The tax situation for us last year is looking a little complicated, thanks to a combination of life events, business moves and tax law changes that have just recently come up. I have just finished speaking to my tax accountant and he told me jokingly, that we were in trouble.
My tax guy is not too happy about the additional work we are making him do, and as a consequence, he’s forced into filing for an extension for our taxes, despite our early preparation efforts. This isn’t altogether our fault though, because he claims that this year is one of the busiest his seen in a while, mainly due to some company bankruptcies affecting some of his other clients, some personal bankruptcies and foreclosures going on, as well as last minute changes in the tax law that have happened in the last year.
Here’s why our taxes are more convoluted this year than in previous years.
Our Tax Return Headaches
(1) We unloaded 75% of our company stock options in a very short span of time.
I’ve mentioned this ad nauseam here, given how much it’s impacted our lives. Because of these financial events, we are seeing a bit of a bump in our income due to the option unloading that we did last year, despite our main breadwinner’s job loss. This one time only situation has pushed us into AMT territory, so we’re bracing for some bigger taxes this year. Not that we’re seeing any material benefits to any option gains we’ve made, as these are being poured right back into the new businesses we’re trying to establish. As I’ve said before, when those options were liquidated: bye bye easy retirement.
(2) I started a few home businesses and a consulting service.
The loss of a steady job in our household has encouraged me to look into additional income sources to help support our cash flow needs at this time. This spawned some home business ventures which brought in a small profit last year. While some of these businesses worked, others didn’t. The tax guy has allowed us to look into applying home office and business expenses deductions against any profit, which has yielded some tax savings. If there were no profit, he wouldn’t have been keen on having us take a home office deduction as that would potentially trigger an audit.
As a reminder, here are the things you can expect to deduct as business expenses:
- Home office
- Travel, meals, entertainment and gifts
- Professional fees and dues
- Office supplies
- Insurance premiums
- Furniture
- Retirement contribution
- Other equipment
- Social Security
- Software and subscriptions
- Telephone charges
- Mileage
- Child and other labor
Now the home office deduction can be part of what you decide to claim. It’s a neat tax deduction if you can qualify for it, because it permits you to deduct expenses you’re already paying for to run your household. The idea is that since you’re using a proportional amount of resources to run your office, that portion of your expenses can be taken out of your gross income for tax considerations. Just how much of the space is deductible? Measure your work area and divide by the square footage of your home. That percentage is the fraction of your home-related business expenses — rent, mortgage, insurance, electricity, etc.– that you can claim.
Here are the ingredients for your home office deduction:
- Property insurance
- Utilities/telecommunications fees
- Home repairs specific to your office
- DSL/other fees to support your home office operations
(3) I screwed up my charity tax deduction tracking process.
Every year, I’m usually pretty good about recycling our surplus items to give away as charity donations. But we were somewhat distracted by changes in our usual routine last year, so that I wasn’t as meticulous with our financial record tracking as I normally am. In the past, this wouldn’t be an issue in the realm of charity deductions since that would mean that I could claim our donations of under $5,000 in our tax return without much question, though to be sure, I get Salvation Army receipts as well as refer to proper appraisals and valuations of property via books and software such as It’s Deductible. But since I’ve been bad, and because new laws have just been passed about stricter government regulations regarding charity donations, I’m out in the cold this time. It looks like the only things I can claim this year are the ones I’ve made in cash, since I have cashed checks to prove my donations.
Tax Deductions Require Proof, So Sayeth Uncle Sam
How can we all make sure we have sufficient evidence to justify our business and charity deductions? Here are some tips to cover our assets:
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(1) Take photos of your home office.
(2) Take photos of your donated items to charity.
(3) Cash donations now require receipts.
This new requirement has now taken effect in 2007. If you plan to deduct cash donations to your church or to any other type of collection box, you’re now required to keep receipts.
(4) Store your various receipts and keep an actual record of your receipt amounts.
If you’re running a business or just plan to itemize deductions, keep your evidence in one place. Organize and store your receipts, even in a shoebox at a minimum. Consider investing in a financial software package to help you with your record tracking and organizational tasks.
(5) Get software or books that help value your donated items.
It’s Deductible is an example of such a book. It may also be available in software form.
(6) Itemize your donated items more carefully.
You need to provide more descriptive information now such as “five shirts, two pants, one lamp, one chair” rather than just something like “two boxes of miscellaneous items”. Your deductions will need more elaboration in your tax return.
(7) For more expensive items, you may want to get an appraisal.
I can imagine what a hassle this can be so it’s only something to consider for truly more valuable goods.
With our tax guy complaining, I’m just glad I have him to do all the work instead of us trying to wrestle with all the requirements on Turbo Tax. Knowing the esoteric kinks that exist in our financial situation, it would take me till kingdom come to work things out. So for now, I feel it’s worth the premium to pay our pretty fiscally conservative tax guy, whom I consider as a form of insurance against costlier tax mistakes and the potential for a dreaded audit. I told him that the only time I’d ever consider using Turbo Tax is if our lives ever got simpler, but I doubt things will ever be that way again. So I’m going to live by the saying: if it ain’t broke, don’t fix it.
Resources:
AMT: Middle class more at risk than millionaires
IRS cracks down on charity cheats
Give and grow rich with charitable deductions
Copyright © 2007 The Digerati Life. All Rights Reserved.
{ 3 comments… read them below or add one }
As option income is ordinary income, which was likely taxed at near the highest marginal rate, I’m surprised that you’re getting hit with AMT.
I also sold a lot of options last year and was able to load up my deductions (pre-pay state tax due, pre-pay property tax) and still avoid AMT.
Sorry to hear about all the complications.
I’m hoping to sell off my options pretty soon. Can you point me to where you discussed them?? I will have no losses to offset the gains, so I know I’ll take a tax hit. But, I don’t like owning any of my company. And, I will only have about 5k worth, anyway.
Are you having regrets about doing it all at once?
Thanks!
Michelle
Dave, thanks, I finally smoked you out. I’m sure you’re right, when are you not…! lol. 😉
Michelle, I think selling all your shares should be fine especially if you are uncomfortable with your position right now. Depending on the type of option you have, you may be subject to different tax rates so you may want to know the circumstances under which you’re going to sell.
From this article…
There are two common types of plans:
Employee stock options come in two basic flavors: nonqualified stock options and qualified, or “incentive,” stock options (ISOs). ISOs qualify for special tax treatment. For example, gains may be taxed at capital gains rates instead of higher, ordinary income rates. Incentive options go primarily to upper management, and employees usually get the nonqualified variety.