Many people can not itemize their deductions on the federal income tax return because the standard deduction is just so high that it is often better than itemizing. However, in Alabama it takes a lot less to itemize because the standard deduction is lower and FICA taxes (Social security and Medicare) are deductible as itemized deductions for Alabama purposes. This means that income alone may be enough to create itemized deductions for state purposes. That is where I see many people be a little lazy.
There are several deductions that most people have and they are good deductions if you are having to itemize anyway. Car Tag Tax, Real Estate Tax, Charitable Contributions, and Mortgage Interest are all deductible expenses that have no AGI limits. That makes them pound for pound equal. The only big deal about mortgage interest is that it is typically much large than the others. What I often see is people itemize on state just because of their FICA tax but they forget their car tags, property taxes, or contributions and when we mention it they just say oh don’t worry about it. I get that a little. They have come down, waited to get their taxes filed and now they don’t want to wait to go dig up that stuff. But, if those things totaled to $1,000 (not uncommon) that is a $50 bill their throwing away. I bet they would say something if my bill went up $50.
Medical deductions are the least useful of all deductions you can take as itemized deductions because they have a 10% of AGI limitation before they become deductible. Medical may help on your state return even if it isn’t useful on the federal. In AL the AGI limit is 4% for 2015. However, some people will still benefit because of the new out of pocket limits made standard by the NOT SO ACA. Most folks keep up with checks, or prescription receipts, Dr receipts and so on. That is a good idea but here is a secret. Auditors prefer the annual print outs that are available from your pharmacy or health care providers. I personally think it is more laziness than anything else on the auditors part but it doesn’t really matter. Those reports make their job quick fast and in a hurry and when you are being audited that is a good thing. So get the reports and log your medical miles too http://www.tmicpa.com/mileage/. One other thing to consider to maximize this deduction is bunching your medical expenses into a single year when possible.
I know the headline sounds a little crazy but let me set the stage for you. I had a client today that had a couple of 1099’s he received from a manufacturer of a product he sells. He had rightly reasoned that regardless of the tax he had to pay on the money he was money to the good. Here is where the story takes a strange turn. A peer of his had the same opportunity to receive the same type of incentive but had chosen not to take the extra money due to the tax implications. Worse yet, his taxpreparer had told him it was a waste of time to take the money because of the taxes it was costing him. My client had a great analogy on taking the money. If I give you a $100 bill and then you have to give me $50 in return will you take the money or consider it a waste of time? I am glad to know that my client was smart enough to grasp the concept. I am embarrassed that anyone giving out that kind of advice can somehow find enough client’s to stay in business. If you have received this kind of advice come on over to the light. I am here and ready to help you keep more of what you earn.
Hiring your children to help you in your business is a smart tax planning strategy. The IRS says that children under 18 are not subject to social security, medicare taxes, or FUTA taxes. The State of AL says they are exempt from SUI until they are 21 and the same applies to FUTA. They are subject to Federal and State income taxes but a little planning can make sure you don’t exceed certain threshold amounts which would create the need to file a federal or state tax return. For some it may even be worth the filing for the tax savings.
I recently ran into a little Quickbooks quirck so I thought I would give you a warning. When I archive something on a computer my expectation is that if I need it I will be able to pull it up and use it. When processing W-2’s I archive them inside Quickbooks. I can see a link to them so I have always believed that if I needed and old W-2 for an employee I could just pull it up and print it. No need to store nasty paper documents for 3 years because I do a great job of backing up my data and if I need it I can get it.
Well here is my latest discovery. Quickbooks uses an image of a blank W-2. The data that goes on the w-2 is archived but the image is an active file an is update from year to year. So, if you need to print a 2015 W-2 in 2017 because an employee approaches you and has lost the original you can’t do it. You will have the correct data for the 2015 W-2 but the image that it pulls up will be 2016 form W-2.
For me that is not a real big deal because I always have back years of pre printed W-2’s. I also have the software to use the archived data so I can reproduce a lost or misplaced W-2 for an employee. But most folks don’t have the software or the forms just laying around so if you have relied on those archives you may have a problem. My recommendation is keep a copy of the employee W-2’s on paper for a minimum of 3 years. That way if you need it you will have it.
Maybe the guys at Intuit have never had an employee lose a W-2 in a future year. I doubt there are many employers that have not had a similar request at least once. Maybe we can get the programmers to give a choice or maybe we can get them to create a real pdf archive that does not depend on their W-2 image file. I’m not holding my breath.