By Jan. 31, most of the tax documents would have been received by the taxpayers. A good record keeping makes the tax filing helpful, easier and less frustrating. Also, it enables to explain and document any item on the return the IRS or other tax agencies might question, and could prevent you from having to pay additional taxes and penalties for unsubstantiated items. Especially business tax payers have a need to keep elaborate supporting documents that substantiate income and expenses.
Below are some record-keeping tips and documents that may help with your tax filings:
W-2/wage statement: Verify that all information on the W-2 is correct – especially if you have deductions like donations, insurance, retirement plans. If you don’t receive W-2 before Jan. 31, 2017 or if you receive an incorrect W-2 – first contact your employer and then IRS requesting them to provide you with the copy of W-2 or transcript or corrected statements.
Form 1099 These are important tax documents and there are various form 1099s for different tax purposes:
1099-Misc: Non-employee compensation, rental income, royalties, other income;
1099-B: Proceeds from brokers – stock and securities transactions;
1099-C: Cancelled debts;
1099-DIV: Dividends – qualified dividends have a lower tax rate;
1099-INT: Interest – Interest on investments including bank interest, CD/money market;
1099-G: Government refunds or payments;
1099-Q: Education account distributions;
1099-R: Pension and IRA distributions;
1099-T: Tuition fees paid.
Receipts are important for tax deductions and credits like donations, mortgage interest, property taxes, child and dependent care, education expenses, etc. For business tax payers, there may be additional record keeping, including receipts for purchase of assets, payments to vendors, payments to employees, rent, and many other operating expenses.
With modern and latest technologies, most receipts can be saved and preserved electronically.
Bank/credit card statements
Many tax-related transactions are done through banks and credit cards. In such cases, it may be a good idea to save the statements including canceled checks. For business tax filers, bank and credit card statements are critical to report proper income and expenses.
Schedule K-1: If you have a beneficial interest in partnerships, S-corporations, or other estates and trusts, you may receive schedule K-1 from the entity. The Schedule K-1 may slightly vary depending on whether it comes from a trust, partnership or S corporation. However, all K-1s provide detailed information about the type of income, deduction or loss so the recipient can accurately report the information on a tax return.
Forms 5498/5498 ESA: Any contributions made during the calendar year to any individual retirement accounts are reported on form 5498; 5498ESA is related contributions to educational accounts are reported on this form. Forms 5498 may arrive late sometimes even after filing the tax returns – so ensure that you have all relevant retirements and educational account information from the respective entities.
Other important tax issues
Reporting specified foreign financial assets (Form 8938)
Unless an exception applies, you must file Form 8938 if you are a specified individual that has an interest in specified foreign financial assets and the value of those assets is more than the applicable reporting threshold.
FBAR (Report of Foreign bank and financial accounts)
You may have to file FBAR if you had a financial interest in or signature authority over at least one financial account located outside of the United States; and the aggregate value of all foreign financial accounts exceeded $10,000 at any time during the calendar year to be reported.
Beginning in 2017 (reporting for the 2016 calendar year), the FBAR will share the same filing deadline as individual income tax returns, April 15. Like income tax returns, FBARs will be permitted to go on extension up to six months, for a final deadline of Oct. 15. FBAR must be filed electronically through FinCEN’s BSA E-Filing System.
The length of time you should keep a tax related document depends on the action, expense, or event the document records. You must keep your records as long as they may be needed to prove the income or deductions on a tax return.
There are various limitations, thresholds and procedures for many of the deduction and filings. Please consult your CPA/Tax attorney/or tax consultant for proper guidance with the above subject matter.
In accordance with IRS Circular 230, the above information is not intended or written to be used, and cannot be used as or considered a "covered opinion" or other written tax advice and should not be relied upon for the purpose of avoiding tax-related penalties under the Internal Revenue Code; promoting, marketing, or recommending to another party any transaction or tax-related matter(s) addressed herein; for IRS audit, tax dispute or other purposes.
Suresh Kumar, CPA, MBA is the Principal of Kumar Consulting, PA, a CPA & Consulting firm licensed in the states of FL, KS and MO and maybe reached at (813) 421-5068 or firstname.lastname@example.org/www.kumarconsultingcpa.com
Are You the ‘Family Bank?’
If you are the person your family turns to for financial support, these insights from Merrill Lynch Wealth Management could help you figure out how to say yes — or no.
Almost every family has one: the person everyone calls when money is tight and they need a helping hand. The more financially responsible you are, the more likely you may be considered “the family bank,” according to a 2013 study conducted by Merrill Lynch in partnership with Age Wave, an organization that explores the challenges of aging. The study, called Family & Retirement: The Elephant in the Room, found that almost two-thirds of people over age 50 provide financial support to family members, with the overwhelming majority saying they do so because “it is the right thing to do.”
Still, if you are that person, you have probably wished sometimes that you could just say no. Maybe you have your own financial issues to deal with, or you doubt the money will be used wisely. Or you are convinced your kids will learn more by saving on their own for a house, a car, a vacation or another big purchase.
Naturally, you will want to be there for your family members when they really need you. But there are times when it makes sense to say a polite no, even to those closest to you. Yet whatever your answer, this can be an opportunity, says Michael Liersch, head of Behavioral Finance at Merrill Lynch Wealth Management. By bringing issues out into the open, you may empower everyone involved and pave the way for more productive, sustainable relationships about money within your family. If you are considered “the family bank,” these rules could help.
Four Rules of the Family Bank
1. Start talking about money with your children when they are young. “It is a good idea to schedule regular family meetings to discuss the role that money plays in your family’s life and how your financial decisions reflect your family’s values,” Liersch says. “From an early age, allow children to ask questions about your decisions so that they can begin to understand the reasoning behind them and develop sound money management habits of their own.” With that grounding, they may have more realistic expectations if they find themselves in a financial bind and consider asking you for help.
2. Create a budget for giving. Even if you pass on your own sound money management habits, there are bound to be times when relatives will need your help. Yet the Family & Retirement survey found that 88 percent of respondents had not made provisions in their budgets for helping family members financially. “We create budgets for such things as travel or shopping, so why not for family giving?” asks Bill Hunter, director of Personal Retirement Strategy and Solutions at Bank of America Merrill Lynch.
Hunter advises that you determine how much you can commit to this purpose without disrupting your retirement saving and your current financial needs. When you have that figure, consider your other priorities. Are there any lifestyle changes you may need to make to keep giving to family members when times get tough? Most important: Do you already have an emergency fund to ensure that you can handle unexpected expenses of your own?
3. Set firm guidelines for saying yes. Decide in advance under which circumstances you would feel comfortable giving or lending money. “If you are going to make a gift of the money, think about using the occasion as a teaching moment,” Hunter suggests. Without preaching or sounding judgmental, try to explain to your relative what you have done to put yourself in a position to provide this assistance. Have you kept your debt under control, for instance, or lived within your means or avoided high-interest credit cards? “For young adults in the family, this could be a valuable lesson,” he says.
“If you expect to be paid back, create a loan document,” recommends Joseph C. Schmieder, principal consultant of the Family Business Consulting Group, Inc. This may include details on how frequently repayments will be made, and whether you will charge interest. If a family member has asked you to invest in a business, request a business plan or other formal details on how the money will be used. “It is important for the recipient to understand your terms,” Hunter says.
4. When you must say no, avoid making it personal. Instead of blaming family members for their financial troubles or questioning their plans, “develop a core philosophy that applies to everyone,” Liersch says. “Explain that this philosophy has helped your family build its wealth and that any loan or gift decisions will be made based on your core values,” such as a strong work ethic or self-sufficiency.
If you dread refusing a request, prepare your reasons beforehand so that you can explain them unemotionally, Liersch suggests. If you cannot afford to give, outline the reasons why. And remember, he adds — even saying no can be a chance to say yes in terms of communicating with your family about money habits and values.
When a family business is involved, Schmieder notes, it is possible that your relatives may not understand the company’s financial limits. “Not everyone may be aware, for instance, that company owners have an obligation to reinvest profits into their businesses to maintain growth,” he says. Use this opportunity to explain that the company’s profits cannot be a ready source for gifts or loans.
As you consider each request, it is always important to remember that gifts or loans to family members will have a direct impact on your retirement planning. An unwritten fifth rule, Hunter says, might be: “Beware of being overly generous, or you could end up needing financial help yourself.”
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