What is the marriage penalty?
The "marriage penalty" results when a married couple has a greater tax liability than would exist if they were two unmarried individuals.  It is generally more beneficial for married couples to file a joint return; however, we can help you calculate the most beneficial way to file your tax return.  Some of the disadvantages of married filing separately include

• Some credits and education benefits may be lost due to lower limitations for those with the filing status of married filing separately.
• If one spouse itemizes their deductions, the other must also do so, even if filing separately.
• Up to 85% of Social Security benefits may be taxable for those filing separately.
• Deduction for net capital losses is limited to $1,500 per spouse if filing separately.

Should I file jointly last year if I am getting divorced but I was married at the end of last year?
If you are currently in the process of getting divorced, but you were still legally married at the end of the year, you can elect to file separately.  However, it may be more beneficial for you to work out an agreement with your former spouse to file a joint return.  We can help you figure out the potential benefits of filing a joint tax return.

How long should I keep my tax records?
Tax records should be kept for at least as long as tax authorities can audit your return.  Generally, the IRS has three years (from the later of the due date or date of filing) to audit your return.  However, if more than 25% of your gross income has been omitted from your return, the IRS has six years to examine your return.  Therefore, to be safe, tax records should be kept for seven years after the return is filed.  Copies of actual tax returns should be maintained indefinitely.

Records that establish the basis (or value) of property for depreciation deductions or for calculating the gain or loss at sale should be kept as long as you have the property plus the same seven years established above.

What documents do I need to keep in order to prove that I made charitable contributions?
For cash donations less than $250, a canceled check or receipt from the organization is acceptable.  For cash donations of $250 or more to one organization in a single contribution, written substantiation from the organization is required (a canceled check is not enough). 

Generally, for all noncash contributions, a record should be kept of the name of the charitable organization, the date and location of contribution, a reasonably detailed description of the donated property, and the fair market value of the property.  Additional requirements are as follows:

• For noncash donations less than $250, a receipt is not required where it is impractical to get one. 
• For noncash donations greater than $250, written acknowledgement must be obtained from the charitable organization. 
• For noncash donations greater than $501, the taxpayer's records must also show the acquisition method, date, and adjusted basis of the donated property. 
• For noncash donations greater than $5,000, a written appraisal is also required.

Should I organize my new business as a sole proprietorship, partnership, LLC, C-corporation, or S-corporation?
There are very distinct differences between the various entity types.  For more information, please see our entity comparison chart.  We can also help you determine what entity type meets your needs and goals.

Do I need to make estimated tax payments?
Generally, you must pay estimated tax for 2005 if you expect to owe at least $1,000 in tax for 2005 (after subtracting your withholding and credits), and you expect your withholding and credits to be less than the smaller of 90% of the tax liability for 2005 or 100% of your 2004 tax.

For more Information, see IRS Publication 505.

What is Alternative Minimum Tax (AMT)?
The AMT applies to taxpayers who have certain types of income that receive special treatment, or who qualify for certain special deductions under the tax law.  Because of these special benefits, some taxpayers with substantial income can significantly reduce their regular tax liability.  The AMT is an additional tax that ensures that these taxpayers pay at least a minimum amount of tax.  We can help you minimize your total tax liability, including that of AMT.

Do I have to pay taxes on the sale of my personal residence?
Generally, if you have lived in the home as your principal residence for two of the past five years, you need not pay tax on a gain of up to $250,000 ($500,000 if married filing jointly).   However, there are a few exceptions to the two year rule, and there are special rules if the home was used as rental property.  We can help you determine the correct treatment for any gains realized on your home sale.

What is the difference between an independent contractor and an employee?
The IRS uses a set of 20 factors to differentiate between employees and independent contractors, but these factors include

1. Behavior control.  An employer can control how an employee does the work.
2. Financial control.  An employer can control how the business aspects of an employee's activities are conducted.
3. Relationship.  An employee generally has access to benefits, and the employment is more likely long-term.

We can analyze your situation to determine if you have or should have employees or independent contractors.

Can I take deductions for having a business office in my home?
You may qualify to take deductions for using your home for business.  Expenses of maintaining the home are usually deducted based on the business use percentage of the home.  For any part of a home to qualify as business use, the area used for business must be used regularly and exclusively as the principal place of business, as a place to meet with clients in the normal course of business, or in connection with the business if it is a separate structure not attached to the taxpayer's personal residence.

Can I still claim my older children as dependents?
Generally, only children under 19 years of age may be claimed as dependents without income limitations.  However, if the child is between the ages of 19 and 23 and is a full-time student, the income limitations are waived.  Any child over the age of 23 may be claimed if their income is less than $3,100 (for 2005).  In all cases, several tests must be met:

• The child must be a U.S. citizen.
• The taxpayer must provide more than 50% of the child's support for the year.
• The child may not file their tax return with married filing joint status.

Who else can I claim as a dependent?
To claim dependency for someone other than a child (see rules for children, listed above), generally all of the following five requirements must be met:

1. The taxpayer must provide over 50% of total support for the individual.
2. The dependent must have less than $3,100 (for 2005) of gross income.
3. The dependent must be a U.S. citizen, resident or national, or a resident of Canada or Mexico.
4. The dependent must not be filing his own return jointly.
5. The dependent must live in the taxpayer's household the entire year or be related (only specific relationships qualify).

There are some exceptions to the rules listed above.  We can help you determine if an individual qualifies as your dependent under any of these exceptions.

Should I adjust my income tax withholding during the year?
The IRS has created a very easy-to-use withholding calculator to determine your tax liability for the year.  If adjustments to your withholding are necessary (based on your current withholding rates), the IRS website will recommend increases in withholding that should be withheld for the remainder of the year.  We can also help you estimate if your withholdings will be sufficient to cover your tax liability.

What is the manufacturing tax deduction?
A part of the American Jobs Creation Act of 2004, this new deduction begins in 2005 and impacts many U.S. businesses.  Starting at three percent of the manufacturer's taxable manufacturing income, this deduction increases to nine percent by 2010.  Service providers do not qualify for the deduction, including businesses selling food and beverages.  If you are making or fabricating a product, you generally qualify for the deduction.  This even includes businesses producing power, construction companies, engineering and architectural firms, and businesses handling, storing or processing agricultural products.  The IRS admits the new deduction is complicated to understand.  We can discuss with you the applicability of this new deduction to your business.

Can I really write off my new SUV?
A vehicle used in a trade or business may be eligible for depreciation deductions.  Recent changes in law have limited the amount of depreciation that may be taken on SUVs purchased after October 22, 2004 to $25,000.  We can help you determine the advantages and disadvantages of purchasing an SUV before the end of 2004.