Eight Ways Children Lower Your Taxes

Got kids? They may have an impact on your tax situation. If you have children, here are eight tax credits and deductions that can help lower your tax burden.

  1. Dependents: In most cases, a child can be claimed as a dependent in the year they were born. Be sure to let the office know if your family size has increased this year. You may be able to claim the child as a dependent this year.
  2. Child Tax Credit: You may be able to take this credit on your tax return for each of your children under age 17. If you do not benefit from the full amount of the Child Tax Credit, you may be eligible for the Additional Child Tax Credit. The Additional Child Tax Credit is a refundable credit and may give you a refund even if you do not owe any tax.
  3. Child and Dependent Care Credit: You may be able to claim this credit if you pay someone to care for your child under age 13 while you work or look for work. Be sure to keep track of your child care expenses so we can claim this credit accurately.
  4. Earned Income Tax Credit: The EITC is a benefit for certain people who work and have earned income from wages, self-employment, or farming. EITC reduces the amount of tax you owe and may also give you a refund.
  5. Adoption Credit: You may be able to take a tax credit for qualifying expenses paid to adopt a child.
  6. Coverdell Education Savings Account: This savings account is used to pay qualified expenses at an eligible educational institution. Contributions are not deductible; however, qualified distributions generally are tax-free.
  7. Higher Education Credits: Education tax credits can help offset the costs of education. The American Opportunity and the Lifetime Learning Credit are education credits that reduce your federal income tax dollar for dollar, unlike a deduction, which reduces your taxable income.
  8. Student Loan Interest: You may be able to deduct interest you pay on a qualified student loan. The deduction is claimed as an adjustment to income, so you do not need to itemize your deductions.

As you can see, having children can make a big impact on your tax profile. Make sure that you’re getting the appropriate credits and deductions by speaking to a tax professional today.

Lending Money to a Friend? It Pays to Plan Ahead

Lending money to a cash-strapped friend or family member is a noble and generous offer that just might make a difference. But before you hand over the cash, you need to plan ahead to avoid tax complications for yourself down the road.

Take a look at this example: Let’s say you decide to loan $5,000 to your daughter who’s been out of work for over a year and is having difficulty keeping up with the mortgage payments on her condo. While you may be tempted to charge an interest rate of zero percent, you should resist the temptation.

Here’s why:

When you make an interest-free loan to someone, you will be subject to “below-market interest rules.” IRS rules state that you need to calculate imaginary interest payments from the borrower. These imaginary interest payments are then payable to you, and you will need to pay taxes on these interest payments when you file a tax return. To complicate matters further, if the imaginary interest payments exceed $14,000 for the year, there may be adverse gift and estate tax consequences.

Exception: The IRS lets you ignore the rules for small loans ($10,000 or less), as long as the aggregate loan amounts to a single borrower are less than $10,000, and the borrower doesn’t use the loan proceeds to buy or carry income-producing assets.
As was mentioned above, if you don’t charge any interest, or charge interest that is below market rate (more on this below), then the IRS might consider your loan a gift, especially if there is no formal documentation (i.e. written agreement with payment schedule), and you go to make a nonbusiness bad debt deduction if the borrower defaults on the loan–or the IRS decides to audit you and decides your loan is really a gift.

Formal documentation generally refers to a written promissory note that includes the interest rate, a repayment schedule showing dates and amounts for all principal and interest, and security or collateral for the loan, such as a residence (see below). Make sure that all parties sign the note so that it’s legally binding.

As long as you charge an interest rate that is at least equal to the applicable federal rate (AFR) approved by the Internal Revenue Service, you can avoid tax complications and unfavorable tax consequences.

AFRs for term loans that is, loans with a defined repayment schedule, are updated monthly by the IRS and published in the IRS Bulletin. AFRs are based on the bond market, which changes frequently. For term loans, use the AFR published in the same month that you make the loan. The AFR is a fixed rate for the duration of the loan.

Any interest income that you make from the term loan is included on your Form 1040. In general, the borrower, who in this example is your daughter, cannot deduct interest paid, but there is one exception: if the loan is secured by her home, then the interest can be deducted as qualified residence interest–as long as the promissory note for the loan was secured by the residence.

If you have any questions about the tax implications of loaning a friend or family member money, don’t hesitate to call.

Five Tips for Starting a Business

When you start a business, you need to know about income taxes, payroll taxes, understanding your tax obligations, and much more. Here are five tips to help you get your business off to a good start:

1. Business Structure. One of the first decisions you need to make is which type of business structure to choose. The most common types are sole proprietor, partnership, and corporation. This is an important step because the type of business you choose will determine which tax forms you file. See, Choosing the Right Business Entity, above.

2. Business Taxes. There are four general types of business taxes. They are income tax, self-employment tax, employment tax, and excise tax. In most cases, the types of tax your business pays depends on the type of business structure you set up. You may need to make estimated tax payments. If you do, you can use IRS Direct Pay to make them. It’s the fast, easy and secure way to pay from your checking or savings account.

3. Employer Identification Number (EIN). You may need to get an EIN for federal tax purposes. The easiest way to find out if you need an EIN is to use the search term “do you need an EIN” on the website. If you do need one, contact the office or apply for one online at

4. Accounting Method. An accounting method is a set of rules that you use to determine when to report income and expenses. The two that are most common are the cash and accrual methods, and you must use a consistent method. Under the cash method, you normally report income and deduct expenses in the year that you receive or pay them. Under the accrual method, you generally report income and deduct expenses in the year that you earn or incur them. This is true even if you get the income or pay the expense in a later year.

5. Employee Health Care. The Small Business Health Care Tax Credit helps small businesses and tax-exempt organizations pay for health care coverage they offer their employees. You’re eligible for the credit if you have fewer than 25 employees who work full-time, or a combination of full-time and part-time. The maximum credit is 50 percent of premiums paid for small business employers and 35 percent of premiums paid for small tax-exempt employers, such as charities.

Questions about starting a business?

Don’t hesitate to call the office if you need answers!

Apps for Tracking Business Mileage

Every business owner, no matter how small, must keep good records. But whether it’s keeping track of mileage, documenting expenses, or separating personal from business use, keeping up with paperwork is a seemingly never ending job.

No matter how good your intentions are in January, the chances are good that by summer that mileage log is looking a bit empty. Even worse, you could be avoiding tracking your mileage altogether–and missing out on tax deductions and credits that could save your business money at tax time.

The good news is that there are a number of phone applications (apps) that could help you track those pesky business miles. Most of these apps are useful for tracking and reporting expenses, mileage and billable time. They use GPS to track mileage, allow you to track receipts, choose the mileage type (Business, Charitable, Medical, Moving, Personal), and produce formatted reports (IRS compliant HTML and CSV tax return reports) that are easy to generate and share with your CPA, EA, or tax advisor.

Here are three popular apps that help you track your business mileage:

TripLog – Mileage Log Tracker

Works with: Android and iPhone

What it does: Tracks vehicle mileage and locations using GPS

Useful Features:

Automatic start when plugged into power or connected to a Bluetooth device and driving more than five mph
Reads your vehicle’s odometer from OBD-II scan tools
Syncs data between the web service and multiple mobile devices
Supports commercial trucks including per diem allowance, state-by-state mileage for IFTA fuel tax reports, and DEF fuel purchases and gas mileage

Track My Mileage

Works with: Android and iPhone

What it does: Keeps track of mileage for business or personal use

Useful Features:

Provides mileage rates used to calculate the deductible costs of operating your automobile
Allows you to group your trips by client
Tracks multiple drivers and vehicles tracking
Localized and translated into more than 20 languages


Works with: iPhone and iPad

What it does: Tracks mileage, as well as expenses and billable time

Useful Features:

Allows you to choose which way you want to track your mileage
Remembers Frequent trips
Creates reports in PDF format or CSV for importing into Excel
Ability to email your reports and photo receipts

Call the office today if you have any questions about using apps that track business mileage or need help choosing the right one for your business needs.

Keep Track of Miscellaneous Deductions

Miscellaneous deductions such as certain work-related expenses you paid for as an employee can reduce your tax bill, but you must itemize deductions when you file to claim these costs. Many taxpayers claim the standard deduction, but you might pay less tax if you itemize.

Here are some tax tips that may help you reduce your taxes:

Deductions Subject to the Two Percent Limit.
You can deduct most miscellaneous costs only if their sum is more than two percent of your adjusted gross income (AGI). These include expenses such as:

  • Unreimbursed employee expenses.
  • Job search costs for a new job in the same line of work.
  • Work clothes and uniforms required for your job, but not suitable for everyday use.
  • Tools for your job.
  • Union dues.
  • Work-related travel and transportation.
  • The cost you paid to prepare your tax return. These fees include the cost you paid for tax preparation software. They also include any fee you paid for e-filing of your return.

Deductions Not Subject to the Limit.
Some deductions are not subject to the two percent limit. They include:

  • Certain casualty and theft losses. In most cases, this rule applies to damaged or stolen property you held for investment. This may include personal property such as works of art, stocks, and bonds.
  • Gambling losses up to the total of your gambling winnings.
  • Losses from Ponzi-type investment schemes.
  • You claim allowable miscellaneous deductions on Schedule A, Itemized Deductions, but keep in mind, however, that there are many expenses that you cannot deduct. For example, you can’t deduct personal living or family expenses.

Need more information about itemizing deductions or help setting up a system to track your itemized deductions? Help is just a phone call away.

Tax Tips for Hobbies that Earn Income

Millions of people enjoy hobbies such as stamp or coin collecting, craft making, and horse breeding, but the IRS may also consider them a source of income. As such, if you engage in a hobby that provides a source of income, you must report that income on your tax return; however, taxpayers (especially business owners) should be aware that the way income from hobbies is reported is different from how you report income from a business. For example, there are special rules and limits for deductions you can claim for a hobby.

Here are five basic tax tips you should know if you get income from your hobby:

Business versus Hobby. There are nine factors to consider to determine if you are conducting business or participating in a hobby. Make sure to base your decision on all the facts and circumstances of your situation. To learn more about these nine factors, please call.

Allowable Hobby Deductions. You may be able to deduct ordinary and necessary hobby expenses. An ordinary expense is one that is common and accepted for the activity. A necessary expense is one that is helpful or appropriate. Don’t hesitate to call if you need more information about these rules.

Limits on Expenses. As a general rule, you can only deduct your hobby expenses up to the amount of your hobby income. If your expenses are more than your income, you have a loss from the activity. You can’t deduct that loss from your other income.

How to Deduct Expenses. You must itemize deductions on your tax return in order to deduct hobby expenses. Your costs may fall into three types of expenses. Special rules apply to each type. Use Schedule A, Itemized Deductions to report these types of expenses.

Use a tax professional. Hobby rules can be complex, but using a tax professional makes filing your tax return easier. If you have any questions about reporting income from a hobby, please call.

Tax Tips for Reporting Gambling Income and Losses

Whether you play the lottery, roll the dice, play cards, or bet on the ponies, all of your gambling winnings are taxable and must be reported on your tax return. If you gamble, these tax tips can help you at tax time next year.

Here’s what you need to know about figuring gambling income and loss:

1. Gambling income. Income from gambling includes winnings from lotteries, raffles, horse races and casinos. It also includes cash and the fair market value of prizes you receive, such as cars and trips and you must report them on your tax return

2. Payer tax form. If you win, you may receive a Form W-2G, Certain Gambling Winnings, from the payer. The form reports the amount of your winnings to you and the IRS. The payer issues the form depending on the type of game you played, the amount of winnings, and other factors. You’ll also receive a Form W-2G if the payer withholds federal income tax from your winnings.

3. How to report winnings. You must report all your gambling winnings as income on your federal income tax return. This is true even if you do not receive a Form W-2G. If you’re a casual gambler, report your winnings on the “Other Income” line of your Form 1040, U. S. Individual Income Tax Return.

4. How to deduct losses. You may deduct your gambling losses on Schedule A, Itemized Deductions. The deduction is limited to the amount of your winnings. You must report your winnings as income and claim your allowable losses separately. You cannot reduce your winnings by your losses and report the difference.

5. Keep gambling receipts. You must keep accurate records of your gambling activity. This includes items such as receipts, tickets or statements. You should also keep a diary or log of your gambling activity. Your records should show your winnings separately from your losses.

If you have questions about gambling income and losses, don’t hesitate to call.

What Are Payroll Items in Quickbooks?

Are you considering processing your own payroll in QuickBooks? Whether you’re moving from a payroll service or getting ready to pay your first employee, you’re taking on a complex set of tasks that requires a great deal of setup and absolute precision. But the reward is complete control over your compensation records and transactions, and constant access to your payroll data.

If you have no experience dealing with paychecks, deductions, and payroll taxes, we strongly recommend that you call the office before you get started. While QuickBooks simplifies the actual mechanics of setting up and running payroll, there’s still a lot you need to know.

It goes without saying that accuracy is critical here. You’re responsible for your employees’ livelihoods and for maintaining any benefits they receive. Federal, state and local taxing agencies will count on you to submit the proper payroll taxes and filings on time; failure to do so can result in stiff penalties and worse.

A Look Around Payroll Items

That said, here is a brief preview of how QuickBooks Payroll Items work. First, make sure that payroll is turned on. Next, open the Edit menu and click Preferences, then click Payroll & Employees | Company Preferences.


Figure 1: The Company Preferences screen in Payroll & Employees Preferences

Under QUICKBOOKS PAYROLL FEATURES, make sure the button in front of Full Payroll is filled in by clicking on it. If you’re interested in exploring Intuit’s online payroll service, someone can tell you about that, as well as advise you on the other options displayed here.

This element of your accounting is complicated enough that QuickBooks has a separate setup tool to guide you through the myriad details you’ll need to provide. You find this tool by going to Employees | Payroll Setup. This is a multi-screen, wizard-like tool that walks you through the process of providing information about employees, compensation, benefits and other additions/deductions, and taxes. Each page poses questions, and you provide answers by entering data and selecting options from drop-down lists. In doing so, you’re creating Payroll Items.

This is a time- and labor-intensive process, one that will send you scrambling for all of the minutiae that make up your payroll system. Once you have your payroll framework established, though, as we said earlier, everything will be in one place and easily accessible.

A Useful List

The information you entered in Payroll Setup is likely to change and need modification. Maybe you forgot to account for something while you were working in the wizard, or perhaps you just want to look up a bit of payroll data. To do any of these, open the Lists menu and click on Payroll Item List.


Figure 2: You can access this menu from the bottom of the Payroll Item List screen.

The window that opens contains a list of the Payroll Items you created. It looks like a checkbook register, with one line devoted to each item. You’ll be able to view, for example, its Type, any Limit imposed, the Payable To name, and Tax Tracking designations. At the bottom of this list, you’ll see three drop-down menus: Payroll Item, Activities, and Reports. When you click on the down arrow next to Payroll Item you’ll see the menu displayed in the above image.

Warning: There are many options in this menu for altering Payroll Item definitions. QuickBooks allows you to do this, but use caution here. If it involves an action that you are not familiar with, please call the office for assistance.

This is fairly self-explanatory. To Edit or Delete a Payroll Item or make it Inactive, highlight it in the list and click on the correct option. You can also Customize Columns in the table and perform other related tasks. When you click on New Item and select EZ Setup on the next page, this window opens:


Figure 3: You can add Payroll Items by working your way through this wizard-like progression of screens.

QuickBooks will help you here by asking questions and building a Payroll Item based on your responses.

There’s much more to know about working with Payroll Items and assigning them to employees. When you’re ready to start processing payroll in QuickBooks, don’t hesitate to call the office for help getting started!