Are you itemizing your deductions, in your individual income tax return? Consider deducting interest expense. There are two types of interest deductible as itemized deductions. They are investment interest and qualified mortgage interest including the points. But remember investment interest is limited, to your net investment income and qualified mortgage interest is allowed, only if you are a buyer. When you prepay interest, you must allocate the interest over the tax years to which the interest applies. You may deduct in each year only the interest that applies to that year. However note that, an exception applies to mortgage points, paid on a principal residence. If you use part of the refinanced mortgage proceeds to improve your main home and you meet certain requirement; you can fully deduct the part of the points related to the improvement in the year you paid them with your own funds. Consider watching our mortgage points video to know the requirements. Qualified mortgage interest is interest and points you pay on a loan secured by your main home or a second home. Your main home is where you live most of the time. A second home can include any other residence you own and choose to treat as a second home. You do not have to use the home during the year. However, if you rent it to others, you must also use it as a home during the year for more than the greater of 14 days or 10 percent of the number of days you rent it, for the interest to qualify as qualified residence interest. Consider checking Can I Deduct My Mortgage Related Expenses? Interview on IRS website. Qualified mortgage interest and points are generally reported to you on Form 1098. Qualified mortgage interests are yield on home acquisition debt and home equity debt. A mortgage taken to buy, build, or improve your home is called home acquisition debt But it qualifies only if throughout the year the mortgages plus any grandfathered debt totaled $1 million or less. The limit is $500,000 if you are married filing separately. Home equity debt other than home acquisition debt taken can qualify up to a total of $100,000. The limit is $50,000 if you are married filing separately. However, Home equity debt other than home acquisition debt is further limited to your home's fair market value reduced by the grandfathered debt and home acquisition debt. You may be subject to a limit on some of your itemized deductions including mortgage interest. Consider reading instructions to Form 1040 for the limits. You may also be able to take a credit against your federal income tax for certain mortgage interest if a mortgage credit certificate was issued to you by a state or local government for low-income housing. Use Form 8396 (PDF), Mortgage Interest Credit, to figure the amount. There are certain types of interest not deductible They include personal interest, such as: Interest paid on a loan to purchase a car for personal use. Credit card and installment interest incurred for personal expenses. Points (if you are a seller), service charges, credit investigation fees, and interest relating to tax-exempt income, such as interest to purchase or carry tax-exempt securities. Also note that there are certain types of interest deductible elsewhere on the return. They are Student loan interest which is an adjustment to income, Non-farm business interest and Farm business interest which are deductible business expenses and Interest incurred to produce rents or royalties which may be limited.
IRS - Home Mortgage Points
Are you itemizing deductions in your individual income tax return? Consider deducting home mortgage points. If you can deduct all of the interest on your mortgage, you may be able to deduct all of the points paid on the mortgage.If you cannot deduct all the interest on your mortgage then you cannot deduct all your home mortgage points. Consider checking Can I Deduct My Mortgage Related Expenses Interview on IRS website for deducting mortgage interest and points. You can deduct the points in full in the year you pay them, if you meet all the following requirements: You use the cash method of accounting. This means you report income in the year you receive it and deduct expenses in the year you pay them. You use your loan to buy or build your main home. Your main home secures your loan. Your Payment of points is an established business practice in your area. The points were computed as a percentage of the principal amount of the mortgage. The amount shows clearly as points on your settlement statement. Remember the points paid should not be more than the amount generally charged in your area. Also note that the points you paid should not be for items that are usually listed separately on the settlement sheet such as appraisal fees, inspection fees, title fees, attorney fees, or property taxes. The funds you provided at or before closing, including any points the seller paid, were at least as much as the points charged. Lastly note that you cannot have borrowed the funds from your lender or mortgage broker in order to pay the points. Remember, you can also fully deduct points paid on a loan to improve your main home if you meet the said requirements. If the points you paid do not meet the requirements consider deducting them over the life of the loan. But remember, you may be subject to a limit on some of your itemized deductions, including points. Consider checking instructions on Form 1040 for the limits of itemized deductions.
IRS - Deductible Taxes
Are you itemizing your deductions in your individual income tax return? Consider deducting taxes you paid during the year. There are four types of deductible non-business taxes: State, local, and foreign income taxes, State and local general sales taxes, State, local and foreign real estate taxes, and State and local personal property taxes. You can elect to deduct state and local general sales taxes instead of state and local income taxes. But remember you cannot deduct only one. If you elect to deduct state and local income taxes, you must check box “a” on line 5 of Form 1040, Schedule A. If you elect to deduct state and local general sales taxes, you must check box “b” on line 5 of Form 1040, Schedule A. Remember, State and local income taxes withheld from your wages during the year appear on your Form W-2. If you elect to deduct state and local general sales taxes, you can deduct expense actually, but in that case, you must keep your actual receipts showing general sales taxes paid. Instead you can use the Optional State Sales Tax Table and the Optional Local Sales Tax Tables in Instructions of Schedule A, Form 1040. Consider also, checking Sales Tax Deduction Calculator on the IRS website. In line 6 of your Form 1040, Schedule A, Real estate taxes are allowed as deduction. Real estate taxes are any state, local, or foreign taxes levied on real property for the general public welfare. Remember, the charge must be uniform against all real property in the jurisdiction at a like rate. Consider checking your real estate bill to figure out the total deduction. If your taxing authority (or lender) doesn't furnish you a copy of your real estate tax bill, ask for it. In line 7 of your Form 1040, Schedule A, Personal property taxes are allowed as deduction. They are based only on the value of personal property such as a boat or car. For example, you paid a yearly fee for the registration of your car. Part of the fee was based on the car's value and part was based on its weight. You can deduct only the part of the fee that was based on the car's value. If you had any deductible tax not listed on line 5, 6, or 7, list the type and amount of tax on line 8. Be cautious to enter only one total on line 8. Consider Including on this line income tax you paid to a foreign country or U.S. possession. But be cautious, you can also take a credit for the foreign tax instead of a deduction.
IRS - Medical and Dental Expenses
Are you itemizing your deductions in your individual income tax return? Consider deducting medical and dental expenses you paid for yourself, your spouse and your dependants. You can deduct the amount of total medical expenses that exceeds 10% of your adjusted gross income. So if you have paid to doctors, dentists, surgeons, chiropractors, psychiatrists, and psychologists you can deduct the amount in your form 1040. Also if you have been hospitalized, you can deduct payments for in-patient hospital care including cost of meals and lodging charged by the hospital. If you participated in smoking cessation program, you can deduct payments to center for alcohol or drug addiction. Remember payments to participate in a weight loss program are allowed but payments for diet foods and payments to health club are not allowed. You can deduct payments for insulin and payments for drugs that require prescription. You can also deduct payments for false teeth, reading glasses, contact lenses, hearing aids, crutches, wheel chairs and also for guide dogs for the blind and deaf. Remember transportation expenses are also allowed if they are paid essentially for medical care. Consider checking the standard mileage rate for medical expenses. Also, insurance premiums you paid for policies qualify too. But remember a premium paid by employer does not qualify. However if premiums are included in your wages, tips and other compensation you can deduct them too. Consider checking box 1 in your Form W2. But be cautious, if you are self employed, you may be eligible for self employee health insurance deduction which is an adjustment to income and not itemized deductions. Remember, you can include the medical expenses you paid in during the year and you should reduce the expenses by any reimbursements while figuring out deductions. Consider checking can I deduct my medical and dental expenses interview on IRS website for additional information
IRS - Standard and Itemized Deductions
IRS provides for deductions from your income tax return to reduce the amount of your taxable income. There are two ways you can take deductions. You can use standard deduction or you can itemize deductions. Standard deduction is a dollar amount that reduces the amount of income on which you are taxed. The amount varies depending on you income, age and filing status and changes each year. You are allowed an additional deduction, if you are 65 or older at the end of the tax year.
You are also allowed an additional deduction for blindness if you are blind on the last day of the tax year. Be sure to check on box 23a in Form 1040 to claim additional standard deduction if you or your spouse were age 65 or older or blind at the end of the year. Certain tax payers are not eligible for to the standard deduction. In that case you can itemize your deductions. Remember, You should itemized deductions if your allowable itemized deductions are greater than your standard deduction
You will benefit by itemizing deductions if you cannot use the standard deduction, you had large uninsured medical and dental expense, you paid interest or taxes on your home, you had large unreimbursed employee business expenses, had large uninsured casualty or theft losses, or made large charitable contributions. But remember your itemized deductions may be limited and your total itemized deductions may even be phased if your adjusted gross income exceed the threshold limits. You can Refer to the Form 1040, Schedule A Instructions (PDF) for the limitation amounts.
IRS - Extension to file
You can definitely extend your time to file IRS return. There are three ways to request automatic extension of time to file your US individual return. First, you can pay all or part of your estimated tax due and you can indicate that the payment if for an extension using Direct Pay option, Electronic federal tax payment system or a credit or debit card. Second you may e-file Form 4868 which is an application for automatic extension of time to file us individual tax return. Third can even file a paper form 4868 and enclose the payment of your estimate tax due. Remember request for extension must be made before the regular due date of your return and extension of time to file is not an extension of time to pay tax you owe. If you are out of country you can check box no 8 in Form 4868 to receive additional 4 months of extension too. In all you can get an extension of 6 months to file IRS return.
IRS - When you owe tax
You may pay tax that you owe on your federal income tax return using the direct pay option. Alternatively you may also send a cheque or a money order with your return to IRS office. You will need to use Form 1040-V which is a payment voucher if case you enclose cheque or a money order. Do not staple your cheque or money order with payment voucher and also do not mail cash with your return. If you use tax-preparation software, consider reading software’s instruction to determine how to make payment through software. If you cannot pay all tax due on you return, you should pay as much as possible to reduce accrual of interest. IRS may also be able to assist you in arranging payments. You might qualify for additional time upto 120 days to pay in full. You might even qualify for monthly installment payment agreement. If you cannot pay and monthly installment does not work, you might wish to propose an offer in compromise. IRS website provides a pre-qualifier tool to confirm if you are eligible for propose an offer in compromise.
IRS - How to file tax return in US
You may file your federal income tax return it electronically. You may also select a tax return preparer that can help you file your tax returns electronically. In addition, you may also file tax return yourself using tax preparation software such as Turbo Tax. You also have an option to file a paper return. If you are filing a paper return, you will need to attach all related schedules and form behind your return in required sequence If you file electronically, you will usually receive your refund within 3 weeks after IRS receives your return. You may even receive it faster if you elect to have it directly deposited into your checking or savings account. When you file electronically, you don’t need to worry about sending it to the right area. When you file paper return, consider reading address indicated in the instructions for the form you are filing.
IRS - When to file tax return in US
Do you wish to file your federal income tax return. Firstly you need to know when to file? If you are calendar year file i.e. January Year 1 to December Year 1, you will have to file on April 15, Year 2. If you are a fiscal year filer, for example February Year 1 to January Year 2, you will have to file on May 15, Year 2. You filing date is referred to as due date. Thus April 15 and May 15 are due dates of filing return. If due date falls on Saturday, Sunday or a legal holiday, the due date is automatically delayed to the next business date. If you cannot file on due date, you can request extension of time to file. You need to fill Form 4868 by the due date to request for extension. By filing Form 4868 you will get a 6 month extension to file your return. But remember extension to file is not an extension to pay tax. You will have to pay tax on original date or return you will owe interest and may be subjected to late payment penalty.
Audit Opinions in US- Scope Limitations
Auditor will provide qualified opinion or disclaimer opinion in case while conducting audit, auditor is unable to obtain sufficient and appropriate audit evidence due to scope limitation. A qualified opinion or a disclaimer opinion will require auditor to include a basis of modification paragraph before the opinion paragraph. In basis of modification paragraph, auditor will include the possible effects of the matter resulting due to scope limitation. If the scope limitation is imposed by client, and management refuses to remove the limitation, auditor is required to communicate the matter to those charged with governance. In case of scope limitations, auditor is required to try and obtain sufficient and appropriate audit evidence by performing alternative audit procedures. If sufficient and appropriate audit evidence is obtained by performing alternative audit procedures, audit will not modify the standard audit report. In evidence is not obtained, auditor will choose to provide a qualified or a disclaimer opinion. There is a difference between limited reporting objective and scope limitation. If auditor is requested to report only on a part of financial statement, it will be a case of limited reporting objective and not scope limitation. Examples of scope limitations are when auditor is refused by the client to send confirmation to the customers and when accounting records are destroyed and not available for audit. Depending on pervasiveness of information, auditor will choose to provide a qualified opinion or disclaimer opinion in case of scope limitations.
Audit Opinions in US- Departures from GAAP
Inadequate disclosures and omission of cash flow statements are two examples which an auditor can face at the time of auditing the financial statements. They can be said to be departures from GAAP. While auditing, if auditor comes across financial statement misstatements due to departure from GAAP, auditor will issue qualified opinion or adverse opinion with basis of modification paragraph. Basis of modification paragraph appears before the opinion paragraph in audit report and should contain the description of departure of GAAP and quantification of financial effects due to departure in the financial statement. If quantification is not practical, auditor should state in the paragraph that the quantification is not practical. Audit client may request the auditor to include a comment stating that other accounts are fairly presented as per GAAP. Auditor should not accept the request as it may lead to contradiction of qualified or adverse opinion.
Audit Opinions in US- Uncertainties
Auditor will modify the standard audit report if conclusive evidence relating to uncertainty of future outcome cannot be made at the time of audit of financial statements. If uncertainty is significant, auditor will issue an unmodified opinion with emphasis of matter paragraph. The emphasis of matter paragraph should refer to the note in financial statement where the uncertainty is described and also state that the opinion is not qualified with respect to the matter. In case there are multiple significant uncertainties and auditor is not able to form an opinion as a whole, a disclaimer opinion will be appropriate. A classic example of issue of unmodified opinion with emphasis of matter paragraph is when the result of a law suit against the client whose financial statement are being audited is uncertain.
Subscribe to:
Posts (Atom)