Tax Credits – those insignificant questions at the end of the form where you actually get to add money back – do you read them? Do you often look them over and wish you understood them?

If you are paying more taxes in at the end of the year, chances are good that you should have some kind of credits coming…

But what kind? Where do you find that information?

If you hired a qualified tax professional to do your taxes, they should be asking questions that will help you get the most value from your tax preparations. There are specific directive forms from IRS that do help with figuring those credits. But you have to do a lot of research to find them. Is it worth the time and effort it takes to find those documents? YES.

Specific Tax Credits that might apply to you include Education Credits, Child Tax Credits, Employment Credits, Enterprise Credits (if you own your own business), and Childcare Credits. You can research many of these topics online with favorable results. If in doubt, contact IRS and ask about specific documents and Informational Circulars that explain the wherefores and whys of specific forms.

If you consistently have to pay more tax at the end of the year, I highly recommend you find a tax consultant with proper credentials to help you figure the best use of your tax dollar.

Best-case scenario: You pay in every dime you owe in taxes, but not one penny more.

IRS Rules and Regulations are there to support our government; they are created to make tax paying as fair and equitable as possible for the Tax Payer. Use them to your benefit.

Most commercial property owners, even those who use professional accountants, fail to take advantage of cost segregation, a tax mechanism that could generate substantial savings in federal income taxes.

While most accountants are familiar with the approach, some are hesitant to recommend it without a documented analysis of correct depreciation amounts. The numerous intricacies of IRS designated building components make it difficult for some accounting professionals to be cognizant of all applicable items on a specific property. CPAs recognize that in order for the client to fully benefit, it is usually necessary to seek a real estate specialist to provide an independent report supporting the owner’s depreciation schedule.

Although it is vastly under-utilized, cost segregation is no wildly speculative accounting tool. In fact, the American Institute of Certified Public Accountants’ National Journal of Accountancy has published numerous articles in support of cost segregation.

It’s a conservative, yet powerful technique for generating federal tax reductions by properly applying tax regulations to depreciate commercial buildings or apartments.

Cost segregation identifies applicable components and establishes the value and correct time line for depreciation. Under typical circumstances, depreciation is spread out over as long as 39 years. However, cost segregation applies depreciation to parts of the property in 5-,7- and 15-year increments. This acceleration in depreciation time reduces the income subject to federal taxes. This method does not dictate alternative minimum tax issues.

Professionals Prepare Detailed Reports
To perform a cost segregation analysis, initially the building’s cost basis for construction, renovation and repairs is reviewed. A technician goes on site to take detailed measurements and observe the quality and condition of the property. After the site visit, he or she calculates the value of the property using widely accepted pricing resources and local economic conditions.

A cost segregation study produces a professional document that is backed by careful research. The results are summarized in a detailed report, documenting the amount of 5-,7- and 15-year property that qualifies for short-life depreciation.

Real estate appraisers or engineering firms typically have the knowledge to perform the detailed cost segregation studies, frequently at the recommendation of the owner’s tax preparer. Preparing the study requires expertise in evaluating real estate and complete command of the regulations that detail these depreciation options. Internal Revenue Code regulations outline approximately 130 categories of property, which qualify for shorter lives.

Cost segregation regulations contain a lot of variables that are not necessarily intuitive. The 5-year property includes items such as carpet and vinyl flooring. Seven-year property may reflect signs and parking lot striping. Fifteen-year property encompasses paving and landscaping.

Many CPAs Recommend Cost Segregation
Most property owners instinctively believe their CPAs are performing cost segregation for them, but research has suggested that this tool is used only 5% - 10% of the time. CPAs and other tax preparers may not routinely perform the study because it involves real estate appraisal methodology and specialized knowledge outside the scope of a typical tax practice. Even though cost segregation may be unfamiliar territory to some accounting professionals, it is highly praised by many accountants.

“Cost segregation is a powerful and necessary part of accurately calculating depreciation for real property,” comments CPA Bill Bandy of Blakely and Bandy, a Houston-based accounting firm. “A properly prepared study is invaluable to me as a CPA because it provides reliable support for preparing the depreciation schedule and reducing my client’s taxes.” Recent changes in tax regulations make cost segregation more attractive and allow it to be implemented years after the completion of a real estate purchase.

How Does It Work?
Historically, most depreciation schedules are split between land and long-life property. Long-life property depreciates over 27.5 years for apartments and 39 years for most commercial properties. A cost segregation study can typically allocate 20% to 40% of the improvement basis to short-life categories, and sometimes more.

High-income owners typically pay a 35% federal tax rate on ordinary income and a 15% rate on capital gains. The mechanics of reporting the gain on a sale usually allocate most of the gain to capital gains, which is taxed at 15%.

A cost segregation study actually reduces the amount of long-life property, which is recaptured at 25% by allocating more of the basis to the 5-,7- and 15-year property. If cost segregation is utilized from inception until a gain on the property is recognized, it can reduce the federal tax rate from 35% to 15% for most investors. The exceptions are C corporations, which pay the same tax rate for either ordinary income or capital gains.

Who Prepares Cost Segregation Studies Today?
Appraisal and engineering firms, Big Four firms and spin-offs of Big Four firms are the primary providers of cost segregation studies. Some accounting firms offer the service but frequently outsource the actual report preparation to an appraisal or engineering firm. With the introduction of new providers, the price gap has widened between very low cost analytical studies and much higher large firm rates.

Do All Properties Benefit From Cost Segregation?
Cost segregation is typically effective and financially feasible for properties that have an improvement basis of $500,000 or higher.

Properties with a great deal of site-improvement, including landscaping and parking, generate great results.

Cost segregation can be performed for properties anywhere in the United States. It is effective for apartments, office, retail, industrial, self-storage and many special use properties.

“Clients expect us to seek out and utilize tools which will minimize their federal taxes,” says CPA Sheldon J. Donner of Donner Weiser & Associates, P.C., an Atlanta-based CPA and consulting firm. “Cost segregation is an appropriate, conservative and cost effective tool to substantially reduce federal and state income taxes. Our clients have been extremely pleased with the results.”

When Should I Obtain A Cost Segregation Report? “We routinely obtain a cost segregation study after purchasing an investment property,” said Jeff Harris, chief financial officer of Boxer Properties, a national property investment firm. It typically makes sense to obtain a cost segregation report the year a property is purchased or built. Property owners who purchased or constructed property after 1986,often can benefit substantially by recouping previously under-reported depreciation without filing amended tax returns.

The IRS has changed the regulations on donating vehicles to charities. If you donated a car last year, you need to read the following to understand the new rules.

Giving Your Car to Charity – The New Tax Rules

Millions of people donate cars, boats, RVs, motorcycles and many other forms of transportation to charities each year. While doing a good thing is one motivation, reaping a sizeable tax deduction is also a motivating factor. Unfortunately, the IRS has concluded that more than a few people were deduction very optimistic values for their cars. Instead of auditing everyone, the IRS simply changed the deduction rules for vehicle contributions to charity.

If you donated a vehicle of any sort to a qualified charity, but claimed less than $500 as a deduction, you can stop reading. The rule changes don’t apply to such situations. If you are claiming a deduction in excess of this amount, read on.

The new IRS regulations are pretty simple to understand. If you donated a vehicle to a qualified charitable organization, the amount you can deduct is the exact dollar value the charity receives when it resells the vehicle. Put another way, you can no longer claim the blue book value of the car. The IRS wants to know what it was really worth, not what it would be worth if you hypothetically repainted it, got new tires, rebuilt the engine and so on.

Charitable organizations are more than aware of the new regulations and they will more or less take care of everything for you. To donate a car, you simply arrange for delivery to the charity. The charity will then resell the car at some point in time. The organization will then will send you correspondence detailing the gross proceeds from the sale of the vehicle.

This correspondence should, but is not required to, come to you as Form 1098-C. Yes, another form. Simply take the deduction for the gross proceeds on Schedule A and attach the Form 1098-C to your tax return. If the charity sends you a written letter, attach that to your tax return.

With the recent push by President Bush for alternative fuel strategies, much confusion has arisen regarding tax incentives for hybrid vehicles. This article clarifies the issue for you.

Tax Deductions for Your 2005 Hybrid Automobile

People buy hybrid vehicles for different reason. They are good for the environment. They get much better mileage, which saves money. There are tax incentives for buying them. With the recent energy plan put in place by the federal government, there is a lot of confusion regarding the tax incentives.

Specifically, the question for most people is whether they can claim a tax deduction or a tax credit when they buy a hybrid. Here is the breakdown:

The Good – If you purchased a hybrid vehicle in 2005, you can claim a tax deduction.

The Bad – If you purchased a hybrid vehicle in 2005, you cannot claim a tax credit.

The Ugly – If you had waited till 2006, you could have claimed a tax credit.

Tax credits save you a lot more money than tax deductions. Tax deductions are applied to your gross income like any other deduction. This helps lower your tax bill, but tax credits are much more powerful. Tax credits are not taken out of your gross income. Instead, tax credits are taken out of the exact amount of tax you owe the government. If you owe the government $10,000 after filling out your tax return and can claim a $2,000 tax credit, your final tax bill is $8,000.

You are stuck with a tax deduction tax deduction if you purchased a hybrid in 2005, but at least it is a nice one. The deduction amount is $2,000 for vehicles certified by the IRS. They include:

Most home sellers are very excited on closing day. They anticipate seeing a very large check, usually the largest check they will see for any type of possession or investment they have sold. But, come the following April 15th, their accountant will be asking whether there are any taxes that must be paid on the profit.

When the 1997 Tax Act passed, the home sale rules were completely changed. Many home sales that were not taxed under the old law may now be subject to tax. But many more people who might have paid taxes on the profits of their home sale under the old rules do not pay anything under the current law.

There are three tests to meet in order to have the profits from your home sale excluded from income taxes:

1. Use test: You must have lived in your home for any two years out of the last 5 years.
2. Ownership test: You must have used the house you sold as your principal residence for any 2 years out of the last 5 years.
3. Timing test: You must not have excluded gain from the sale of another home within the last 2 years.

If you meet all three tests, you can exclude from your taxes up to $250,000 of gain, if you are single, or up to $500,000 of gain, if you are married, filing jointly. If only 1 spouse meets the Ownership test, the full exclusion is allowed, as long as both spouses meet the Use test. Or if 1 spouse has done a tax-free sale within the last 2 years, the other spouse may sell and exclude $250,000 of gain. If 2 non-married persons own a house together and both live there, each can exclude up to $250,000 of gain. Even if you don’t meet the Use test because you did not live in the home for at least 2 years, you may still qualify for a partial exclusion. If you own a second (vacation) home, this tax law will not apply, because you will not meet the Ownership test.

Recent statistics show Americans are simply not saving money for the future. To encourage savings, the government has come up with tax incentives.

Tax Incentives for Saving for Education

Higher education in America is an expensive proposition. If you have a child in college, I hardly need to tell you this. While every parent is proud of a child pursuing education, the glorious event can make for some sleepless night when thinking about how to pay for it. If you have young children, the government has taken steps to make saving for college attractive from a tax perspective.

There are a number of different tax incentives to promote saving for education. One such program is known as the Coverdell.

A Coverdell account is designed to promote education savings by removing part of the tax penalty of doing so. The basic idea is that any money distributed from the account will not be taxed so long as distributions don’t exceed the expenses of pursuing education. Here is how it works.

An account is set up for a beneficiary – the child. You can open one account per child and contribute up to $2,000 a year. The beneficiary must be under 18. Obviously, this is a long-term strategy since contribution amounts are limited. Nonetheless, here are some key things to understand:

1. Distributions are not taxed, but must be used for education costs such as tuition, books and so on.

2. The school can be public, private or religious and the money can be used as early as elementary school, to wit, this particular platform is not just for college.

3. You can use this strategy in addition to the hope and lifetime learning strategies, i.e., they don’t cancel each other out.

4. If distributions do not go to education expenses or are more than said costs, the beneficiary is taxed like income tax and a ten percent penalty is added.