July 2013 Tax Alerts

Recordkeeping: How To Get All That Paper Under Control
A Tax Credit Is Available For Adoptions
Budget Issues Force IRS Closures
Pay Attention To The Fringe Benefits You Offer
Give Your Children A Good Financial Education


Recordkeeping: How To Get All That Paper Under Control

It's spring cleaning time, and that includes your tax paperwork. While it can get a bit confusing, there are some general guidelines that you can follow.

Income tax returns
These should be kept indefinitely. IRS has been known to lose a tax return, and this is your only way to prove original filing. You should also keep the various back-up documents associated with the return, such as W-2 forms, mortgage interest statements, year-end brokerage statements, interest/dividend income statements, etc. This may seem like overkill, but you never know when you might need these documents for other purposes.

Supporting documents
These are things like cancelled checks, receipts, expense and travel diaries. With respect to retaining these items: three years minimum, five years is better, and seven years is best. How long you keep these records depends on your storage area and audit potential.

Stock/bond/mutual fund purchase confirmations
These are documents that you need to retain during the time that you own the stock or mutual fund. They can be destroyed 3/5/7 years after the date of the sale of these assets. While many brokers are now reporting your fund purchase price, many records are still unavailable to them, so they cannot report your cost basis. It's ultimately up to you to prove your cost of these purchases.

Real property escrow/title statements
These are the documents that you receive when you purchase property. They are provided to you at your property closing by your title agent, escrow agent, or attorney. These are also documents that you need to retain during the time that you own the property in order to prove your purchase price at the time that you sell the property. The ultimate purging of these documents also follows the 3/5/7 year provisions after the date of the sale.

And when you do finally decide to get rid of those old documents, do so carefully. Many documents will carry your social security number, bank/brokerage account number, and other bits of information that could lead to theft of your identity. So make sure that any documents that you get rid of are properly shredded or otherwise completely destroyed.

LUERS & DYER RECORD RETENTION POLICY

A Tax Credit Is Available For Adoptions

Together you make a family.

Is this the year you'll become an adoptive parent? In addition to the benefits of family togetherness, you might also qualify for a special break on your income tax return. The federal credit for qualified adoption expenses became permanent in January.

As you know, tax credits save you money by reducing the amount you owe dollar-for-dollar. In the case of the adoption credit, you may be able to save up to $12,970 on your 2013 federal income tax return for expenses you pay during the process of adopting a child.

Be aware the credit is subject to a phase-out that is, the amount you can claim is reduced once your 2013 modified adjusted gross income (MAGI) reaches $194,580. No credit is available when your MAGI is $234,580 or more.

In general, the credit is based on total out-of-pocket expenses including adoption fees, amounts you paid your attorney, court costs, and your meals and lodging while away from home. However, when you adopt a special needs child and qualify for the credit, you can claim the full $12,970, regardless of how much you spent during the adoption process. In addition, you may also be able to exclude from income certain adoption benefits provided by your employer.

The credit is typically available for both foreign and U.S. adoptions. For domestic adoptions, you can claim it even if your attempt to adopt was unsuccessful. Other tax breaks are available for new parents. Please call us if you would like details.

Budget Issues Force IRS Closures

The IRS closed all of its operation on July 22 and will close again on August 30. 2013. The current budget situation, including the sequester, has made these closures necessary. IRS employees will be furloughed without pay on these days. Taxpayers should continue to file returns and pay any taxes due as usual, though on these days the IRS will not answer toll-free hotlines or accept or acknowledge receipt of electronically filed returns. Electronic deposits of employment and excise taxes must be made as usual.

Pay Attention To The Fringe Benefits You Offer

Fringe benefits may be such an established part of your business compensation package that you're fairly casual about them. Nevertheless, it's wise to review your policies periodically to make sure you're correctly classifying the fringe benefits you provide and getting the maximum tax deduction.

For example, say you've been including expenses such as break room coffee and snacks in your "meals and entertainment" general ledger account. The practice could be costing you at year-end. Why?

Generally, only 50% of the cost of meals and entertainment expenses are deductible on your federal income tax return. However, office snacks provided to workers on your business premises qualify for 100% deductibility. Separating the expenses makes it easy to determine the proper tax treatment.

Health insurance premiums may also require separate accounting. For example, when you own more than 2% of the stock of an S corporation, premiums you pay for your policy must be reported on your Form W-2 at year-end as part of your wages.

The health insurance premiums you pay for your employees are generally not included in wages, though they may be reported on Form W-2.

Fringe benefits can be a valuable tax break for your business. To be deductible, they must be an ordinary and necessary business expense and meet certain other requirements.

Give us a call. We'll help you untangle the rules.

Give Your Children A Good Financial Education

Financial illiteracy appears to be rampant in the younger generation. The same kid who is adept at using a smartphone or iPad may have trouble with basic math skills, balancing a checkbook, or managing money.

Knowing about money, how to earn it, use it, invest it, and share it is a critical life skill. Unfortunately, such skills are often given short shrift in our education system and homes. Recent surveys have highlighted an astonishing level of ignorance in today's teenagers when questions about simple financial concepts are raised. For example, one survey found that only 26% of teens understood credit card interest, and only one in three could read a bank statement or balance a checkbook.

If you haven't already started teaching your children about money and finances, you're neglecting an important part of their education. But where do you start? Perhaps begin with the following benchmarks of financial literacy.

Time value of money
One of the most essential of all financial concepts is the time value of money. Children should be shown the benefits of saving money, watching it grow, and patiently deferring purchases until a future time. When children grow a little older, they can learn the reverse lesson: how debt today results in accumulated interest costs down the road. To illustrate the point, show them a loan amortization schedule for a typical car or home loan. That should get their attention.

Transactional skills
In today's cashless society, your children will someday need to know how to write a check, how to use a debit or credit card, and how to bank online. When they are ready, consider taking them to the bank, introduce them to a representative, and set up their first checking account and bank card. Children will appreciate this rite of passage to adulthood, and they will learn how to use an ATM or bank website correctly.

Good records
You might feel a little hypocritical when pointing out your children's recordkeeping shortcomings, but they probably need your help more than you think. Knowing how to reconcile a checkbook and track where they spend their money is a valuable life skill. Developing a system for safely storing receipts, warranties, and other valuable papers is also important. When your child begins driving, point out the location and importance of the vehicle proof of insurance and registration.

Investment concepts
Introduce your child to investment basics by having him or her acquire shares of one or more stocks or mutual funds. Your child can learn a lot by charting the investment's progress on a regular basis.

Borrowing money
Even if you act as the lender, your child can learn valuable lessons by borrowing a small amount of money. Again, an online calculator will indicate how compounded interest piles up. Your child will likely be encouraged to avoid debt.

Taxes
It's not what you earn, but what you keep that matters. Show how taxes can erode earnings and why they must be factored into financial decisions.

Set a good example
The way you handle your money may be the most powerful lesson of all for your children. For your child's sake, as well as your own financial well-being, it's important to practice what you preach.