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Tax Preparation - US, Canada and International - A Division of  Joseph C Smith  Tax Consultants







                                        CLICK ON EACH BLUE TAB TO OPEN FOR FURTHER INFORMATION.
These are basic tax facts. For the temporary travel jobs, see the "FAQ about Traveling" button on the left. Read and learn, but we are also always available to chat on the phone, or the "Ask Us a Question" link on the left allows you to email us without opening an email browser.


This is the number at the bottom of the first page of the 1040 tax return. It is supposedly the total income for the year just before all the deductions kick in. In theory, it is what someone lives on for the year. Financial institutions are most interested in this number when they are evaluating the financial status of an individual. This can hurt a traveler whose earned income (what shows up on their W2), is artificially low, because reimbursements have replaced their income.

The AGI is also utilized in several computations on the personal tax return, including the reduction of allowable medical and business expenses.

AUDITS      - I got a letter! What do I do!?

Breathe! Be it the IRS or a state notice, fax/email it to us and let us look at it. Never forget that we defend any return we sign, that's what you pay us for. If we did not prepare it, we will give you a free initial consultation. Some of our most faithful clients have come to us from audits.

1) It may be nothing but a request for more information, because something is missing. Example: a statement that did not get uploaded from your bank or employer. You send off your copy and it is done.

2) It may be a more serious inquiry requiring substantiation of deductions, etc. If that is the case, we really do not want you to communicate with the IRS/state office. An individual unversed their ways can unintentionally open themselves up to an extensive investigation. Let us do the talking.

3) Realize that the IRS has very slow turning gears. Nothing seems to ever get resolved quickly, no matter what you may want to do. It will be a long drawn out process of 30 day letters, 60 day letters, auditors not setting dates until 3 months later... Once again, that is what we are here for. We have a system of managing audits that requires and ensures nothing gets lost in the process, even though it takes forever. (Yeah, it drives us nuts also.)

AUDITS       - I got an email / phone call from the IRS! What do I do?

Ignore it! Or better yet, forward the email to THE IRS WILL NEVER CONTACT YOU BY EMAIL!!!

The IRS has a listing of instructions at:,,id=179820,00.html.

CHARITABLE DEDUCTIONS      - What values do I give for my donated items?

Many taxpayers have grown up with a type of "old wive's tale" of entering $500 on the charity deduction line, because it did not need to be substantiated. (wink, wink) Those days are over! Today, receipts are required for every donation, AND depending on what is donated and how much is claimed, the receipt requirements get stricter and stricter.

If you have the remotest possibility of itemizing, get a receipt for everything. It must have the date, organization name, and donated amount/value. For non-cash charitable donations (clothing/household items) the receipt should also have some sort of listing of items. Because many of these donation facilities have only tiny receipt slips, it is acceptable to attach your own itemized list of items to the receipt.

The valuation of you non cash charitable donations can be found in multiple areas of the internet. Below we have given you PDF files for the two most common facilities. Hopefully you can utilize these lists to create your own records.

                    Goodwill Donation Values                       Salvation Army Donation Values

EDUCATION EXPENSES     -When are my education expenses 100% deducible as employee business expenses?

When it is a requirement of the job or improves your skills, AND DOES NOT qualify you for a new profession. An associate’s degree to bachelors in many healthcare jobs almost always falls under this qualification. There are several situations that advanced degrees will also qualify for these deductions. Employee education expenses encompass: Tuition, books, equipment, mileage driven to and from school, even partial computer and internet costs. Call the office to talk over your particular situation.  

FILING REQUIREMENTS     - What if I have not filed?

There are many individuals that have put off filing returns for years. Eventually it catches up to you especially if the taxing agencies calculate a tax delinquency based on their own data, or you hold a professional practice license that requires the filing of a return.

The IRS will typically send a letter asking for a filing and if no response is made, will file a return for the taxpayer based on a married filing separate or single filing status. No refunds are issued – that requires a filed return, but any delinquencies that the IRS calculates with be pursued. This is where most back filers find themselves when they come to us.

The attack plan is to file a return. That sounds simple but it can become complex when there are no records or W2’s. The IRS can provide the information that they have, but many states do not keep a record of income and withholding that would be found on your W2. Many individuals who have not filed and have large amounts due ask whether that can make an offer to settle their taxes at an amount less than the amount of the delinquency. The IRS has strict guidelines for this, but you must have all the returns filed before this can be pursued.

FILING STATUS      - Is there ever an advantage to file as "married, but filing separate?'
Rarely, but it does come up occasionally. In the case of when one spouse has significant medical expenses, casualty losses, or miscellaneous itemized deductions it can work out better. Our software allows us to quickly calculate the returns separately, and we keep an eye out for those situations. Very few of of our clients benefit from filing separately.
FILING STATUS      - My spouse owes the IRS, should I file separate? Will I lose my refund?
There are tax breaks for filing jointly, so it usually best to go that route. File separately only if you are unable to get your spouse's information and signature. The thing to realize is that even with a joint return, the IRS has forms for allocating income tax, liability and a proportional refund. They can issue refund checks in your name only, and even mail them to a different address if needed. Don't sacrifice your money because of fears. Call us to talk this over and understand your options.
FILING STATUS      - We are having martial difficulties, or my spouse does not want to file, how should I file?

What you wind up doing here is balancing financial benefits and the status of your relationship. If you can, you want to avoid filing separately. It rarely benefits either person, due to preset limitations.

If both of you can cooperate enough to file as married, and split the refund appropriately, this is best.

If you are legally separated on the last day of the year, or have not lived together between July 1st-Dec 31st, you may file as single or head of household (if you qualify with a dependant).

FILING STATUS      - What are the regulations for registered domestic partners/civil unions/same sex marriages?

This is an ongoing area of change in the tax world. For now, the question is limited to the states that allow for same sex marriages or civil unions. Only a handful of states have a provision for joint filing and unlike common law marriages, this status is not portable, meaning that another state will recognize a union consummated in another state. Call us to discuss your particular situation.

FILING STATUS      - What is a "qualifying person" to be a considered a dependant?

This is a topic that can be filled with "IFs" and "ANDs." The website is really the best place to go to review the requirements and follow the flow sheets.

Here is the link for the page you need:

As always, feel free to give us call or email us with your questions.

FILING STATUS      - What is the difference between Head of Household and Married?

If you are of a married on the last day of the year, you are considered married for the whole year, regardless of whether your spouse works outside of the home or not. There is a financial benefit of joint status that should never be ignored. However, if you are having marital problems, see the other tabs.

Head of Household means that you are unmarried (or considered unmarried) on the last day of the year, can claim dependant who has lived with you for over 6 months of the year and are responsible for maintaining over half the cost of a home. Exceptions exist if that dependant is away from home for temporary absences like school, or if it is a parent (who may be living in a assisted facility).

ITEMIZING      - Do I lose out if I can't itemize?

Let’s clarify what a deduction is first. A deduction represents money spent on something that the government decided you do not have to be taxed on. It is money that you have already spent.

Itemizing is a hassle. Receipts have to be kept and categorized throughout the year. Then they have to be listed on your return, math has to be done with percentages and your AGI, etc. and then all of those records need to be saved in case of an audit. A lot of paperwork for a lot of people, so the IRS decided to create a standard deduction. This represents the average amount that the average person would deduct if he/she were to itemize. No records required. Just subtract that one number from you AGI and you are done. No receipts or records needed. But what about the non-average person who happens to have more than the standard? They are allowed to itemize every qualifying deduction.

What about the person that has less than average? They luck out with more than their share of deductions when they did not even spend the money. Ergo: 50% of the people that “just take the standard deduction” are actually making out better than they deserve!

ITEMIZING      - What records do I keep?

The 2011 standard deduction for a single individual is $5,800 ($11,600 for married filing jointly). If you have more than this in deductions you need to be more diligent in saving receipt and records. To be honest, the best thing to do is to print out one of our workbooks. If we ask for a number, you need to keep a record or receipt for it. If it is not in there, throw it away. We constantly update our workbooks to be accurate.

NEW CLIENT      - Why does TravelTax need to see my last year's tax return?
It is not because we don't trust you. First, it is a requirement for our due diligence as a preparer. Second, there are many items on the previous return that need to be carried forward or used in comparison. Did you claim mileage utilizing the standard deduction or actual costs? Are you currently depreciating any assets? Do you have a capital loss carry forward? ...Sometimes it is easier to look at the previous year's return.
NEW CLIENT      - Why does TravelTax require so much information and ask so many questions?

We defend any return we prepare free of charge. Any penalties or interest that are due to our mistakes, we pay. Our integrity is our most valued asset. You won't find many tax offices like that!

As a side note, we also keep copies of everything you send us in PDF format. In the event of an audit, we will have most of the information we need. In the event that you have all of your records lost or destroyed, we can give you copies of all of your returns, old W2s, etc., free of charge.

MEDICAL & DENTAL DEDUCTIONS      - Flexible Spending Accounts (FSA)

A FSA is an annual pre-tax medical spending account that you contract for a certain amount every year. The total amount is available to you at the beginning of the year, but your contributions are spread over the entire year, with each paycheck. The disadvantage with an FSA is that it falls under a "use it or loose it" provision, which has been known to scare off individuals from even considering it as an option.

Just like everything else, you have to be wise here. It you have regular prescriptions, or medical expenses that you will use regardless, it is to your advantage to put that amount in a FSA. Remember by being tax free, you are increasing every dollar's value by about $0.30. ( If you are thinking that you will get the same benefit by deducting that money spent on your tax return, read the "zeroing out" FAQ below.)

One last thought: It is okay if you do wind up loosing up to 30% of your FSA at the end of the year. That 30% would only have gone to the IRS by way of FICA and income tax anyway. If what is lost is only 10%, you have come out ahead.


MEDICAL & DENTAL DEDUCTIONS      - High-deductible Spending Account (HSA)

HSA are similar to the FSA (see above), but are used in conjunction with high deductible health insurance plans. They give the taxpayer the opportunity to put away pre tax money into an account AND earn interest/capital gains that grow tax free. Amounts can be withdrawn tax free if used for medical purposes. It works on a lifetime accumulation and stays with you until you use it up, regardless of whether you decide at a later date to switch over to a regular insurance plan.

The catch is that the annual deductible for your insurance is high ($3150 for single and $6250 for married in 2012), so it is much better deal for the healthy who are less likely to have regular expenses.

Many use it as a way of adding to their retirement funds if they have already maxed out their retirement contributions for the year. After all, as you age, you are almost guaranteed to have regular medical expenses and you will be able to use your HSA, and save your IRA and retirement money for other fun things... like your winter condo in Arizona!

MEDICAL & DENTAL DEDUCTIONS      - I have expenses every year, but they get zeroed out.

Most taxpayers are aware that they can deduct medical and dental expenses, but they do not understand the 7.5% AGI floor. The AGI for the year (bottom line on the first page of the 1040) gets multiplied by .075 and that sum is subtracted from your total deductible medical expenditures for the year. (A $50,000 AGI reduces your medical deductions by $3750.) For most individuals, it reduces their deduction to zero.

This is why we encourage participation in a FSA or HSA, because it is the only way to avoid the 7.5% reduction.

MEDICAL & DENTAL DEDUCTIONS      - What is deductible?

Only the after tax expenses are eligible to be claimed as a deduction.
     - Most employer provided health insurance is paid for with pre-tax money and does into qualify.
     - Any medical expenses paid out of a Flexible Spending Account or a HSA are pre-tax and do not qualify.

RECORD KEEPING      - What to keep?

What needs to be kept and for how long? Because the IRS has up to 3 years to audit a return, and often they notify taxpayers about 2 years into that time period. Some travelers have to recreate their assignments with correct dates and expenses or pay thousands to the IRS.

Anything used to obtain the numbers on the tax return needs to be kept 6 years. (If the IRS suspects major issues with unreported income, -and travelers have a lot of income tied up in reimbursements, -they can then open the audit up to 6 years.)

REFUND      - What it really is!

What is the point of defining a refund? Explaining what it is not. It is not free cash that a conniving tax preparer embezzles from the government.

It is a result of too much money being withheld from a paycheck. That’s all. That is why the IRS calls it an OVERPAYMENT. Look at the bottom lines of a tax return and you will see that the IRS is refunding the overpayment. At the end of the year “the books are settled” when the tax return is filed. Too much withheld = refund; not enough put in = owe.

Does the person that gets a $4,000 refund realize they overpaid the government by $330 every month? And then they say they need their tax refund to pay off bills!

RETIREMENT      - What is the difference between an IRA and ROTH IRA?

ROTH's are unique in that contributions are after tax - there is no tax deduction for contributing to a ROTH and there are income limits. The beauty of this situation is that while you pay taxes on what you put in, you don't pay taxes on the capital gains/interest when you take it out, provided you take it out under the withdraw guidelines. The other IRA's are salary deferral arrangements. Contributions to these programs are tax deductible, but upon retirement, the earnings are taxable.

High income taxpayers generally benefit more in the long run with traditional IRAs. Young, or low income individuals usually benefit with the ROTH, because that money has a long time to grow.

Talk to your investment advisor about what is right for you.

RETIREMENT      - How much can I contribute?

This requires a lengthy list of “what ifs” that space here does not provide, and combinations of plans can be pursued that will increase the amount that can be contributed. Also, the plans that one would pursue as an employee can produce a result very different from that of a self-employed individual. For the employee, the basic limit is $16,500 a year or $22,000 for those over 50. A self-employed individual can contribute roughly 20% of their net profit based on a rather confusing formula. Profit sharing plans can be added to increase this amount.

For people contributing to individual IRA’s or ROTH IRA’s the limit is 5000/6000 based on age but income and the opportunity to contribute to an employer plan at any time during the year can reduce this maximum.

We work closely with an investment/financial advisor to achieve the maximum benefit for our clients.

W4     - Can I get in trouble if I claim to be exempt and have no taxes withheld?

IRS Tax Topic 306 from the website is very clear on this, so we will just quote: “The United States income tax is a pay-as-you-go tax, which means that tax must be paid as you earn or receive your income during the year. You can either do this through withholding or by making estimated tax payments. If you do not pay enough tax, you may have to pay a penalty for underpayment of estimated tax. Generally, most taxpayers will have paid enough tax to avoid this penalty if they owe less than $1,000 in tax after subtracting their withholding and credits, or if they paid at least 90% of the tax for the current year, or 100% of the tax shown on the return for the prior year, whichever is smaller.”

The point to take away from this is: Do not adjust a W4 so there is waaaay too little money taken out of a paycheck, or there may be penalties to pay!

W4      - Definition.

Many fill these out with fear and trembling, probably due to the phrase just above the signature, stating that the signer of the document is under penalties of perjury, but in reality, that is only so there is a legal recourse for income tax evasion when someone declares themselves exempt. The true purpose of this form is so the employer withholds the correct amount from each paycheck.

So long as the correct amounts are withheld, the IRS could care less if you have withholding at the higher single rate and declare 7 exemptions. But they do want their money, and if these forms are filled out incorrectly, resulting in less than: a) 100% of the previous year’s tax liability or b) 90% of the current year’s liability, there are penalties come filing time.

If you have more than one job, the calculations that are done in the payroll department if you fill both W4s out the same way. (This is because each job knows nothing about the other one, calculating in your standard deduction and personal exemptions before they take out the taxes, creating a doubled up number of deductions.) Take the minor job and claim zero and it should work out; or at least make it less painful.