We try to anticipate questions you might have and provide the answers here. If you need additional information send a email to www.wellsincometax.com.
What do I do if I receive a notice from the IRS about my taxes?
Don’t panic! the first thing to do is carefully read the notice—to determine why it was sent, what the IRS is requesting, and what they want you to do. It may be nothing of importance; it may even be a notice in your favor. After reading it you should bring it to our attention.
What is the difference between a C and an S corporation?
A C-Corporation and an S-Corporation are exactly the same in respect to liability protection. The difference is in how you are taxed. A C-Corporation has what is referred to as a double taxation. First the corporation is taxed, and secondly the dividends are taxed on the shareholders’ tax returns. An S Corporation is not taxed at the corporate level, only at the shareholder level. Most small businesses are eligible to file as S corporations. But the appropriate election must be made.
What do I need to bring when I am having my taxes prepared?
Following is a list of the more common items you should bring if you have them:
- Wage statements (Form W-2)
- Pension, or retirement income (Forms 1099-R)
- Dependents' Social Security numbers and dates of birth
- Last year's tax return
- Information on education expenses
- Information on the sales of stocks and/or bonds
- Self-employed business income and expenses
- Lottery and/or gambling winnings and losses
- State refund amount
- Social Security and/or unemployment income
- Income and expenses from rentals
- Record of purchase or sale of real estate
- Medical and dental expenses
- Real estate and personal property taxes
- Estimated taxes or foreign taxes paid
- Cash and non-cash charitable donations
- Mortgage or home equity loan interest paid (Form 1098)
- Unreimbursed employment-related expenses
- Job-related educational expenses
- Child care expenses and provider information And any other items that you think may be necessary for your taxes.
How do I find out about my refund?
The best way is to use the Check Your Refund link on the IRS website at www.irs.gov To look up the status of your federal, you will need your social security number, filing status, and exact amount you’re expecting back.
How long do I keep my records and tax returns?
You should keep your records and tax returns for at least 3 years from the date the return was filed or the date the return was required to be filed, whichever is later. It is recommended that you keep these records longer if possible.
What are the consequences of early withdrawals from my retirement plans?
If you withdraw money from a 401(k) or an IRA before age 59 ½, the distribution is taxable and there is a 10% penalty on the taxable amount. The main exceptions that let you withdraw money early without penalty are as follows:
Qualified retirement plan distributions if you separated from service in or after the year you reach age 55 (does not apply to IRAs). Distributions made as a part of a series of substantially equal periodic payments (made at least annually) for your life or the joint lives of you and your designated beneficiary.
Distributions due to total and permanent disability.
Distributions due to death (does not apply to modified endowment contracts)
Qualified retirement plan distributions up to (1) the amount you paid for unreimbursed medical expenses during the year minus (2) 7.5% of your adjusted gross income for the year.
IRA distributions made to unemployed individuals for health insurance premiums.
IRA distributions made for higher education expenses.
IRA distributions made for the purchase of a first home (up to $10,000).
Distributions due to an IRS levy on the qualified retirement plan.
Qualified distributions to reservists while serving on active duty for at least 180 days.
What college expenses may I deduct?
There are several ways you can claim deductions for college expenses on your tax return. They are the tuition deduction, the American Opportunity Credit and the Lifetime Learning Credit. If we are preparing your return we will determine which ones you qualify for and which one gives you the greatest tax benefit.
What is the child tax credit?
The child tax credit is a credit of $1000 per child from the IRS. In order to qualify the child must:
1. Be under 17 at the end of the tax year
2. Be a citizen of the United States
3. Be your child
4. Live with you for more than half the year
5. Not be treated as the qualifying child of someone else.
What medical expenses are deductible?
A deduction is allowed only for expenses paid for the prevention or alleviation of a physical or mental defect or illness. Medical care expenses include payments for the diagnosis, cure, mitigation, treatment, or prevention of disease, or treatment affecting any structure or function of the body. Except for insulin, only prescription drugs are deductible. The cost of health insurance is deductible. You may also deduct the cost of traveling to and from the care provider. You can deduct only the part of your medical and dental expenses that exceeds 10% of your adjusted gross income.
What do I need to keep for my charitable contributions?
First, is your contribution cash or non-cash?
If you make a cash donation, you must have a bank record or written communication from the charity showing the name of the charity and the amount of the donation. A bank record can be the cancelled check or a statement from a bank or credit union—so long as it lists the charity’s name, the date, and the amount of the contribution. Personal records such as bank registers, diaries and notes are no longer considered acceptable proof of contributions.
Any used items (such as clothing, linens, appliances, etc.) must be in good condition and may only be deducted at the price you could reasonably ask for the item in used condition. For contributions worth $250 or more, you must have a written receipt or letter from the organization. For contributions worth $500 or more, you must file Form 8283 (Noncash Charitable Contributions) and attach it to your Form 1040.
All contributions must be made to qualified charitable organizations.
What is an amended return, and when should I file one?
An amended return is simply a return filed with the IRS and/or state because of an error or an omission on your original return. You should file an amended return if there is a material difference between the original return and your new changes. As of now, an amended return cannot be electronically filed, and any expected refunds will take longer to receive than the original return (2-3 months, according to the IRS). Generally to claim a refund, your amended return must be filed within 3 years from the date of your original return or within 2 years from the date you paid the tax, whichever is later.
Is my social security taxable?
Usually if your income including social security benefits is less than $25,000 if single or $32,000 if married, your benefits are not taxable. If your income is higher than those limits, there are formulas to determine what percentage of your social security is taxable. Currently up to 85% of your social security may be taxable.
What are the differences between a Roth and a conventional IRA?
A traditional IRA lets you deduct contributions in the year you make them, and the distributions are included as income on your return when you withdraw from the IRA after reaching age 59½. A Roth IRA does not let you deduct the contributions, but you also do not report the distributions as income, no matter how much the Roth account has appreciated. With a Roth, you can exclude the income earned in the account from being taxed.
Do I have to file a joint return with my spouse?
No, you can file either as married filing joint or married filing separate. If you file separately your taxes will most likely be higher. Many credits—such as earned income, education (Hope and lifetime learning), and child care—are not allowed when you file separately.
There are special circumstances where people who are married but either do not want to or cannot file with their spouse can file as Head of Household, which therefore entitles them to these credits and a lower tax bracket. In order to qualify as a Head of Household you must meet the following conditions.
You lived apart from your spouse for the last six months of the tax year. Temporary absences for special circumstances, such as for business, medical care, school, or military service, count as time lived in the home.
You filed a separate return from your spouse.
You paid over half the cost of keeping up your home for 2008.
Your home was the main home of your child for over half of the year.
You can claim this child as your dependent.
If you do not meet all these conditions but are legally separated as of the last day of the year, you may also qualify to file as single.
How should I keep records for my business driving?
Keep a log in your vehicle and record the purpose and mileage of each trip. You also need to record the odometer readings at the beginning and end of each year, as the IRS will ask you for total miles driven during the year. Keep your repair bills as these normally record odometer readings when the car is serviced.