State and local taxes are those imposed by the 50 states or any of their political subdivisions (such as a county or city) and by the District of Columbia. You may deduct state, local, or foreign income taxes withheld from your salary, as well as estimated payments made under a pay-as-you-go-plan of a state or local government. You also may deduct payments made on taxes due but not paid in an earlier year in the year they were actually withheld or paid. In sum, to be deductible the tax must be paid during your tax year. You may deduct only those taxes paid during the calendar year for which you file a return.

If you receive a refund of these taxes in a later year, you must include the return as income in the year you receive it. This would include refunds resulting from taxes that were over withheld, not figured correctly, or figured again as a result of an amended return. If you did not itemize your deductions in a previous year, you do not have to include the refunds. Furthermore, the amount included in your income is limited to the tax benefit you received in the earlier years. For example, assume you deducted $500 in taxes and received a refund of $100; your total itemized deductions exceeded your standard deduction amount by only $50. The only tax benefit you received, therefore, was the $50 excess itemized deduction. On this basis you need only include $50 of the refund in your income for the subsequent year.

You also may deduct amounts required to be withheld from your wages for certain state disability benefit funds that provide against loss of wages. These payments to the disability fund are deductible as state income taxes. Furthermore, employee contributions to a state fund that provides indemnity coverage for the loss of wages caused by unemployment resulting from business contingencies are also deductible as taxes. Employee contributions to private disability plans, however, are not deductible.

Foreign taxes include those taxes imposed by a foreign country, a U.S. possession, or any of their political subdivisions. Foreign income taxes that you pay may either be deducted as an itemized deduction or claimed as a credit against your U.S. tax.

-Extracted From the book “How to pay zero taxes 2010″ by Jeff A.Schnepper

If you are a small business owner, or an S-corporation owner, it is time for you to consider your small business taxes. Small business taxes, S-corporations, are driven by minimum reasonable compensation.

Your business may make a profit but you as the owner may or may not have paid yourself a salary by this time in the year. One of the components of small business taxation is social security and medicare tax.

The IRS acquires these taxes only when you pay yourself as an owner from your own corporation. There is little difference to the owner in their income tax calculation if they pay themselves as a wage or as a distribution however there is a very large difference if an owner pays themselves as an employee.

The social security and medicare tax as well as other with holdings can be as much as 20% of the gross wage. This represents an unneeded expense in the minds of many small business owners. Unfortunately the IRS sees this an area of high abuse and will in fact audit S-corporation to collect these small business taxes. They typically will impute a wage from the company to the owner, even if a wage was not paid.

This is usually in the amount of the full profit for the year. They next impute what the payroll taxes would have been plus penalties. The cost is very high. Our advice is to call us to do a year end projection and at least pay a reasonable wage before the IRS audits you and imputes the wage for you.

As we near the end of 2012 many are getting ready to celebrate the Christmas season and prepare themselves for a new year. Many are not aware that we are nearing a significant change in our taxing system where the tax burden on your earnings may not be the same in future years as it is now.

For many the option of including income in the current year at lower tax rates is preferable to holding off income until later years. This is the opposite of the typical logic. If you are a resident of Los Angeles and need help in planning for tax preparation in Los Angeles, you may want to talk to me so we can do a projection on your earnings.

We can determine when it would be best to incur income given the current tax structure. Tax preparation in Los Angeles is going to become more confusing and more demanding as we draw closer to year end and as we implement new laws that are set to go into effect.

It is to your advantage to spend a little of your time and effort to know your options. We do not know how or when the fiscal cliff will be avoided. We don’t know how the pending tax hikes will be modified. What we do know is we can build a model of your taxes that will allow us to adjust our advice as legislation occurs.

If you wait until the very end, you may not have time to accurately assess the effect changes will have on you.

As we near the end of 2012 many are discussing the looming fiscal cliff. We are nearing a change in our taxing system that is likely to result in higher tax rates. For many it will be more advantageous to accelerate income into the current year rather than have it taxed at a higher rate next year.

This is the opposite of the typical logic. If you in the market for tax preparation in Torrance we would urge you to call us sooner rather than later so we can do a projection on your earnings. We can determine when it would be best to incur income given the current tax structure.

Tax preparation in Torrance as in all cities and states is going to become more confusing and more demanding as we draw closer to year end and as we implement new laws. It is to your advantage to spend a little of your time and effort to know your options. We do not know how or when the fiscal cliff will be avoided. We don’t know how the pending tax hikes will be modified. We do know our taxes will be higher and we do know is we can build a model of your taxes that will allow us to adjust our advice as legislation occurs.

If you wait until the very end, you may not have time to accurately assess the effect changes will have on you. You have nothing to lose but a phone call.

The process starts with recognizing the reason so many have inadequate records of income. About 87 percent of Americans work for an employer, receiving W-2 forms at the end of the year reporting wages and withholding. These workers generally do not keep independent records of their income. Instead, they rely on the employer to provide accurate W-2s. For a number of reasons, this is a critical error.

For starters, employers make mistakes. Usually the errors are inadvertent, but they nevertheless cause serious problems. Look at what happened to Ramon in chapter nine when a contractor filed an errant 1099. Without independent income records, it is more difficult to correct mistakes. Do not believe that errant W-2s and 1099s are isolated problems. In fact, they are so pervasive that Congress considered as part of the Taxpayers’ Bill of Rights Act 2, requiring all payers to put their telephone numbers on information returns to better enable citizens to contact them when disputes arise.

The second concern is that a few people file fraudulent information returns in a deliberate effort to get others in trouble. This too is more widespread than you might think. It caused Congress to add a provision to the law as part of the Taxpayers’ Bill of Rights Act 2 allowing those harmed by such documents to sue the perpetrator. New code section 7434 allows one to sue for damages when harmed by a fraudulent information return.

The third problem is companies can go out of business, and then fail to issue information returns. If you do not have independent records of your income, you may never notice the missing return, especially if you have changed jobs often. However, the IRS often does notice if it obtains your bank records or discovers the data by auditing the company in question.

The fourth and most compelling reason to make independent records of your income is simple. A Form W-2, however accurate it may be, does not speak to what you earned elsewhere. It addresses only what you earned from the company making the report. An agent may say, “Sure, the W-2 proves you earned X amount of dollars from the ABC company, but it does not address what you earned working on the side.” This is an attempt to box you into proving a negative.

You cannot prove you did not work a second job by merely producing a W-2 issued by your principle employer. On the other hand, independent income logs give you just such an advantage. All information returns must be tied to income logs which in turn must be tied to bank records. Finally, they must be supported with an affidavit declaring that income earned from all sources is accurately reflected in the logs and bank records.

When you accomplish that, you have an airtight package of documentation that can defeat any unfounded claim of unreported income. My strongest recommendation therefore, is you begin now, for all future returns, to document your income through your own independent logs.