The Basics – income, expenses, common schedules and credits
It is important to keep good records and make sure you give us everything needed for a complete and accurate return. We are here to help you and can provide our annual organizer for you to fill out or you can utilize our checklists for various topics (Schedule A, Schedule C or Schedule E).
Income – make sure to inform us about all of your family's income, big and small, whether reported to the IRS or not. Include all W-2s and 1099s, cash income, Unemployment Income, gambling income (and losses), social security, retirement income and other unique income for the tax year.
ALL worldwide income is taxable unless there is a section of the tax code that says it is not.
Expenses – Depending on your expenses you have the choice of taking either the Standard Deduction (an amount set by the IRS annually) or you may itemize your deductions based on your actual expenses. Generally people will itemize when the amount spent on basic needs is higher than the standard set by the IRS. If you decide to itemize your deduction, then you will need to file a Schedule A (see below).
Common Schedules -
Schedule A is for basic expenses including medical expenses (prescriptions, health insurance premiums, hospital fees, dental, glasses and contact lenses, miles driven, etc.); real estate taxes, home mortgage interest paid, investment income, donations, volunteer expenses for a non-profit, previous year tax preparation fees, etc. A Schedule A is needed when a taxpayer decides to itemize expenses.
Schedule C is for self-employed taxpayers including sole proprietors and single-member LLCs not electing to be taxed otherwise. Generally, Income is reported on a 1099-MISC or is cash income where no taxes were paid to the IRS. Many business related expenses can be recorded on the tax return to reduce the amount of tax owed on this business income. The expenses incurred in the course of earning this income are recorded on the Schedule C.
Qualifying business expenses include advertising, auto expenses, equipment costs, payments for services, cost of goods sold, insurance, licensing, some meals, home office expenses, supplies, rent, telecommunications and travel, etc.
Standard Mileage v. Actual Car Expenses – There are two options for determining one’s expenses related to a vehicle that is used for a business. A taxpayer can opt to take either the standard mileage rate, which is a rate set by the IRS annually. In the alternative, a taxpayer could opt to show actual expenses related to the business use of the vehicle including mileage, fuel, oil, maintenance, insurance, parking, tolls, and RTA excise tax.
Self-Employment Taxes –Based on one’s income, each taxpayer is required to pay income tax, Medicare tax and Social Security tax on their income. When employed by a company, the employer pays a portion of the Medicare and Social Security taxes (called FICA) and withholds an equal portion from the employee’s wages with each paycheck. When the taxpayer is self-employed, they are responsible for paying both the employer portion and the employee portion, since they are acting as both. Similar to income taxes, these amounts are not taken out of the income when earned during the year, so the reconciliation must occur at the end of the year in the form of self-employment taxes.
Schedule E is for taxpayers with rental property. Income will include rent, non-refundable damage deposits, and last month rent deposits. Expenses associated with maintaining the rental income will include advertising, auto expenses, capital assets (including rental property), cleaning and maintenance, interest paid, management fees, repairs, supplies, utilities, etc.
Child and Dependent Care Credit is a credit for taxpayers with earned income who hire a person or agency to look after a dependent child under 13. The expenses that qualify include day care, before/after school programs and summer programs, and must be incurred in order for the taxpayer(s) to work or look for work. These expenses are reported on Form 2441 and require the amount paid per qualifying child, name and address of the business and their EIN (employer identification number). If the taxpayer hired an individual, then the form requires a SSN (social security number).
Upon request, the business should provide a letter or receipt that includes all of this information and what dates payments were made. Make sure to get receipts or a letter from each person or program that was paid for during the tax year.