HOW TO CHOOSE A CPA (OR TAX PREPARER) – ELEVEN QUESTIONS TO ASK

1/22/2012

Here we are at the beginning of tax season.  By now you are starting to receive W-2s, 1099s, and other tidbits of data needed to prepare your tax return.  You can try it on your own (and should, if your return is basic and straight forward!) but if beads of sweat are already forming on your brow at the thought of assembling information and getting it onto a tax form – NOW is the time to find a tax preparer.  Do not wait until April 2…unless you don’t mind extending (more on that another day—it is NO big deal to extend as long as your taxes are paid by April 15 — or 17^th this year, 2012).

Here is a handy dandy list of questions to help you select a CPA tax preparer.  Do yourself a favor and do not call 10 preparers in an effort to select one.  Instead – (1) ask reliable/put-together friends for a referral, (2)  look at web sites not only for info about the CPA/preparer, but also for info that HELPS YOU and that is updated frequently – like a blog, (3) place a call and ask for a phone appointment to chat with the head honcho for 10 minutes (no charge at our firm), and (4) ask one or more of the questions below to get a sense of whether or not you have found a good fit.

PRICE

Please note that that question:  “How much do you charge?”  is near the bottom of the list.    While price is always a consideration/important, it should NOT be THE primary concern.  If price IS your primary concern and you hold your preparer’s feet to the price tag fire – I can just about guarantee that you will be UNDERSERVED.  You will be in danger of getting  a “commodity” return – just the basics — because the preparer will be pressured to rush to finish in order to squeeze out a little profit.  He or she will not have time or interest in finding out more about YOU to help YOU get the best tax result.  May I suggest that it is better to ask for a RANGE of prices – ASK: what would it cost for a  low end commodity-type return versus a higher end customized return experience that includes meetings to consider alternative tax positions, phone calls to uncover greater opportunities, mid year reviews to plan for better tax outcomes.  And – of course, the price of some level of service in between.  Your preparer will love you for your intelligent approach!  And you will probably get a decent price for a great product.

QUESTIONS TO ASK:

ONE – What are your areas of practice and specialization?

TWO – What is your background/experience/years in business–have you helped other individuals and/or businesses with “xyz” issue?

THREE – How will your services benefit me—how are they different from other tax preparers?

FOUR  – How do  you guarantee your work and your results?

FIVE  – Do you offer a free consultation?

SIX – Who in your office will work with me?

SEVEN – How and when can I reach you—before AND after April 15?

EIGHT – What is your turn around time?

NINE – How do you avoid and/or resolve conflicts with clients?

TEN – What are your fees and how do you bill?

ELEVEN – Are you accepting new clients? 

Remember – there are no truly right or wrong answers to these questions.  You should get clear and concise answers so you know WHAT TO EXPECT in your relationship with your CPA (or tax preparer).

Visit us:  www.zaffore.com  And YES – we are accepting new clients .

BASIC FACTS ON SIMPLEs AND SEPs

1/19/2012

Here is a brief overview of requirements for SIMPLEs and SEPs.  Great checklist from IRS for SIMPLEs.

SIMPLE IRA . 

 http://www.irs.gov/pub/irs-tege/simple__checklist.pdf

a.            Corp cannot maintain another retirement plan (so NO to SEP if there is a  SIMPLE)

b.            Must be offered to all employees who have earned at least $5,000 from employer in any prior two years and are reasonably expected to do so in the current year.

c.             Employee elective deferral limited to $11,500 in 2011 AND 2012 (add $2500 if age 50 or older at END of the year).

d.            Match employee elective deferral dollar for dollar up to 3% of wages – can go as low as 1% in any 2 out of 5 years.  OR employer contributes 2% of wages for ALL employees including NONparticipants for wages up to $245K.

e.            Employer contributions are required.

f.             Employer contributions are deductible to employer and deferred to participant.

g.            Earnings are tax deferred until withdrawn

h.            Deductible contributions allowed after age 70 ½

i.             “Elective Deferrals must be deposited as soon as possible but no later than 30 days after the end of the month in which the amounts would otherwise have been payable to the employee in cash.”

j.             Penalty for early withdrawal  (before fully reaching age 59 ½) – 10% of distribution.  But 25% (!!) if withdrawn less than 2 years from date of first participation in the plan.

k.            Employer contributions are due by tax return due date including extensions.

SEP-IRA http://www.irs.gov/retirement/article/0,,id=111419,00.html

a.            Corp CAN maintain another retirement plan (So OK for SEP and 401k but not SEP and SIMPLE)

b.            Must be offered to employees who are at least 21 and who worked for employer anytime during at least 3 of last 5 years, and received wages of at least $550 per year.

c.             Employer may contribute up to 25% of wages (must be same percentage for everyone) with maximum contribution of $49,000 for 2011 and $50,000 for 2012.  These are aggregate maximums – so if you have more than one plan, you may not fund more than a maximum of $49,000/$50,000.  Payroll of $245K/$250K needed to max.

d.            Contributions must be cash and not property.

e.            Early withdrawal penalty = 10%

f.             Can make contributions after age 70 ½ if there is still earned income.

g.            But – must start withdrawing at age 70 ½

h.            Contributions must be made by extended due date of return.

Questions?  See our web site at www.zaffore.com

A FEW NEW FORMS FOR 2011

1/15/2012

Do you file your own tax return without the aid and assistance and crying shoulder of a tax professional?  Brave soul.  I agree with you– it should not be difficult for Americans to file their own returns.  Well, no one is listening apparently.  Here are three new forms for you to tackle this year (this is not an exhaustive list – but perhaps exhausting):

 

•  Capital Gain/Loss Reporting on Your 2011 Tax Return.  There is for 2011 a NEW form [Form 8949 http://www.irs.gov/pub/irs-pdf/f8949.pdf ] to report gains and losses of certain capital assets.   It relates to basis.  Securities brokers are now required to tell you what your basis was, starting with securities purchased/acquired in 2011.  So, if you bought a security in 2011 and sold it in 2011, you will be filing Form 8949 for sure.  But then if you sold anything in 2011, you will also be filing Form 8949. That includes real estate if not reported elsewhere in your return.  Each transaction must be line itemed and separate forms filed for each type of transaction (long or short) and whether or not the broker reported basis or you did not get a 1099-B for the transaction.  Find the instructions here  http://www.irs.gov/instructions/i1040sd/ch02.html.  If you are a day trader with 82 pages of stock trades, you may summarize on your e-filed form, but will need to send the detail to IRS with Form 8453.  Simple, eh?    Oh yes, you will still file Schedule D, too.

 

• Foreign Asset Reporting.  If you have foreign assets as of and after March 18, 2010, the government wants to know.   You will include 2010 assets along with the 2011 assets on your 2011 tax return.  You will ALSO continue to file the TDF90-22.1 to Treasury and the Form 8891 if you have Canadian retirement funds.  Serious stuff – it is why we ask at least 4 times on the organizer if you have foreign assets.  Here are the links to IRS to see the new form and the instructions: http://www.irs.gov/pub/irs-pdf/f8938.pdf  http://www.irs.gov/pub/irs-pdf/i8938.pdf.  You will find lists of the assets that must be reported on page 4 of the instructions along with complicated descriptions of who must file (page 1 through 3).  As of last week, there was still discussion over real estate – it would appear that you do not have to report real estate in a foreign country even if it is a rental property…but what if it is held in an LLC—common in many countries?  Then you don’t own real estate, you own a “capital or profits interest in a foreign partnership” or  perhaps an “interest in any specified foreign financial asset(s) owned by the disregarded (ie single member) entity.”  And bingo – you may have reportable assets.  What about stock in foreign companies held in your trading account or 401(k)?  Those are not reportable assets – IF you are buying/selling through a US brokerage.   As I mentioned – this is serious stuff.  DO NOT BLOW IT OFF.  Seek advice and assistance if necessary.  And DO NOT forget to mention foreign assets to your tax preparer.  Please.

 

• Earned Income Tax Credit.   The IRS encourages you to claim your credit if you are eligible : http://www.irs.gov/newsroom/article/0,,id=106429,00.html but warns that there are some stiff penalties for trying to fraudulently game the system.  The IRS is really cracking down.  And should IMHO.  Remember to file Schedule EIC with your request for this refundable credit.  For the first time, paid preparers are required to file Form 8867—we used to be able to fill it out and stuff it in a file, but now the IRS wants to see it.  It is basically a checklist for preparers to remind us to ask a lot of questions to make certain that our clients are indeed eligible – so once again, we are cast in the role of watchdog.  Sigh.

2011 COUNTDOWN: MORE TAX BENEFITS EXTENDED THROUGH 2012

12/21/2011

We started a list yesterday of tax breaks. Here is a laundry list of CREDITS extended through 2012. A *deduction* (tax break) reduces your taxable income, and thus reduces your tax. A *credit* is real money with which to pay your tax. Some credits are *refundable* meaning money in the bank…the credit pays your tax and whatever is left over, you get. Other credits are *nonrefundable* meaning the credit pays your tax but only to zero – there is no leftover. With most credits, higher income taxpayers get a limited credit or no credit at all. As you peruse this list, think about what you might be eligible for and then get some guidance from us or your tax pro (read that: we will feel your pain if you do not qualify and some of the income limitations are quite low) .

THE AMERICAN OPPORTUNITY CREDIT – back for another year. This is an Obama era credit and it is a*refundable* credit up to $2,500 for your first four years of undergraduate education (or those of your dependents). Be careful here – sometimes your dependent college students work a job and know that they are getting a refund. So – they file a tax return early in the year and claim an exemption for themselves. They get the refund of perhaps a few hundred dollars. But, you lose the dependent exemption AND potentially the very nice American Opportunity Credit. Coordinate efforts now! And even if this happens, all may not be lost, because you can file an amended return. Ask us first about whether or not that makes sense for your specific situation – no one-size fits all.

THE CHILD TAX CREDIT – scheduled to drop to $500/year at the end of 2010, Congress renewed the chunkier $1,000 credit through 2012. This is *partially refundable* and applies to children under age 17. The YEAR your child turns 17…that is the end for the credit. No sliding scale. “Lucky me” – my daughter turned 17 the FIRST year that this credit was available…I didn’t get it. And I’m still trying to figure out how to write off her horses legally, of course!

THE EARNED INCOME CREDIT FOR THREE DEPENDENTS – provides a tad more help for low income working families with more than two children. Through 2012, the earned income credit, which is *refundable* is calculated at higher rates and for three children. It reverts to two children in 2013. There must be earned income and there is no longer an advanced earned income credit available from your employer.

THE ADOPTION TAX CREDIT – higher credit amounts (up to $10K –with additional $1K for 2011 only) apply to the years 2011 and 2012, but this one is tricky. For 2011, the credit is *refundable.* For 2012, even though the credit amounts remain at the higher level, the credit is *nonrefundable.* The Adoption Tax Credit may also allow you to exclude employer-provided assistance from you income.

THE DEPENDENT AND CHILD CARE TAX CREDIT – this pre-2011 tax credit maxed at $2,400 for one child and $4,800 for two or more children. Now, for 2011 and 2012, you can claim a credit of $3,000 for one child and $6,000 for two or more for their daycare. This credit is *nonrefundable* and each parent must be employed, disabled or a full time student to qualify to take the credit. Kindergarten fees don’t count but before/after school care, as well as some summer programs do count as child care. And remember that “dependent” does not necessarily mean a child. It could be eldercare for your aging and dependent parent.

EMPLOYER-PROVIDED CHILD CARE – If you are an employer who provides child care facilities for your employees, you may be eligible for a tax credit. And it can be chunky—up to $150K. Qualified costs include costs paid to acquire/construct/rehab a property that will be used as a child care facility, and/or for costs of training and compensating employees. Contact us or your tax pro for assistance.

2011 COUNTDOWN: A FEW TAX BREAKS STILL IN EFFECT FOR AT LEAST ANOTHER YEAR

12/20/2011

Remember the unpronounceable  TRUIRJCA of 2010 (see blogs from the past few days—The Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act of 2010)?  While some tax breaks vanish at the end of 2011, many of the Bush-era tax cuts remain for another year as part of the deal struck by Congress last December.  Here are a few:

• Individual tax rates – The Bush tax cuts were destined to become history last December 31, 2010, but Congress rallied and extended the rates through December 31, 2012.  Who could have guessed back in 2001 that the country would go through a massive recession and that lower tax rates might be needed just to enable families to keep a roof over their heads?  But here we are – and the rates will remain at 10%, 15%, 25%, 28%, 33% and 35% for individuals for another year.  The proposals to tax the “wealthiest Americans” would raise that 35% approximately 3-4% along with additional Medicare taxes.

•  Capital Gains/Dividends tax rates – For lo, these many years, we have enjoyed a maximum capital gains rate of 15% on qualified dividends as well as on the sale of appreciated stock and most other capital assets [there is still a 28% gain rate on collectibles and 25% on Section 1250 recapture--depreciation].  And the news is even better if you are in the 10% or 15% tax brackets – there is actually a 0% tax rate on capital gains!  (see our blog from December 3, 2010, “Yes Virginia, There Really is a 0% Cap Gains Tax Rate”).  Granted – capital gains have been elusive for the past few years.  But if Congress had not acted last year, the rates would have climbed to 20% — just in time for the Dow to break 12,000–again.

• PLANNING THOUGHTS – If your tax rate is 15% or lower, this might be a great time to harvest capital gains.   If you don’t qualify, maybe your non-dependent adult children do – so a gift of appreciated stock this year or next has a bigger bang—remember that gifted stock bears the donor’s basis.  Or how about this – do you have a long term shareholder loan out with your closely held corporation, S or C?  Convert it – with advice from your tax professional!!! – to a dividend…potentially without taxation (or 15% at the highest).  Get it off your books now before rates go up.
• FLIP SIDE – And what about installment sales – beware!  If you sell an asset on the installment method, you are taxed on the capital gain you collect annually.  Right now, that is 15%.  But it could jump to 20% before the term runs on the installment contract thus exposing you to higher tax rates in future years.

• Itemized Deduction Limitation – Here is a stealthy tax presented in the first Bush era to tax, well, the wealthiest Americans.  Yep–not a new idea.  More and more of our clients have become subject to this tax over the years (due to inflation) and very few people noticed it because there was NO LINE on the tax return demonstrating the tax.  It effectively reduced the deduction for mortgage interest, taxes (property and state) and charitable contributions.  Here is how it worked – briefly:  you put 100% of your deductions on Schedule A and then the software (or the IRS) subtracted a mysterious amount from the bottom line of the form (if you foot the form, it doesn’t foot…so 2 + 2 does not equal 4 on Schedule A from many prior year returns, but of course, it is quite complicated – see below for a much better example).  The result of lower deductions is higher taxable income and higher tax.  So, when Obama talks about reducing the deduction for charitable giving and mortgage interest, he is only resurrecting the old tax law but less smoothly than his predecessors.  It has been going on for a very long time.  The Bush tax cuts repealed this stealthy tax for 2010 ONLY and then it was coming back with a vengeance in 2011.  Now, with TRUIRJCA of 2010, it remains repealed through 2012. 

 

• Personal Exemption Phaseout – Another “gentle” way to tax higher income taxpayers was the personal exemption phaseout.  Higher income taxpayers did not get to take a full (or any in some cases) exemption for themselves or their dependents.  The Bush tax cuts repealed this phaseout for 2010 ONLY, but the TRUIRJCA of 2010 includes the repeal for 2011 and 2012.  Now THIS is interesting:  The Joint Committee on Taxation reports that higher income taxpayers will save approximately $20 billion (that is billion) from the repeal of the itemized deduction limitation combined with  the personal exemption phaseout.   So where is Congress going to get this money replaced – by cuts or by other taxes or ???  Food for thought.

 

More tomorrow.

PS – a good explanation of so-called “Pease Provision” – itemized deduction limitation (lifted from The Tax Foundation Special Report, April 2010 No. 178 — www.taxfoundation.org—thank you!):

“For example, if a couple had combined income of $100,000, they retained the full value of their deductions for mortgage interest, charitable gifts, etc. But if they earned $150,000, and their itemized deductions totaled $20,000, then the couple would have to subtract three percent of the earnings above the threshold from their deductions. In this case, three percent of $50,000 is $1,500, so their deductions would be shaved from $20,000 down to $18,500. When enacting the Pease provision, Congress decided not to allow it to completely wipe out a taxpayer’s deductions. Twenty percent of the deductions can be kept no matter how high the taxpayer’s income.”

 

My comment – oh, boy…20%.  And then there is alternative minimum tax, too.  Yes, we need a simpler tax code.  Absolutely.

 

By the way, the $100K combined income has been indexed over the years.  Obama Administration is proposing a threshold of around $255K for joint filers and $204K for singles, after 2012.  Important thing to note – NO PEASE PROVISION for 2011 or 2012.  Also to note – does it seem like there is a marriage penalty here?

COUNTDOWN 2011: JUST THE FACTS – MILEAGE, BENEFIT PLANS AND MORE

12/19/2011

STANDARD DEDUCTIONS:

2011       $11,600

2012       $11,900

 

PERSONAL EXEMPTIONS:

2011       $3,700

2012       $3,800

 

AUTO STANDARD MILEAGE ALLOWANCES

Business

2011       .51 changing to .555 after 6/30/2011

2012       .555

Charitable

2011       .14

2012       .14

Moving/Medical

2011       .19 changing to .235 after 6/30/2011

2012       .23 (down a tad – this is correct)

 

IRA CONTRIBUTION MAXIMUMS

2011       $5,000 ($6,000 FOR THOSE 50 OR OLDER)

2012       $5,000 ($6,000 FOR THOSE 50 OR OLDER)

 

401(K) SALARY DEFERRAL MAXIMUMS

2011       $16,500 ($22,000 FOR THOSE 50 OR OLDER)

2012       $17,000 ($22,500 FOR THOSE 50 OR OLDER)

 

SIMPLE DEFERRAL MAXIMUMS

2011       $11,500 ($14,000 FOR THOSE 50 OR OLDER)

2012       $11,500 ($14,000 FOR THOSE 50 OR OLDER)

 

EARNINGS CEILING FOR SOCIAL SECURITY

2011       $14,160 (BELOW FULL RETIREMENT AGE)

2011       $37,680 (YEAR FULL RETIREMENT AGE IS REACHED)

2011       UNLIMITED (AT FULL RETIREMENT AGE)

 

2012       $14,640 (BELOW FULL RETIREMENT AGE)

2012       $38,880 (YEAR FULL RETIREMENT AGE IS REACHED)

2012       UNLIMITED (AT FULL RETIREMENT AGE)

 

SOCIAL SECURITY WAGE BASE

2011       $106,800

2012       $110,100

COUNTDOWN 2011: DEATH AND TAXES – A FEW CRITICAL CONSIDERATIONS NOW FOR DEATHS THAT OCCURRED IN 2010

12/16/2011

First, a disclaimer – we are not *experts* in estate tax and defer to those who are.  We dabble in it simply because death affects our clients and we know just enough to direct them to the proper expert.

That said, the years 2010 and 2011 created paradigm shifts – everything you thought you knew about estate tax (like the need for marital bypass trusts and step-up in basis for spouses) has been altered, but perhaps not forever.   Remember how there was no estate tax in 2010?  Then Congress compromised and set an estate tax exclusion threshold of $5,000,000 per spouse for 2010 through 2012, with a max tax rate of 35%.  And what happens in 2013?  Well, who knows?  Congress has yet to figure that out.  The way it stands, estate exclusion thresholds will return to $1,000,000 in 2013 if Congress fails to act, with a max tax rate of 55%.  Forgive me for sounding jaded, but since many members of Congress have estates in excess of $1,000,000 – they will not fail to act this time around as they did in 2010.

So what about the “no estate tax in 2010?”  The 2010 Tax Relief Act mentioned in yesterday’s blog reinstated the estate tax for deaths in 2010-2012 with a $5M per person exclusion and max tax rate of 35%.  However, it came so late in the year (mid-December) that it allowed estates executors to elect the zero estate tax along with an allocation of limited additional basis for certain properties (up to $1.3M for non-spouse and additional $3M for surviving spouse – to be allocated asset by asset—and of course, there are a couple of other complications).  This is referred to as the Section 1022 Election and it is made by filing Form 8939 – AND the deadline for making the election and filing the form is January 17, 2012.  There are no extensions.  If you are an executor of a 2010 estate and think you made this election sometime in the past year, you must do it again using the form.  This is incredibly important.  Once the election is made with the form, it is irrevocable.  If you have not heard from your estate attorney about this issue, call now.  The deadline is coming like a freight train.  If the estate makes the Section 1022 election, it does not file Form 706 no matter how large the estate is.  There is no tax and only limited step-up in basis.

If the Section 1022 Election is not made, the applicable exclusion amount is $5,000,000 and there is a step-up in basis for all assets.  The estate must file Form 706 — but only if the estate exceeds $5M.

So what does this mean?

•  For small estates that are less than the $5M threshold, consider (with competent counsel…this blog is not “competent counsel”) doing NOTHING.  The estate will then fall under the $5M exclusion rule – that is, the estate need not file Form 706 (because it is too small) AND the estate will enjoy a step-up in basis of all assets.  Good news for small estates – but there can be exceptions – so – competent counsel is advised!
•  For large estates that exceed, for example, $20M, consider (with competent counsel…this blog is not “competent counsel”) making the Section 1022 Election which provides some step-up in basis (the $1.3M nonspousal and additional $3M spousal allocations) along with NO taxation.  File Form 8939 by January 17, 2012.  Failure to file = $5M exclusion, 35% tax on excess, and Form 706 is mandatory.
•  For medium-sized estates between $5M and $20M, the executor is in for some sleepless nights—with or without competent counsel – but do get counsel (and again, this blog does not represent “competent counsel”).  To avoid future litigation, the executor must attempt to determine whether it is better to benefit the current estate with no taxation OR benefit the heirs with across-the-board steps-up in basis to minimize their future taxation when inherited assets are sold.  This includes determining which assets to “bless” with the allocation of limited steps-up in the event Section 1022 Election is made; which assets should remain with the surviving spouse under Section 1022 Election; capital gains rates in the future; life expectancies of heirs.  Et cetera.  I am glad I am not executing any estates from 2010!

For more info – these are good articles to reference:

http://mcgladrey.com/Tax-Services/Estate-and-gift-tax-guidance-released

http://onesource.thomsonreuters.com/solutions/trust-tax/trust-tax-us/tax-technical-informaton/article1/

COUNTDOWN 2011: 100% BONUS DEPRECIATION EXPIRES – REPLACED BY 50% FOR 2012

12/15/2011

Some tax bills just defy spiffy acronyms.  The Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 (Pub.L. 111-312, 124 Stat. 3296, H.R. 4853) is one of them.  TRUIRJCA  — nope, that does not roll off the tongue, like say EGTRRA (pronounced EggTra) and JGTRRA (JeggTra).  If you think you’ve never heard of these…well, those are the original “Bush Tax Cuts.”  In 2010, you may recall that Congress passed the unpronounceable Jobs Creation Act of 2010 to maintain the Bush Tax Cuts for another couple of years.  “Bonus Depreciation” was one of the, well, bonuses of the Act to assist/encourage small businesses in the purchasing of *new* equipment.

On the surface, bonus depreciation (which lives in the IRC at Section 168(k) if you’d like to read about it in the original language…) is straight forward.  But…there are some twists and turns, so please get some help if you plan to use this law to help you reduce tax by 12/31/2011.  And here is the kicker – if you do NOT want to use this law for your 2011 purchases, you must elect OUT of it.  As I say…get help.

Bonus Depreciation for 2011 allows you to deduct 100% of an asset’s cost if purchased after September 9, 2010 and placed in service (that is important) during 2011.  If you purchased the asset back in 2010 and placed it in service in 2010, then you deducted it on your 2010 tax return with 50% bonus depreciation which was the law in 2010.  But let’s say you bought computers on December 29, 2010 and they were not delivered and installed until January 10, 2011 – then, you were supposed to have waited and taken the bonus depreciation in 2011.  Chances are good that you took the 50% deduction in 2010 (remember, the 100% deduction did not start until 2011) and wrote off the remainder with Section 179 election.  Do not double dip on this one by accident.  Your books will not balance and the IRS will take exception with your methodology.   If you did this incorrectly – have a conversation with your tax preparer sooner than later.

A couple more rules to remember – the asset must be *new.*  Used assets do not qualify for Bonus Depreciation (but there is always Section 179, which does allow the expensing of previously used assets).  The asset must have a recovery period of twenty years or less (determined by the IRS) or water utility property or computer software other than software covered by Section 197 or be qualified leasehold improvement property as defined by Section 168(k)(3).  Did I mention – get help.  And while seeking  help, remember – Congress was trying to make it less painful for you to buy stuff to stimulate the economy.

Why is Bonus Depreciation important?  Because it is not limited – no ceiling as there is with Section 179.  The sky is truly the limit.  This is the year that there is no depreciation (OK, there is recapture…more in a moment).  You could purchase a 6000 pound business SUV/truck with a price of $100,000 and no money down, and place it in service before the year end and  get a $100,000 deduction on your business tax return for 2011. You could buy a $250,000 piece of equipment on a note, place it in service by the end of the year and get a $250,000 deduction before your first note payment is due in 2012.  But do keep in mind that when you expense 100% of a newly purchased asset whether you pay cash or execute a note, the basis becomes ZERO.  That means, if you sell the asset next year, the full sales price is taxable income (aka “recapture”).  Also, payments made on a note or installment plan are not deductible (the portion of the payment that is interest is deductible).  So – when you expense your purchase this year, you will not have an offsetting deduction next year when the asset is productive and helping you generate revenue.

That said, Bonus Depreciation is deductible even if it creates a net operating loss.  You cannot do that with Section 179.  You have to suspend the Section 179 loss to the next year.  But the Bonus Depreciation is currently deductible, even if it takes company bottom line below zero.  The net operating loss can be carried forward to offset next year’s bottom line income, or carried back to wipe out income and taxation from prior years (get help—this is a recurring theme).   S corp shareholders – beware, net operating losses reduce your stock basis and can make distributions taxable (ok, one last time – get help).

These are just the highlights of Bonus Depreciation.  How can such a simple concept be so complicated?  Talk to us or your tax advisor for more details.  Soon.  Bonus Depreciation goes down to a mere 50% for 2012.

COUNTDOWN 2011: CONGRESS PLAYS HOT POTATO WITH OUR PAYROLL TAXES

12/14/2011

Tick tick tick.  The time is running down and Congress continues to fight over the payroll tax cut that benefits millions of workers in the United States.  Including rich and poor alike.  For 2011, Congress allowed Americans a 2% decrease in the payroll tax that funds Social Security (FICA).  The FICA withholding has been 6.2% for many years on an ever increasing portion of your paycheck (up to $106,800 of wages where it caps for now—going to $110,000 of wages in 2012).  So, if you earn $75,000, your FICA withholding is normally $4,650 ($75,000 x .062).  And your employer contributes a matching  $4,650. During 2011, with the 2% reduction, it was $3,150 – a tax savings of $1,500—money in your pocket—up to $2,136 ($106,800 x .02).  Your employer did not get any savings and still funded your SS account with your wages times .062.

[Incidentally, Social Security and Medicare are “flat” taxes – everyone pays the same percentage, up to the limits.  If you earn $25,000 a year, in most recent years you will have had $1,550 subtracted from your paycheck to fund Social Security ($25,000 x .062) and $363 subtracted to fund Medicare ($25,000 x.0145).  A person earning $106,800 (the Social Security cap) contributed $6,622 to his/her Social Security account and $1,549 to his/her Medicare account.  A person earning $1 million in wages paid $6,622 (106,800 x .062)(ie the same as the person earning $106,800) to the Social Security account and $14,500 to Medicare—because there is no cap on Medicare.  Your employer matched your contribution to Social Security and to Medicare dollar for dollar, thus doubling it.] 

The House passed a bill days ago allowing a continuation of the 2% tax break for 2012 on nearly party lines, pro Republican.  But before you leap for joy, please note that the Republicans did not send a “clean bill” to the Senate.  Oh, no.  They had to tack on a forced commencement of the construction of the 1700 mile Keystone XL oil pipeline that stretches from the tar oil sands of Canada to the oil refineries in Texas.  The Republicans knew that the Democrats  oppose the pipeline for a variety of reasons including cost and environmental impact.  The Republicans believe that 20,000 jobs will be created.   The Democrats counter that only about 3,500 jobs will come to fruition.   Bottom line – the Republicans were pretty sure that the bill would not make it through the Senate. They were right.   Playing politics with the middle class once again, each side eager to make the other side look really bad.

For a much longer read on this topic:  http://www.cbsnews.com/8301-250_162-57342767/payroll-tax-cut-row-threatens-govt-shutdown/

So – what will happen?  Who knows.  I don’t agree with much of what Michelle Bachmann says, but I was startled to hear her say on the debate this week that the 2% reduction is bad public policy.  I agree!!  I hate paying higher taxes.  I hate having my clients pay higher taxes.  But the reality is that Social Security is in trouble and a lot of seniors depend on it.  We are the wealthiest nation on earth – in the history of modern civilization.  It would be a travesty to allow poor American seniors to live on the street without the safety net of Social Security.  My own grandfather reportedly starved to death during the Depression after an injury forced him from his day labor job.   No one wants that to happen again.    Can we really afford to reduce our contributions to such a fragile institution and put elderly poor people at risk?  We have all been humbly reminded during these tough economic times that “there, but for the grace of God, go I.”

That said – my question last year was WHY are we giving this tax break to the worker (even though I admit that I enjoyed having a tad more money every month)?  If we gave it to the employer, wouldn’t it encourage employers to hire more workers?  If we are going to have public policy that weakens Social Security by a decrease in contributions, why not do it in a way that negates the decrease by putting people back to work—thus shoring up the system with additional payroll taxes paid by additional employees?  Or even better – how about lowering the overall rate for Social Security contributions permanently to 4.2% (or lower!) for employee and employer alike and simply remove the cap, like we have done for Medicare.   Perhaps naïve – certainly not popular with Congress people seeking reelection.  What do you think?

2011 TAX COUNTDOWN: BUSINESS TAX DEDUCTIONS AND CREDITS EXPIRING ON DECEMBER 31 2011

12/13/2011

As of this morning, Congress continued to bicker about tax law changes, so as of now…the following  items will cease to provide tax relief to businesses at midnight on December 31, 2011:

• The 100% Bonus Depreciation Deduction (aka Section 168(k) bonus depreciation) – this is the big one and we will discuss it more completely in another blog, coming very soon
• $500,000 Section 179 “Depreciation Expensing” Deduction – dropping to $139,000 after the first of the new year – more on this big one soon, too
• The 15 year depreciation period for qualified leasehold improvements, qualified restaurant property and qualified retail improvement property.  Reverts to 39 year depreciation.  Does anything last for 39 years anymore??
• 100% exclusion of taxation on the gains from sale of “qualified small business stock” – this one could be quite important to anyone starting a business (or buying stock of a qualifying small business after September 27, 2010 and before 1/1/2012 (yes, in the next two weeks).  If you hold the stock of a qualifying C corporation for more than five years, you may be able to exclude gain on the sale of the stock.  Lots of limitations, as you can imagine.  And most small businesses still prefer the benefits of the S corporation – which does not qualify for this tax exclusion.
•  Various favorable tax treatments related to charitable contributions – computer equipment, books, food inventory
• S Corp BIG Tax (“built in gains” tax) 5 Year look back – reverts to a 10 year lookback.  This one only applies to S corps that have been C corps in the past and is ridiculously complex – get help.
• Research and Development Credit
•  Work Opportunity Tax Credit
•  Energy Efficient Expenditure credits and tax breaks
• Retention Credit for Qualified Unemployed Workers – this one expired last year, but you may still be eligible to take the credit on your 2011 tax returns since one of the requirements was 52 consecutive weeks of employment starting as late as December 31 2010.  Again, lots of rules.

While not an exhaustive list, these are the highlights of benefits sailing away on December 31 – unless Congress acts to extend any or all of them on the eve of an election year.  Whiffs of compromise may be in the air.   We will keep you posted.  If you think any of these impact you…contact us or your tax professional ASAP.

2011 TAX COUNTDOWN: TAX BREAKS THAT EXPIRE ON DECEMBER 31 2011

12/12/2011

It is said that tax law changes on average 23 times a day…at least it SEEMS like it does.  Congress passes major legislation, the IRS issues rulings and tweaks what Congress has done, and the courts try to figure it all out.  Day in and day out.  Excluding Saturdays and Sundays.  And a couple of major holidays.

So – here we arrive at the tail end of 2011, which was relatively quiet for tax law–thus, less than 23 changes a day.  Congress, however, is still squabbling over a couple of issues, so we expect new legislation before the bell tolls on December 31.  But for now, here is a list of what will expire if Congress does little or nothing by year end – and that is, fortunately or unfortunately (depending on your politics), becoming their hallmark.

Keep in mind as you peruse this list – you may be eligible to take advantage of these tax tidings of good cheer until the end of the year (and maybe longer….stay tuned to the blog):

•  Social Security Tax “holiday” for employees and the self- employed (the 2% tax savings you have been enjoying all year goes through Dec 31 – and this is one of the major issues being debated in Congress right now.)
• Tax free withdrawals from your IRA if transferred directly to a charity AND you are at 70.5 or older
•  “Refundable” adoption credit – “refundable” means you could get a refund of more than you paid in on your withholding or estimates if you completed a qualified adoption
• Energy-efficient improvements credit for your personal residence – be aware that this is limited to a life-time credit of $1500, so if you’ve taken credits in the past…you may not be able to claim the full $500 for 2011
• Qualified higher education deduction  up to $4,000 (to help those who may not qualify for the sizable education credits)
• Teacher’s deduction of $250 for consumable school supplies
• Choice to deduct either state income tax or local sales tax – this is an itemized deduction.
• Qualified home mortgage insurance premium deduction – an itemized deduction
• Higher alternative minimum tax exemptions (why doesn’t Congress just FIX this problem once and for all??? Oh, yeah – the govt collects a lot of tax from unsuspecting taxpayers with AMT, the stealth tax.  It is, by the way, basically a flat tax…..35% flat).
• Qualified small business stock – 0% tax rate on the capital gains on sale of qualified stock
• Conservation easements – tax advantages if donated to a charity
• Washington DC residents:  first time homebuyer’s credit

What about BUSINESS breaks expiring?  We will post that list to the blog tomorrow.  Then, in the following days, watch for some details about these and other breaks to help you decide if any of them may benefit you.   It is easy to register for our blog — see the sidebar to the right, scroll down to Email Subscription and pop in your email address.  It’s free and we will not bother you with advertising nor will we ever share your email address.

We urge you to contact us or your tax professional as soon as possible if you have situations that may be improved by planning and action taken now.  Once the bell starts gonging, the year is closed—and so are a number of planning opportunities.

Exemptions for Kids of Divorced Couples – Fed Law Trumps State Decrees

12/01/2011

The IRS no longer wishes to wade into the murky waters of divorce, and the tax technicians who open the mail certainly don’t want to read your legal papers, so here is the relatively new edict:  court orders, decrees and separation agreements alone cannot be relied upon to determine which parent may “take the kids” to his or her tax return, with all the goodies that go with those exemptions.   It does not matter what your attorney jots into those papers or what the judge allows or what you negotiate.  In the matter of federal taxation, IRS rulings trump state law.

So what does that mean?  Simply stated – ONLY the custodial parent has the right to claim the exemption and various credits for a qualifying child on his or her tax return.  And the “custodial parent” is defined by the IRS as the one who puts a roof over the child’s head for more nights of the year than the other parent.  The IRS cares not what your decree says.   For tax purposes, there is only one custodial parent – and the other parent is the noncustodial parent.  OK – so what about the strange year (ie perhaps a leap year?) wherein the child spends the night equally with both parents?  Are you ready for this?  The custodial parent is then deemed to be the one with higher adjusted gross income – really (IRC 152(c)(4)(B)).  There is method behind that madness – the one with the higher adjusted gross income may be less likely to claim an earned income credit.  Aha!

Can the noncustodial parent ever claim the exemption for the kids?  YES!!  The custodial parent can relinquish his/her right to claim the child on his/her return by signing a written declaration (best to use Form 8332) promising not to claim the child as a dependent for a given taxable year  or years and the noncustodial parent must attach it to his or her tax return every year the child is claimed on the noncustodial parent’s return.  For an e-filed tax return, Form 8332 gets attached to Form 8453 and mailed to the IRS.  Here is the real rub:  the declaration must be an “unconditional release” of the custodial parent’s claim to the child.  Unconditional means that it cannot be revoked to satisfy ANY condition – such as nonpayment of child support – no matter what your decree says.  Message here:  be very careful what you sign.   If you are the custodial parent and doubt that your ex will continue to send support, you might want to go year by year rather than signing away the right for blocks of years.  Just a thought.  Get advice from your tax professional.  And educate your attorney  .

You, the custodial parent,  CAN revoke the declaration using Form 8332 Part III – but, as the instructions tell us, “ the revocation will be effective no earlier than the tax year FOLLOWING the year you provide the noncustodial parent with a copy of the revocation or make a reasonable effort to provide the noncustodial parent with a copy of the revocation.”  So – a long time from “now.”  Make sure that you attach a copy of the revocation (Form 8332) to your tax return for each year that YOU are claiming your child as a result of the revocation.  And also keep evidence demonstrating HOW you notified or attempted to notify the noncustodial parent, too.   You may be in for a fight.

Last but not least…even with a release in effect, the custodial parent may still claim head of household filing status, as well as the earned income credit and dependent care credit, if eligible.  The noncustodial parent will receive the dependency exemption and the child tax credit.

To Roll or Not to Roll — 401(k) to IRA

11/02/2011

This morning it is snowing like crazy here in Colorado, so instead of racing to work, I had a second cup of coffee and watched one of
the morning news talk shows.  The money topic was IRAs and the speaker—a newly minted author/expert– advocated rolling
over your 401(k) to an IRA because you would have a lot more flexibility and control over your money.  Period.  End of discussion.

Whoa! I thought.  Just a moment.  There are a few very good reasons NOT to rollover your 401(k) to an IRA – at least it should not be a simple knee jerk reaction.  You need to give it a little thought.  You will have to check our web site soon because I will do a Top Ten Things to Consider Regarding Rolling your 401(k) to an IRA.
But for blogging purposes – here are a few reasons that popped into my mind immediately after hearing the simplistic black/white, one size fits all approach presented by the expert:

1. ASSET PROTECTION – funds in ERISA regulated plans, such as 401(k)s, may not be invaded to resolve bankruptcy claims or claims made by private creditors, period.  Well, except for the IRS, that is – more on this in a moment.  However, IRAs are not
   ERISA regulated plans.  The moment you rollover your money from a 401(k) plan to an IRA, you are exchanging federal law for
   state law (oh boy).  Every state has its own flavor of IRA asset protection or lack thereof.  I found this handy dandy guide—I cannot vouch for it, so be sure and check with your CPA or attorney to verify state law if you think you need asset protection BEFORE you roll your 401(k) to an IRA.  And be sure to notice the “statutory provision” column on this chart (scroll down thru the article to find the chart once you are on the site)  http://www.irafinancialgroup.com/selfdirectedassetprotection.php
2.   WITHDRAWAL RULES AND PENALTIES—your age may impact the decision to roll or not to roll.  If you are age 55 or older and leaving the company, you can generally withdraw funds from a 401(k) WITHOUT penalty.  You have to wait until age 59 ½ with your IRA.  And the IRS does mean 59 ½.  It cannot be the year you turn 59 or 59 ½.  It is your official 59 ½ birthday that matters.  One of my clients got stung with this rule in 2010 (disclaimer: he did not check with us first) – withdrawing a large sum from his IRA in the year he turned 59 ½, thinking that would cover it.  Nope.  The 10% penalty was a killer.  Also to consider:  you must start withdrawing  IRA savings when you are 70 ½  (there is that crazy ½ year thing again), however, IF you are still working at 70 ½ (hey, most of us are or will be, given current economy), you can continue to participate in your company’s 401(k) plan and you are not required to withdraw.  Why is this important?  The money you withdraw is taxable and it increases your adjusted gross income, which in turn causes more of your Social Security to be taxable and lowers your ability to claim certain deductions or receive certain credits.  YES – our tax system is WAY too complicated!  But I don’t know about the 9=9=9 thing – another blog for another day.
3. ORDINARY INCOME VERSUS CAPITAL GAINS ON COMPANY STOCK – this is really complicated stuff, but important while we still have cap gain rates of 15% and tax rates that go up to 35% for individuals.  You can actually choose to withdraw a lump sum of your 401(k) that is held in your company’s stock, pay the tax (and perhaps the penalty) on the BASIS of the stock – the amount you paid for it.  Then you can hold it and sell it after a year and a day (be careful) and receive capital gain treatment.  This is important and powerful IF the stock has appreciated in value. It is called Net Unrealized Appreciation.  If you roll over the stock into your IRA —— you will pay ordinary income tax on the whole enchilada.  You can also choose to take lump sums of only parts of the stock.  If
   you have your own company’s APPRECIATED stock in your 401(k) – GET HELP before you “simply” just roll it over into an IRA.
4. ACCESSIBILITY – some company plans allow you to borrow from your 401(k) at very low interest rates – it is YOUR
   money after all.  As long as you pay it back within the plan’s rules or before you leave the company, you will not pay a dime of tax on the use of the money. Don’t even try this with an IRA. No Can Do.  Well…there is always an exception,  isn’t there?  You could take money from your IRA for 60 days and then pay it back…but that is really risky.  Really risky.

OK – those were just the four that popped into my mind, but since starting to jot this blog, I thought about fees, about estate issues,
about rolling to your new employer’s 401(k), about starting a business and rolling into your own 401(k) plan, about using your 401(k) money to start a business without current taxation…. Etc. Stay tuned at our web site: www.zaffore.com.

And I promised a word about our buddies at the IRS.  In my experience, I have never had the IRS levy money from a client’s IRA or 401(k).  I
think we always find some other path before that happens.  Does anyone out there have a story to tell?  I have had collections’ officers suggest strongly that taxpayers use IRA money or take a loan from a 401(k) to settle a balance due.  They have also suggested borrowing money from family and friends – true story.  And of course, if a taxpayer has a chunk of change in a retirement account over which he/she has control, the IRS may be less likely to do an offer in compromise or put the taxpayer into “currently not collectible” status.  Here is a ray of sunshine on this snowy day – if the IRS DOES levy your IRA, the withdrawal is fully taxable to you  BUT there is no penalty .

Scam-O-Rama: Annual Colorado Secretary of State Reporting Requirement and A Couple of Others

04/02/2011

In spite of the fact that April 18 looms large on my horizon, I could not help myself from commenting on a few well-presented and scary scams that may be lurking in YOUR mailbox.  All were shared with us by clients who should be applauded for double checking before reacting.

 Secretary of State Filing.  In Colorado, if you do business as an entity or as a sole proprietor with a trade name, you register with the Secretary of State. Then on the anniversary date, or thereabouts, each year you go online and validate your entity or trade name by updating your contact information (essentially). If you file timely, the fee is a whopping $10. The Secretary of State has always sent post card reminders in the past, but will no longer do so. You can sign up to get an email reminder that appears about 2 to 3 months ahead of the due date.

Here is the scam (or legitimate request to offer assistance, depending on your view point): On a “notice” that is designed to look exactly like correspondence from the Colorado Department of Revenue (which has no involvement with annual corporate reporting), a company, who shall remain nameless here, headlines the letter with “Periodic Report, Directors/Shareholders, Colorado Corporate Control [followed by the corporations official and easy-to-get corporate registration number—it is public information].

The first two paragraphs quote state law regarding the requirement to file annually with the Secretary of State with an admonition to fill out the form and return it to an address along with $225 (remember that it costs $10 to renew your report).

Then down near the bottom, in slightly smaller print is the statement that the “product or service” offered by this letter has NOT been approved or endorsed by any government agency, that it is simply an advertisement/solicitation and is not a bill or a statement or an invoice or anything else – and that you have no obligation to respond in any way.  So….DON’T RESPOND. Simply put this nonsense through your shredder. It is trash. Unless of course, you think that you should spend $225 to do something you can do in under five minutes for $10.

Employee Information Posters. Various companies sell posters informing your employees of their rights regarding wages and safety. These posters are required in the workplace. But don’t fall for the threats in the letters, that if you don’t get them NOW from the solicitor of the appeal, you will go to jail. Instead, find out if your state’s Department of Labor has templates or even provides posters. Go online and shop for posters. You are bound to get a much better deal.

“IRS” Contacts You by Email. There is an email circulating that looks like an IRS notice—same identical letterhead complete with eagle. It tells you to go immediately to a web site (NOTE: that it is not www.irs.gov but rather www.irs.org) and provide a bunch of personal information in order to get yourself out of trouble. When you go to www.irs.org you will find myriads of ads for people and companies who will charge you a lot of money to get you ‘free and clear’ (or not).

The IRS will NEVER EVER contact you first by email. They may call, but if they do, do not hesitate to say that you are not sure who you are really talking to and that you would prefer to receive a letter. Especially if the person at the other end does not seem to know a lot about you. Trust me, the IRS knows a lot about you. But…you can still demand to be contacted by mail. It is your right.

 Bottom line – READ CAREFULLY. Be cautious. If you are pretty sure you are not out of compliance, you are probably right.

Colorado Joins the OnLine Nexus Sales Tax Controversy – Do You Owe Use Tax on Your Online Purchases?

01/29/2011

A client emailed a notice she received from one of her online vendors.  It stated, “This notice is being sent to comply with Colorado Regulation 39-21-112.3.5 recently enacted in 2010.  This regulation requires out-of-state retailers to send a summary invoice on or before January 31^st to Colorado customers with more than $500 in purchases in a given calendar year.”   The notice includes a summary of the purchases our client made from the vendor during 2010, including dates, dollars and descriptions of each purchase and admonishes to consult one’s tax advisor regarding the recipient’s tax reporting responsibility.  Of course, the client wanted to know, in the immortal words of David Letterman, “Is this something…or is this nothing?”

 It is “Something.”  Colorado did enact legislation to try to wrap its arms around what it hopes are millions of dollars of lost revenue, while also leveling the playing field for brick-and-mortar retailers in Colorado.  Here is the site of the actual law if you’d like to read it – it is pretty straight forward: http://www.colorado.gov/cs/Satellite?blobcol=urldata&blobheader=application%2Fpdf&blobkey=id&blobtable=MungoBlobs&blobwhere=1251644563466&ssbinary=true

The whole state sales tax issue is starting to come to a head again as state governments face economic crises.  Back in 1992, when the Internet was just a baby, the US Supreme Court ruled that states could not force businesses to collect sales tax if the business had no physical presence (nexus) in that state.  Ever since, states have been trying to figure out ways around the edict.  According to the Tax Foundation, at least a dozen states are fiddling with nexus laws now.  In the recent past, three states (NY, NC, RI) enacted laws requiring collections, and our own Colorado chose what it hoped was a safer, less litigious back door approach.

The new Colorado law requires that out of state “non collecting retailers” (ie those selling to the final users/customers—not resellers) NOTIFY their Colorado customers of dates, dollars and descriptions of items purchased if in excess of $500.  THEN current and long standing law kicks in – the Colorado consumer is required to pay “use tax” in lieu of the sales tax that was not collected.   Colorado consumers rarely voluntarily remit “use tax” and the state rarely enforces.  But now, with notification requirements, if the consumer does not pay, Colorado Department of Revenue probably plans to just send you a bill.  And threaten penalties if you choose not to comply.

But WAIT – there is MORE.  The Direct Marketing Association is challenging!  Of course they are.  For nearly twenty years, many online marketers (like Amazon) have been competing with the advantage of no sales tax added to the price–a substantial discount (especially is shipping is also “free”).  They will not give up that goodie without a fight.  On the other side, brick-and-mortar businesses in Colorado laud the new law, claiming better competition on a leveler playing field.  The Denver Post reported today, January 29, 2011, that US District Court granted a temporary injunction “which prevents Colorado from enforcing” the new law.  The Post article presents both sides and is a quick read: http://www.denverpost.com/business/ci_17232715.

So – are we in limbo?  No.  Not really.  Just because the seller doesn’t collect the sales tax doesn’t mean you are truly “off the hook.”  The law is pretty clear – if you buy something not exempt from sales tax, but no sales tax is collected….then, you are obligated to remit USE TAX.  My client only owes around $45, and I will suggest that she pay it.   Sales and use tax issues are deep and wide with a lot of unpleasant consequences, particularly for businesses (ie did you know that if you buy a business, you could owe sales tax on the personal property purchased?) – so, as a matter of course, as the notification suggested, please consult your tax advisor.  And stay tuned.

Update – S Corporation Shareholder Health Insurance and State Unemployment

01/28/2011

We have had tons of activity on the S corporation shareholder health insurance issue. Here is an update related to State Unemployment–at least here in Colorado.

The State of Colorado has taken the position that health insurance premiums of S corp shareholders IS includible in gross wages for unemployment. It is NOT includible for Social Security, Medicare, or FUTA. Colorado’s law states that all items taxable for FUTA are taxable for Colorado SUTA. So we asked the Department of Labor:  why do we have to include health insurance premiums if they are NOT included in FUTA? And the answer (drum roll please): the law does not say what is EXCLUDED, only what is INCLUDED — so the state is free to include more than FUTA. Interesting, eh?

And a sign of the economic times–at least here in Colorado.

ObamaCare Taxes the Sale of Your Home – or does it??? Debunking

01/27/2011

You gotta love the Internet. Information (and dis-information) on steroids coming at us 24/7. I started getting emails from clients in the fall with forwarded messages of doom, that ObamaCare promised to tax one of our nation’s most sacred tax “loopholes” – the gain on the sale of our principal residences – in order to pay for the escalating costs of Medicare. If you sold your house for $200,000, one of these propaganda pieces proclaimed, you will pay a 15% capital gains tax of (GASP) $30,000!! NO NO NO, I told one and all. And assured them that whoever was spamming the country with this nonsense must have some agenda. Might I guess — fear, in an election year? Neither side of the aisle is innocent in playing with our collective phobias. So – it is important to shed light on what is true and what isn’t on this issue.

There is no group more impacted by the real estate taxation disinformation campaign than the National Association of Realtors. If you think you are going to be taxed into infinity on the sale of your home, well—maybe you just won’t sell. And then realtors may have to tighten their belts. As a result, the National Association of Realtors published an excellent brochure that provides examples and plain language explanations of how the health care law MIGHT effect you when it comes to sale of real estate.   You can look it up yourself at http://speakingofrealestate.blogs.realtor.org/2010/11/24/the-3-8-tax-is-not-a-real-estate-transfer-tax/.

Here is the skinny: Beginning in January 2013, there will indeed be a new 3.8% tax on SOME (not all) investment income for SOME (very few) taxpayers. It is, of course, complicated. The law MAY impose a 3.8% tax on SOME income from interest, dividends, net rents and net capital gains and MAY impact individuals with adjusted gross income (AGI)exceeding $200,000 and couples with adjusted gross income (AGI) exceeding $250,000. It will apply to the LESSER of the investment income amount OR the excess of of AGI over the $200K or $250K limits. All those “somes,” “mays,” and “lesser” are limiters.

Important to note: nowhere in the new legislation do we Americans lose our $250,000 (for singles) or $500,000 (for couples) capital gain exemption on the sale of our principal residences. Nowhere. Congress people, Internet bloggers, news media, your father – anyone who tells you that everyone will be taxed on personal residence sale has either not read/understood the new law OR they are willfully sharing disinformation with you. Or __________ (you fill in the blank).

 
That said, the tax is real. It will be more real for some taxpayers than others – generally if your income is higher than $200-$250K you will have to think about it and even perhaps plan with it in mind.

Here is an example from the brochure mentioned above showing that SOME people will have a tax:

John and Mary sell their primary home (tax lingo: principal residence) and realize a GAIN of $525,000. A miracle in today’s market, to be sure. Remember that a GAIN means that they purchased their home for, let’s say, $250,000 and they are selling it for $775,000 ($775 – $250 = gain of $525). They are STILL ALLOWED AN EXEMPTION of $500,000 – the new law did NOT take this benefit away from us!!  But their gain was greater than $500K by $25K…so they have a “taxable gain” of $25K. This couple’s AGI before the gain was $325,000. So now we add the $25K to the $325K and come up with new AGI of $350K. Here is where the new 3.8% tax comes into play. We apply it to the LESSER of the investment income ($25K) OR the excess of AGI over $250K ($350K AGI – $250K limiter = $100K). The LESSER is $25K. The tax rate of 3.8% is multiplied by the $25K = $950.

Another example:

Harry and Sarah have substantial income from their securities investments. Their AGI before considering the investment income is $190,000. They also have $60,000 in interest income from bonds and CDs, dividend income of $75,000 and capital gains from the sale of stock of $10,000. Their investment income totals $145,000, which gets added to the $190,000 of other income to equal AGI of $335,000. Here is the tax again – we apply it to the LESSER of the investment income of $145,000 OR the excess of AGI over $250K ($335K AGI – $250K limiter = $85K). The LESSER is $85K. The tax rate of 3.8% is multiplied by the $85K = $3,250. That is starting to sound like real money. But keep in mind the income limits.

So – bottom line: YES - there is a 3.8% tax imposed on SOME higher income taxpayers on investment income. NO – you will probably not be taxed on the sale of your personal residence unless you are fortunate enough to have made a substantial capital gain on the sale and you earn more than $200K/$250K otherwise.

The goal of the new tax is to shore up Medicare. Supporters say it will raise $210B for the beleaguered Medicare system. Hard to tell. Remember – if the health care act is not repealed, this tax will become effective in 2013.  I would LOVE it if ALL of our clients had to worry about this tax by 2013.  Think about that.

Payroll Tax “Holiday” – Social Security Only

01/10/2011

A client called today positive that she had found a glitch in QuickBooks payroll software — the Social Security deducted at the employee level did not equal the Social Security calculated for the employer.  Yep, I told her, it is right.

Here is the deal.  For 2011 ONLY, Congress decided to allow wage earners and the self employed to have a reduction in Social Security rates.   Employees and the self employed have been paying 6.2% on their wages for Social Security for twenty-one years.  For this payroll year only, the rate has been dropped to 4.2%.  Employers will continue to pay 6.2%.  The self employed person will pay a total of 10.4% for the Social Security portion of self employment tax (they had been paying 12.4%).   The upper limitation for both 2010 and 2011 is $106,800.  There is no Social Security burden on the amount one earns over $106,800.  Thus, for 2010, the maximum SS tax you would have paid was $6,622.  The maximum you will pay in 2011 is $4,486–a savings of $2,136.

Medicare remains the same — 1.45% for the employee and 1.45% for the employer with no wage limitation.

Here is a thought - Do not get used to having this extra money, since it is a one-year-only deal.  Instead, fund your emergency savings or your 401(k).  It is a windfall for a year.  Good idea to treat it that way.  It is highly likely that Social Security taxation will go up in the near future, so you may need those emergency savings to make ends meet down the road.

Tax Season Delays – Are You Impacted? (and April 18 filing date)

01/01/2011

Congress waited until the LAST POSSIBLE MOMENT to act on the Bush tax reduction extenders and other tax relief legislation recommended by the Obama Administration.  The President signed the new legislation into law on December 17 .   This has put a wrench in the works for virtually 100% of our clients.  We are going to be late this year — see below, a note from our software provider AND the Internal Revenue Service:

“The IRS has announced that it will need time to reprogram its processing systems for the three provisions that were extended with the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010.  Specifically this means that anyone claiming the state and local sales tax deductions, higher education tuition and fees deductions, educator expense deductions, or any taxpayer that itemizes deductions via a Schedule A, will need to wait to file their tax returns until the processing system is ready, which the IRS projects will be completed in mid- to late February.”

More specifically, the IRS has informed us that we will NOT be able to file a tax return until they tell us we can file — maybe mid to late February.  I’m sure that the IRS and our software company are NOT having a Happy New Year — they are all toiling away day and night to update forms and software because Congress could not make up its mind.

Over the next few days, I’ll blog/outline some of the changes that are going to impact us all.  But right now — everyone who itemizes their deductions (99% of our clients) will not be able to file until the IRS says it is OK.   Sigh.  Not the IRS’s fault, nor ours.  The IRS has, however, given us until April 18 to file this year due to Emancipation Day, a holiday in Washington DC.   So, an extra weekend.  Be aware though, MOST states, including Colorado, will NOT recognize the additional 3 days to file…so if you owe money to your state…get it in by April 15, which is a Friday.

 

2010 TAX COUNTDOWN – A SEP-IRA May Be a Great Deduction for You!

12/14/2010

http://www.irs.gov/retirement/article/0,,id=111419,00.html#1

If you are a business owner looking for a fast and easy way to reduce your tax burden this year, SEP-IRAs are one of my favorite recommendations. SEP is the acronym for Simplified Employee Pension plan. And while the truth is that no qualified plan is really “simple” – SEPs come pretty close. The web address above will take you to the FAQ page at the IRS’s web site that gets into some of the nitty gritty. Here is the executive summary:

•  Must be a written plan. Many small employers can adopt the IRS Model SEP by using Form 5305-SEP which you can get on the IRS web site (www.irs.gov). Or you can ask your financial institution if they have a prototype SEP document that you can use. And of course, you can go it alone and create your own…but it has to comply with law, so see a benefits administrator. Provide a copy of the plan to all eligible employees. The deadline to establish a new SEP plan is the due date of the company’s tax return including extensions – so for new SEPs now, the final date for establishment and funding is September 15, 2011.
• Eligible employees. All employees who are at least 21 years old during the year; have worked for the employer in at least three of the last five years; and have earned at least $550 (2010 and 2011 – this is adjusted periodically) from the employer during the plan year. You can be less restrictive but not more restrictive.
• Contribution limits. A SEP is an EMPLOYER CONTRIBUTION only – the employee DOES NOT CONTRIBUTE. The employer may make a contribution to an employee’s SEP-IRA of up to 25% of wages, not to exceed a contribution of $49,000 in 2010 and 2011. You read that right – you can sock away $49,000 tax deductibly and you have until September 15 to fund the plan. It is NOT taxable income to your employees until they withdraw the money from the SEP-IRA. The contribution is NOT taxed for Social Security and Medicare. Employees love SEPs. If you are self employed (and file Schedule C or SE in your individual tax return), you cannot do 25% of gross revenues, but rather a percentage of net self employment income. IRS Publication 560 provides a worksheet.
• Contribution Rules. The employer must contribute the same percentage to all eligible employees. So – if you are a single employee/shareholder of an S corporation, and you take payroll of $100,000, you can fund a SEP-IRA with up to $25,000. If you have five employees who are all eligible and you contribute 25% of your wages to your SEP-IRA, then you must fund SEPs for the employees also at 25% of their gross wages. That can get pricey. You do not have to do 25% — you can do 3% or 10% or whatever – you just have to do the same percent for all eligible employees. Unlike other qualified plans, if you decide to do a SEP this year, you are NOT obligated to fund one next year. Also – there is no annual reporting requirement and no top-heavy testing. Read that : no/very low cost to manage the plan.
• Where does the money go? Every eligible employee sets up his/ her own account at whatever financial institution he/she chooses. All the employee needs to set up the account is a copy of the plan document. When the account is established, the employee will provide you, the employer, with the name of the institution. You will make a check payable to the institution – NOT THE EMPLOYEE!! – and the employee will deposit the check. Your responsibility ends at that point. The employee is in total control of the SEP-IRA account. Period. Is that easy, or what?
• Partnership/LLC rules. Because SEP-IRAs are formed at the entity level, the partnership or LLC taxed as a partnership must establish the SEP-IRA. It gets complicated quickly for partners and members, especially if there are also eligible employees. Guaranteed payments and draws become an immediate problem. It works but get help.
• Is a SEP the best option? Maybe yes, maybe no. If you are on your own in your company, you may want to investigate establishing a Solo 401(k) plan. 401(k)s may allow you to put away larger sums of money without higher payroll taxes – to really load a SEP, you need very high wages. 401(k)s are more administratively challenging, requiring annual compliance reporting and perhaps mandatory contributions. AND they have to be set up by December 31…which is coming like a freight train.  No such deadline for SEPs.

2010 TAX COUNTDOWN – Roth IRAs and Kids: A Winning Combo

12/13/2010

Who can set up a Roth IRA? Anyone who has earned income (as in W-2 wages or self employment income) and as a single taxpayer has modified adjusted gross income of less than $120,000. Who does that describe? Lots of people – including YOUR KIDS.

Here is the rule: for 2010 and 2011, a child who earns income can contribute to either a traditional IRA or a Roth IRA the lesser of (a) his/her earned income or (b) $5,000. He/she can also do a combination contribution – some to a traditional IRA, some to a Roth with the same limitations – no more than earned income or a total of $5,000.

So – if you daughter works at Sonic all year and earns $4,750, she will have no income tax, since her income falls below the taxable limitations ($5,700 this year). She can sock away the entire $4,750 into a Roth IRA where it can grow tax free for a lifetime. Or she can withdraw the contribution portion without consequence to pay for college or a down payment on her first home (if she withdraws the whole enchilada before age 59.5, she will be taxed and penalized on the growth portion of the IRA). What’s that you say? She doesn’t have one dime of the money left to contribute to a Roth? You could gift her any amount up to $4,750 to fund the Roth and then figure out an incentive plan to help her make the 2011 contribution herself. Maybe matching dollar for dollar?  Just a thought.

If you own a business, here is another thought: you can hire your child for a job that he is capable of performing and in actuality does perform, and voila! The amount you pay him is earned income that can be used to determine the funding level for a Roth IRA. If your business is a sole proprietorship (you file Schedule C with your tax return), or a mom-pop partnership/LLC (you file Form 1065 or Schedule C), your child’s wages are exempt from Social Security, Medicare and FUTA taxes, and probably workers’ comp insurance. If your business is formed as a corporation, your child’s wages are treated as any other employee – fully impacted for Social Security, Medicare, FUTA/SUTA, workers’ comp and so on. But the payroll taxes are deductible to your business. By the way, when you pay your kids, you are shifting income from your high tax rates to their low tax rates. No kiddie tax on earned income. Win-win.

Where should your kid set up her Roth IRA? Anywhere that you would – running the gamut from savings or CD accounts at banks and credit unions all the way to trading accounts with an online brokerage like Schwab or TDAmeritrade. There is paperwork to be completed and deadlines to meet – for 2010, the Roth IRA must be funded by the tax filing deadline without extensions – usually April 15, but the tax deadline this year is April 18. A fluke related to a holiday….really.

And while you are helping your child to start saving for his or her future, remember to fully fund your retirement accounts, too. Especially your 401(k) at least up to the company match. What a role model!

2010 Tax Countdown – Small Business (and Household Employer!) Healthcare Tax Credit Effective for 2010 through 2013

12/06/2010

Small business owners and household employers (as in Nanny)– listen up! And watch a YouTube from our buddies at the IRS http://www.youtube.com/watch?v=85i1kzIG57k. The Affordable Care Act of 2010 passed earlier this year may offer some financial relief for you IF you provide health insurance for your employees.

Here is the skinny on qualifying for the credit:

• Employ 25 or fewer full time employees (or full time equivalents) not including owners
• Pay wages on average of less than $50,000 per employee not including owners
• Provide health insurance and pay at least 50% of the employee’s single-rate premium

That is the easy part. Like any new tax law, it quickly gets difficult and murky, especially in the finer definitions of the three things mentioned above—it seems so straight forward, but, alas, it is not. The IRS has, however, attempted to answer most questions (see FAQs at http://www.irs.gov/newsroom/article/0,,id=220839,00.html ).

Suffice to say here that your business/household may qualify for a credit up to 35% of the health insurance premiums you pay on behalf of your employees. That could be a chunk of change. But the operative term there is “up to” – only relatively small employers who pay low wages will max the credit. But it is still worth investigating with your CPA soon. The credit is retroactive to January 1, 2010. And since it is based on full time equivalents, your company may qualify even if it hires more than 25 part timers. Family members and owners are generally not considered employees for calculating the credit. There are also several transition rules that make it easier for employers to qualify in 2010.

Note – the credit (which is payment of tax, as in money) will reduce your company’s health insurance deduction (which lowers your taxable income and thus ratably reduces your tax). It is usually better to get a credit than a deduction. To give a shot at calculating the credit, try http://www.nfib.com/issues-elections/healthcare/credit-calculator. And for potential information overload (but good stuff): http://www.smallbusinessmajority.org/hc-reform-faq/index.php.

2010 Tax Countdown – S Corporation Shareholders and Health Insurance Deduction – Check NOW

[UPDATE DEC 2011:  We have been told by a seminar presenter that for 2011 and beyond, S corps should report health insurance for shareholders on W-2 in Box 12 with DD code instead of Box 14 as in the past...we are going to research this a tad more...but there you have it for now.  Also, the presenter indicated that the IRS was NOT happy about year end journal entries for health insurance...that IRS wants to see monthly/quarterly payments...but again...that is not definitive/law.  More when we have something certain.  And if YOU have more info, please post so we can all get in on the search for the truth .]

12/05/2010

http://www.irs.gov/businesses/small/article/0,,id=203100,00.html for more info.

S Corporation Shareholders – if you own 2% or more of the stock in your S corporation, now is the time to make sure that you have reported your health insurance correctly in order to get the best deduction. Even though the law was enacted and clarified late in 2007 (Notice 2008-1), we are still seeing errors on Forms K-1 and W-2s coming from payroll companies and our fellow accountants – and those errors are expensive to fix after December 31.

[Please note - if you have been purchasing health insurance coverage for your employees, the expense is deductible as health insurance and is generally not taxable to your employees. This blog does not address issues involving health insurance for your employees.]

The problem addressed by Notice 2008-1 is the “more-than-2%-shareholder-employee’s” expense. That is YOUR health insurance if you are, for example, the sole owner of your company. Here are the steps to ensure deductibility at both the corporation and personal levels:

1.  Shareholder-Employee. If your company is profitable, you should be paying yourself “reasonable” compensation – that is the law. Compensation is payroll, complete with payroll taxation. In order for health insurance premium expense to be deductible at the company level, it must not exceed your personal earned income. Thus, you must have wages from your company in order to be eligible to have health insurance paid by the company. If your wages are $10,000, then you could have health insurance of $10,000. That makes sense, doesn’t it? If you are not an employee of a company or a dependent of an employee, why on earth would the company pay your insurance for you? If your company is not profitable, you are not required to take payroll, but then your health insurance is not deductible at the company level (you can still take it as a distribution and deduct it on Schedule A Itemized Deductions).
2.  Who Owns the Accident and Health Plan? Much confusion here was explained in Notice 2008-1. The company can own a group plan or you can own an individual plan. Important: the company must pay for the premiums either directly or as a reimbursement to you, the shareholder, for your personally owned policy. Do not fail to have the company reimburse you if you buy an individual policy. If the company does not reimburse you, the company cannot take the deduction – and you lose. You can, however, still take Schedule A Itemized Deduction.
3. Bookkeeping. On your corporation books, you will have expense for health insurance whether you pay it directly or you reimburse yourself. It is a company level expense/deduction. It is NOT a distribution to you. Ultimately, it becomes a payroll expense, deductible ONLY at the corporation level.
4. Payroll Reporting. During the year, when you file your payroll quarterly reports (Form 941 and your state unemployment reports), you will report your health insurance premiums as PAYROLL that is NOT subject to Social Security or Medicare. You will also not be subject to federal and generally state withholding (check on your state…in Colorado, you are not subject to withholding).
5. W-2 Year End. Your W-2 will include health insurance premiums in your gross Box 1 wages, but will NOT include the premiums in Box 3 or Box 5 (Social Security and Medicare). You should also see your health insurance premiums in Box 14 as S Corp Health/Medical Insurance. If your accountant reports your health insurance premiums as a K-1 distribution item, you may ONLY take a Schedule A Itemized Deduction and NOT a page one deduction. It is imperative that your health insurance premium be reported on your W-2 to assure the best tax treatment.
6. Your 1040. You will report your total Box 1 wages on your personal tax return. And then you will take a Page One deduction for the health insurance premiums. The result is a wash. This is correct. Bizarre, but correct. It’s not the way we would have done it. But it is what it is. Read on.

THE ACTUAL DEDUCTION IS TAKEN AT THE COMPANY LEVEL ONLY, so your total ordinary income reportable on your K-1 will be reduced by the health insurance deduction. If this seems like a complicated way to take a deduction, we agree with you! We have no idea why Congress and the IRS  made this so difficult, but we do know that if you follow these procedures, your health insurance payments receive a good deduction and if you DO NOT follow these procedures, you are limited to a Schedule A Itemized Deduction—generally not a good deduction.

CHECK NOW with your bookkeeper/accountant/payroll service to make sure that you will be able to claim the health insurance deduction. If you wait until your payroll reports are finalized, all may have to be amended. Messy and expensive!

2010 Tax Countdown – Is a Gym Membership Deductible as a Medical Expense?

12/04/2010

As we all start drafting our 2011 New Year Resolutions, “get healthy and fit” will be at the top of many of our lists – AGAIN. But this time, I’m serious!! Aren’t you? So, of course, the burning question is: Can I deduct my gym membership? After all, it is all about being responsible for myself so I don’t become a burden on society, right? Taxpayers everywhere should applaud my effort.

Lucky for us, a lot of taxpayers are anxious to deduct gym membership fees and one of them was bold enough to approach the Chief Counsel of the Internal Revenue Service recently to find out about introducing legislation that would permit such a deduction as a medical expense. Chief Counsel responded in a readable letter  that explained once again that “health club dues paid to improve one’s general health or to relieve physical or mental discomfort not related to a particular medical condition” are NOT deductible.  http://www.irs.gov/pub/irs-wd/10-0175.pdf

However, the door did not slam closed. Chief Counsel went on to say that “A taxpayer who claims that an expense of a peculiarly personal nature is primarily for medical care must establish the fact.” OK – WHEN is a medical expense NOT “peculiarly personal” in nature? Anyone who has ever had a colonoscopy would agree!

That said, there are objective factors that can support that a personal expense (gym membership) is actually a deductible medical care expense:

•  What is your motive /purpose for the gym membership? Chief Counsel states, “A taxpayer cannot deduct a personal expense as medical care if he/she would have paid the expense in the absence of a medical condition.” There is a court case to support this interpretation. So, if the gym membership is to help you fit into your Size 6 jeans again, sorry, that is not a medical care expense, even if your heart gets stronger by accident. But if it is to force yourself, an avowed couch potato, to beat back diagnosed diabetes, AND you would not otherwise have joined the gym, the expense may very well be deductible. However, you may not have an argument if you have been a gym member for years and now get a diagnosis that recommends that you exercise. That could be an uphill battle with the IRS at audit – you’ve been exercising at the gym but it apparently did not work, so now you will be exercising more/differently because maybe now it will work? Hmmm–isn’t that the definition of insanity?  Hey – that is a medical condition, too!
• Did a physician diagnose your medical condition AND prescribe a particular course of action that could be gotten by joining a gym? GET IT IN WRITING. GET IT RENEWED ANNUALLY. Ask your doctor to be as specific as possible – for example, “Because Bob has bad knees and is diabetic, he must swim several times a week to control blood sugar as part of his treatment for diabetes. Since Bob does not have a pool at home, I recommend that he join a fitness center with a pool and a swimming program.” Then make sure you join the swimming program.
•  Is the “treatment” related to the illness and are you improving? Document the types of classes and activities in which you participate and how your illness is affected by those activities. It is a great idea to chart your progress with your doctor and have him/her mention the results of the treatment in the annual letter that recommends gym membership.

Remember – medical expense deductions go on Schedule A Itemized Deductions and before the first dollar is deductible, your medical expenses must exceed 7.5% of adjusted gross income. This is not an easy hurdle. If you don’t otherwise itemize your deductions, then go to the gym, be happy, get healthy and enjoy the simplicity of not keeping records to support a deduction.  Look for me in a gentle yoga class.  OHMMMM.

2010 Tax Countdown – Yes, Virginia, There Really is a 0% Capital Gains Tax Rate

12/03/2010

You read that right. There is a 0% capital gains rate in effect for 2010. That means NO TAX (or reduced tax) on long term capital gains on sale of stock other securities or any capital asset, like a second home. We don’t know yet if it will be extended to 2011, so if you qualify – think about taking advantage of it before December 31. Remember that long term means you have held the asset for more than a year. This, of course, does not apply to IRAs or other pension funds or distributions (cap gains inside of retirement accounts are not taxed currently). Here is how it works:

You Qualify! – if you are in a 15% or lower income tax bracket. Keep in mind that the amounts listed below are TAXABLE INCOME, not gross or adjusted gross income. Taxable Income is the amount you are actually taxed on AFTER reducing adjusted gross income for itemized deductions (or standard deduction) and personal exemptions.

Married Filing Jointly – taxable income $68,000 (or lower)
Single – taxable income $34,000 (or lower)
Head of Household – taxable income $45,550 (or lower)
Married Filing Separately – taxable income $34,000 (or lower)

If your total taxable income including long term capital gains is lower than the amounts shown above, you will pay no tax on long term capital gains. If your taxable income including capital gains is higher than the bracket thresholds, you may still have a 0% tax rate applied to a portion of your long term capital gains. For example, if you are single and your W-2 wages are $30,000 and your long term capital gain is $10,000, your adjusted gross income equals $40,000. Then you are allowed to take either a standard deduction or itemized deduction and your personal exemption. So: $40,000 minus $5,700 (standard deduction) minus $3,650 (personal exemption) = $30,650. You will pay no tax on your capital gain. Let’s say that your W-2 wages are $33,000 and your long term gain is $15,000 to total $48,000. Take away your standard deduction and personal exemption and your taxable income is $38,650. You would pay no tax on $1,000 of capital gains (the difference between your wages of $33K and the bracket limit of $34K) and then 15% tax on the remaining $14,000 of gain.

The Possibilities :

1. Sell High, Buy High. If you are sitting on a chunk of stock and your income is low (unemployed for part of the year?; retired?; underemployed?), consider harvesting some long term capital gains, taking care to remain below the thresholds. Then if you like, buy it back at the current price. You will have a new higher basis and will have taken advantage of the 0% tax rate. I can find no law that says you cannot buy the same stock on the same day at the same price. It seems too good to be true.

2. Gift Stock to Elderly Parents or Your Adult Children (over age 24 to avoid kiddie tax). If your parents or kids are in the lower tax brackets and you would like to give them money this year, consider gifting stock to them and they can sell it without taxation. Remember that you can gift up to $13,000 to anyone you like this year. You and your spouse together can gift up to $26,000 to anyone. The gift is NOT deductible to you and is NOT taxable OR reportable income to the recipient. The recipient’s basis in the stock is the same as yours. BUT the gift is valued at the fair market price. That means that IF the stock is worth $13,000 but you only paid $5,000 for it, the gift is a $13,000 gift.  The recipient’s basis is $5,000 (this does NOT work for losses–get help from a tax pro).  When the stock is sold by the recipient, the gain on the sale will be taxable income, but if the rules above are followed, the result could be zero cap gains tax and thus more money in the pockets of your parents or kids. Another caveat—the sale will result in an increase in adjusted gross income for your parents which in turn could cause more of their Social Security to be taxed thus interfering with this overall strategy – get help from your CPA. Even in the case of zero tax, tax law is complicated.

2010 Tax Countdown – 2010 ONLY Additional Health Insurance Deduction for the Self Employed

11/29/2010

With all the talk about health insurance reform, here is one that may level the playing field for self employed people who calculate Social Security and Medicare tax on Schedule SE in the personal Form 1040 – that is those who file Schedule C, Schedule F or Schedule E for earned income (not generally S corp shareholders). It comes to us courtesy of the Small Business Jobs Act of 2010 signed into law in September 2010. The excellent news is that self employed people will for the FIRST TIME be able to deduct health insurance costs in calculating net earnings from self-employment for the purposes of determining self-employment taxes.

Why is this a big deal? Social Security and Medicare tax is expensive — up to 15% since sole proprietors pay both the employer and the employee portions .  Corporations have been able to exclude Social Security and Medicare tax as well as take a deduction for income taxes for the cost of  health insurance premiums for-ever. But sole proprietors and single members of LLCs have been stuck taking only an income tax deduction for the cost of insurance.   Health insurance premiums have always been fully taxed for Social Security and Medicare for self employed taxpayers.  This law takes a stab at leveling the playing field…well, maybe.

Remember – for a self employed person, the tax return determines two taxes (three if you are subject to AMT)—income tax AND self employment tax (SS and Medicare).

Please note, too –this self employment tax deduction is ONLY FOR 2010. Isn’t that weird? We don’t know for sure, but apparently we are going back to the front page deduction only for income tax in 2011. So, if you were thinking of paying one big annual premium, December would be a good time to do that. It will be too late in January for this tax break.

One other draconian rule to take into account. Let’s say you are self employed and you get a health insurance plan for only yourself since your spouse is covered by a plan at his/her place of work. If the spouse’s plan is subsidized by the company (and they all are), and you are eligible to join your spouse’s plan, you may be stunned to learn that your personally owned health insurance premiums may not be deductible anywhere good on your return. OK…you can deduct them as itemized deduction on Schedule A. That is usually a pretty limited deduction. But you are probably not eligible for the good front page deduction. Does this seem fair? Unfortunately, “fair” is not a tax code concept.

2010 Tax Countdown – NEW Law Regarding Cell Phone Deduction

11/28/2010

The Small Business Jobs Act of 2010, passed on September 27, 2010 offers new and extended tax assistance for America’s small and self-employment businesses. I will be posting a number of blogs covering the highlights. Here is the first:

The new act promises simplification of record-keeping rules for business cell phone use. YAY!… I think.

OLD WAY: You have heard me explain over the years that the IRS will allow only business calls on your cell phone and that means that you have to keep all of your bills, highlight your business calls, and write in who the call was with along with the reason for the call. The highlighted and explained lines are then deductible. If you have employees to whom you have given company cell phones, they must turn in their records to you and then only the business related calls are deductible. Their personal calls constitute compensation – taxable income to the employee. This has been a pain. No wonder small employers have been hammering away at their Congress people to get this changed.

NEW WAY: Retroactive for all of 2010, cell phones and other similar devices (ie blackberries) are no longer subject to the time-consuming and overarching record-keeping rules of yore.

WARNING: But before you phone home the good news, please note — doing away with heavy duty record keeping does NOT mean doing away with all record keeping. We do not yet have guidance on how the IRS will interpret this law. But because rules for fringe benefits and tax-free expense reimbursements remain in force, it can be assumed that a self employed person or an employee will have to substantiate business versus personal use and that employers may be able to establish personal use policies to ensure deductibility of cell phone use. Those policies will be determined by IRS interpretation of the new law. Congress mentioned that “if” personal use was minimal that the value could be excluded from the employee’s or self employed person’s income. We don’t know what that means, but I’m sure we will find out — eventually.

TO DO: So – what should you do now? We really don’t know yet, but here are some “common sense” thoughts (OK, tax law is not always driven by “common sense” – so proceed with CAUTION—and ask your CPA). Continue to maintain documents showing phone/device charges. Mark the personal calls. If the personal calls far outweigh the business calls, then you probably have a personal cell phone—it is NOT deductible (and if you are an employee with a company phone, it is probably TAXABLE). If you are an employee making mostly personal calls on a company phone, you have probably already had your cell phone privilege revoked in these tough economic times. If your personal calls on your biz phone represent a very small fraction of your total calls, then the whole cost of the cell phone is probably deductible. If it is, say, 80/20 biz/personal, then you may have some compensation income to acknowledge. Remember – this is MY interpretation, not the IRS interpretation. Important difference.

If you are a business owner who provides cell phones to your employees, you may want to talk to your CPA about establishing either an “accountable plan” or “unaccountable plan” for company cell phone use if you don’t already have one. If you have been charging your employees for their minimal personal use, you may want to reverse those charges before the end of the year—good news for your employees! But talk to your CPA before doing anything!

SO WHAT CHANGED? You used to have to keep track of the thousands of biz calls you made annually and now you only have to keep track of the dozens of personal calls…anyway, that is my read. The IRS will get around to supporting or rejecting my understanding.

New Landlord Law – 1099s for Service Providers

UPDATE 2011 – GOOD NEWS!!!  THIS WAS REPEALED!!!  DISREGARD!!  I AM LEAVING IT POSTED SO YOU WILL KNOW IT WAS REPEALED - Best, Kathy 12/05/2011]

11/17/2010

The recently enacted Small Business Jobs Act promises some tax relief for America’s small businesses, but hidden in its recesses is an overlooked item that impacts you, if you have rental property. And it starts as of January 1, 2011 – that is a few weeks from today. Landlords (owners of property) will be required to provide Forms 1099-MISC to service providers for payments of $600 or more during the year. That means payments to plumbers, managers, accountants, handymen etc IF the service provider is a sole proprietor, an LLC or a partnership. You don’t have to provide 1099s to corporations – yet. That is coming next year as an obscure part of the health care reform…good grief.

The American Institute of Certified Public Accountants (AICPA), of which we are a member, shot off a letter yesterday to Congress to request a REPEAL of the parts of the health care legislation and the small business legislation that require the 1099 reporting. Interestingly, Max Baucus (moderate Democrat Senator from Montana), who helped pen the health care legislation, has changed his mind regarding the 1099 provision of the new laws. He went home to Montana and was barraged by small business people complaining about yet more reporting burden—read that: costs both time and money but doesn’t make money = burden on behalf of the government by already stressed small business people. He returned to the Senate and vows to fight for repeal of those parts of the laws. The question is – why didn’t he ask the small business community BEFORE the legislation was passed. Wouldn’t that have been simpler?

At any rate, Congress does not move fast these days (the Republicans are already finding excuses for postponing their first meeting with Obama…come on, guys/gals, get a clue…America wants you to accomplish something!). SO – unless we have some definite progress in the next couple of weeks, it is my suggestion that landlords get ready to comply with this law. It might get repealed retroactively, but, it might not.

Here is what to do:
1. Go online to www.irs.gov and do a search for Form W-9. Print off a few.

2. Before you engage ANY service provider, have him/her fill out the very easy Form W-9, which asks for basic information such as name, address and social security number or federal tax id number (only for partnership or LLC). If the provider whines about this, simply say, hey, it’s the law and if you don’t want to give me this information, I’ll just make arrangements with someone else to do work for me. If the provider is organized as a corporation or is an employee of some big company, you don’t need to get the W-9. If the person is a sole proprietor with a trade name, you must get the person’s actual name and the social security number. The trade name and tax id number will be rejected by IRS – and that will cost you some penalties.

3. Store Forms W-9 securely – you are now holding identities that can be stolen and you can be held accountable. Great. More burden.

4. No later than January 31 of the following year, you must provide Form 1099-MISC to the service provider. Then you must remit the forms with a transmittal (Form 1096) to the Internal Revenue Service by February 28 (if paper) or March 31 (if electronic). So, for work done and paid for in 2011, the 1099-MISC is DUE JANUARY 31, 2012.

5. Ways to get the forms done:

a. Do them yourself on paper forms. You can get forms at any office supply for a chunk of change. You can get them for free from IRS by calling 1-800-829-3676. QuickBooks and Peachtree will print data onto blank forms fed through printer. You can also neatly handwrite them on blank forms. Be sure to put the amount you paid to the service provider in the box called NONEMPLOYEE COMPENSATION.

b. You can have us do them for you.

c. You can try one of the nifty online services like www.efilemyforms.com for a nominal price. (This could be the “best bet” but I’ve never tried it, so I don’t really know.)

Remember that IF this portion of the law is not repealed, and we really hope it will be, rental owners will have to file. If you don’t file, you could be forfeiting deductions and subject to penalty assessments. Stay tuned. Congress is back in session.

Fix the Deficit-You Can Do It!

11/16/2010

The New York Times has posted a nifty interactive tool that lets you try your hand at fixing the deficit. OK, it doesn’t offer infinite options, but it does challenge you to think about what you WOULD CUT or change if you were Queen of the Universe (or King)(or Caesar, whatever you like). I cut the deficit with a few bold strokes (including raising SS retirement to Age 68, reducing troop force in Afghanistan by 2013, but the biggies were capping medicare growth to GDP plus 1%, and enacting a national sales tax at 5% and not eliminating income tax…sorry).
What would you do? Let me know. It’s great to stand behind Michelle Bachmann and say we will just cut “wasteful spending” – but, I want to know WHAT wasteful spending? Don’t quote me bizarre research projects that really don’t add up to squat – we are in deep weeds here—we need BILLIONS of dollars of cuts (or tax collection…yikes). Every significant cut impacts our lifestyles, not to mention our security and competitive edge in the world marketplace. So – what would you do and why?

http://www.nytimes.com/interactive/2010/11/13/weekinreview/deficits-graphic.html

Roth Conversion Update – Can You Convert 457 or 401k funds?

03/11/2010

We had a great question yesterday from a client who is a firefighter and has two 457 plans in place. These are plans that are similar to 401ks but are in the governmental and non profit sector. In our client’s case, one plan is with a former employer. The other plan is with his current employer. His question: could he convert the 457 money into a Roth IRA [see blog entry on January 4 for more detail on IRA conversions to Roths]

The answer: yes and no, maybe. You have just got to love tax law. My knee jerk reaction was to say that the 457 from the former employer could probably be rolled into a Roth, but not the funds with the current employer.

After some research, I determined that there is confusion out there around this question. It seems clear that you can roll 401k or 457 funds into a traditional IRA and then convert to a Roth IRA IF the funds are in a plan of a former employer. I could not find anything definitive (ie on IRS web site) that verified that you could roll 401k or 457 funds directly into a Roth, although there were commentaries here and there that said you could. I would advise that you ask whoever you are investing with — ie Fidelity or Schwab or Wells Fargo etc.

It gets dicier with funds held in a current employer’s plan. If the plan permits “in-service distributions,” then you may be able to roll the funds into a Roth. But if there is no “in-service distribution” allowance, you are probably stuck.

If anyone out there has more information, feel free to chime in.