Income tax planning is a complex process, each individual and couple are unique and require a unique solution. If you are single, check Lee's rules to help keep your taxes down. Our objective at GayTax is to have less taxes paid (net) for all the individuals in the "family" unit. "Pay the lowest legal tax" is our motto. The process takes some thought and organization.
At GayTax we think that it is important to make payments for tax deductible expenses from a joint household account. This household account provides a documentation trail in the event of an audit. In most areas of the United States the audit rate is less than two percent of the returns filed. We have found few auditors are interested in who put the money in the account. The more important issue is who made the payment and was the payment legally required and documented.
The next step is to be sure all names are on any accounts that make tax reports. That means bank accounts, CD's, stock & bonds and real estate. These are the items of income and expense we want to have the option of reporting on either return. We never ask a bank, transfer agent or other institution how to change the tax identification number being reported to Internal Revenue Service. The institutions ask too many questions and often want extra paperwork. Save time and stay out of the institutions way with our simple tip.
Download and print IRS form W-9, you can also call 1-800-tax-form and ask the IRS to mail you a few. Next you type in the name, identification number and address you want reported. The first name on the form is the identification number that is reported. Use you legal name as it appears on your social security card. If you hate the name mom gave you, close your eyes and sign. Next in the payer information put exact account number, policy number, certificate and the address of the company. Mail this form with a cover letter, they have a way of getting to the right place. Check the next statement for corrections. If the changes are not made, mail it again.
We have a summary of the audits that take place in different geographical areas. Don't play audit lotto, it's a bad game if your number gets drawn. Plan ahead, organize your records and get a tax preparer that does not think a "fag" is a piece of firewood.
It is important to verify all information reports on last years tax return. These are 1099's, K-1, mortgage interest paid, be sure tax identification numbers are reported are the correct individual. Unreported income or errors in identification number cause problems. The tax identification numbers can be changed at any time during the year.
In tax planning there are general rules.
Defer income and report income on the return with the lowest rate.
Accerlaterate deductions and report the deductions on the return
with the highest rate.
To help you get started, we made up some typical couples. These are types of couples we see in our San Francisco practice. We have started with the most typical couple. Each succeeding couple can use the information from the others.
Going from the simple cases to more complex
cases makes format a little easier to write and read. If we did not
make that very clear, read all the couples until you get to the couple
most like your family. In all cases you should calculate the income
tax for both individuals, using different methods, add them together
to find the combination with the lowest tax.
Couple A: Both are salaried or wage earners, they have no children at home, and do not own their home. They earn about the same amount of money. Unless you live in a state that has an income tax, it is not likely that your total itemized deductions will exceed $3,500 per year. It is rare to medical deductions on a return (barring major illness) due to the high deductible, which is seven percent of your adjusted gross income. If your employer has a medical cafeteria plan, use that for any co-payments for services or insurance. If your company covers domestic partners, include those expenses in your plan.
If total itemized deductions for one of the individuals exceed or is close to the $3,500 allowance, it is an advantage to shift contributions from the household account to this return. Don't forget the in-kind contributions when you give things to charity. Out of pocket expenses (not your time), including travel are deductible as contributions. Get a good checklist of deductions, including investment expenses and employee business expenses. Please read the rules on employee business expenses. They must be necessary, reasonable and REQUIRED by your employer. High employee business expenses are an audit flag!
In the gross income of either individual
is low enough, you may qualify for federal low income tax credits. These
credits are refundable. Check your tax return for other credits and
deductions that can be taken without itemized deductions.
Couple B: Both are salaried or wage earners, have children at home or eligible dependents and do not own their own home. They may earn about the same amount of money. One of the individuals can be head of household. All of the facts for couple A apply. A cafeteria plan for childcare will most often save tax dollars, if you are lucky enough to have an employer provide this benefit. Child care subject to certain limits is deductible. You will need an identification numbers for all child care providers. Don't forget if they work in your house, they are employees. Be sure you use the same name for each child or dependent and the correct number that is on their social security card. Child care is a deduction or credit you must chose one method. Some cost of child or dependent care are medical expenses. This expenses must be under doctors orders.
Couple C: One is a salaried or wage earner, the other individual does not work or is disabled. There maybe children at home and they do not own their home. Most cases are either a mother on AFDC or a disabled partner. In order for the working partner to claim a deduction as a dependent, they must provide more that half of the support of their domestic partner or eligible dependent. With AFDC, SSA, SSI or employer provided benefits this is a difficult test to meet.
It may be possible that the individual not working can be a dependent for medical expenses. The rules are the same as dependents. If out of pocket medical or care giving costs exist, first try for inclusion in a cafeteria plan that includes domestic partners and other dependents. If there is no plan available, out of pocket medical costs may be deducted on the return of the working individual only if the dependent test is met. Taxable benefits and pensions can be reduced with itemized deductions.
If employer or public benefits are provided
to the individual who does not work, be sure you know the rules. Often
other income and assets are part of a means test to measure on going
eligibility. This is a very important area to seek advice an be sure
all the "T's" are crossed.
Couple D: Both are salaried or wage earners, may or my not have children or other eligible dependents and they own there own home. In this couple both may be able to itemize their personal deductions. If incomes vary, one individual might chose to itemize and the other claim the standard deductions. Joint accounts are very important in these cases.
Always be sure the mortgage interest is reported to the social security number of the highest wage earner. You can change the reporting number at any time during the year. Contact your lender for more information. Mortgage interest taxes and be split among the owners of record in a number of different ways.
For example, percentage of ownership may
be different, percentage of contribution to expenses may be different.
Other factors may be present to allocate the deductions for interest
and taxes using different methods. If you are deducting interest
and taxes and you are not the individual reported on the form 1098,
attach a copy of the report to your return. All the deductions
for our other sample couples applies.
Couple E: One is salaried or is a wage earner, the other is not working or is disabled and they own there own home. Get some help if there are public benefits being received. All the suggestions from couple D apply here. Be very carefully in this situation, if the cause of disability is AIDS you must focus on an objective to met medical and care giving expenses and try to preserve assets for the survivor.
Couple F: One is self employed in there
own business or corporation, the
other works in the business or outside employment. A partnership will not offer all of these tax benefits. Talk to your tax advisor at GayTax for more ideas.
Now we can have some fun and bring the taxes as low as possible. Income is shifted with payroll checks. If there are children old enough to work, they too can be paid. Even if your partner works outside of the business, they can still get paid. Withholding, social security, unemployment and workers compensation will apply. Sole proprietors can pay children without social security coverage. You can exclude Officers from worker compensation, but we do not advise our client to exclude unless the rate is very high. Many officer owners will find workers compensation is cheap (deductible) insurance.
As many expenses as possible are reported on the business return. Things like auto and truck expenses. Travel for business purposes, meals and entertainment, computers and supplies. Telephone and long distance from home can be deducted if they relate to business. Have all you long distance calls billed to the business telephone. Use one of our tax organizers as a check list.
Health insurance can be deducted for the owners, if certain conditions are met. If you provide domestic partner benefits, one of the members of the household gets domestic partner benefits for the other. The result is deduction not subject to income limitations. The use of a medical reimbursement plan can cover out of pocket or plan deductibles. Your business must provide the same benefits for all it's eligible employees.
This were careful planning and documentation of expenses will provide a dramatic reduction in taxes for the "family". In order for and expense to be deductible it must be documented. The expense must be ordinary and reasonable for the type of business.
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