Derham & Logan, EA's - Archived Tax Tips

Archived Tax Tip Articles

How Small Businesses Can Save on Various Smaller Costs

If An IRS Agent Calls, Get It In Writing

A Slip of the Lip May Bring on a Tax Audit

When Can You Stop Paying Private Mortgage Insurance?

What To Do When You Are Approached For Charitable Donations

When Is It Worthwhile To Refinance Your Home?

Roth IRAs Offer Some Advantages over Traditional IRAs

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How Small Businesses Can Save on Various Smaller Costs

Here are some suggestions that may allow your business to save when it comes to buying supplies and paying for various services. Many businesses focus only on big-ticket costs such as salaries and overhead, but the savings garnered from smaller items of cost can also add to a business’s cost effectiveness.

Stationery and Supplies.
Buy lesser-known brands of paper, pens, and other supplies. (Exceptions to this rule would include law firms and certain other professional firms in which the quality of stationery is key to business image.) Instruct staff to spend the time and look for "special deals" on expensive items such as print cartridges. Purchase supplies in bulk whenever possible.

Equipment Servicing.
Some service contracts may not be necessary. Examine whether you are paying for unnecessary equipment service contracts. Depending on the age and dependability of the machine in question, it may make more sense to pay out-of-pocket for repairs.

Telephone Lines.
Periodically ask your carrier whether you are eligible for a better rate on your service. Also, it’s a good idea to examine whether your business is paying for too high a level of telephone service, or whether it could save money under a different service plan.

TIP: Enforce company rules on personal long-distance calls.

Shipping and Mailing.
Employees may be routinely using a higher-cost service than is necessary. Check to make sure employees are using the most efficient services — e.g., using overnight service when U.S. mail or e-mail might be used. Provide employees with guidelines, and check to make sure the guidelines are being followed. Also, ask your carrier every so often whether you are entitled to a discount or a better rate.

Internet Service Providers.
Check to make sure that the ISP you are using is the most efficient one for your business. Further, find out whether a discount is available for paying fees yearly.

TIP: Even in a smaller organization, it is usually more efficient to make one staff member responsible for purchasing services and supplies and asking for bids, if such centralization is feasible.

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If An IRS Agent Calls, Get It In Writing

IRS Agents are required to notify you in writing if your tax return is to be examined. It seems, however, that some Agents are telephoning taxpayers selected for audit prior to sending a written notice. If you receive this type of call from an Agent, do not get into any discussion with the caller because:

You have no way of knowing if the caller is really an IRS Agent;
You may inadvertently divulge information that the Agent is not entitled to; or
You may make an offhand comment that might be misinterpreted by the Agent, causing him or her to adopt a position that will take considerable time and effort to overcome.

TIP: If someone claiming to be an IRS Agent calls, saying that your return has been selected for audit (or for any other reason), ask for written notification. If you receive it, talk to your tax advisor before proceeding further.

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A Slip of the Lip May Bring on a Tax Audit

Many taxpayers have learned, to their dismay, that it generally isn't wise to talk carelessly about their taxes - especially about sensitive areas. Why? Because the wrong person overheard their careless talk and "turned informer," either for revenge or in the hope of an "informer's reward." An informer's "tip" to the IRS will often trigger a tax audit. Even though the taxpayer has done nothing improper, he or she may have to suffer through the audit. Not only is this time-consuming, it an also result in additional taxes due to the discovery of an innocent error on the return or the disallowance of a marginal deduction. TIP: Most informers are disgruntled employees and former spouses or lovers.

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When Can You Stop Paying Private Mortgage Insurance?

If you make a down payment of less than 20% when buying a home, the lender will generally require you to buy private mortgage insurance (PMI). You can generally drop the PMI when you have attained a 20% equity in the home or when the value of your home goes up (due to a good real estate market such as we're currently enjoying) so that your equity constitutes 20%.

Some lenders require you to keep the PMI forever and others make you keep it at least five years.

TIP: To find out whether you can cancel the coverage, send a letter to your mortgage servicing company (the company to which you send your mortgage payments). This will get the process started. You may be required to pay for an appraisal, and you will need to have a good payment record.

If you are able to cancel the insurance, you will receive any prepaid premiums that are in your escrow account.

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What To Do When You Are Approached For Charitable Donations

When you are approached by a door-to-door solicitor for a contribution of either your time or your money, ask questions - and don't hand over any cash (or charge your credit card) until you're completely satisfied with the answers. Charities with nothing to hide will encourage your interest. Be wary of reluctance or inability to answer reasonable questions.

1. Ask for the charity's full name and address and demand identification from the solicitor.

2. Ask if the contribution is tax-deductible as a charitable donation.
TIP: Contributions to tax-exempt organizations are not always tax-deductible.

3. Ask if the charity is registered or licensed by state and local authorities (required by most states and many communities).
TIP: Registration in and of itself does not mean that the state or local government endorses the charity.

4. Watch out for statements such as "all proceeds will go to charity." This can mean that money left after expenses, such as the cost of written materials and fund-raising efforts, will go to the charity. These expenses can make a big difference, so check carefully.

5. When you are asked to buy candy, magazines, or show tickets to benefit a charity, be sure to ask what the charity's share will be. Sometimes the organization will receive less than 20% of the amount you pay.
Caution: Don't succumb to pressure to make an immediate donation or allow a "runner" to pick up a contribution.

6. Call your local Better Business Bureau if a fund raiser uses pressure tactics, such as intimidation, threats, or repeated and harassing calls or visits. Such tactics violate the Council of Better Business Bureau's recommended standards for charitable solicitations.

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When Is It Worthwhile To Refinance Your Home?

Refinancing generally becomes worthwhile if the current interest rate on your mortgage is at least two percentage points higher than the prevailing market rate. Talk to some lenders to determine the available rates and the costs associated with refinancing (such as appraisals, attorney's fees, and points). Once you know what your refinancing costs will be, determine what your new payments would be if you refinance. You can estimate how long it will take to recover the costs of refinancing by dividing your refinancing costs by the difference between your new and old payments (your monthly savings).

Example: Your refinancing costs will be $2,000, your new monthly payments will be $600 and your current payments are $700. It will take you 20 months to recover the costs of refinancing your mortgage, viz., $2,000¸ ($700-$600).

Be aware that the amount you ultimately save depends on many factors, including your total refinancing costs, whether you sell your home in the near future, and the effects of refinancing on your taxes.

TIP: Refinancing can be a good idea if you:

Want to get out of a high-interest-rate loan to take advantage of lower rates.
Have an adjustable-rate mortgage (ARM) and want a fixed-rate loan in order to know exactly what the mortgage payment will be for the life of the loan.
Want to convert to an ARM with a lower interest rate or more protective features than the ARM you currently have.
Want to build up equity more quickly by converting to a loan with a shorter term.
Want to draw on the equity built up in your house to get cash for a major purchase or for your children's education.