Jupiter

How long should you keep your tax records?

I am frequently asked by clients how long they should retain their personal income tax records. The records supporting your income tax return may have to be produced if IRS (or a state or local taxing authority) was to audit your return.

In general, the IRS only has three years from the date you filed the return (or, if later, three years after the return was due) to assess additional taxes. For example, if your 2009 individual income tax return is filed by its original due date of April 15, 2010, the IRS will have until April 15, 2013 to assess a tax deficiency against you. If you file your return late, the IRS generally will have three years from the date you filed the return to assess a deficiency.

However, there are exceptions to the three-year rule. The assessment period is extended to six years if the IRS believes that more than 25% of gross income is omitted from a return. Also, if you don’t file a tax return, the IRS has no specific time period which limits their ability to assess additional taxes. If the IRS claims that you never filed a return for a particular year, keeping a copy of the return will help you to prove that you did.

While it’s impossible to be completely sure that the IRS won’t at some point seek to assess tax, retaining tax returns indefinitely and supporting records for six years after the return is filed should be adequate. If you file your returns electronically, be sure to get copy for your records.

One important caveat to this rule applies to a transaction that may occur in one year, but for which the amount that is taxable depends upon a transaction from an earlier year. For example, suppose you bought a home in 1986 for $100,000 and made $20,000 of capital improvements in 1993. To determine the tax consequences of the sale, it’s necessary to know your cost basis. If you sell your home in 2010, and your return for that year is audited, you may have to produce records relating to the original purchase in 1986 and the capital improvement in 1993. So those records should be kept for at least six years after your 2010 return is filed instead of just six years after the transactions they relate to occurred.

Similar considerations apply to other property which is likely to be bought and sold-for example, securities. In particular, remember that if you reinvest dividends to buy additional shares of stock, each reinvestment is a separate purchase of stock. The records of each reinvestment should be kept for at least six years after the return is filed for the year in which the stock is sold.

So, there is a lot of information that you can safely shred. Just keep in mind the six year rule, and avoid the mistake of destroying something that may fall outside the six year window, but might be critical to substantiating a transaction or deduction in the future.

By Glenn Schanel, CPA

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Glenn Schanel, CPA, CFP® is the President of Schanel & Associates, PA, Certified Public Accountants. The firm provides tax, accounting, and consulting services to clients throughout South Florida and the United States.

The information contained in this communication is intended as general guidance on matters of interest only. The application and impact of laws can vary widely based on specific facts involved. Given the changing nature of laws, rules and regulations, and the inherent hazards of electronic communication, there may be delays, omissions, or inaccuracies in information contained in this transmission. The information contained herein should not be used as a substitute for consultation with professional accounting, tax, legal or other competent advisors. Pursuant to Regulations Governing Practice Before the Internal Revenue Service, any tax advice contained in this communication, unless explicitly provided otherwise, is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein.

Jupiter

Improved Education Tax Credit for 2009 and 2010 – Part 2

The American Opportunity tax credit is also 40% refundable, which means that you can get a refund if the amount of the credit is greater than your tax liability. For example, someone who has at least $4,000 in qualified expenses and who would thus qualify for the maximum credit of $2,500, but who has no tax liability to offset that credit against, would qualify for a $1,000 (40% of $2,500) refund from the government.

As noted above, the American Opportunity credit is based on the payment of qualified tuition and related expenses. These are the expenses for tuition and academic fees that are required for enrollment or attendance at an eligible educational institution. Qualified tuition and related expenses do not include student activity fees, athletic fees, insurance expenses, room and board, transportation costs and other personal living expenses. They also don’t include the cost of any course or education involving sports, games, or hobbies unless the course or education is part of the student’s degree program. Books are qualified expenses under the American Opportunity tax credit.

The amount of qualified tuition and related expenses taken into account in computing the American Opportunity credit must be reduced by tax-exempt scholarships and fellowships, certain military benefits, and any other tax-exempt payments of those expenses other than gifts or bequests.

The credit is phased out for higher income taxpayers. For 2009 and 2010, the American Opportunity tax credit is phased out for couples with income between $160,000 and $180,000, or singles with income between $80,000 and $90,000. These higher thresholds will allow more taxpayers to qualify for the credit.

If you have questions about this credit or any other tax issue, please feel free to contact our offices at 561-624-2118.
Glenn Schanel, CPA, CFP® is the President of Schanel & Associates, PA, Certified Public Accountants.  The firm provides tax, accounting, and consulting services to clients throughout South Florida and the United States.  We provides tax, accounting, and consulting services to clients throughout South Florida, North Palm Beach and Palm Beach County.

Jupiter

Improved Education Tax Credit for 2009 and 2010 – Part 1

The American Opportunity tax credit created a new and improved HOPE credit that may allow you to turn part of the higher education expenses you incur for yourself, your spouse, or your dependents into tax savings.

The maximum credit allowed is $2,500 per student (for both 2009 and 2010) for the first four years of undergraduate education at an eligible educational institution. Generally, eligible educational institutions are accredited schools offering credit toward a bachelor’s or associate’s degree or other recognized post-high school credential, and certain vocational schools.

The American Opportunity tax credit is available only for the qualified tuition and related expenses of an eligible student, i.e., a student who’s enrolled in a degree or certificate program at an eligible educational institution on at least a half-time basis, and who has never been convicted of a federal or state felony drug offense.

A taxpayer may claim an American Opportunity tax credit and exclude from gross income amounts distributed from a Coverdell education savings account (formerly called an education IRA) or 529 plan for the same student, as long as the distribution isn’t used for the same educational expenses for which a credit was claimed.

In order to be eligible for the American Opportunity tax credit for a tax year, qualified tuition and related expenses must be paid during that tax year for education furnished during an academic period (e.g., semester) that starts within that tax year or within the first three months of the following year. Under this rule, taxpayers have a timing option. For example, for a semester beginning in Jan. of Year 2, a taxpayer may pay the expenses in Year 1 or Year 2. The credit will be available in whichever year the payment is made.

If you have questions about this credit or any other tax issue, please feel free to contact our offices at 561-624-2118. We are located in Jupiter, Palm Beach County. Glenn Schanel, CPA, CFP® is the President of Schanel & Associates, PA, Certified Public Accountants. The firm provides tax, accounting, and consulting services to clients throughout South Florida and the United States. We provides tax, accounting, and consulting services to clients throughout South Florida, North Palm Beach and Palm Beach County.

Jupiter

First-Time Home Buyers’ Tax Credit Improved

First-Time Home Buyers’ Tax Credit Improved
by Glenn Schanel, CPA – Jupiter, Florida

In an effort to revive the real estate market, in 2008 Congress created a tax credit for “first time home buyers.”  In its original form, this “credit” of $7,500 was in reality an interest free loan that the taxpayer had to repay over a 15 year period.  It soon became evident that this credit/loan was not very “stimulative”, so in 2009 Congress created a new plan that included a true credit.

The new law created a refundable federal tax credit of up to $8,000 ($4,000 for a married taxpayer filing separately) for qualifying first- time homebuyers who purchased a home between April 8, 2008, and December 1, 2009. In order to qualify for the credit, the taxpayer must have not owned a qualifying principal residence in the U.S. during the three-year period before the purchase of the new home.  This credit was phased out for individual taxpayers whose modified adjusted gross income was between $75,000 and $95,000 (between $150,000 and $170,000 for married taxpayers filing jointly).

As a result of the continuing weakness in the real estate market, last month Congress enacted the Worker, Homeownership, and Business Assistance Act of 2009.  This Act extends the $8,000 first-time homebuyer credit for contracts to purchase entered before May 1, 2010, and closed before July 1, 2010. The new law also liberalizes the credit by making it available to higher income taxpayers, as well as to those individuals who are not first-time homebuyers.

Generally, existing homeowners who are qualifying “long-time residents” may qualify for the tax credit if they contract to purchase another principal residence before May 1, 2010, and close before July 1, 2010. The Act provides that any individual who has maintained the same principal residence for any five-consecutive-year period during the eight-year period ending on the date of the purchase of a subsequent residence be treated as a “first-time homebuyer”.

However, the maximum credit for long-time residents who qualify under the Act is the lesser of $6,500 ($3,250 for married individuals who file separate returns) or 10% of the purchase price of the principal residence.

The credit now phases out for individual taxpayers whose modified adjusted gross income is between $125,000 and $145,000 ($225,000 and $245,000 for married taxpayers filing joint returns).  In addition, for purchases after November 6, 2009, the first-time homebuyer tax credit cannot be claimed for the purchase of a principal residence if its purchase price exceeds $800,000.

If you qualify, you can claim your credit by attaching a Form 5405 to your income tax return in the year of the home purchase and a copy of your settlement statement.  You can also elect to treat any home purchased in 2009 as if it occurred on December 31, 2008 and a purchase in 2010 as if it occurred on December 31, 2009.  If you choose to do this and have already submitted your prior year’s tax return, you can claim your credit by filing an amended tax return.

So if you believe that you would qualify for either the first time home buyer or long-time resident tax credits, this could be the right time to buy a home.

Glenn Schanel, CPA, CFP® is the President of Schanel & Associates, PA, Certified Public Accountants.  The firm provides tax, CPA, accounting, and consulting services to clients throughout South Florida and the United States. Our clients are located in North Palm Beach, Port St. Lucie County, Palm Beach County, West Palm Beach.

The information contained in this communication is intended as general guidance on matters of interest only.  The application and impact of laws can vary widely based on specific facts involved.  Given the changing nature of laws, rules and regulations, and the inherent hazards of electronic communication, there may be delays, omissions, or inaccuracies in information contained in this transmission.  The information contained herein should not be used as a substitute for consultation with professional accounting, tax, legal or other competent advisors.  Pursuant to Regulations Governing Practice Before the Internal Revenue Service, any tax advice contained in this communication, unless explicitly provided otherwise, is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein.

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