Main Home Sale

If you meet the ownership and use tests, you will generally only need to report the sale of your home if your gain exceeds a certain dollar amount prescribed by law. To determine the amount of gain that can be excluded from income refer to Publication 523, Selling Your Home. You may be entitled to exclude gain from income if during the 5-year period ending on the date of the sale, you have:

1. Owned the home for at least 2 years (the ownership test), and
2. Lived in the home as your main home for at least 2 years (the use test).

If you owned and lived in the property as your main home for less than 2 years, you may still be able to claim an exclusion in some cases. If you are required or choose to report a gain, it is reported on Form 1040, Schedule D (PDF), Capital Gains and Losses.

Read more on this subject...

What kind of records should I keep?

You may choose any recordkeeping system suited to your business that clearly shows your income and expenses. Except in a few cases, the law does not require any special kind of records. However, the business you are in affects the type of records you need to keep for federal tax purposes. Your recordkeeping system should also include a summary of your business transactions. This summary is ordinarily made in your business books (for example, accounting journals and ledgers). Your books must show your gross income, as well as your deductions and credits. For most small businesses, the business checkbook is the main source for entries in the business books.

More on this IRS article...

Terry Goddard Cautions Home Owners About Storm Repair Offers

With the monsoons upon us, Attorney General Terry Goddard reminds Arizona residents to be wary of fraudulent home repair contractors offering their services to consumers whose homes have been damaged by storms.

In addition to bringing wind, rain and dust, summer monsoons also attract unlicensed contractors, including roofers, pool companies and landscapers, that offer home repairs and improvements to residents who have been storm victims. Many of these contractors stop by unexpectedly and say they have extra supplies they want to use up or claim they have been working in the neighborhood and have time to make storm repairs.

Consumers are given a verbal quote but rarely a written estimate for the job. Once completed, the homeowner typically receives a final bill that is hundreds, if not thousands, of dollars more than the original quote.

These contractors demand immediate payment and in some cases refuse to leave, seeking to pressure the consumer into paying the full amount billed.
Here are some tips for Arizona consumers to follow when choosing a storm-damage repair contractor:

• Be alert to any contractors or repair workers, including roofers, pool companies and landscapers, who unexpectedly show up at your home after a storm.
• Be wary of contractors who take a “quick look” around your property, then say you need a major repair.
• Be cautious of contractors who claim they are working in the neighborhood and have time to fix your house or have leftover supplies from another job.
• Hire a contractor licensed by the Arizona Registrar of Contractors.
• Get written estimates from several contractors.
• Make sure the scope of the project, the price and any other material terms are in a written contract.
• Request a list of references and check them before agreeing to hire a contractor.
• Never allow yourself to be hurried into making a decision. Reputable contractors will not try to pressure you into hiring them.

If you believe you have been a victim of fraud, please contact the Attorney General’s Office in Phoenix at 602.542.5763; in Tucson at 520.628.6504; or outside the Phoenix and Tucson metro areas at 1.800.352.8431. To file a complaint in person, the Attorney General’s Office has 35 satellite offices throughout Arizona with volunteers a vailable to help. Locations and hours are posted on the Attorney

General’s Web site at www.azag.gov.

Reduce Your Non-deductible Interest

Back in college days, I remember James Cash Penney, founder of JC Penney Company, Inc., lecturing to students to buy goods with cash not credit. He not only implemented this policy with his company but would not allow his company to issue credit cards to sell more goods. After he lost control of his company, the company came out with a credit card.

Penney’s philosophy was a good one. Debt increases the price of everything that is bought by debt, including your house, your car and household goods. Only loans against your house is tax deductible so get rid of those interest expenses that increase your cost of living. Here are some great ideas for reducing your debt and increasing your savings.

• Take your lunch to work in a brown bag and send the $5 you would have spent for lunch as a payment to your credit card company. With online bill-pay, making multiple payments is a snap. $5 a day for 20 working days in a month is $100. Credit card interest is not tax deductible.

• Collect all of the coins that you have in your house, your car, your golf-bag or your purse. Take them to your local supermarket or other retail store that has a change counter and collect your reward. Add to your savings. When you increase your savings enough to make a car payment, do so. Interest on your savings account is much less than the interest you pay on your car.

• Look in your closet, your garage, or other storage places and list the items on eBay. Or, you can have a yard sale. I raised about $1,000 for a charity by having yard sales and selling items on eBay. $1,000 would take a big chunk out of your debt. Clean out your storage areas at least once each year. Afterall, one man's trash is another man's treasure. Items you don’t use in a year you don’t need. When cleaning your closets, watch for items with tags that have never been worn and take them back for a refund. You will never wear them. Don’t forget to send the money to your creditor.

• How many collections do you have sitting around your house that is not being used? Do you have an old car that you were going to fix up and never did? Do you have a collection of jewelry, sport memorabilia, paintings, coins or other items of value that might be worth something? If the item in question has little or no “sentimental value”, consider selling it at auction or on eBay.

• Are you paying for monthly, recurring entertainment expenses? Send the savings to your creditors. Cancel all of those unnecessary subscriptions for movies or premium channels on your cable or dish network. Reduce your phone bill. Phone companies have become very competitive but watch out for their sales gimmicks. Get the basics. You don’t have time to watch movies, television or talk on the telephone. You are too involved in looking for ways to make more money and get out of debt.

• Watch your utility bills decline by turning off the lights, turning off water when brushing your teeth and turn the oven off after baking. Be mindful of saving on your utilities. Your utility companies probably publish ways for you to reduce your utilities. Use these savings to reduce your non-deductible interest by eliminating your debt.

• Do a budget. Follow your budget monthly or at the very least quarterly. See how much you can lower your expenses over a year.

• Have you called your credit card companies and request that they lower your interest rates? Have you called cell phone providers, cable providers, and Internet providers and ask for customer-loyalty discounts? Try it. You might like the benefits.

Above, I have shown you a few ideas for speeding up your debt reduction. Spend time thinking about ways to reduce your spending or increase your income. Americans are inundated with commercials and other advertising on spending money. I had a boss once that spent much of his time thinking of ways to earn money. We should all think like that. Have you thought of finding a second job, working more hours or asking for a raise? Do you have something that you could sell? Are you paying for goods or services that you never really use? Think of something each day to decrease your debt and / or increase your income?

New Law on Illegal Aliens

The Governor recently signed into law the Legal Arizona Workers Act, one of the toughest laws of its kind in the country. The new law, effective on January 1, 2008, prohibits any employer from intentionally or knowingly employing an “unauthorized alien.”

The law covers any individual or organization that transacts business in this state, has a license issued by an agency in this state, and employs one or more individuals who perform services. “Employee” is defined broadly as any person who performs employment services for an employer pursuant to an employment relationship.

A first violation will result in a probation period of 3 years (for knowing violations) or 5 years (for intentional violations); mandatory quarterly reports on all new employees throughout the probationary period; and either (a) possible suspension of business licenses for up to 10 days (for knowing violations) or (b) mandatory suspension of business licenses for a minimum of 10 days (for intentional violations). A second violation during the probation period will result in the permanent revocation of all “licenses,” including the employer’s articles of incorporation.

Beginning January 1, 2008, every employer must verify the employment eligibility of new employees through the federal government’s Basic Pilot Program (also known as the Employment Eligibility Verification Program). Information about registering for the program can be found online at the web site of the U.S. Citizenship and Immigration Service (www.uscis.gov). Fortunately, if an employer has verified the legal status of the employee under investigation, there is a presumption that the employer did not intentionally or knowingly employ the unauthorized alien.

Finally, on or before October 1, 2007, the Arizona Department of Revenue will send notices to all employers required to withhold taxes, explaining the new law and how to register in the Basic Pilot Program.

Next Year Don’t Be a Late Filer

The main reason taxpayers are late filers is due to poor organization. Tax filing doesn't have to be an ordeal. And it can be less frustrating and less time-consuming if you have all the material at your fingertips.

By being prepared, you'll be ready to file your return at the earliest possible moment (the IRS usually starts accepting returns around mid-January). And the earlier you file, the sooner you'll get your refund.

Much of the paperwork you'll need to complete your Form 1040 will tell the IRS how much money you made so they can tax it. But there also is information that will help you trim your tax bill.

To help you organize your tax paperwork, here are some of the most common documents you'll need.

Filing by the (identification) numbers

The IRS tracks every taxpayer through a Social Security number. For those of you who file your own returns, this isn't a problem. But if you drop all your data off at your tax preparer’s office, make sure that your Social Security number is in there, as well as your spouse's if you file jointly.

Do you have any dependents -- children, parents -- that you'll be claiming? Then you'll need those numbers, too. This includes everyone, even infants. If your kids don't have their numbers yet, contact the Social Security Administration immediately. A missing Social Security number for any person listed on your return could cost you.

The IRS could delay the processing of your return, slow down any refund, or even disallow a credit if you don't have the identification numbers to support it.

And don't forget the tax identification number of the person or business that takes care of the kids while you're at work. You'll need it if you file for the child care credit. You should receive a statement from the care provider that includes his or her tax ID number, as well as the amount you paid, so you can use it to claim the credit.

It is called an income tax
Since it's our income that the taxman wants a piece of, start thinking about the employment and income data you'll need to file.

By the end of January, employees should get a Form W-2 from the boss showing how much was earned, how much is taxable and just what taxes were withheld. If you have more than one job, you should get a Form W-2 from each employer.

You say you're still waiting for your W-2? The IRS has a substitute form, Form 4852, you can use in its place. You'll need last year's final pay stub for data to enter on the alternate W-2. And even if you have your official tax form, check it against that last pay stub to make sure the W-2 data is correct.

If you're an independent contractor, the company you worked for should send you a Form 1099-MISC showing your gross earnings. You can view, but not download, Form 1099-MISC online at the IRS Web site.

If you're self-employed, you have a bit more work to get organized. Track down all receipts and documentation for business-related expenses, from the mileage records you kept when using your car for business to the office equipment and supplies you bought to the utility bills you paid to keep the home-office lights on.

Find a safe place to hide all of your documents and receipts as they come in. Many people use a shoe box and some buy folders at an office supply store. Keep only those receipts that are tax related. An accountant or tax preparer will charge between $50 and $250 per hour to plow through your unrelated receipts.

Federal Minimum Wage Increases on July 24

The Fair Labor Standards Act increases the federal minimum wage in three steps:

July 24, 2007, $5.85 per hour
July 24, 2008, $6.55 per hour
July 24, 2009, $7.25 per hour

See the U.S. Department of Labor’s Wage and Hour Web site or call the DOL toll-free help line at 1-866-4US-Wage (487-9243) for more information and a copy of the poster every employer with employees subject to the Fair Labor Standard Act’s minimum wage provisions is required to display at their business.

Using Retirement Funds to Start a Business

Recent news articles discuss using retirement funds to start a business. This is a complex area and without the guidance of a competent pension practitioner it could result in a prohibited transaction subject to taxes and penalties imposed by the IRS and U.S. Department of Labor.

Generally, prohibited transactions are transactions between the plan and a disqualified person that are prohibited by law. If you are a disqualified person who takes part in a prohibited transaction the sanctions mentioned above would be applicable.

The final authority to determine whether a given transaction is a prohibited transaction rests with the DOL.

DOL has issued two advisory opinions that provide some idea of how DOL treats an IRA investing in a business:

DOL Advisory Opinion 2000-10A
DOL Advisory Opinion 2006-01A

Employer Identification Numbers

An Employer Identification Number is a nine-digit number that IRS assigns to a business entity that is required to file various business tax returns. Generally, businesses need an EIN.

Publication 1635, Understanding Your EIN, is a good source for more information.

In addition, Pub. 1635 explains the different types of business entities, such as sole proprietor, corporation, partnership, and limited liability companies that are often confusing to small businesses.

Publication 1635

Recordkeeping is More Than Just Paperwork

Keeping good records is very important to your business.

Why should you keep records?

You need good records to monitor the progress of your business, keep track of deductible expenses, prepare tax returns and support the items you report on tax returns.

Related link:

Recordkeeping

Homeowner Tax Breaks, Part IV

Home-Equity-Debt Interest: After settling in your new home and your equity may have escalated, you decide to take out a home-equity loan. As mentioned in Part I, you may be able to claim an itemized deduction for interest on up to $100,000 worth of home-equity debt. The key words here are may be. The law says that you can't deduct interest to the extent the home-equity-loan principal plus your first mortgage principal exceeds the value of your home. For example, say your first mortgage is $150,000 and your home-equity loan is $50,000. If your home appraises at $175,000, you are able to deduct interest only on $25,000 or one-half of the interest on the home-equity-loan. Interest on the remaining $25,000 falls into the nondeductible personal-interest category, which also includes non-deductible credit-card and automobile-loan interest.

Another consideration in deducting the interest is a rule that disallows any alternative minimum tax (AMT) deduction for home-equity-loan interest unless the loan proceeds were used to improve your property. For example, the $50,000 home-equity loan you took out in the previous example was used to pay off a car loan and some credit-card balances. For regular tax purposes, that's okay. You can deduct the home-equity-loan interest on Schedule A as well as interest on your first mortgage. However, when computing AMT, you can't deduct any of the home-equity-loan interest for your AMT taxes. Ouch! That hurts.

On the other hand, if you spend your $50,000 home-equity-loan proceeds on home improvements, such as a new pool and covered patio, you're fine for both regular tax and AMT purposes. To add salt to the wound, the high-income deduction-phaseout rule explained earlier can also reduce your otherwise allowable home-equity-loan interest deduction.

Is buying a home worth the headache: Yes. This article points out the home-ownership tax angles your realtor was afraid to tell you. Buying for the sake of taxes still works out to be at least a decent proposition taxwise. And it will be much better than decent if you eventually sell for a big tax-free gain down the road. If you're married, you can potentially rake in a federal income-tax free profit of up to $500,000, or $250,000 if you're unmarried. That will cure any headache!

The End

Publication 530 (2006), Tax Information for First-Time Homeowners

Homeowner Tax Breaks, Part III

High-Income Phaseout: If you earn big bucks, you probably won’t be affected by the standard-deduction. It’s likely you will have enough itemized deductions from state and local taxes, charitable contributions and other common deductions to exceed the standard deduction amount even without any deductions for mortgage interest and property taxes. Instead, you may have to be concerned about the unpleasant deduction-phaseout rule that plague high-income taxpayers.

If your 2006 adjusted gross income (AGI) exceeds $150,500 (the figure applies to both joint and single filers), the phaseout rule reduces your itemized deductions by 2% of the excess. For example, let’s say your AGI is $200,000. Your itemized deductions are reduced by $990 [($200,000 - $150,500) x .02]. If your AGI is $500,000, your itemized deductions are reduced by $6,990 [($500,000 - $150,500) x .02]…and so on. Some itemized deductions are not affected by this unwelcomed rule, but mortgage interest and property taxes are. Under this rule, taxpayers can't lose more than 53.33% of their deductions. That’s when its victims ask, “Who are we working for, the government or us? High-income taxpayers may revert to the standard deduction mode because their itemized deductions are clipped to the bone. Mortgage interest and property taxes don’t matter anymore if this happens.

Moral: If you anticipate that your AGI will exceed $150,500, bring out the calculator to figure your actual home-ownership tax savings. (For 2007, the $150,500 amount will be adjusted for inflation.)

Read Part IV...

Publication 530 (2006), Tax Information for First-Time Homeowners

Homeowner Tax Breaks, Part II

You probably know that as a homeowner, you can deduct mortgage interest, home-equity debt interest, points and real estate taxes. But just how much does it really help you. Your real estate agent probably points out that you will be saving taxes based on your mortgage interest and your taxes. Do you really? Let’s look at an illustration.

Standard Deduction: Your tax break in buying a home may be less than you thought if you were previously claiming the standard deduction. Everyone gets the standard deduction when filing taxes. You don’t need to have any personal deductions to claim it. It’s free. For 2006, joint filers get a standard deduction of $10,300; singles get $5,150 and heads of households get $7,550.

If your itemized deductions are less than the standard deduction, it's best to claim the standard deduction rather that itemizing. Most young people claim the standard allowance until they purchase a home and can claim mortgage interest and property taxes. These deductions together with state and local taxes, automobile license taxes and charitable donations usually put you over the standard deduction limit.

What is the real tax break? Assuming you buy a house and pay mortgage interest of $11,500 and property taxes of $1,500, it appears you have a tax break of $13,000. Adding deductions for state and local taxes of $2,000 and contributions to charities of $450, the total itemized deductions total $15,450. That is only a $5,150 ($15,450 minus $10,300) tax break for a married couple filing joint after deduction the standard deduction of $10,300. So rather than a tax break of $13,000, your actual tax break is $5,150. The actual tax savings is based on your effective tax rate, which is the actual income tax paid divided by net taxable income before taxes, expressed as a percentage.

Some individuals already itemized before they bought or were very close to doing so. If they did, their additional deductions from mortgage interest and property taxes will reduce their taxable income dollar for dollar (or nearly so). The moral of the story is: Make sure you know what your deductions will be so that you don’t unexpectedly have a huge tax bill next tax season. Analyze your taxes using the standard deduction effect on your tax savings.

Go to Part III...

Publication 530 (2006), Tax Information for First-Time Homeowners

Homeowner Tax Breaks

Are you tired of renting and not getting any deductions on your income taxes? You are probably already aware of the tax breaks you might get on your next income tax return.

But just in case you are not aware or maybe you forgot, let me show you some great advantages. In most cases, the cost of renting is generally is a nondeductible expense, but homeowners can claim interest as an itemized deduction to a limit up to $1 million worth of mortgage debt. The debt must be used to acquire or improve your principal residence. The same is true for interest on home-equity debt secured by your principal residence. It has a limit of $100,000 of debt.

Real estate property taxes can also be claimed as an itemized deduction. Points can generally be deducted that you paid (or the seller paid on your behalf) to take out the mortgage.

Publication 530 (2006), Tax Information for First-Time Homeowners

Go to Part II...

Can I Deduct Investment Expenses?

You have a job and invest sparingly. Are there any deductions related to your investment activity?

What is included in investment expenses? Expenses for professional investment advice, accounting and legal fees related to investment activities, subscriptions to relevant investment publications, the portion of Internet Service Provider (ISP) charges incurred to follow and trade investments, and your home computer
You can’t deduct everything. Costs related to tax-exempt securities are nondeductible because they generate tax-free income. Trading commissions are added to the cost basis of the investment, giving you a tax break when you sell the securities. And travel costs to attend investment conventions and seminars and stockholder meetings are generally nondeductible, as are attendance fees for conventions and seminars.

Can you take these deductions? Yes, if these expenses — along with your other "miscellaneous itemized deductions" such as tax-preparation fees and unreimbursed business expenses — exceed 2% of your adjusted gross income (AGI). However, most taxpayers fail to clear the "2% of AGI" hurdle.

If you are lucky enough to rack up 2% in miscellaneous deductions, you may suffer one more set-back from the tax laws: The more money you make the less valuable is your write-off. Why? Taxpayers lose two cents of every deduction dollar for each dollar of 2007 AGI in excess of $156,400, or $78,200 for married-filing-separate status. For 2006, the AGI thresholds are $150,500 and $75,250, respectively.

Lastly, miscellaneous itemized deductions that survive the preceding two limitations are completely disallowed for alternative.

Publicaton 550, Investment Income and Expenses