This article is from the April 2012 issue of KC Stage
Editor’s note: what follows are excerpts from Dean Vivian’s 2011-2012 tax letter that he sends out to his clients. It is only excerpts and is not intended as a full-fledged guide on how to prepare your taxes. KC Stage encourages you to seek out qualified help if you have any questions or concerns about preparing your taxes.
By writing down a handful of often overlooked deductions, logging work at home, and using simple tax laws to your advantage, you can save a few bucks to hundreds of thousands of dollars over your lifetime. But only if you write it down. Here’s how the IRS rule on deductions reads: “You cannot deduct expenses for travel (including meals unless you used the standard meal allowance), entertainment, gifts, or use of a car or other listed property unless you keep records to prove the time, place, business purpose, business relationship (for entertainment and gifts), and amounts of these expenses. Generally, you must also have receipts for all lodging expenses (regardless of the amount) and any other expense of $75 or more.”
So what does this really mean?
It is the duty of the taxpayer to keep good records in order to deduct ANY expenses. Canceled checks and charge statements are okay, but don’t expect a $125 charge line for “Macy’s” to be accepted without a detailed receipt.
You must keep originals of all business lodging receipts regardless of the amount, and all original receipts $75 and over.
Gifts and Entertainment require more extensive record keeping. I’ll explain more fully in a minute.
The vast majority of receipts – those under $75 – aren’t needed once the purchase is recorded in your electronic or handwritten logbook.
If you write it down, you get the money. If you don’t write it down, you DON’T get the money. Period.
Ultimately, the IRS goes to you, the taxpayer, as the source, and you must have “contemporaneous” written proof, which the IRS defines as logged within 2-3 weeks of the date.
Do you mean I don’t need to keep all the receipts?
Yes, as long as the amount is under $75, and does not involve business lodging. Record the pertinent info, either by hand or electronically. But do it now. One newer advantage: lists from the “Sent” mailbox in your e-mail account can help prove work was done, although it no longer establishes you at home in the age of smart phones.
What if it’s $75 or more, or a lodging receipt?
The IRS (when you’re audited) will want to see the issuing company’s original receipt. No receipt, no deduction ... no kidding. And if you don’t have the receipt, you’ll have to explain to a skeptical auditor why you deducted it originally.
How long do I have to keep my old records?
Forever. The reasons are too numerous and detailed. In short: anything can happen. Some things you will always need: All info on investments (purchases, dividends, reinvestments, sales), and all info regarding real estate (settlement statement, rentals, expenses for building that extra wing, etc.). Don’t believe what you’ve heard about three or four years; my experience is different. For example, if you sell business property, your tax preparer should ask to see the last five years of returns. To be 100% safe, these papers must be kept, realistically, until seven years after you die. On that note, it’s becoming easier and easier to keep permanent records of important papers, especially since institutions offer many electronically. Be sure to keep an extra copy of bank statements, tax returns, and insurance policies, as well as photos of each room in case of disaster. For safety, keep the scanned documents and archival photos with a friend or family member who doesn’t live in the area. The IRS Publication 584, Disaster Loss Workbook (www.irs.gov/pub584), can help.
What’s new this year?
The IRS has loosened rules regarding handwritten daybooks. Long time clients who have heard me preach Write It Down and Write It Off for over a generation may be as stunned as I was: without fanfare, the IRS removed wording requiring handwritten proof in the instructions on how to deduct, so electronically entered records of appointments, deductible mileage, etc., are now allowable. This doesn’t release the taxpayer from any record keeping requirements, other than adding the option for electronic record keeping in addition to the traditional handwritten. Also, they will certainly look at this closely, and have been known to throw out an entire mileage logbook when they found willful false entries. And keep in mind a handwritten log is still the strongest proof!
Deductible amounts for business mileage, moving mileage, and medical mileage changed midway in 2011, due to higher gasoline costs. In 2011, deductible mileage rates are 51¢ for business until June 30, then 55.5¢ for the second half of the year; 19¢ for medical & moving until June 30, 23¢ the 2nd half of the year; and 14¢ for charity all year long. For 2012, rates are 55.5¢ for business, 23¢ for medical & moving, and 14¢ for charity.
The Making Work Pay Credit expired in 2010. Instead, the employee’s portion of FICA taxes was reduced from 7.65% to 5.65% for 2011, and as of this writing until Feb. 29.
Starting now, electronic payers will report electronic purchases to the government – and you – via a new form, a 1099-K, Merchant Card, and Third-Party Payments. If you take credit cards as part of your business, the third-party (Visa, MasterCard, Paypal, etc) will issue a new 1099-K with the amounts they transferred to you. Be sure to keep good records, so any discrepancies can be corrected, and you’re not taxed for giving cash back, for example. You will only receive these if you have over 200 transactions AND over $20,000 in payments.
Despite what you may have heard, health care will NOT be taxable this year or next year. Your employer has the option to put the amount paid on your behalf on your W-2, under Code DD, but it’s informational only [like the 401(k) info], not taxable, and, again, optional.
HSAs/MSAs don’t allow over-the-counter drugs to be purchased on their plans any more, other than insulin. Medical supplies still qualify, such as crutches, breast pumps, wheelchairs, etc. Non-medical purchases now carry a penalty of 20%, double the old penalty. Good news: if your AGI is under $100,000, you can make a one-time transfer of $100,000 from a Traditional IRA or a 401(k) to your HSA. Should you? Absolutely: it can still grow tax-deferred, like a Traditional IRA, and if you spend it for medical expenses in retirement (and who won’t?) the withdrawals are tax-free!
Schedule D has a new look. It’s just a Summary Page now, with transaction information about capital gains & losses entered on the new Form 8949.
The IRS Website has a new way to find forms. To get a 1040, just type www.irs.gov/form1040. For Publication 17, Your Income Tax, www.irs.gov/pub17.
April’s filing deadline in 2012 is April 17, instead of April 15 (which falls on a Sunday) or April 16 (a holiday in Washington, D.C., Emancipation Day). October’s deadline for filing extended taxes remains October 15. Remember: if you’re not going to file, be sure to extend. And keep in mind, an extension to file is not an extension to pay; you’ll still need to pay what you estimate you’ll owe. If you expect a refund, no payment is due, but be sure!
Dean Vivian has been an actor for over 30 years, and started helping fellow performers with their taxes in 1985. His specialties include performers, the self-employed, and people with home-based businesses. Should you wish to consult him on your taxes, he can be contacted at firstname.lastname@example.org or by calling (816) 523-3476.