227,00.html  (more…)

Do You Need A Copy of Your Prior Year Tax Returns?

Wednesday, August 17th, 2011

The exclusive purpose for the information which is provided from this website is to disseminate  information, and not to provide tax advice.

 For a number of different reasons you may need to obtain a filed copy of your prior year tax returns.  Although you may have religiously backed up your data, if you’ve been the victim of a natural disaster or catastrophe (fire), those tax records may no longer be available to you.  There are three possible alternatives which are available to you, but each is different.  The three options are:

  1. Tax Return Transcript – shows most line items from your tax return as it was originally filed, including any accompanying forms and schedules. It does not reflect any changes made after the return was filed (this option is free), or a
  2. Tax Account Transcript – shows any later adjustments either you or the IRS made after the tax return was filed. This transcript shows basic data, including marital status, type of return filed, adjusted gross income and taxable income (this option is free), or a
  3. Tax Return – an actual copy of a previously processed tax return.  The cost is $57.00 per tax year requested.  

You may submit your request either on line at, by mail, or by calling (800) 829-3676.  (more…)

Tax Benefits for Education and Training

Tuesday, August 16th, 2011

The exclusive purpose for the information which is provided from this website is to disseminate  information, and not to provide tax advice.

Classes have already resumed for almost all students throughout the nation.    All education is an investment for our future, and this “investment” will usually always provide an exceptional “rate of return” throughout your entire life.     

If you have incurred expenses for either your education, or someone else, the costs may qualify for either a tax deduction or tax credit.   However, the requirements change almost every year.  Always review the most current requirements to ensure that both you and your expenses qualify.  Additional tips include:

  •   Keep and maintain accurate supporting records – these include (but are not limited to) credit card statements, cancelled checks, bank statements, student loan lender reports, etc;
  •  Change of address updates – be sure to always update your current address, especially with lenders.  The lender will use the latest address on file at the end of the year to file the required reports with the IRS, and to provide you with a copy for your tax returns;
  •  Review the requirements from the current tax authority publication to determine which provisions provide the greatest tax benefit to you.  For example, the American Opportunity Credit has been extended for two additional years.  This tax credit has a maximum of $2,500.00/year for calendar years 2011 and 2012.  It is important to note that this tax credit is $500.00 more than the Lifetime Learning Credit annual limit of $2,000.00.  It is also 40% refundable which means that you may receive a tax refund even if you do not owe any income taxes.  There are income limits based on your “modified adjusted income” (as defined here,,id=146823,00.html  ) 
  •  Review IRS publication 970,  “Tax Benefits for Education”,  in either Acrobat Reader format ( or HTML format (;
  •  Other topics which are contained in this publication include:  “Scholarships, Fellowships, Grants, and Tuition Reductions”, “Student Loan Cancellations and Repayment Assistance”, “Coverdell Education Savings Accounts”, “Qualified Tuition Programs”, “Education Exception to Additional Tax on Early IRA Distributions”, “Education Savings Bond Program”, “Employer-Provided Educational Assistance”, and “Business Deductions for Work-Related Education”. 


Deducting Moving Expenses

Wednesday, August 10th, 2011

The exclusive purpose for the information which is provided from this website is to disseminate  information, and not to provide tax advice.

From a global perspective, we are a a very mobile society.  With the exception of those who are serving in our U.S. Armed Forces, up until the mid 1900s moving our families from the general area in which we grew up to another location 100 miles or so away was not a usual occurrence.  During the latter half of that century we began to relocate from one geographic area to another for a myriad of reasons including, employment, better career opportunities, financial gain, adventure, retirement etc.  However, there are expenses and costs which are associated with any move.  In some cases an employer may cover 100% of the costs.  In other situations taxpayers are required to pay some or all of these costs. 

If you meet the specific requirements, most of your costs may be deducted on your tax return. Your total deductible moving expenses are an adjustment (reduction) of your “Total Income” for the determination of your “Adjusted Gross Income” (Line #26 of the 2010 Federal form 1040).  There are two key references for these expenses:  1)  IRS Publication 521, “Moving Expenses”, (  and the instructions for the required Federal form 3903, “Moving Expenses” (   The former document is only 19 pages in length and the latter is a four-page document.   If your situation or circumstances are not explained, call (800) 829-1040.  You should also review the instructions for your state of residence if the state in which you reside has a state income tax as the rules and requirements may be different.

There are some additional specific facts and information that should be emphasized:

  1. If you are buying or selling a home in conjunction with your move, review the provisions and requirements that are contained in IRS Publication 523 (“Selling Your Home” and this recent website article:
  2.  Keep accurate, detailed written records for your move including receipts, bills, statements, cancelled checks, credit card statements, mileage logs, employer reimbursement claim forms, etc;
  3. Be sure to keep a complete (all pages), signed copy of the Housing and Urban Development form (HUD-1) from both the purchase and sale of your old home, and the the purchase of your new home; 
  4. Effective July 1, 2011 the standard mileage rate for moving has increased from $ .195/mile, as stated in the IRS Form 3903 instructions, to $ .235/mile;
  5. The costs for sightseeing trips or personal excursions enroute are not deductible;
  6. The expenses for your move must be “reasonable”;
  7. Your employer will report the total amount of your moving expense reimbursements in Block #12 of your W-2 form using code “P”  Be sure that you reduce the amounts deducted on your tax return by this amount;
  8. The costs of meals and house hunting trips are no longer deductible;
  9. You can not deduct your moving costs as both a “business expense” and a “moving expense”;
  10. Generally, your moving expenses must be work related.  If you are an “employee” you are expected to work full-time for 39 weeks (three quarters) during the 12 months following your move.  If you are “self-employed” the requirement is 78 weeks (six quarters) during the 24-month period after your move.  Review pages two-six of IRS Publication 521;
  11. There are also specific tests for the distance which you moved.  Special rules are provided for members of the U.S. Armed Forces, those who are moving to or from the United States, and other specific situations (i.e. retirees and survivors). 


Are You Planning To Sell A Home?

Monday, August 8th, 2011

The goal for the information in this website is to disseminate  information, and not to provide tax advice.

You should review the appropriate Federal and state tax rules, and work with your tax return preparer, if you are planning to sell a “home”, even if it is not your “main” home.  IRS Publication 523 (“Selling Your Home”) is an excellent place to start.   There is a wealth of information in this 40-page document. 

If you received or were eligible for the “First-Time Homebuyer Credit” in 2008 you should also review the instructions for Form 5405 at  The provisions of this tax credit went through several changes from 2008-2010.  For example, if you received the tax credit for a home that was purchased in 2008, the “tax credit” was in fact a loan that is subject to repayment beginning in tax year 2010.   If you have sold your main home that qualified you for the credit, the entire amount of the previously received credit was an addition to your 2010 tax liability.  If you still live in that main home, your re-payment requirement commenced in 2010 and is due to be repaid in equal amounts over the next 15 years.

Additional points to consider are:

  • A “Main Home” can be a house, houseboat,  mobile home, cooperative apartment,  or condominium;
  • For the year of the sale, and if you meet the requirements, you may be able to exclude up to $250,000 of the “gain” on the sale.  Married taxpayers filing a joint tax return may exclude up to $500,000.  “Losses” on a sale are not deductible;
  • The “gain” exclusion tax benefit is applicable only for the sale of your “main” home.  Second homes do not qualify and are usually subject to capital gains tax treatment;
  • There is a requirement for you to have actually lived in your main home for two of the five years prior to the sale.  However, if you are qualified, there are special rules for a reduced exclusion amount if the reason for the sale is a) change of employment location, b) health reasons, or c) “unforseen circumstances”, all of which are defined in the publication;
  • Additional special rules and calculations are applicable if you used your main home for your business or as rental property;
  • Be sure to keep a complete (all pages), signed copy of the Housing and Urban Development form (HUD-1) from both the purchase and sale of your old home, and the the purchase of your new home; 
  • The rules will apply if your former residence is no longer your “main” home (i.e. you retired, moved from New York to Florida, and you did not sell your former residence in New York).  (more…)