Standard Deduction vs. Itemizing: Seven Facts to Help You Choose

Each year, millions of taxpayers choose whether to take the standard deduction or to itemize their deductions. The following seven facts from the IRS can help you choose the method that gives you the lowest tax.

1. Qualifying expenses - Whether to itemize deductions on your tax return depends on how much you spent on certain expenses last year. If the total amount you spent on qualifying medical care, mortgage interest, taxes, charitable contributions, casualty losses and miscellaneous deductions is more than your standard deduction, you can usually benefit by itemizing.

2. Standard deduction amounts -Your standard deduction is based on your filing status and is subject to inflation adjustments each year. For 2011, the amounts are:
        Single     $5,800
        Married Filing Jointly   $11,600
        Head of Household   $8,500
        Married Filing Separately  $5,800
        Qualifying Widow(er)  $11,600

3. Some taxpayers have different standard deductions - The standard deduction amount depends on your filing status, whether you are 65 or older or blind and whether another taxpayer can claim an exemption for you. If any of these apply, use the Standard Deduction Worksheet on the back of Form 1040EZ, or in the 1040A or 1040 instructions.

4. Limited itemized deductions - Your itemized deductions are no longer limited because of your adjusted gross income.

5. Married filing separately - When a married couple files separate returns and one spouse itemizes deductions, the other spouse cannot claim the standard deduction and therefore must itemize to claim their allowable deductions.

6. Some taxpayers are not eligible for the standard deduction - They include nonresident aliens, dual-status aliens and individuals who file returns for periods of less than 12 months due to a change in accounting periods.

7. Forms to use - The standard deduction can be taken on Forms 1040, 1040A or 1040EZ. To itemize your deductions, use Form 1040, U.S. Individual Income Tax Return, and Schedule A, Itemized Deductions.

These forms and instructions may be downloaded from the IRS website atwww.irs.gov or ordered by calling 800-TAX-FORM (800-829-3676).

Links:

• Publication 17, Your Federal Income Tax (PDF)
• Schedule A, Itemized Deductions (PDF) 

Seven Tips to Help Taxpayers Avoid Phony Refund Schemes Abusing Popular College Tax Credit

The Internal Revenue Service offers the following seven tips to help taxpayers avoid an emerging scheme tempting senior citizens and other taxpayers to file tax returns claiming fraudulent refunds.

These schemes promise refunds to people who have little or no income and normally don’t have a tax filing requirement.

Promoters claim they can obtain for their victims, often senior citizens, a tax refund or nonexistent stimulus payment based on the American Opportunity Tax Credit, even if the victim was not enrolled in or paying for college.

Con artists falsely claim that refunds are available even if the victim went to school decades ago. In many cases, scammers are targeting seniors, people with very low incomes and members of church congregations with bogus promises of free money.

A variation of this scheme also falsely claims the college credit is available to compensate people for paying taxes on groceries.

These schemes can be quite costly for victims. Promoters may charge exorbitant upfront fees to file these claims and are often long gone when victims discover they’ve been scammed.

Taxpayers should be careful of these scams because, regardless of who prepared their tax return, the taxpayer is legally responsible for the accuracy of their tax return and must repay any refunds received in error, plus any penalties and interest. They may even face criminal prosecution.

To avoid becoming ensnared in these schemes, the IRS says taxpayers should beware of any of the following:

• Fictitious claims for refunds or rebates based on false statements of entitlement to tax credits.
• Unfamiliar for-profit tax services selling refund and credit schemes to the membership of local churches.
• Internet solicitations that direct individuals to toll-free numbers and then solicit social security numbers.
• Homemade flyers and brochures implying credits or refunds are available without proof of eligibility.
• Offers of free money with no documentation required.
• Promises of refunds for “Low Income – No Documents Tax Returns.”
• Claims for the expired Economic Recovery Credit Program or for economic stimulus payments. 
• Unsolicited offers to prepare a return and split the refund.
• Unfamiliar return preparation firms soliciting business from cities outside of the normal business or commuting area.

In recent weeks, the IRS has identified and stopped an upsurge of these bogus refund claims coming in from across the United States. The IRS is actively investigating the sources of this scheme, and its promoters can be subject to criminal prosecution.

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Quick Guide to Business Entities

Entity	Advantages
Proprietorship	1)Easy to form & simple to operate
Schedule C or	2)Easy to sell assets.
Schedule F	3)Fewer administrative burdens
	4)All taxation to owner
	Disadvantages
	1)Limited source of capital
	2)No limited liability for owner
	3)No continuity past proprietor
	4)All net income is subject to self-employment (SE) tax
Partnership	Advantages
Form 1065	1)More sources of capital & more management resources
	2)Less adminisrative burdens than corporations
	3)Pass-through taxation; special allocations allowed
	4)Limited partners have limited liability and no SE tax
	Disadvantages
	1)Transfer of interests is more difficult than stock or limited liability units
	2)Each general partner is personally liable
	3)General partners' net income is subject to SE tax
	4)Complexity of partnership tax rules; restrictions on choice of tax year
C Corporation	Advantages
Form 1120	1)Can raise capital with stock sales
	2)Owners have limited liability
	3)Corporations have perpetual life
	4)Ease of transferability of stock
	5)More mangement resources
	Disadvantages
	1)Earnings subject to double taxation
	2)Administrative burdens
	3)Somewhat difficult to form and to dissolve
	4)Borrowing often requires shareholder guarantees
	5)Potential double taxation on dissolution
S Corporation	Advantages
Form 1120s	1)Pass-through status aoids double taxation
	2)Owners have limited liability
	3)Individual tax rates may be lower than the applicable corporate rates.
	4)Distributions from the S corporation are exempt from payroll taxes.
	Disadvantages
	1)Number of sharholders limited to 100; no corporate, partnership or  nonresident alien shareholders
	2)Only one class of stock permitted
	3)Lack of tax-free fringe benefits to greater-than-2% shareholder-employees
	4)Individual tax rates on the pass-through income may be higher than  applicable corporate rates; restrictions on choice of tax year
	5)Shareholders must directly invest to have basis to claim losses; guarantee of  entity debt is insufficient
Limited Liability	Advantages
Company	1)All members have limited liability
Schedule C or	2)No limit on number or types of members
Schedule F or	3)Pass-through taxation under partnership rules
Form 1065	4)Member distributions can include special allocations
	5)Members may participate in management
	6)Different classes of ownership may be permitted
	Disadvantages
	1)May have a limited life.  Tax year choice restricted if taxed as partnership
	2)Transferability of interests may be limited
	3)LLC laws vary from state to state
	4)LLC liability protection is relatively untested in the courts
	5)Members who have management authority, who have debt responsibility  or who materially participate may be exposed to SE tax
This information is from Quickfinders Handbook Thomson Rueters

The Sabbath Day

The Sabbath Day is a day of rest and an opportunity to think about Christ and the activities that went on in the previous week.  Max Jr. enjoyed last week because he completed his first audit count of inventory!

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FAFSA

FAFSA's are due March 10th.  7 more days.

Schedule A: All Deductions Excluding Medical Expenses

State and Local Income Taxes – Taxpayers who choose to deduct state and local sales taxes can deduct either:

1)      Actual sales tax amount (based on their records)

2)      Predetermined deduction figures from IRS tables

Real Estate Taxes ­– Real estate taxes are deductible for all property owned by a taxpayer.

Personal Property Taxes – Personal property taxes are deductible if they are a state or local tax:

1)      Charged on personal property

2)      Based only on the value of the personal property

3)      Charged on a yearly basis.

Example: Automobile license fees.

Interest Expense

1)      Business interest

2)      Capitalized interest

3)      Student loan interest

4)      Investment interest

5)      Mortgage interest

6)      Passive activity interest

Charitable Contributions

Includes money given to:

1)      Churches, synagogues, temples, mosques and other religious organizations

2)      Federal, state and local governments, if contribution is solely for public purchases

3)      Nonprofit schools, hospitals and volunteer fire companies

4)      Public parks and recreation facilities

5)      Public charities such as Salvation Army, Red Cross, CARE, Goodwill Industries, United Way, Boy/Girl Scouts, Boys/Girls Clubs of America, etc.

6)      War veterans’ group

Charitable travel $0.14 per mile

Casualty and Theft Losses – A casualty is the damage, destruction or loss of property resulting from an identifiable event that is sudden, unexpected or unusual.

1)      Car accidents

2)      Earthquakes

3)      Fires, Floods, Hurricanes, Tornadoes, Volcanic Eruptions

4)      Mine cave-ins

5)      Shipwrecks

6)      Thefts

Miscellaneous Itemized Deductions

Fully Deductible:

1)      Amortizable premium on taxable bonds

2)      Casualty and theft losses from income-producing property

3)      Estate taxes imposed on taxable income

4)      Gambling losses

5)      Repayment of income of more than $3,000

6)      Special job-related expenses of the handicapped

7)      Unrecovered cost of annuities

Subject to 2%-of-AGI floor:

1)      Appraisal fees (for charitable donation or casualty losses)

2)      Clerical help and office rent for maintaining investments

3)      Credit card convenience fee for paying income tax by credit or debit card

4)      Employee business expense, including travel, 50% of meals and entertainment, supplies, small tools, professional books and journals, home office deductions, and depreciation on property used for business

5)      Excess deductions allowed a beneficiary on termination of an estate or trust

6)      Fees to collect interest or dividends

7)      Hobby expenses, up to the amount of hobby income

8)      Indirect miscellaneous of pass-through entities

9)      Investment expenses

10)   IRA, SEP, SIMPLE or self-employed qualified plan custodial fees paid with funds outside the account

11)   Job-hunting expenses

12)   Job-related education expenses

13)   Legal fees for collecting or producing taxable income, keeping a job or obtaining tax advice.  Legal fees in a voluntary bankruptcy to the extent attributable to the taxpayer’s business

14)   Liquidated damages paid to a former employer for breach of employment contract

15)   Loss on deposits in an insolvent or bankrupt financial institution

16)   Losses on IRA invesments when all amounts in all IRAs have been distributed and total distributions are less than unrecovered basis, if any.

17)   Medical examinations required by employer.

18)   Professional and union dues

19)   Research expenses of a college professor

20)   Safe deposit box fees or cost of installing a safe in a home

21)   Service charges on dividend reinvestment plans

22)   Tax preparation expenses

23)   Trust administration fees

24)   Undeveloped land management expenses

25)   Work clothes and uniforms if required and not suitable for street wear.

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