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How to be a better informed voter - courtesy of the IRS

 Now you can find out who is running a tax-exempt political organization and how the organization is spending its money. You can also search the data to see who is contributing, down to name, date, and amount of contribution.

One of the best features of the site is its search capability. The Web site includes a helpful guide on how to search at the basic or advanced level. It even includes a number of pre-formatted "popular searches" to extract commonly requested information. You can also download data from the reports if you wish.

If you hear an ad for a political organization or are about to make a contribution, consider checking the group out first. You can access the site at www.irs.gov/polorgs.

Simplify your life by organizing your tax records

Did you spend hours pulling together your tax records in preparation for filing your 2004 tax return? It doesn’t have to be that way. Avoid the problem next year by taking a few simple steps now.

• First, decide what records you need to keep. For the current year, you’ll need records of income items and deductible expenses. Use last year’s tax return as a guide.

• You’ll also need to keep some items for longer periods. For example, you may need purchase records for your house and other investments years later to calculate your capital gains.

• Set up a filing place for each category. Use folders or plastic pouches for paper records, such as charitable receipts, property tax payments, and mortgage reports.

• If you manage your banking and finances online, open up a series of folders on your hard drive. Save copies of electronic statements or transaction receipts in the relevant folder. Remember to make regular data backups.

• Then stay current with your records as you go through the year. It’s easier to spend a few minutes each month than to waste hours reconstructing everything at the end of twelve months.

• At the end of each month, highlight income and deduction items in your check register. Use one color for charitable contributions, another for work expenses, and so on. You can do this whether you keep your register on paper or on a computer. Make sure any associated receipts are filed away correctly.

• At year-end, you should know exactly what falls into each category and where the records are.

Remember, the better your recordkeeping, the better your chances of maximizing tax breaks.

There are tax breaks for seniors

• Higher standard deductions. You’re eligible for a higher standard deduction once you reach age 65. In 2005, you can claim an extra $1,250 deduction if you’re single. If you and your spouse are both 65 or older, your combined extra deduction is $2,000.

• Tax credit for the elderly. You may qualify for this direct credit against taxes if you’re age 65 or older during the tax year. There are limitations if your tax-free pension benefits such as social security exceed certain levels. Income limitations may also apply.

• Tax breaks for social security benefits. Generally, you’ll pay no tax on social security benefits if the total of one-half of the benefits plus all other income is less than $25,000 (singles) or $32,000 (married filers). Above those levels, you’ll pay tax on up to 50% of your benefits. High-income seniors could be taxed on up to 85% of their social security benefits.

• Possibly escape filing a tax return. Because of the higher standard deductions and potentially tax-free social security benefits, your taxable income may not reach the filing threshold. You may need to file for other reasons, though.

• Additional breaks on state taxes. Some states offer special breaks on taxes for seniors. Also check whether you qualify for deferral programs or other breaks on your property taxes.

Please contact our Fort Collins, Colorado office to make sure you’re receiving all the tax breaks for which you qualify at any age. 

If you qualify, a percentage of your contributions to an IRA or a qualifying plan will directly reduce the taxes you owe. Here's how it works.

To qualify, your adjusted gross income (AGI) must be less than $50,000 for joint filers. If you're single, the limit is $25,000, or $37,500 for a head of household. If you meet these income limits, your tax credit is a percentage of your retirement contributions. Only the first $2,000 of contributions per person qualifies for the credit. Also, you cannot claim the credit if you are under age 18, a full-time student, or a dependent of someone else.

The credit percentage varies between 10% and 50%, depending on your income level. For example, if you're single with AGI of $15,000 you would receive a credit of 50% of your contributions. If your AGI is at the upper limit of $25,000, your credit would be 10% of contributions. Remember, you also get a tax deduction for your contribution, reducing your tax bill further.

If you haven't been contributing to a retirement plan, this new tax credit adds yet another incentive to do so. You have until April 15, 2003, to make a 2002 IRA contribution that could reduce your 2002 taxes. For more information about the new saver's credit or about retirement accounts, contact our office. 

If you're hit by disaster, look for the silver tax lining

 Also, the IRS must remove interest penalties that result from your delay in paying any tax during the extended filing period

Faster refund. Taxpayers suffering losses in a federal disaster area have a choice of which tax year to deduct the casualty loss. You may deduct it in the year the loss occurs, or it can be claimed on your prior year's tax return. Amending your prior year's return may allow you to get much-needed cash now instead of waiting to deduct the loss on your 2003 return.

Tax-free gain. If the insurance proceeds exceed the tax basis of your property, you will end up with a casualty gain. Casualty gains in federal disaster areas receive special tax treatment.

 For example:

• Individuals may qualify for up to a $250,000 gain exclusion ($500,000 for married couples) on their principal residence. That's because the destruction of the residence is treated as a "sale" for tax purposes.

• No gain is recognized on the insurance reimbursement for the contents of a building as long as those contents were not separately listed on the insurance policy.

If you replace your property with similar property within four years, you may be able to avoid or postpone paying tax on any gain from your involuntary conversion.

If you suffered a casualty this year, give us a call here at Dye and Whitcomb LLC Fort Collins, Colorado to discuss the best course of action in your situation. We are here to help.

Don't let your life insurance be subject to estate taxes

Who should own your policy? Life insurance policies can be owned in many forms: directly by you, by your spouse, by your children, or by a trust. Setting up an irrevocable life insurance trust during your lifetime to own the policy, or having a family member other than you own the policy, can avoid having the proceeds included in your taxable estate.

Removing life insurance from your estate avoids the potential estate tax of 37% to 49% on the proceeds of the life insurance.

Can you transfer ownership? If you transfer an existing policy to a trust or an individual, the proceeds will still be included in your taxable estate if the transfer has taken place within three years prior to your death. Depending on the value of the policy and other factors, the transfer may escape gift tax (and the generation skipping tax).

The drawback to transferring ownership of your life insurance policy is that you no longer have control over the policy, including the ability to change beneficiaries.

Smart planning will save taxes. Proper planning for the ownership of your life insurance is essential. Keeping life insurance out of your gross estate will leave more to your beneficiaries. Contact Dye and Whitcomb LLC if you would like details about this and other strategies that could reduce taxes on your estate.

Not all dividends are equal 

for your 2003 tax return, it pays to know your dividend types.

• Qualified dividends include most common stock dividends paid by U.S. companies. You'll pay a maximum tax rate of 15% on qualified dividends, or just 5% if you're in the lowest two tax brackets. Dividends paid by foreign companies may also qualify if the company is traded on a US stock exchange or meets certain other requirements.

• Other dividends are taxed at higher ordinary income rates. This category includes dividends paid by credit unions, mutual insurance companies, cooperatives, and certain other nonprofit organizations. Some preferred stock dividends may not qualify for the lower tax rates. Even regular dividends may not qualify if you hold the stock for only a short time around the dividend payment date.

What about mutual fund dividends? Some dividends paid by mutual funds qualify for the low rates; some don't. It all depends on the underlying investments that generate income for the mutual fund. "Dividends" paid by a money market mutual fund, for example, probably won't qualify. That's because the underlying investments are usually not equity securities.

Although the rules are clear in most cases, there are numerous exceptions and fine details. If in doubt, contact our Fort Collins office for advice before you invest. It could save you from getting a nasty surprise when you receive your Form 1099-DIV at the end of the year.

There are tax breaks for the disabled

The tax code tries to be helpful to the disabled. It excludes some income from tax, it allows special deductions, and it gives tax credits. It also offers tax credits to businesses for employing the disabled and improving disabled access. Here’s a quick review of some of the special tax breaks.

Other benefits you receive from social security might be taxable, depending on your income level. (If you become disabled, you can also make penalty-free withdrawals from your IRA or 401(k) plan.)

Deductions. A disabled person can deduct some extra items, as well as the normal costs of medical care and drugs. These include artificial limbs, a wheelchair, costs of a guide dog or service animal, and specially-adapted telephones or computers. Other deductions include the costs of learning Braille or sign language. You might also be able to fully or partially deduct special improvements to your home to accommodate your disability. These include items such as wheelchair ramps, wider doorways, and stair lifts.

Work expenses. If you’re disabled and have a job, you can claim an itemized deduction for expenses necessary to let you work. For example, the costs of an attendant to help you at your workplace are deductible.

Tax credits. The Credit for Elderly and Disabled offers a 15% tax credit against disability income, subject to various adjustments. You can claim this credit at any age if you’re permanently and totally disabled.

If you or someone you care for is disabled, or if you employ someone who is disabled, please contact our Fort Collins, Colorado Accountants office. We can make sure that you are receiving all the tax breaks to which you’re entitled

Back to School: Check out these tax breaks

Here's a quick reminder from Dye and Whitcomb of some education tax benefits that are new or improved in recent years.

• Prepaid tuition plans at private colleges Beginning on January 1, 2004, distributions from prepaid tuition plans run by private institutions will be nontaxable. Currently, only state plans qualify for this tax benefit. These plans allow you to purchase tuition credits, at today's rates, that your child can redeem tax-free when he or she attends college.

• U.S. savings bonds used to pay for higher education expenses If you redeem a US savings bond and use the proceeds to pay for qualified higher education expenses, the interest is not taxable. There are income limits, and only certain expenses qualify. (Bonds must be purchased after 1989 by someone at least 24 years old.)

• Deductions for higher education expenses and student loan interest You can now take a deduction for up to $3,000 of qualified expenses at accredited colleges or vocational schools. You can also deduct up to $2,500 of interest expense on student loans.

• Deduction for classroom supplies If you're a teacher and you buy classroom supplies out of your own pocket, you can deduct up to $250 of the cost.

• Increase in the lifetime learning credit The lifetime learning credit doubles for 2003, to a maximum of $2,000. The credit is calculated as 20% of the qualified tuition expenses you pay.

Don't ignore deductions, or you might overpay your taxes

Nobody knows why so many taxpayers choose not to itemize. Perhaps they consider it too much trouble to keep the necessary records to identify and substantiate deductions. Whatever the reason, if you claim the standard deduction without analyzing whether itemizing would be better, it's time you checked your deductions to see if you're paying more tax than necessary.

Start by looking at the big deductible items – mortgage interest, state and local income taxes, and property taxes. You should be able to easily find these numbers on year-end reports you receive. Add up your charitable contributions and any out of pocket expenses connected with volunteer work you did for charitable organizations. Medical expenses for which you're not reimbursed by insurance are deductible if they exceed 7½% of your adjusted gross income. Some job-related, investment, and miscellaneous expenses are also deductible.

Take some time now to identify all the deductions you'll be entitled to for 2003, and be sure your recordkeeping system is adequate to track them. Don't just assume that the standard deduction is right for you, because it may not be. Keep track of your deductions so that you can itemize on your 2003 tax return if doing so will save you tax dollars.