Category Archives: Tax Records

Protect Tax Data, Keep All Sensitive Tax Data Safe

The IRS Warns Taxpayers to Protect Tax Data and Keep All Sensitive Tax Data Safe

Did you know that when you protect tax data it will help with your future filings, amended returns and audits? Not to mention protect your identity, as well?

Since we all are heading in tax season soon, the IRS wants all taxpayers to be aware as to how long to keep tax returns and other supporting documents.
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Early Year-End Tax Planning To Take Advantage Of Possible Tax Reform

Wouldn’t you like to know about early year-end tax planning to take advantage of possible tax reform?

So, why do we think early tax planning is appropriate this year? Actually, with the prospect of major tax reform on the horizon, some strategies can be put into place before the end of the year that can substantially reduce your 2017 tax bill. That would be nice.

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Massachusetts DoR Wants Copies of Your W-2s

It is true, Massachusetts Department of Revenue wants copies of your W-2s, 1099s, etc.

Did you get a letter from Mass Department of Revenue asking for copies of your W-2s, 1099s, etc? Don’t panic. Chances are you have these w2 copies in your files and you just need to pull them out and follow these steps. Continue reading

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Tips Earned Can Be Taxing

Tips are income too. Do you get tipped? Do you work in an occupation where tips are part of your total compensation? If so, you need to be aware of several facts relating to your federal income taxes.

Tips, tip splitting, tip reporting

Tips are Taxable

Tip income is subject to federal, social security, and Medicare taxes. The value of non-cash tip income, such as tickets, passes, or other items of value, is also income and subject to taxation.

Include Tips on Your Tax Return

You must include in gross income all the cash you received directly from customers. This includes tips added to credit cards, and your share of any tip received under a tip-splitting arrangement with fellow employees. This is regardless if your employer records the tips or not. Reporting is the responsibility of the person who ultimately receives them.

Report Tips to Your Employer

If you receive $20 or more in tip income in that month, you should report all of your tips to your employer. Your employer is required to withhold federal income, social security, and Medicare taxes. If the tips received are less than $20 in any month, they need not be reported to the employer. However, these tips are still taxable and must be reported on your tax return, as they are subject to income and social security taxes.

Tip-Splitting and Cover Charges

Under a tip-splitting arrangement are not subject to the reporting requirement. You should report to your employer only the net tip income you receive. Service or cover charges, which are randomly added by the business establishment, are excluded from the tip reporting requirements. The employer should add each employee’s share of service charges to each employee’s wages.

Employer Allocation of Tips

Tip allocation is applicable to “large food and beverage establishments.” These are food service businesses where tipping is customary and that have 10 or more employees. These establishments must allocate a portion of their gross receipts as tip income to those employees who “underreport.” Under reporting occurs if an employee reports tips that are less than 8% of the employee’s applicable share of the employer’s gross sales. The employer must allocate to those underreported employees the difference between what the employee reported and the 8%. If you are in this situation, your allocation amount will be noted on your W-2 form. These allocated tips will not have been included in the total wages box on your W-2, so they must be accounted for as additional wage income on your return, unless you have adequate records to show that the amount is incorrect. Because social security, Medicare, and Additional Medicare taxes were not withheld from the allocated tip income, to the extent these tips are included in your income, you must report those taxes as additional tax on your return. The IRS frequently issues inquiries when the taxpayer’s W-2 shows an allocation of tips and a lesser amount is reported on the tax return.

Keep a Running Daily Log of Tip Income

Tips are a frequently audited item and it is a good practice to keep a daily log of your tips. The IRS provides a log in Publication 1244 that includes an Employee’s Daily Record of Tips and a Report to Employer for recording your tip income. Here is an IRS Publication 1244 that can help you with the daily recording of tips.

Maybe you are a restaurant or service employer or employee who receives tips, read more about the IRS handling of tips here. If you are receiving tips and have any questions about their taxation, please feel free to call Alex Franch, BS EA at 781-849-7200.

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Tossing Old Tax Records? Read This First!

Old Tax Records, Tossing Old Tax Records, Old Records, Files
Now that your taxes have been completed for 2014, you are probably wondering what old tax records can be discarded. If you are like most taxpayers, you have old records from years ago that you are afraid to throw away. It would be helpful to understand why the records must be kept in the first place.

Why Do We Keep Old Tax Returns?

Generally, we keep old tax records for two basic reasons:

  1. In case the IRS or a state agency decides to question the information reported on our tax returns.
  2. To keep track of the tax basis of our capital assets so that the tax liability can be minimized when we dispose of them.

How Long Before We Can Toss Our Old Tax Records?

With certain exceptions, the statute for assessing additional taxes is three years from the return due date or the date the return was filed, whichever is later. However, the statute of limitations for many states is one year longer than the federal law. In addition to lengthened state statutes clouding the recordkeeping issue, the federal three-year assessment period is extended to six years. This is if a taxpayer omits from gross income an amount that is more than 25 percent of the income reported on a tax return. And, of course, the statutes do not begin running until a return has been filed. There is no limit where a taxpayer files a false or fraudulent return to evade taxes.

If an exception does not apply to you, for federal purposes, most of your tax records that are more than three years old can probably be discarded. Again, take note that you should add a year or so to that if you live in a state with a longer statute.

Examples – Sue filed her 2011 tax return before the due date of April 15, 2012. She will be able to dispose of most of the 2011 records safely after April 15, 2015. On the other hand, Don files his 2011 return on June 2, 2012. He needs to keep his records at least until June 2, 2015. In both cases, the taxpayers may opt to keep their records a year or two longer if their states have a statute of limitations longer than three years.

Note: If a due date falls on a Saturday, Sunday or holiday, the due date becomes the next business day.

The Big Problem!

So what’s the problem with the carte blanche discarding of records for a particular year because the statute of limitations has expired? The problem is that many taxpayers combine their normal tax records and the records needed to substantiate the basis of capital assets. These need to be separated and the basis records should not be discarded before the statute expires for the year in which the asset is disposed. Therefore, it makes more sense to keep those records separated by asset.

The following are examples of records that fall into that category:

  • Stock acquisition data – If you own stock in a corporation, keep the purchase records for at least four years after the year the stock is sold. This data will be needed to prove the amount of profit or loss you had on the sale.
  • Stock and mutual fund statements (If you reinvest dividends) – Many taxpayers use the dividends they receive from stocks or mutual funds to buy more shares of the same stock or fund. The reinvested amounts add to the basis in the property. This means they reduce gain when it is finally sold. Keep the statements at least four years after the final sale.
  • Tangible property purchase and improvement records – Keep all records of home, investment, rental property, or business property acquisitions AND related capital improvements for at least four years after the underlying property is sold.For example, when the large $250,000 and $500,000 home exclusion was passed into law several years back, homeowners became lax in maintaining home improvement records. The thinking was that the large exclusions would cover any potential appreciation in the home’s value. Now that exclusion may not always be enough to cover sale gains. This is particularly the case in markets where property values have steadily risen. Records of home improvements are vital. The records can be important to prove your deductions. Please use caution when discarding them.

What about the tax returns themselves?

Disposal of the back-up documents used to prepare the returns can usually be done after the statutory period has expired. However, you may want to consider keeping a copy of your old tax returns. These should include the 1040 and any attached schedules or statements,  plus your state return indefinitely. That’s right, forever! If you just do not have room to keep a copy of the paper returns, securely digitizing them is an option. Use caution when opting to do this. Remember, the cloud is a very curious place for your personal information, and hackers would love to get their hands on it.

Do you have more questions about tossing old tax returns?

If you have questions about whether or not to retain certain old tax records, WorthTax can help you work through all the documents. Give Alex Franch, a call first at 781-849-7200, and make an appointment today.

We would love to hear your thoughts about your solutions to saving old tax records below or feel free to visit our Facebook or Google+ page.

Maybe you know someone who can benefit from this information, feel free to share:
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