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Tuesday December 10th 2019

Never Miss Mileage Deductions Again

If you own a small business or are an employee with business mileage, you know that the mileage deduction can save you money on your taxes. The rate is going up in 2011 to 51¢ per mile, making it an even more lucrative deduction. However, keeping track of mileage can be a hassle; forgetting to record trips, having to guess at mileage and keeping up with written logs can be time consuming and stressful. There’s a handy little gadget that can take those problems off your hands; it’s called CarCheckup, and it makes keeping up with mileage virtually painless.


The device is very small and lightweight; all you do is plug it into the onboard diagnostic port in your vehicle and it automatically records your trips. Any car made in 1996 or later will be equipped with the port. It tells the date, the start and stop time of each trip and miles driven. You download the data into your computer using Excel or the CarCheckup software; from there you can enter a purpose for each trip, whether business or pleasure, and record notes about each trip if you desire. It even allows you to create customized reports. It takes the stress out of providing documentation for the IRS as well; Jennifer Funkhouser, co-founder of CarCheckup, points out that it provides all the documentation necessary.

Other Uses

Besides tracking business mileage, the CarCheckup has other useful features as well – it can be used to monitor teen driving since it tracks time idling, time spent at different speeds, acceleration, hard breaking, etc. It also reads trouble codes in your car’s computer and provides an explanation if your car’s engine light comes on. The $150 price tag for the device seems more than fair for the time and effort you will save and should even pay for itself over time since you will not miss mileage deductions anymore.

Write Offs May Not Last Forever

Take advantage of this and other deductions while you can, though. If the Obama administration has its way, many tax deductions may be reduced or phased out in an effort to reduce the nation’s spiraling deficits. President Obama recently announced that he wants to limit itemized deductions for the wealthiest 2% of Americans; he also wants to reform the tax code. He wants tax reform, both individual and corporate, “that closes loopholes and produces a system which is simpler, fairer and not rigged in favor of those who can afford lawyers and accountants to game it.”

The president supports his Fiscal Commission’s recommendations, one of which would eliminate all deductions and credits. Another option being tossed around is setting a trigger to limit popular tax deductions until Congress can get legislation enacted to reform the code. The administration has stated that everything is on the table with regards to fiscal reform, so it’s likely that we could see reductions or eliminations of such deductions in the future. Until then, continue to take advantage of every tax break available before they disappear.

Can I Deduct the Cost of My Diet Program?

In this tough economy, everyone wants to minimize taxes by finding more deductions. One category of deductions for those that itemize is medical expenses. Medical expenses are entered in the first section of Schedule A of Form 1040. Along with other items like mortgage interest, real estate taxes and charitable contributions, medical expenses can reduce your taxable income. And lower taxable income means lower taxes.

So what are qualified medical expenses? The IRS defines them as expenses for the prevention or treatment of physical or mental defects or illnesses. Generally, things like doctor and dentist fees, hospital services, prescription drugs, transportation for medical care, treatment for drug and alcohol addiction, as well as various items like eyeglasses, hearing aids, wheelchairs, etc. are deductible as medical expenses.

When Weight Loss is Deductible

In some cases, costs of weight-loss programs can even be deductible. However, before writing off the costs of those Weight Watchers or Nutrisystem meals, be aware that there are some pretty strict requirements. If you are just looking to improve your health or appearance or even if a doctor recommends a weight-loss program for your overall well-being, the costs will not be deductible.

The IRS only allows deductions for these programs if they are treating a specific medical condition, such as hypertension or obesity, that has been diagnosed by a physician. This would include membership fees and meeting fees in a weight-loss program. However, gym, health club and spa dues are not deductible expenses, though separate fees for weight-loss activities can be deducted. Generally, the cost of diet foods and beverages will not be deductible because they are substituted for foods that meet normal nutritional needs.

Many Restrictions Apply

Occasionally, special foods can be deductible expenses; however, they must meet three criteria. First, they must not satisfy normal nutritional needs. Secondly, they must alleviate or treat an illness. Third, a doctor must substantiate the need for the special food. Even if foods meet all three criteria, only the cost that exceeds the cost of a normal diet is deductible.

You Must Meet the Medical Threshold First

Further, medical expenses must meet a threshold before they can be included on Schedule A; they must exceed 7.5% of a taxpayer’s adjusted gross income (AGI). So, for example, if a taxpayer’s AGI is $50,000, total medical expenses must exceed $3,750 before they can be included as itemized deductions. With the strict rules on deducting the cost of weight-loss programs and the relatively high threshold for medical expense deductions, in most cases, diet and weight-loss program expenses will not be deductible against federal income taxes. Still, for a taxpayer with relatively high medical bills who meets the IRS requirements for weight-loss program expenses, it might be worth calculating the possible deduction. Every little bit helps.

Deductible Losses on a Rental Home

Many people are facing losses on real estate sales, made to get out from under a weighty mortgage. This begs the questions, if you pay tax on real estate gains, do you get a break from real estate losses? The answer is logical, but only after you understand how gains on real estate are taxed.

Capital Gains Tax

The IRS does not always charge you taxes on capital gains. If you profit by $250,000 as a single seller, or $500,000 as a couple, you do not have to pay capital gains tax. You only pay for profits above those amounts.

Therefore, the logic follows that you would not get a break if you lost money on the sale of your home. However, exceptions do exist for those who sell an investment property. What qualifies as such a property? Any real estate that brings income qualifies, such as a rental house or vacation home that you rent out part of the vacation season.

How Much Can You Deduct?

The IRS lets you deduct losses up to specific amounts. Depreciation is also deductible, which can really muddy the waters when figuring your taxes. For this reason, it’s best to talk to a tax professional to figure out exactly how much you can deduct. Claiming losses on investment property requires a completed IRS form 4797.

When selling a second home, you generally pay taxes as long-term capital gains for properties owned over one year or short-term capital gains one homes owned less than one year. If you would pay capital gains on a profit from the sale in these situations, then you would be able to deduct a loss.

Don’t Think of it as a Second Home

When you think of the rental property as a “second home,” you muddy the waters. The IRS allows certain deductions on a second home, but they do not allow deductions on losses for these properties. The difference is the purpose of the property. Is it truly a “second home” or is it an investment? Are you earning income from it?

Dealing with Depreciation

Most people who rent out a property take depreciation every year. When you sell the property, that depreciation counts against the value of the property, reducing your tax-deductible loss. The good news is that the loss is deduct-able as an ordinary loss, deduct-able in full against the income. Limits apply and you must also address the issue of passive losses. This complicated topic definitely requires the help of a tax professional.

529 Plan Funds Won’t Pay Your Student Loans

One of the many expenses parents take into consideration when raising children is the future cost of sending that child to college. Various savings options allow families to begin a nest egg for that very endeavor. The government, in cooperation with investment firms, developed the high yielding 529-college savings plan. While the plan provides substantial growth and returns (5% or more annually), the option also contains many drawbacks…one of which is that 529 plan funds don’t pay for student loans.

Expenses Covered Under 529 Plans

Contributions and earnings from 529 plans are only tax exempt when used for qualified higher education expenses or QHEE. Specifically, these expenses include books, equipment, mandatory fees, supplies and tuition. The plans also cover room and board, as long as the child enrolls at a minimum of a ½-time student, and under certain circumstances, there may be a cap on housing allowances.

The money may also pay for the expenses of special needs students. The money cannot be used for paying off student loans or for any other purpose, including food, personal expenses or travel, otherwise plan owners must pay federal and state income tax in addition to a 10% penalty on earnings.

Non-covered 529 Plan Costs

While the monies from 529 plans are transferable from state to state, certain schools in states may be ineligible for these funds. Parents having a 529 plan in Wisconsin can use the money for college in Florida. Though most schools qualify, some do not.

In addition to possible taxation for improperly used money from 529 plans, the accounts are subject to application fees, management fees and annual maintenance fees, that in total, range from $300 to $2000. These charges vary with individual states and with the type of plan acquired.

One might argue that student loans are for money that paid for the expenses that 529 plans do cover. Unfortunately, the law does not see it that way. Student loan payments and the interest attached to them is not covered by a 529 plan. This means that parents need to carefully consider which costs they take loans for and which they pay for with 529 plan funds.

Parents considering a 529 plan must either begin the account early enough in the child’s life in order to pay for college from the start of enrollment, or have a backup plan to accommodate student loans and other non-school related expenses. The Coverdell Education Savings Account has similar restrictions, the difference being that until the end of 2010, individuals were also allowed to use the monies for K-12 educations.

How to Get the Most out of Both

The smartest thing to do is to create a list of college expenses that your child will incur. Then pull out those that will be covered under your 529 plan. If the plan has enough to cover all of these costs, great! You can simply pay the non-covered costs by loan, savings or other investments you have set aside for your child’s education. If not, the balance of education expenses should be lumped with the costs not covered by the 529 plan and addressed through whatever means you have set up for these costs. Just don’t get caught with a large 529 account and a school loan when you can’t use those funds to pay the loan. See what you can pay with the 529 account first and then dip into loans if you must.

Shoeboxed Small Business Accounting Software – Too Much Fun for Tax Time

Many experience the headaches and stress equated with tax time. Some go paperless, some use a box of receipts and others spend countless hours locating and organizing receipts and other bits of data required to authenticate expenses. All of these groups may want to consider using some free small business software that can make your taxes run more smoothly. The online software service, cleverly entitled “Shoeboxed,” saves the time consuming, tedious task of locating, organizing and categorizing all of that information by doing it for you.

Who Might Like Shoeboxed?

Individuals, small business owners or busy executives can benefit from the features the service offers. Upon opening an account, you can send business cards, receipts and other documentation to Shoeboxed in one of several ways.

• Use Shoeboxed postage paid envelopes
• Scan and upload
• Take pictures of documentation using a mobile phone or iPhone app and upload
• Email receipts and other data directly to your account

After receiving all the information, Shoeboxed goes to work categorizing, organizing and entering all of the data into the account. Shoeboxed uses optical character recognition and human verifiers, who accurately record every piece of data, including receipt notations. They will also verify business or vendor names and payment types.

Within 24 hours, users have the option of downloading, emailing, printing or viewing all of the files. Choose from 15 different categories in which to organize data including meals/entertainment, office supplies, and computer/internet expenses.

Integration with Other Accounting Software

The software also conveniently integrates with other services for exporting data. These include BatchBook, CSV, Excel, PDF, Quicken and many others. Certified by TRUSTe, the information remains secure, providing private access to all of the necessary business financial figures. In addition, the company supplies clients with a quarterly back-up CD.

Shoeboxed is similar to having a virtual secretary. Once an account becomes established, automatically upload information as it comes along and the software handles the rest. Alternatively, save materials in an account envelope and mail to Shoeboxed at intervals for a fee.

Manage Contacts

The software can also help to save the laborious task of entering and organizing contacts. Instead, send the contact information to Shoeboxed and let the program handle the rest.

The features and services vary depending on the needs of individual clients and account services chosen. Shoeboxed is free to use if you plan on scanning documents yourself. If you want to mail in your documents or take an iPhone image and upload it, fees start at just under $10. Larger businesses with vast amounts of documentation require larger, more extensive file systems, but services do not exceed $49.95 per month.

Too Much Fun for Tax Time

No matter how you look at it, Shoeboxed is a good way to get organized, keeping your information secure and organized for very little cost. Like many other Google products, Shoeboxed is simple to use, effective and, admittedly, a little too much fun for something as boring as accounting!

Should You Take Control of Your Escrow?

Gain Control of EscrowManaging your own escrow used to be a popular technique among homeowners. But like all things, it has gone in and out of fashion. There was a time when taking control of escrow saved time and hassles. When the bank managed the fund, homeowners had to forward all of the insurance and tax bills to the escrow account, wait for it to get lost in the mail so they could send it again and wait to get threatening letters from the tax man or the insurance agent. Then there was the inevitable one-hour call to the bank or servicing agent, getting transfered to five representatives until you could find one who was willing to help you get things straightened out. But these days, letting the bank manage your escrow is nearly hassle free. But there are still good reasons to manage your own escrow.


5 Retirement Plans for the Self-Employed

Self employment means that one is responsible for setting up and maintaining one’s own retirement plan. If this is neglected, the financial future of the self employed person may be in trouble. Besides the obvious problem of not having enough money to be comfortable at retirement time, setting up a retirement plan can provide significant tax savings, either now or in the future.

Here are some of the available retirement plans and their benefits and drawbacks for the self employed person.

401(k) Retirement Plans

A solo 401(k) can be established for the self employed, although 401(k) plans were designed for an employer to implement. Choosing a 401(k) can mean more expense than other plans in setting up and maintaining the plan.

Individual Retirement Accounts (IRA’s)

Another plan that was not meant for the self employed but can still work is an Individual Retirement Account (IRA). The most common types of IRA’s are Roth and the traditional type. The biggest advantage to either a Roth or traditional IRA is in taxes.

Using a Roth IRA, an individual pays taxes on earnings, then makes the retirement payment and there are no further taxes due when it’s time to receive distributions at retirement. Although there are other rules and regulations, usually if a self employed person thinks he will be in a higher tax bracket when retirement comes, then a Roth IRA is the right decision.

Traditional IRA’s are paid into before taxes are made on earnings and will not be taxed until retirement distribution. This works out very well if the tax payer thinks he will be in a lower tax bracket at retirement, thus paying less tax on the same amount of money.

SIMPLE Retirement Plans

SIMPLE stands for Savings Incentive Match Plan for Employess or Small Employers. In reality, a SIMPLE plan is an IRA, but it was created specifically for small businesses. Again, it can be used by self employeed individuals if they’re sole proprietors.

A SIMPLE plan is easy to establish and inexpensive to maintain. It’s a commonly offered plan by many financial institutions and it has lower contribution limits than other available IRA plans.

SEP Retirement Plans

A retirement plan written for self employed persons and small business owners, an SEP is also a type of IRA plan, much on the order of the SIMPLE plan. LLC’s, sole proprietorships and S and C corporations all qualify for this retirement plan.

As a rule, contributions to a SEP IRA are completely tax deductible, with even investment earnings only taxed at withdrawal. Contributions are made before taxes are paid. If a withdrawal is made from an SEP plan before 59 1/2 a 10% penalty may be charged by the IRS, in addition to income tax on the amount. Withdrawals after 59 1/2 years of age will be taxed at the rate of ordinary income.

SEP IRA’s have great benefits in that there is minimal administration involved and annual contribution limits are high, but with no requirement to contribute amy certain amount. If the income fluctuates somewhat from year to year, a self employed person has the freedom to adjust contributions accordingly, allowing the fund to grow quickly at times and more slowly when income is lower.

Keogh Retirement Plans

This plan was written especially for self employed persons. It can be structured two ways: As a defined benefit plan and as a defined contribution plan. A defined benefit plan is similar to a pension plan, while a defined contribution plan is similar to a 401(k).

Since Keogh plans are not as common as other plans the self employed can use because they’re harder to set up and expensive to maintain.