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What To Do If Your Tax Refund Is Stolen

There are few things worse than spending hours preparing your tax return only to discover that identity thieves have already snatched your refund.

For many people, the misery starts with an error message from their tax software saying that they’ve already submitted a return; for paper filers, a letter from the IRS is usually the red flag. Either way, if thieves come after your tax return, experts say there are a few steps you’ll need to take to deal with the damage.

1. Fill out IRS Form 14039.

“It's the affidavit that tells the IRS that you're a victim of IRS tax return fraud. You can also use it if your identity has ever been compromised or you're a victim of any other type of identity theft,” identity theft expert Carrie Kerskie  says.

As soon as you find out there’s a problem, send Form 14039 via certified mail with a return receipt request, so you’ll know that the IRS received it, Kerskie adds. Keep a copy of the form for yourself.

2. Shield your credit.

You’re entitled to a free 90-day fraud alert on your credit report if you’re a victim of identity theft. Fraud alerts require businesses to verify your identity before issuing credit, so they may try to contact you before opening new accounts.

After that, you can ask the credit bureaus for a seven-year extension, though that sometimes requires a police report — and those can be hard to get because tax return fraud is usually a federal rather than a local issue, Kerskie says.

A credit freeze may be better because it prevents potential creditors from accessing your credit report, which thwarts attempts to open accounts in your name — though you’ll have to remember to “thaw” your credit report each time you want to use it, Kerskie adds.

3. Lock down your cellphone.

Fraud alerts are linked to your phone number, Kerskie says. That’s why identity thieves frequently try to gain access to a victim’s cellphone account in hopes of redirecting fraud-alert calls. To mitigate the risk of an account takeover, make sure your email address is attached to your account.

4.  File your tax return.

You’ll still need to get the right return to the IRS, and the deadline waits for no one. Because the thieves have already filed in your name, you likely won’t be able to file electronically. Instead, you’ll need to submit a paper return and a photo ID with your Form 14039, Velasquez says.

5. Prove you’re you.

The IRS may ask you for additional documentation, such as a copy of your driver’s license or utility bills, Kerskie says. “They might have you send a copy of the previous year's tax return, because a criminal should not have that,” she adds. And watch your snail mail, because the IRS doesn’t request personal or financial information from taxpayers by email, text or social media. “You need to stay on top of it,” Kerskie says.

6. Don’t expect a quick resolution.

Once you report the theft, “Your complaint will be reviewed, delaying your refund for months,” security expert Robert Siciliano says. The IRS typically resolves identity theft cases within 120 days, according to the agency.

Velasquez encourages victims to call the IRS’ ID theft hotline (800-908-4490) but says they should be prepared to sit on hold. And there’s no way to estimate how long the whole process will take, she says.

“It's extremely inconsistent. We have talked to people where they have had resolution in just a couple of months, and we have talked to people who have been unable to resolve the issue and it's been over a year,” she says.

By Tina Orem of NerdWallet for USA Today

Published: August 17, 2016

Florida's back-to-school tax free weekend begins next week!

Shoppers looking to save money on back-to-school supplies will have the chance to buy items tax free in Florida from August 5-7. 

Florida state officials recently voted to cut allowances on clothing, shoes, computers, and dates for Florida 2016 Sales Tax Holiday.

For a full list of tax exempt items click here.

CLOTHING
Up to $60 each. Florida legislators were a little more generous than years past. Garments and accessories are tax free up to $60 each. In 2013, the exemption stopped at $75 per piece.

SHOES
Up to $60 per pair. Shoes are eligible for the tax exemption. As with clothing, however, only footwear costing less than $60 per pair will ring up tax-free.

SCHOOL SUPPLIES
Up to $15 each.

Sales tax will not be charged on items such as pens, pencils, erasers, rulers, and glue. The state set a price limit of $15 per item for this category, but left off items such as staplers and computer paper.

Personal computers and computer accessories are no longer subject to Florida Sales Tax Holiday.

BUYING BOOKS
All books, besides the Bible, are still taxable during the Florida Sales Tax Holiday 2016.

Lawmakers love tourists, but they did not want to give visitors a tax break. So, sales tax will still apply to purchases made in theme parks, entertainment complexes, hotels, and airports.

Published: July 27, 2016

Identity Thieves Love Small Businesses

Not long ago, a small business owner I work with found herself the target of an identity thief. He didn’t open credit lines in the name of the business, but instead stole its name and good reputation to bilk other entrepreneurs out of thousands of dollars. He was quite blatant about it, even representing himself on LinkedIn as a principal of the business.

Dealing with identity theft is bad enough, but if it hits your business it can be devastating. It can take enormous resources and time to straighten out — and what entrepreneur has lots of time to spare? It can even bring your business to a screeching halt if you don’t catch it and stop it quickly.

 Here are three reasons identity thieves love small business owners.

1. It’s Easier to Get Info

There are strict limits on who can review personal credit reports or scores, but the same limits do not apply to small business credit reports or scores. (That’s true as long as they don’t contain personal credit information about the owner — some do — and those are subject to restrictions).

“Because it’s not covered by Fair Credit Reporting Act protections, anyone can check a business’s credit report and get sufficient information (EIN, address, employees and principal owners’ details, etc.) to start the ID theft process,” says Caton Hanson, co-founder of Creditera. “Personal information is more difficult to obtain and requires nefarious means to do so,”

In addition, there are many more points of access to sensitive information. If you’ve been watching the series “Mr. Robot,” you know that the main character Elliott Anderson finds “phishing” — simply asking the right questions — to be an easy way to get into other people’s email or social media accounts. Similarly, in a small (or large) company sometimes all it takes is one employee with a weak password or a lack of skepticism to open the door to criminal activity.

2. It Can Be Lucrative

An established small business may have larger credit lines and larger bank accounts, both of which make them more attractive to a scammer. Why not steal $50,000 if it takes the same amount of work as stealing $5,000? In addition, small businesses may have a history of larger transactions so, for example, a large wire transfer overseas doesn’t set off alarm bells the way it might on an individual’s account.

3. It’s Harder to Detect

Small business owners are often surprised to learn there are many business credit reporting agencies they’ve never heard of before. There are a variety of credit reporting agencies that report small business credit information — and many specialized agencies that most entrepreneurs haven’t heard of. (I provide details on the various business credit bureaus in my new book Finance Your Own Business.)

And because some vendors and creditors don’t report business credit activity at all, it could be months before you realize you’ve been a victim. I learned of one business that was a victim, and the imposters rented office space in the same building where the actual business was located to pull off their scheme!

You’ve Been Warned

The steps for protecting yourself from business identity theft will likely sound very similar to those that are used to protect yourself from personal identity theft. They include:

  • Shredding all sensitive documents.
  • Using very strong passwords and changing them regularly.
  • Limiting access to sensitive information by employees on a need-to-know basis.
  • Keeping track of your credit. Companies such as Experian, DNB and Creditera offer business credit monitoring.
  • Making sure employees with access to sensitive information secure laptops, cellphones and all data related to your business.

There are many challenges when running a small business. There are a number of obstacles to overcome. Identity theft is a continuing challenge for small business owners. Put up your own road blocks and defenses to make sure you are not the next victim.

By Garrett Sutton for Credit.com

Published: July 22, 2016

Should Your Small Business Offer Health Insurance?

Health insurance is expensive—and getting more so all the time. Does it make more sense for a small company to provide coverage (with employees paying some of the premiums) or let them get a policy on their own through the Affordable Care Act?

Not long ago, it could be difficult and often very expensive for individuals to buy their own health insurance, while the tax code gives an advantage to group insurance provided through the workplace. To keep employees happy and maintain a stable workforce, companies that could afford to offered group insurance.

Now Obamacare, as the law is known, has changed the calculus. Individuals these days can buy insurance with regulated benefits and premiums, and most are eligible for big subsidies. And while companies with the equivalent of at least 50 full-time employees must offer health insurance to those full-time workers or pay penalties, the ACA has no such requirement for smaller businesses.

The upshot is that in many cases, particularly when employees are relatively low-paid, both the company and its employees might be better off if workers buy their own insurance.

“Eighty percent of the time, we find an individual plan to be cheaper than a comparable group plan,” says Abir Sen, chief executive of Gravie, an employee benefits manager that seeks to wean companies from offering group health.

Plus, there’s the virtue of allowing employees to choose insurance that best fits their own needs, rather than cookie-cutter coverage designed for a “typical” but perhaps nonexistent employee.

Gravie and at least one health insurance agency, HealthMarkets.com, offer software that incorporates the many moving parts of the equation. But if you have the patience to do a little digging, here’s the back-of-the-envelope approach to this very important decision.

Start with the group plan. You’ll probably want to settle on a network structure, like a preferred provider organization (PPO) or health maintenance organization (HMO). The first tends to cost more but gives you a greater range of physicians, and the second is cheaper and restricts your physician choice more.

Then you’ll have to decide how much of medical costs should come out of the patient’s pocket, through deductibles and other charges. The ACA uses four metal tiers, as they are called, with different cost-sharing levels, ranging from low-premium, high out-of-pocket bronze plans to steeper premium, lower personal outlay platinum plans. You can choose a specific plan through a broker or directly from a carrier.

You can also compare plans through your state’s government-run small business health insurance, or SHOP, exchange, though your options will be more limited. To get a quote, you’ll need to know the age, smoking status, and location of each employee and dependent you might offer coverage to.

Very small businesses paying modest wages are eligible for a three-year tax credit equal to as much as 50% of premiums paid for group insurance purchased on a SHOP exchange. The tax credit phases out as the number of full-time employees rises to 25 and average income increases to $50,000. 

Calculate the total cost for individual insurance. There are three components to the cost of a worker’s individual insurance: how much the plan costs him or her (the premium), how much federal subsidy is available, and how much an employee has to pay out of pocket.

To compare, pick an individual plan with the same network type and cost-sharing as the group plan. You can get successive quotes for premiums for each employee and family through your insurance exchange or through an online broker like eHealth. If you are shopping outside the ACA’s open enrollment period, which runs from this coming November through January 2017, the employee must have a “life event,” such as gaining a new child or getting married, to join an Obamacare plan.

How big will the federal subsidy be? You find out by comparing the cost of a specific health plan against the worker’s income, and the worker’s income against the federal poverty level. The Kaiser Family Foundation offers an easy-to-use subsidy calculator. You also need to know each employee’s household income and family size.

Subtract the subsidy from the premium and you have the employee’s cost. But the employee will have to pay that out of taxable income. Calculate the pre-tax wages your worker will have to earn to make that after-tax payment.

Be sure to add 15.3% for Social Security and Medicare (both the employer and employee share) to the combined marginal rate before doing your math.

Now compare—with caveats. Health insurance coverage is a good way to keep your current employees. That’s one big argument for offering group insurance, even if it’s much more expensive. Weigh how difficult it is to train employees or to replace them if they leave.

On the other hand, if you can’t afford to contribute to family coverage and your workers aren’t likely to afford it on their own, don’t offer it. If you offer family members insurance, they will be barred from getting a federal subsidy to buy their own insurance through the ACA, even if your offer is unaffordable to them. And if your insurer requires you to offer dependent coverage, switch to another carrier or drop out altogether.

If you decide to drop out and your employees tap the ACA, don’t think you can easily give them a backdoor subsidy to help them satisfy their premiums. Lawyers say the Internal Revenue Service won’t let an employer condition a raise on the worker buying insurance—employees have to be free to spend the money as they see fit. You can, however, tailor the additional compensation to the cost of the individual’s insurance. And that might be a good idea, since older people pay more for insurance.

Finally be wary of organizations, most prominently Zane Benefits, that say you can reimburse employees for a health plan they take out. Although Zane insists the subsidy is not taxable income to your people, the IRS has warned repeatedly that employers using those plans could be subject to penalties—up to $36,500 a year per affected employee.

Whether you offer a group plan or help employees navigate the ACA, seeing that they are covered ultimately is good business.

By Robb Mandelbaum for TIME Money

Published: July 19, 2016

Married? 6 Times You May Want to File Taxes Separately

A whopping 95% of married couples file taxes jointly, and for good reason: It’s almost always cheaper than filing separately. But what about the other 5% of the time? Here are a few cases where splitting up those returns might make more sense.

1. If You Have Income-Based Student Loan Payments

Income-based student loan payments usually key to adjusted gross income, or AGI. So your filing choice could dramatically change the size of your payment, according to Carrie Houchins-Witt, a certified financial planner in Coralville, Iowa. When you file separately, payments are based only on the borrower’s income, rather than on the couple’s joint income.

The IRS does nix certain breaks for couples who file separately, including the student loan interest deduction, but Houchins-Witt says many clients choose to file separately anyway.

“They might end up owing an extra $1,000 on their tax return, but if they’re going to save $400 a month on their student loan payments, then it makes sense to do that,” she says.

2. If You Have A Lot of Medical Expenses

Generally, only medical expenses that exceed 10% of AGI are deductible (the threshold drops to 7.5% for people 65 or older). So the higher your AGI, the higher the hurdle gets. Filing separately could lower that hurdle.

“If the spouse that has the health issues is not making a lot of money, but the other spouse is making significantly more … [for] the one that’s not making as much, it might be more advantageous,” says Ben Barzideh of Piershale Financial Group in Crystal Lake, Ill.

3. If Your Spouse Already Owes the IRS

If your spouse brought overdue taxes into the relationship, it may be worthwhile to file separately, says Samuel Jones of Capital Business Service in Napa, Calif. That way, the IRS won’t apply your refund to your spouse’s overdue bill.

The strategy isn’t that common, though. “Even in that particular circumstance, a married couple is usually willing to join their tax returns in order to reduce their overall burden,” Houchins-Witt notes.

4. If You're High Earners 

For the 2015 tax year, the IRS limits itemized deductions for joint filers with a combined AGI over $309,900. If you and your spouse are high earners, you could lose some deductions by combining incomes. But note that when you’re filing separately, if one spouse itemizes instead of taking the standard deduction, the other must itemize, too. You’ll also have to decide which spouse gets each deduction, which can get complicated, Jones says.

5. If You Don't Live In A Community Property State

Filing separately may not be viable if you live in Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington or Wisconsin. Those states are community property states: Anything couples earn generally belongs to both spouses equally. Couples filing separately there each have to report half of the income both spouses earned, which nullifies most of the advantages of filing separately, Barzideh says.

6. If You're Suspicious Of Your Spouse

If you’re getting a divorce or you aren’t sure your spouse is being upfront about tax matters, you should think about filing separately, says Bill Smith, managing director of the national tax office at financial consultancy CBIZ MHM in Bethesda, Md.

“It’s very important, because once you sign that joint return, you have joint liability,” Smith says. The IRS does offer relief for innocent spouses, but unless you’re willing to endure the process of getting the IRS to agree you’re innocent, you’re on the hook, he says.

By Tina Orem for NerdWallet

Published: July 14, 2016

3 Ways Student Loans Affect Your Taxes

Anxiety at tax time is common, but Millennials feel it more than others.

Millennials are the age group most worried about filing their taxes, according to a recent NerdWallet survey conducted by Harris Poll.

Factoring in student loan debt can be especially confusing. “You’d be surprised how many people out there don’t even think that’s relevant for their tax return,” says Eric Schaefer, a financial adviser at Evermay Wealth Management in Arlington, Va.

Here are three ways student loan debt affects your taxes, from deductions to tax bills you might owe in the future.

1. You can deduct student loan interest from your income.

If you paid interest on student loans last year, you can lower your taxable income by up to $2,500.

Student loan borrowers can deduct the interest paid last year through the student loan interest deduction. The IRS looks at modified adjusted gross income to see who qualifies and for how much. You qualify for the full deduction if your modified gross is less than $65,000 (filing as a single or head of household) or $130,000 (if married and filing jointly). You get a reduced amount if it’s up to $80,000 (single) or $160,000 (filing jointly).

The deduction can lower your taxable income by a maximum of $2,500, which gets you $625 back on your taxes if you’re in the 25% tax bracket. The borrower who took out the loan, whether it’s the student or the parent, will get the deduction — but neither will qualify if the student is listed as a dependent on a parent’s tax return.

Your student loan servicer, the company that collects your monthly bill, should have sent you a Form 1098-E interest statement by early February if you paid $600 or more  in interest last year. Ask your servicer for the document if you paid less than $600 in interest; you’ll still be able to deduct that amount, but you might not receive the form in the mail or by email without a request.

2. Filing jointly with a spouse could increase your student loan payment.

More and more grads are opting for income-driven repayment plans to pay off their federal student loans. These plans limit your monthly payment to a percentage of your discretionary income. Plus, they forgive your loan balance after you’ve made payments for 20 or 25 years.

The way you file your taxes can significantly affect how much you owe on income-driven plans, though. If you file jointly with your spouse, your monthly payment will be based on the two incomes combined. That could increase your bill or even disqualify you from certain repayment plans if your income jumps high enough.

Instead, consider filing your taxes separately. When you do, the income-based and Pay As You Earn repayment plans will calculate your monthly payment using the student loan borrower’s income alone.

“It might make financial sense to do that vs. having a monthly loan payment that’s twice as high,” Schaefer says.

There are a few financial considerations and potential downsides to choosing married filing separately, though. For example: You won’t be able to take certain tax deductions and credits (including the student loan interest deduction), and your ability to contribute retirement savings to a Roth IRA will be limited. When you file taxes separately, you can’t contribute to a Roth IRA  if your modified adjusted gross income is more than $10,000 a year — compared with the $184,000 threshold for married taxpayers.

“That is a huge disadvantage for doing married filing separately,” says Ara Oghoorian, an Encino, Calif., financial planner at ACap Asset Management who works primarily with health care employees. If you can’t otherwise afford your loan payment, however, the benefits of filing separately could outweigh the drawbacks.

To make it more complicated, Revised Pay As You Earn (known as REPAYE), the newest income-driven student loan repayment plan, combines married borrowers’ incomes when it calculates your payment even if you file taxes separately. That might influence whether you choose this option to repay your loans.

3. You could be in for a big tax bill if your loans are forgiven later on.

You’ll get your federal student loans forgiven after a certain number of years if you take advantage of the government’s Public Service Loan Forgiveness program, or if you choose an income-driven repayment plan. But these two options affect your taxes very differently.

You’ll qualify for Public Service Loan Forgiveness after you’ve made 120 on-time loan payments while working full time at a non-profit or government agency. There’s an extra benefit, too: The forgiven amount won’t be taxed.

As it stands now, however, a borrower on an income-driven plan will pay income tax on the forgiven loan balance the year his or her repayment period ends. That means grads or parents with large loan balances could be in for a big tax liability.

Use the Repayment Estimator tool on Federal Student Aid’s website to see how much you should expect to have forgiven in the future.

“You might want to set aside money knowing that that’s a risk,” Schaefer says. But there may be reason to be optimistic about a change in policy.

“I wouldn’t be surprised if the IRS came up with a program to pay those tax bills in installments,” he says.

By Brianna McGurran for NerdWallet

Published: July 13, 2016

Top Tax Issues for 2016

1. Supreme Court ruling on ACA

Millions of people will now continue to have access to affordable health care in the states which did not establish marketplace healthcare exchanges. It also tees up our next three major tax issues.

2. Affordable Care Act changes for individuals

The individual mandate penalty increases to the higher of 2 percent of yearly household income or $325 person per year, with a maximum penalty per family for those using this method of $975.

In addition, federal poverty level guidelines, used to determine if the individual qualifies for subsidy, have increased.

3. ACA provisions’ impact on businesses

Applicable large employers who have on average of 50 or more full-time equivalent employees in the prior calendar year must offer minimum essential coverage that is affordable to their FTEs and their dependents, or be subject to an employer shared responsibility payment. Transition relief for 2015 exists for ALEs with fewer than 100 FTEs in 2014, and only requires employers to offer minimum essential coverage to 70 percent of full-time employees and their dependents in 2015.

4. New forms to contend with

The Form 1095-B and Form 1095-C, which were optional for calendar year 2014, must be filed by any person that provides minimum essential coverage to an individual (1095-B) and by applicable large employers (Form 1095-C) who had on average at least 50 full-time equivalent employees during calendar year 2014 or small employers who are member of a controlled group that collectively had at least 50 FTEs and who offer an insured or self-insured plan or no group health plan at all.

5. Increase in identity theft

Under new policies announced by the IRS, taxpayers may receive a letter when the service stops suspicious tax returns that have indications of involving identity theft but contain legitimate taxpayer’s name and/or Social Security number. The IRS has agreed to reverse its policy and provide identity theft victims with copies of the fraudulent tax return that has been filed under their name by scammers, so they can take the proper steps to secure their personal information.

6. Extenders

Despite efforts to get ahead of schedule, Congress looks likely to pull its usual wait-until-the-last-minute trick for extending things like the Section 179 deduction, the R&D credit, and host of other credits and deductions that expired at the end of 2014. If not extended to cover 2015 before year’s end, this will make tax planning difficult, and result in delays in tax forms and software releases.

7. Supreme Court ruling on same-sex marriage

All states must now recognize all married couples in the same way for state income tax purposes, regardless of gender. This will impact the ability to file join income tax returns, the ability to transfer property to each other tax-free, the ability to leave an estate to the spouse without gift tax implications, and spousal treatment of inherited IRAs.

8. Trade legislation tax changes

The Trade Preferences Extension Act of 2015 contains a number of tax provisions in addition to its trade measures. Taxpayers who exclude foreign earned income under Code Section 911 cannot claim the child tax credit; taxpayers must receive a payee statement (1098-T) before they can claim an American Opportunity, Hope, or Lifetime Learning Credit or take the deduction for qualified tuition and related expenses. This is effective for tax years beginning after the TPEA’s date of enactment.

9. Tangible property regulations

These regs caused a number of headaches last tax season. Under the final regs, all costs that facilitate the acquisition or production of such property must be capitalized. Improvements to property that better a unit of property, restore it, or adopt it to a new and different use must also be capitalized.

Exceptions: De minimis safe harbor (annual election required); routine maintenance safe harbor; (no election required); per building safe harbor form small businesses (annual election required).

From Accounting Today

Published: June 29, 2016

The Most Overlooked Retirement Account

I work with hundreds of employees every year who are serious about retiring comfortably. They generally know the importance of contributing to their employer’s retirement plan and an IRA, which both have significant tax benefits. I’ve found that another of the best but most misunderstood retirement planning options is the health savings account (HSA), which has been around since 2003 in conjunction with the explosion of high deductible health plan (HDHP) options. Many employees think the HDHP is just a way for their employer to lower medical benefits costs, but for most employees, these plans offer so much more than that. Growing some retirement resources in an HSA can be beneficial for you in a number of ways:

Deferring money to an HSA is even easier to do than most retirement plans. You can have the funds taken directly from your paycheck, but you can also make direct deposits by check, by bank transfer and even in cash depending on where your HSA account is held. You also have until the tax filing deadline to contribute for the previous year.

They can be completely tax-free. HSA contributions are pre-tax and income and gains compound without tax dilution. For money you use to pay qualified medical expenses, there are no taxes ever.

There’s no use it or lose it. Not to be confused with a medical FSA, which often happens, HSA balances that aren’t used by year-end carry over indefinitely and can be invested as the HSA plan permits. Here’s what I’ve suggested to many employees: keep your HSA card at home and pay small co-pays (and perhaps the bigger ones) out-of-pocket. Let it go and let it grow! (You might want to keep the receipts though since you can still withdraw the amount you spent on qualified medical expenses from the HSA tax and penalty-free in the future.)

They can help reduce Medicare premiums. Most people don’t know that their Medicare Part B premiums are dependent on their taxable income from 2 years prior. If funds are taken from taxable accounts like an IRA or 401(k) to pay medical expenses, the resulting increased income can trigger premium surcharges referred to as IRMAA, doubling or even tripling your Medicare premiums. Using HSA balances for these expenses eliminates this additional taxable income.

They can supplement your retirement income.Generally, there’s a 20% tax penalty when you use money from an HSA for non-medical expenses. However, that penalty goes away when you turn 65 (and qualified medical expenses are still tax-free).

There are no required distributions.  As with a Roth IRA, HSA balances aren’t subject to required minimum distributions and thus don’t create unnecessary taxable income. This allows you to continue deferring the tax and perhaps avoid it altogether with future medical expenses.

They’re available for both spouses. If you have extra HSA balances when you pass away, your surviving spouse can access the rest of it and enjoy the benefits. But don’t use your HSA as a wealth transfer tool. Once both spouses die, the beneficiaries get the remainder but must pay taxes on it regardless of how it is used after paying off the deceased’s final medical bills.

So how do you take advantage of an HSA? If you’re covered only by an HDHP, you can contribute up to $6,750/yr if you’re married ($7,750 if over 55) or $3,350 if you’re single ($4,350 if over 55). Don’t forget to factor in any money added to it as an incentive at work before making that extra deposit though. That needs to be subtracted to get to your maximum contribution limit for the year. If your workplace health plan allows you to stay on it after age 65 without filing for Medicare, you can put off Medicare filing until after your employment ends and stay eligible to add to your HSA to build additional tax-free funds to use later.

Our 2016 Generational Report reinforces the idea that small improvements in financial behavior can dramatically increase expected retirement balances and help you retire earlier. People generally think of saving for retirement in their employer’s retirement plan and an IRA. Taking advantage of an HSA’s benefits as well is another one of those improvements that can help you become financially healthier and write smaller tax checks!

By Paul Wannemacher, Contributor for Forbes Magazine

Published: June 27, 2016

Will There Be a Rise of State Entity-Level Taxes?

The number of passthrough entities (which includes partnerships, limited liability companies, and S corporations) has been on the rise for the last 30 years. And along with the increase in the number of passthrough entities has been a decrease in the number of C corporations. According to the Tax Foundation, passthrough businesses now account for 94 percent of all businesses in the United States.

None of that is really news. The rise of the passthrough entity is well documented. It’s also not news that, at the federal level, partnership audits will be on the rise. Very briefly, under new federal rules, the IRS will assess tax on the partnership (at the entity level) and the partnership will be tasked with determining how to pass the tax through to partners. Stories have been written about the effect that the new partnership regime will have on state tax administration.

But I wonder what this means for states. Will states be able to manage an increase in federal adjustments to partnership returns? Will states be able to manage an increase in partnership audits in general? It seems unlikely. State taxing agencies are not well staffed to perform many additional complex or technical audits. This is one of the reasons states shied away from transfer pricing -- they don’t have staff that understands the complexities of transfer pricing or experts who could produce transfer pricing reports.

What will states do? And will they simply avoid doing partnership (and other passthrough entity) audits all together and turn to entity-level taxes?

There is certainly concern that states will struggle to adapt to the IRS’s new partnership audit regime. During a panel at the State and Local Taxes session of the ABA Section of Taxation meeting on May 6, representatives from the American Institute of CPAs, the American Bar Association, the Multistate Tax Commission, and the Council On State Taxation said they were discussing ways to jointly help states.

At the same panel, practitioners raised numerous concerns about how states would react. Bruce Ely of Bradley Arant Boult Cummings LLP said taxpayers want to avoid a situation in which states had 50 different reactions. That would set the stage for a compliance nightmare for taxpayers. Other issues raised included whether state laws would need to change for a partnership to be considered a taxpayer under state law and whether states would need to change composite return rules.

One state, Arizona, has enacted a measure to update the revenue agent report statutes to reflect the IRS’s new partnership audit rules. Beyond that, a few states have established working groups to examine these and other issues. It seems likely, however, that at least some states will consider their own entity-level tax regime and not bother trying to implement the new federal rules for partnerships. Currently, roughly half of the states impose some sort of entity-level tax on passthrough entities.

Some of the entity-level taxes are fixed annual assessments. For example, Connecticut imposes an annual “business entity tax” of $250 on LLCs and limited liability partnerships. Vermont imposes a $250 annual tax on LLCs and LLPs, and Rhode Island imposes a $500 tax on LLCs taxed as partnerships.

Other states impose entity-level taxes more analogous to an income tax. For example, Illinois imposes a 1.5 percent replacement tax on partnerships and LLCs. Kentucky imposes a limited liability entity tax that is equal to the lesser of 9.5 cents per $100 of Kentucky gross receipts or 71 cents per $100 of Kentucky gross profits.

Given the option of dealing with the many issues that will arise because of the new federal partnership audit rules or finding an alternative (hopefully less complex) means of taxing and auditing passthrough entities, I tend to think at least some states will choose the latter. In any case, it will be interesting to watch the discussion during the next year as states drill down and identify all the issues with the new federal partnership audit rules, and ultimately determine their next moves.

By Cara Griffith for The Tax Analysts Blog

Published: May 31, 2016

Paying Taxes by Credit Card? Read This First

This time of year many Americans would like to take a swipe at the IRS. Some taxpayers even should, experts say — with their credit card.

Though paying a bill in full is the best way to avoid late charges and other hassles, credit card payments can help those struggling with the their bills to buy time – and even save money. “If you’re going to need a year or more to pay it out you could borrow on a low interest credit card and it could be a good deal,” says Gregg Wind, a certified public accountant in Los Angeles.

While not ideal, credit cards and lines of credit can help people pay the tax man while avoiding potentially steep late payment penalties and interest charges. The IRS generally charges interest on any unpaid tax starting from the day the tax is due to the date it is paid. Currently at 3%, the interest rate is reset quarterly. And that doesn’t include late payment penalties, which are 0.5% of taxes owed a month. Between interest charges and late payment penalties, someone who is a year late in paying their taxes could see their bill increase by 9%, Wind estimates.

Those fees can be reduced if one pays with a low-interest credit card, he says. Take someone with a credit card that has a 4% APR. Including a onetime convenience fee of up to 2.4% that third-party service providers charge for using a credit card, fees would add up to 6.4% of taxes owed, he estimates. On a $10,000 bill, that could mean $260 in savings. Someone using a zero percent credit card may be able to save more, but they need to be careful not to carry the balance past the promotional period because the interest rate can shoot up and credit card charges could erase those savings, he says.

Some investors who don’t want to liquidate important investments to cover their tax bill may be able to set up a similar arrangement by opening a line of credit with their brokerage firm, says Phil Conway, U.S. head of lending for J.P. Morgan Private Bank. For those in the middle of a property sale that still hasn’t cleared or who expect a bonus coming up later in the year, a line of credit can provide more time to pay the bill without forcing them to sell other assets prematurely, says Conway. Interest rate charges can often be around 3% since they are usually 2 percentage points on top of the London Interbank Offered Rate, or the rate that banks charge to borrow from each other. Still, taxpayers should generally aim to clear their credit lines before next tax season to avoid having their debts pile up, Conway says. “We’re not trying to say to pay this back like you would pay back a car,” he says.

That said, there may be less expensive options for taxpayers who don’t qualify for a low interest credit card or line of credit. Those who need less than 120 days to pay the bill you may be able to set up an informal payment plan with the IRS, says Wind. And the IRS introduced a program this year that gives some filers more time to pay, penalty free. Some people may also be able to set up an installment agreement with the IRS, which would lower late payment penalties to 0.25% of taxes owed a month.

From the Wall Street Journal

Published: May 27, 2016

'Nanny Tax' Could Trip Up More Taxpayers This Year

Should you be worried about the dreaded "nanny" tax?

While the growing gig economy implicitly treats service providers as independent contractors, families who hire people to watch their kids, clean their houses, or perform other household tasks need to make sure they don't inadvertently run afoul of regulations this year that classify them as employers with wage and tax obligations.

For people looking to hire workers, the lure of getting a service performed cheaply could come with an expensive downside if they inadvertently take on an employee, then wind up having to pay back taxes or penalties.

"What's new this year that a lot of families need to be aware of is Department of Labor issued new guidelines on who is an employee and who is an independent contractor," said Tom Breedlove, director of Care.com HomePay.

Last summer, the IRS added two factors to a test for worker classification, Breedlove said, one pertaining to permanence and the other evaluating how much of their income is provided by you.

For the 2015 tax year, families who paid someone $1,900 or more over the course of the year to come into their home and perform jobs like personal assistance, cooking, cleaning or taking care of kids, elderly parents or even pets had to withhold and pay taxes, because that worker is considered an employee who must be paid hourly. For 2016, that amount goes up to $2,000. With recent minimum wage increases taking place in a number of states and municipalities, families are more likely to hit that threshold sooner.

"There used to be a gray area, [but] the DOL and IRS have really, really tightened the definition," Breedlove said. "They've essentially said all household workers should be treated as employees," he said.

There also is more awareness on the part of workers about their rights, said Guy Maddalone, founder and CEO of GTM Payroll Services. More are seeking out legal advice, and more attorneys are advertising their services to represent domestic workers.

"Six states have legislation that secures the rights of domestic workers, and five of those have full bills of rights," Marzena Zukowska, spokeswoman for the National Domestic Workers Alliance, said in an email. These laws generally spell out (among other things) requirements for tax-related compensation topics like minimum wage and overtime pay.

Along with stricter rules, the government today has a better chance of catching up with people who misclassify the people who do work for them. Since people now have to be able to prove their income to obtain subsidies for Affordable Care Act health insurance, there is less incentive for childcare, eldercare and other domestic workers to want to get paid off the books, and an additional opportunity for the government to spot discrepancies between reported incomes.

The rub is that while the stakes are higher, experts say a shift in the way service providers connect with the people they work for has created a knowledge gap that can leave people unaware of who they need to classify as an employee and when.

Maddalone said the rise of "gig economy" platforms is disrupting the traditional agency placement model for domestic workers.

"Their business is shrinking," he said, as more workers turn to sites that connect buyers and sellers of services but don't offer any guidance about worker classification or labor law and tax obligations. "The advice is not getting out there."

"All those sites and boards have really disrupted the ability of the local expert in the community [to] let them know there's certain laws here," Maddalone said.

From NBC News

Published: May 23, 2016

"When do I get my tax refund?"

The official word from the Internal Revenue Serviceis that it takes up to 21 days after the IRS accepts your e-filed tax return to get your refund.  If you mailed your tax return, the refund process for those paper returns can range from six weeks to eight weeks after the date the IRS receives the return.

You can check the status of your federal refund online at "Where's my refund?" at IRS.gov.  You'd need your Social Security number, your filing status and the exact amount of the refund. Don't try to check every hour, though. The IRS said its refund information is only updated once every 24 hours or so, usually overnight.

But, (and isn't there always a but?) there can be plenty of reasons that a refund can take longer to process. Such as:

  • Did you file an amended tax return? It could take up to 16 weeks to get that refund. To check the status of an amended return, you'd go to IRS.gov for Where's my amended return? 
  • Is some of your refund money going toward past-due child support? Again, it's going to take longer for you to receive what's left. 
  • Were you a victim of ID theft where crooks filed a tax return using your ID? Mark Ciaramitaro, vice president of tax products for H&R Block, said it can take anywhere from six months to a year for some tax-refund victims to get their own tax refunds, as the ID theft mess is investigated.
  • Was your tax return incomplete? Did it contain some errors? If so, the tax refund could take longer than normal to process. 
  • Did you put the right bank account information on the return? The IRS notes that if you incorrectly enter an account or routing number that belongs to someone else and your financial institution deposits the money into someone else's account, you must work with the bank to recover your money. If you contact the bank and two weeks have passed with no results, file Form 3911 "Tax Statement Regarding Refund" with the IRS if the refund check is lost or if there has been trouble receiving the refund money.

"The fastest way to get your refund is to ensure the return you file is error-free," said Luis Garcia, a spokesman for the IRS in Detroit.

It's possible, he said, the refund could face further delays if you used nicknames, or your married name doesn't match up to the name on file with Social Security.

Susan Allen, certified public accountant and lead technical manager for the tax division for the American Institute of CPAs, said in order for an IRS employee to assist you, more than 21 days must have passed since you received your e-file acceptance notification (or more than six weeks has passed if you mailed your tax return).  You can also work with your CPA to resolve any IRS issue.

The refund process was slightly slower going into early April, according to the numbers from the Internal Revenue Service. About 76 million refunds were issued through April 1, down about 1.5% from a similar period last year. The average refund was $2,989 through April 1 — up $10 from the similar time last year.  More than 86% of refunds so far are directly deposited into bank accounts or onto prepaid cards.

Best tip of all: Don't spend the refund money the very second you e-file that tax return. It's going to take more than a few days to get that actual cash in your hands.

From USA Today

Published: May 17, 2016

Congress Might Make Your Gym Membership Tax-Deductible

You may not have known, but Wednesday was National Golf Day in Washington D.C., the day the industry’s leaders come together and push their agenda on issues that could help the game. Among them is a bill called the PHIT Act, which proposes to make the costs associated exercise tax-deductible.

Golf Digest has a nice explainer on what it would mean for golf:

Because if the PHIT Act passes as currently constituted it would, along with several other physical-fitness expenses, make golf camps and clinics, lessons and training aids, green fees and driving-range fees, tournament fees and, wait for it . . . golf balls and golf clubs tax deductible up to $1,000 for an individual or $2,000 for a head of household or family.

That’s great news for all the golfers out there, but the language of the PHIT Act is actually far broader. In fact, it’s rather limiting golf-wise when you consider what else it has the potential to do.

According to the bill:

“(12) QUALIFIED SPORTS AND FITNESS EXPENSES.—

“(A) IN GENERAL.—The term ‘qualified sports and fitness expenses’ means amounts paid—

“(i) for membership at a fitness facility,

“(ii) for participation or instruction in a program of physical exercise or physical activity, and

“(iii) for equipment for use in a program (including a self-directed program) of physical exercise or physical activity.

“(B) OVERALL DOLLAR LIMITATION.—The aggregate amount treated as qualified sports and fitness expenses with respect to any taxpayer for any taxable year shall not exceed $1,000 ($2,000 in the case of a joint return or a head of household (as defined in section 2(b))).

What does that mean? It means that gym memberships, classes, sneakers, fitness videos, books and exercise equipment are all some of the things you could potential write-off on your taxes.

But alas, if something’s too good to be true it probably is: Does the PHIT Act actually have a chance of passing? Right now, it doesn’t seem so.

100 lawmakers in both the House and Senate support the bill, but it’s been stuck before the House Ways and Means committee since it was introduced last year. Rep. Jerry Weller (D-IL) has been pushing this bill since 2006 so while it has been making slight progress, GovTrack still only pegs its chances of being signed into law at four percent.

But on the plus side, that’s right! Four! Whole! Percent! Do the math, and you’ll find that’s four percent more likely than zero percent.

Published: May 13, 2016

Now is a Good Time to Plan for Next Year’s Taxes

You may be tempted to forget about your taxes once you’ve filed but some tax planning done now may benefit you later. Now is a good time to set up a system so you can keep your tax records safe and easy to find.  Here are some IRS tips to give you a leg up on next year’s taxes:

  • Take action when life changes occur.  Some life events can change the amount of tax you owe. Examples  include a change in marital status or the birth of a child. When these happen, you may need to change the amount of tax withheld from your pay. To do that, file a new Form W-4, Employee's Withholding Allowance Certificate, with your employer. 

  • Report changes in circumstances to the Health Insurance Marketplace.  If you enroll in insurance coverage through the Health Insurance Marketplace for  2016 coverage, you should report changes in circumstances to the Marketplace when they happen. Report events such as changes in your income or family size. Doing so will help you avoid getting too much or too little financial assistance.

  • Keep records safe.  Print and keep a copy of your 2015 tax return and supporting records together in a safe place. This includes  W-2 Forms, Forms 1099, bank records and records of your family’s health care insurance coverage. If you ever need your tax return or records, it will be easier for you to get them. For example, you may need a copy of your tax return if you apply for a home loan or financial aid for college. You should use your tax return as a guide when you do your taxes next year.

  • Stay organized.  Make tax time easier. Have your family put tax records in the same place during the year. That way you won’t have to search for misplaced records when you file next year.

  • Shop for a tax preparer.  If you want to hire a tax preparer to help you with tax planning, start your search now. Choose your tax preparer wisely. Use the Directory of Tax Return Preparers tool on IRS.gov to find tax preparers in your area with the credentials and qualifications that you prefer.

  • Think about itemizing.  You may be able to lower your taxes if you itemize deductions instead of taking the standard deduction. Owning a home, paying medical expenses and qualified donations to charity could mean more tax savings. See the instructions for Schedule A, Itemized Deductions, for a list of deductions.

Published: May 11, 2016

Things You Should Know about Filing Late and Paying Penalties

April 18 was this year’s deadline for most people to file their federal tax return and pay any tax they owe. If you are due a refund there is no penalty if you file a late tax return. If you owe tax, and you failed to file and pay on time, you will most likely owe interest and penalties on the tax you pay late. To keep interest and penalties to a minimum, you should file your tax return and pay the tax as soon as possible. Here are some facts that you should know.  

  1. Two penalties may apply. One penalty is for filing late and one is for paying late. They can add up fast. Interest accrues on top of the penalties.

  2. Penalty for late filing. If you file your 2015 tax return more than 60 days after the due date or extended due date, the minimum penalty is $205 or, if you owe less than $205, 100 percent of the unpaid tax. Otherwise, the penalty can be as much as five percent of your unpaid taxes each month up to a maximum of 25 percent.  

  3. Penalty for late payment. The penalty is generally 0.5 percent of your unpaid taxes per month. It can build up to as much as 25 percent of your unpaid taxes.

  4. Combined penalty per month. If both the late filing and late payment penalties apply, the maximum amount charged for the two penalties is 5 percent per month.

  5. File even if you can’t pay. Filing on time and paying as much as you can will keep your interest and penalties to a minimum. If you can’t pay in full, getting a loan or paying by debit or credit card may be less expensive than owing the IRS. If you do owe the IRS, the sooner you pay your bill the less you will owe.

  6. Payment Options. Explore your payment options on our website at IRS.gov/payments. For individuals, IRS Direct Pay is a fast and free way to pay directly from your checking or savings account. The IRS will work with you to help you resolve your tax debt. Most people can set up a payment plan using the Online Payment Agreement tool on IRS.gov.

  7. Late payment penalty may not apply. If you requested an extension of time to file your income tax return by the tax due date and paid at least 90 percent of the taxes you owe, you may not face a failure-to-pay penalty. However, you must pay the remaining balance by the extended due date. You will owe interest on any taxes you pay after the April 18 due date.
Published: May 6, 2016

Tip Income & How It Affects Your Taxes

If you get income from tips, you should know some things about tips and taxes. Here are a few tips from the IRS to help you file and report your tip income correctly:

  • Show all tips on your return. You must report tip income. This includes the value of non-cash tips such as tickets, passes or other items.
  • All tips are taxable. You must pay tax on all tips you received during the year. This includes tips directly from customers and tips added to credit cards. This also includes your share of tips received from a tip-splitting agreement with other employees. 
  • Report tips to your employer. If you receive $20 or more in any one month, you must report your tips for that month to your employer by the 10th day of the next month. Only include cash and check and credit card tips you received. Your employer must withhold federal income, Social Security and Medicare taxes on the reported tips. 
  • Keep a daily log of tips. Use Publication 1244, Employee's Daily Record of Tips and Report to Employer, to record your tips. This will help you report the correct amount of tips on your tax return.
Published: April 4, 2016

[Not So] Dumb Tax Questions You Might Be Embarrassed to Ask

Unless you're an accounting geek like us, chances are you don't like thinking about taxes.

But when it comes to the IRS, you can't just bury your head in the sand and claim ignorance. Here are answers to a few seemingly dumb and super-simple questions that actually are neither.

Do I really have to file a federal tax return?

Probably.

The only time you're not required to file is if your income is less than your personal exemption plus your standard deduction, both of which are determined by your marital status and age.

You can use this table to figure out your personal situation. But generally, if you made more than $23,100 in 2015, you will have to file, according to Mark Luscombe, principal federal tax analyst of Wolters Kluwer Tax & Accounting US.

But here's the thing: Even if your income is too low to have to file, you may want to anyway. Why? You could be owed a refund.

Too much tax may have been withheld from your paycheck or you may be entitled to a refundable tax break like the Earned Income Tax Credit, which pays money to qualified filers even if the credit exceeds their tax bill.

How long will it be before I get my refund?

Most filers get refunds and the vast majority of them get their refunds in hand within 21 days from the day they file their returns.

Is it true the IRS can withhold my refund?

Yes, there are four situations in which the IRS will not send you part or all of your refund: If you're behind in paying federal student loans, child support, or state income taxes; or if you got too much of a government subsidy to buy health insurance on a federal or state exchange.

What if I know I owe money to the IRS but can't afford to pay?

First, file anyway. If you don't, you'll be hit with a failure-to-file penalty, which is steep.

Second, take a deep breath. There are different payment plan options you can work out with the IRS so that you don't have to pony up everything all at once.

If you owe more than $10,000, it's advisable to have a CPA with experience setting up payment plans to represent you.

If you owe less than that, you still might want to seek a tax professional's help if all this stuff seems too daunting.

Okay so when do I have to file?

The deadline this year is Monday, April 18. (Usually, it's April 15.)

If that doesn't fit into your schedule, you can file an automatic 6-month extension form.

Remember, though, an extension to file is not an extension to pay. Any remaining money you owe for tax year 2015 is due April 18.

So if you think you'll have to cut the IRS a check, estimate how much it will be and pay it when you send in your extension form.

If you don't, you'll owe interest on the amount due and could be hit with a failure-to-pay penalty.

Will I get audited?

Probably not. Audit rates are very low these days -- thanks largely to budget cuts at the IRS. But that doesn't mean your return will always escape scrutiny, especially if you go out of your way to invite it.

Be sure to report all your income. The IRS has copies of any tax forms you get -- from employers, banks, brokers, educational institutions or partnerships. And it uses an automated form-matching system to cross-check the numbers on your return match the numbers it has on file. If there's any discrepancy, that could trigger an audit.

You'll also call attention to your return if you blatantly try to claim tax breaks you don't qualify for -- say, trying to deduct all your housing costs for that home office you don't have or reporting several years of losses for a small business that's nothing more than a hobby.

By Jeanna Sahadi for @CNNMoney

Published: March 29, 2016

Retirees Face April 1 Deadline for Required Retirement Plan Distributions

The Internal Revenue Service today reminded taxpayers who turned 70½ during 2015 that in most cases they must start receiving required minimum distributions (RMDs) from Individual Retirement Accounts (IRAs) and workplace retirement plans by Friday, April 1, 2016.

The April 1 deadline applies to owners of traditional (including SEP and SIMPLE) IRAs but not Roth IRAs. Normally, it also applies to participants in various workplace retirement plans, including 401(k), 403(b) and 457(b) plans.

The April 1 deadline only applies to the required distribution for the first year. For all subsequent years, the RMD must be made by Dec. 31. So, a taxpayer who turned 70½ in 2015 (born after June 30, 1944 and before July 1, 1945) and receives the first required distribution (for 2015) on April 1, 2016, for example, must still receive the second RMD by Dec. 31, 2016. 

Affected taxpayers who turned 70½ during 2015 must figure the RMD for the first year using the life expectancy as of their birthday in 2015 and their account balance on Dec. 31, 2014. The trustee reports the year-end account value to the IRA owner on Form 5498 in Box 5. 

Though the April 1 deadline is mandatory for all owners of traditional IRAs and most participants in workplace retirement plans, some people with workplace plans can wait longer to receive their RMD. Usually, employees who are still working can, if their plan allows, wait until April 1 of the year after they retire to start receiving these distributions. Employees of public schools and certain tax-exempt organizations with 403(b) plan accruals before 1987 should check with their employer, plan administrator or provider to see how to treat these accruals.

The IRS encourages taxpayers to begin planning now for any distributions required during 2016. An IRA trustee must either report the amount of the RMD to the IRA owner or offer to calculate it for the owner. Often, the trustee shows the RMD amount in Box 12b on Form 5498. For a 2016 RMD, this amount would be on the 2015 Form 5498 that is normally issued in January 2016.

IRA owners can use a qualified charitable distribution (QCD) paid directly from an IRA to an eligible charity to meet part or all of their RMD obligation. Available only to IRA owners 70½ or older, the maximum annual exclusion for QCDs is $100,000. For details, see the QCD discussion in Publication 590-B.

Published: March 28, 2016

Six Facts You Should Know Before Deducting a Charitable Donation

If you gave money or goods to a charity in 2015, you may be able to claim a deduction on your federal tax return. Here are six important facts you should know about charitable donations.

1. Qualified Charities. You must donate to a qualified charity. Gifts to individuals, political organizations or candidates are not deductible. An exception to this rule is contributions under the Slain Officer Family Support Act of 2015. To check the status of a charity, use the IRS Select Check tool.

2. Itemize Deductions. To deduct your contributions, you must file Form 1040 and itemize deductions. File Schedule A, Itemized Deductions, with your federal tax return.

3. Benefit in Return. If you get something in return for your donation, you may have to reduce your deduction. You can only deduct the amount of your gift that is more than the value of what you got in return. Examples of benefits include merchandise, meals, tickets to an event or other goods and services.

4. Type of Donation. If you give property instead of cash, your deduction amount is normally limited to the item’s fair market value. Fair market value is generally the price you would get if you sold the property on the open market. If you donate used clothing and household items, they generally must be in good condition, or better, to be deductible. Special rules apply to cars, boats and other types of property donations.

5. Form to File and Records to Keep. You must file Form 8283, Noncash Charitable Contributions, for all noncash gifts totaling more than $500 for the year. The type of records you must keep depends on the amount and type of your donation. 

6. Donations of $250 or More. If you donated cash or goods of $250 or more, you must have a written statement from the charity. It must show the amount of the donation and a description of any property given. It must also say whether you received any goods or services in exchange for the gift.

Published: March 24, 2016

5 Changes You Must Know About Before Filing Your Taxes This Year

Congress did make a couple of notable changes last year, including making permanent some tax breaks that had been extended year to year.

"We've had 50 major tax law changes in the last 13 years," says Jeff Schnepper, a tax attorney in Cherry Hill, New Jersey, and the author of "How to Pay Zero Taxes 2016: Your Guide to Every Tax Break the IRS Allows." "Our tax code is a disaster. It's thousands of words dancing without rhythm."

One difference this year is the deadline: Federal tax returns this year are due April 18 because Washington, D.C., celebrates Emancipation Day and the holiday falls on April 15 this year. That gives taxpayers across the country three extra days to file their taxes.

Even if the tax law hasn't changed significantly since you filed your last return, you still may find yourself facing a completely different tax situation because your life has changed. Marriage, divorce, death, the birth of a child, buying and selling a house, an inheritance, big medical expenses, foreclosure, buying or selling a business – all those life events can significantly affect what you need to report on your return and what you pay (or don't pay) in taxes.

"Every time you have a lifestyle change, you're going to have some effect on the tax code," Schnepper says.

If your life has gotten more complicated, it may be time to find professional help.

"My advice to anybody is to always get a tax professional," says Steven Goldburd, a partner at Goldburd McCone tax law firm in New York. "There are ways to do it yourself. Doing it yourself will not always get you the best outcome." If your life changes, you may be eligible for deductions and credits you weren't before, or you may not realize you need to send additional information. Mistakes can cost you money and also make you more vulnerable to an audit.

He advises asking friends, family and colleagues for referrals. "Make sure you have someone that seems trustworthy," Goldburd says. "If it's too good to be true, it probably is. You've got to be careful with that person preparing tax returns out of his bodega."

This time of year, it may be hard to find an accountant with time to talk to you, but you can file for an extension and then seek help, including advice for next year's tax planning, after April 18. If you think you'll owe taxes, you are required to pay on time, even if you get an extension. Anyone can get an extension and delay filing a tax return until Oct. 15, when they might be in a better position to receive the tax guidance needed to prepare a suitable return. You'll have to make a rough estimate of what you owe based on last year's return and how much you have paid so far, either in quarterly estimated taxes or via payroll deduction.

"People fail to take the deductions they're entitled to," Schnepper says. "There's almost nothing that in the appropriate situation can't be deducted if structured correctly."

One piece of advice that has not changed: "The most important thing in terms of taxes is substantiation," Schnepper says. "Any time you don't have a record ... you're throwing away money. Get the receipt."

Here are five changes to be aware of for this year's tax return:

Deadline to file is April 18. This year's tax return deadline is Monday, April 18, because April 15 is Emancipation Day in Washington, D.C. If you live in Maine or Massachusetts, states that celebrate Patriots Day, the deadline to file is Tuesday, April 19. If you can't file on time, ask for an extension, which will give you six more months to send in your return.

The penalty for not having health insurance has risen. If you did not have health insurance in 2015, you may have to pay a tax penalty of 2 percent of your household income, or $325 per adult and $162.50 per child, up to a maximum of $975 per family. That's up from $95 per adult and $47.50 per child, with a maximum of $285, for 2014. However, there is a long list of exemptions from the penalty, including not being able to afford insurance. If you got insurance through the Affordable Care Act exchange and under or overestimated your income, you could either owe additional money or receive a tax credit. The IRS has extensive guidance on the ACA and your taxes.

Some key numbers have changed – slightly. The personal exemption for 2015 has risen from $3,950 to $4,000. That's the amount deducted from taxable income for each person on the return. The Alternative Minimum Tax exemption was increased to $53,600 ($83,400 for married couples filing jointly), from $52,800 and $82,100. The AMT is designed to make sure everyone pays at least some tax and requires a complex set of calculations once your income goes above the exemption threshold. You can see more of those changes here. The mileage rate for 2015 returns is 57.5 cents for business miles (up from 56 cents in 2015), 23 cents for medical or moving mileage (down half a cent from 2014) and 14 cents per mile for charitable work.

Some temporary tax breaks have become permanent. Every year, Congress waits until the end of the year to take up what are known as tax extenders – or tax breaks that expire. This makes it hard to plan. This year, several of those tax breaks were made permanent, including the ability for taxpayers over 70 1/2 to donate IRA funds up to $100,000 without paying taxes, the deduction of sales taxes for taxpayers in states that do not have a state income tax and the $250 above-the-line deduction for teachers who buy their own supplies, which will rise with inflation. The enhanced Child Tax Credit, American Opportunity Tax Credit, and Earned Income Tax Credit were made permanent.

The tax break for cancellation of debt on a primary residence was extended. Normally, if a creditor forgives debt you owe, that is considered income and you owe taxes. But after the foreclosure crisis, Congress created a tax break for homeowners who did short sales on underwater homes and had balances forgiven. The tax break, which applies only to primary residences, was extended through 2016.

From USA Today

Published: March 22, 2016

The Best And Worst States For Taxes In 2016

With tax day drawing near, it’s the time of year to gripe about why taxes are so darn high in your state. If you live in New York, New Jersey or Connecticut, that gut feeling you have is dead on. Resident of the Golden State? At least you’re better off than in New York. And Texas, we’re completely jealous.

Tax rates can be tricky to compare across state lines because there are so many variables. When it comes to income taxes, nine states in the U.S. charge residents a flat percentage regardless of the size of their salary. Most states take a graduated approach with multiple income brackets (Missouri and California lead the pack with 10). And seven states (Alaska, Florida, Nevada, South Dakota, Texas, Washington, and Wyoming) charge no state income tax at all.

To come up with the cleanest comparison of taxes by state, data analysts from Forbes Magazine calculated the effective tax rate for single taxpayers earning a taxable $50,000 in each state. Why use $50,000 for our comparison? Since the median household income for 2014 (the latest year for which Census data is available) was $53,657, it’s reasonable that after taking each state’s standard deduction (from $0 in Indiana to $10,250 in Wisconsin), a single-earner household making the median income might land around a taxable $50,000. In most states, this taxable $50,000 spans multiple tax brackets, with each ascending bracket assessed at a higher rate. To come up with the effective rate at this taxable income level, we crunched the numbers using 2016 tax data from the Tax Foundation, a nonpartisan think tank in Washington, D.C., that tracks tax policy.

Of course, there are more kinds of taxes than income, with property and sales taxes the next biggest considerations. The Tax Foundation tallies total tax revenue collected by each state from both individuals and businesses. This total figure includes not only income, property and sales tax, but also special taxes like real estate transfer, personal property taxes on some vehicles, and special tax district fees. The Tax Foundation divides this total by the number of residents in each state, and calls this figure the total tax burden per capita in that state. Unfortunately, because of the way property tax data is collected, it’s very difficult to tease out the portion that is paid by people as opposed to businesses. Still, it’s the best state-by-state account of tax burden that we’ve encountered, and so it is a metric we support being used to rank the states. Analysts used the most recent data available, which is for the fiscal year that ended in 2012.

On the list of the Best And Worst States For Taxes, New York comes in dead last. The lowest tax burden is found in Alaska. Though the effective tax rate at $50,000 taxable income wasn’t used to rank the states, analysts also looked at the top income bracket for each state. It’s interesting to note that only nine states have special tax brackets for people earning more than $200,000 in taxable income annually: California, Connecticut, Maryland, New Jersey, New York, North Dakota, Ohio, Vermont, and Wisconsin–plus the District of Columbia.

As part of your strategy to minimize your taxes, maybe it’s time to think about a move!

This year, five states made changes to income tax policy, said Jared Walczak, policy analyst at the Tax Foundation. Hawaii bid adieu to its top three brackets for the upper incomes, which were temporary brackets anyway; now its top marginal rate is 8.25%, down from 11%. Arkansas adopted a new tax schedule for incomes between $21,000 and $75,000 and now has three different tax schedules. Maine lowered its tax rates and added a third bracket. Massachusetts hit a level of state revenue that triggered a drop of the flat tax rate by 0.05% to 5.1%. And Ohio’s top marginal rate fell from 5.333% to 4.997%. “They’ve been shifting away from individual income taxes but imposing higher taxes on corporations,” Walczak explains, of the Midwestern state.

For many married couples, it’s advantageous at the federal level to file jointly. Unfortunately, nearly half of the states—24—impose a marriage penalty, meaning that in those states married couples filing jointly pay more income tax than they would if they each filed on their own. Twenty-six of the states either have no marriage penalty or do not have an individual income tax at all. However, it’s tough to get around this marriage penalty, since states won’t let you file jointly at the federal level and separately for the state.

Finally, residents of several states this year may notice that though their taxable income hasn’t changed, their tax bracket has—to their advantage. That’s because many states index their brackets to inflation by tying them to the Consumer Price Index, Walczak says, and as the brackets rise the effective tax rate drops just a tad.

By Erin Carlyle for Forbes Magazine

Published: March 21, 2016

Is itemizing your taxes worth the hassle?

Come tax time, every American wants to get the biggest possible refund.

But Uncle Sam already gives taxpayers a pretty generous starting point via the so-called “standard deduction,” a tax break granted to everyone when they file; the standard deduction for single filers this April  is $6,300, while couples filing taxes together get a standard deduction of $12,600.

That means if you don’t have qualified expenses above those dollar amounts, you’re better off just taking the standard deduction on your Form 1040 and forgetting about the extra paperwork.

In fact, the vast majority of Americans rely on this standard deduction instead of filing itemized returns. According to the IRS, fewer than one-third itemize their taxes.

Still, just because fewer people itemize doesn’t mean you shouldn’t look into it,  said Lisa Greene-Lewis, a CPA and tax expert with tax-preparation software providerTurboTax. That’s because many Americans who claim only a standard deduction could be leaving money on the table simply because they don’t know what they can claim to win a bigger refund.

“When people are rushing around doing their taxes at the last minute, it’s easy to leave out tax deductions or credits,” she said.

When does itemizing pay off?

Greene-Lewis said that while every tax situation is different, there are a few major categories that can sometimes put taxpayers above the standard deduction even without any other qualified expenses.

“Generally, if you own a home, you should itemize,” she said, because mortgage interest and local property taxes are both deductible on your federal return. In many real estate markets, these items alone can get you a bigger refund than what’s offered via the standard deduction.

Other big home-related items that can be itemized include points paid on your home loan in the last tax year, or any property losses caused by disasters like tornadoes or hurricanes for which you’re not reimbursed by an insurance company, Greene-Lewis added.

Another big reason to itemize is if you pay steep local or state income taxes, said Maria Alexeychuk for Hammer Financial Group just outside of Chicago.

“Whatever the state deems taxable that year is a deduction on your federal return,” she said. “It seems like nobody realizes that.”

That means if you make a decent wage and live in a state with relatively high income taxes, such as  California, New York or Minnesota, you may want to itemize to get a break on your federal filing.

Big unreimbursed medical expenses or a large charitable donation to a qualified organization can also put you over the standard deduction, Alexeychuk said. And remember that even if these items can’t top the standard deduction by themselves, they may add up to a larger deduction when added up with other qualified deductions.

“There are numerous times where we’ve seen a young couple buy a house but then say, ‘Well, with the mortgage interest alone it’s not enough to itemize.’ But because they’ve never done an itemized return they just don’t realize all the other things they can write off,” she said.

There are certain situations where someone is highly unlikely to have many of the aforementioned expenses — most obviously being a single taxpayer in a rental or being an older American who has paid down their mortgage and has seen their children leave the nest.

But regardless of your personal situation or the specifics of your individual tax return, you should take any and all qualified deductions possible to earn a bigger refund from the IRS, she said.

“I don’t think itemizing makes you more likely to be audited. If you’ve got this stuff and it’s legitimate, write it off.” Alexeychuk said. “Just make sure you have your receipts for any itemized deductions.”

From USA Today

Published: March 18, 2016

Tax Forms You May Have Forgotten About

You likely already know you need some version of Tax Form 1040 to file your personal taxes, and you’ll also be needing your W-2 from your employer to help you fill it out. But you might be overlooking some of the other forms you’ll need if you, say, won big on that trip to Las Vegas or started paying back your student loans last year.

Here are some of the tax forms you might not have known you needed.

Form W-2G

What happens in Vegas stays in Vegas, except if you win money — then you might have to tell the IRS about it. Form W-2G, Gambling Winnings, is used to report gambling winnings (direct wager only) of $600 or more in any one session and 300 times the buy-in or wager.

Tax Form 1040X

Need to correct your tax return? Whether it’s reporting additional withholding, changing your tax deductions or personal exemptions, adding or removing dependents or reporting additional income, this is the form to use.

Remember, though, you do not need to file a 1040X if you are only correcting errors in math ― IRS computers automatically check the math and make those corrections for you.

Form 8822

Did you move? Well, the IRS would like to know. Form 8822 is used to report your change of address.

Tax Form 4868

Need an extension? If you are not able to file your federal individual income tax return by the due date, you may be able to get an automatic 6-month extension of time to file. To do so, you must file Tax Form 4868 by the original due date for filing your tax return

It’s important to note that Form 4868 does not extend the time for payment of tax, which is still owed by the original due date of your return. You will need to give an estimate of your taxes due when filing for a tax extension ― and you can pay none, all, or part of your estimated income tax due using a credit card or checking/savings account.

It’s also important to note that not paying your taxes can result in a tax lien, which can hurt your credit scores. 

Form W-10

Do you used child care or dependent care? Use this form to get the correct name, address and taxpayer identification number (TIN) from each person or organization that provides care for your child or other dependent if you plan to claim a credit for expenses related to their care, or if you receive benefits under your employer’s dependent care plan.

Form 1098

If you have a mortgage, you need Form 1098, the Mortgage Interest Statement, to report mortgage interest of $600 or more paid to your lender, which may be used as an itemized deduction.

From USA Today

Published: March 14, 2016

How to Protect Your Tax Refund From Scammers

Identity theft is a fast-growing problem for taxpayers.

The Internal Revenue Service said it investigated nearly 1,500 cases of tax fraud in 2013, up 66 percent from the year before.

"The scams are usually what they call phishing, where they're fishing for information. So you should not give out any information -- banking or Social Security numbers or anything like that -- on the phone," New York certified public accountant Charles Stein said, explaining the most common way criminals get their hands on people's tax refunds.

The IRS says it will never contact you for personal information over the phone, email or social media, and asks taxpayers to report suspected phishing to phishing@irs.gov.

Mixing up your online passwords also helps. Always use a mix of numbers and special characters, and make sure to keep all those passwords stored in a safe place.

The best way to protect yourself from scammers is to file your taxes as soon as you have all of your documents, Stein says.

If you think you've been scammed, call the IRS right away and they'll find a way to get you that refund.

"The IRS will send you a letter and they'll generally ask you to file via paper instead of electronically because somebody's probably beat you to filing," Stein said.

From ABC News

Published: March 11, 2016

As U.S. Passports For Domestic Flights Loom, IRS Can Now Revoke Passports

In October 2020, the hassle factor for domestic air travel may increase. Soon, your state’s driver’s license may not be enough to get you through security and on board. In fact, the Los Angeles Times reports that 26 states–including California–do not meet federal regulations. There is an extension of time for these states, through Oct. 10, 2016. But after that, there is worry that your U.S. passport may be needed.

Now, there is a reprieve until January 22, 2018. Homeland Security Secretary Jeh Johnson has issued a statement that, until then, residents of all states can continue to use their state driver’s license for domestic air travel. But by Oct. 1, 2020, every air traveler will need a Real-ID-compliant license, or another acceptable form of federal ID for domestic travel. The Real ID Act created a national standard for state-issued IDs. Some states initially refused to comply, fearing that the federal government would make a national database of citizens.

It is clear that a U.S. passport will have increasing importance even for domestic travel. And the rise of the passport’s importance coincides uncannily with a new law giving the IRS power to revoke passports. Plainly, the easy answer to travel worries may be to dig out your passport, and they are already often in evidence in domestic air check in lines. But what if your passport is cancelled because you owe the IRS?

H.R.22 added new section 7345 to the tax code, titled “Revocation or Denial of Passport in Case of Certain Tax Delinquencies.” The idea goes back to 2012, when the Government Accountability Office reported on the potential for using passports to collect taxes. Now that it has become law, the State Department will start blocking Americans with ‘seriously delinquent’ tax debts. That means anyone the IRS certifies as having a seriously delinquent tax debt in an amount in excess of $50,000.

Even months after the law passed, administrative details about how it will be administered remain scant. But in all likelihood, it will mean no new passport and no renewal. It could even mean the State Department will rescind existing passports of people who fall into that category. The list of affected taxpayers will be compiled by the IRS, using a threshold of $50,000 in unpaid federal taxes.

Notably, if you are contesting a proposed tax bill administratively with the IRS or in court, that should not count. That is not yet a tax debt. There is also an administrative exception, allowing the State Department to issue a passport in an emergency or for humanitarian reasons.

But how that will work isn’t clear, nor is the amount of time it will take to get special dispensation. You would still be able to travel if your tax debt is being paid in a timely manner, as under a signed installment agreement. Yet the dynamics are still significant and could drastically alter how people interact with the IRS.

Moreover, these harsh rules are not limited to criminal tax cases. They aren’t even limited to situations where the government thinks that you are fleeing a tax debt. In fact, you could have your passport revoked merely because you owe more than $50,000, and the IRS has filed a notice of lien.

Notably, the $50,000 figure includes penalties and interest. And as everyone knows, interest and penalties can add up fast. A lien filing is hardly unusual. In fact, the IRS routinely files tax liens to put creditors on notice. IRS tax liens cover all your property, even acquired after the lien is filed. The courts use liens to establish priority in bankruptcy proceedings and real estate sales.

To file a Notice of Federal Tax Lien, the IRS must simply assess the liability; send a Notice and Demand for Payment; and you then fail to fully pay the tax debt within 10 days. A tax lien can also be filed by mistake. Occasionally, the person may just need to straighten out a pile of paperwork. With all this in mind, is the law subject to challenge?

Consider the roughly eight million Americans living overseas, many of whom are already reeling from FATCA compliance problems. Although we think of passports as useful only when traveling internationally, even stateside flights may soon make passports even more fundamental.

From Forbes Magazine

Published: March 9, 2016

How to Save Over $1,000 on Your 2015 Tax Bill

Contributing to an IRA can significantly reduce the income tax you owe.

It's not too late to reduce your 2015 tax bill. Retirement savers continue to have a powerful option to decrease the amount they owe in federal income tax, if they are willing to deposit money in an individual retirement account. Depending on your tax rate, a last-minute IRA contribution could save you hundreds or even over $1,000.

The higher your tax bracket the more you save. You can defer paying income tax on up to $5,500 that you contribute to an IRA. "That $5,500 deduction is going to either lower your tax bill or bump up the refund you are owed," says Trent Porter, a certified financial planner for Priority Financial Partners in Denver. "A lot of tax programs can give you that hypothetical of how much more your refund will be if you contribute X amount of dollars to an IRA." Maxing out your IRA will reduce your tax bill by $825 if you are in the 15 percent tax bracket, $1,375 for those in the 25 percent bracket and $1,815 if you pay a 33 percent tax rate. Income tax won't be due on this money until you withdraw it from the account.

Workers over 50 can get an even bigger tax break. People who are age 50 or older can contribute an extra $1,000 to an IRA, which will get them a larger tax deduction. If a 55-year-old worker who is in the 25 percent tax bracket contributes $6,500 to an IRA, he will reduce his tax bill by $1,625.

Double your tax break with a spousal IRA. Married couples can double their tax break by each opening an IRA in their own name. If only one spouse works and you file a joint tax return, the working spouse can contribute to an IRA in each spouse's name. A married couple can claim a tax deduction on as much as $11,000 that they contribute to two or more IRAs. And if both spouses are 50 or older, the contribution limit climbs to $13,000. A married couple, both age 50, who are in the 25 percent tax bracket and max out an IRA in each of their names will save $3,250 on their income tax bill.

Contribution deadlines differ by state. IRA contributions that will qualify you for a deduction on your 2015 return are due by April 18, 2016. "IRA contributions can be made up until 11:59 p.m. on the tax deadline, assuming they are received in good order," says John Boroff, director of retirement product management at Fidelity Investments. Residents of Maine and Massachusetts get an extra day to contribute due to the Patriots' Day holiday celebrated in those states, so they have until April 19, 2016, to make 2015 IRA contributions. Several IRA providers, including Vanguard and Charles Schwab, say they won't be able to accept online IRA contributions for 2015 after April 18 but will accept in-person contributions and envelopes postmarked by April 19 from residents of Maine or Massachusetts.

You can file a tax return claiming an IRA deduction before the money is in the IRA account as long as you make the deposit by your tax filing deadline. "You could file your taxes on March 1 and tell the IRS you will make the contribution by April 15," Porter says. "You can get your refund and use that to go toward what you are going to be putting in the IRA." You can even deposit your tax refund directly into an IRA. When making a tax-year 2015 contribution during 2016, it's important to specify which tax year you would like the contribution to be applied to. IRA custodians are allowed to attribute contributions to the calendar year in which they are received unless you indicate otherwise.

Claim the saver's credit. In addition to the tax deduction on your IRA contribution, workers who earned less than $30,500 for individuals, $45,750 for heads of household and $61,000 for couples in 2015 are eligible for the saver's credit. This tax credit is worth between 10 and 50 percent of the amount you contribute to an IRA up to up to $2,000 for individuals and $4,000 for couples. A couple earning $30,000 who saved $2,000 in an IRA could receive a $1,000 credit, in addition to the tax deduction for the contribution.

Don't wait until the last minute. While contributions postmarked by the tax deadline are eligible to be counted as 2015 deductions, it's a good idea to contribute a few days or weeks in advance to allow for processing time or to correct mistakes. And, of course, contributing early gets the money compounding on your behalf sooner. "The whole idea behind an IRA is to have tax-deferred growth of your money," says Austin Chinn, a certified financial planner for Fountain Strategies in San Jose, California. "The sooner you put it in the longer it has to grow."

From US News & Reports

Published: March 7, 2016

The Costly Tax Mistakes Most People Make

About half of the nation's taxpayers do their own taxes, but not necessarily well.

From choosing the wrong filing status to not itemizing, many filers leave about $400 on the table, on average, by not claiming all the credits and deductions they could take, according to a study by tax preparer H&R Block.

"The biggest mistakes today are mistakes of omission," said Mark Steber, Jackson Hewitt's chief tax officer. These often go unchecked by the IRS but are also the ones that will leave you shortchanged. "The IRS's primary job is to make sure that you paid all your taxes, not that you got all the benefits you are due," he added.

Not Itemizing

"Itemizing can save hundreds of dollars in taxes," said Kathy Pickering, executive director of H&R Block's Tax Institute. Still, H&R Block estimates that only about 1 in 3 taxpayers itemize, although millions more should, particularly homeowners. For example, homeowners can deduct mortgage interest, premiums paid for mortgage insurance and interest up to $100,000 borrowed on a home-equity loan or line of credit.

As a general rule, if you have deductions that add up to more than the standard deductions (that's $6,300 if you are single or $12,600 for a married couple filing jointly), then you should be itemizing on your return. And it's pretty easy to hit those levels if you own a house.

Forgetting What You Learned

If you cracked open a textbook in 2015, chances are, there's a tax break for you. College students or those enrolled in their first four years of higher education are eligible for the American Opportunity Credit, which is currently as much as $2,500 per student for eligible expenses.

Beyond those first four years, anyone at any age who took an enrichment course to improve their job prospects can claim the Lifetime Learning Credit on their federal income-tax return. That credit is 20 percent of the first $10,000 of eligible expenses to a maximum of $2,000, and it applies to tuition, enrollment fees and any required books or supplies for just about any post-secondary course.

Not Claiming Expenses on a Schedule C

Not claiming all appropriate expenses to offset income on a Schedule C or failing to claim income properly on a Schedule C is one of the most common mistakes, Pickering said.

If you are self-employed or run a side business, there are likely a slew of expenses that can offset those earnings.

For example, if you run a lawn-mowing business, consider the cost of the lawn mower, depreciation, gas, maintenance and so on. Claiming all of those expenses will be to your benefit at tax time.

Using the Wrong Filing Status

Married filing jointly or separately? Choosing the appropriate filing status can be confusing, particularly if your relationship status is also unclear.

Pickering recommends calculating each option that could apply to you in order to see which results in the most favorable tax outcome. If you are married, then married filing jointly usually qualifies you for more tax credits, but that's not always the case, so it's wise to double check.

Skipping A Savings Contribution

Don't forget about socking money away for retirement, college or upcoming health-care costs — those contributions could qualify for federal or state tax benefits.

Many people don't realize that they can make a contribution to a health savings account, retirement account, like an IRA, or college savings account, like a 529 plan, and deduct a portion of that amount.

The rules vary by state and income, so check what, if any, contributions will qualify you for a tax deduction or credit. 

For example, if you already participate in a 401(k) plan, then the deduction for traditional IRA contributions are phased out at incomes between $61,000 and $71,000. For a married couple filing jointly, where one spouse is covered by an employer-provided retirement plan, deductions for IRA contributions are phased out from $98,000 to $118,000.

Children Can Claim Parents, Too

These days, children aren't the only ones who could qualify as dependents, as far as Uncle Sam is concerned.

"In the sandwich generation, children can claim their parents if they are providing support, even if they don't live together," Pickering said.

If you are providing more than half of the financial support to care for an elderly parent, which easily adds up if you are paying their monthly rent and a few other expenses, then you are entitled to claim them as a dependent and deduct up to $4,000 on your federal return.

From CNBC

Published: February 19, 2016

Claiming the Dependent-Care Tax Credit for 2015

The dependent-care tax credit is based on up to $3,000 in child-care expenses if you have one child or $6,000 if you have two or more children. The children must be no older than 12, and the care must be provided so you and your spouse can work or look for work (or so one spouse can attend school full-time while the other works). The dependent-care FSA lets employees set aside up to $5,000 in pretax money for child-care expenses, with the same definition of eligible expenses.

The way the child-care credit is calculated, the amount of money you set aside pretax in your employer’s dependent-care FSA must be subtracted from the $3,000 or $6,000 in eligible expenses for the dependent-care credit. That means if you contributed the maximum $5,000 to your dependent-care FSA at work and have just one child, you won’t be eligible to take the dependent-care credit, too. But if you have two or more children, you can max out your FSA and still take the tax credit for up to $1,000 of eligible expenses.

The size of that tax credit depends on your income. The credit is worth 20% to 35% of your eligible child-care expenses (up to the $3,000 for one child or $6,000 for two children). The higher your income, the smaller the percentage. If your income is more than $43,000, for example, the credit is worth 20% of your eligible expenses (the income limits are the same, whether you’re filing as single, head of household, or married filing jointly). Since you can take the credit for $1,000 of eligible expenses and earn more than $43,000, you qualify for a credit of $200. You can calculate the credit using IRS Form 2441, Child and Dependent Care Expenses.

Eligible child-care expenses include the cost of day care, a nanny or a babysitter while you work, as well as preschool (but not the cost of school for children in kindergarten or higher grades). You can also count the cost of before-school or after-school care and day camp during the summer and school breaks if using them allows you to work.

By Kimberly Lankford for Kiplinger

Published: February 17, 2016

Revaluing Family Treasures for the Taxman

On Friday, a bright red 1957 Ferrari rolled onto a stage in Paris and sold for 32 million euros, or about $35.8 million, making it, by some measures, the most expensive car ever sold at auction.

The celebrated racing car captured the attention of wealthy car collectors around the world — as well as the interest of the French tax authorities.

The Ferrari was sold by the Bardinons, a prominent French family whose members are feuding with one another and the French government over their famous Ferrari collection.

For tax purposes, some members of the family initially valued its stable of over a dozen Ferraris at around 70 million euros, or $78 million. And yet experts say the collection could be worth over $200 million. Especially after Friday’s sale, the French tax authorities are likely to take a closer look at the family’s math.

“This case is like a thriller,” said Vincent Grandil, a leading French tax lawyer with the firm Altexis.

The battle over the Bardinon Ferraris highlights an increasingly popular tax strategy being used by wealthy families around the world. Art, vintage cars and other collectibles passed down to family heirs are often subject to estate taxes or gift taxes. Yet the values of these trophy assets can often be subjective. So some families are using special appraisers and selective data to value their family heirlooms and lower their tax bill.

The problem has become even more acute in recent years as the prices for fine art, cars and wine have soared, giving families more leeway in valuations.

“A valuation for a painting 10 months ago may not be valid today given what’s happened in the art world and the auctions,” said David A. Handler, a trust and estates lawyer with Kirkland & Ellis who often advises wealthy families on valuing assets.

Mr. Handler said some clients asked him if they could simply avoid disclosing their costly paintings or collectibles to the Internal Revenue Service. “No one wants to pay more than they have to,” he said. “But I tell them, “If you try to hide it, there’s a good chance the I.R.S. will find out.’”

The I.R.S. rules surrounding fair-market value for collectibles are highly technical. The agency has a special panel of experts, called the Art Advisory Panel, that helps it determine values for big-ticket artworks claimed by taxpayers. The panel found that taxpayers were increasingly lowballing their art values.

In 2014, the panel looked at 54 taxpayers with 315 items valued at a total of $251 million. It challenged two-thirds of the valuations. The owners had valued the items at $103 million, but their actual total value was over $180 million, according to the panel’s annual report.

Conversely, rich taxpayers are overvaluing items they give to charity, increasing their deductions. The Art Advisory Panel report said the items it examined, valued at $3.8 million for charitable deductions in 2014, should have been valued at $1.7 million.

Patti Spencer, a trust and estates lawyer in Pennsylvania, said one of her clients gave a collection of dinner plates to a university and valued them at $200,000 for the tax deduction. The I.R.S. challenged the appraisal, and determined the value to be closer to $50,000, said Ms. Spencer, who advises her clients to be thorough and hire top appraisers.

“People just figure the checking on this stuff is so spotty, why not try?” she said.

The I.R.S. said its employees “have access to a variety of resources that allow them to stay abreast of changes in the art and collectible markets.”

On Friday, the Bardinon Ferraris brought the issue to the world stage. Pierre Bardinon, born in 1931, was an heir to the Chapal family, a French leather and fur dynasty famed for making pilot bomber jackets. As a boy, Bardinon fell in love with cars and started buying old racing Ferraris in the 1960s, when few other collectors were interested in them.

He went on to buy more than 70 rare Ferraris. He turned the family chateau at Mas du Clos, near Aubusson, into a Ferrari playground, with a museum housing the cars, and a two-mile racetrack.

After Mr. Bardinon died in 2012, and his wife a year later, the French government levied an inheritance tax of millions of dollars on their three children, according to court documents. The Bardinon siblings are now battling in court over the future of the collection.

The Ferrari collection had dwindled to around 20 cars by 2012, as Mr. Bardinon sold them off. Yet their value has soared. Classic Ferraris have led the recent explosion in collectible car prices; a Ferrari 250 GTO sold for $38 million in 2014 to become the most expensive car ever auctioned.

Marcel Massini, a Geneva-based Ferrari historian who knew Mr. Bardinon and frequently inspected the collection, said the remaining cars in the Bardinon collection could be worth over $200 million. He said at least three of them could fetch over $30 million each in today's market.

"These are like the Mona Lisas of the Ferrari world," he said. "They are the best of the best."

And yet for tax purposes, certain members of the family valued the entire collection at 70 million euros, according to court documents.

As the court fight continued, two of the siblings decided to auction off a trophy of the collection, a 1957 Ferrari 335 Sport Scaglietti, the one that sold at an Artcurial Motorcars auction on Friday. Measured in euro terms, it was the most expensive car ever sold at auction, but measured in dollar terms, it ranked second. Lawyers familiar with the case say the sale could lead the French government to increase the valuation for the family's collection — and demand more taxes.

The Bardinon family and their lawyers declined repeated requests for comment.

Some wealthy collectors hope that the situation could lead to more Ferraris being up for sale. "There are a lot of billionaires in the world who want these cars," Mr. Massini said. "So I think they are very happy with the result. But I don't know how happy the family is."

By Robert Frank for CNBC

Published: February 15, 2016

Tips for Your 2015 Filing

If you are one of the millions of Americans who has yet to file your taxes this year, we have some tips from tax expert Steve Schult.

"One of the first things I would tell you is file early because one of the biggest problems we have been having recently is identity theft and fraudulent tax returns," Schult said.

He says all thieves need is your name, birthday and social security number and they can steal your identity and file a false tax return.

"When we would go to file our clients tax returns they would come back and say that we couldn't file them because they had already been filed. Obviously when that happened we knew that was a problem. That basically tells you, you have a fraudulent tax return that was filed," Schult said.

Filing early can buy you some time to straighten things out if your identity is stolen. Also, Schult says don't fall for scams.

"Unless you know you are having a problem with the IRS, you are going through a tax its audit, the IRS will never call you. Again it's a major problem that we run into."

Several tax provisions that had expired were reinstated at the end of the year last year, including extending IRA contributions and the half a million dollars of depriciation that small businesses can take.

"It allows small businesses to deduct up to half a million dollars of depreciation of asset purchases so it really helps spur the economy and gives them a great tax benefit."

From NBC News

Published: February 11, 2016

Choosing the Correct Filing Status

It’s important to use the right filing status when you file your tax return. The status you choose can affect the amount of tax you owe for the year. It may even determine if you must file a tax return. Keep in mind that your marital status on Dec. 31 is your status for the whole year. Sometimes more than one filing status may apply to you. If that happens, choose the one that allows you to pay the least amount of tax. It's important to let your CPA know your personal situation so that we my assist you in choosing the most accurate and advantageous filing status. 

Here’s a list of the five filing statuses:

1. Single. This status normally applies if you aren’t married. It applies if you are divorced or legally separated under state law.

2. Married Filing Jointly. If you’re married, you and your spouse can file a joint tax return. If your spouse died in 2015, you can often file a joint return for that year.

3. Married Filing Separately. A married couple can choose to file two separate tax returns. This may benefit you if it results in less tax owed than if you file a joint tax return. You may want to prepare your taxes both ways before you choose. You can also use it if you want to be responsible only for your own tax.

4. Head of Household. In most cases, this status applies if you are not married, but there are some special rules. For example, you must have paid more than half the cost of keeping up a home for yourself and a qualifying person. Don’t choose this status by mistake. Be sure to check all the rules.

5. Qualifying Widow(er) with Dependent Child. This status may apply to you if your spouse died during 2013 or 2014 and you have a dependent child. Other conditions also apply, your CPA will help you to determine applicability. 

Published: February 1, 2016

Choose Your Tax Preparer Wisely

If someone helps you do your taxes, you're not alone. The IRS asks you to choose your tax return preparer wisely – for good reason. You are responsible for the information on your income tax return. That’s true no matter who prepares your return. Here are ten tips to keep in mind when choosing a tax preparer:

1. Check the Preparer’s Qualifications. Use the IRS Directory of Federal Tax Return Preparers with Credentials and Select Qualifications on IRS.gov. This tool can help you find a tax return preparer with the qualifications that you prefer. The Directory is a searchable and sortable listing of certain preparers registered with the IRS. 

Not all accountants can call themselves a certified public accountant (CPA). A CPA must adhere to certain professional and technical requirements. CPAs have undergone rigorous schooling and testing requirements and are also required to complete ongoing annual continuing education requirements to keep abreast of the ever-changing tax climate. CPAs can represent any client before the IRS in any situation. However, new rules apply to the rights of non-credentialed tax preparers to represent their clients before the IRS. Non-credentialed preparers without an Annual Filing Season Program – Record of Completion – may only prepare tax returns. The new rules do not allow them to represent clients before the IRS on any returns prepared and filed after December 31, 2015. Annual Filing Season Program participants can represent clients in limited situations. 

2. Check the Preparer’s History. Ask the Better Business Bureau about the preparer. Check for disciplinary actions and the license status for credentialed preparers. For CPAs, check with the State Board of Accountancy. 

3. Ask about Service Fees. Avoid preparers who base fees on a percentage of their client’s refund. Also avoid those who boast bigger refunds than their competition. Make sure that your refund goes directly to you – not into your preparer’s bank account. The CPAs at Hershkowitz & Kunitzer, P.A. will only every bill you based on our time. 

4. Ask to E-file Your Return. Make sure your preparer offers IRS e-file. Paid preparers who do taxes for more than 10 clients generally must file electronically. The IRS has safely processed more than 1.5 billion e-filed tax returns.

5. Make Sure the Preparer is Available. You may want to contact your preparer after this year’s April 18 due date. Avoid fly-by-night preparers.

6. Provide Records and Receipts. Good preparers will ask to see your records and receipts. They’ll ask questions to figure your total income, tax deductions, credits, etc. Do not use a preparer who will e-file your return using your last pay stub instead of your Form W-2. This is against IRS e-file rules.

7. Never Sign a Blank Return. Don’t use a tax preparer that asks you to sign a blank tax form.

8. Review Your Return Before Signing. Before you sign your tax return, review it and ask questions if something is not clear. Make sure you’re comfortable with the accuracy of the return before you sign it.

9. Ensure the Preparer Signs and Includes Their PTIN. All paid tax preparers must have a Preparer Tax Identification Number, or PTIN. By law, paid preparers must sign returns and include their PTIN. Be sure you get a copy of your return.

10. Report Abusive Tax Preparers to the IRS. Most tax return preparers are honest and provide great service to their clients; however, some preparers are dishonest. Report abusive tax preparers and suspected tax fraud to the IRS. 

Published: January 26, 2016

Tips on Whether to File a 2015 Tax Return

Most people file a tax return because they have to, but even if you don’t, there are times when you should. You may be eligible for a tax refund and not know it. Here are six tips to help you find out if you should file a tax return:

  1. General Filing Rules. Whether you need to file a tax return depends on a few factors. In most cases, the amount of your income, your filing status and your age determine if you must file a tax return. For example, if you’re single and under age 65 you must file if your income was at least $10,300. Other rules may apply if you’re self-employed or if you’re a dependent of another person. There are also other cases when you must file. Ask your CPA for more information. 
  2. Premium Tax Credit.  If you enrolled in health insurance through the Health Insurance Marketplace in 2015, you may be eligible for the premium tax credit. You will need to file a return to claim the credit. If you chose to have advance payments of the premium tax credit sent directly to your insurer during 2015 you must file a federal tax return. You will reconcile any advance payments with the allowable premium tax credit. You should receive Form 1095-A, Health Insurance Marketplace Statement, by early February. The form will have information that will help you file your tax return
  3. Tax Withheld or Paid. Did your employer withhold federal income tax from your pay? Did you make estimated tax payments? Did you overpay last year and have it applied to this year’s tax? If you answered “yes” to any of these questions, you could be due a refund. But you have to file a tax return to get it.
  4. Earned Income Tax Credit. Did you work and earn less than $53,267 last year? You could receive EITC as a tax refund, if you qualify, with or without a qualifying child. You may be eligible for up to $6,242. 
  5. Additional Child Tax Credit. Do you have at least one child that qualifies for the Child Tax Credit? If you don’t get the full credit amount, you may qualify for the Additional Child Tax Credit.
  6. American Opportunity Tax Credit. The AOTC is available for four years of post secondary education and can be up to $2,500 per eligible student. You, your spouse or your dependent must have been a student enrolled at least half time for at least one academic period. Even if you don’t owe any taxes, you still may qualify. 
Published: January 20, 2016

Higher Interest Rates Are Coming, How They'll Affect You

Will the increase affect you? In some way it will affect everyone, but how much depends on your particular circumstances. If you've got a fixed rate mortgage, minimum credit card debt, and you're not invested in bonds, any effect may go unnoticed. But if you're investing in real estate, have heavy credit card debt, loans where your interest rate is pegged to the prime or another benchmark, you may want to consider the potential effects.

Bonds. Bonds and other fixed income securities are the first investments that come to mind when interest rates change. Prices on these instruments move inversely to interest rates. That means they'll drop in price as interest rates increase. How much? The biggest effect will be on the longest-term bonds, the least on shortest-term ones. Within a term, some bonds will do worse than others. Junk or bonds with a low credit rating generally take a harder hit than better rated ones.

Real Estate. These sector of the economy is affected because most real estate has some debt financing associated with it. If interest rates rise a typical borrower who can't afford a higher monthly payment will have to look for a less expensive property. That puts pressure on prices. While the same logic affects many other purchases, real estate is particularly sensitive because of the long term financing involved. How much of an effect? The table below assumes that a borrower can afford no more than $477.42 per month on a 30-year fixed mortgage. Here's how much of a mortgage he can afford at various interest rates:

4% = $100,000
5% = $88,933
6% = $79,628
7% = $71,759

For example, you can just afford a $300,000 mortgage now, if interest rates move to 5%, you'd only be able to afford $266,799, $33,201 less ((100,000-88,939) x 3). That's significant. If you're selling a property, it means you're likely to get less. Higher rates are likely to dampen price increases, but not by as much as the table would suggest because of other factors.

We're not suggesting rates will be going to 7%. Historically, rates have average closer to 6%. Note that the biggest drop in affordability is between 4% and 5%.

If you've got a fixed rate mortgage and you're not moving, there's no effect. Want to refinance? If you've got a mortgage at a higher rate, consider refinancing. Got an adjustable rate mortgage? Consider locking in a fixed rate.

Other Consumer Loans. Other consumer borrowing rates could increase. Credit card rates are susceptible to increases and auto loans are likely to increase. On auto loans, the biggest increase is likely to be on the longest term. Most vulnerable are those five years or longer. Leasing? Payments are likely to increase because there's an implied interest rate component.

Many lenders will probably use any rate increase to raise rates in order to boost profits.

Business Loans. Much the same applies to business loans. If you've got a fixed rate loan, there's no effect. But more than likely your loan is tied to the prime or another benchmark. On a positive note, some lenders who haven't been interested in smaller businesses may consider making loans at the higher rates.

Stocks and Other Investments. Some stocks are likely to perform relatively better than bonds under a rate increase. But some stocks are interest-rate sensitive. For example, the purchase of heavy machinery is usually financed with debt. That means the same rules apply here as to real estate. Less affordability puts pressure on prices and affects a company's earnings.

And some companies routinely finance operations with debt for one reason or another. That increases their expenses.

What's in Your Portfolio? Year-end is a good time to take stock of your investments--for investment and tax purposes. Bond holdings and mutual funds that invest in bonds deserve particular attention. Pay attention to any high-yield funds--both taxable and tax-exempt. Need a loss for tax purposes? You could sell now and invest in similar bonds down the road.

Hold more exotic investments? Some hedge funds and other investments can be particularly sensitive to interest rate movements.

Before making any moves, talk to your financial advisor.

Flip Side. What about savings rates? Don't look for much of a change here. Getting 5% again in your savings account just isn't going to happen anytime soon. Same for CDs. But now isnot the time to go long term. Stay on the short side so you can roll over a CD to a higher rate when it expires. Same for bonds and other fixed income investments. Consider laddering your bonds and CDs.

From the A/N Group

Published: January 7, 2016

13 Smart Tax Write-Offs You Could Take Advantage Of

Thirteen smart entrepreneurs from YEC Young Entrepreneurs Council have saved some money by getting deductions for things they pay for regularly.

We're talking books, parking fees and even event-specific clothing. Things you would never have thought to deduct from your taxes. 

Scan this list to see what you can claim and how much you can save on taxes this year.

1. Health Insurance Premiums

If you pay for your own health insurance, you can deduct the premiums from your adjusted gross income. This can really add up over a year and especially over several years. Of course, there are requirements that need to be met so be sure to talk with your accountant before taking any action. – Alex Miller, PosiRank LLC

2. Education

Online courses, books, certifications, workshops, training and conferences can all be deductible for your business. I have a small education stipend set aside every year for me and my employees. This is a great way to increase your knowledge and a great perk for employees. – Vanessa Van Edwards, Science of People

3. Travel Expenses

Mileage to and from meetings and business-related activities adds up -- so do tolls, parking fees and gas. All of these can be documented easily if you are willing to take the time to do it. It might seem petty at first, but watch how much it adds up to over the course of a full year. The key is to stay up on it. Scan your receipts daily as soon as you get back to the office. – Jonathan Long, Market Domination Media

4. Self-Employed 401K

While it's technically not a tax write-off, contributing to a self-employed 401(K) plan can reduce your taxable income by up to $53,000. Contribution limits for 2015 allow for salary deferrals of up to $18,000 and profit sharing contributions of up to 25 percent of your compensation or an annual maximum of $53,000. These pre-tax contributions can significantly reduce your taxable income. – Brett Farmiloe, Markitors

5. International Sales

If your value added is over 50 percent domestically, and you export $1M or more, you can set up an IC-DISC and save taxes on your exports. – Wei-Shin Lai, M.D., AcousticSheep LLC

6. Association Membership Fees

Often, entrepreneurs forget that it is important to network with others in the same/similar industries. Industry and trade associations are important to network and stay abreast of latest trends. While most of them have membership fees, these fees can be used towards a write-off. It's a win-win! – Tamara Nall, The Leading Niche

7. Clothing

Any clothing that has to be purchased for a specific event or is uniquely required to accommodate a client can be written off. This includes company swag for a conference, a suite for a panel and a formal gown rental for an industry banquet. Any clothing expenditure that is needed to market your company, yourself or your client is a legitimate business expense. – Faithe Parker, Marbaloo Marketing

8. Hospitality Expenses

It’s often the little things that people forget to write off, either out of laziness or because they think that it won’t add up to anything. Coffee for clients, buying the team dinner after a long day’s work -- these little things add up. It’s not just the new computers and major business expenses that you have to worry about during tax time. It’s all the little pieces as well. – Matt Doyle, Excel Builders

9. Philanthropy

I am a huge believer of giving back to the community -- not only with money but time. In my eyes, what better way than giving money toward something beneficial to the community which also counts as a tax write-off? Even taking it a step further you can start your own philanthropy to offer other businesses the chance to donate and use it as a write-off. – Marc Devisse, Tri-Town Construction

10. Technology

You can write off technology, including your cell phone plan, so long as you're using it for business purposes. Also, the home office deduction is a nice one if you have a dedicated work space at home. – Brian David Crane, Caller Smart Inc.

11. Cost of Tax Prep Fees

Hands down, failing to deduct the cost of tax preparation; this is money right out of your pocket! We see this on 90 percent of the returns we process. Businesses can deduct these fees on their corporate returns, and individuals can deduct the fees on Schedule A. Of course, they have to itemize on their 1040 for this to work. – Marjorie Adams, Fourlane

12. Real Estate Ownership Deductions

Many entrepreneurs often overlook the benefits of owning their office/retail or commercial space versus renting them. If you're looking to build a sustainable company that is going to be around for a while, then being an owner-operator might be for you. Taking a few hours to meet with a real estate tax professional never hurt anybody. – Mikhail Zabezhinsky, OceanTech

13. Bonuses

This is true especially around the holiday season. Most of your employees have gone above and beyond for the company and for you. Why not reward your top-performing employees with a nice end of the year bonus check. This will in return lower the bottom line and soften your tax burden while simultaneously putting a huge smile on the face of your employees. I bet they will be roaring to hit the new year with a bang. – Engelo Rumora, Ohio Cashflow

Published: January 4, 2016

10 Random Breaks In The Tax Extenders Bill That Probably Won't Help You

  1. Extension of classification of certain race horses as 3-year property. If you followed the drama over Serena Williams beating out American Pharaoh for Sports Illustrated’s Sportsperson of the Year (even though American Pharaoh isn’t an actual person), you know that – at least in 2015 – Americans love their race horses. Now, the owners of those race horses get yet another break: the 3 year recovery period for race horses placed in service during 2015 or 2016 is extended (instead of reverting to 7 years).
  2. Extension of 7-year recovery period for motorsports entertainment complexes. Nothing kickstarts an economy like a motorsports entertainment complex, which is helpfully defined as “a racing track facility which is permanently situated on land and which during the 36-month period following its placed-in-service date hosts a racing event.” It also includes support facilities such as food and beverage vending. The shorter recovery period has been a favorite of the American Motorcyclist Association and International Speedway since 2011 when Sen. Debbie Stabenow (D-MI) attempted to make the 7 year rule permanent in order “to provide predictability and certainty in the tax law, create jobs, and encourage investment.” It’s not permanent, just extended. Again.
  3. Extension of credit for the production of Indian coal facilities. Among other things, the provision extends the credit for the production of Indian coal for two years through December 31, 2016 and exempts the Indian coal credit from the alternative minimum tax, which may sound great – except that most tribes don’t directly benefit from the provision. According to USA Today, only three tribes benefit at all from the credit: the Crow, the Hopi and the Navajo. And those tribes only receive an indirect benefit: the credit is actually attributable to corporations who mine inside reservations. The credit has been around – and highly criticized – since 2005. Yet, it still gets extended time after time.
  4. Extension of temporary increase in limit on cover over of rum excise taxes to Puerto Rico and the Virgin Islands. Yo ho ho – and a federally subsidized bottle of rum. Under the current law, an excise tax is imposed on distilled spirits produced in or imported into the US. The excise taxes for rum produced in Puerto Rico or the Virgin Islands are transferred back to those territories and referred to as a cover-over; the territories also split revenue from rum produced internationally in proportion to how much rum each produces (thus creating an incentive to try and “out rum” each other). Under the new provision, the $13.25 per proof gallon excise tax cover-over amount paid to the treasuries of Puerto Rico and the Virgin Islands is extended through 2016. Without the extension, the cover-over amount would simply be $10.50 per proof gallon.
  5. Extension of special expensing rules for certain film and television productions. The special expensing provision for qualified film, television, and live theater productions is extended through 2016. In general, only the first $15 million of costs may be expensed. And sorry, no porn (it’s expressly excluded). A qualified film or television production is defined “as any production of a motion picture (whether released theatrically or directly to video cassette…” Wait. I have to stop there. Yes, the provision alludes to video cassette. This year. In 2015. Video cassette. Congress apparently still thinks that people own video cassettes. You know, to watch their moving picture shows. I think that’s all we need to know about that provision.
  6. Extension of American Samoa Economic Development Credit. The provision extends through 2016 the existing credit for corporate taxpayers currently operating in American Samoa. With all due respect to the people of American Samoa, the total population in 2013 was 55,165 (in contrast, the population of Rhode Island is more than 1 million). People born in American Samoa are not US citizens (unless their parents are US citizens) and by law, they aren’t subject to US taxes on Samoan income. Nonetheless, Congress decided that it was important to encourage investment in American Samoa for years. The majority of the tax break reportedly benefits StarKist Co., which is why retired Sen. Tom Coburn (R-OK) referred to it as the “tuna tax break.”
  7. Modification of definition of hard cider. When is a beer a beer? Or a wine a wine? When it comes to excise taxes, it’s more or less whatever Congress says it is. That’s why Congress defined hard cider for purposes of alcohol excise taxes as “a wine with an alcohol content of between 0.5 percent and 8.5 percent alcohol by volume, with a carbonation level that does not exceed 6.4 grams per liter, which is derived primarily from apples, apple juice concentrate, pears, or pear juice concentrate, in combination with water.” Assuming it meets the criteria, hard cider is, for excise tax purposes, taxed at $0.226 per wine gallon.
  8. Modification of effective date of provisions relating to tariff classification of recreational performance outer wear. With a 60-something degree forecast on Christmas in the northeast, most of us aren’t running out to buy coats just yet but it’s good news for retailers of “certain recreation performance outerwear products” that won’t see tariff increases for awhile. The provision was tacked onto the House bill (and not explained in the JCT summary) which makes it feel like an add on.
  9. IRS employees prohibited from using personal email accounts for official business. I feel like this shouldn’t have to be a rule but Congress felt different. In their bid to continue to micro-manage the Internal Revenue Service (IRS), the new law prohibits employees of the IRS from using a personal email account to conduct any official business. Yes, this was already an established rule at the agency. But apparently it needed to be made law. You can perhaps blame Lois Lerner for this one.
  10. Duty to ensure that Internal Revenue Service employees are familiar with and act in accordance with certain taxpayer rights.. Yet another zinger at the IRS. This one is a legal requirement that – wait for it – IRS employees know how to do their jobs. Maybe I’m oversimplifying. The law is actually meant to ensure that IRS employees know and enforce the Taxpayer Bill of Rights introduced in June of 2014. While I know that the National Taxpayer Advocate was thrilled to get IRS to recognize the Taxpayer Bill of Rights, making it a law that IRS employees familiarize themselves feels – again – like micromanagement. I thought we wanted less government?
From Forbes Tax News
Published: December 17, 2015

IRS Announces 2016 Filing Season Start Date

The Internal Revenue Service (IRS) has announced the 2016 filing season start date. And surprise! There’s no delay. Tax season for paper and electronically filed returns will open on Tuesday, January 19, 2016. 

Even better? There’s no tiered opening season. All taxpayers can begin filing on January 19, 2016. There was some concern about what might happen if Congress did not sign off on all of the tax extenders. Fortunately, Congress eventually approved a tax extenders package which renewed all of those extenders – with no changes – making it possible for all taxpayers to start filing at the same time.

The IRS will begin accepting individual electronic returns on Tuesday, January 19, 2016.  The IRS expects to receive more than 150 million individual returns in 2016, with more than four out of five being prepared using tax return preparation software and e-filed. The IRS will begin processing paper tax returns at the same time. There is no advantage to people filing tax returns on paper in early January instead of waiting for e-file to begin.

“We look forward to opening the 2016 tax season on time,” IRS Commissioner John Koskinen said. “Our employees have been working hard throughout this year to make this happen. We also appreciate the help from the nation’s tax professionals and the software community, who are critical to helping taxpayers during the filing season.”

Tax Day is pushed out a bit this year. Tax Day will be Monday, April 18, 2016, rather than April 15, 2016.

Traditionally, Tax Day is April 15 unless that date falls on a Saturday or a Sunday, in which case the due date for federal income tax returns gets pushed ahead to the next business day. In some years, the District of Columbia observes Emancipation Day on the same day as Tax Day, which affects the nation’s tax filing deadline – so the deadline gets moved.

Emancipation Day falls on a Saturday in 2016. You’d think that Emancipation Day would get pushed ahead to Monday, April 18, 2016 – but it doesn’t. It actually gets pushed back. By law, when April 16 falls during a weekend, Emancipation Day is observed on the nearest weekday – not necessarily the following weekday. That means, in 2016, Emancipation Day will be observed on Friday, April 15, on what would normally be Tax Day. Tax Day, which falls on a Friday, gets pushed ahead by statute to the next business day, which is Monday, April 18, 2016.

It’s even more confusing if you file your return in Maine or Massachusetts: due to Patriots Day, the deadline will be Tuesday, April 19, 2016, in those states.

From Forbes Tax News

Published: December 14, 2015

In 2016, Some Tax Benefits Increase Slightly Due to Inflation Adjustments

For tax year 2016, the Internal Revenue Service announced annual inflation adjustments for more than 50 tax provisions, including the tax rate schedules, and other tax changes.

The tax items for tax year 2016 of greatest interest to most taxpayers include the following dollar amounts:

  • For tax year 2016, the 39.6 percent tax rate affects single taxpayers whose income exceeds $415,050 ($466,950 for married taxpayers filing jointly), up from $413,200 and $464,850, respectively. The other marginal rates – 10, 15, 25, 28, 33 and 35 percent – and the related income tax thresholds for tax year 2016 are described in the revenue procedure.
  • The standard deduction for heads of household rises to $9,300 for tax year 2016, up from $9,250, for tax year 2015.The other standard deduction amounts for 2016 remain as they were for 2015:   $6,300 for singles and married persons filing separate returns and $12,600 for married couples filing jointly
  • The limitation for itemized deductions to be claimed on tax year 2016 returns of individuals begins with incomes of $259,400 or more ($311,300 for married couples filing jointly).
  • The personal exemption for tax year 2016 rises $50 to $4,050, up from the 2015 exemption of $4,000. However, the exemption is subject to a phase-out that begins with adjusted gross incomes of $259,400 ($311,300 for married couples filing jointly). It phases out completely at $381,900 ($433,800 for married couples filing jointly.)
  • The Alternative Minimum Tax exemption amount for tax year 2016 is $53,900 and begins to phase out at $119,700 ($83,800, for married couples filing jointly for whom the exemption begins to phase out at $159,700). The 2015 exemption amount was $53,600 ($83,400 for married couples filing jointly).  For tax year 2016, the 28 percent tax rate applies to taxpayers with taxable incomes above $186,300 ($93,150 for married individuals filing separately).
  • The tax year 2016 maximum Earned Income Credit amount is $6,269 for taxpayers filing jointly who have 3 or more qualifying children, up from a total of $6,242 for tax year 2015. The revenue procedure has a table providing maximum credit amounts for other categories, income thresholds and phase-outs.
  • For tax year 2016, the monthly limitation for the qualified transportation fringe benefit remains at $130 for transportation, but rises to $255 for qualified parking, up from $250 for tax year 2015.
  • For tax year 2016 participants who have self-only coverage in a Medical Savings Account, the plan must have an annual deductible that is not less than $2,250, up from $2,200 for tax year 2015; but not more than $3,350, up from $3,300 for tax year 2015. For self-only coverage the maximum out of pocket expense amount remains at $4,450. For tax year 2016 participants with family coverage, the floor for the annual deductible remains as it was in 2015 -- $4,450, however the deductible cannot be more than $6,700, up $50 from the limit for tax year 2015. For family coverage, the out of pocket expense limit remains at $8,150 for tax year 2016 as it was for tax year 2015.
  • For tax year 2016, the adjusted gross income amount used by joint filers to determine the reduction in the Lifetime Learning Credit is $111,000, up from $110,000 for tax year 2015.
  • For tax year 2016, the foreign earned income exclusion is $101,300, up from $100,800 for tax year 2015.
  • Estates of decedents who die during 2016 have a basic exclusion amount of $5,450,000, up from a total of $5,430,000 for estates of decedents who died in 2015.
Published: December 11, 2015

Top Tax Issues for 2016

1. Affordable Care Act changes for individuals

The individual mandate penalty increases to the higher of 2 percent of yearly household income or $325 person per year, with a maximum penalty per family for those using this method of $975.

In addition, federal poverty level guidelines, used to determine if the individual qualifies for subsidy, have increased.

2. ACA provisions' impact on businesses

Applicable large employers who have on average of 50 or more full-time equivalent employees in the prior calendar year must offer minimum essential coverage that is affordable to their FTEs and their dependents, or be subject to an employer shared responsibility payment. Transition relief for 2015 exists for ALEs with fewer than 100 FTEs in 2014, and only requires employers to offer minimum essential coverage to 70 percent of full-time employees and their dependents in 2015.

3. New forms to contend with

 The Form 1095-B and Form 1095-C, which were optional for calendar year 2014, must be filed by any person that provides minimum essential coverage to an individual (1095-B) and by applicable large employers (Form 1095-C) who had on average at least 50 full-time equivalent employees during calendar year 2014 or small employers who are member of a controlled group that collectively had at least 50 FTEs and who offer an insured or self-insured plan or no group health plan at all.

4. Increase in identity theft

Under new policies announced by the IRS, taxpayers may receive a letter when the service stops suspicious tax returns that have indications of involving identity theft but contain legitimate taxpayer’s name and/or Social Security number. The IRS has agreed to reverse its policy and provide identity theft victims with copies of the fraudulent tax return that has been filed under their name by scammers, so they can take the proper steps to secure their personal information.

5. Extenders

Despite efforts to get ahead of schedule, Congress looks likely to pull its usual wait-until-the-last-minute trick for extending things like the Section 179 deduction, the R&D credit, and host of other credits and deductions that expired at the end of 2014. If not extended to cover 2015 before year’s end, this will make tax planning difficult, and result in delays in tax forms and software releases.

6. Supreme Court ruling on same-sex marriage

All states must now recognize all married couples in the same way for state income tax purposes, regardless of gender. This will impact the ability to file join income tax returns, the ability to transfer property to each other tax-free, the ability to leave an estate to the spouse without gift tax implications, and spousal treatment of inherited IRAs.

7. Trade legislation tax changes

The Trade Preferences Extension Act of 2015 contains a number of tax provisions in addition to its trade measures. Taxpayers who exclude foreign earned income under Code Section 911 cannot claim the child tax credit; taxpayers must receive a payee statement (1098-T) before they can claim an American Opportunity, Hope, or Lifetime Learning Credit or take the deduction for qualified tuition and related expenses. This is effective for tax years beginning after the TPEA’s date of enactment.

8. Proposed salary threshold for overtime pay

Under new rules proposed by the Obama administration, the Department of Labor would require most salaried workers earning less than $50,440 annually to be paid 1.5 times their normal pay for time worked beyond 40 hours. This is slated to take effect, if passed, on Jan. 1, 2016.

9. Tangible property regulations

These regs caused a number of headaches last tax season. Under the final regs, all costs that facilitate the acquisition or production of such property must be capitalized. Improvements to property that better a unit of property, restore it, or adopt it to a new and different use must also be capitalized.

Exceptions: De minimis safe harbor (annual election required); routine maintenance safe harbor (no election required); per building safe harbor form small businesses (annual election required).

10. New filing deadlines

In observance of Emancipation Day on Friday, April 15, 2016, taxpayers will have until April 18, 2016, to file their 2015 individual returns and make their first 2016 estimated tax payment. Taxpayers in Maine and Massachusetts will have until April 19, 2016, to file their returns so they can observe Patriots Day on April 18.

From AccountingToday

Published: December 9, 2015

IRS Audits Lowest In More Than a Decade

Thanks to persistent budget cuts, the IRS was only able to conduct 1.2 million individual audits this year, the lowest level in 11 years, according to new data from the agency.

Though dreaded by taxpayers, audits help keep filers honest and are an important source of income for the government. Revenue collected from audits sank to a 13-year low.

"Between 2005 and 2010, the revenue generated from audits averaged $14.7 billion annually. [Since then], it has averaged only $10.5 billion," IRS Commissioner John Koskinen said in an address to tax professionals on Tuesday.

For the upcoming tax season, Koskinen isn't expecting much better, unless Congress gives the agency more funding to replace at least some of the 5,000 enforcement personnel who were lost through attrition in the past five years.

"The government is forgoing billions just to achieve budget savings of a few hundred million dollars, since we estimate that every $1 invested in the IRS produces $4 in revenue," he said.

Taxpayer service is also unlikely to improve if lawmakers don't restore at least some of the budget cuts the agency has sustained -- which Koskinen said amounted to $1.2 billion over five years.

Service hit a new low last year, when only about 40% of calls to the IRS were answered and taxpayers seeking in-person help had to wait in long lines outside of IRS service centers.

It got so bad that callers who'd been waiting up to two hours on the phone for an agent would then be automatically hung up on -- a so-called "courtesy disconnect" -- when the system was overloaded, which often happened since so many people tried calling back, Koskinen said.

To avoid that fate this year, the IRS could upgrade to a "virtual hold" system wherein taxpayers could leave their phone number and get a call back when an agent is free. But to implement that would cost $45 million, Koskinen said.

He's asked Congress to provide more funding for the agency to hire and train more seasonal employees to answer taxpayer questions.

Congress hasn't decided yet on the IRS budget for this current fiscal year. But the expectation is the IRS won't see a big bump up in funding, if any at all. And there's some chance its budget could be cut further.

by Jeanne Sahadi for CNN Money

Published: December 7, 2015

Four Things about Advance Payments of the Premium Tax Credit

When you enroll in coverage through the Marketplace during "Open Season", which runs through Jan. 31, 2016, you can choose to have monthly advance credit payments sent directly to your insurer. If you get the benefit of advance credit payments in any amount, or if you plan to claim the premium tax credit, you must file a federal income tax return and use a Form 8962, Premium Tax Credit (PTC) to reconcile the amount of advance credit payments made on your behalf with the amount of your actual premium tax credit.  You must file an income tax return for this purpose even if you are otherwise not required to file a return.

Here are four things to know about advance payments of the premium tax credit:

• If the premium tax credit computed on your return is more than the advance credit payments made on your behalf during the year, the difference will increase your refund or lower the amount of tax you owe. This will be reported in the ‘Payments’ section of Form 1040.

• If the advance credit payments are more than the amount of the premium tax credit you are allowed, you will add all or a portion of the excess advance credit payments made on your behalf to your tax liability by entering it in the ‘Tax and Credits’ section of your tax return.  This will result in either a smaller refund or a larger balance due.

• If advance credit payments are made on behalf of you or an individual in your family, and you do not file a tax return, you will not be eligible for advance credit payments or cost-sharing reductions to help pay for your Marketplace health insurance coverage in future years.  

• The amount of excess advance credit payments that you are required to repay may be limited based on your household income and filing status.  If your household income is 400% or more of the applicable federal poverty line, you will have to repay all of the advance credit payments. Those whose household income is less than 400% above the federal poverty line will have a limited maximum of repayment costs. 

Feel free to contact our office if you have questions regarding the tax implications of the Premium Tax Credit. 

Published: November 24, 2015

The Gain On That Sale Of Stock May Be Tax Free

Long thought of as “the entity choice of last resort” — due to the corporate level tax and the resulting potential for double taxation upon distribution or liquidation — C corporations offer certain opportunities that S corporations and partnerships simply can’t match.

For example, only C corporation stock meets the definition of “qualified small business stock” under the meaning of Section 1202. And while you may not be aware you evenown  qualified small business stock (QSBS), if you do, and if you acquired this qualified small business stock (QSBS) between September 27, 2010 and December 31, 2014, you will eligible to exclude the ENTIRE gain from a subsequent sale of the stock, provided it has been held for five years prior to sale. And since five years from September 27, 2010 was six weeks ago, some of these sales eligible for 100% exclusion may now be coming home to roost.

Thus, now is as appropriate time as any to crank out a Tax Geek Tuesday to point out the advantages and pitfalls of Section 1202 stock.

Section 1202, In General

Section 1202 is nothing new; it’s just that until recent years, it has largely been toothless. Prior to 2010, if a noncorporate taxpayer sold QSBS that had been issued after August 10, 1993 and held for more than five years, 50% of the gain was excluded under Section 1202.  While that sounds wonderful, the remaining 50% of the gain was subject to tax at 28%, meaning the tax rate on the total gain was 14%. This offered only a 1% benefit over the long-term capital gain rate of 15% that was in place at the time. Couple this with the fact that 7% of the gain was also treated as an AMT preference item, and Section 1202 was rendered a rather useless provision.

In 2009, Section 1202 was amended to provide that for stock acquired after the date of the enactment — and subsequently sold after being held for five years — the exclusion rises to 75%.

The stakes were further raised with the enactment of the Creating Small Business Jobs Act of 2010, however, when Section 1202 was again amended to provide that QSBS stock acquired after September 27, 2010, and before January 1, 2014 would be eligible for a 100% exclusion, after a five-year holding period.

Sweetening the pot further, no portion of the exclusion is treated as a tax preference item for purposes of the alternative minimum tax. This presented a unique opportunity for noncorporate taxpayers to invest in Section 1202 stock between  2010 and the end of 2014 and enjoy the benefit of tax-free gain on a subsequent sale of the stock five years down the road, which at its earliest, is right now. And while the window to acquire stock eventually eligible for a 100% exclusion period technically ended on December 31, 2014, this provision is on the table to be reinstated as part of the extender package for 2015, meaning stock acquired this year may also make the cut.

In addition, assuming tax rates remain the same for the next five years, the 100% exclusion will be much more valuable that pre-2010 iterations of Section 1202 in that it will be offsetting tax rates that significantly exceed the 15% maximum rate on long-term capital gains that existed prior to 2013. Remember, after January 1, 2013, the maximum rate on such gains has increased to 23.8% for those taxpayers in the 39.6% ordinary income tax bracket who are also subject to the net investment income tax. This obviously makes the benefit of Section 1202 even more attractive, as taxpayers can now keep income otherwise taxed at 23.8% — rather than 15% — off of their tax return.

From Forbes Tax Geek

Published: November 18, 2015

How to Choose Between a Revocable and Irrevocable Trust

It's called a trust for a reason: You're counting on this stand-alone legal entity to do something you can't. You may want the trust to ensure that ownership of your assets will transfer to heirs smoothly and privately. You may want it to convey some tax advantages. You may think it can protect your assets from creditors.

Well, maybe. Maybe not.

The first thing to consider is not what type of trust to set up, but how much control you want and need over your assets. That will dictate the type of trust that is appropriate -- if any. Estate lawyers and financial advisors say that for many middle class families, trusts might be more bother and expense than they are worth.

Revocable trusts are just that: You can revoke and rewrite the terms of the trust as much as you want. Irrevocable trusts are the opposite. You set up the trust, then relinquish control to the trustee. You can't step back in and change the terms of the trust or fire the trustee without getting the approval of everyone involved, including the beneficiaries. For the most part, what's done is done.

The decision, then, is how much control you need and want over the trust. The more control you have, the fewer immediate benefits you have. The less control you have, the greater the potential benefits down the road.

Why bother with a trust of either type?

If your goal is to protect estate taxes -- the classic rationale for a trust -- recent changes to tax policy have come to your rescue.

The exemption on estate taxes is now $10.6 million for married couples. "That takes a lot of people out of the picture," notes estate lawyer Laird A. Lile, who is based in Naples, Florida.

You won't save any taxes by pouring assets into a revocable trust. "From the IRS' point of view, revocable trusts are invisible," Lile explains. "There are no tax considerations or gift tax considerations to having a revocable trust." Nor is such a trust as likely to shield assets from a creditor.

These days, the main reason for a revocable trust is to get it set up and ready to accept assets when you no longer have the ability to manage your own affairs, says Paul Pantano, senior financial planner with Luttner Financial Group LLC in Pittsburgh. When you move assets to a revocable trust, you provide direction for their use after you die, usually without going through probate and usually with a modicum of privacy. As soon as you die, a properly set up revocable trust will become an irrevocable trust, and the trustee will manage it. Thus, a revocable trust can become a partial substitute for a will, affording some privacy for the family.

That process is only worth it for assets that are not already jointly owned (such as real estate) or that have a direct beneficiary (such as an individual retirement account), Pantano says. In those cases, ownership of the assets transfers seamlessly, so it actually complicates things to have them in a trust.

Finally, a revocable trust can be useful for setting up plans for handling your assets and income if you become incapacitated, points out Michael A. Dribin, a trust and estate lawyer with Harper Meyer Perez Hagen O'Connor Albert & Dribin LLP in Miami.

"The trust makes a provision for the continued management of the assets without a formal court order. It might just take a letter from a physician to validate that you can't handle the assets for the successor trustee to take over," he explains. "It's designed to be pretty seamless. You don't have court interventions, and you can make quick decisions using the assets."

But, he adds, you might be able to achieve the same planning goals by using a durable power of attorney.

Irrevocable trusts: only for the very sure. The purported trust tax advantages of irrevocable trusts mainly exist for the very well off. Even then, they are in the form of complex constructs in irrevocable trusts that are costly to set up and administer, estate lawyers and advisors say.

For the rest of us, irrevocable trusts are mainly of value for addressing special circumstances, such as guaranteeing for the continued support of a disabled dependent or protecting assets from professional liability.

You might also turn to an irrevocable trust to protect assets from creditors, but only if you are thinking way ahead and put assets in the trust before you have credit problems, Lile says. "If you're trying to stay a step ahead of an emerging legal or credit situation, creating an irrevocable trust could be construed as a fraudulent conveyance," Lile says.

In any of these cases, you essentially permanently lose control of whatever is in the irrevocable trust.

Additional considerations:

  • Who will be the trustee or trustees? With a revocable trust, you can change the trustee any time you want. But with an irrevocable trust, you give up control, so you should be confident that the trustee will make decisions congruent with your desires.
  • Don't assume that a trust will keep your estate out of probate court completely. Depending on the state, probate laws still might apply to some degree.
By Joanne Cleaver for US New & World Reports

Published: November 16, 2015

The Downside of Striking It Rich

Who hasn’t daydreamed about striking it rich? Many people think winning the lottery or getting a hefty inheritance means all their problems will disappear. But sometimes when that daydream turns into a reality, it can actually become a nightmare.
 
Winning the lottery

Winning the lottery means you’re set for life, right? But when you win the lottery the government wins, too. Those three lucky Powerball winners from last week are in for a life-changing experience. But when they claim all that cash, the federal tax rate will kick in at the highest bracket of 39.6%.  And that doesn’t even take into consideration state taxes, which vary from state to state but average around 10%. Though lottery rules are not always identical – typically, about 50% of the total value of winnings is going straight to the government. A simple example: if you win $10 million, you’ll take home about $5 million.
 
Lottery fails

We’ve heard the horror stories of lottery winners who fly too high with their winnings and eventually crash and burn. Danielle and Andy Mayoras, attorneys and authors of “Trial & Heirs”, have covered lottery fails for many years.

“There have been lots of Lotto winners who have unfortunately mismanaged their money,” Danielle Mayoras says.
 
A USA Today article from 2006 described the myriad ways lottery winners have frittered away their windfalls. One example was Evelyn Adams, who won the New Jersey Lottery twice, in 1985 and 1986, for a total $5.4 million. She gambled and gave away all of her money, and by 2001 was living in a trailer.
 
Andy Mayoras says a Chicago man was another example of someone who regretted winning the lottery. He won $1 million in the lottery and then was poisoned shortly after.
 
Of course some lottery winners are savvier managers of their newfound wealth and avoid the mistakes other winners have made. Louise White, a 2012 Powerball winner from Rhode Island, put her $336.4 million windfall in an irrevocable trust. According to Danielle Mayoras, this was a smart move. “She paid the taxes, took the money in a lump sum payment, put all of it in the trust, and the trust actually had provisions as to how she could take the money out from the trust and how she could use it,” she said.
 
You can ask your tax professional at Hershkowitz & Kunitzer, P.A. about how to choose between a revocable and irrevocable trust.
 
Inheritance issues
 
About two-thirds of baby boomer households will receive an average inheritance of $64,000, according to the Center for Retirement Research at Boston College. And mishandling inheritance money is common among heirs.
 
Danielle Mayoras warns that in most cases inherited wealth will be gone by the time the grandchildren pass away. She says in many instances that hand-me-down cash can cause people of lose their work ethic.
 
Some celebrities have been vocal about working hard and making their own living despite their family’s deep pockets. CNN’s Anderson Cooper, during an interview with Howard Stern, said he won’t be getting any money from his mother, Gloria Vanderbilt.
 
"My mom's made clear to me that there's no trust fund,” Cooper said. He also called inheriting money a curse and an initiative sucker.
 
Before his death from a drug overdose last year, actor Philip Seymour Hoffman chose not to create trusts for his three children. “[He] did not leave money to his kids because he did not want to have what he called it – trust fund kids – he wanted to keep their work ethic intact,” says Danielle Mayoras.
 
Whether it’s unexpected money from a family member or unexpected fame from the lottery, time and again the pitfalls of striking it rich can be disastrous. Danielle and Andy Mayoras suggest seeking out advice from professionals. 
 
Andy Mayoras says: “A lot of people when they come into money don’t know what to do with it. They might not only spend it poorly but not know how to invest it properly. Use smart vehicles to grow that money slowly into something that can be there for you and your kids and grandkids.”

From Yahoo! Finance

Published: November 12, 2015

Business Travel Expenses

Travel expenses are among the most common business expense deductions. However, this type of expense is also one of the most confusing! When is the cost of a trip deductible as a business expense? How about conventions - particularly in other cities? What if you bring your family? 

It will be easier to plan your business trips, and to combine business with vacation when possible, if you become familiar with the IRS's ground rules.

The following is a list of expenses you may be able to deduct depending on the facts and circumstances:

  • 50 percent of the cost of meals when traveling
  • air, rail, and bus fares
  • baggage charges
  • hotel expenses
  • expenses of operating and maintaining a car, including the cost of gas, oil, lubrication, washing, repairs, parts, tires, supplies, parking fees, and tolls
  • expenses of operating and maintaining house-trailers—provided using one is "ordinary" and "necessary" for your business
  • local transportation costs for taxi fares or other transportation between the airport or station and a hotel, from one customer to another, or from one place of business to another, and tips incidental to the foregoing expenses
  • cleaning and laundry expenses
  • computer rental fees
  • public stenographer fees
  • telephone or fax expenses
  • tips on eligible expenses
  • transportation costs for sample and display materials and sample room costs

Travel Expenses Must Be Business Related 

Your travel must be primarily business-related in order to be deductible. Pleasure trips are never deductible. You can deduct travel expenses only if you are traveling away from home in connection with the pursuit of an existing business.

Travel expenses you incur in connection with acquiring or starting a new business are not deductible as business expenses. However, you can add these costs to your startup expenses and elect to deduct a portion of them and amortize the remainder over 180 months.

Expenses must be ordinary, necessary and reasonable. A travel expense is a type of business expense. Therefore, you must be able to meet the general business expense requirements in order to claim a deduction.

You can't deduct travel expenses to the extent that they are lavish or extravagant—the expenses must be reasonable considering the facts and circumstances. However, the IRS gives you a great deal of latitude here. Your expenses won't be denied simply because you decided to fly first class, or dine in four-star restaurants.

You must be "away from home" to deduct travel expenses. It sounds obvious, but you must be traveling in order to deduct traveling expenses. That is you must be "away from home." 

However, as with much of tax law, it's not as simple as it seems. For this purpose, you are traveling away from home if you meet the following two conditions:

  • The travel is away from the general area or vicinity of your tax home.
  • Your trip is long enough or far away enough that you can't reasonably be expected to complete the round trip without obtaining sleep or rest. This doesn't mean that you need to stay overnight at the destination; for example, it may be that you had an all-day meeting and needed to get a few hours sleep in a hotel before driving home.

Generally, your tax home is the entire general area or vicinity (e.g., a city and surrounding suburbs) of your principal place of business, regardless of the location of your personal or family's home.

There are special rules governing the following situations:

  • More than one place of business. If you conduct your business in more than one place, you should consider the total time you ordinarily spend working in each place, the degree of your business activity in each place, and the relative amount of your income from each place to determine your "principal" place of business.
  • No regular place of business. If you don't have a regular place of abode and no main place of business, you may be considered an itinerant - your tax home is wherever you work and, therefore, you can never satisfy the away-from-home requirement.
  • Temporary assignment.When you are temporarily (a year or less), as opposed to indefinitely, working away from your main place of business, your tax home doesn't change—all your "away from home" expenses are deductible.

Allocation Required if Travel Combines Business and Pleasure

What about travel that is both business-related and personal? The IRS is on the lookout for taxpayers who try to classify a nondeductible personal trip as a deductible business trip. So, if you travel to a destination and engage in both personal and business activities, you can deduct your traveling expenses to and from the destination only if the trip is primarily related to your business.

The primary purpose of a trip is determined by looking at the facts and circumstances of each case. An important factor is the amount of time you spent on personal activities during the trip as compared to the amount of time spent on activities directly relating to business. Travel expenses outside the U.S. may be further limited if any part of your trip is for personal purposes.

If the trip is primarily personal in nature, none of your traveling expenses are deductible. This is true even if you engage in some business activities while you are there. (However, you may be able to deduct particular expenses you incur while you're at your destination if they otherwise qualify as business deductions.)

From BizFilings.com

Published: November 9, 2015

Tax Tips: 5 Rules for Deducting Business Meals

Like most business owners, you probably incur costs on wining and dining customers or clients. You’d think that this is an easy tax deduction, but you’d be wrong. The tax law is peppered with rules and limitations that curtail or prevent you from deducting meal costs you’d think would be a legitimate write off.

Here are five rules you need to know to optimize your deductions.

1. Only 50 percent is deductible.
You meet a customer for breakfast at the local diner or take a client to dinner at a fine restaurant. Provided the meal is for business and you’re not just socializing, you can only deduct 50 percent of the cost.

To be treated as a deductible cost at 50 percent, the meal must be directly related to the conduct of your business or the meal must directly precede or follow a substantial business discussion. For example, you’re trying to convince a prospect to do business with you in a meeting in your office. Following your presentation, you take the prospect to lunch. This would be a deductible business meal, subject to the 50 percent limit.

Special rules: There are several exceptions to the 50 percent rule, such as reimbursements to employees that are treated as taxable compensation to them or reimbursements to independent contractors for their meals; these are fully deductible. Also, those subject to Department of Transportation limitations on hours of service, such as independent interstate truckers, can deduct 80 percent rather than 50 percent of meal costs away from home.

2. No deduction for your in-town lunch.
If you eat out rather than brown bag it for lunch, the cost is on you. It’s a nondeductible personal expense.

This unfavorable result doesn’t change even if you’re across town and are forced to eat out because of business. As long as you aren’t “away from home” (in tax parlance this means out of town), your meal costs when eating alone are not deductible in any amount. If you are out of town, your meal costs -- eating alone or with others on business -- are subject to the percentage limitation discussed earlier.

3. Records are required.
If the meal is deductible, you need certain records to back up your claims. Technically, no deduction can be claimed without these records, although there are some limited exceptions. The IRS looks closely at deductions for meal costs because of the potential for abuse and, if your return is questioned, will ask to see required records:

  • A record stating when, where, and why you had the meal. For example, the record could indicate that on November 25, 2013, you had lunch with Ms. Davis, a customer, and you discussed a new project that you’re working on for Ms. Davis.
  • Receipts for expenses. Exception: You don’t have to retain receipts for a meal costing less than $75.

There are a number of apps for your smartphone that assist you with recordkeeping. You can input the date, location, etc. and take a photo or scan the receipt, making recordkeeping easier.

4. Standard meal allowance rates can ease recordkeeping.
If you have difficulty keeping records and receipts for meals when out of town on business, you can deduct a standard meal allowance. It may be less than your actual meal costs, but you won’t need receipts. If you have employees who travel on business, you may want to use the standard rate to reimburse them for their meal costs out of town.

For 2013, the standard meal allowance usually is $46 per day within the continental U.S. It’s higher in New York City, San Francisco and other high-cost locations, including some resort areas. The U.S. General Services Administration publishes the daily standard rates by state. Independent truckers and others in the transportation industry have a special daily meal rate of $59 per day within the continental U.S.

Caution: Using this rate does not relieve you of the responsibility to keep a record of the time, place and business purpose of the trip.

5. Holiday parties are 100 percent deductible.
If you hold a party for your staff -- in your facility or a restaurant -- you can deduct all of the cost in this instance. As long as the party is for the benefit of employees and is not limited to the top brass, you can write off 100 percent of your costs.

Be sure to discuss your business practices with respect to tracking and reporting meal costs with your Hershkowitz & Kunitzer tax advisor to make sure you’re in compliance with tax rules.

Published: October 20, 2015

Extension Filers: Don’t Miss the Oct. 15 Deadline

If you are one of the 13 million taxpayers who asked for more time to file your federal tax return and still haven’t filed, your extra time is about to expire. Oct. 15 is the last day to file for most people who requested an automatic six-month extension. If you have not yet filed, here are some things that you should know:

  • Use Direct Deposit.   If you are due a refund, the fastest way to get it is to combine direct deposit and e-file. Direct deposit has a proven track record; eight in 10 taxpayers who get a refund choose it. The IRS issues more than nine out of 10 refunds in less than 21 days.
  • Use IRS Online Payment Options.  If you owe taxes the best way to pay them is with IRS Direct Pay. It’s the simple, quick and free way to pay from your checking or savings account. You also have other online payment options. These include Electronic Funds Withdrawal or payment by debit or credit card. Just click on the “Payments” tab on the IRS.gov home page.
  • Don’t overlook tax benefits.  Make sure to check if you qualify for tax breaks that you might miss if you rush to file. This includes the Earned Income Tax Credit and the Saver’s Credit. The American Opportunity Tax Credit and other education tax benefits can help you pay for college.
  • File on time.  If you owe taxes, file on time to avoid a late filing penalty. If you owe and can’t pay all of your taxes, pay as much as you can to reduce interest and penalties for late payment. You can also file Form 9465, Installment Agreement Request, with your tax return.
  • More time for the military.  Some people have more time to file. This includes members of the military and others serving in a combat zone. If this applies to you, you typically have until at least 180 days after you leave the combat zone to both file returns and pay any taxes due.

Each and every taxpayer has a set of fundamental rights they should be aware of when dealing with the IRS. These are your Taxpayer Bill of Rights. Explore your rights and the IRS' obligations to protect them on IRS.gov.

Published: October 2, 2015

Is it Ever OK to Finance a Startup with Home Equity?

Who are the big idea innovators in the startup world these days? Is it the fearless 20-year olds? Not so much.

Actually, the majority of new business owners are innovators who are over the age of 40. 

According to the Kauffman Foundation, during the last 16 years, entrepreneurship among 55 to 64-year-olds increased by an astounding 64%. For 45 to 54-year-olds, new business formation increased by 10%. Yet during the same period, entrepreneurs aged 20 to 34 dropped by 24%.

Given the recent recovery of home valuations and advancing age of new business founders, it makes sense that I’m getting more questions to my FOXBusiness inbox about funding a startup with home equity funds.

Is it a good idea or bad idea? 

Different types of businesses, at different stages of business development, call for different funding solutions. Drawing down funds from a home equity loan to invest in a startup is a riskier investment move than using home equity funds as an emergency source of capital for businesses that generate revenues from a reliable customer base.

Here are the factors every entrepreneurial homeowner should think about before turning to a home to fund a new business.

Real funding requirements. A common mistake of startup entrepreneurs and first-time business buyers is to estimate the funding requirements to start a business, not succeed in business. The difference is subtle but meaningful.

If the amount of funding required to complete product development, secure a first customer, or achieve positive cash flow far exceeds your family’s resources, don’t start your business with a home equity loan. Funding your new business with equity from investors rather than debt may be the smarter, risk-adverse way to go.

Your monthly payment. It’s easy to find free online tools that will help you calculate a monthly payment from a new mortgage or home equity loan. Can your family afford the increased monthly bill? For how long?

Of course, the real problem with funding a new business with a home equity loan is bad timing. Just at the time when the total home financing bill goes up, the family’s household income often goes down because one family member usually left another paying gig. If the new business is not able to pay any salary to the entrepreneur for some period of time, then the family’s finances can easily spiral out of control. 

Impact of rising interest rates. Most second mortgages and home equity loans are issued with variable interest rates. Can your family finances afford a sudden rate increase of one percent or more? Work the numbers, don’t just guess the numbers!

Budget for delays and unexpected problems. If you are pursuing a business that is outside your primary area of expertise, (for example an advertising executive starting a restaurant), budget some extra funds for beginner's mistakes and routine trial and error. 

A good exercise is to double your company’s projected startup expenses and delay the introduction of new products or services by a good six months or more. It also usually takes longer for startups to secure their first customers and get paid by their first customers, too.  

Reliance on investors to pay back loans. It’s quite common for older entrepreneurs to draw down funds from a home equity loan or personal savings and then “invest” the funds in the form of debt into the new business entity.  Their big hope—and deadly miscalculation—is that they will get paid back quickly by angel investors or venture capital funds.

The real deal is investors in young companies prefer to fund new product development, aggressive sales and marketing plans, patent filings and other initiatives that will boost a company’s revenue and profit generation. Paying off debt to founders or their family members is simply not a priority.  In these situations, expect investors to insist that any debt to founders or their family members will be rolled into equity as a condition of investment.  So, when will entrepreneurs get their money back? Usually when the company is sold, which can be years down the road. Yikes!

In general, debt is not a good funding option for startups especially if it adds strain to a family’s finances. Many banks understand this too and turn down home equity loan requests if it is revealed that the funds will be used for new business purposes.

Tapping a home equity loan, however, can be a reasonable solution for households that are not dependent on the new business for fast debt repayment or to pay other household bills. It also helps if the new business is not capital intensive and may start with one or more commitments from first customers or clients.

By Susan Schreter for FOX Business

Published: September 29, 2015

4 Rules for Legal Fees

When it comes to the deductibility of legal fees, don't make assumptions. Here's what you need to know.

Legal fees for your business can be high, with hourly rates reaching $500 or more, depending on where you are located and what type of services and expertise are in involved. Legal fees may be deductible as an ordinary business expense, with no dollar cap or other special limitations on the amount that is deductible (other than that they must be reasonable). However, there are some situations in which fees may not be currently deductible. Here are the four tax rules you need to know about legal fees.

1. Basic rule

Generally, legal fees may be currently deductible as ordinary and necessary business expenses. Examples of legal actions in which fees are currently deductible include:

  • Creating or reviewing contracts and agreements, suing for breaches or defending against claims of breach of contract
  • Assistance in collecting outstanding accounts payable
  • Defending against trademark, patent or copyright infringement claims
  • Defending against wrongful discharge or other employee (or former employee) claims
  • Obtaining tax advice, actions involving the IRS or state tax departments or obtaining an IRS ruling

2. Rule for start-up costs

When a business is getting started, there may be legal fees involved. Special rules apply in this case. Legal fees related to creating a partnership or corporation are immediately deductible up to $5,000.

Excess costs can be written off ratably over 180 months (15 years). However, if legal fees exceed $50,000, then the $5,000 up front deduction is reduced by one dollar for every dollar over $50,000; no upfront deduction can be claimed if fees are more than $55,000. For example, if you pay $2,500 to the ABC Law Firm to create articles of incorporation and another $500 to your state to incorporate, you can deduct the $3,000 in legal fees in the corporation’s first year.

3. Rule for capitalized costs

No deduction can be claimed for legal fees that are viewed as capital expenditures. These are costs related to creating, acquiring, or protecting a capital asset, such as real estate and intellectual property. These costs are added to the basis of the capital asset.

However, in some cases, the legal fees that are capitalized may be recovered through depreciation or amortization. For example, your company buys an office building and incurs legal fees of $3,000. Because the fees relate to the acquisition of a capital asset—the building—the fees are added to the cost basis of the building. The cost of the building (minus the land) can be depreciated over 39 years, so effectively the fees will be written off over 39 years.

Examples in which legal fees must be capitalized and are not currently deductible:

  • Fees to defend title to realty
  • Fees for suing for trademark, patent or copyright infringement

4. Rule for personal costs

No deduction is allowed for legal fees that are purely personal in nature and not otherwise deductible (i.e., do not relate to the production of income, such as a recovery of a taxable award in a lawsuit). For example, no deduction can be claimed by a business owner for obtaining a divorce, even though the business is a marital asset subject to division or distribution during the course of the divorce.

Final word

When it comes to the deductibility of legal fees, don’t make assumptions. In the case of fees related to lawsuits, look at the “origin of the claim” giving rise to the legal action. If it relates to business issues and is not required to be capitalized, a current deduction may be appropriate. Discuss the deductibility of any legal fees with your tax advisor.

By Barbara Weltman for OPEN Forum

Published: September 28, 2015

Tips about Filing an Amended Tax Return

We all make mistakes so don’t panic if you made one on your tax return. You can file an amended return if you need to fix an error. You can also amend your tax return if you forgot to claim a tax credit or deduction. Here are ten tips from the IRS if you need to amend your federal tax return.

1. When to amend.  You should amend your tax return if you need to correct your filing status, the number of dependents you claimed, or your total income. You should also amend your return to claim tax deductions or tax credits that you did not claim when you filed your original return. 

2. When NOT to amend.  In some cases, you don’t need to amend your tax return. The IRS usually corrects math errors when processing your original return. If you didn’t include a required form or schedule, the IRS will send you a notice via U.S. mail about the missing item. 

Form 1040X has three columns. Column A shows amounts from the original return. Column B shows the net increase or decrease for the amounts you are changing. Column C shows the corrected amounts. You should explain what you are changing and the reasons why on the back of the form.

3. More than one year.  If you file an amended return for more than one year, a separate return will need to be filed for each tax year. 

4. Amending to claim an additional refund.  If you are waiting for a refund from your original tax return, don’t file your amended return until after you receive the refund. You may cash the refund check from your original return. Amended returns take up to 16 weeks to process. You will receive any additional refund you are owed.

5. Amending to pay additional tax.  If you’re filing an amended tax return because you owe more tax, you should file Form 1040X and pay the tax as soon as possible. This will limit interest and penalty charges.

6. Corrected Forms 1095-A.  If you or anyone on your return enrolled in qualifying health care coverage through the Health Insurance Marketplace, you should have received a Form 1095-A, Health Insurance Marketplace Statement. You may have also received a corrected Form 1095-A. If you filed your tax return based on the original Form 1095-A, you do not need to file an amended return based on a corrected Form 1095-A.  This is true even if you would owe additional taxes based on the new information. However, you may choose to file an amended return.

In some cases, the information on the new Form 1095-A may lower the amount of taxes you owe or increase your refund.  You may also want to file an amended return if:

  •  You filed and incorrectly claimed a premium tax credit, or
  •  You filed an income tax return and failed to file Form 8962, Premium Tax Credit, to reconcile your advance payments of the premium tax credit.

Before amending your return, if you received a letter regarding your premium tax credit or Form 8962 you should follow the instructions in the letter. 

7. When to file.  To claim a refund file Form 1040X no more than three years from the date you filed your original tax return. You can also file it no more than two years from the date you paid the tax, if that date is later than the three-year rule.

8. Track your return.  You can track the status of your amended tax return three weeks after you file with “Where’s My Amended Return?” available on the IRS website. 

Published: August 31, 2015

Your Health Insurance Company May Ask for Your Social Security Number

Your health insurance company may request that you provide them with the social security numbers for you, your spouse and your children covered by your policy.  This is because the Affordable Care Act requires every provider of minimum essential coverage to report that coverage by filing an information return with the IRS and furnishing a statement to covered individuals. The information is used by the IRS to administer – and individuals to show compliance with – the health care law.

Health coverage providers will file an information return, Form 1095-B, Health Coverage, with the IRS and will furnish statements to you in 2016, to report coverage information from calendar year 2015.

The law requires coverage providers to list social security numbers on this form. If you don't provide your SSN and the SSNs of all covered individuals to the sponsor of the coverage, the IRS may not be able to match the Form 1095-B with the individuals to determine that they have complied with the individual shared responsibility provision.

Your health insurance company may send a letter that discusses these new rules and requests social security numbers for all family members covered under your policy. The IRS has not designated a specific form for your health insurance company to request this information. The Form 1095-B will provide information for your income tax return that shows you, your spouse, and individuals you claim as dependents had qualifying health coverage for some or all months during the year. You do not have to attach Form 1095-B to your tax return. Keep it with your other important tax documents.

Anyone on your return who does not have minimum essential coverage, and who does not qualify for an exemption, may be liable for the individual shared responsibility payment.

The information received by the IRS will be used to verify information on your individual income tax return. If you refuse to provide this information to your health insurance company, the IRS cannot verify the information you provide on your tax return and you may receive an inquiry from the IRS. You also may receive a notice from the IRS indicating that you are liable for a shared responsibility payment.

Published: August 27, 2015

For Most, Highway Use Tax Return is due Aug. 31

The Internal Revenue Service today reminded truckers and other owners of heavy highway vehicles that in most cases their next federal highway use tax return is due Monday, Aug. 31, 2015.

The deadline generally applies to Form 2290 and the accompanying tax payment for the tax year that begins July 1, 2015, and ends June 30, 2016. Returns must be filed and tax payments made by Aug. 31 for vehicles used on the road during July. For vehicles first used after July, the deadline is the last day of the month following the month of first use.

Though some taxpayers have the option of filing Form 2290 on paper, the IRS encourages all taxpayers to take advantage of the speed and convenience of filing this form electronically and paying any tax due electronically. Taxpayers reporting 25 or more vehicles must e-file.

The highway use tax applies to highway motor vehicles with a taxable gross weight of 55,000 pounds or more. This generally includes trucks, truck tractors and buses. Ordinarily, vans, pick-ups and panel trucks are not taxable because they fall below the 55,000-pound threshold. The tax of up to $550 per vehicle is based on weight, and a variety of special rules apply. 

Published: August 21, 2015

Don’t Fall for New Tax Scam Tricks by IRS Posers

Though the tax season is over, tax scammers work year-round. The IRS advises you to stay alert to protect yourself against new ways criminals pose as the IRS to trick you out of your money or personal information. These scams first tried to sting older Americans, newly arrived immigrants and those who speak English as a second language. The crooks have expanded their net, and now try to swindle virtually anyone. Here are several tips from the IRS to help you avoid being a victim of these scams:

  • Scams use scare tactics.  These aggressive and sophisticated scams try to scare people into making a false tax payment that ends up with the criminal. Many phone scams use threats to try to intimidate you so you will pay them your money. They often threaten arrest or deportation, or that they will revoke your license if you don’t pay. They may also leave “urgent” callback requests, sometimes through “robo-calls,” via phone or email. The emails will often contain a fake IRS document with a phone number or an email address for you to reply.
  • Scams use caller ID spoofing.  Scammers often alter caller ID to make it look like the IRS or another agency is calling. The callers use IRS titles and fake badge numbers to appear legit. They may use online resources to get your name, address and other details about your life to make the call sound official.
  • Scams use phishing email and regular mail.  Scammers copy official IRS letterhead to use in email or regular mail they send to victims. In another new variation, schemers provide an actual IRS address where they tell the victim to mail a receipt for the payment they make. All in an attempt to make the scheme look official.
  • Scams cost victims over $20 million.  The Treasury Inspector General for Tax Administration, or TIGTA, has received reports of about 600,000 contacts since October 2013. TIGTA is also aware of nearly 4,000 victims who have collectively reported over $20 million in financial losses as a result of tax scams.

The real IRS will not:

  • Call you to demand immediate payment. The IRS will not call you if you owe taxes without first sending you a bill in the mail.
  • Demand that you pay taxes and not allow you to question or appeal the amount that you owe.
  • Require that you pay your taxes a certain way. For instance, require that you pay with a prepaid debit card.
  • Ask for credit or debit card numbers over the phone.
  • Threaten to bring in police or other agencies to arrest you for not paying.
Published: August 11, 2015

Tax Filing Problems Could Jeopardize Health Law Aid

About 1.8 million households that got financial help for health insurance under President Barack Obama’s law now have issues with their tax returns that could jeopardize their subsidies next year. Administration officials say those taxpayers will have to act quickly.

“There’s still time, but people need to take action soon,” said Lori Lodes, communications director for the Centers for Medicare and Medicaid Services, which runs HealthCare.gov.

The health care law provides tax credits to help people afford private insurance. Nationally, that aid averages $272 a month, covering roughly three-fourths of the premium. By funneling the aid through the income tax system, Democrats were able to call the overhaul the largest middle-class tax cut for health care in history. But they also spliced together two really complicated areas for consumers: health insurance and taxes. Confusion has been the result for many.

Consumers who got health care tax credits are required to file tax returns that properly account for them, even if they are unaccustomed to filing because their incomes are low. Unless they follow through, “they will not be able to receive tax credits to help lower the cost of their health insurance for 2016,” Lodes explained.

Treasury officials said 1.8 million households are at risk of losing subsidies for next year, and that number breaks down as follows:

—About 710,000 households that have not filed a 2014 tax return, although they were legally required to account for health insurance tax credits that they received.

—Some 360,000 households that got tax credits and requested an extension to file their returns. They have until Oct. 15.

—About 760,000 households that got tax credits and filed their tax returns omitted a new form that is the key to accounting for the subsidies. Called Form 8962, it was new for this year’s tax filing season.

“I think it was definitely confusing for people,” said Elizabeth Colvin of Foundation Communities, an Austin, Texas, nonprofit that helps low-income people with health insurance and taxes. “It could have been worse, quite honestly. I think a lot of tax preparers didn’t know how to do these (forms) either.”

The 1.8 million households with tax issues represent 40 percent of 4.5 million households that had tax credits provided on their behalf and must account for them. The rest had their returns successfully processed by the IRS as of the end of May.

Earlier this summer, a Supreme Court decision preserved health care tax credits for consumers in all 50 states, turning back a challenge from conservatives opposed to “Obamacare.” Because of the law’s built-in complexity, some of those consumers may now be at risk of losing their assistance.

Administration officials say they’re working hard to prevent that. An estimated 16 million people have gained health insurance since HealthCare.gov opened for business in late 2013, and the White House does not want any slippage.

The IRS has started reaching out to consumers with tax issues. HealthCare.gov is reporting an increase in tax-related calls to its consumer assistance center. That telephone number is 1-800-318-2596. The Health and Human Services department plans another outreach campaign in the fall, coordinated with the start of the 2016 sign-up season on Nov. 1.

“What the IRS is doing here is sending these people a not-so-gentle reminder that they need to file or they will put their subsidy at risk,” said Mark Ciaramitaro, vice president for tax and health care at H&R Block, the tax preparation company. He cautioned that many consumers will find the process cumbersome, so they should waste no time getting started.

Despite a thinning out of taxpayer services due to budget cuts, IRS Commissioner John Koskinen says the tax-filing season went relatively smoothly, even with the health care law added. Nonetheless, he acknowledged that there’s a learning curve for everybody on health care.

“This is the first year for this new provision,” Koskinen wrote in a letter to lawmakers last month. “We expect that taxpayers will continue to better understand this process as it becomes more routine.”

The administration and the health law’s supporters could be doing a better job educating consumers, said Judy Solomon of the Center on Budget and Policy Priorities, which advocates for low-income people.

“There is definitely room for improvement to make sure people understand how it works,” she said. “They are getting an advance payment of a tax credit, and to finish the process they need to file a tax return. They have to look at it as a process that is a year long and has multiple steps.”

By Ricardo Alonso-Zaldivar for The Associate Press 

Published: August 7, 2015

Don’t Miss the Health Insurance Deduction if You’re Self-Employed

If you are self-employed, the IRS wants you to know about a tax deduction generally available to people who are self-employed.

The deduction is for medical, dental or long-term care insurance premiums that self-employed people often pay for themselves, their spouse and their dependents. The insurance can also cover your child who was under age 27 at the end of 2012, even if the child was not your dependent.

You may be able to take this deduction if one of the following applies to you:

  • You had a net profit from self-employment. You would report this on a Schedule C, Profit or Loss From Business, Schedule C-EZ, Net Profit From Business, or Schedule F, Profit or Loss From Farming.

  • You had self-employment earnings as a partner reported to you on Schedule K-1 (Form 1065), Partner's Share of Income, Deductions, Credits, etc.

  • You used an optional method to figure your net earnings from self-employment on Schedule SE, Self-Employment Tax.

  • You were paid wages reported on Form W-2, Wage and Tax Statement, as a shareholder who owns more than two percent of the outstanding stock of an S corporation.

There are also some rules that apply to how the insurance plan is established. Follow these guidelines to make sure the plan qualifies:

  • If you’re self-employed and file Schedule C, C-EZ, or F, the policy can be in your name or in your business’ name.

  • If you’re a partner, the policy can be in your name or the partnership’s name and either of you can pay the premiums. If the policy is in your name and you pay the premiums, the partnership must reimburse you and include the premiums as income on your Schedule K-1.

  • If you’re an S corporation shareholder, the policy can be in your name or the S corporation’s name and either of you can pay the premiums. If the policy is in your name and you pay the premiums, the S corporation must reimburse you and include the premiums as wage income on your Form W-2.
Published: August 4, 2015

Compilations vs. Review vs. Audits

What is the difference between a financial statement compilation, review and an audit?

The difference is the level of service, which is determined by your needs and what your creditors and/or investors require.

The higher the level of service required, the more time a CPA needs to complete the engagement and, therefore, the more costly the engagement.

While companies often opt for compiled or reviewed statements, credit agreements with lenders often require audited statements.
 

Compilation

Compiled financial statements represent the most basic level of service CPAs provide with respect to financial statements.

In a compilation engagement, the accountant assists management in presenting financial information in the form of financial statements without undertaking to obtain or provide any assurance that there are no material modifications that should be made to the financial statements.

In a compilation, the CPA must comply with Statements on Standards for Accounting and Review Services (SSARSs), which require the accountant to have an understanding of the industry in which the client operates, obtain knowledge about the client, and read the financial statements and consider whether such financial statements appear appropriate in form and free from obvious material errors.

A compilation does not contemplate performing inquiry, analytical procedures, or other procedures ordinarily performed in a review; or obtaining an understanding of the entity’s internal control; assessing fraud risk; or testing of accounting records; or other procedures ordinarily performed in an audit.

The CPA issues a report stating:

  • The compilation was performed in accordance with Statements on Standards for Accounting and Review Services
  • The accountant has not audited or reviewed the financial statements
  • And accordingly does not express an opinion or provide any assurance about whether the financial statements are in accordance with the applicable financial reporting framework.

Review

Reviewed financial statements provide the user with comfort that, based on the accountant’s review, the accountant is not aware of any material modifications that should be made to the financial statements for the statements to be in conformity with the applicable financial reporting framework.

A review engagement involves the CPA performing procedures (primarily analytical procedures and inquiries) that will provide a reasonable basis for obtaining limited assurance that there are no material modifications that should be made to the financial statements for them to be in conformity with the applicable financial reporting framework.

In a review, the CPA designs and performs analytical procedures, inquiries, and other procedures as appropriate, based on the accountant’s understanding of the industry, knowledge of the client, and awareness of the risk that he or she may unknowingly fail to modify the accountant’s review report on financial statements that are materially misstated.

A review does not contemplate obtaining an understanding of the entity’s internal control; assessing fraud risk; testing accounting records; or other procedures ordinarily performed in an audit.

The CPA issues a report stating:

  • The review was performed in accordance with Statements on Standards for Accounting and Review Services
  • Management is responsible for the preparation and fair presentation of the financial statements in accordance with the applicable financial reporting framework and for designing, implementing and maintaining internal control relevant to the preparation performs analytical procedures, inquiries and other procedures, and fair presentation of the financial statements
  • A review includes primarily applying analytical procedures to management’s financial data and making inquiries of management;
  • A review is substantially less in scope than an audit and that the CPA is not aware of any material modifications that should be made to the financial statements for them to be in conformity with the applicable financial reporting framework.

Audit

Audited financial statements provide the user with the auditor’s opinion that the financial statements are presented fairly, in all material respects, in conformity with the applicable financial reporting framework.

In an audit, the auditor is required by auditing standards generally accepted in the United States of America (GAAS) to obtain an understanding of the entity’s internal control and assess fraud risk.

The auditor also is required to corroborate the amounts and disclosures included in the financial statements by obtaining audit evidence through inquiry, physical inspection, observation, third-party confirmations, examination, analytical procedures and other procedures.

The auditor issues a report stating:

  • The audit was conducted in accordance with GAAS
  • The financial statements are the responsibility of management
  • An opinion that the financial statements present fairly in all material respects the financial position of the company and the results of operations are in conformity with the applicable financial reporting framework (or issues a qualified opinion if the financial statements are not in conformity with the applicable financial reporting framework).
  • The auditor may also issue a disclaimer of opinion or an adverse opinion (if appropriate)
From information from the "Guide to Financial Statement Services: Compilation, Audit and Review" by Barfield, Murphy, Shank & Smith. 

Published: July 31, 2015

IRS Scales Back to Absorb Funding Cuts

The Internal Revenue Service has been scaling back its activities and using some of its budgeting flexibility to absorb funding cuts, according to a new government report.

The report, from the Government Accountability Office, pointed out that the IRS’s budget shrunk from $12.1 billion in fiscal year 2010 to $11.3 billion in fiscal year 2014, a reduction of approximately 7 percent. The IRS's budget declined by an additional $346 million from fiscal year 2014 to fiscal year 2015.

The IRS used some of its budgeting flexibility to absorb the budget reductions by allocating user fee revenue, which made up 3.4 percent of its budget, or $416 million, in fiscal year 2014. In addition, to increase agency-wide coordination of budget decisions, the IRS formed a new office and committee to inform budget formulation and execution decisions.

To absorb the budget cuts, the IRS’s Human Capital Office, Office of Chief Counsel, and Small Business/Self-Employed Division each reduced their staff by 16 to 30 percent.

According to officials, they also prioritized legally required programs, such as tax litigation, and reduced some programs or services, such as limiting non-filer investigations, postponing software acquisitions, and delaying approximately 24,000 employee background reinvestigations.

Such scaled back activities potentially reduce program effectiveness or increase risk to the IRS and the federal government, the GAO noted.

For fiscal year 2016, the Obama administration has requested $12.9 billion in appropriations for IRS. The request is almost $2 billion (18 percent) more than the IRS's fiscal year 2015 appropriation.

However, last month the House Appropriations Committee adopted a fiscal year 2016 budget proposal that would provide the IRS with a budget of $10.1 billion—$838 million less than the current level and $2.8 billion below the Obama administration’s proposal. The Senate Appropriations Committee voted last Thursday to reduce IRS funding to $10.5 billion. Meanwhile, a highway-funding bill pending in both the House and Senate calls for new tax enforcement efforts by the IRS to pay for fixing the nation's highways rather than raising gasoline taxes.

Declining Taxpayer Service
National Taxpayer Advocate Nina Olson released her midyear report to Congress and pointed to dramatic decreases in taxpayer service by the IRS as the agency struggled to absorb the impact of the budget cuts. The IRS answered only 37 percent of taxpayer calls routed to customer service representatives overall, and the hold time for taxpayers who got through averaged 23 minutes. This level of service represents a sharp drop-off from the 2014 filing season, when the IRS answered 71 percent of its calls and hold times averaged approximately 14 minutes.

The IRS also answered only 45 percent of calls from practitioners who called the IRS on the Practitioner Priority Service line, and hold times averaged 45 minutes. The agency answered only 39 percent of calls from taxpayers seeking assistance from the Taxpayer Advocate Service on the National Taxpayer Advocate Toll-Free hotline, and hold times there averaged 19 minutes.

The IRS answered just 17 percent of calls from taxpayers who called after being notified that their tax returns had been blocked by the Taxpayer Protection Program on suspicion of identity theft, and the hold times averaged about 28 minutes. In three consecutive weeks during the filing season, the IRS answered fewer than 10 percent of these calls.

The number of “courtesy disconnects” received by taxpayers calling the IRS skyrocketed from about 544,000 in 2014 to about 8.8 million this filing season, an increase of more than 1,500 percent. The term “courtesy disconnect” is used when the IRS essentially hangs up on a taxpayer because its switchboard is overloaded and cannot handle additional calls.

By Michael Cohn for Accounting Today

Published: July 28, 2015

Tips About Vacation Home Rentals

If you rent a home to others, you usually must report the rental income on your tax return. However, you may not have to report the rent you get if the rental period is short and you also use the property as your home. In most cases, you can deduct your rental expenses. When you also use the rental as your home, your deduction may be limited. Here are some basic tax tips that you should know if you rent out a vacation home:

  • Vacation Home.  A vacation home can be a house, apartment, condominium, mobile home, boat or similar property.
  • Schedule E.  You usually report rental income and rental expenses on Schedule E, Supplemental Income and Loss. Your rental income may also be subject to Net Investment Income Tax.
  • Used as a Home.  If the property is “used as a home,” your rental expense deduction is limited. This means your deduction for rental expenses can’t be more than the rent you received. 
  • Divide Expenses.  If you personally use your property and also rent it to others, special rules apply. You must divide your expenses between the rental use and the personal use. To figure how to divide your costs, you must compare the number of days for each type of use with the total days of use.
  • Personal Use.  Personal use may include use by your family. It may also include use by any other property owners or their family. Use by anyone who pays less than a fair rental price is also personal use.
  • Schedule A.  Report deductible expenses for personal use on Schedule A, Itemized Deductions. These may include costs such as mortgage interest, property taxes and casualty losses.
  • Rented Less than 15 Days.  If the property is “used as a home” and you rent it out fewer than 15 days per year, you do not have to report the rental income. In this case you deduct your qualified expenses on schedule A.
Published: July 17, 2015

4 Ways to Get the Most out of Your CPA Relationship

Successful business owners and leaders build a network of trusted advisors to help them achieve their goals, including CPAs. But how can you ensure you are using your CPA relationship to the fullest? Here are four tips for getting the most out of your relationship with a CPA.

1. Partner with a CPA with industry expertise

If you’re not currently working with a CPA, seek out a firm that has specific expertise in your industry. Interview several CPAs to find the right fit for your organization’s needs. Ask them about other clients they work with that are in your industry, and find out if you can speak directly with some of those clients.

2. Communicate proactively

Keep your CPA informed on what’s happening at your business.Although many clients naturally build solid relationships with their CPAs through the normal course of doing business, a little proactive communication can go a long way towards heading off any financial challenges and fostering a rewarding relationship.

3. Ask questions

If you have questions about the tax effects of certain decisions, or about how to approach banking relationships, do not hesitate to ask your CPA. He or she has probably addressed those same issues many times before and can offer valuable input.

4. Make their jobs easier

What’s one of the best ways to build a relationship with someone?Make his or her job easier. Many companies opt to share access to employee data and reports through online reporting tools. By allowing their CPAs to view fiscal year-to-date reports and other information, you can help make the year-end process run more smoothly and save your CPA valuable time—which in turn, saves you money.

From Paycor Industry Insights

Published: July 15, 2015

Last-Minute Tax Savings: 5 Things to Know

Some small-business owners are scrambling in this last week of the year to try to reduce their tax burden. Reporting income when you receive it and deducting expenses when you pay them gives you more control over your taxes. Ready to make some very last-minute tax moves that may save you money? According to Weltman, here are five things you need to know.

1. Don't bill yet for work you're doing now. Typically you'd send an invoice as quickly as possible, but Weltman suggests at this point, for tax purposes, you "consider waiting until the end of the year to send it. This will ensure payment is received the following year, and taxes on the income are deferred for another year." One caveat, according to Weltman, is if you expect to be subject to the alternative minimum tax (AMT). If so, the opposite approach may make more sense -- bill immediately to receive the income so "your income will be taxed at no more than 28 percent under the AMT vs. a regular tax rate of up to 35 percent," Weltman says.

Another factor to keep in mind: If you have any concerns about getting paid, it's not worth it to delay invoicing just for the tax benefits. "The sooner you start collections," Weltman says, "the more likely you'll receive all that you're owed."

2. Buy office supplies before the end of the year. Assuming you have the space to store it, try to stock up on the paper, toner or other office supplies you project to use throughout the next year. "Order them now so that the cost is deductible now," Weltman says.

Weltman says an exception to this deduction is prepaid expenses for something that extends beyond the end of next year. For example, if you prepay a three-year subscription to a trade journal or renew a three-year membership to a trade association, that cost is deductible over three years, not just in the year you pay.

3. Invest in a qualified retirement plan. "If the current year is expected to be profitable and you don’t yet have a qualified retirement plan, sign the paperwork to establish one for your business before the end of the year," Weltman says. "You'll then have until the extended due date of your return to fund the plan."

Weltman suggests you talk to a brokerage firm, mutual fund or other financial institution about what you need to do to adopt the plan for the current year. Find more information about qualified retirement plans in IRS Publication 560.

4. Splurge on equipment. Want an iPad? Need more office computers? Tempted by the after Christmas sales? According to Weltman, if you buy the equipment and start to use it in your business before the end of the year, you can claim a full-write off. The write-off is available whether you finance the purchase in whole or in part. Here's what Weltman says you need to do to get this deduction:

  • Use the Section 179 ("expensing") deduction for pre-owned property. This write-off is allowed only if you are profitable. The dollar limit on purchases is $500,000.
  • Use 100 percent bonus depreciation for new property, whether or not you are profitable. The write-off of the entire cost of eligible property can create or increase a net operating loss, which can mean a refund of some or all of the taxes paid in the prior two years.

5. Settle up your accounts payable. "You may have bills piled up that are not due until next year -- if you pay them now, you can deduct the expenses for this year," says Weltman. If you don’t have the funds in your bank account at the moment, Weltman says you should consider putting the expenses on your business credit card if the vendor or other party allows it. Costs charged to a major credit card before the end of the year are deductible this year even though the credit card bill isn’t due until the following year.

Though you may be tight on time, Weltman says you shouldn't skip one more important step: "Contact your CPA or other tax advisor immediately to discuss whether these or other last-minute actions make sense for your tax situation," she says.

By Janean Chun for the HUffington Post

Published: July 13, 2015

Tech Company Converts Its Contractors Into Employees

Yet another Silicon Valley company is hiring its contractors as employees.

Shyp, which helps customers mail packages, said Wednesday it planned to reclassify hundreds of couriers as employees. The news follows a similar announcement made last month by grocery delivery startup Instacart.

Depending on how many hours they work, Shyp's couriers will now receive access to benefits such as healthcare. The company -- which operates in San Francisco, Los Angeles, Miami and New York -- also promised to pay for vehicle expenses, unemployment, Social Security and Medicare taxes.

“As a rapidly growing business, we want to ensure that each time a customer uses Shyp they have an incredible experience,” CEO Kevin Gibbon wrote in a blog post. “We want to provide our couriers with additional supervision, coaching, branded assets and training, which can only be done with employees, so a shift is needed.”

The move comes amid a heated debate over the role of contractors at startups. Ride-hailing services such as Uber and Lyft rely on armies of contracted drivers to make up their workforces.

Last month, the California Labor Commission ruled that an Uber driver qualified for back pay as an employee. Uber appealed, claiming the ruling threatened its entire business model.

Shannon Liss-Riordan, a Boston lawyer who filed pending suits against Uber and Lyft, filed similar complaints against Shyp and rivals Washio and Postmates earlier this week, according to the San Francisco Business Times.

"I cannot comment on it at this point in time aside from saying that we didn't receive it until after this morning's announcement," Johnny Brackett, a Shyp spokesman, told The Huffington Post in an email. "I can assure you that our decision to transition from 1099 to W2 had absolutely nothing to do with it."

Shyp no doubt watched the Uber case closely. Couriers already wore branded t-shirts, used certain brand phrases and were responsible for finding coworkers to cover their shifts when they were unable to work -- all of which may constitute inappropriate requirements for independent contractors, according to a report on BuzzFeed News.

Now, Shyp’s decision will likely add pressure to the entire startup industry to address the employment status of its contract workers.

By Alexander C. Kaufman for the Huffington Post

Published: July 9, 2015

Write Off Your Car

If you are self-employed, you likely use your personal car or truck for business as well as pleasure. If so, the business portion of your vehicle expense is deductible.

If you work for The Man and use your vehicle on the job and are not reimbursed for your mileage, you have a write off as well.

Did you know that you can write off mileage every time you run to the pharmacy to pick up a prescription or visit your eye doctor or embark other trip for medical purposes? And if you do volunteer work for a qualified nonprofit, your unreimbursed volunteer mileage may be deductible.

It gets better. If you work two jobs and drive between job #1 and job #2 (without going home first), you can deduct those miles. I have a client who saves about a grand a year in taxes because he writes off the mileage between his two jobs.

You’re thinking, “Yeah! This is great!” Sure, it’s great, but it’s not necessarily easy. Naturally, there are rules to follow, forms to complete, data to track. In fact, the IRS regulations state that you should basically attach a clipboard to your steering wheel and keep a mileage log. You need to track every deductible mile you drive. You must report the exact number of total miles you drive every year breaking out commuting mileage, which, by the way is not deductible, personal miles driven, and business miles; like you’re really going to jump on that one. Even if you make it a New Year’s resolution, it’s hard work to keep a complete and accurate mileage log.

I’ve been representing taxpayers in audits for more than 20 years and here’s the deal when it comes to that mileage log: The auditor asks for it and I say “Come on, you know nobody, absolutely nobody, keeps one.” (Well I did have a client once who kept one but was he ever audited? No!) So the auditor will argue for a bit saying he can disallow the deduction because no contemporaneous records were kept. I carry on about how it’s unreasonable to expect folks to really do this, and finally the auditor consents to a reconstruction.

So if you have an appointment book (always retain your appointment books in your tax file) you can go through it and using Mapquest if necessary, compile the numbers the IRS is looking for.

You should keep some basic records that are easy to manage:

  1. On January 1 log in your beginning mileage from your odometer into your appointment book.  If you use a PDA, record the mileage on a sheet of paper and place it in your current year tax file.
  2. Put a note on your December 31 calendar to list your ending odometer reading.
    1. Note: If you’re going through an audit and don’t have odometer readings, look for repair receipts near the beginning and end of the year. The odometer reading will be listed there and it’s possible to extrapolate the numbers.
  3. By subtracting your beginning from your ending odometer reading you will have your total mileage figure for the year. The IRS asks for this number on your tax return.
  4. Mark as many business destinations as you can throughout the year in your appointment book. At year end do a rough calculation to determine what your deductible business usage is.
  5. If your business usage is greater than 50% you may qualify to deduct that percentage of your total actual expenses including: gas and oil, tires, repairs, maintenance (car washes, etc.), insurance, loan interest, vehicle registration, and depreciation. Or you may elect to take the standard mileage rate times the total business miles driven. Your tax pro can help you decide which method is best for your particular situation. If you use your vehicle less than 50% for business, you can only take the standard mileage rate.

Due to the advent of PDAs, appointment books are becoming obsolete. If you use an electronic calendar and printout capability is not available, than you will want to log reminders to mark the odometer readings and store that information in your tax files. Quarterly, you should manually track business versus personal usage to establish and substantiate your percent of business usage.

It’s unfortunate that we have to spend so much time keeping these sorts of records, but you will be happy you did if the IRS knocks at your door.

By Bonnie Lee for the Taxpertise Blog

Published: July 7, 2015

All About Medical Expenses

Lots of folks have misconceptions about what can be deducted - what is and what isn’t allowable when it comes to medical expenses.

First of all, one must be able to itemize deductions in order to take the medical expense deduction. The IRS grants us an option of the standard deduction – generally taken by renters and lower income individuals or itemized deductions – generally available to homeowners and higher income individuals.  Either the standard deduction or the total of itemized deductions (reported on Schedule A) is subtracted from your income. Income tax liability is calculated on the remainder. So the more itemized deductions you can list, the more you will save in taxes.

Know this; you generally have to have an awful lot of medical expenses in order to take these expenses as an itemized deduction. You don’t just list your medical then deduct it. After totaling your medical expenses, the IRS requires that you subtract 10% (7.5% if you are 65 or older) of your adjusted gross income from the total of your medical expenses. You then write off the remainder.  So if you made $100,000 last year, you can write off the amount above $10,000 ($7,500 if 65 or older) in medical expenses. If you’re healthy, you might not have enough medical bills to enjoy the write-off. But don’t quit reading yet. You can deduct more than just doctor visits.

A complete list of deductible medical expenses is available in Publication 502. Most people track medical insurance, doctor visits, prescriptions, eye and dental care. You may be surprised to find the following are deductible medical expenses:

  1.  Capital improvements to your home or vehicle to accommodate a disability
  2. Transportation and lodging in another city if the primary purpose is medical care
  3. Medicare premiums deducted from your Social Security check
  4. Chiropractor, acupuncture, therapeutic massage, psychologist, psychiatrist, marriage counselor, naturopath
  5. Alcohol and drug addiction for inpatient treatment at a therapeutic center, including meals and lodging
  6. Dentures, birth control pills, and pregnancy test kits, fertility enhancement
  7. Cost of buying, training, and maintaining a guide dog or other service animal when required to assist you or your dependent with physical disabilities
  8. Unused sick leave to pay for your health insurance premiums
  9. Cost of medical conferences and transportation to same if the topic concerns the chronic illness of yourself, your spouse or your dependent
  10. Adapters to television sets and telephones for the hearing-impaired.
  11. Braille instruction, Braille books and magazines
  12. Bandages
  13. Health, dental and eye insurance, long term care insurance, HMO fees, disability insurance withheld from your paycheck
  14. Lead-based paint removal in your home
  15. Cost of weight loss clinic if prescribed by a doctor for treatment of obesity or hypertension
  16. Cost of medical care, lodging and meals in a nursing home if there for medical reasons
  17. Medical mileage – trips to see practitioners, pharmacy, etc
  18. Cosmetic surgery for breast reconstruction after a mastectomy for cancer or to correct a birth defect or other condition that interferes with one’s health.

Generally cosmetic surgery is not deductible.  However, a stripper won a court case several years ago and was allowed a deduction for breast enhancement. However, it was not allowed as a medical expense. Instead, she was able to write it off as an “ordinary and necessary” business expense.

Also not deductible are vitamins and supplements, gym membership, dance lessons and swimming lessons even if recommended by your physician, prescriptions for controlled substances (marijuana, laetrile, etc. that violate federal law) or prescription medicines from foreign countries, hair transplants and teeth whitening.

TIP: stack your medical expenses into one year. So for example, if you had a surgery this year and also need a root canal and new glasses, don’t wait until January to have that work done. Do it now so you can maximize the tax benefit. You cannot pay for them now and take the deduction unless you actually undergo the treatment or procedure.

By Bonnie Lee for Taxpertise

Published: July 1, 2015

Supreme Court Strikes Down Maryland Law That Double-Taxes Income

The Supreme Court struck down as unconstitutional a Maryland tax that has the effect of double-taxing income residents earn in other states.

Maryland officials say the 5-4 ruling means the loss of hundreds of millions of dollars in tax revenues. It also could affect similar tax laws in nearly 5,000 local jurisdictions in other states, including New York, Indiana, Pennsylvania and Ohio.

The justices agreed with a lower court that the tax is invalid because it discourages Maryland residents from earning money outside the state.

The unusual split wasn't along ideological lines. Writing for the court, Justice Samuel Alito said the tax "is inherently discriminatory" under the Constitution's Commerce Clause. The court has interpreted that provision to ban states from passing laws that burden interstate commerce.

Alito was joined by Chief Justice John Roberts and Justices Anthony Kennedy, Stephen Breyer and Sonia Sotomayor.

Maryland allowed its residents to deduct income taxes paid to other states from their Maryland state tax, but it did not apply that deduction to a local "piggy back" tax collected for counties and some city governments.

Maryland officials argued that the state has authority to tax all the income its residents earn to pay for local services like public schools.

The case arose after Maryland residents Brian and Karen Wynne challenged their tax bill. They had been blocked from deducting $84,550 that they had paid in income taxes to 39 other states. Brian Wynne's out-of-state income resulted from his ownership stake in a health care company that operates nationwide.

The Wynnes argued that Maryland was unfairly subjecting them to double taxation and taxing earnings that have no connection to the state.

Maryland's highest court ruled in 2013 that the tax violates the Constitution's Commerce Clause.

Maryland officials have said an adverse ruling could cost local governments in the state $45 million to $50 million annually and warned that Maryland might have to refund up to $120 million in taxes.

In dissent, Justice Ruth Bader Ginsburg said nothing in the Constitution requires a state to avoid taxing its residents just because another state has a similar tax regime targeting the same income. She was joined in dissent by Justices Antonin Scalia and Elena Kagan.

Scalia also wrote separately to note his longtime opposition to "a judge-invented rule under which judges may set aside state laws that they think impose too much of a burden on interstate commerce." Clarence Thomas wrote separately to say the Commerce Clause cannot be used to strike down a state law.

From the Associated Press

Published: June 30, 2015

10 States Where Taxes Are Going Up

Some states, still facing tight budgets after years of recession and slow recovery, are turning to tax increases to make up for the shortfalls. In some states, you'll soon pay more for Gucci bags and other luxury goods. In others, soft drinks, cigarettes, gasoline and live entertainment will cost more.

Pay attention even if your state isn't on this list. Some of the taxes are aimed at tourists and motorists passing through the states. And many other states may follow suit with similar tax hikes if these states' efforts prove successful at raising revenues without upsetting voters.

The tax increases may come as a surprise, since there are more pro-business, antitax Republicans in state legislatures than at any point since 1920. Here's a look at some of the tax increases kicking in this summer:

Connecticut

Buying a pair of Jimmy Choo shoes or even a T-shirt from the Gap will cost a little more in the Constitution State under a budget deal that is expected to yield nearly $1.7 billion in new revenue.

Starting July 1, yachts and other luxury items will be taxed at 7.75%, up from 7%, as part of a state budget plan for the next two years. And clothing and shoes under $50 will no longer be exempt from the state's 6.35% sales tax.

The state tax on cigarettes also will climb -- from $3.40 to $3.65 per pack on October 1, 2015, and to $3.90 per pack on July 1, 2016.Connecticut's wealthiest citizens and businesses will feel the biggest pinch. A projected $300 million will come from the addition of two income tax brackets above the state's current highest rate of 6.7%. The new top rate: 6.9%.

Georgia

Hotel guests will have to pay $5 more each night, thanks to a tax package that could yield up to $1 billion to fix the Peach State's backlog of road and bridge repairs.

Drivers and owners of electric cars will also have to pay more. Motorists will pay an additional 6 cents for each gallon of gas starting July 1, 2016, under a new law that moves the state from a series of sales and excise taxes on gasoline to a single excise tax. Owners of electric vehicles face new registration fees ($200 a year for noncommercial electric vehicles, $300 for commercial). Meanwhile, heavy trucks will have to pay an extra "highway impact fee" of $50 to $100.

Counties also were given the green light to ask voters to approve a sales tax of up to 1% to fund local transportation projects.

Kansas

Kansans will pay more for nearly everything they buy in the Sunflower State. Lawmakers raised the state's sales tax to 6.5% to close a $400-million budget gap. The hike came three years after Gov. Sam Brownback, a Republican, backed the largest tax cut in the state's history.

The new rate, up from 6.15%, is effective July 1. Coupled with local sales taxes, Kansas now leapfrogs California to have the eighth-highest sales tax in the United States, according to the Tax Foundation.

Smokers will pay more, too. The per-pack tax on cigarettes goes to $1.29, from 79 cents, effective July 1. And beginning July 1, 2016, people who use e-cigarettes will be taxed 20 cents per milliliter of consumable material.

Nevada

What happens in Vegas may stay in Vegas, but so will more of your money, thanks to a historic tax package that is expected to raise $1.5 billion over the next two years. Everything from hailing a cab, smoking and attending events will cost more in the Silver State.

Taxi passengers, including Uber users, will see a 3% excise tax on all fares, and the cigarette tax will go up a buck, to $1.80 per pack. That's still a far cry from the nation's highest tobacco tax, $4.35 per pack in New York state.Most venues with live entertainment will have to charge a 9% ticket tax, instead of a sliding scale of 5% to 10%. The tax applies to fees for escort services, but not to rates charged by prostitutes at the state's legal brothels.

Finally, a 0.35% sales tax boost that was due to expire became permanent. Nevada relies heavily on the sales tax and tourism because it doesn't have an income tax. Most of the increases start July 1, although the live entertainment levy kicks in on October 1.

South Dakota

Motorists will have to pay more, but in return they'll be able to drive faster on two major highways.

State lawmakers passed sweeping legislation earlier this year that raised the gas tax by 6 cents per gallon on April 1, to 28 cents. It also added 1 percentage point to the excise tax on vehicle purchases, making it 4%. The legislation allows counties and townships to raise property taxes for road and bridge work, if voters agree. The entire funding package is expected to raise $85 million per year for state and local infrastructure work.

In exchange, drivers can legally travel 80 miles per hour on Interstates 90 and 29, 5 mph faster than the old maximum speed.

Utah

Motorists will pay 5 cents more per gallon at the pump, starting Jan. 1, 2016. The revenue will help fund transportation projects and maintenance. In addition, counties can add a sales tax increase of a quarter-cent per dollar if voters give an OK. Before the hike, the Beehive State faced an $11-billion funding gap for critical road projects through 2040.

Meanwhile, homeowners will see a boost of $50 on property tax bills in November. The $75 million in new revenue will be used for education programs.

Vermont

Soft drinks and cigarettes will cost more, while wealthy taxpayers will be able to take fewer deductions. The changes were aimed at closing a budget gap of nearly $100 million.

For the first time, Vermont's 6% sales tax will hit soft drinks. The tax applies to nonalcoholic beverages that contain natural or artificial sweeteners, but not to those containing milk or milk substitutes, or to drinks that include at least 50% vegetable juice or fruit juice by volume. Also, smokers will pay an extra 33 cents in state taxes for cigarettes, raising the rate to $3.08 a pack by next year.

Millionaires in Vermont could pay about $5,000 more in taxes. The plan limits the amount filers can deduct from income taxes to $15,000 for an individual and $31,500 for a household. Vermonters also won't be able to deduct from this year's tax liability what they paid in state and local taxes the previous year.

Idaho, Iowa, Nebraska

Gas tax increases are also coming in Idaho (7 cents a gallon), Iowa (10 cents per gallon) and Nebraska (a 6-cent hike spread over four years).

Other states are likely to boost gas taxes in the coming years as Congress struggles to pass a long-term surface transportation bill to fund road and bridge repairs, and as the cost of deferred maintenance soars.

By Pamela M. Prah for Kiplinger

Published: June 29, 2015

Uber Case Spotlights a Challenge: When Is a Worker an Employee?

Regulators from California to Washington are trying to determine when a worker is an employee in an economy that increasingly relies on contractors and temporary hires.

The debate holds big financial consequences for companies including start-ups like Uber Technologies Inc., the San Francisco-based developer of ride-sharing software for drivers and passengers, as well as traditional businesses that perform construction, trucking and cleaning services.

Companies using contractors don’t have to pay a minimum wage, reimburse expenses or contribute to Social Security. Employees, but not contractors, can form labor unions.

“This is a stealth issue; technical on the surface, but with tremendous underlying importance,” said Gary Chaison, a professor of industrial relations at Clark University in Worcester, Massachusetts. “This is about classifying workers as full participants in the workforce and capable of being unionized.”

Last week, California’s labor commissioner ruled an Uber driver was an employee, ordering the company to reimburse her expenses. Federal labor attorneys in Boston and Chicago are reviewing a complaint brought by a driver for Uber competitor Lyft Inc. who is trying to organize a union. The U.S. Labor Department is preparing new guidance on the subject, and is spending more time investigating companies that may be misclassifying workers to avoid having to pay minimum wage or meet federal workplace standards.

On Demand

The developing “on demand” economy, which links workers - - drivers and cleaners, for example -- directly with customers, is creating new challenges for regulators. But classification issues are broader and, analysts say, increasing as the nature of work shifts away from permanent jobs that last a career.

“It’s going to impact not just independent contractors and sharing economy stuff, but a whole range of employment relationships,” said Alexander Passantino, a partner at Seyfarth Shaw in Washington. “There are some businesses whose whole business model may be called into question.”

If upheld in court, the California labor commission ruling against Uber could lead more drivers to seek reimbursement for gasoline and other expenses, a direct challenge to its business model.

Uber spokeswoman Jessica Santillo said the decision contradicts rulings in five other states that concluded that drivers were independent contractors.

"The majority of them can and do choose to earn their living from multiple sources, including other ride sharing companies,'' Santillo said in an e-mail.

Contingent Workers

In addition, Uber and Lyft face federal lawsuits that contend their drivers should have legal protections afforded employees.

The ranks of contingent workers, including the self-employed, temporary hires and independent contractors, swelled to 40 percent of the workforce in 2010, from 31 percent in 2005, the Government Accountability Office, Congress’s investigative arm, said in an April report. Most of the growth came in part-time workers, possibly due to the recession, the report said.

The National Employment Law Project, a New York-based group that advocates for workers, said in a report last year that the 2.8 million temporary workers in the U.S. was a record.

Labor Investigations

David Weil, who heads the U.S. Labor Department’s wage and hour division, said he’s concerned that the shift is costing workers wages and workplace protections provided to employees.

The agency has stepped up investigations into back pay violations by more than 20 percent since 2009, and has signed cooperation agreements with 21 states as part of a campaign against misclassification.

Weil said he plans to issue a new “administrative interpretation” to provide further guidance to help companies judge who’s an independent contractor and who’s an employee.

“Employment relationships in more and more industries have been broken apart,” said Weil, who as an economics professor at Boston University wrote an influential book on the subject called the “Fissured Workplace.”

In a fissured workplace, workers at a hotel may not be directly employed by the brand name on the door but a subcontractor hired by a staffing agency. Companies can reduce costs as much as 30 percent by using contractors instead of employees, Weil said.

Reduce Costs

“As each business takes its cut, things like pensions and other benefits fall out,” said Rebecca Smith, deputy director of the employment law project.

The employer-versus-independent contractor question also is arising in labor disputes.

Attorneys with the National Labor Relations Board’s regional offices in Chicago and Boston are looking into a complaint by a driver at Lyft who is trying to organize a union at the company.

As a first step, board investigators will have to determine if the driver is an employee and therefore eligible to organize under labor law.

Shannon Liss-Riordan, an partner at Lichten & Liss-Riordan, P.C. in Boston, is representing the Lyft worker. She also represents Uber drivers in California. Liss-Riordan didn’t return a call for comment.

‘Not Employees’

“Lyft drivers are not employees,” said Chelsea Wilson, a Lyft spokeswoman, in an e-mailed statement. “They use Lyft, and other on-demand services, as a flexible and reliable way to make ends meet without having to be stuck in a schedule that doesn’t work for them. We hear from drivers that this flexibility is one of the main reasons they choose Lyft.”

The NLRB also is reconsidering its definition of an employer. The five-member panel, which investigates worker claims and adjudicates labor disputes, soon may rule on a proposal from its general counsel to rewrite its “joint employer” standard, which could change the responsibility some businesses have over the working conditions and benefits of the contractors and temporary staff.

Business group are challenging the shift, arguing a new classification would raise costs and slow expansion in a growing segment of the economy.

“Upending the current, well-established, joint employer standard would cause uncertainty and disruption for many small business owners, force some small businesses to close and deter aspiring entrepreneurs from opening businesses and creating new jobs,” said Matthew Haller, a spokesman for the International Franchise Association, which opposes the proposed revision to the NLRB’s joint employer standard.

The issues over classification are “much more visible, much more complicated and much more significant in many ways,” due to the shifting nature of the workforce, Wilma Liebman, a former chairwoman of the National Labor Relations Board, said in an interview.

By Jim Snyder for Bloomberg Business

Published: June 24, 2015

Should you and your spouse file taxes separately?

If you are married, conventional wisdom says you should file a joint Form 1040 with your spouse. However, there are exceptions to the conventional wisdom, and you should consider them when preparing your 2014 return.

Here’s what you need to know:

Married at year-end equals married all year

Your marital status for federal income tax purposes generally depends on whether you were married as of Dec. 31 of the year in question. For example, say you got married near the end of last year. As far as the IRS is concerned, you were married for all of 2014. So your tax filing options for last year are limited to: (1) filing jointly with your spouse by combining your income and deductions on one return for the entire year or (2) using married filing separate (MFS) status, which requires you and your spouse to file separate returns that include your respective income and deduction items.

Why not file jointly?

Filing jointly will reduce the combined tax hit on you and your spouse, right? Not necessarily. In many cases, the biggest reason to file jointly is simply because it eliminates the need to file two separate returns. You may not save a dime in taxes.

That said, filing jointly usually does lower your tax bill when one spouse earns a lot more than the other. Reason: the joint-filer tax brackets are exactly twice as wide as the MFS brackets. So when one spouse earns quite a bit and the other not so much, filing jointly will usually cut your tax bill because more of the higher-earning spouse’s income gets taxed at lower rates. In this situation, the conventional wisdom is correct, and filing a joint return is usually the tax-smart choice. Still, you should not reflexively reject the MFS option. It can save taxes in certain circumstances that could apply to you. So please keep reading.

When and how to file separately

You should always check out the potential advantage of using MFS status whenever: (1) you and your spouse both have taxable income and (2) at least one of you (preferably the person with the lower income) has significant itemized deductions that are limited by adjusted gross income (AGI). AGI is the sum of all your taxable income items (salary, capital gains, dividends, and so forth) reduced by certain write-offs claimed on Page 1 of Form 1040 (such as deductible IRA and self-employed retirement plan contributions, alimony paid, and moving expenses). When you use MFS status, you separately calculate your AGI and your spouse’s AGI, and this can work to your advantage.

The three most common itemized write-offs that are limited by AGI are:

  • Medical expenses (deductible only to the extent they exceed 10% of AGI or 7.5% of AGI if you or your spouse was age 65 or older as of De. 31, 2014).
  • Personal casualty losses (deductible only to the extent they exceed 10% of AGI).
  • Miscellaneous itemized write-offs such as unreimbursed employee business expenses, fees for tax advice and preparation, and investment expenses (deductible only to the extent they exceed 2% of AGI).

 When you have these types of expenses, filing separately can lead to tax-saving results, because the AGI numbers on your separate returns will be lower. Therefore, your allowable deductions for these types of expenses may be considerably higher if you file separately.

Here’s the rub: You and your spouse cannot just split your income and deductions up any way you want in order to maximize the MFS tax savings. Instead, state law determines how you must divide up your income and deductions.

The single most important factor is whether you live in one of the nine community property states (Arizona, California, Idaho, Louisiana, New Mexico, Nevada, Texas, Washington, and Wisconsin). If you do, you may be unable to gain much or any benefit from filing separately because you will probably have to split most or all of your income and deductions 50/50. (See the sidebar below.)

If you live in one of the 41 non-community property states or the District of Columbia, the general rule is that you and your spouse can each report the income you earn and the deductible expenses you pay on separate returns. For instance, the tax savings in the preceding example can be collected as long as the husband paid all the medical bills out of his own account and split the other deductible expenses 50/50 with his wife (by paying them out of a joint account funded by both spouses, for example).

Beware of the dark side of filing separately

It is important to understand that using MFS status can disqualify you from a number of potentially valuable tax breaks. For instance, the following goodies are off limits.

  • The child and dependent care tax credit.
  • The deduction for college tuition expenses.
  • The American Opportunity and Lifetime Learning tax credits for higher education expenses.
  • The college loan interest write-off.
  • The deduction for up to $3,000 of net capital losses (the deduction is limited to only $1,500 on a separate return).
  • The right to make a Roth IRA contribution if your separate AGI exceeds $10,000.

By Bill Bischoff for MarketWatch

Published: June 23, 2015

Your Tax Bill Isn't As Bad As You Think!

Tax Day is always a grim reminder of how much of the money you earn you don’t get to keep. But taxes are the price of living in a civilized society (ahem) and here in the United States, the tax burden isn’t all that bad, in general.

The typical American pays 31.5% of his or her income in taxes, including federal, state and local income taxes, plus the amount taken out to fund Social Security and Medicare. (That figure also includes the employer contribution to Social Security and Medicare, which might otherwise be added to your paycheck as income.) That’s a big chunk of money, but it’s lower than in most other advanced countries.

The average tax burden in developed countries is 36%, according to the Organization for Economic Cooperation and Development. Twenty-four advanced countries have a higher tax burden than the United States, while only 9 have lower taxes. Two countries similar to the U.S. have very similar tax burdens: Canada (also 31.5%) and the U.K. (31.1%).

Belgium, Austria and Germany have the highest tax burden, on account of extensive social assistance programs and nationalized healthcare (which virtually all developed countries have, except for the U.S.). At the bottom of the list are Chile (7%), New Zealand (17.2%) and Mexico (19.5%), countries that don’t fund big militaries and have low social security taxes

For all the angst over taxes in America, the tax burden on most people has declined during the last 35 years. President Obama raised some taxes beginning in 2013, but that mostly affected high earners. For many middle-income families, the effective federal tax rate -- after deductions and other tax breaks -- is the lowest it has been in decades.

By Rick Newman for Yahoo Finance

Published: June 19, 2015

Tax Breaks Remain In Limbo

It sounds like a cruel prank: Congress creates juicy tax breaks but makes them only temporary. Then, after the benefits expire, lawmakers procrastinate, leaving taxpayers wondering for many months whether those breaks will be extended—and whether they might be altered.

Some prank. Actually, that is the sad reality, thanks to continued Washington paralysis, especially on tax issues. This bizarre situation has sparked reader questions about the fate of “extenders” legislation, Washington shorthand for legislation to extend the life of numerous tax laws that died at the end of last year.

Here’s a look at three tax breaks that may or may not be revived for 2015 and what it all means for taxpayers.

Among the expired provisions that have sparked reader interest is one that encouraged many taxpayers to donate directly to charities from their individual retirement accounts. Charitable organizations loved this provision. They said it helped bring in large amounts of donations that might not otherwise have been made.

Here’s how it worked for the 2014 tax year: Taxpayers who were 70½ or older typically could transfer as much as $100,000 directly from an IRA to a qualified charity without having to include any of that money as income. Done properly, such transfers, known as qualified charitable distributions, counted toward the taxpayer’s minimum required IRA distribution for the year.

Bob Farney, a reader from Evansville, Ind., writes to ask whether this now-deceased law has been “re-approved” for 2015. If not, he asks, “how can a person plan for doing this? Having to possibly wait until December for Congress to re-approve (as happened last year for the 2014 tax year) is pretty risky.”

Answer: No, the law hasn’t been resurrected, says Greg Rosica, a tax partner at Ernst & Young and a contributing author to the EY Tax Guide. But most tax experts I have spoken to predict Congress probably will approve an extenders bill later this year that will include this provision, among others.

“Since these provisions are popular and impact many taxpayers, there is interest in continuing these provisions,” Mr. Rosica says. “However, there is a revenue impact to the government that needs to be considered.”

“Based on past practice, extending almost everything for another year would be a good bet, but it’s not guaranteed,” says Len Burman, Pozen Director of the Tax Policy Center, a joint venture of the Urban Institute and the Brookings Institution.

To be on the safe side, “taxpayers should probably put off taking their required minimum distribution for the year as long as possible to see what action Congress might take,” says Mark Luscombe, principal analyst at Wolters Kluwer Tax & Accounting U.S. in Riverwoods, Ill.

For more details on how this law worked, including some important twists, see go to irs.gov.

Sales-tax deduction

Under another expired tax provision, taxpayers who filed Form 1040 and itemized their deductions on Schedule A had a choice. They could deduct either their state and local income taxes or their state and local sales taxes, but not both.

The option to deduct sales taxes has been a big hit in states that don’t have a state income tax, such as Florida, Texas and Washington. But many people in other states chose that option, too. The IRS has estimated, based on preliminary data, that nearly 9.8 million federal income-tax returns claimed sales-tax deductions, totaling more than $16.2 billion, for the 2013 tax year.

Here’s my take: While nothing is sure these days, especially when it comes to taxes, this provision has an exceptionally good chance of being extended, at least through 2015. It has been so popular and affects so many voters that Congress will feel intense pressure to restore it.

Under the expired provision, taxpayers had a choice of how to calculate their sales-tax deduction. If they kept receipts, they could deduct the total amount of general sales taxes they paid during the year.

If they didn’t save those receipts or didn’t want to bother with the calculations, they could fill out an IRS work sheet and use the optional general sales-tax tables in the instructions for Schedule A. (They were allowed to add sales taxes on certain big-ticket items, such as a motor vehicle, aircraft or boat.) Or they could use the IRS’s sales-tax-deduction calculator.

This can be surprisingly tricky, especially for people who moved during the year. See the IRS website for details.

My advice: If you think you might benefit from this provision for 2015, save your sales-tax receipts, even though that’s a pain and even though it’s still not definite that this provision will be available for 2015. Many people probably will find they will get higher deductions that way than by relying on the IRS tables.

A reader asked whether this provision existed for the 2013 tax year. Answer: Yes. If you didn’t claim the sales-tax deduction for 2013 and want to do so, you can file an amended return using Form 1040X.

Educator-expense deduction

Millions of elementary- and secondary-school educators were eligible to deduct as much as $250 of their out-of-pocket expenses for classroom supplies, such as books and computer equipment, including related software and services, under a provision that has expired.

A friend asked whether this applied only to teachers. No. To qualify, you had to be a teacher, instructor, counselor, principal or aide who worked at least 900 hours in a school year in a school that provides elementary or secondary education, kindergarten through grade 12, based on state law, the IRS said.

This was an especially attractive break because educators who qualified could claim it whether or not they itemized their deductions. More than 3.9 million returns claimed it for the 2013 tax year, according to IRS estimates.

By Tom Herman for the Wall Street Journal

Published: June 18, 2015

The Triple Tax Benefit of Health Savings Accounts

Americans are generally aware of tax-advantaged investment vehicles such as 401(k) plans, individual retirement accounts and 529 college savings plans. But one instrument, the health savings account, isn't as well known, although it offers three separate tax benefits.

An HSA allows account owners to pay for current health care expenses and save for those in the future. Its first advantage is that contributions are tax-deductible, or if made through a payroll deduction, they are pretax. Second, the interest earned is tax-free. Third, account owners may make tax-free withdrawals for qualified medical expenses.

Qualified expenses include most services provided by licensed health providers, as well as diagnostic devices and prescriptions. They even include acupuncture and substance-abuse treatment.

Unlike health care flexible spending accounts, which have a maximum year-to-year carry-over of $500, HSAs have no limit on carry-overs or when the funds may be used. Even if the account is opened through an employer-sponsored program, all money in an HSA belongs to the account owner. Accounts are held with a trustee or custodian, which may be a bank, credit union, insurance company or brokerage firm.

Although the tax advantages are appealing, advisors say investors shouldn't overlook HSAs' role as vehicles to save for medical expenses in retirement, when health care expenses generally rise.

"When they are discussed, they're thought of as a tax shelter, which is true," says Shelby George, senior vice president of advisor services at Manning & Napier, a Fairport, New York, investment manager.

"There's no other vehicle under the tax code that has the kind of preferential treatment that health savings accounts have. But it's a way for those who are not focused on tax-shelter opportunities to put the money aside as well," she adds.

HSAs were established under the Medicare Modernization Act of 2003 and are available to people covered by high-deductible health plans. According to the IRS, those are plans "with an annual deductible that is not less than $1,300 for self-only coverage or $2,600 for family coverage, and the annual out-of-pocket expenses (deductibles, co-payments and other amounts, but not premiums) do not exceed $6,450 for self-only coverage or $12,900 for family coverage."

As employers try to shift health care costs away from the company and onto workers, high-deductible plans are becoming more common. That means more Americans are becoming eligible for HSAs. It also means financial advisors see more opportunities to educate clients about the benefits of HSAs.

Ann Reilley Gugle is co-owner and principal at Alpha Financial Advisors in Charlotte, North Carolina. For people who are eligible, an HSA is a good choice, she says.

"We typically advise clients to take advantage of enrolling in HSA-eligible, high-deductible health plans if their employer offers them and they don't typically have high out-of-pocket health care expenses. We recommend contributing the maximum amount to the HSA annually, as this vehicle allows you to save tax-free for future health care costs," she says.

Gugle adds that there is a strategy to maximize the account's benefits. She suggests investing the money for long-term appreciation, letting it grow tax-free, rather than spending it on current health care needs.

"In this sense, the HSA resembles a Roth IRA, in that it grows tax-free, but you also get the benefit of a current deduction. We advise clients to keep growing the HSA as long as possible as a hedge against the risk of rising health care costs," she says.

HSAs have contribution limits. For 2015, an individual may contribute up to $3,350; for a family, that amount is $6,650. People over 55 may add another $1,000 per year as a catch-up contribution.

Rising health care expenses. The investment industry often appeals to retirement savers with images of healthy, attractive couples walking on the beach. But it leaves out an unpleasant reality of aging: increased medical expenses.

HealthView Services, a Danvers, Massachusetts, maker of health care cost-projection software, studies retiree medical expenses. In a 2015 report, it found that medical expenses for a 65-year-old couple retiring today rose by 6.5 percent over a year ago.

Rapidly rising health care expenses are a reason to designate funds specifically for medical costs, says Ryan Monette, a financial advisor at Savant Capital Management in Rockford, Illinois.

"Because the HSA grows tax-deferred and distributions for qualified medical expenses are tax-free, I recommend funding the HSA even at the expense of lowering retirement plan contributions for those near retirement age," he says. "We know that medical expenses will play a role at some point, so why not take advantage of the deduction from current contributions and the tax-free nature from the distributions? In a way, it is saving for retirement, but the funds are earmarked towards qualified medical expenses."

To quickly fund an HSA, Monette suggests a transfer from an IRA. An individual may make a tax-free rollover from an IRA to an HSA once in his or her lifetime. The rollover is limited to the maximum allowable contribution for the year, minus any amount already contributed.

Before age 65, account owners face a 20 percent penalty for withdrawals for nonqualified medical expenses. These include elective cosmetic surgery, hair transplants, teeth whitening and health club memberships, among other things.

Starting at age 65, account owners may take penalty-free distributions for any reason. However, to be tax-free, withdrawals must be for qualified medical expenses.

Although HSAs may seem a little more complex than other retirement-savings vehicles, advisors say some research can pay off.

"An HSA is really an important financial planning tool," George says. "Individuals could benefit from taking some time to understand how these plans and savings accounts work."

By Kate Stalter for US News 

Published: June 11, 2015

4 Costly Misconceptions About Student Loans

Student loans may be designed to help your child become smarter, but after trying to find some, you may end up feeling pretty stupid.

It doesn't help that by the time you get to looking at student lending options, you're probably mentally exhausted from helping your college-bound kid apply to schools – and from filling out the Free Application for Federal Student Aid form, aka FAFSA, which can be completed annually by students looking for financial aid. But even if you didn't have to go through all of that, student loans are simply complicated because there are so many options.

Taking out loans also equals taking on debt, which is why you don't want to make big mistakes. In a recent report from the Institute for College Access & Success, 69 percent of 2012 graduates had an average $28,400 in student loan debt. The report, however, noted that because most for-profit colleges don't report what their students owe, that number may be higher.

Charles Wareham, CEO of Valark Financial Services in Hartford, Connecticut, says he’s seen many clients' kids graduating with $60,000 or more in student loans.

As far as monthly payments go, Wareham says, "That's at the level of having a condo mortgage without the condo."

What you don't want to do is allow your misconceptions about student loans to exacerbate your kid's student loan problems. And there are so many misconceptions swirling about, including:

False belief No. 1: No need for student loans. High grades will pay the way. It's a nice fantasy, thinking your kid's grades are going to yield a full ride. But in most cases, it’s just a pipe dream.

While full-ride scholarships do exist, they’re more rare than many parents and students realize, says Maggie Mittuch, associate vice president for student financial services at University of Puget Sound, a private liberal arts institution in Tacoma, Washington.

"The full ride or paying full-freight thing isn't the standard experience, not on my campus, or most universities, from what I've seen," Mittuch says.

So unless you've saved up everything for college, expect to take out some student loans. "With the high cost of college, it’s almost impossible for the everyday family to pay for college without debt," Wareham says.

False belief No. 2: You have to lock in student loans ASAP. Sure, it's always nice to get something checked off your to-do list, but if you're a natural-born procrastinator, that's OK in this instance.

"One of the biggest misconceptions about loans is around timing. Many families think they must make a decision about accepting a student loan very early in the process, and [that] once that decision is made, they can't change their minds," says Jill Nutt, director of financial aid at Hope College in Holland, Michigan.

Nutt works with many families who aren't sure how much money they'll need – if they even need a loan at all. "No problem," Nutt says. "Federal loans can be certified and originated well into the school year, assuming the student continues to meet all eligibility criteria."

False belief No. 3: All student loans are created equal. As your eyes glaze over while reading the fine print, you may be tempted to assume there aren't major differences between the loans, especially if you're looking at a loan you know you can get. But student loans are not created equally, and some private loans are predatory, warns Adam Minsky, a Boston attorney who devotes his entire law practice to assisting student loan borrowers.

"You can basically think of student loans as two broad groups," Minsky says. "Loans that are guaranteed directly by the federal government, and then everything else."

The “everything else” describes private loans, offered by places including banks, credit unions, state agencies and the universities and colleges themselves. "As a general rule, private loans are much more restrictive, and you don't have much wiggle room in how you make your payments. They also usually have a higher interest rate," Minsky says.

And it is dangerous not to make distinctions between federal and private loans, Minsky says, citing a former client who came into his office with numerous loans, including one for $30,000 from a private lender.

"The borrower was on some sort of payment plan – a very long plan that lasted between 20 and 30 years, and the interest rate was very high, over 10 percent, and the loan had origination fees,” Minsky explains. “Since it was a private loan, interest was accruing the moment the borrower was in school." So by the time the loan would be paid off, the borrower will have paid $100,000 in interest.

"It's mind-blowing to think that to get an education, you're going to spend $100,000 [extra] for a $30,000 loan," says Minsky, who was able to help the borrower reduce other student loans, making it easier to pay off the $30,000 private loan faster, which was loaded with restrictive contractual language locking the borrower into paying it all off.

False belief No. 4: You think your student loans are … [insert your own misconception]. Plenty of borrowers, especially students, don't understand the terms of their loans, and they end up creating their own realities. For instance, Mittuch says a lot of the student borrowers she works with either think "the loan payments will be crippling, or that paying them off won't be difficult."

She adds that her office works hard to educate the students in financial literacy, but you should help your college student at least understand how much the payments will be and when the monthly payments will begin.

Many parents evidently don't do that. Brian Quisenberry, director of financial planning at Birmingham-Southern College in Birmingham, Alabama, says he meets borrowers who don't even realize they will need to make payments after college.

"Some students seem to forget that they took out the loans," he says.

Of course, to some extent, this is understandable. You live a lot of life during four or more years of college. Between tightly scheduled classes, late-night studying, making new friends, dating, drinking, getting a hangover, having midnight pizza fests, packing on the freshman 15, working a job while going to college, pledging to a fraternity or sorority, sleeping – whatever your kids do in college, they’ll do a lot of it. By the time they leave college, those high school years, when you were all fretting about how to pay for everything, feel a lifetime away.

Plus, if your kid forgets, it may be your fault.

"Part of this may be that their parents are the ones completing the student’s loan entrance and exit counseling on their son or daughter’s behalf," Quisenberry says. "Then, when the loan payment information arrives from the servicer six months after graduation, the student either doesn’t remember taking out the loans in the first place or thinks it’s a mistake and doesn’t begin making payments."

But knowing how much fun it is to pay off debt, can you really blame your kid for wanting it to be a mistake?

By Geoff Williams for US News

Published: May 15, 2015

4 Ways the New Overtime Rules May Affect Your Paycheck

In the coming months, millions of employees around the country could learn that they will become newly eligible for overtime pay due to a change in federal rules.

Everyone's first assumption is that the rule change will mean bigger paychecks. But that may not be how it plays out for some or even many.

Today, the only way you're automatically guaranteed time-and-a-half pay after logging 40 hours a week is if you earn less than $23,660 a year ($455 a week).

A soon-to-be unveiled proposal from the Department of Labor is expected to raise that threshold. Observers believe the proposed salary threshold will fall somewhere between $42,000 and $52,000, although some advocates would like to see it go as high as $69,000.

One of four changes could occur if your pay falls below the new threshold:

1. You'll start getting overtime: Right now, workers who make a little more than $23,660 and are given some managerial duties are considered "exempt" from overtime pay. Under the new rules, such low-paid managers would be reclassified as "non-exempt," so when they work more than 40 hours they would be compensated at time and a half.

2. You'll get a small raise. If you earn just under the new threshold, an employer may decide to just raise your base pay by a few thousand dollars to avoid having to pay you overtime, said Tammy McCutchen, a management-side lawyer with firm Littler Mendelson.

3. No more pay, but your hours could be limited. If you regularly work long hours but don't get paid overtime because you're exempt, you might be able to start heading home earlier. Your boss might just prefer to send you home after an 8-hour day, rather than pay you extra.

4. You could see no change in hours or pay. Even if you become eligible for overtime, you may still end up working long hours but not get paid a dime more, because your employer could lower your base pay to offset any overtime you'll be owed.

Say an assistant manager makes $40,000 a year or $770 a week. And say she usually puts in about 50 hours a week.

If she becomes eligible for overtime pay under the new rules, her employer may decide to reset her hourly rate so that her pay still won't top $40,000, even with her 10 extra hours of work every week.

The "cost-neutral" rate would come to $560 a week, or $14 an hour, said McCutchen, who used to run the DOL's Wage and Labor Division.

Add to that $210 for 10 hours of overtime at $21 an hour and the employee's paycheck for a 50-hour week is still $770.

But there's a big downside here: If she puts in fewer than 50 hours, she'd essentially see a pay cut because, unlike an exempt employee, she will only be paid for the hours she works.

That may feel all kinds of wrong. But it is not illegal.

The federal government can't tell employers how much they should pay their employees so long as they're paying at least minimum wage under federal and state laws, said McCutchen, who will draft public comments on the new rules for the U.S. Chamber of Commerce.

Still, employers who exercise this option could pay a different price.

"[Workers] will understand loud and clear just how valuable they are to the employer and probably jump ship the first chance they get," said Judy Conti, federal advocacy coordinator of the National Employment Law Project.

Other potential effects: Sometimes companies offer less generous benefits to non-exempt employees than to their exempt staffers, McCutchen noted. So some workers who are reclassified as non-exempt under the new rules may find changes to their vacation accrual schedules and health benefits. Or they may no longer be entitled to bonuses or profit-sharing.

By Jeanne Sahadi for @CNNMoney

Published: May 13, 2015

When You Should (and Shouldn’t) Worry If Your Tax Refund Is Delayed

For those anxiously awaiting a check in the mail or a sum deposited directly into their bank account, the wait can be fraught with worry.

After all, a delayed refund can mean more than waiting a few extra days for your cash – it can signal problems with your return. So when should you give worrying a rest, and when is there real cause for concern?

Where’s My Return?

According to the IRS, refund information is available as soon as 24 hours after an e-filed return is received, while the status on a mailed return takes about three to four weeks. The IRS’s Where’s My Refund? tool is popular with taxpayers wanting to check on their return. In fact, it’s so popular that the tool has been known to get jammed by eager taxpayers checking on their returns several times a day.

By early March, the website and mobile app had received more than 179 million hits, although the IRS has only processed 72 million tax returns by roughly the same period. An incredible backlog isn’t to blame for the disparity. It’s the result of people making multiple visits per day.

“Where's My Refund? is the quickest and easiest way for taxpayers to get important information about their tax refund," IRS Commissioner John Koskinen said in a statement this month. "Taxpayers need to remember that the Where’s My Refund? system is updated every 24 hours, usually overnight, so there's no need to check more than once a day."

Repeat: There’s no need to check it more than once a day.

We’re starting to get on the tail end of it, but the early-season filers are blowing up the IRS with Where’s My Refund?” says Brian Ashcraft, director of operations for Liberty Tax. “But the IRS recently announced that more than 90 percent of refunds are being issued in less than 21 days.” The only question that remains, he says, is “what’s the issue with the remaining 10?”

Ashcraft says there are a number of reasons a refund could be delayed, any of which are a legitimate cause for concern. “Incomplete or glaring errors on the return could do it, or they could get an additional IRS review,” he says. “Certain returns are flagged, or if your return has been impacted by identity theft or fraud.”

But Melissa Labant, director of the American Institute of Certified Public Accountants tax staff, says taxpayers will know that’s an issue long before they go to check the status of their refund. “If there’s an issue of identity theft, in most cases, you’ll know when you attempt to file your return,” she says. “The IRS won’t allow you to file your return because another one has been filed under your Social Security number.”

Earlier in the tax season, some TurboTax customers encountered this sort of fraud when they attempted to file a state return, only to discover one had already been filed with their information.

The holdup with your tax refund could also be an issue of withholding.

“Unpaid child support, federal agency debt, outstanding student loans, back state income tax – any of these things could offset the refund,” Ashcraft says. “But if it does, you’ll be notified.”

Before you assume the worst, remember a few things: The IRS is short-staffed, most Americans are filing their returns in April and sometimes a delay is just a delay.

“With the recent budget cuts at the IRS, it may simply take longer to process everyone’s returns,” Labant says.

When to Take Action

If you haven’t heard anything three weeks after of filing your return, it’s time to check in with the IRS.

“After 21 days, that would be the only time you’d realize that something didn’t go through as normal,” Ashcraft says, “and you can talk to an IRS representative.”

If a month goes by and you haven’t heard anything, visit the Where’s My Refund? page for more information. If your refund has been lost, you can request a replacement check if it has been more than 28 days from when your refund was mailed. 

And keep in mind there's always the possibility that a minor error is holding things up.

“It’s not always 'the sky’s falling' if you didn’t get your refund,” Ashcraft says. “Sometimes, you just didn’t fill it out properly.”

By Molly McCluskey for US News

Published: May 12, 2015

When It's OK to Tap Your IRA

You've been saving diligently for your retirement, but now you need some of that cash to cover today's expenses. Can you get to it without incurring Uncle Sam's tax wrath? In some instances, the answer is yes.

The tax laws governing early distributions are toughest when it comes to traditional IRAs, but they also apply, albeit slightly differently, to Roth accounts. For both types of retirement plans, the IRS generally considers IRA withdrawals made before you reach age 59 1/2 as premature distributions. In addition to owing any tax that might be due on the money, you could face a 10 percent penalty charge on the amount.

But there are times when the IRS says it's OK to use your retirement savings early.

Two popular, penalty-free withdrawal circumstances are when you use IRA money to pay higher-education expenses or to help purchase your first home.

OK for School

When it comes to school costs, the IRS says no penalty will be assessed as long as your IRA money goes toward qualified schooling costs for yourself, your spouse or your children or grandkids.

You must make sure the eligible student attends an IRS-approved institution. This is any college, university, vocational school or other postsecondary facility that meets federal student aid program requirements. The school can be public, private or nonprofit as long as it is accredited.

Once enrolled, you can use retirement money to pay tuition and fees and buy books, supplies and other required equipment. Expenses for special-needs students also count. And if the student is enrolled at least half time, room and board also meet IRS expense muster.

First-Home Exemption

Then, there's your home. Uncle Sam offers various tax breaks for homeowners. He'll even bend the IRA rules a bit to help you get into your house in the first place.

You can put up to $10,000 of IRA funds toward the purchase of your first home. If you're married, and you and your spouse are first-time buyers, you each can pull from retirement accounts, giving you $20,000 in residential cash.

Even better is the IRS definition of "first-time homebuyer." Technically, you don't have to be purchasing your very first abode. You qualify under the tax rules as long as you (or your spouse) didn't own a principal residence at any time during the previous two years. In fact, you can even share your IRA wealth. The IRS says the first-time homebuyer using your IRA funds for a down payment can be you, your spouse, one of your children, a grandchild or a parent.

But be careful not to take out your money too soon. You must use the IRA funds within 120 days of withdrawal to pay qualified acquisition costs. This includes the costs of buying, building or rebuilding a home, along with any usual settlement, financing or closing costs.

Different Treatment for Roths

These homebuying IRA options apply to traditional retirement accounts. The rules are a bit different if your nest egg is in a Roth IRA.

The $10,000 you take out for your first home is a qualified distribution as long as you've had your Roth account for five years. This means you can take out your retirement money without penalty, and because Roth earnings are tax-free, you'll have no IRS bill, either.

If, however, you opened your Roth IRA less than five years ago, the withdrawal is an early distribution. As with a traditional IRA early withdrawal, a Roth holder can use the first-home exception to avoid the 10 percent penalty but might owe tax on earnings that are withdrawn.

You can reduce the tax bite by first withdrawing the already-taxed contributions you made to your Roth. In fact, the IRS has specific rules about the order in which you can take unqualified Roth distributions: contributions, conversions from traditional IRAs and earnings.

Military Exceptions

Members of the military reserves also can receive early IRA distributions without penalty. To qualify, the following conditions must be met.

Conditions

  • You were ordered or called to active duty after Sept. 11, 2001.
  • You were ordered or called to active duty for a period of more than 179 days or for an indefinite period because you are a member of a reserve unit.
  • The distribution is from an IRA or from an elective-deferral plan, such as a 401(k) or 403(b) plan or a similar arrangement.

In addition, the early distribution cannot be taken before you received your orders or call to active duty or after your active duty period ends.

Personnel eligible for this early withdrawal exception include members of the Army or Air National Guard; the Army, Naval, Marine Corps, Air Force or Coast Guard Reserves; and the Reserve Corps of the Public Health Service.

Allowable (but not preferable) Distributions

Early IRA withdrawals also are penalty-free in a few other instances. Unfortunately, most of these are hardship situations that no taxpayer wants to face.

Hardship circumstances for penalty-free withdrawals:

  • Payment of excessive unreimbursed medical expenses.
  • Payment of medical insurance premiums while unemployed.
  • Total and permanent disability.
  • Distribution of account assets to a beneficiary after you die.

You also can get IRS-approved early access to your nest egg if you take IRA money on a specific schedule. Known as substantially equal periodic payments, this method allows you to begin withdrawing from your IRA early as long as the amounts are determined by an IRS-calculated life expectancy table.

Finally, keep in mind that the early withdrawal exceptions do not eliminate your tax bill if you take the money out of a traditional IRA. Unlike Roth accounts where you eventually can withdraw your money tax-free, taxes are merely deferred on traditional IRAs. So when you take the money out of such an account, regardless of your age or the purpose of the withdrawal, you'll owe your regular tax rate on the amount.

But the early withdrawal exceptions do protect you from paying the IRS more in penalty charges. To let the IRS know that you used the retirement money early for a tax-acceptable purpose, file Form 5329. When you report your withdrawal here, you'll also enter a code, found in the form's instructions, that lets the IRS know the distribution is penalty-free.

By Kay Bell for BankRate.com

Published: May 8, 2015

CPAs Play an Essential Role in Improving Financial Education of Americans

As Financial Literacy Month draws to a close, it’s important to reflect on the essential role CPAs play in helping improve the financial knowledge of Americans.  Educating consumers about their finances is the volunteer cause of the CPA profession.  Through the AICPA’s 360 Degrees of Financial Literacy program (360), thousands of CPAs from all over the country volunteer their time to speak with consumers of all ages about their finances. Increasing our citizens’ financial education is critical to our country’s financial success, and the AICPA is leading the way for the CPA profession.

During my tenure as chair of the National CPA Financial Literacy Commission, CPAs across the country achieved much and celebrated many milestones in financial literacy.  I have been involved with developing and releasing several rounds of creative from Feed the Pig, the AICPA’s PSA campaign with the Ad Council, and, along with the rest of the Commission, participated in releasing the AICPA’s first consumer publication, Save Wisely, Spend Happily, authored by Commission member Sharon Lechter, CPA.  Commission members promote 360 and its related programs, and represent 360 before the media and national organizations. Our members are essential in promoting 360 with AICPA leadership, committees, state society leadership and key accounting organizations. I am proud of the work Commission members do and the leadership they provide.

CPAs in public service have also played an important role in the profession’s financial literacy efforts. On April 22, U.S. Representative and Congressional Caucus on CPAs and Accountants member Michael Conaway, CPA (TX-11) gave a speech on the House floor highlighting April as Financial Literacy Month. Representative Conaway noted the important role that CPAs across the country play in improving the financial literacy of Americans, and how, for over 10 years, the AICPA, members and state CPA societies have worked together through 360.

Since 360 was launched eleven years ago, more than 2,500 financial education events have been held by the AICPA and all 55 state CPA societies. In honor of this year’s Financial Literacy Month, the AICPA launched an updated 360 website, the centerpiece of our financial literacy program, with revised tools and content to provide enhanced guidance and support to consumers everywhere. The website contains information on making smart financial decisions through every life stage.  Earlier this month, the AICPA also launched a new Tumblr campaign for Feed the Pig, designed to educate young adults about their finances through memes and humor.

The road to financial well-being is a lifetime endeavor.  As a father of five grown boys, I know firsthand the importance of planning for college, a career and a secure retirement.  I told each of them early on that there are many paths to a secure financial future.  It is important to first decide where you have your passion, then determine how to fund the education needed to get there.  Getting a solid education leads to good employment and an affordable lifestyle. 

Through one united effort of the profession, CPAs are playing an essential role in the financial education of our nation. I am proud of the work the AICPA, members, state CPA societies and the National CPA Financial Literacy Commission has accomplished over the past three years and look forward to continuing to play an active role in improving the financial well-being of all Americans.

By Ernest A. Almonte for AICPA Insights

Published: May 6, 2015

Could You Owe Taxes of College Scholarships?

Paying for college isn’t getting any cheaper, so in order to avoid going into unaffordable education debt, families and students either need to save more money, go to less expensive schools or find someone else to pay for it.

There are hundreds of thousands — maybe even millions — of scholarship opportunities out there, but receiving monetary awards can do more than affect your financial aid situation. It may also affect your taxes.

Defining ‘Scholarship’

Whether or not a scholarship is taxable depends on a few things, mostly on how you receive it. A lot of schools give students discounts on tuition and fees and call it a scholarship, but the institutions aren’t really giving students money to help pay for school; they’re just charging them less.

That sort of scholarship isn’t taxable, said Elliott Freirich, a certified public accountant in Chicago. It sill affects the scholarship recipient’s taxes, because reduced tuition may mean a reduced amount of education credit he or she can claim.

If a school is actually giving you money, that changes things. Such a situation often comes up in graduate programs, when students sometimes receive stipends for work they do at the university or to cover living expenses during a demanding, time-consuming program. Stipends are taxable and should be reported as Form W-2 income, Freirich said. In his experience, however, that doesn’t always happen.

“Universities often screw up how it’s reported,” he said. “In some cases, they have reported it as self-employment income, which means the student is going to have to pay both halves of Social Security and Medicare on that income.” He’s also encountered students who didn’t receive any tax forms from their universities — just letters stating the stipend amount — and it’s up to the student to figure out the tax part.

“I would ask for a tax document first,” Freirich said. “Ask for some kind of official documentation from the school, and if the school doesn’t know … find a good CPA to help you.”

How to Handle Checks

Sometimes, a scholarship program will dole out awards by paper check directly to its recipients. From a tax perspective, there are two things to consider when you receive a scholarship: What you're using it for and how you're receiving it. If you use the money to pay for tuition, fees books, supplies or equipment required for enrollment at your institution, the scholarship is tax-free. It's paying for optional expenses (anything you're not required to pay for in order to be enrolled) when your scholarship would be subject to taxes.

If you receive and deposit the check, and you use the funds to pay for optional education-related expenses, you are required to claim that check as taxable income, Freirich said. However, if the scholarship program sends the payment directly to the school, essentially paying on your behalf, you never receive that money and do not pay taxes on it.

"The school just issues a document called a 1098-T, and it shows how much is paid for tuition and how much is a scholarship, but it doesn’t say 'This much was for room and board and is taxable,'" Freirich said. (Room and board can get tricky with scholarships, because if it's not required for enrollment, it could be considered an incidental expense and subject to taxes). The key here is to communicate with the scholarship provider and make sure you understand how the funding will be delivered.

Scholarships are a fantastic resource for students looking to reduce how much they pay for their educations. They’re generally quite competitive, which is why financial aid experts often recommend applying for as many as you can and treating the scholarship search-and-application process like a job. The less of your education you have to finance with student loans, the better, because while student loans can be a good resource for making higher education attainable for people of various financial backgrounds, the debt can be a serious, lifelong burden if it’s mismanaged. Student loan debt can generally not be discharged in bankruptcy, and falling behind on loan payments will destroy the borrower’s credit for years.

By Christine DiGangi for Fox Business

Published: May 4, 2015

Obamacare Took $729 Bite Out of Tax Refund

The majority of filers who received federal help to pay for their health insurance in 2014 got an unwelcome surprise when it came to their refund.

Sixty-one percent of filers saw their refunds reduced by an average of $729 -- or a third of the group's overall average of $2,195, consumer tax services providers said Monday.

The reason for the decline: they'd underestimated what their 2014 household income would be when they signed up for insurance on a health exchange back in 2013.

The lower your income, the higher your federal subsidy. Anyone earning up to 400% of the poverty line is eligible for a subsidy. That means any individual earning up to $45,960 (or $94,200 for a family of four).

If you received a subsidy based on an estimated income that turned out to be lower than your actual income, you must repay a portion of the subsidy.

Roughly 13% of prepared returns involving health insurance subsidies saw no change in their refunds, while about 25% actually saw their refunds increase by an average of $425 because those filers had overestimated their 2014 incomes.

Filers who remained uninsured for more than three months in 2014 were subject to a penalty. The average penalty paid was $178 among affected clients, according to those polled preparers.

The penalty for being uninsured in 2014 was $95 or 1% of income, whichever is greater. This year, it will be the greater of $325 or 2% of income. That means an uninsured family of four with a $60,000 income would see their penalty jump to $975 from $400 in 2014.

If you don't have the money to pay the penalty or if you refuse to pay, the only legal way for the government to collect that money is to withhold as much of your refund as necessary.

There are, however, some exemptions to the penalty that a filer may claim. Among H&R Block clients who claimed a penalty exemption, 46% said their income fell below the tax-filing threshold.

H&R Block did not reveal how many 2014 returns it prepared that had a federal subsidy component. But the company did say it prepared 20.5 million returns overall.

The IRS, which is the final arbiter on tax statistics for the country, has not yet released a statistical analysis of the 2014 returns.

By Jeanne Sahadi for @CNNMoney

Published: April 28, 2015

Tax Season Is Over - Or Is It?

April 15 has come and gone and perhaps you filed your tax return and perhaps you instead filed for an extension. If you filed for an extension, remember that’s only an extension of time to file, not an extension of time to pay. If you think you will owe, you should send the IRS a payment, making sure you write: “2014 Form 1040” and your Social Security number on the check.

If you have filed, you likely have exhaled, happy to have the chore accomplished.

But guess what? Tax season is never really over. And I’m not saying that purely from a tax professional’s point of view. Keeping as much of your own money in your pocket and out of the hands of the IRS is the goal of pretty much everyone in this country. And in this day and age with loopholes closing and tax laws changing seemingly every twenty minutes, it pays to take steps to ensure that next year you will legally pay the minimum necessary.

Below are some tips to help you on the journey:

1. Review your 2014 income tax return. If you are number savvy, you might be able to do this on your own. If not, make an appointment with your tax professional for later next month (he or she is likely off to Barbados right now!) to look over your taxes and determine if there are any cost saving measures that you can employ to reduce your liability this coming year.

2. If you will experience any major life-changing events this year – marriage, divorce, birth of child, move to another state, changing jobs, losing a job, becoming self-employed, getting rich or poor from the stock market, whatever it may be - get with your tax pro for a planning session. It’s important to crunch the numbers to not only predict next year’s tax liability, but to find ways to minimize it and to prevent any big surprises next April 15. A client came to me a year ago who had gone through a divorce, turned his personal residence into a rental property, and changed jobs. He was shocked at what he owed. If he had sat down with a tax professional during the course of the year, there may have been steps he could have taken to reduce his liability. But by the April 15th due date it was too late. Most transactions must occur during the tax year.

3. Start a tax file for 2015. Throughout the year put in the receipts and data and charitable organization acknowledgement letters and any other information that will be necessary for preparing your 2015 income tax return. Getting organized as you go is so easy and rewarding. Then come next January, slide in those important tax documents that arrive in the mail – W2s, 1099s, K-1s etc. You will magically be prepared to file your taxes by the beginning of February.

4. File early. Your tax pro is considerably more clear-headed and relaxed in February than on April 14th. Some preparers offer a discount for bringing in data before February 10th for example. Preparing your return far in advance of the due date may provide you with a window of opportunity to stockpile your retirement plan before the April 15th due date thus saving you money. It may also give you time to review your finances and determine if you had missed any deductions.

By Bonnie Lee for Taxpertise

Published: April 27, 2015

Taxes are Filed – Now What?

If you filed your tax return by April 15, you can exhale, kick back and wait for your refund – if you’re getting one.  Here are some answers to many post tax season questions that most taxpayer have:

1. When will I get my refund?. The most secure method of receiving your refund is direct deposit to your bank account - checking or savings.  You don’t have to worry about thieves at the mailbox if the funds are transferred to you electronically. It doesn’t cost extra to receive your refund in this manner. If you elected to receive your refund by check and have already filed your taxes, it’s too late to ask the IRS to perform a direct deposit. Just keep this method in mind for next year.  Your bank will not tell you when the refund arrives but usually it can take anywhere from one to two weeks depending upon when in the season you electronically filed your tax return.  If your paper filed your return, it could take as much as four to six weeks. Continue to check with the bank to determine if it has arrived.

2. Why is my tax refund being held up?  If it has been more than two weeks since you electronically filed or more than four weeks if you paper-filed your return, go to the Where's My Refund button on the IRS website home page to discover the progress of your refund. The step-by-step procedure is very easy to follow. You need to know your filing status, your Social Security number and the exact amount of the refund from the tax return. You can expect a hold up or relinquishment in the refund for various reasons: past due student loans, unpaid child support, unpaid state income tax liabilities, claiming injured spouse, or questions about the validity of the Earned Income Tax Credit claimed on your return.

3. What if I can’t pay? If you filed your return without paying the tax owed, don’t panic. The good thing is that you filed the return. I often hear stories of taxpayers who don’t file because they can’t pay. Big mistake. By not filing, you incur a “failure to file” penalty on top of the failure to pay penalty. And it can get expensive. The failure to file penalty racks up at 5% per month, capping out at 25%. That’s $250 on a $1,000 liability. So if you haven’t filed for this reason, file now! And if you have filed but didn’t pay and you think you can pay off the balance within six months then begin making payments as soon as possible. Write “Form 1040 2014” along with your Social Security number on the memo line of the check to ensure that the payment is applied to the 2014 tax year. Better yet, make your payments electronically at EFTPS, the IRS secured website for receiving payments. The IRS will bill you with penalties and interest for not paying the total due by April 15. Just make the payments accordingly. The first six months you will receive correspondence from the IRS requesting payment. Be assured that these are computer generated. A human is not handling your account; no one is going to send out Roscoe and Vinnie to collect. If after six months, you have not paid in full, set up an Online Payment Agreement Application. There is an application fee.

4. I made a mistake on my tax return. Now what? If after filing your taxes, you review your return and encounter an error, know that this doesn’t necessarily flag your return for a face-to-face audit with an actual agent from the IRS. Every year the IRS mails out “correspondence audits” that also are not handled by humans. The IRS matches documents filed by banks, your employer and other sources to individual tax returns to ensure that the proper amounts of income and deduction have been reported. For example, your employer provides you with a W2 showing taxable wages of $50,600 but on your tax return you showed only $50,000 - $600 less. The IRS will catch this error – it might take up to a year – and generate a letter called a CP2000 showing the correct amount and billing you for any difference in tax this error generated. You will also owe a bit of interest. You have the option to amend your income tax return to show previously omitted items or to correct other errors. These returns are processed by actual humans so it’s important to provide as much back up documentation as possible to substantiate any additional deductions. It’s usually best to have a professional prepare an amended return for you.

By Bonnie Lee for Taxpertise

Published: April 24, 2015

When the IRS Can Keep Your Refund

People rely on their tax refunds. 

So it may come as an unhappy surprise to learn that the IRS may legally keep some or all of your refund in at least four situations.

While your refund is about taxes, you could end up losing all or part of it because of non-tax debts you owe the government or court-ordered payments you failed to make, according to Lindsey Buchholz, principal tax research analyst at The Tax Institute at H&R Block.

Delinquent student loans: If you're more than 90 days delinquent on your federal student loan payments and the agency to which those payments are due has given you (or any co-signers on your loan) a chance to cure the situation, it may request that the federal government redirect some or all of your refund toward the balance.

Obamacare payments due: There are two measures in the Affordable Care Act that allow for your refund to be offset.

The first is the penalty you must pay if you failed to buy health insurance coverage during the tax year. If you don't have the money to pay the penalty or if you refuse to pay, the only legal way for the government to collect that money is to withhold as much of your refund as necessary.

The second situation involves any kind of subsidy you may have received to offset the cost of your policy. The subsidy is paid in the form of a tax credit. And as with any other tax credits, if you've received more than you should have, you must pay it back. To reclaim the money, the government may choose to garnish your wages, put a lien on your property or keep some your refund.

Earlier in the tax season, H&R Block reported that 52% of its clients who enrolled in Obamacare had to pay back a portion of their premium credit -- which resulted in an average refund offset of $530.

On the flip side, about a third of those who enrolled found out that they hadn't been paid enough of a premium tax credit, resulting in an average refund increase of $365.

Past-due state income tax: Many elements of your state income taxes are tied to your federal income taxes. For instance, any state income taxes you pay are deductible on your federal return. So if you're delinquent in paying state income taxes, the Treasury may withhold some or all of your refund for the state.

Past-due child support: If a court has ordered you to pay child support and you're behind on payments, a state may first try to garnish your wages or seize property. But it also may make a claim on your refund, which the federal government will collect on its behalf. This might be the case, for instance, if you move away from the state in which the judgment was made.

If you find yourself in any of these circumstances, you should get a heads-up by way of a letter from the Treasury's Bureau of Fiscal Service, which actually issues refund checks. The letter will include your original refund amount as well as the amount that will be offset. It will also include contact information for the agency that will receive the money. That's the agency you should talk to if you think a mistake has been made.

If it turns out you're right -- that your refund shouldn't have been offset because the debt in question has already been paid -- that agency is responsible for paying you back, not Treasury.

If, however, you're wrong, and this year's refund isn't enough to cover your outstanding payments due, your refund next year could be offset too.

By Jeanne Sahadi for @CNNMoney

Published: April 23, 2015

What Happens When You Can't Pay Everything You Owe the IRS?

Finding out that you owe the IRS serious money is enough to ruin your year.

But what if you can't come up with the money, at least not all at once?

The good news: There are options other than pawning everything you own or having the IRS go after your wages and bank account.

Your first step should be to file all your returns of the past few years if you haven't done so already. Otherwise steep failure-to-file penalties will accrue quickly, compounding your financial woes.

Second, you must weigh lots of variables to figure out the best payment plan for you -- and then hope the IRS agrees. Those variables include how much you owe, your capacity to pay, the time required under different plans to do so and how much financial information you must reveal to seal the deal.

Whatever deal you strike, follow the terms down to the letter. Because if you miss a payment you're considered in default and then "the gloves come off," said former IRS collections officer David Levine, now an enrolled agent in Reno, Nevada.

Getting help: If the IRS maze confuses you, find a qualified pro to help.

If you've always done your own taxes, you might want a tax professional to look them over to make sure you really owe as much as the IRS says before working out a payment plan, Levine suggested.

It's advisable to have a CPA with experience setting up payment plans represent you.

"The more that is owed to the IRS, the more complicated it becomes to negotiate with the government," the Gregorys noted.

Payment options include:

Personal loan: If available to you and you're sure it won't ruin your relationship, a personal loan from a family member or friend will let you pay what you owe in full, save you money in penalties and get the IRS off your back right away.

Assuming you can pay the loan back, Levine recommends this option.

But make sure you formalize the loan by writing down the repayment terms, including interest, and having it notarized, he said.

For many people, of course, a personal loan is not an option. So consider the following:

Short-term extension: If you think you can pay off your debt within 120 days, the IRS may let you do so, and that will curb how much you'll owe in interest and penalties. Plus there's no fee to set up this payment plan as there are with most other options.

Installment agreement: If it will take you time to pay your debt, an installment agreement may be your best bet. You can apply online or on paper.

To be considered for one, you generally must owe less than $50,000, be current on your tax return filings and can pay what you owe within 72 months or within the remaining portion of the 10-year collection statute, whichever is less, Garrett Gregory noted.

You may be able to get an installment agreement if you owe more than $50,000 too, but the bar for acceptance is much higher. In addition to everything those who owe less than $50,000 must do to apply, you also must produce a financial statement and all documents supporting income and expenses, he said.

Undue hardship extension: If you can document that paying your tax debt immediately would cause you undue hardship -- e.g., forcing a fire sale of your home -- the IRS may grant you up to 18 months to pay.

To apply for the extension you must include a statement of assets and liabilities, as well as itemize the income and expenses you had three months prior to the tax due date.

Offer in Compromise (OIC): If you can make the case with supporting documents that you will never be able to pay your tax debt in full, the IRS may agree to accept a lesser amount.

Keep in mind, though, the IRS only accepts a minority of OICs and undue hardship extensions.

By Jeanne Sahadi for @CNNMoney

Published: April 21, 2015

What to Do With Your Tax Refund

So you’re getting a tax refund? Good for you. I know a lot of folks like having that little – or sometimes big – windfall at this time of the year. It helps make up for the overspending from Christmas. According to personal finance expert and personal bankruptcy lawyer William Waldner http://midtownbankruptcy.com, “The average refund this year will be approximately $3,000.”

One thing to consider before deciding on what to do with your refund is to analyze your withholdings and/or estimated tax payment situation. You obviously paid in more than was necessary, thus allowing the government to enjoy your money for the year rather than it being put to use for your own purposes.

Conventional wisdom dictates that you could have been making interest off the over withholdings. However, banks aren’t paying much these days so the amount of earnings is likely negligible. And for some, saving is difficult. Over withholding all year provides a means for creating a cushion. Whatever the case, it’s worth giving a few minutes thought as to whether or not you need to adjust your withholdings or estimated tax payments. Input from your tax professional and a financial planner might prove valuable in determining any adjustments and to receive guidance on the best course of action with the funds.

According to a report issued by the National Retail Federation survey, approximately 54.9% of millennials expecting a tax refund this year plan to deposit the refunds into their savings accounts.

“Americans are thinking of the future, and remaining financially secure is a big part of that,” NRF President and CEO Matthew Shay said in a statement on the NRF Website. “A check from Uncle Sam gives consumers the ability to pay down debt, add a cushion to their savings or splurge on a vacation or big-ticket item.”

The report also states, “Consumers have a plan for how they will use their refunds: 39.1 percent will pay down debt and 25.1 percent plan to use it for daily expenses. While 13 percent say they will splurge on a vacation, 10.5 percent plan to spend on a major purchase like a television or car.”

According to Waldner, “An overwhelming amount of young men and women like to splurge on a new gadget or device, especially phones or tablets, mistakenly treating a refund as a bonus or payday, rather than part of their annual salary they already earned then overpaid in taxes. Men buy electronics, women buy clothing, accessories and jewelry, which is fine if you have plenty of money.”

But if you don’t, then Waldner feels that building up your emergency fund is a good move. But even better, he believes, is to “invest in something slightly riskier. Go to a financial advisor to find a good portfolio and turn it into something exciting.”

Other good ideas include saving up to buy a home or if you already own your residence then you could make improvements that increase its value.

Waldner has analyzed the benefits of putting monies into a college savings plan for your children but in the final analysis, does not feel there is much benefit in that. “It’s important to understand why your child wants to go to college. So many kids going to college rack up huge debt, yet cannot find a job once they graduate. Starting your own business or getting into a profession that does not require a degree may be a better course of action.”

Putting the monies into an emergency fund rather than a college savings plan from which non college distributions can be penalized is a far better move. You can draw upon those funds to help if your child decides to go to college after all.

Waldner feels that “investing in your career by taking skill enhancing courses or freshening up your work attire would be a great personal investment of your tax refund.”

He adds, “A tax refund shouldn’t mark your foray into angel investing. Avoid loans of investing your refund into the ventures of your family and friends, no matter how promising they look.”

After all, it’s your money!

By Bonnie Lee for Taxpertise

Published: April 17, 2015

Celebrity Tax Troubles

Celebrities aren't exempt from troubles with the IRS! Here are few famous cases of celebs who've found themselves in some hot water with Uncle Sam:

TERESA & JOE GUIDICE
The Real Housewives of New Jersey star has been sentenced to 15 months in prison on fraud charges. Her husband Joe was sentenced to 41 months in prison and ordered to pay $414,000 in restitution for fraud and failure to file federal income tax returns.

NICOLAS CAGE
The actor plunked down $6.25 million in 2012 to help pay off the massive back taxes he owes the IRS, but he still owes somewhere around $7 million. Yeah, it's that bad.

LINDSAY LOHAN
The Internal Revenue Service filed a federal tax lien against LiLo in 2012, after the actress failed to pay not only her 2009 taxes, but those on her 2010 earnings as well, totaling around $140,203.30.

WESLEY SNIPES
The Blade star was indicted in 2006 on eight counts of tax fraud. A jury acquitted Snipes of federal tax fraud and conspiracy charges but convicted him on three misdemeanor counts of failing to file a tax return. He has been serving three-years prison sentence since December 2010.

CHRISTIE BRINKLEY
The former Sports Illustrated hottie owed the IRS a whopping half-million dollars in back taxes in 2011.

FAT JOE
The "Make It Rain" rapper—real name Joseph Cartagena—faced up to two years in prison after pleading guilty to tax-evasion. He reportedly owed upwards of $700,000. 

LIONEL RICHIE
The 62-year-old music legend is facing a $1.1 million debt to the Feds, from some leftover unpaid income taxes in 2010.

JAIME PRESSLY
The former My Name Is Earl star owed more than $637,000 in deliquent taxes in 2011.

SOULJA BOY
The hip-hop rapper owed $3,571 in back taxes to the state of Mississippi in 2011, but paid it all off.

PAMELA ANDERSON
The former Baywatch babe was in the red for more than $493,000 in personal income taxes in 2010.

JA RULE
The rapper was sentenced to 28 months in a federal prison for tax evasion in 2011, after he pleaded guilty to three counts of failing to file tax returns with the IRS for a whopping five years from 2004 to 2008.

SWIZZ BEATZ
Superstar hip-hop producer and sometime rapper owed more than $2.4 million in back taxes to Rockland County, N.Y., in 2010.

HÉLIO CASTRONEVES
The former Indy 500 racing champ, who won the fifth season of Dancing With the Stars, got himself into hot water in 2008 after the feds obtained an indictment against him for failing to pay millions in taxes over a four-year period. But he plead not guilty and was later cleared.

CHRIS TUCKER
The Rush Hour star owed more than $11 million in back taxes to the Internal Revenue Service in 2010.

JOHN TRAVOLTA
The Pulp Fiction star acknowledged he short-changed the government and agreed to pay $607,400 in back taxes in 2000, about half the $1.1 million in back taxes and penalties the IRS had claimed Travolta owed for 1993-1995.

MARLEE MATLIN
The Celebrity Apprentice star owed the IRS a whopping $50,000 in back taxes from 2009.

METHOD MAN
Former Wu-Tang Clan member was arrested in 2009 on felony charges of skipping out on $32,799 in taxes from 2004 to 2007. He pleaded guilty and avoided jail time after paying approximately $106,000 in restitution, penalties and interest he owed to New York State.

BURT REYNOLDS
In 2009, word came out that Reynolds owed the government a relatively paltry $225,000.

SNOOP DOGG
In 2009, officials said the rapper owed the state of California $284,053 in back taxes and that a lien has been put on his home.

JOE FRANCIS
The Girls Gone Wild mastermind pleaded not guilty in 2008 to two felony tax-evasion charges in federal court in Los Angeles.after being accused of unlawfully deducting more than $20 million in bogus business expenses on his 2002 and 2003 corporate tax returns.

DIONNE WARWICK
The Grammy winner owed  $2.1 million to the state of California in 2009, down a smidge from her $2.7 million two years prior, but she was "cooperating" and made a payment plan.

RICHARD HATCH
The Survivor winner was sentenced to four years and three months in prison for tax evasion and perjury in 2006, after he lied about failing to pay taxes on his reality earnings as well as other sources of income, including $327,000 he earned as cohost of a Boston radio show and $28,000 in rent on property he owned.

SINBAD
The Jingle All the Way star owed $2.5 million in back income taxes in 2009 dating to 1999.

OZZY & SHARON OSBOURNE
The rock-star couple owed more than $1.7 million in back taxes in 2011, but they paid it off in full, days later.

O.J. SIMPSON
The former NFL player copped up to owing the Internal Revenue Service $700,000 in back taxes in 1997, leaving him with the possibility of tax-evasion charges.

PAUL HOGAN
The Crocodile Dundee star was accused of using a complex system of offshore trusts to hide roughly $40 million from the Australian government in 2010, but that all got cleared up.

Compiled from Information from E Online. 

Published: April 15, 2015

Five Key Tax Tips about Tax Withholding and Estimated Tax

If you are an employee, you usually will have taxes withheld from your pay. If you don’t have taxes withheld, or you don’t have enough tax withheld, then you may need to make estimated tax payments. If you are self-employed you normally have to pay your taxes this way. Here are five tips about making estimated taxes:

  1. When the tax applies.  You should pay estimated taxes in 2015 if you expect to owe $1,000 or more when you file your federal tax return next year. Special rules apply to farmers and fishermen.
  2. How to figure the tax. Estimate the amount of income you expect to receive for the year. Also make sure that you take into account any tax deductions and credits that you will be eligible to claim. 
  3. When to make payments.  You normally make estimated tax payments four times a year. The dates that apply to most people are April 15, June 15 and Sept. 15 in 2015, and Jan. 15, 2016.
  4. When to change tax payments or withholding.  Life changes, such as a change in marital status or the birth of a child can affect your taxes. When these changes happen, you may need to revise your estimated tax payments during the year. If you are an employee, you may need to change the amount of tax withheld from your pay. If so, give your employer a new Form W–4, Employee's Withholding Allowance Certificate. 

How to pay estimated tax.  Pay online using IRS Direct Pay. Direct Pay is a secure service to pay your individual tax bill or to pay your estimated tax directly from your checking or savings account at no cost to you. You have other ways that you can pay online, by phone or by mail. Visit IRS.gov/payments for easy and secure ways to pay your tax. If you pay by mail, use the payment vouchers that come with Form 1040-ES.

Published: April 9, 2015

The Premium Tax Credit - The Basics

If you get your health insurance coverage through the Health Insurance Marketplace, you may be eligible for the premium tax credit.

Here are some basic facts about the premium tax credit.

What is the premium tax credit?

The premium tax credit is a credit designed to help eligible individuals and families with low or moderate income afford health insurance purchased through the Health Insurance Marketplace.

What is the Health Insurance Marketplace?

The Health Insurance Marketplace is the place where you will find information about private health insurance options, purchase health insurance, and obtain help with premiums and out-of-pocket costs if you are eligible. 

How do I get the premium tax credit?

When you apply for coverage in the Marketplace, the Marketplace will estimate the amount of the premium tax credit that you may be able to claim for the tax year, using information you provide about your family composition and projected household income. Based upon that estimate, you can decide if you want to have all, some, or none of your estimated credit paid in advance directly to your insurance company to be applied to your monthly premiums. If you choose to have all or some of your credit paid in advance, you will be required to reconcile on your income tax return the amount of advance payments that the government sent on your behalf with the premium tax credit that you may claim based on your actual household income and family size.

What happens if my income or family size changes during the year? 

The actual premium tax credit for the year will differ from the advance credit amount estimated by the Marketplace if your family size and household income as estimated at the time of enrollment are different from the family size and household income you report on your return. The more your family size or household income differs from the Marketplace estimates used to compute your advance credit payments, the more significant the difference will be between your advance credit payments and your actual credit.

Published: March 25, 2015

Five Key Points about Children with Investment Income

Special tax rules may apply to some children who receive investment income. The rules may affect the amount of tax and how to report the income. Here are five key points to keep in mind if your child has investment income:

1. Investment Income.  Investment income generally includes interest, dividends and capital gains. It also includes other unearned income, such as from a trust.

2. Parent’s Tax Rate.  If your child's total investment income is more than $2,000 then your tax rate may apply to part of that income instead of your child's tax rate. 

3. Parent’s Return.  You may be able to include your child’s investment income on your tax return if it was less than $10,000 for the year. If you make this choice, then your child will not have to file his or her own return. See Form 8814, Parents' Election to Report Child's Interest and Dividends, for more.

4. Child’s Return.  If your child’s investment income was $10,000 or more in 2014 then the child must file their own return. File Form 8615 with the child’s federal tax return.

5. Net Investment Income Tax.  Your child may be subject to the Net Investment Income Tax if they must file Form 8615. 

Published: March 24, 2015

Good Records are Key to Claiming Gifts to Charity

For any taxpayer, keeping good records is key to qualifying for the full charitable contribution deduction allowed by law. In particular, this includes insuring that they have received required statements for two contribution categories—each gift of at least $250 and donations of vehicles.

First, to claim a charitable contribution deduction, donors must get a written acknowledgement from the charity for all contributions of $250 or more. This includes gifts of both cash and property. For donations of property, the acknowledgement must include, among other things, a description of the items contributed.

In addition, the law requires that taxpayers have all acknowledgements in hand before filing their tax return. These acknowledgements are not filed with the return but must be retained by the taxpayer along with other tax records.

Second, special reporting requirements generally apply to vehicle donations, and taxpayers wishing to claim these donations must attach any required documents to their tax return. The deduction for a car, boat or airplane donated to charity is usually limited to the gross proceeds from its sale. This rule applies if the claimed value is more than $500. Form 1098-C or a similar statement, must be provided to the donor by the organization and attached to the donor’s tax return.

The IRS also reminded taxpayers to be sure any charity they are giving to is a qualified organization. Only donations to eligible organizations are tax-deductible. Select Check, a searchable online tool available on IRS.gov, lists most organizations that are eligible to receive deductible contributions. In addition, churches, synagogues, temples, mosques and government agencies are eligible even if they are not listed in the tool’s database.

Only taxpayers who itemize their deductions on Form 1040 Schedule A can claim gifts to charity. Thus, taxpayers who choose the standard deduction cannot deduct their charitable contributions. This includes anyone who files a short form.

A taxpayer will have a tax savings only if the total itemized deductions (mortgage interest, charitable contributions, state and local taxes, etc.) exceed the standard deduction. Use the 2014 Form 1040, Schedule A to determine whether itemizing is better than claiming the standard deduction.

Besides Schedule A, taxpayers who give property to charity usually must attach a special form for reporting these noncash contributions. If the amount of the deduction for all noncash contributions is over $500, a properly-completed Form 8283 is required.

The IRS provided these additional reminders about the special rules that apply to charitable contributions of used clothing and household items, monetary donations and year-end gifts.

Rules for Charitable Contributions of Clothing and Household Items

  • This includes furniture, furnishings, electronics, appliances and linens. Clothing and household items donated to charity generally must be in good used condition or better to be tax-deductible. Clothing or household item for which a taxpayer claims a deduction of over $500 does not have to meet this standard if the taxpayer includes a qualified appraisal of the item with the return.

Guidelines for Monetary Donations

  • A taxpayer must have a bank record or a written statement from the charity in order to deduct any donation of money, regardless of the amount. The record must show the name of the charity and the date and amount of the contribution. Bank records include canceled checks, and bank, credit union and credit card statements. Bank or credit union statements should show the name of the charity, the date, and the amount paid. Credit card statements should show the name of the charity, the date and the transaction posting date.
  • Donations of money include those made in cash or by check, electronic funds transfer, credit card and payroll deduction. For payroll deductions, the taxpayer should retain a pay stub, a Form W-2 wage statement or other document furnished by the employer showing the total amount withheld for charity, along with the pledge card showing the name of the charity.

Year-End Gifts

  • Contributions are deductible in the year made. Thus, donations charged to a credit card before the end of 2014 count for 2014, even if the credit card bill isn’t paid until 2015. Also, checks count for 2014 as long as they were mailed in 2014.
Published: March 19, 2015

Taxpayers Receiving Identity Verification Letter Should Use IDVerify.irs.gov

The Internal Revenue Service today reminded taxpayers who receive requests from the IRS to verify their identities that the Identity Verification Service website, idverify.irs.gov, offers the fastest, easiest way to complete the task.

Taxpayers may receive a letter when the IRS stops suspicious tax returns that have indications of being identity theft but contains a real taxpayer’s name and/or Social Security number. Only those taxpayers receiving Letter 5071C should access idverify.irs.gov.

The website will ask a series of questions that only the real taxpayer can answer.

Once the identity is verified, the taxpayers can confirm whether or not they filed the return in question. If they did not file the return, the IRS can take steps at that time to assist them. If they did file the return, it will take approximately six weeks to process it and issue a refund.

Letter 5071C is mailed through the U.S. Postal Service to the address on the return. It asks taxpayers to verify their identities in order for the IRS to complete processing of the returns if the taxpayers did file it or reject the returns if the taxpayers did not file it. The IRS does not request such information via email, nor will the IRS call a taxpayer directly to ask this information without you receiving a letter first. The letter number can be found in the upper corner of the page.

The letter gives taxpayers two options to contact the IRS and confirm whether or not they filed the return. Taxpayers may use the idverify.irs.gov site or call a toll-free number on the letter. Because of the high-volume on the toll-free numbers, the IRS-sponsored website, idverify.irs.gov, is the safest, fastest option for taxpayers with web access.

Taxpayers should have available their prior year tax return and their current year tax return, if they filed one, including supporting documents, such as Forms W-2 and 1099 and Schedules A and C.

Taxpayers also may access idverify.irs.gov through www.IRS.gov by going to Understanding Your 5071C Letter or the Understanding Your IRS Notice or Letter page. The tool is also available in Spanish. Taxpayers should always be aware of tax scams, efforts to solicit personally identifiable information and IRS impersonations. However, idverify.irs.gov is a secure, IRS-supported site that allows taxpayers to verify their identities quickly and safely.

IRS.gov is the official IRS website. Always look for a URL ending with “.gov” – not “.com,” “.org,” “.net,” or other nongovernmental URLs.

Published: March 18, 2015

Standard or Itemized?

Most people claim the standard deduction when they file their federal tax return. But did you know that you may lower your taxes if you itemize your deductions? Find out if you can save by doing your taxes using both methods. Usually, the bigger the deduction, the lower the tax you have to pay. You should file your tax return using the method that allows you to pay the least amount of tax.

1. Figure your itemized deductions.  Add up deductible expenses you paid during the year. These may include expenses such as:  

  • Home mortgage interest
  • State and local income taxes or sales taxes (but not both)
  • Real estate and personal property taxes
  • Gifts to charities
  • Casualty or theft losses
  • Unreimbursed medical expenses
  • Unreimbursed employee business expenses

Special rules and limits apply. 

2. Know your standard deduction.  If you don’t itemize, your basic standard deduction for 2014 depends on your filing status:     

  • Single $6,200
  • Married Filing Jointly $12,400
  • Head of Household $9,100
  • Married Filing Separately $6,200
  • Qualifying Widow(er) $12,400             

If you’re 65 or older or blind, your standard deduction is higher than these amounts. If someone can claim you as a dependent, your deduction may be limited.

3. Check the exceptions.  There are some situations where the law does not allow a person to claim the standard deduction. This rule applies if you are married filing a separate return and your spouse itemizes. In this case, you can’t claim a standard deduction. You usually will pay less tax if you itemize. 

Published: March 17, 2015

Still Time to Contribute to an IRA for 2014

The Internal Revenue Service today reminded taxpayers that they still have time to contribute to an IRA for 2014 and, in many cases, qualify for a deduction or even a tax credit.

This is the eighth in a series of 10 daily IRS tips called the Tax Time Guide. These tips are designed to help taxpayers navigate common tax issues as the April 15 deadline approaches.

Available in one form or another since the mid-1970s, individual retirement arrangements (IRAs) are designed to enable employees and self-employed people to save for retirement. Contributions to traditional IRAs are often deductible, but distributions, usually after age 59½, are generally taxable. Though contributions to Roth IRAs are not deductible, qualified distributions, usually after age 59½, are tax-free. Those with traditional IRAs must begin receiving distributions by April 1 of the year following the year they turn 70½, but there is no similar requirement for Roth IRAs.

Most taxpayers with qualifying income are either eligible to set up a traditional or Roth IRA or add money to an existing account. To count for 2014, contributions must be made by April 15, 2015. In addition, low- and moderate-income taxpayers making these contributions may also qualify for the saver’s credit when they fill out their 2014 returns.

Eligible taxpayers can contribute up to $5,500 to an IRA. For someone who was at least age 50 at the end of 2014, the limit is increased to $6,500. There’s no age limit for those contributing to a Roth IRA, but anyone who was at least age 70½ at the end of 2014 is barred from making contributions to a traditional IRA for 2014 and subsequent years.

The deduction for contributions to a traditional IRA is generally phased out for taxpayers covered by a workplace retirement plan whose incomes are above certain levels. For someone covered by a workplace plan during any part of 2014, the deduction is phased out if the taxpayer’s modified adjusted gross income (MAGI) for that year is between $60,000 and $70,000 for singles and heads of household and between $0 and $10,000 for married persons filing separately. For married couples filing a joint return where the spouse who makes the IRA contribution is covered by a workplace retirement plan, the income phase-out range for the deduction is $96,000 to $116,000. Where the IRA contributor is not covered by a workplace retirement plan but is married to someone who is covered, the MAGI phase-out range is $181,000 to $191,000.

The deduction for contributions to a traditional IRA is claimed on Form 1040 Line 32 or Form 1040A Line 17. Any nondeductible contributions to a traditional IRA must be reported on Form 8606. 

Even though contributions to Roth IRAs are not deductible, the maximum permitted amount of these contributions is phased out for taxpayers whose incomes are above certain levels. The MAGI phase-out range is $181,000 to $191,000 for married couples filing a joint return, $114,000 to $129,000 for singles and heads of household and $0 to $10,000 for married persons filing separately. For detailed information on contributing to either Roth or traditional IRAs, including worksheets for determining contribution and deduction amounts, see Publication 590-A.

Also known as the retirement savings contributions credit, the saver’s credit is often available to IRA contributors whose adjusted gross income falls below certain levels. For 2014, the income limit is $30,000 for singles and married persons filing separate returns, $45,000 for heads of household and $60,000 for married couples filing jointly.

Eligible taxpayers get the credit even if they qualify for other retirement-related tax benefits. Like other tax credits, the saver’s credit can increase a taxpayer’s refund or reduce the tax owed. The amount of the credit is based on a number of factors, including the amount contributed to either a Roth or traditional IRA and other qualifying retirement programs. Form 8880 is used to claim the saver’s credit, and its instructions have details on figuring the credit correctly.

Published: March 16, 2015

Are You Self Employed? Check Out These Tax Tips

Many people who carry on a trade or business are self-employed. Sole proprietors and independent contractors are two examples of self-employment. If this applies to you, there are a few basic things you should know about how your income affects your federal tax return. Here are six important tips about income from self-employment:

  • SE Income.  Self-employment can include income you received for part-time work. This is in addition to income from your regular job.
  • Schedule C or C-EZ.  There are two forms to report self-employment income. You must file a Schedule C, Profit or Loss from Business, or Schedule C-EZ, Net Profit from Business, with your Form 1040. You may use Schedule C-EZ if you had expenses less than $5,000 and meet other conditions. See the form instructions to find out if you can use the form.
  • SE Tax.  You may have to pay self-employment tax as well as income tax if you made a profit. Self-employment tax includes Social Security and Medicare taxes. Use Schedule SE, Self-Employment Tax, to figure the tax. If you owe this tax, make sure you file the schedule with your federal tax return.
  • Estimated Tax.  You may need to make estimated tax payments. People typically make these payments on income that is not subject to withholding. You usually pay this tax in four installments for each year. If you do not pay enough tax throughout the year, you may owe a penalty.
  • Allowable Deductions.  You can deduct expenses you paid to run your business that are both ordinary and necessary. An ordinary expense is one that is common and accepted in your industry. A necessary expense is one that is helpful and proper for your trade or business.
  • When to Deduct.  In most cases, you can deduct expenses in the same year you paid for them, or incurred them. However, you must ‘capitalize’ some costs. This means you can deduct part of the cost over a number of years.
Published: March 9, 2015

Education Tax Credits: Two Benefits to Help You Pay for College

Did you pay for college in 2014? If you did it can mean tax savings on your federal tax return. There are two education credits that can help you with the cost of higher education. The credits may reduce the amount of tax you owe on your tax return. Here are some important facts you should know about education tax credits.

American Opportunity Tax Credit:

  • You may be able to claim up to $2,500 per eligible student.
  • The credit applies to the first four years at an eligible college or vocational school.
  • It reduces the amount of tax you owe. If the credit reduces your tax to less than zero, you may receive up to $1,000 as a refund.
  • It is available for students earning a degree or other recognized credential.
  • The credit applies to students going to school at least half-time for at least one academic period that started during the tax year
  • Costs that apply to the credit include the cost of tuition, books and required fees and supplies.

Lifetime Learning Credit:

 

  • The credit is limited to $2,000 per tax return, per year.
  • The credit applies to all years of higher education. This includes classes for learning or improving job skills.
  • The credit is limited to the amount of your taxes.
  • Costs that apply to the credit include the cost of tuition, required fees, books, supplies and equipment that you must buy from the school.

For both credits:

  • The credits apply to an eligible student. Eligible students include yourself, your spouse or a dependent that you list on your tax return.
  • You must file Form 1040A or Form 1040 and complete Form 8863, Education Credits, to claim these credits on your tax return.
  • Your school should give you a Form 1098-T, Tuition Statement, showing expenses for the year. This form contains helpful information needed to complete Form 8863. The amounts shown in Boxes 1 and 2 of the form may be different than what you actually paid. For example, the form may not include the cost of books that qualify for the credit.
  • You can’t claim either credit if someone else claims you as a dependent.
  • You can’t claim both credits for the same student or for the same expense, in the same year.
  • The credits are subject to income limits that could reduce the amount you can claim on your return.
Published: March 6, 2015

Rules for Deferral of Income from Gift Card Sales

The IRS issued guidance clarifying that taxpayers that sell gift cards can defer recognizing income from the sale of gift cards redeemable by an unrelated third party until the year after the payment is received (Rev. Proc. 2013-29, clarifying and modifying Rev. Proc. 2011-18). With the rapid growth in the use of gift cards in recent years and the increasing variety of ways in which they are sold and redeemed, the IRS has been issuing guidance to address the tax accounting issues that have arisen regarding recognition of revenue and expenses related to gift cards and gift certificates.

Revenue from sales of gift cards is not recognized immediately for financial reporting purposes and may also be deferred for tax purposes. Under the new rule, if a gift card is redeemable by an entity whose financial results are not included in the taxpayer’s applicable financial statement (as defined in Rev. Proc. 2004-34, §4.06), the taxpayer will recognize in income payment for a gift card to the extent the gift card is redeemed during the tax year. For a taxpayer without an applicable financial statement, if a gift card is redeemable by an entity whose financial results are not included in the taxpayer’s financial statement, a payment for a gift card will be treated as earned by the taxpayer to the extent the gift card is redeemed by the entity during the tax year. Any payment the taxpayer receives that is not recognized in income in the year of receipt must be recognized in the next year. 

Because the rule as it was originally drafted in Rev. Proc. 2011-18 appeared to apply only to gift cards that were redeemable by related parties, this clarification was necessary to permit deferral in cases where the cards were redeemable by an unrelated entity. The new rule applies both to taxpayers with applicable financial statements and those without applicable financial statements as if it was included in the original revenue procedure and will apply to tax years ending on or after Dec. 31, 2010. 

By Sally P. Schreiber for the Journal of Accountancy

Published: March 2, 2015

Key Points to Know about Early Retirement Distributions

Some people take an early withdrawal from their IRA or retirement plan. Doing so in many cases triggers an added tax on top of the income tax you may have to pay. Here are some key points you should know about taking an early distribution:

1.Early Withdrawals.  An early withdrawal normally means taking the money out of your retirement plan before you reach age 59½.

2.Additional Tax.  If you took an early withdrawal from a plan last year, you must report it to the IRS. You may have to pay income tax on the amount you took out. If it was an early withdrawal, you may have to pay an added 10 percent tax.

3.Nontaxable Withdrawals.  The added 10 percent tax does not apply to nontaxable withdrawals. They include withdrawals of your cost to participate in the plan. Your cost includes contributions that you paid tax on before you put them into the plan.

A rollover is a type of nontaxable withdrawal. A rollover occurs when you take cash or other assets from one plan and contribute the amount to another plan. You normally have 60 days to complete a rollover to make it tax-free.

4.Check Exceptions.  There are many exceptions to the additional 10 percent tax. Some of the rules for retirement plans are different from the rules for IRAs. 

5.File Form 5329.  If you made an early withdrawal last year, you may need to file a form with your federal tax return. Your tax professional will be able to guide you in filing all necessary forms with your return. 

Published: February 27, 2015

Changes to Small Business Health Care Tax Credit

Small employers should be aware of changes to the small business health care tax credit, a provision in the Affordable Care Act that gives a tax credit to eligible small employers who provide health care to their employees.

Beginning in 2014, there are changes to the tax credit that may affect your small business or tax-exempt organization:

  • Credit percentage increased from 35 percent to 50 percent of employer-paid premiums; for tax-exempt employers, the percentage increased from 25 percent to 35 percent.
  • Small employers may claim the credit for only two consecutive taxable years beginning in tax year 2014 and beyond.
  • For 2014, the credit is phased out beginning when average wages equal $25,400 and is fully phased out when average wages exceed $50,800. The average wage phase out is adjusted annually for inflation.
  • Generally, small employers are required to purchase a Qualified Health Plan from a Small Business Health Options Program Marketplace to be eligible to claim the credit.  Transition relief from this requirement is available to certain small employers.

Small employers may still be eligible to claim the tax credit for tax years 2010 through 2013.   Employers who were eligible to claim this credit for those prior years – but did not do so – may consider amending prior years’ returns if they’re eligible to do so in order to claim the credit.  

Published: February 26, 2015

5 Key Steps in Preparing for April 15

It is probably the most dreaded day on the calendar for many people, and it is right around the corner: April 15, the deadline for most Americans to file their income tax return. This dread usually stems from two primary factors: the fear of having to write a large check payable to the Internal Revenue Service; and/or the amount of time needed to gather and organize all of the paperwork, tax forms and receipts that are needed to prepare your tax return. This is true even if you hire a tax professional to prepare and file your tax return — because you still have to pull all of this together for him or her.

With just a few weeks remaining before the tax-filing deadline, it is probably time for you to shift into high gear when it comes to preparing your tax return if you haven’t yet. Here are some steps to get you started:

1. Contact your tax professional. - Filing income taxes has gotten so complicated that the majority of Americans now use a paid tax preparer to help them file their tax return. If you are among this majority and you have not contacted your accountant or CPA to arrange a meeting to discuss your taxes yet, pick up the phone to do so right now.

If you do not have an accountant or CPA but would like to hire one for tax help, start out by asking friends or associates whom you trust for a recommendation. But don’t settle for the first tax professional who says he or she can meet with you. Perform some research to check on the qualifications and credentials before hiring a tax professional — for example, do an Internet search on the individual or firm and see what comes up, or check with your local Better Business Bureau or state board of accountancy.

2. Get all of your paperwork organized. - Whether you work with a tax professional or prepare your tax return yourself, plan on setting aside some time to get all of your tax documentation and forms together either before your meeting with your CPA or before you sit down at your computer. Start by pulling out (or pulling up) last year’s tax return — this will serve as a good roadmap for getting started on this year’s return.

Other important forms you’ll need are your W-2 Form from your employer, Forms 1099-MISC from clients who paid you last year (if you’re self-employed), and bank account and brokerage statements like Forms 1099-DIV, 1099-INT and 1099-B. In addition, you’ll want to gather receipts to support any deductions you plan to claim on Schedule A, Form 1040 (see below).

3. Determine your deductions. - Each year, Americans over-pay their taxes by millions of dollars by failing to claim legitimate deductions on their income tax returns. While it is easier to just claim the standard deduction — $6,200 for singles, $9,100 for heads of household and $12,400for married couples filing jointly for 2014 returns (all under 65 years of age) — doing so could be leaving a lot of money on the table.

You could increase the size of your tax refund substantially by itemizing your deductions instead. Doing so requires careful recordkeeping throughout the year and the filing of Schedule A (Itemized Deductions) along with your Form 1040. Among the expenses that you might be able to deduct are contributions you made last year to qualified charitable (or501[c][18][D]) organizations, sales taxes or state and local income taxes (but not both), mortgage interest and points paid on a new mortgage or mortgage refi, expenses incurred while looking for a new job, and contributions to some qualified retirement plans (see below). 

If you operate a business out of your home, even if it is just a part-time or freelance business, you should determine whether you qualify for the home office deduction. You may qualify for the deduction if your home office is used exclusively and regularly as your principal place of business or it is used regularly to store product samples or inventory, as rental property or as a home daycare facility.

4. Make a last-minute retirement plan contribution. - You can make a 2014 tax-deductible contribution to an Individual Retirement Account (IRA) or Simplified Employee Pension plan (SEP) all the way up until the April 15 tax-filing deadline. This is a great way to lower your tax bill and possibly increase the size of your tax refund. 

For tax year 2014, you and your spouse can each contribute up to $5,500 to an IRA (or $6,500 if you are age 50 or over but under age 70 1/2 at the end of 2014 ). If you are self-employed or own a small business, you can deduct contributions to your employees' SEP-IRAs of up to $52,000 per participant or 25 percent of the compensation (which is limited to $260,000 per participant), whichever is less.

If you hear a faint ticking sound in the background, that might be the clock ticking down to the April 15 tax-filing deadline. At this point, you don’t have much time to lose: Now is the time to start preparations for filing your tax return. Following these five steps is a good way to get started — and also possibly maximize your tax refund.

Adapted from MoneyTips.com

Published: February 24, 2015

Social Security Benefits and Your Taxes

If you receive Social Security benefits, you may have to pay federal income tax on part of your benefits. These IRS tips will help you determine whether or not you need to pay taxes on your benefits. They also explain the best way to file your tax return.

• Form SSA-1099.  If you received Social Security in 2014, you should receive a Form SSA-1099, Social Security Benefit Statement, showing the amount of your benefits.

• Only Social Security.  If Social Security was your only income in 2014, your benefits may not be taxable. You also may not need to file a federal income tax return. If you get income from other sources you may have to pay taxes on some of your benefits.

• Tax Formula.  Here’s a quick way to find out if you must pay taxes on your Social Security benefits: Add one-half of your Social Security to all your other income, including tax-exempt interest. Then compare the total to the base amount for your filing status. If your total is more than the base amount, some of your benefits may be taxable.

• Base Amounts.  The three base amounts are:

  • $25,000 – if you are single, head of household, qualifying widow or widower with a dependent child or married filing separately and lived apart from your spouse for all of 2014
  • $32,000 – if you are married filing jointly
  • $0 – if you are married filing separately and lived with your spouse at any time during the year

Published: February 23, 2015

Tempted to Pump Up Your Fuel Tax Credit? Don't!

For all the gas you buy in a given year, chances are good you won't be allowed to claim a credit on your tax return for the federal fuel taxes you paid.

Eligibility rules for the fuel tax credit are pretty limited: Do you run a commercial fishing boat? A farm? A school bus company? Or does your business run vehicles primarily on local roads, rather than federal highways?

If not, you probably don't qualify.

And yet, shady tax preparers push the idea.

"The IRS routinely finds unscrupulous preparers who have enticed sizable groups of taxpayers to erroneously claim the credit to inflate their refunds," the agency said.

Identity thieves, too, have been known to file a fraudulent return for a business or farm to claim the credit.

Part of the problem may be that while you must have a log of the people from whom you bought the fuel and the purchase dates, you're not required to attach receipts to your tax return.

The only way that lack of evidence would be discovered is if the IRS decides to audit you, said Mark Luscombe, principal federal tax analyst for tax publisher Wolters Kluwer, CCH.

If the IRS sniffs out a fraudulent or inflated fuel tax credit claim, it can result in a penalty of $5,000. And if the claim is part of a larger scam, that can result in other penalties, interest and possible criminal prosecution.

The agency said that it has beefed up its detection system to root out fraudulent or excessive fuel tax credit claims through use of new identity theft screening filters and has taken additional steps to set aside more returns for review that claim the credit.

From CNN Money

Published: February 20, 2015

10 Facts You Should Know About Capital Gaines and Losses

When you sell a capital asset the sale results in a capital gain or loss. A capital asset includes most property you own for personal use or own as an investment. Here are 10 facts that you should know about capital gains and losses:

1. Capital Assets.  Capital assets include property such as your home or car, as well as investment property, such as stocks and bonds.

2. Gains and Losses.  A capital gain or loss is the difference between your basis and the amount you get when you sell an asset. Your basis is usually what you paid for the asset.

3. Net Investment Income Tax.  You must include all capital gains in your income and you may be subject to the Net Investment Income Tax. This tax applies to certain net investment income of individuals, estates and trusts that have income above statutory threshold amounts. The rate of this tax is 3.8 percent. For details visit IRS.gov.

4. Deductible Losses.  You can deduct capital losses on the sale of investment property. You cannot deduct losses on the sale of property that you hold for personal use.

5. Long and Short Term.  Capital gains and losses are either long-term or short-term, depending on how long you held the property. If you held the property for more than one year, your gain or loss is long-term. If you held it one year or less, the gain or loss is short-term.

6. Net Capital Gain.  If your long-term gains are more than your long-term losses, the difference between the two is a net long-term capital gain. If your net long-term capital gain is more than your net short-term capital loss, you have a net capital gain. 

7. Tax Rate.  The capital gains tax rate usually depends on your income. The maximum net capital gain tax rate is 20 percent. However, for most taxpayers a zero or 15 percent rate will apply. A 25 or 28 percent tax rate can also apply to certain types of net capital gains.  

8. Limit on Losses.  If your capital losses are more than your capital gains, you can deduct the difference as a loss on your tax return. This loss is limited to $3,000 per year, or $1,500 if you are married and file a separate return.

9. Carryover Losses.  If your total net capital loss is more than the limit you can deduct, you can carry over the losses you are not able to deduct to next year’s tax return. You will treat those losses as if they happened in that next year.

10. Forms to File.  You often will need to file Form 8949, Sales and Other Dispositions of Capital Assets, with your federal tax return to report your gains and losses. You also need to file Schedule D, Capital Gains and Losses with your tax return. Your knowledgable tax professional will prepare the necessary forms on your behalf. 

Published: February 18, 2015

Florida has Highest Number of Consumers Buying Health Insurance in US

Florida has eclipsed California to become the state with the highest number of consumers buying health insurance in both the state and federal exchange under the Affordable Care Act.

Federal health officials said Wednesday that Florida's roughly 1.6 million enrollees includes both first time enrollees and some of the nearly 1 million Floridians who enrolled last year. California led the country last year with 1.2 million consumers, but lagged behind this year with a total of 1.4 million — 300,000 fewer than the state's goal.

According to the U.S. Census Bureau, 3.8 million of Florida's 19.5 million residents were without health insurance, making it the third-highest in the nation at 19.5 percent. By comparison, 6.5 million of California's nearly 38 million residents were without health insurance, about 17 percent.

From FOX Business

Published: February 17, 2015

Average Federal Tax Refund So Far: $3,539

It's still early days in the tax season, but the IRS has already received more than 14 million returns, the agency said Friday.

And it has issued refunds averaging $3,539 to nearly 7.6 million filers through January 30.

Refunds tend to be bigger early in the tax season, since those expecting a lot of money back are most likely to file first.

Over the course of the next few months, nearly 8 out of 10 filers will get a refund.

Normally, the IRS cuts its refund checks pretty quickly. But this year, because of budget cuts, IRS Commissioner John Koskinen has warned that there could be a delay in issuing some of them.

The agency said 9 out of 10 refunds will go out within 21 days from when a return is filed. But refunds for paper returns -- which normally take four to six weeks -- could take at least 7 weeks this year.

The vast majority of the returns filed so far this year (13.3 million) were filed electronically.

Overall, the IRS receives about 150 million returns a year.

From CNN Money

Published: February 13, 2015

Don't File a 'Frivolous' Tax Return

Wild, misguided notions of what's legal may make for amusing conversation, but when it comes to taxes, they're a problem.

There are still plenty of scam artists who are willing to use loopy ideas to convince fee-paying tax filers that they really don't owe any income tax at all.

The IRS calls these ideas "frivolous tax arguments" and has seen some doozies in recent years.

Among the most common: Filing and paying your taxes is voluntary. Only foreign-source income is taxable. You may refuse to pay your taxes on religious or moral grounds by invoking the First Amendment. And the only people subject to federal income tax are employees of the federal government.

Or there's this one: You won't owe federal income taxes if you simply file a return saying that you have no income and no tax liability. People apparently do this despite having recorded taxable income through, say, a paycheck. The same people often ask for a refund for the taxes their employer withheld, the IRS said.

All told the IRS has compiled more than 40 frequently made frivolous arguments.

"These arguments are wrong and have been thrown out of court," the agency said in a statement.

Any taxpayer, of course, is free to contest his tax liabilities. "But no one has the right to disobey the law or disregard their responsibility to pay taxes," the IRS noted.

If you choose to file a so-called frivolous tax return -- or let someone else do it on your behalf - you'll pay a $5,000 penalty for the privilege. You could also face accuracy-related penalties, a civil fraud penalty, and an erroneous refund claim penalty among others, according to the IRS.

From CNN Money

Published: February 12, 2015

Hiding Money in a Tax Shelter Can Come Back to Bite You

When someone tries to sell you on a complicated scheme that promises to slash or eliminate your tax bill, think twice. It's likely to be a scam.

These scam promoters set up abusive tax shelters in which they will move your income-producing assets -- including any business you own -- into a trust, limited liability company (LLC), limited liability partnership (LLP), international business company (IBC), or foreign financial account the IRS warned.

The IRS said it also has been seeing frequent misuse of "captive insurance" arrangements.

Regardless of the structure, however, the basic idea behind an abusive shelter is this: Once you put your assets into one of these entities, a string of complicated transactions are conducted solely for the purpose of hiding your money from the IRS and making it look like you can claim fat deductions, escape self-employment taxes, and shift money out of your taxable estate.

While some who perpetrate these scams are the taxpayers themselves, it's also common for business owners, physicians and other high-net-worth filers to be snookered by someone who promises the moon and backs up the scheme with official-looking documents to make it seem legal.

Before signing on: Ask whoever is trying to sell you the product whether he's collecting a referral fee from anyone, and get a second opinion about the set up from a trusted, independent tax advisor.

If you fall for this scheme and get caught, it could mean large penalties, interest and even criminal prosecution.

From CNN Money

Published: February 11, 2015

IRS Imposes New Limits On Tax Refunds By Direct Deposit

While taxpayers were popping returns into the mail this year, scammers were busy trying to figure out how to cash in. The Internal Revenue Service reported that, by Tax Day, they were investigating 1,800 active cases of identity theft investigations. Many of those cases involved millions of dollars each: just recently, a New York woman pleaded guilty for her part in a $65 million stolen identity tax refund fraud scheme.

The IRS has long walked a balance between trying to prevent fraud and issuing refunds to taxpayers in a timely manner. Taxpayers who file electronically and use direct deposit can get refunds in an average of 10 work days. That’s good news for taxpayers but even better news for fraudsters who hope to use the accelerated refund procedures to sneak in bogus claims. Putting the brakes on those refunds for fraudsters can, in some cases, slow down refunds for honest taxpayers. Finding ways to get refunds into the hands of honest taxpayers without increasing the opportunity for fraud has been difficult.

The IRS is introducing new procedures in 2015 which could help address some of these issues.

Effective for the 2015 tax season, the IRS will limit the number of refunds electronically deposited into a single financial account (such as a savings or checking account) or prepaid debit card to three. Under the new rules, any subsequent refunds will be issued by paper check and mailed to the taxpayer. The idea is to make it more difficult for criminals to obtain multiple refunds.

Of course, the new rules could make it more difficult for some honest taxpayers, too, such as families which use a single bank account. The IRS will not make an exception for accounts used by parents and children or other family configurations: those taxpayers will need to plan ahead by making other deposit arrangements or waiting a little longer for a paper check. Paper checks tend to take up to four weeks, compared to ten days by direct deposit. If you’re making other deposit arrangements, keep in mind that the IRS can only deposit tax refunds into accounts held by the taxpayer.

The rule also applies to preparers. I’ve long encouraged taxpayers to avoid using preparers who attempt to direct refunds into their own accounts. It’s not faster or better. Such preparers are often involved in schemes to steal taxpayer identities, money or both. Additionally, preparers are not allowed to get paid by splitting refunds using a federal form 8888 (downloads as a pdf) or by opening a joint bank account with the taxpayer. If a preparer suggests these options to you, walk away and do so quickly.

It’s worth noting that most taxpayers will not be affected by the new rules. The IRS continues to encourage the use of filing electronically in combination with direct deposit, claiming that it’s the “fastest, safest way for taxpayers to receive refunds.”

Expect the new rules to take effect in mid-January 2015.

By Kelly Phillips Erb for Forbes Magazine

Published: February 5, 2015

Lost or Haven't Received a W-2?

Form W-2 is one of the most essential pieces of paper when filing your taxes. If you've lost a W-2 - or if you never got one in the first place - there are a few things you can do:

Your employer is supposed to send a W-2 to both you and the Internal Revenue Service. The form reports how much you earned and the amount of taxes witheld from your paycheck.

Go ahead and contact the IRS. The IRS advises you to reach out if you haven't received the form by February 14. You should also contact your employer and ask them to issue you a W-2, or replace the one you lost.

If you run out of time, you can file your taxes using a Form 4852, estimating your income and witholding taxes yourself. If you get a W-2 after the tax deadline you can file an amended return.

You can contact the IRS about missing W-2s at 800-829-1040. Remember to provide your name, address, Social Security number and phone number, as well as your employer's contact information, the dates you worked there and your estimated wages and income tax witheld.

Published: January 30, 2015

Time to Send Out 1099s: What to Know

The 1099 can be mysterious. Business owners guess at its rules and requirements. Tracking changes to the procedures (some as recent as last February) can be so exasperating, some entrepreneurs just give up and file nothing at all. This can be dangerous as penalties can add up quickly. But the 1099 doesn't need to be complicated. To help simplify things, here are the basics.

To whom are you required to send a Form 1099? As a general rule, you must issue a Form 1099-MISC to each person to whom you have paid at least $600 in rents, services (including parts and materials), prizes and awards, or other income payments. You don't need to issue 1099s for payments made for personal purposes. You are required to issue 1099 MISC reports only for payments you made in the course of your trade or business. You'll send this form to any individual, partnership, Limited Liability Company, Limited Partnership or Estate.

What are the penalities? The penalties for not doing so can vary from $30 to $100 per form ($1.5 million for the year), depending on how long past the deadline the company issues the form. If a business intentionally disregards the requirement to provide a correct payee statement, it is subject to a minimum penalty of $250 per statement, with no maximum.

What are the exceptions? The list is fairly lengthy, but the most common is that you don't need to send a 1099 to corporations or for payments of rent to real estate agents (typically property managers -- yet they are required to send them to the property owners). Additionally, you don't need to send 1099s to sellers of merchandise, freight, storage or similar items.

Lawyers get the short end of the stick. Ironically, the government doesn't trust that lawyers will report all of their income, so even if your lawyer is 'incorporated,' you are still required to send them a Form 1099 if you paid them more than $600.

The W-9 is your "best friend." One of the smartest procedures a business owner can implement is to request a W-9 from any vendor you expect to pay more than $600 before you pay them. Using this as a normal business practice will give you the vendor's mailing information, Tax ID number, and also require the vendor indicate if it is a corporation or not (saving you the headache of sending them a 1099 next year). 

The procedure. Regrettably, you simply can't go to www.irs.gov and download a bunch of 1099 Forms and send them out to your vendors before the deadline. The form is "pre-printed" in triplicate by the IRS. Thus, you have to order the Forms from the IRS, pick them up at an IRS service center, or hopefully grab them while supplies last from the post office or some other outlet. Next, don't forget you have to compile all of your 1099s and submit them to the IRS with a 1096 by the following month. Sounds like fun...right?

The deadlines. Finally, you are required to issue and essentially mail out all of your Form 1099s to your vendors by January 31. Then you have to send in the transmittal Form 1096 to the IRS before February 28. For those of you that 'outsource' this service, your accountant with the proper system can actually submit the 1096 and stack of 1099s electronically by March 31. Don't forget as well, that depending on state law, you may also have to file the 1099-MISC with the state.

What about foreign workers? Also, if you hire a non-U.S. citizen who performs any work inside the United States, you would need to file the 1099. It is your responsibility to verify that the worker is indeed a non-U.S. citizen, and performed all work outside the United States. For that purpose, in the future you might want to have that foreign worker fill out, sign and return to you Form W-8BEN.

Don't ignore the 1099 or the process and even if you miss the first deadline of January 31, get with your CPA and make sure to finish up the process before the end of March. This could save you major penalties if you get caught not filing the Forms and you can show reasonable cause for your delays.

By Mark J. Kohler for Entrepreneur Magazine

Published: January 29, 2015

Less than One Week to File W-2s and 1099s

The good news: you get two extra days this year to provide those W-2 and 1099-MISC forms. The bad news? You'll have to work the weekend!

Businesses with employees or anyone who has contracted for more than $600 in work to a freelancer or subcontractor: you have until February 2, 2015, to provide the appropriate wage and income reporting form – a W-2 or 1099-MISC – to all recipients. Due to the typical filing deadline (January 31) falling on a weekend, the 2015 deadline for businesses to mail these forms from the previous tax year is February 2. For those who procrastinate, sorting through the various IRS reporting requirements at the last minute can make a tight deadline even more stressful.

  • How late can I file and still meet my deadlines?
    When waiting to file, businesses should – ideally – leave ample time to get filings out.  Make sure your provider clearly states when their deadline is for accepting filings to meet government deadlines. For recipient W-2 and 1099 reporting through electronic filing with the federal government, businesses can file until 6 p.m. ET on March 31 and still have filings completed in time. Hershkowitz & Kunitzer, P.A. must recieve all applicable information by Friday, January 30th, to ensure that W-2s and 1099s are mailed to recipients prior to February 2nd. 
  • Do I need to file with my state also?  What are my requirements?
    The answer is: "it depends." If your state requires workers to file an individual income tax return, you most likely need to file a 1099-MISC or W-2 form with the state and provide the worker with a copy to file with his or her return. Many states require that the 1099-MISC form be sent to the recipient, but the recipient does not need to attach the 1099-MISC form to his or her income tax return.

For any labor payment, though, get those 1099s out by the end of the January. For several years now the IRS has a two-line questionnaire on the requisite forms that asks, “Were you required to file Forms 1099?” “Did you file Forms 1099?” YES or NO. The IRS does not put questions on a tax form for no reason. Expect extreme penalties and the possible disallowance of payments not reported on Form 1099.

It's easy with our help, so let's get it done and avoid the negative consequences!

Press Release via Virtual Strategy Magazine

Published: January 27, 2015

Getting Organized for Tax Preparation

The holiday season is behind us; our New Year’s resolutions are in place and now we must get ready to meet with our tax pro to file 2014 income tax returns. If you started a 2014 income tax file at the beginning of last year and have been filing away important tax documents throughout the year, you may find the task will not be too daunting. The backup data you require will be at your fingertips. If you kept your personal finances on an accounting program such as QuickBooks or Quicken, you will be able to generate reports that provide the data your tax professional requires to prepare your income tax return.

But if you must sit down instead and review your check registers and other receipts, the following tips should help you get organized quickly.

Start by labeling a file folder “2014 Income Taxes” to hold copies of cancelled checks, credit card statements and other back up data for the numbers you will be using on your tax return.

If your tax pro sent you an organizer, it is best to complete the appropriate fields within the organizer and return that along with your back-up documentation. But if you, like so many others, have your own system and do not use the organizer, then plow ahead compiling your data as you did in years past. Remember however, that your tax preparation fee is based on how organized you present your data as well as on the number of forms involved and the complexity of your tax situation. If you provide your tax pro with well-organized, complete, and totaled data, your fee may be lower. Discuss your presentation with your tax pro for organizational tips.

Most organizers have boxes to fill in with the information from your W2. Do not bother to fill in that data. Instead, simply staple your W2(s) to that page in the organizer. If a client presents me with a W2, I input the data directly from the W2. I never bother with what is listed on the organizer; there may have been transpositions or incomplete fields. The same principle applies to all other data requests that are backed up with 1099s or K-1s. Simply provide the document. 

This will save a lot of time doing copy work.

In lieu of using the organizer you might prefer a spreadsheet program that can list all data and provide accurate totals. Refer to the organizer to make sure that you have not missed an important reportable item. The organizer normally contains columns with prior year data. This will jog your memory as to what deductions to look for as you review your financial data.

This year, because of Obamacare, there are two additional tax forms that may be required to file with your tax return. Your tax pro will likely provide an ACA questionnaire or worksheet for you to complete along with the organizer. If you did not have health insurance coverage for the entire year, you may be required to pay a penalty. Your tax professional will need dates of coverage and amounts paid listed by month in order to make the calculation or to determine if you are exempt from the penalty. Because tax pros have been put in a position to police the Affordable Care Act, your tax preparation fees will likely be slightly higher than last year. If you or your employer provided health care coverage for the entire year, you will not be required to break down the monthly costs.

As you organize your data think in terms of audit proofing your tax return. Make sure that you put receipts and cancelled checks in your tax file in the event of audit. Also be sure that all charitable contributions are backed up with an acknowledgement letter from the nonprofit. This is required and must be in place before filing the tax return. You cannot obtain the letter years later when you are audited. The IRS will disallow the deduction. If you have deductible automobile, travel and entertainment expenses – all red flags in the eyes of the IRS – be sure to have other documentation in your tax file to provide a bona fide tax deductible purpose for the expense. To substantiate automobile mileage you should have a mileage log, but absent that, you should have at least an appointment book or some other documentation showing dates, destinations, and number of miles traveled.

In this day and age, it’s rare to see an actual paper appointment book. Review your electronic calendar and on paper make a list of dates, destinations and miles driven to substantiate the expense. Keep this information in your tax file.

If you purchased or refinanced your home, second home, or a rental property during 2014, provide your tax pro with the settlement papers from escrow. There may be deductible items such as points or property taxes paid that provide a tax benefit.

Once you have compiled your data, review the organizer to ensure that you have completed all requirements for filing your return.

By Bonnie Lee for TAXpertise

Published: January 22, 2015

2015 Florida Taxable Wage Base Decrease & Minimum Wage Increase

Reemployment Tax Rates for 2015 

The 2015 reemployment (formerly unemployment) tax rate notices (RT-20) will be mailed to Florida employers by late January. Under Florida law, reemployment tax rates are calculated each year. The taxable wage base has decreased from the first $8,000 in wages per employee to the first $7,000 per employee for wages paid in 2015. Businesses should use the correct tax rate identified on the Reemployment Tax Rate Notice (RT-20) when filing the 1st quarter report in April 2015.

The State of Florida pays reemployment assistance benefits to qualified claimants using monies from theUC Trust Fund, which is funded by the reemployment (formerly unemployment) tax paid by Floridaemployers; Florida employees do not pay into the fund.

Reemployment tax is calculated by multiplying thetax rate by the taxable wages for the quarter.

2015 Tax Rates (effective January 1, 2015)

  • Minimum rate: .0024 or $16.80 per employee
  • Maximum rate: .0540 or $378.00 per employee

(The 2015 rate is based on annual salary up to $7,000 per employee.)

Florida's 2015 Minimum Wage

Effective January 1, 2015, Florida’s minimum wage will increase from $7.93 to $8.05, with a minimum wage of at least $5.03 per hour for tipped employees.

The minimum wage rate is recalculated yearly based on the percentage increase in the federal Consumer Price Index for Urban Wage Earners and Clerical Workers in the South Region for the 12-month period prior to September 1, 2013. 

On November 2, 2004, Florida voters approved a constitutional amendment which created Florida’s minimum wage.  The minimum wage applies to all employees in the state who are covered by the federal minimum wage.

Florida Statutes require employers who must pay their employees the Florida minimum wage to post a minimum wage notice in a conspicuous and accessible place in each establishment where these employees work. This poster requirement is in addition to the federal requirement to post a notice of the federal minimum wage.

Published: January 21, 2015

5 Things That Can Stop You From Getting a Tax Refund

For the average person, a tax refund check can end up being the equivalent of around two paychecks (give or take). This amount of money can serve many purposes for the typical household: it can pay an extra mortgage payment or two, pay off a few credit cards, or it can be enough money to take that much-needed vacation. 

But before you go packing your bags or making other plans for your check, you have to make sure you’re entitled to a refund first, and that nothing is standing in your way of receiving a check this tax season.

Although most taxpayers receive a refund, there are some things that can stop that from happening. Here are a few things that can stop you from receiving a refund this tax season. 

1. You (or your spouse) defaulted on student loans

Student loans are one of most common reasons that people have their tax refund checks offset. A default generally occurs after a borrower fails to make payments for 270 days, according to the Department of Education. Around 14% of borrowers default on their loans soon after they are scheduled to begin making payments.

Your joint return can also be intercepted for your spouse’s student loan debt. If only one spouse has a student loan debt (and only one spouse is legally responsible for that debt), you can fill out Form 8379, injured spouse allocation, and request to have only one spouse’s portion of the refund taken, as opposed to the entire refund.

2. You owe child support

According to the Office of Child Support Enforcement, federal refunds have been offset to pay past-due child support since 1982. “Since the program began in 1982 through the beginning of March 2013, more than $35 billion in past-due support was collected from 38 million intercepted tax refunds,” it explains.

As with student loans, if a spouse is not legally responsible for child support, that person may be able to collect his or her portion of the tax return by filling out an injured spouse allocation (From 8379). This, however, depends on individual state laws.

3. You owe an IRS debt

If you were audited by the IRS or you have a debt from a prior tax year for any other reason, the IRS is more than likely going to collect the money you owe to it prior to issuing any refund.

Generally speaking, the more money involved, the higher your risk of audit. That is, a person with a $50,000-per-year income is less likely to be audited than someone earning $1 million per year. In any case, either taxpayer has a chance of being audited.

In some cases, a spouse (or former spouse) may be able to be relieved of the tax debt, interest, and penalties. A tax debt is different from other types of debts, like child support and student loan debts. With a tax debt, the spouse generally would not file for injured spouse relief but for a different type of relief, such as innocent spouse relief or separation of liability.

4. Your income went up (or your tax situation changed)

If you made more money this tax year than you did last year, you may no longer be eligible for certain credits, like earned income tax credit (EITC), which is a refundable tax credit that results in large refunds for millions of taxpayers. According to the IRS, in 2013, more than 27 million taxpayers received a combined total of $65 billion in EITC.

An increase in income may also impact other tax benefits, like the premium tax credit. If you used the premium tax credit to lower the cost of your marketplace health insurance plan, and then your income increased throughout the year, you may even end up owing money because you are not entitled to as much tax credit as you received.

Even if your income didn’t change, your tax situation can change if you adjusted the amount of tax you paid throughout the year. For instance, an employee who adjusted withholding allowances to increase his or her paycheck — and underestimated the amount of tax that person needed to pay — may have to pay that money when it’s time to file.

5. Someone stole your identity

Identity thieves will steal information that can provide them with some sort of financial benefit, and this may include stealing a Social Security number and filing a tax return using that false Social. In the Tampa Bay Times, one taxpayer discussed her experience with this situation, and she didn’t receive her refund until nearly six months after she initially filed.

According to the Tampa Bay Times, “The IRS identified more than 2.9 million incidents of identity theft in 2013 and has described identity theft as the No. 1 tax scam for 2014.”

The IRS has identity theft-related notices that it issues, such as these:

  • CP01:”We received the information that you provided and have verified your claim of identity theft. We have placed an identity theft indicator on your account.”
  • CP01A: “This notice tells you about the Identity Protection Personal Identification Number (IP PIN) we sent you.”
  • CP01S: “We received your Form 14039 or similar statement for your identity theft claim. We’ll contact you when we finish processing your case or if we need additional information.”

If you think someone has stolen your identity, the IRS suggests you contact your local police, file a complaint with the FTC, place a fraud alert on your credit report, contact your creditors, and close any fraudulent accounts. Also, respond to any IRS notices, submit IRS Form 14039, “Identity Theft Affidavit,” and continue to send in your tax return (even if you send in a paper return).

By Erika Rawes for Personal Finance Cheat Sheet

Published: January 20, 2015

3 Steps to A Smoother Tax Season

April 15 is rapidly approaching and now is a good time to start getting ready.  

The following are some suggested steps to take now while there is still time to ensure a less stressful tax season and also save money on taxes, whether you prepare your own returns or have them done for you.  

1. Gather Your Charitable Receipts

Many of us make charitable contributions of cash or goods.  The IRS allows a deduction for these contributions typically up to 50% of AGI.  Proper documentation is required to substantiate these deductions so it is wise to gather these now.

Individuals making cash contributions of $250 to any single organization must obtain a written acknowledgment from the organization in order to claim a deduction.  This letter must be received before the filing date of the tax return.  Single contributions of less than $250 can be substantiated by cancelled check.

If you make total non-cash contributions over $500 you must complete a detailed IRS form that is attached to the tax return listing each item and its fair market value.

2. Organize Tax Documents

You will soon be receiving various tax documents from your employer, the federal government and the various financial institutions you do business with.  Forms such as the W-2, reporting your income and withholdings from employment, the 1099-B, reporting stock and mutual fund transactions, and the 1099-DIVand 1099-INC, reporting bank paid dividends and interest, are issued by the end of January.  Key data from these forms must be correctly reported on your tax return as the IRS also receives copies and will send you a notice if these are not reflected on your return.  As you receive these forms, place them in a folder so that they will be handy when needed.  Scanning them to a secure digital folder is also a good idea in case the paper originals are ever lost.  Follow up with issuers immediately if you have not received an expected tax form by early February.  

3.  Spend Your Flexible Spending Account (FSA) Money

Many employers offer their employees a way to set aside a portion of their salary on a pre-tax basis to pay for out of pocket medical expenses.  Given that the IRS does not allow a deduction for medical expenses that do not exceed 10% of adjusted gross income, a Flexible Spending Account (FSA) is usually the only way to save taxes on these expenses.  FSAs are particularly valuable for taxpayers who are impacted by the AMT tax as a way to lower their taxes via pre-tax savings thereby offsetting some of the deductions lost due to the AMT.  

The IRS allows employers to give employees until March 15 to spend prior year FSA savings before they are forfeited.   IRS rules also allow employers to offer the option of rolling over up to $500 of unused savings to the following year, but this is not mandatory.  Review your unclaimed out of pocket medical expenses for 2014 and make sure to claim enough of these to use up any FSA savings that will otherwise be lost.

Tax season is inherently a stressful time.  Getting an early jump on your preparation will allow you not only to lower your stress level but also avoid letting key tax saving opportunities fall through the cracks.

By Joe Alfonso for GoLocalPDX

Published: January 16, 2015

Tax Credits for Parents

More and more parents can't afford to pay for child care. College tuition is always on the rise, and the general costs of living are harder to cover as the national economy struggles to right itself. Parents, however, may find some help at tax time. There are credits for education, child care and for simply having children.

Child Credits

Most of the tax breaks for parents pertain to child care and education, but the easiest break of all is to simply have children. The Child Tax Credit provides up to $1,000 for every child under 17 in your care if you meet certain income requirements. Those filing a joint return will see the amount of the credit begin to phase out if their adjusted gross income exceeds $110,000. The phase-out starts at $75,000 for single parents.

The number of children you have also figures into your eligibility for the Earned Income Tax Credit, which can significantly reduce the amount of tax you owe. In 2014, you are eligible for the credit if you have three or more children and earned less than $46,997 as a single person, or $52,427 as a married couple filing jointly. The income thresholds then drop according to the number of children you have.

"If you have really low income and you are single, you can get an earned income credit as long as you have wages," says Barbara Steponkus, an Edgerton, Wisconsin-based board member with the National Association of Tax Professionals. "If you have one child, you can make more money. If you have two children, you can make more money yet (and still qualify)."

Parents may also get a break if they're spending a lot of money on child care. As of 2014, child care could cost more than $18,000 a year, according to the National Association of Child Care Resource and Referral Agencies. The answer for that is the child and dependent care credit, which will cover up to 35 percent of child-care expenses, or up to $3,000 for a child under 13. A second child may also qualify you for up to $3,000. Both credits depend on your income.

Also, your employer may exclude up to $5,000 from your taxable wages for child-care expenses.

"If you have one child, that's a great way to get it because you get $5,000 instead of only $3,000," Steponkus said.

The employer deduction may not be added on top of the child and dependent care credit, so it's not as sweet if you have more than one child. All things being equal, credits against taxes owed are preferable to deductions from taxable income, Steponkus says. That’s because a tax credit is applied dollar-for-dollar to your taxes owed, rather than simply reducing the amount of income that can be taxed.

School Benefits

A slew of tax benefits are available if you're putting your children through school. Some states offer benefits for parents paying for parochial-school tuition and supplies for children in kindergarten through high school.

"But everything in a federal return is just for college (or other post-secondary education)," said Jo Ann Schoen of Rochester, Minnesota, treasurer for the National Association of Tax Professionals.

As with child care, federal education benefits come in the forms of credits and deductions. These benefits do not overlap, however, so you must know which ones you are eligible for and which to claim.

The American Opportunity Credit is available through 2017. It allows for a credit of up to $2,500 for tuition and related expenses for each of the first four years attending college at least half-time. Individuals who earn no more than $80,000 and couples earning no more than $160,000 are eligible for the full American Opportunity Credit, which basically expands on and replaces the Hope Credit. The credit phases out over the next $10,000 ($20,000 married filing jointly) of income.

The Hope Credit had lower income limits, a maximum credit of $1,800, did not cover books and other supplies, and was good only for the first two years of college. These rules are likely to go back into place if the American Opportunity Credit expires at the end of 2017.

The Lifetime Learning Credit has lower income limits and applies to students in non-degree and career skills training programs. Eligibility for the Lifetime Learning Credit is capped at $61,000 for single filers and $122,000 for couples filing jointly. The maximum benefit is $2,000. Also, the Lifetime Learning Credit is available on a per-household basis. The American Opportunity Credit is available on a per-student basis.

There are other key differences to consider when choosing between the American Opportunity Credit and the Lifetime Learning Credit. The Lifetime Learning Credit doesn’t take into account felony drug convictions, is available year after year, and requires enrollment in only one course. The first 40 percent (up to $1,000) of the American Opportunity Credit is refundable, which means you can receive that amount even if your tax is zero.

"They split it out when you actually go through the tax form," Steponkus said. When you use TurboTax to prepare your taxes, we’ll recommend the credit that gives you the best tax outcome.

If you don’t claim either of the education tax credits, you still have the option to deduct up to $4,000 of tuition and fees. The income limits for the tuition and fees deduction are $80,000 for single taxpayers and $160,000 for married couples filing jointly.

529 Plan

Qualified tuition plans, or 529 plans, offer yet another way to save on taxes while providing for your child’s education. A 529 plan is not a deduction or a credit. It’s a shelter. The state-by-state 529 plans authorized by the Internal Revenue Service allow you to invest and earn interest on the funds without subjecting you to federal income taxes. In many cases, it also wipes out state income taxes.

Jo Ann Schoen, treasurer for the National Association of Tax Professionals, says "529 plans are a good way of starting that nest egg for college."

You must ensure that the withdrawals are spent on eligible education expenses, including tuition and room and board. Otherwise, you’ll get hit with income taxes after the money is spent. The Securities and Exchange Commission recommends you assess your overall financial situation before starting a 529 plan. After all, there's no point in depositing money into a restricted account for future savings if you're presently struggling to pay the bills.

From TurboTax Tips

Published: January 14, 2015

IRS Warns of Tax Refund Delays

The IRS normally refunds quicker, but this year, some filers are going to have to wait. 

Due to budget cuts, people who file paper tax returns could wait an extra week for their refund — "or possibly longer," wrote IRS Commissioner John Koskinen in a memo to employees Tuesday. And filers with errors or questions that require additional review will also face delays.

Last month, Congress approved a $10.9 billion budget for the IRS for fiscal year 2015, which ends in June. That's the lowest level of funding since 2008, Koskinen said.

Koskinen said the budget cuts would result in several other changes at the agency, including:

Fewer audits. Due to cuts in enforcement staff, collection efforts for individuals and businesses will be reduced.

Hiring freeze. The freeze, plus normal attrition rates, will result in 3,000 to 4,000 fewer full-time employees at the agency by the end of June. Including the headcount losses incurred since 2010, that means the agency's full-time staff will be reduced by as many as 17,000 employees over the course of five years.

Less taxpayer help. Cuts in overtime and temporary staff hours will not only delay refunds, but hurt correspondence with taxpayers as well. Koskinen said it's likely that fewer than half the taxpayers that call the agency will be able to get through.

A possible two-day shutdown after tax season. To minimize disruptions, Koskinen said a temporary shutdown, if needed, would likely occur closer to June. But, he added, the agency will do what it can to avoid this option, which he called a "last resort."

Delays in IT investments. Among the delays, will be technologies that offer new taxpayer protections against identity theft.

By Jeanne Sahadi for @CNNMoney

Published: January 9, 2015

5 New Year's Resolutions to Save on Taxes

Another year has rolled in and it's time to make those ever-challenging New Year's resolutions. Sometimes resolutions can be hard to keep. But when money is at stake, I bet the odds of compliance increase. Here are some New Year’s resolutions that are worth keeping in order to keep your money in your pocket, rather than in Uncle Sam’s:

1. Pack away 2014. This one is easy. Take all those receipts, stuff them in an envelope or in file folders or place in a plastic tub marked 2014 and shove it in the shed. I suggest going through the receipts first. Some that don’t need to be around for legal or tax reasons can be discarded. If there is a tax purpose, create a file for 2014 Income Taxes and place the receipts in this file. Later in the month you can add your W2, 1099s, K-1s and other important tax documents that arrive in the mail for preparation of your 2014 Income tax return. Also set up files for 2015 for bank account statements, credit card statements and general categories that you want to track. During the year, file away receipts and other documents as they come in in order to enjoy an orderly and easily accessible financial life.

2. Make a 2015 Tax File. It’s never too early to prepare for 2015 income taxes. In fact, you will be glad you did. Throughout the year you can slide receipts for medical expenses, property tax payments, vehicle registration fees, and other tax data into the file. It is especially critical to keep copies of acknowledgement letters from nonprofit organizations for charitable contributions made. This has been a major audit point for the IRS the past several years. Copies of cancelled checks and credit card receipts are not enough. By inserting tax documentation as you go during the year, you cut down on the angst and stress of preparing your data for the tax return. Almost all of the work has been done; the data has been pre-assesmbled and you can just pick up the file and head out to your tax appointment come tax time.

3. Set up QuickBooks. If your personal tax situation is complex, for example, you own one or more rental properties and you itemize deductions, it might be prudent to set up your tracking on accounting software. Bill paying, tracking, checkbook reconciliation are facilitated as well. Plus, you can generate financial reports that summarize income and expenses for each rental property. And you can view financial statements that disclose household spending. This is great for creating future budgets and for discovering where all that money went.

4. Tax Planning. In this day and age with the complexity of tax law, it is important to stay ahead of the game. This involves a midyear sit down with your tax professional to review the current year and set up a game plan to minimize your tax hit. This is especially true if you experience any significant changes in finances: divorce, marriage, buying and selling real estate, cashing out stock, IRA withdrawals, changing jobs, losing a dependent, losing a job. Don’t let the following April 15 slap you in the face. When you see your tax pro this season set up a post season appointment for planning.

5. Make your Estimated Tax Payments. Almost everyone with a tax liability who does not receive a W2 at year end is a candidate for estimated tax payments. This includes those who are self-employed or who make their living from investments. Your tax pro will set you up with quarterly vouchers to prepay your current year tax liability. Estimated tax payments are required if your federal liability is greater than $1,000. You may also have a requirement at the state level as well. Check with your state taxing agency or tax pro to determine if you do. It can be easy to blow off paying the estimates when other things like a new car or a vacation beckon. However, you can be penalized for not prepaying your liability and you may end up in tax trouble if you cannot come up with the total due by April 15. It might be advisable to have a separate “tax savings account,” in which to deposit money for disbursing quarterly to the IRS and the state.

By Bonnie Lee for FOX Business

Published: January 5, 2015

Business Drivers Get a Bigger Tax Deduction in 2015

Gas prices are at their lowest point in more than four years, yet the Internal Revenue Service has raised the tax break for employees using their vehicles for work in 2015.

The IRS revised its standard business mileage — the amount the federal agency will allow taxpayers to deduct for unreimbursed driving expenses for cars, vans, pickups and panel trucks — to 57.5 cents per mile, up from 56 cents in 2014.

The 2015 rate is the second highest in the tax service’s history. In 2008, record high gas prices drove the rate to 58.5 cents.

The increased deduction is good news for drivers, but puzzling to anybody who has been watching gas prices plummet since September.

Fuel costs only represent a portion of what the IRS considers when it produces mileage rates, said Jennifer Jenkins, Western Pennsylvania spokeswoman for the tax service. The IRS relies on a variety of fixed and variable factors.

The government has calculated that it is becoming more expensive for drivers to own, lease, insure and maintain their vehicles. Those increases more than offset fuel savings, at least for now.

IRS mileage rates are based on research from Runzheimer International, a travel management firm in Wisconsin. The government has worked with the company for the past 35 years, said Cris Robinson, research analysis supervisor with Runzheimer.

“Even when your operational costs are going down — that’s the fuel, the maintenance, the tires, the oil, all of those things — the fixed costs are usually a little bit more as far as the annual cost of the vehicle,” Ms. Robinson said.

Those fixed costs, which include vehicle depreciation, have been rising steadily since the late 2000s, she said.

Runzheimer does not provide suggested rates to the IRS. The IRS uses the company’s data to set the annual mileage rates, Ms. Robinson said.

Though the business mileage rate is going up, the rate that taxpayers can deduct for driving related to medical or moving purposes is going down — to 23 cents from 23.5 cents. That rate is factored using only variable rates, such as gas prices.

In 2015, the mileage rate for charitable activities, which also is calculated separately, is unchanged at 14 cents.

Though falling fuel prices weren’t enough to drive down the business mileage rate this year, Ms. Robinson said fuel prices are an important factor in setting rates. That’s reflected in historical business mileage rates, which were set at 9 cents as recently as 1995 before climbing significantly in the following years. An average gallon of gas cost $1.15 in 1995.

Ms. Robinson said Runzheimer does not factor speculative statements in its research, so gas price predictions are ignored. 

Ms. Jenkins noted individuals who claim mileage deductions must be prepared to show documentation for those miles driven — such as mileage logs, event calendars and even work schedules.

“The key thing is that it doesn’t look like they’re coming up with numbers out of thin air,” she said.

While the standard mileage rate is useful for many drivers, it is an imperfect figure. An individual’s actual driving costs might vary — much the same way the standard deduction differs from actual deductible tax expenses — and some drivers might opt to itemize their costs for a more accurate figure.

But for those who don’t want to track and document every business expense, the standard mileage rate is a “safe harbor,” Ms. Robinson said.

By Michael Sanserino for the Post-Gazette

Published: January 2, 2015

Hate Taxes? Be Thankful You're Not a Pro Athlete

Former Chicago Bears linebacker Hunter Hillenmeyer was willing to pay his fair share of taxes to cities where he played. Cleveland, he says, got greedy. Hillenmeyer and former Indianapolis Colts center Jeff Saturday are suing the city in the Supreme Court of Ohio for refunds of $5,062 and $3,294, respectively. They say it’s not the sum that matters but the principle: Cleveland taxes all the athletes on a visiting team for every game, even players who are hurt or don’t attend. “Nobody likes paying taxes—that’s obvious—but they should be fair,” says Hillenmeyer, who retired in 2010 after eight years in the National Football League. “It was just such an egregious and shameless money grab by the city of Cleveland, it just felt wrong not to try to do anything about it.”

Twenty-one states and eight cities that are home to major professional sports teams—including Detroit, Kansas City, and Philadelphia—tax visiting players, coaches, trainers, and others who accompany the team, says Sean Packard, an accountant in Virginia who handles taxes for about 200 athletes. These income taxes, often based on players’ salaries and how often they play in the state, can be a major revenue source. California collected $163.8 million in 2011 from resident and nonresident professional athletes for MLB, the NBA, NHL, NFL, WNBA, golf, tennis, and soccer, according to the state Franchise Tax Board. About $151 million of that came from the top four sports, the board said. Pittsburgh took in $3.1 million from pro athletes in 2013. Not all states and cities break out tax revenue from players.

Athletes are attractive targets because they make billions in combined income, have no say in where they play, and aren’t exactly objects of public pity. The taxes became widespread after California used its income tax laws to extract money from players for the Chicago Bulls, who’d defeated the Los Angeles Lakers in the 1991 NBA championship, says Robert Raiola, an accountant in New Jersey who represents about 125 athletes. Illinois retaliated with its own taxes on out-of-state athletes in what became known as “Michael Jordan’s Revenge,” he says.

Although players can get credit in their home states for out-of-state taxes paid, they generally can’t get credit for taxes that cities make them pay, Packard says. Hillenmeyer and Saturday are challenging the way Cleveland assesses its tax, which they say is unfair. The city uses a games-played calculation that divides the number of games a team plays in the city by the number of games in a season. The players prefer a formula known as duty days. It divides the number of games played in the city by the number of days in a season, which means lower taxes per game.

Here’s how it works out: In 2006, Hillenmeyer’s salary was $3.2 million. Using its formula, the city of Cleveland calculated that his per-game taxable income was $162,002, according to papers Hillenmeyer filed with the Ohio Board of Tax Appeals. Under the more common duty-days calculation that other cities and states use, Hillenmeyer’s taxable income would have been $38,557, according to the filing.

Saturday’s complaint isn’t only that he had to pay Cleveland too much but that he shouldn’t have had to pay at all. A six-time Pro Bowl center, he played 13 years with the Colts and won a Super Bowl in 2007 before finishing his career with the Green Bay Packers in 2012. In 2008 he was injured and missed the Colts’ only game in Cleveland that year. He was still hit with a $3,294 tax, thanks to city regulations that count payments an employer makes to a sick and absent employee. “It just became a tipping point,” says Saturday, who retired last year and is an analyst for ESPN. “I didn’t want other guys to have to face the same thing.”

Hillenmeyer’s and Saturday’s protests spent years working their way up to the Ohio Supreme Court, which has agreed to hear the cases but hasn’t yet set a date. Cleveland city spokeswoman Maureen Harper declined to comment on the case. The city has said in filings that it has discretion as long as the tax is reasonable. The games-played formula is precise because athletes are paid to perform in games, the city has said.

States usually give visiting executives a little leeway before they have to start forking over local income taxes. Ohio law says nonresidents who work in a city for 12 or fewer days a year don’t have to pay anything. Sports stars and entertainers are specifically exempted from this grace period. And it’s no use for a linebacker or center fielder to try to slip in and out of the state unnoticed, says New Jersey CPA Raiola. “Athletes,” he says, “are high-profile, high-salary, and very easy to track.”

By Mark Niquette for BusinessWeek

Published: December 31, 2014

ObamaCare Fines Rising in 2015

Don't have health insurance? Get ready to pay up. 

The ObamaCare-mandated fines for not having insurance are rising in 2015 -- and for the first time, will be collected by the Internal Revenue Service. 

The individual requirement to buy health insurance went into effect earlier this year. But this coming tax season is the first time all taxpayers will have to report to the IRS whether they had health insurance for the prior year. 

The fines for the 2014 year were relatively modest -- $95 per person or 1 percent of household income (above the threshold for filing taxes), whichever is more. 

But insurance scofflaws face a sharp increase if they don't get covered soon. The fine will jump in 2015 to $325 or 2 percent of income, whichever is higher. By 2016, the average fine will be about $1,100, based on government figures. 

The insurance requirement and penalties remain the most unpopular part of the health care law. They were intended to serve a broader purpose by nudging healthy people into the insurance pool, helping to keep premiums more affordable. But the application of fines in 2015 could renew criticism of the law, at a time when Republicans are taking control of Congress and looking at ways to undercut the policy. 

According to government figures, tens of millions of people still fall into the ranks of the uninsured. 

Unclear is how many would actually be assessed a fine. The law offers about 30 different exemptions, most of which involve financial hardships. Further, it's unclear how aggressively the IRS would go after the fines. 

Many taxpayers may be able to get a pass. 

Based on congressional analysis, tax preparation giant H&R Block says roughly 4 million uninsured people will pay penalties and 26 million will qualify for exemptions from the list of waivers. 

Deciding what kind of waiver to seek could be crucial. Some can be claimed directly on a tax return, but others involve mailing paperwork to the Department of Health and Human Services. Tax preparation companies say the IRS has told them it's taking steps to make sure taxpayers' returns don't languish in bureaucratic limbo while HHS rules on their waivers. 

Timing also will be critical for uninsured people who want to avoid the rising penalties for 2015. 

That's because Feb. 15 is the last day of open enrollment under the health law. After that, only people with special circumstances can sign up. But just 5 percent of uninsured people know the correct deadline, according to a Kaiser Family Foundation poll. 

"We could be looking at a real train wreck after Feb. 15," said Stan Dorn, a health policy expert at the nonpartisan Urban Institute. "People will file their tax returns and learn they are subject to a much larger penalty for 2015, and they can do absolutely nothing to avoid that." 

In a decision that allowed Obama's law to advance, the Supreme Court ruled in 2012 that the coverage requirement and its accompanying fines were a constitutionally valid exercise of Congress' authority to tax. 

Sensitive to political backlash, supporters of the health care law have played down the penalties in their sign-up campaigns. But stressing the positive -- such as the availability of financial help and the fact that insurers can no longer turn away people with health problems -- may be contributing to the information gap about the penalties. 

Originally published by FoxNews.com with information from The Associated Press. 

Published: December 30, 2014

Tax Return Filing Season Opens January 20, 2015

Ready, set, file? Not quite. If you’re waiting on a tax refund, you can’t get it until you file, and the IRS says it will accept returns starting January 20, 2015. Following the passage of the extenders legislation, the IRS says it anticipates opening the 2015 filing season as scheduled in January.

The IRS will begin accepting tax returns electronically on Jan. 20. Paper tax returns will begin processing at the same time. The IRS had previously announced that it planned a Jan. 30 tax season opening for 1040 filers, so this isn’t bad at all.  After all, Congress was tweaking the tax law at the last minute, renewing a number of “extender” provisions that expired at the end of 2013.

These provisions were renewed by Congress through the end of 2014. The final legislation was signed into law Dec 19, 2014. Some had predicted that the IRS would not start accepting returns until January 30 or later. But here’s what the IRS Commissioner said:

“We have reviewed the late tax law changes and determined there was nothing preventing us from continuing our updating and testing of our systems,” said IRS Commissioner John Koskinen. “Our employees will continue an aggressive schedule of testing and preparation of our systems during the next month to complete the final stages needed for the 2015 tax season.”

The IRS reminds taxpayers that filing electronically is the most accurate way to file a tax return and the fastest way to get a refund. According to the IRS statement, there is no advantage to filing tax returns on paper in early January instead of waiting for e-file to begin. The IRS says more information about IRS Free File and other information about the 2015 filing season will be available in January.

By Robert W. Wood for Forbes Magazine

Published: December 29, 2014

2015 Capital Gains Tax: 5 Things You Need to Know

Your main goal when you invest is to make money. But the IRS wants its cut of your profits, and usually, you have to pay taxes on any capital gains that you have when you sell an investment that has gone up in price. You can expect the 2015 capital gains tax rates to stay pretty much the same as they were in 2014, but many people still get confused about the ins and outs of paying taxes on capital gains more broadly. Let's look at a few basic tips you can use to pay as little as possible in capital gains taxes in 2015 and beyond.

1. Don't want to pay capital gains taxes? Don't sell

Perhaps the most important tax break that many people don't realize they get is that no matter how much a stock you own goes up in price, you don't owe capital gains taxes on your profits until you actually sell the stock. That means long-term investors get a huge tax break in the form of deferral of tax, even if they own a stock in a regular taxable account.

Investors in mutual funds have to deal with different rules, though, whereby funds can actually pay out capital gains distributions even if you don't sell your shares. The reason: when thefund sells the investments it owns, it has to pass through the resulting capital gains to you for you to include on your tax return. Using exchange-traded funds rather than traditional mutual funds can help cushion the blow here, as their different structure makes them less prone to generate capital gains.

2. Long-term traders sometimes pay nothing in capital gains taxes.

If you hold investments for longer than a year, then you qualify for long-term capital gains treatment, which involves lower rates. In fact, for those who are in the 10% or 15% tax brackets for ordinary income like wages or interest income, long-term capital gains qualify for a special 0% tax rate -- meaning you won't pay a penny on your profits. Even those who are in higher brackets will pay a maximum of 15% unless you're in the top bracket, in which case a 20% maximum applies. The 20% rate took effect in 2013; before that, 15% maximums applied all the way up the income scale. Keep in mind, though, that for taxpayers who earn more than $200,000 for singles or $250,000 for joint filers, an extra 3.8 percentage point net investment income surtax applies, boosting your total effective tax rate.

3. Short-term traders pay the highest capital gains taxes.

If you hold property for a year or less, then you don't get to take advantage of any of the favorable long-term capital gains tax rates you've heard about. Instead, you'll pay the same tax rate you do for other types of income, including wages, interest income, and retirement-account distributions. You could pay short-term capital gains taxes of as much as 39.6%, as well as having to add on the 3.8% from the net investment income surtax. The easiest way to avoid the high short-term capital gains tax: hold onto stocks for longer than a year so you can get the better long-term rate.

4. Another smart tax-cutting strategy: use losses to offset gains.

Toward the end of the year, many investors look for capital losses that they can use to offset any capital gains from earlier in the year. Because you only have to pay tax on any net capital gains, a loss on one investment can cancel out gains on another. So if you expect to have a big capital gains liability early in 2015, then you spend the rest of the year looking for losing stocks in your portfolio whose losses you can use to reduce or eliminate any net capital gains.

5. The ultimate tax dodge (warning: it comes at a high price)

One little-known way to avoid capital gains tax forever is to hold onto your assets until your death. Assets you own in a taxable account get a step-up in their tax basis when you die, and as a result, your heirs won't have any capital gains tax liability at all if they sell shortly after your death. Of course, that's not a strategy you can use for yourself, and so it represents a tension between your own financial interests and those of your broader family.

Tax planning can seem complex, and in some cases, it is. But dealing with capital gains doesn't have to be hard. Keep these simple tactics in mind, and you'll go a long way toward reducing your 2015 capital gains tax bill.

By Dan Caplinger for The Motley Fool

Published: December 23, 2014

Tax Filing in 2015: 4 Important Things to Know

The year is coming to an end, and before you know it, it will be time to start working on your taxes. No matter whether you have a refund coming and will be itching to file as soon as possible, or you plan to wait until the last minute to delay paying a hefty tax bill, tax season always involves collecting necessary documents and then using them to prepare a timely return. Let's look at four important things you'll need to know to make your tax filing in 2015 go smoothly.

1. Don't jump the gun.

Many people figure they can file their tax returns as soon as the new year begins. If you have a pay stub that indicates your total income for the year, it's tempting to get a jump on the filing season by grabbing an online copy of the tax forms you need and sending them in.

But each year, the IRS sets an opening date before which it will not accept tax filings. In 2014, the IRS originally set that date for Jan. 21, but last-minute revisions to the tax laws forced the agency to push back the date to Jan. 31. Similarly, in 2013, major tax law changes tied to the expiration of tax cut provision passed in the early 2000s required the IRS to delay accepting returns until Jan. 30.

For tax filing in 2015, IRS Commissioner John Koskinen warned that delays from lawmakers in passing provisions extending many well-established tax breaks could push the tax filing date back again. Although those extensions were largely renewed earlier this month, that might nevertheless come too late for the IRS to start on time, especially with reduced resources for the government agency.

2. Know when your tax documents are coming.

To file your taxes, you need accurate information, which employers and financial institutions are required to provide. However, the government gives them time beyond the end of the year to prepare those documents, which can force you to hold off on tax filing as early as you might like.

Employers have until Feb. 2 to send W-2 forms to their personnel. The same date applies to many of the 1099 information returns that you receive on interest and dividend income. Those with brokerage accounts, though, might have to wait until mid-February to receive information returns covering sales of assets. Moreover, those who invest in master limited partnerships and other specialized investments could wait much longer to get their necessary tax information, with due dates running from mid-March to mid-April in some cases. Investors should watch closely to ensure all their income is reflected on statements before filing a final tax return.

3. Dealing with erroneous information.

Often, you'll get information returns that have mistakes on them. Because the IRS also receives a copy of those returns, it's critical that you not just fix the mistake on your own taxes, but have your employer or financial institution file an amended information return. Otherwise, the discrepancy between what the form says and what you put on your return could trigger a red flag that could lead to an audit.

Some financial institutions realize on their own that they have made mistakes in the information provided to you. That can lead to you receiving an amended information return; if you have already filed your taxes, then you'll need to amend your own tax filing to reflect the new information.

4. Rein in your expectations for a speedy refund.

Many people have high expectations about how soon they will receive their tax refund after they file their taxes. But before you make plans for your refund money, keep in mind that the IRS makes no claims about when you should expect to see a check. In fact, the IRS says, "Don't count on getting your refund by a certain date to make major purchases or pay other financial obligations."

That said, the IRS has traditionally been good about making speedy refunds to those taxpayers who file electronically. According to IRS figures, more than 90% of taxpayers receive their refunds within 21 days. The more complex your return is, the more likely it will need additional review that could delay your refund.

By Dan Caplinger for The Motley Fool

Published: December 22, 2014

Congress Passes Tax Extenders

The U.S. Senate passed a $42 billion package of tax incentives, reviving dozens of lapsed breaks for 2014 and setting them to expire two weeks from tomorrow.

After the 76-16 vote, the bill heads to President Barack Obama. The House passed the measure Dec. 3 on a 378-46 vote.

Congress will have the “dubious distinction” of starting next year with all of the provisions expired, said Senator Orrin Hatch, a Utah Republican who is poised to become chairman of the Senate Finance Committee in January.

“Never in the history of tax legislation have so many voted for so little and been so disappointed,” he said.

Beneficiaries of the breaks include multinational corporations such as General Electric Co. and Intel Corp., along with individuals who sold homes in short sales or live in states without income taxes.

By extending the tax breaks through 2014, Congress did the bare minimum necessary to avoid creating a major disruption to the 2015 tax-filing season or saddling taxpayers with unexpectedly higher bills.

“Congress is turning in its tax homework eleven-and-a-half months late and expects to earn full credit,” Finance Chairman Ron Wyden, an Oregon Democrat, said on the Senate floor before the vote this evening.

 

Eight Democrats

Wyden, who wanted an extension through 2015, was one of eight Democrats who voted no; the others were Elizabeth Warren of Massachusetts and Joe Manchin of West Virginia. Eight Republicans voted no, including Pat Toomey of Pennsylvania and Rob Portman of Ohio.

Lawmakers didn’t provide predictability or certainty for 2015. That will put the lapsed tax breaks back on the agenda next year.

The tax breaks are known as extenders, because they are routinely set to lapse and then are continued.

The package includes some provisions with broad bipartisan support, such as incentives for charitable donations from retirement accounts, the research tax credit for companies and higher capital writeoff limits for small businesses.

 

Wind Energy

It also includes a few items targeted to particular industries, such as the production tax credit for wind energy and accelerated depreciation for motorsports tracks.

Though some are occasionally dropped from the list, the tax breaks have survived for years as a group, propelled by corporate lobbying and lawmakers’ willingness to vote for each others’ priorities. They often are attached to broader must-pass legislation, though not this year.

The last three times Congress considered the package -- in October 2008, December 2010 and January 2013 -- the breaks were revived retroactively and extended for a full year going forward.

This time, lawmakers aren’t extending the breaks beyond Dec. 31 or making any of them permanent.

House Republicans and Senate Majority Leader Harry Reid were close to a deal in late November that would have made some of the breaks permanent, including the research tax credit, the state sales taxdeduction and a tuition tax credit that doesn’t lapse until the end of 2017.

That proposal collapsed when Obama threatened to veto it, with administration officials saying it aided businesses without providing enough to individuals. In particular, Obama wanted permanent extensions of expanded tax credits for low-income families that expire at the end of 2017.

Separate from the tax-break extensions, the bill would create a new type of tax-advantaged account. Disabled people would be able to set money aside for future needs while remaining eligible for government benefit programs.

By Richard Rubin for Bloomberg

Published: December 19, 2014

Save Twice with the Saver's Credit

If you are a low-to-moderate income worker, you can take steps now to save two ways for the same amount. With the saver’s credit you can save for your retirement and save on your taxes with a special tax credit. Here are six tips you should know about this credit:

  1. Save for retirement.  The formal name of the saver’s credit is the retirement savings contributions credit. You may be able to claim this tax credit in addition to any other tax savings that also apply. The saver’s credit helps offset part of the first $2,000 you voluntarily save for your retirement. This includes amounts you contribute to IRAs, 401(k) plans and similar workplace plans.

  2. Save on taxes.  The saver’s credit can increase your refund or reduce the tax you owe. The maximum credit is $1,000, or $2,000 for married couples. The credit you receive is often much less, due in part because of the deductions and other credits you may claim.

  3. Income limits.  Income limits vary based on your filing status. You may be able to claim the saver’s credit if you’re a:
    • Married couple filing jointly with income up to $60,000 in 2014 or $61,000 in 2015.
    • Head of Household with income up to $45,000 in 2014 or $45,750 in 2015.
    • Married person filing separately or single with income up to $30,000 in 2014 or $30,500 in 2015.

  4. When to contribute.  If you’re eligible you still have time to contribute and get the saver’s credit on your 2014 tax return. You have until April 15, 2015, to set up a new IRA or add money to an existing IRA for 2014. You must make an elective deferral (contribution) by the end of the year to a 401(k) plan or similar workplace program.

    If you can’t set aside money for this year you may want to schedule your 2015 contributions soon so your employer can begin withholding them in January.

  5. Special rules apply.  Other special rules that apply to the credit include:
    • You must be at least 18 years of age.
    • You can’t have been a full-time student in 2014.
    • Another person can’t claim you as a dependent on their tax return.
Published: December 16, 2014

Homeowner Tax Tips: Consider These Smart Moves Before 2014 Ends

With just over two weeks remaining in the year and the holiday rush upon us, income taxes may be the last thing on your mind. But property owners would be smart to check their to-do lists twice to make sure they get the maximum homeowner tax benefit from the IRS in 2015.

The good news is that 2014 looks an awful lot like 2013 in terms of tax policies affecting homeowners—nothing has really changed. Forbes spoke with two CPA financial planners, Jerry Love of Abilene, Tex., and Michael Schulman of Central Valley, N.Y., who offered the following suggestions homeowners might want to consider as they close out the year.

1. Pay your property taxes early. In states where property taxes are due in multiple chunks, it may make sense to pre-pay next year’s first installment before this year ends. This is especially the case for people expecting their incomes to go down in 2015. Just be sure that your mortgage company allows for pre-payments. “If [property tax payments] are being done through your escrow account, you may not have any control over that at all,” notes Love.

2. Accelerate mortgage payments. Following the same logic, it may make sense to push January’s mortgage payment into December so that you can accelerate that interest deduction in the current year. Just writing a check on Dec. 29 isn’t a guarantee that the mortgage company will cash—or count—for in 2014. “Absolutely communicate with the mortgage company on when the mortgage company needs to receive it to count it for the current year,” Love notes. “Because if it’s not on that form 1098, it’s going to be difficult to get the deduction.”

3. Consider bunching deductions. Now is the time to plan ahead in terms of itemizing versus standard deduction, for both this year and next, notes Love. In some cases, it may make sense to switch off between these two strategies. For example, consider a married couple, who for 2014 have a standard deduction of $12,400. Let’s assume that in 2013 they had itemized deductions worth $7,500, meaning it would make more sense for them to take the 2013 standard deduction (then $12,200). “But let’s say that $5,000 of that $7,500 is their property tax,” says Love. He would have advised such a couple to take the standard deduction for 2013, and then to pay their 2013 year-end property taxes in January 2014 and their 2014 taxes in December, in order to create a total “property tax for 2014 of $10,000.” Add in $3,000 in about charitable donations and suddenly this hypothetical couple would want to itemize. Again, this kind of bunching requires planning ahead. “If someone were starting that strategy, they would be looking at their property tax and saying I need to not pay my property tax in December, I need to pay in January so I could have two in 2015,” Love says.

4. Watch the tax extender bill. In early December the House passed the “Tax Increase Prevention Act of 2014,” which extends energy credits for windows, as well as energy-efficient building envelope components including insulation, exterior windows (or skylights), exterior doors and some roofing materials, among other items. The measure has not yet made it through the Senate. Just make sure all this has shaken out before taking advantage of the expected extensions.

Other homeownership-related aspects of tax time don’t necessarily need action steps now, but may be a bit confusing. Here are some items you can’t do anything about, necessarily, but want to understand before you visit the taxman or file on your own.

  1. Private mortgage insurance. PMI is deductible and should show up on your 1098. Homeowner’s insurance is not deductible. Love says he’s seen many a client confused on this point.
  2. Limit on mortgage interest deductibility.  Mortgage interest is always deductible—almost. There are limits to how much mortgage interest you can deduct, based on the amount of the mortgage: “Its $1 million on the first mortgage and $100,000 on the second mortgage,” says Schulman. “So if you have a house that cost $5 million with a $4 million mortgage, you won’t be able to deduct the entire mortgage interest you pay on that.” (Limits are for two people who jointly own the property.) Be very careful, Schuman warns. “The IRS has been actively going after this.”
  3. Vacation/second homes. Mortgage interest payments and property taxes are deductible on second homes. So, too, are other business expenses on rental properties. “You can’t deduct your own homeowner’s insurance [on a primary residence], but you can deduct it on a rental property,” says Schulman. The same is true for costs for snowblowing, gardening, or maintenance charges for a co-op.
  4. Home equity loans. These instruments generate mortgage interest that you can claim on your taxes. “If you have a home equity loan that was secured by your home—in other words, your home is the collateral—the bank should be issuing a 1098 for the interest that you pay, and that’s deductible,” says Love.
  5. Casualty losses. If a big storm damaged your home, you may qualify to claim casualty losses on your taxes. This is based on the net loss after insurance has been paid and must be more than your adjusted gross income (AGI). Let’s hope you don’t qualify.
  6. Home office deduction. The simplified standard is now $5 per square foot up to a maximum of 300 square feet.
  7. Exclusions on gains from sales: This rule has been around for a decade but is still worth noting: home sales in 2014 qualify for an exclusion on the net sales gain (selling price minus purchase price, plus any improvements) of up to $250,000 for an individual, $500,000 for a couple. However, this only applies to homes used as a primary residence for two out of five years. If you’ve moved out and then moved back in, you must live in the home for five years before you can take this exclusion.

By Erin Carlyle for Forbes Magazine

Published: December 15, 2014

Don't Forget These Year-End Retirement Planning Tips

You only have a few weeks left to make a 401(k) contribution that will get you a tax deduction on your 2014 return. The deadline is also rapidly approaching for retirees to take required minimum distributions from their retirement accounts. Here’s a look at the retirement planning moves you need to make before the end of the year.

Make last-minute 401(k) contributions. Workers age 49 and younger can contribute up to $17,500 to their 401(k) plan in 2014. Income tax won’t be due on the amount deposited in a traditional 401(k) account until the money is withdrawn. An employee in the 25 percent tax bracket who is able to max out his 401(k) would save $4,375 on his federal income tax bill, compared with $1,250 in tax savings for someone who deposits $5,000 in a 401(k). Contributions are typically due by Dec. 31, but it’s a good idea to avoid waiting until the last minute. “You can’t call on Dec. 29 and say you want to put in an extra five grand,” says Joyce Streithorst, a certified financial planner for Frisch Financial Group in Melville, New York. “They need to have a little lead time of at least one paycheck and sometimes two.” In some cases, you can also allocate part or all of a year-end bonus to your 401(k) account and avoid the extra tax bill on it. Workers age 50 and older can contribute an extra $5,500 to a 401(k) account as a catch-up contribution in 2014, or a total of $23,000.

Extra time for IRA contributions. While 401(k) contributions typically need to be made by the end of the calendar year, you have until April 15, 2015, to make IRA contributions that count toward tax year 2014. “For a lot of my clients, we wait until 2015 because we want to see what their tax return looks like,” says Robert Reed, a certified financial planner for Partnership Financial in Columbus, Ohio. “We can see if it will make more sense for us to do a traditional IRA and get the tax break this year or do a Roth IRA and pay the tax this year and then not pay tax again ever.” You can have your tax professional enter a hypothetical IRA or Roth IRA contribution into tax preparation software to see how much you could save on your tax bill. However, if you wait until 2015 to contribute to an IRA for tax year 2014, make sure you specify which tax year the contribution should be applied to. Financial institutions may automatically apply contributions to the calendar year when they are received unless you indicate otherwise.

Take your required minimum distributions. Distributions from traditional 401(k)s and IRAs are required after age 70½, and income tax will be due on each withdrawal. The penalty for missing a distribution is a 50 percent tax on the amount that should have been withdrawn. You have until April 1 of the year after you turn 70½ to take your first required minimum distributions, but subsequent distributions are due by Dec. 31 each year. And if you delay your first distribution until April, you will then need to take two distributions in the same year, which could result in an unusually high tax bill. “If you have to take two distributions in that year, you may want to be careful because it could push you up into a higher tax bracket,” Reed says. “You’re just looking at a difference of a few months, so for the vast majority of people, when you get to be 70½, just take it.”

Get the saver’s credit. Workers who earn up to $30,000 for individuals, $45,000 for heads of household or $60,000 for married couples in 2014 and save in a 401(k) or IRA are eligible for an additional tax perk, the saver’s credit. This valuable tax credit available to moderate-income households can be worth as much as $1,000 for individuals and $2,000 for couples, with the biggest credits going to people with the lowest incomes who manage to save for retirement.

Reset your contributions for 2015. In tax year 2015, the 401(k) contribution limit will increase by $500 to $18,000, and the catch-up contribution limit will also grow by $500 to $6,000. So if you can, consider setting your 401(k) direct deposits a little higher next year to get the biggest retirement savings tax break you can. “Make sure you take full advantage of your 401(k), especially if there is an employer match,” says Gwen Gepfert, a certified financial planner and principal of Oaktree Financial Planning in Basking Ridge, New Jersey. You can even use part of your 2014 tax refund to get a jump-start on saving for next year.

An Article From U.S. News & World Report by Emily Brandon

Published: December 10, 2014

Should You File Your Own Tax Return?

There are more than 75,000 pages of tax code and the tax laws become much more complex when one becomes self-employed. Many number-savvy individuals will look at Schedule C where sole proprietors list their income and business expenses and think that it’s a slam dunk to do it themselves. After all, there’s a line for listing your sales then there are fields in which to list the various business expenses incurred during the year. Add up the expenses, subtract the total from sales and you’re done, right?

Sounds simple, but in fact there is much more to it than that.

First of all, there are many things to consider: treatment of startup expenses, treatment of assets (depreciation and amortization), what qualifies as a business expense, automobile expense accounting, home office, self-employment tax, just to name a few. Unless you understand the principles behind these concepts, you may miss valuable deductions or at the other extreme, send up a red flag for audit. In fact, a self-prepared tax return with a Schedule C is an audit flag.

According to Poulos Accounting and Consulting, Inc., “The IRS is increasing its audit enforcement and conducting many more correspondence audits than in previous years.” He adds, “What a person saves on the front end in tax preparation fees, they could pay on the back end for representation. There is no substitution for a highly qualified tax professional such as an Enrolled Agent or Certified Public Accountant.”

But let’s say you are not self-employed but you own rental properties. The income and expenses for these ventures are listed on Schedule E. Here again, it appears to be a simple process of showing rents and rental expenses. But unless you know the rules for depreciation, amortization, taking passive losses, distinguishing between repairs and capital improvements, and what qualifies as a rental expense, you would be wise to turn over the preparation of this schedule to a seasoned tax professional as well.

Even if you are only a wage earner with a W2 but you need to complete Schedule A Itemized Deductions, you may find that the help of a tax pro is required. However, if you read the instructions carefully and don’t overlook any deductions – most commonly forgotten is vehicle registration fees – you can probably handle it and do very well.

Some people make the mistake of thinking that using tax software can replace the help of a tax pro. Not so. Years ago with the advent of modern technology, a phrase was spawned that holds true today: “Garbage in, garbage out.” Tax software can process numbers and in fact can ask leading questions to guide you (hopefully) to the correct fields and answers. But it’s not fool-proof and cannot cover every topic included in the tax code.

Another factor to consider are the ongoing changes in tax law. Preparing 2014 income tax returns will be even trickier than 2013 due to the passage of the Affordable Care Act. New provisions kick in and there are two new forms added to the existing batch. During December Congress will be making a decision on the status of the 55 extenders that expired at the end of 2013. There is always a lot to learn.

And what happens if you don’t know the rules and make a mistake? According to Poulos, “Not following the rules and regulations of tax laws can have serious consequences. It can range from getting a simple letter that you can handle yourself, to getting audited and owing thousands… and having a tax problem to solve.” Penalties and interest on unpaid liabilities are expensive.

By Bonnie Lee for FOX Business. 

Published: December 9, 2014

Divorce and Taxes Can Be Complicated

Going through a divorce can be a dramatic and trying time. Issues such as division of property, custody of children and family support are huge. And the decisions made to resolve these issues have a tax impact. It is important to know how you will be affected and take steps to minimize your tax liability.

The IRS doesn’t make it an easy chore. Even determining filing status can be complicated. A good rule of thumb is that your marital status at the end of the year determines your filing status.

If you are still married at the end of the year, in other words the divorce is in process but not yet final, you can still enjoy the tax benefits of filing married filing joint. However, you must both agree to this filing status. Otherwise, you will file married filing separate, which normally results in a higher tax to each filer but will protect you from the other spouse’s tax liability.

Taxpayers lose many benefits when electing the filing status of married filing separate. For example, both must elect to either take the standard deduction or itemize deductions. This could skew in favor of the spouse who is able to take the deductions when itemizing. For example, the spouse who is making the house payment will enjoy the mortgage interest deduction, usually a substantial write off. The other spouse will get zero. Other benefits lost by both parties include the American Opportunity Credit and Lifetime Learning Credit (for higher education), tuition and fees deduction, and student loan interest.  Dependent Care Credit and Earned Income Credit may also be affected.

If filing joint, the marital separation agreement (MSA) will not protect you from the IRS on the issue of tax liability. The IRS holds both parties signing a joint return responsible for the tax liability even if the MSA states one spouse or the other must absorb the expense. The IRS expects payment and will seek payment from each spouse and let you duke out with each other in court later on. So if the tax is not paid, they can easily garnish wages and levy bank accounts of both parties.

But let’s say you file jointly and enjoy a refund. The IRS provides 'Form 8379 Injured Spouse Allocation' to determine how the refund should be fairly split.

Your tax professional can run the tax return under either filing status to determine the additional tax liability, if any, and advise you on the best way to file.

You may also be eligible to file as Head of Household even if you are still married, which is an advantageous tax bracket. But you must fall within these requirements:

  1. You paid more than half the cost of maintaining your home during the tax year
  2. If still married, your spouse did not live in the home during the last six months of the year
  3. The home must be the main home for you and at least one child, step child or foster child for more than half the year
  4. You must be either unmarried or considered unmarried on the last day of the year

You cannot file head of household without a qualifying person in the picture. And that qualifying person is usually a child. A new boyfriend or girlfriend or roommate does not qualify a person for this filing status.

The only way you can file as single is if you have a settlement agreement and a final decree of divorce or if you were awarded a decree of annulment. This normally applies to divorced couples without children.

It is important to discuss the tax implications of divorce with your tax professional and determine a plan and course of action that benefits your tax situation.

By Bonnie Lee for FOX Business

Published: December 2, 2014

Taxes and Divorce, What You Need to Know

Finances and taxes are a significant issue during divorce, especially when children are involved. There are also special rules in the tax code that govern divorce and separation. It’s important to be apprised of these rules.

Dependency Exemption. If you are the custodial parent of the children, you can claim a dependent exemption of $3,950 (for 2014) for each child. The noncustodial parent may claim the dependent exemption and the child tax credit for the children with the consent of the custodial parent. For this change to be valid, the custodial parent must sign 'IRS Form 8332 Release of Claim to Exemption for Child of Divorced or Separated Parents'. The noncustodial parent must attach the signed release to his or her income tax return each year for which the dependency exemption is claimed.

Even if the noncustodial parent takes the exemption, the parent who has custody of the child can still claim Head of Household filing status, which results in a lower tax liability. The custodial parent may also qualify for the Child Care Credit, Exclusion for child Care Benefits and the Earned Income Credit. So, all is not lost if giving up the exemption credit.

Sometimes the parent who is not entitled to the exemption will attempt to take it anyway. In my tax practice, I see this happen every year. An electronically filed tax return is rejected because the dependency exemption has already been claimed. Resolving this issue is a long process, involving letters to the IRS with proof of the claim such as a statement in the Marital Separation Agreement (MSA). Or in the case where no MSA exists, the parent making the claim must provide proof of residency and of having provided more than 50% of the child’s support in order for the IRS to adjust the tax returns in his or her favor.

If you suspect your former spouse may try to hijack the exemption, my best advice is file early, file first.

Child Support. There are no tax issues revolving around child support. This is because child support is not deductible to the person paying it nor is it taxable income to the recipient. It doesn’t go on the tax return but it may be an element that comes into play when determining support issues for claiming the dependency exemption.

Alimony. Alimony however, is includible in income and is taxed at ordinary income tax rates. The party paying alimony may take it as a deduction. It’s listed an adjustment to income on Line 31a on Form 1040. Note that you must provide the social security number of your former spouse on Line 31b. This is because the IRS checks to ensure that the recipient is declaring the alimony income. There is also a match up to ensure that the amount claimed as a deduction matches what is claimed as income on the other party’s income tax return. If the numbers don’t match, someone is likely to get audited!

When you consider how much Uncle Sam gets from every paycheck, it becomes even more important to structure the elements of the divorce settlement in such a manner that benefits all parties. Therefore, one should consult with a tax professional as well as the attorney when filing for divorce.

By Bonnie Lee for FOX Business

Published: December 1, 2014

Is Your Business Being Audited? What the IRS is Looking For!

If you are self-employed your chances of being audited are three times higher than the average wage earning taxpayer.

Why is that?

If you are a wage earner, you will receive a Form W2 at year end. The IRS gets a copy of this form from your employer. If what the employer declares matches what you list on your tax return and there are no other sources of income and merely a standard deduction, you are pretty much audit-proof. The IRS has all the information it needs to determine if you have declared and paid the proper amount of income taxes. It’s very cut and dried.

But if you are self-employed, there is a greater opportunity to cheat by not declaring all income or by deducting personal expenses as business expenses. There is also the chance of not understanding tax law and making an error. After all, the tax code is lengthy and complicated and mistakes do happen.

So here is what the IRS does when it examines the tax return of a self-employed person:

Ensure that all income is declared. The first line on the business tax return or Schedule C is Gross Receipts. If yours is a service business like a graphic artist, web designer, attorney, or accountant, you will likely receive Forms 1099 at year end from your customers. The IRS receives copies of these 1099s, totals them and compares the total to what is declared on the Gross Receipts line.

Audit-proof tip: Total all 1099s you receive for the year and make the comparison yourself prior to filing the tax return. If your 1099s total $150,000 and you declare only $125,000 on your tax return, you can be sure that the IRS will show up at your door.

If you find an error on a 1099, make sure the originator files a correction with the IRS and provides you with a copy.

The next step the IRS takes to ensure proper reporting of income is a comparison of Gross Receipts from the tax return with total bank deposits for the year. It’s important to define additional bank deposits that do not relate to sales and keep a record of the details of the transaction. For example if the IRS sees $200,000 in bank deposits but you report Gross Receipts of $175,000 the IRS will want to know where the other $25,000 came from. If you cannot prove a legitimate source, it will likely assign the $25,000 difference to sales and charge tax on it. You must prove the bank deposits were not taxable sources of income. For example, the $25,000 difference may include capital contributions on your part of $10,000 from savings to help cash flow, and a credit line advance of $15,000. These two transactions are not taxable events and if you have canceled checks for your contributions and the credit line statement as proof, you’re home free.

Ensure that no personal expenses are deducted. Your taxable income is reduced by the total deduction of all “ordinary and necessary business expenses.” Classification of these expenses is a subjective task open to argument with the IRS. As long as the deduction falls within those parameters and was also not for an illegal activity (such as getting a parking ticket while attending a business meeting), you are fine.

Let’s say for example that wining and dining customers is common in your industry because you own a winery. These expenses will fly with the IRS as “ordinary and necessary.” However, if you are a car mechanic, you will likely have a very small amount of expense in this area. The IRS will not expect to see a large deduction for meals and entertainment and will disallow anything excessive, feeling that you are likely attempting to write off family meals, meals with friends and other personal meals.

If you have valid deductions that may be questionable (meals, travel, entertainment and vehicle expense are always suspect) keep all documentation that proves business rather than personal intent.

The IRS will look for personal use when touring your home office. The auditor will measure the square footage to determine if it matches what is declared on the tax return. He will also check out the space itself to see if the room is used for personal purposes. And if so, may disallow that portion of the room.

Basically the same rule applies if, for example, you have business inventory or assets in storage. The auditor will tour the storage facility to see if any personal items are kept therein. If so, the amount paid for storage expense may be reduced and result in a higher tax liability.

By Bonnie Lee for FOXBusiness

Published: November 19, 2014

7 Tax Extenders That Affect You

The elections are over and a Republican dominated Congress was voted in. It appears that expired tax extenders will be voted upon soon. The window for end of year tax planning will be snapping shut within the next six weeks. I’d advise you to get with your tax pro soon to determine your 2014 tax liability and prepay it before it becomes a potential penalty issue next April 15. Consider whether the elimination or revival of these tax laws will impact your tax scenario and plan for it to go either way. If not revived, determine the increase in your tax liability and prepare accordingly.

The tax laws that expired at the end of 2013 benefited many taxpayers. Congress will now determine if they are worthy of revival. Each year the vote on extenders is delayed to almost the end of the year. In fact, the extenders that were up for renewal during 2012 were not voted into law and signed off by the President until 1:00 a.m. on January 1, 2013. They were made retroactive to January of 2012, but as you can see, this did now allow for any decent tax planning.

We are in the same boat again.

According to the Expiring Provisions Improvement Reform and Efficiency (EXPIRE) Act Committee Report the following provisions are under consideration:

1. Deduction for expenses of elementary and secondary school teachers

The bill extends for two years the $250 tax deduction for teachers and other school professionals for expenses paid or incurred for books, supplies (other than non-athletic supplies for courses of instruction in health or physical education), computer equipment (including related software and service), other equipment, and supplementary materials used by the educator in the classroom. A two-year extension of this provision is estimated to cost $430 million over 10 years.

2. Mortgage debt forgiveness

This is a big one. If you experienced mortgage debt cancellation or forgiveness on your personal residence after 2013, you may be required to pay taxes on that amount as taxable income unless the exclusion is renewed by Congress. Under this provision, up to $2 million of forgiven debt is eligible to be excluded from income ($1 million if married filing separately) through tax year 2015. This provision was created in the Mortgage Debt Relief Act of 2007 to shield taxpayers from having to pay taxes on cancelled mortgage debt stemming from mortgage loan modifications, through 01/01/2010. It was extended through 01/01/2013 by the Emergency Economic Stabilization Act of 2008; and extended through 01/01/2014 by the American Taxpayer Relief Act of 2012. A two-year extension of this provision is estimated to cost $5.4 billion over 10 years.

3. Deduction for mortgage interest premiums

The bill extends the ability to deduct the cost of mortgage insurance, also known as PMI on a qualified personal residence. This deduction is driven by income levels. Depending upon how much you make, the deduction may be ratably reduced and is unavailable for a taxpayer with an AGI in excess of $110,000. The bill extends this provision for two additional years, through 2015. A two-year extension of this provision is estimated to cost $1.85 billion over 10 years.

4. Deduction for state and local general sales taxes

The bill extends the election to take an itemized deduction for State and local general sales taxes in lieu of the itemized deduction permitted for state and local income taxes for two years. The original passage of this bill leveled the playing field for those who lived in a state that did not levy a state income tax.  A two-year extension of this provision is estimated to cost $6.5 billion over 10 years.

5. Above-the-line deduction for higher education expenses

The Economic Growth and Tax Relief Reconciliation Act (EGTRRA) created an above-the-line tax deduction for qualified higher education expenses. Taxpayers could enjoy the deduction rather than take the American Opportunity Credit or the Lifetime Learning Credit. The maximum deduction was $4,000 for taxpayers with AGI of $65,000 or less ($130,000 for joint returns) or $2,000 for taxpayers with AGI of $80,000 or less ($160,000 for joint returns). The bill extends the deduction to the end of 2015. A two-year extension of this provision is estimated to cost $596 million over 10 years.

6. Tax-free distributions from individual retirement plan for charitable purposes

The bill extends for two years the provision that permits an Individual Retirement Arrangement (“IRA”) owner who is age 70-1/2 or older generally to exclude from gross income up to $100,000 per year in distributions made directly from the IRA to certain qualified charities. This deduction is beneficial for seniors that no longer itemize deductions. It essentially allows for a charitable deduction in addition to the standard deduction.  A two-year extension of this provision is estimated to cost $1.8 billion over 10 years.

7. Credit for energy efficient improvements to existing homes

The bill extends for two years, through 2015, the 10% credit for purchases of energy efficient improvements to existing homes. Homeowners can claim up to $200 for energy efficient windows, up to $150 for an efficient furnace or boiler, and up to $300 for other improvements, including insulation. The total credit is capped at $500 per taxpayer. The bill also allows energy efficient roofing products to qualify. A two-year extension of this provision is estimated to cost $1.65 billion over 10 years.

By Bonnie Lee for FOXBusiness

Published: November 17, 2014

Small Business Guide to Deducting Charitable Donations

Businesses can make tax deductible donations to bona fide nonprofit organizations. But you may be surprised to learn how it is deducted on your tax return. In fact, the only entity able to deduct a cash charitable contribution as a business expense is a C Corporation.

If you are a sole proprietor and you make a donation of $100 to a dog rescue society which is registered as a 501(c)(3) with the Internal Revenue Service – all bona charities must be registered as such for your gift to be tax deductible – and your business received no goods or services in return, the deduction is listed as an itemized deduction on Schedule A of your tax return. This provides a tax benefit only if you are able to itemize deductions.

You cannot deduct this contribution on Schedule C. It is not a business expense; it will not reduce your self-employment tax. The IRS views it as a personal expense paid from business funds.

But now let’s say you want to support young athletes and therefore donate $100 from business funds as a sole proprietor to the local soccer league. In exchange, they run a small display ad for your business on their program. This is no longer a donation. This is an advertising expense; you received something in return which can be classified as an “ordinary and necessary business expense,” and therefore the cost is deductible as such on Schedule C.

If as a sole proprietor you donate your services to a bona fide 501(c)(3), you have no deduction whatsoever. Doesn’t seem fair, does it? But the IRS places no value on your time or expertise. A manicurist donated her time to do nails for women clients at a shelter who were preparing for job interviews. While she was not allowed to deduct the $35 per manicure she would normally charge, she was able to deduct her mileage to and from the shelter, and the cost of all supplies and materials used in the performance of the manicures. She gave away bottles of nail polish to be distributed by the nonprofit to their clients. These were a write off for her as well.

By the same token, if this manicurist were to give away a nail care set of polish and files and other products to a poor individual who needs help, she would not be able to write off the donation. This is simply because the IRS does not allow the deduction of gifts to individuals, or for that matter to political organizations or candidates.

If your business is incorporated as an S Corporation or formalized as a partnership filing Form 1065, the same rules apply. In fact, any donations made at the S Corporate or partnership level flow out as a special line item on your Schedule K-1 and end up on Schedule A of your individual income tax return. Again, this is a tax benefit only if you are able to itemize deductions.

A C Corporation may take the deduction on Form 1120 but must follow all of the IRS rules regarding donations.

Remember to acquire and retain the acknowledgement letter from the nonprofit for your donation. Your cancelled check is not enough documentation and the IRS may disallow the deduction if you cannot provide this document. It must be obtained before filing your tax return. You cannot request it later during an IRS audit.

By Bonnie Lee for FOXBusiness

Published: November 14, 2014

Remember, Some Gifts Are Taxed

“It’s better to give than to receive.” Remember that adage as a child that Mom used to badger you with to get you to share? Now it’s become ingrained and if you are in the position to do so, you may wish to share gifts with friends and family. Especially with the advent of the holiday season, our giving hearts awaken and the sharing begins.

But be forewarned. Giving gifts can be a taxable event.

Most givers think they may be able to write off the gift they present to another individual, usually their child. Can I deduct it as a charitable contribution? The answer is no, you cannot. Donations to charity must be to bona fide 501(c)(3) organizations. Therefore, money given to homeless individuals or families in need, or to your son or daughter are not deductible as charitable contributions and therefore do not present any tax benefit for the giver.

Your generosity to family, friends, or other individuals goes unrewarded in this lifetime. And in fact, the converse is the case. The act of giving may be a taxable event for the giver. The recipient is home free. You can give someone a million bucks and that person does not have to pay taxes on it.

But you might have to.

Here are the rules. You are allowed to gift up to $14,000 (for 2014) per year to any person without having to declare the gift and pay gift tax. Every year the dollar amount of an allowable gift changes, so stay tuned for a new threshold in 2015 and beyond.

Let’s say you and your wife would like to gift $50,000 to your son and his wife so they can put a down payment on a house. You are allowed $14,000 per individual per giver. Therefore, you can give tax free a grand total of $56,000 in this instance without incurring a tax liability. As the giver, you may gift $14,000 to your son, $14,000 to his wife and your spouse may do the same. $14,000 x 4 = $56,000.

Let’s say however, that you wish to gift them $100,000. To prevent taxation of the excess, consider splitting the gift over a two year period rather than all at once. Or make a loan of the excess. But put it in writing, secure repayment, and be sure to charge interest. The IRS insists that you charge the Applicable Federal Rates for the transaction to be construed as a loan rather than as a gift.

The IRS provides guidance for certain acts that are excluded from the gift tax:

Gifts that are not more than the annual exclusion for the calendar year.

  1. Tuition or medical expenses you pay for someone (the educational and medical exclusions).
  2. Gifts to your spouse.
  3. Gifts to a political organization for its use.

If you find that you will provide the gift all at one time, and incur the taxable event, The gift is not declared on your Form 1040. Instead, file IRS Form 709. You may pay up to 40% of the value of the gift in taxes.

Keep in mind that gifts under $14,000 may sometimes have to be reported. A gift under the exclusion amount must be characterized as “a present interest,” meaning that the recipient can use the gift immediately. If it is not, let’s say it’s a gift to a trust, in which beneficiaries don’t have any rights until later. A gift of this nature that has no present interest value must be reported, no matter how small the amount.

There are many rules and regulations and exceptions governing this issue, so it would be wise to consult with your tax advisor at Hershkowitz & Kunitzer, P.A.

By Bonnie Lee for FOXBusiness

Published: November 13, 2014

S Corporations Cannot Always Write off Losses

If you are the owner of an S Corporation, the corporation pays no federal income tax. Instead, you enjoy a pass through of corporate profit or loss on your individual income tax return where it is taxed at your individual rate. This rate can vary depending upon your other tax transactions and the amount of corporate profit or loss you are declaring.

But did you know that you can write off corporate losses only to the extent of basis in the corporation? For this reason it is important that either you or your tax professional track basis every year to determine eligibility for deducting losses.

Stock basis is determined by a complex formula. Essentially, you begin with the initial value of your stock, the amount of which is determined when you become a shareholder. Each year you must combine certain elements from the financial statements to come up with an end of year basis for each shareholder. The elements you combine are: initial stock value plus ordinary income (profit) for the year less distributions less nondeductible expenses less ordinary business losses plus capital contributions.

Let’s examine some of the terminology.

You accountant can provide you with your intital stock value.

Ordinary income or loss is the difference between your total sales for the year less your total expenses and includes depreciation expense.

Distributions are draws that you take as a shareholder aside from your salary or wages. Salary and wages do not play a role in determining basis. Distributions may also include amounts paid out on your behalf not deductible by the corporation such as health and disability insurance premiums or contributions into an IRA or SEP IRA or SIMPLE plan.

Nondeductible expenses include 50% of meals and entertainment expenses, fines and penalties on delinquent payroll, sales, and excise taxes, fines for illegal activities like parking tickets.

Contributions are monies and other property that you assign to the corporation.

So let’s say you are the sole shareholder and your initial outlay for corporate stock is $10,000. During the year you have taken distributions of $30,000. This is aside from your regular salary totaling $120,000. Nondeductible expenses total $5,000. The business shows a profit for the year of $50,000.

Adding these elements together $10,000 – 30,000 – 5,000 +50,000 = $25,000. Your ending basis in the corporation is $25,000. You do not have to worry about the impact of basis this year because the business is not showing a loss.

However, let’s take a look at the subsequent year. You start the year with a beginning basis of $25,000. But it turns into a bad year. You put in $50,000 of your own money to help with cash flow. You suffer a loss for the year of $90,000. You therefore end the year with a negative basis, –$15,000.

What happens now? The IRS says, “A shareholder is not allowed to claim loss and deduction items in excess of stock and/or debt basis. Loss and deduction items not allowable in the current year are suspended due to basis limitations and are carried over to the subsequent year.”

You can’t take the loss. But at least you don’t lose it completely. You are allowed to carry it forward.

If you take distributions in excess of basis, they would be required to be reported on Schedule D of your income tax return as a long term capital gain if you’ve held the stock for more than one year.

Basis is a complicated issue. For S Corporations, other items to track include debt basis, passive activity loss limitations and at risk limitations. Check with your tax professional at Hershkowitz & Kunitzer, P.A. for more information.

By Bonnie Lee for FOXBusiness Taxpertise

Published: November 7, 2014

What is accelerated depreciation?

Accelerated depreciation is the allocation of a plant asset's cost in a faster manner than the straight line depreciation. Compared to straight line depreciation, accelerated depreciation will mean 1) more depreciation in the earlier years of an asset's life and 2) less depreciation in the later years of the asset's life. [Note that the total amount of depreciation over the asset's life will be the same regardless of the depreciation method used.] Hence, the difference between accelerated depreciation and straight line depreciation is the timing of the depreciation.

Three examples of accelerated depreciation methods include double-declining (200% declining) balance, 150% declining balance, and sum-of-the-years' digits (SYD).

The U.S. income tax regulations allow a business to use accelerated depreciation on its income tax return while using straight line depreciation on its financial statements. For profitable corporations this will likely result in deferred income tax payments being reported on its financial statements. 

From AccountingCoach.com

Published: November 6, 2014

How One Government Spends Your Taxes

Want to know exactly how the government is spending your taxes?

Twenty-four million British taxpayers are about to find out as they receive personalized summaries that break down exactly where their hard-earned cash goes.

The program, considered one of the first of its kind by experts, aims to improve transparency and make the government more accountable for its spending.

Each person will get a chart showing, pound for pound, how the taxes they pay on their income are used.

About 25% goes towards welfare programs -- the biggest area of government spending -- including support for children and families, people with disabilities, pensioners and the unemployed.

Nearly 19% of tax money is funneled into healthcare, and roughly 5% towards defense.

"It's good for people to think about how their money is spent," said George Bull, a senior tax partner at accountancy firm Baker Tilly.

A worker making £30,000 ($48,000) per year -- or slightly more than the average wage -- will see that they pay £6,781 in income taxes each year. Nearly £300 goes towards criminal justice, while £114 is spent on "culture" programs including libraries and museums. Nearly £80 goes to overseas aid.

The new initiative may upset some people who disapprove of certain types of government spending.

"You pay your taxes, the government chooses how to spend them," said Bull. "The government doesn't send these out to give you a choice about how your taxes are spent."

The smallest item outlines how much each taxpayer contributes to the European Union. For a person making £30,000, they'll pay £51 a year.

Britain's relations with Europe have become increasingly strained in recent years. Prime Minister David Cameron has promised to hold a referendum in 2017 on whether the U.K. should remain a member of the EU, if he is re-elected next year.

By Alanna Petroff for @CNNMoney

Published: October 28, 2014

As Your Business Multiplies, Your Bank Accounts Shouldn't

Question: We recently expanded to open our third retail location this year. Should we have a separate bank account for each location? Or is it OK to have one account to run through all our operating expenses, payroll, etc.?

Answer: It’s easier, and probably cheaper, for you to route everything through one bank account. That’s true as long as all three locations operate under one corporate entity and use the same employer identification number.

If, however, you’ve established separate companies to operate the locations, you will need separate accounts, says Cece Mitchell, senior vice president and Small Business Administration lending manager at Zions Bank. That’s because with each company operating under its own identification number and filing its own tax return, you won’t want to mingle the funds.

Of course, maintaining separate accounts is a bigger hassle for you—and it will cost you more when it comes to banking fees, printing checks, and accounting processes.

Better to use one account and take advantage of your bank’s cash management services. They should allow you to concentrate all your business banking transactions, Mitchell says, while still tracking the revenues and expenses at each individual store. “Deposit slips and checks can be coded to indicate the separate locations, as can the individual merchant terminals,” she says. Most accounting software can be set up in a similar fashion, so you can track financials and produce reports by location.

Janet Coletti, senior vice president for business banking at M&T Bank, points out additional benefits of keeping your bank accounts to a minimum. With a single account you’ll only have to track a single balance, which will make managing payments simpler. And, if your bank requires a minimum balance on business accounts, you’ll be more likely to maintain that balance when all your revenues are combined. A bigger balance may give you leverage to negotiate on service fees, too.

As your business continues to grow, revisit your decision occasionally. “For some larger businesses, an additional account to manage payroll expenses separate from payables makes the reconciliation of those expenses much easier,” Coletti notes.

And if you’re still not decided, ask your bank to prepare an analysis of both scenarios and then bring your accountant in to help you determine which one works best for you.

By Karen E. Klein for Bloomberg Smart Answers

Published: October 27, 2014

5 IRS Penalties You Want to Avoid

Nobody sets out at tax time to figure out how to pay more money to the IRS. But careless mistakes can leave many people doing just that, thanks to the penalties the IRS imposes. According to tax experts, some IRS penalties are for very common mistakes. Those mistakes are avoidable through awareness of and strict adherence to the tax rules, including deadlines.

1. Late filing penalties

The first thing you must remember is the date April 15. Mark it on your calendar.

Coppell, Texas-based certified public accountant Wray Rives thinks you might need to circle the date in red.

“Nobody likes having to file their tax return, but we all know April 15 is the deadline to file, or at least request an extension,” said Rives. “Avoid being in so much angst over taxes that you just don’t file. The IRS knows you exist and they got copies of all those W-2s and 1099s you received in the mail, so they know you made some money last year.”

“Late filing penalties can add 25 percent to your tax bill,” Rives said.

You also must sign your return, he noted.

“Forgetting to sign a tax return is the most common mistake taxpayers make,” Rives said. “The IRS won’t accept your tax return if it is not signed, and that is just the same as not filing it at all.” When you use tax software like TurboTax to e-file your tax return, the IRS assigns a PIN that acts as your electronic signature.

2. A tale of two mileage rates

If you’re self-employed, and you intend to deduct all the wear and tear you put on your car last year getting the job done, it has to be done according to the new rules. You need to be accurate in your record keeping to avoid penalties.

Should your creative bookkeeping set off red flags to IRS employees, you will have to provide a journal detailing every mile you claimed on your return. You'll also have to turn over receipts for all other questions they may have on your entire tax return.

If you are unable to prove your side, there is a 25 percent inaccuracy penalty on top of the additional tax and then the interest on the entire amount.

3. Penalties for math errors

If you’re not good at math, then you had better sharpen your skills if you are preparing your taxes by hand. According to the experts, math errors are very common on pen-and-paper returns, so check and re-check your math.

If the math error results in you paying less tax than you should, the IRS is likely to require that you pay the additional amount of taxes owed plus interest accrued since the due date of the return.

The good news is, when you use TurboTax, we handle all the math and we guarantee that our calculations are 100% accurate.

4. Home office deduction penalties

If you run a home daycare service, use part of your home as an office, or designate a closet or other area to store inventory, you may confidently take a deduction for your home office.

The key is that you use your home office ‘exclusively and regularly’ as your principal place of business. You should only deduct the exact area(s) you use exclusively for business, so if your office doubles as a spare bedroom, you can only deduct the portion of the room used for business.

If the IRS determines the taxpayer does not qualify for the home office deduction, the damage can be twofold. First, because the deduction is taken on Schedule C, it may raise the taxpayer’s taxable income. Second, if the reduction in expenses leads to more income on the Schedule C, that amount is also subject to self-employment tax, which is 15.3 percent in most years.

5. Some not-so-charitable penalties for charitable donations

They say it’s always better to give than to receive. In the case of income tax filing that is true.

Paul Lupo of Shelton, Connecticut-based Lupo & Associates cautions taxpayers against making common mistakes when it comes to claiming non-cash charitable contributions.

“In donating clothing and other goods to a charitable organization, the donor must receive an itemized slip from the organization listing what has been donated and the condition of the items,” Lupo said. “There’s also a place where the person should be putting down a value and then signing the slip.”

If you are selected for an audit, he said, the deduction may be denied because there’s nothing specific listed on the slip, like the condition of the items and their value. “If denied, the filer will have to pay the additional taxes and perhaps a 25 percent inaccuracy penalty on top of the additional tax, and then the interest on the entire amount,” Lupo said.

From Intuit Tax Tips

Published: October 23, 2014

Social Security Benefits Rising 1.7% For 2015, Top Tax Up 1.3%

The nation’s nearly 64 million Social Security recipients will get a 1.7% cost of living increase for 2015, while the maximum Social Security tax, which is linked to a different measure, will go up by just 1.3%, the government announced today.

The 1.7% boost means the average retired worker will see a $22 increase to $1,328 a month and the average senior couple will get a $36 boost to $2,176, the Social Security Administration said. The maximum monthly Social Security check for a single baby boomer claiming benefits in 2015 at the “full” retirement age of 66 will be $2,663, up from $2,642 in 2014. The increase will show up in regular Social Security checks in January and in payments made to 8 million beneficiaries of Supplemental Security Income (SSI) benefits on Dec. 31, 2014.

By law, since 1975, the Social Security COLA has been linked to the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W). It is set each October based on the CPI-W for the 12 months ended September 30, which was announced by the Bureau of Labor Statistics this morning.  While advocates for the elderly argue CPI-W understates the true increase in costs the elderly face, deficit hawks have pushed for linking COLAs to an even lower measure of inflation known as the chained CPI.

The 1.7% COLA is up a tad from 2014′s 1.5% increase. Moreover, for the second year in a row, the Medicare Part B premiums withheld from retirees’ checks will remain unchanged at $104.90 a person per month. The additional Medicare Part B premiums charged to higher income seniors will also remain unchanged for the second year in a row. Those extra premiums start at $42 a month per person for singles with modified adjusted gross ranging from $85,000 to $129,000 and couples with MAGI from $170,000 to $258,0000 and top out at $230.80 per person a month for singles with income above $214,000 and couples above $428,000.

Workers can claim reduced Social Security retirement benefits at age 62, but lose some of those early benefits if they continue to work and earn above a certain amount.  As part of today’s announcement, the Social Security Administration said that recipients who are age 62 through 65 in 2015 will be docked $1 in benefits for every $2 in earnings they have above $1,310 a month  ($15,720 a year)  up from  $1,290 a month ($15,480 a year) in 2014.   A worker who turns 66 in 2015 can earn up to $3,490 a month before his or her birthday, without losing benefits. Above that threshold, the worker will lose $1 in benefits for each $3 earned. Social Security recipients can earn as much as they like without being docked once they reach the full retirement age of 66.

Meanwhile, for 2015, the maximum amount of a worker’s pay subject to the Social Security tax (the so-called “wage base”), which is linked to the increase in average wages, not the CPI-W, will climb by just 1.3% to $118,500 from $117,000 in 2014. That means about 10 million high wage workers will see $7347 in Social Security taxes taken out of their paychecks in 2015, up $93 from 2014.  In 2014,  the wage base and the top tax rose by 2.9%, while in 2013 all workers faced Social Security tax sticker shock as Congress allowed a temporary cut in the employee’s Social Security tax rate —from 6.2% to 4.2%—to expire.  (The employer’s 6.2% share of Social Security tax was never cut.)

Employees and employers also pay 1.45% each in Medicare taxes on all wages, with no cap. In addition,  as part of ObamaCare, wages and self-employment income above $250,000 for a couple or $200,000 for a single are subject to a 0.9% Medicare surcharge, which is paid on a household’s 1040 income tax return.

By Janet Novak for Forbes Magazine

Published: October 22, 2014

PolitiFact: Delayed Tax Refunds are Fake News

Readers recently forwarded us a claim they had begun seeing in their inbox -- and which their friends were believing. It was a link to a story headlined, "2014 Federal Tax Refunds To Be Delayed Until October 2015."

This would be a pretty big deal if true. Is it?

The short answer is: No.

It turns out that the article was published in September 2014 on a website called the National Report. Here’s a portion of the article:

"Normally when you file your taxes, whatever money is owed back to you is quickly repaid. The process of getting your money back has been made even quicker in recent years through the use of E-file and direct deposit of federal tax rebates. But starting in 2015, federal tax refunds for the 2014 fiscal year are going to take longer for Americans to receive. A lot longer.

"The deadline to have your federal taxes filed will remain April 15th, but under new directives issued to the IRS, no refunds are to be issued before October 15th, 2015. This means that early filers who normally receive their refunds around the beginning of February will have to wait an additional 7 months longer than normal to get the money owed to them.

"White House Press Secretary Josh Earnest defended the upcoming changes to IRS tax refund policy. 'It’s a minor cost saving measure initiated by the administration with bipartisan support,' said Earnest. 'The recommendation to initiate this new refund structure came out of the Committee On Ways And Means, under the leadership of Republican Congressman David Camp. Absolutely zero dollars are going to be kept that is owed to hardworking Americans. All you are seeing here is a policy change streamlining the way in which the IRS structures tax refund repayments. Americans who find this objectionable can always opt to bring their tax withholding more in line with the actual taxes they will owe in the future.' "

The article went on to quote two Republican senators critical of the move -- Rand Paul of Kentucky and John McCain of Arizona.

A lot of people appeared to believe it. The article was shared 647,000 times on Facebook since it was published. Forbes tax columnist Kelly Phillips Erb was among those who noted its wide reach.

There is one problem with the claim: It comes from a fake-news site.

The last time we checked a bogus claim from National Report, the site had a disclaimer that said "the views expressed by writers on this site are theirs alone and are not reflective of the fine journalistic and editorial integrity of National Report." This disclaimer has since been removed by the site.

Another, clearer disclaimer -- also removed -- has been archived by urban-legend investigation site Snopes.com. The disclaimer said, "National Report is a news and political satire web publication, which may or may not use real names, often in semi-real or mostly fictitious ways. All news articles contained within National Report are fiction, and presumably fake news. Any resemblance to the truth is purely coincidental."

We reached out several times to the IRS to see if we could get an official disclaimer from the agency, but we never heard back.  

Our Ruling

A chain email has been circulating with a link to an article headlined, "2014 Federal Tax Refunds To Be Delayed Until October 2015." However, the article comes from the National Report, a satire website. It is not accurate and was never intended to be. We rate the claim Pants On Fire.

By Nai Issa for PolitiFact.com

Published: October 20, 2014

Tax Guide for Mutual Fund Distributions

The distributions of income and capital gains you get from funds are taxed according to principles that are often perplexing and sometimes unfair. This guidebook covers the basic rules.

The rules are for fund shares in taxable accounts. They are largely irrelevant to the taxation of funds held in IRAs and 401(k)s.

TEN RULES

1. Flow-Through. Funds don’t pay corporate income tax. Instead, they flow their dividends, interest and capital gains through to their shareholders, who declare these on their own tax returns. The distributions are taxable whether or not the shareholder reinvests them in the fund.

Income comes in different tax flavors: municipal bond interest, U.S. Treasury interest, fully taxable interest, dividends that qualify for the favorable rate, dividends that don’t qualify, short-term gains, long-term gains. For the most part, the flavors flow though, just as they would in a partnership.

There are two big differences between partnerships and funds. Partnerships can flow through losses as well as gains; funds can’t. Partnerships can flow through short-term gains; in a fund, these gains decay into less-desirable ordinary income.

2. Hot Potato. A distribution—and the tax bill that sticks to it—is delivered to whoever is holding the fund when the distribution goes out. This isn’t necessarily someone who is making money.

Say you buy a fund share for $20 and a month later, with the fund still worth only $20, you get a $1 distribution. Immediately thereafter, the fund share value drops to $19.

So far, you are only breaking even, but you owe tax on the $1 distribution. You can partly or fully offset that tax by cashing out the fund share at $19, creating a $1 capital loss. But you are inconvenienced and, if you are one of the unfortunates still buying funds with sales commissions, out the commission.

Prevent this problem. Avoid buying funds near the end of the year, when lump-sum distributions are common.

3. Corporate Dividends. Dividends from corporations like ExxonMobil and Apple qualify for a reduced federal tax rate. Most people pay a 15% federal rate on dividends; a few low-income shareholders get a free ride and the wealthy pay a 20% marginal rate. (Most states, in contrast, hit dividends with their usual tax rates.)

The favorably-taxed divs flow through to fund investors, and many funds invested in stocks can boast that 100% of their income distributions qualify for favorable treatment. But at some funds, the percentage qualifying is substantially less. 

A fund can fall short of 100% purity on its dividend income several ways. Dividends from real estate investment trusts, and from many foreign corporations, don’t qualify for the low rates. The fund can mess up your taxes by trading a lot because the tax break is lost for positions held a short time.

Funds with European stocks and smaller U.S. stocks often lend securities to short-sellers. The shorts make payments to the funds to replace missing dividends, and those substitute payments do not get the favorable tax rates.

4. Muni Interest. A fund that owns “municipal” bonds (bonds sold by states, cities, nonprofits and so on) can flow through federally tax-exempt interest to its investors. To do so, the fund must have at least 50% of its assets invested in these bonds. No surprise that funds mixing stocks and munis stay on the safe side of the barrier. 

5. AMT Gotcha. If the muni bond finances a government or a charity, it gets the federal exemption. If the bond finances a “private activity” like an airplane hangar, it is exempt only for certain taxpayers. Taxpayers who are subject to the Alternative Minimum Tax have to include the interest on their tax returns.

Your tax-exempt bond fund might report that you got $1,000 of interest and that $150 of the amount was from private activity bonds. If you are in AMT territory—likely if your income is between $200,000 and $500,000 and you live in a high-tax state—then you’d pay federal tax on the $150.

AMT bonds, which have a whiff of crony capitalism, are often of low credit quality. So you’ll see them in junkier muni portfolios. They also populate money-market funds.

6. Out-of-State Munis. Most states exempt interest on their own municipal bonds from state income tax, while whacking the coupons from other states. And most states let you count fractional revenue streams.

Let’s say you live in New Jersey and your fund reports that you got $1,000 of tax-exempt interest, 12% from New Jersey sources. On your New Jersey tax return you’d include $880 of this interest.

Utah and Indiana use a tit-for-tat tax system that gives you a somewhat better break. (They tax another state’s bonds only if that state taxes their bonds.) Minnesota has a worse deal: The entire interest payout is taxable unless at least 95% of it came from Minnesota.

Illinois has the worst arrangement of al. That state taxes all fund payouts, even payouts entirely from Illinois bonds. You get a local tax exemption only by buying Illinois bonds directly—a hazardous undertaking, given the state’s sickly finances.

7. Treasury Interest. States exempt from tax the interest on U.S. Treasury debt. They usually pro-rate distributions from funds that own a mix of Treasury and non-Treasury securities. California, Connecticut and New York, however, permit this carve-out only if a certain percentage of the fund’s payout or assets is Treasury-flavored. In New York the hurdle is 50% of assets.

8. Foreign Tax Credit. You can claim a federal tax credit (which is better than a deduction) for foreign taxes, and you can claim the foreign taxes paid on your behalf by a fund. If your foreign tax credits total more than $600 on a joint return, you’ll need some detail, including each fund’s foreign-source income and foreign taxes paid. The fund will either give you the numbers or give you a way to calculate them.

If you hold the fund in a tax-sheltered account, you lose the credit (permanently). Try to own your international funds in a taxable account.

9. Short-Term Trouble. Short-term trading gains by your fund get converted on your tax return into less-desirable ordinary income. (Why? Years ago, Congress determined that trading by fund managers was wicked.) The only consolation is that some funds are able to shelter you from some of this damage by creative use of their corporate dividend income. How is that possible? It relates to the fact that fund expenses can be taken against the short gains rather than against the dividend income.

Suppose that, per fund share, the fund’s corporate dividend income was $5, its expenses 80 cents, and its short gains $3. It distributes $7.20, and would describe this in shareholder reports as $4.20 of income and $3 of capital gains. But on the 1099s sent out to customers it would declare $5 of dividend income eligible for the low rates and $2.20 of ordinary income.

Notwithstanding the possibility of this fancy footwork, short gains are likely to be bad news at tax time. 

10. Long-Term Trouble. If a fund sells a stock that it has held for more than a year, the gain or loss is long-term. Net long-term gains are dished out to the shareholder’s tax return, where they retain their flavor. (It doesn’t matter how long the fund investor has held the fund.) Since long gains get the same favorable rates as dividends from Exxon (0%-15%-20%), they aren’t too nasty. Still, it’s better if the fund sits on winners and doesn’t inflict gains on its customers at all.

By William Baldwin for Forbes Magazine

Published: October 17, 2014

The Biggest Tax Breaks in 2014

More than $1 trillion of the estimated $1.4 trillion in so-called tax expenditures this year will benefit individuals, according to a new analysis from the Tax Policy Center.

By contrast, just $148 billion in tax breaks will go to corporations.

That represents less than half the cost of health-related tax expenditures -- the No. 1 category, costing an estimated $383 billion.

The biggest player in this group is the exclusion for employer-sponsored health insurance, worth more than $300 billion. This is the tax-free compensation a worker enjoys when his employer pays for a portion of his health insurance policy.

Also in this group is the new premium assistance offered to low- and middle-income families under Obamacare, worth about $34 billion, according to the analysis, which was published in Tax Notes.

Housing is the next biggest category, accounting for $255 billion of the $1.4 trillion. Among the biggest players here are the mortgage interest deduction, the property tax deduction, and the tax-free treatment on the first $250,000 in capital gains ($500,000 for married couples) on the sale of a home.

Third up are the $160 billion in tax breaks offered for pensions and other types of income security, such as the deduction for 401(k) contributions and the tax-free treatment of Roth IRA withdrawals.

And fourth in line is the $117 billion tax break on investment income -- namely, capital gains and dividends, which are often taxed at a lower rate than ordinary income.

All told, the top 4 categories of tax expenditures account for more than 60% of the $1.4 trillion in forgone revenue.

And that $1.4 trillion is the equivalent of nearly half of the total federal revenue the government is likely to collect this year.

By Jeanne Sahadi for @CNNMoney

Published: October 9, 2014

What is an asset's useful life?

An asset's useful life is the period of time (or total amount of activity) for which the asset will be economically feasible for use in a business. In other words, it is the period of time that the business asset will be in service and used to earn revenues.

Because of the advances in technology, an asset's useful life is often less than its physical life. For example, a computer may be useful for only three years even though it could physically be operated for decades.

The useful life (as well as the salvage value at the end of the useful life) are estimated amounts needed in the calculation of the asset's depreciation. Depreciation is required so that the company's financial statements comply with the matching principle.

In the U.S., income tax regulations specify the useful life that must be used for income tax reporting. This is one reason that in a given year the depreciation on a company's income tax return will not agree with the depreciation reported on its financial statements. 

Published: October 8, 2014

Should I Buy a Building in the Name of My S Corporation or Set Up a Separate LLC?

When an S Corporation owner initially considers buying a building is the ideal time to set up an LLC and then to have a separate LLC own the business with their own S Corporation being the tenant and the new LLC the landlord as the LLC would ideally purchase the building. This is the most ideal time as the tax repercussions as detailed below are not in effect.

However if an S Corporation initially buys and now owns a piece of real estate and then seeks to sell it to another (even if selling/transferring it) to an LLC the S corporation owner owns 100% of the ownership of both the S Corporation and the LLC, the taxes owed can be a disaster.

If after an S Corporation owns a piece of real estate it is a fairly simple legal process  to simply transfer the real estate from an S Corporation to an LLC and filing the necessary paperwork with the county. However an S Corporation owner seeking to transfer the real estate to the LLC they also own must value the building at its FMV/Fair Market Value and then the S Corporation would sell the real estate to the LLC at its then present value. This Fair Market Value would then be compared to the   present NBV/Net Book Value which is determined by the original cost of the building less the depreciation taken on the building since its original purchase.

For example, if a building is initially purchased by an S Corporation for $400,000 eight years ago and there has been recorded $60,000 of depreciation expense the building would have a Net Book Value of $340,000 ($400,000 original cost less $60,000 of accumulated depreciation).  If the Present Fair Market Value of the building is now $450,000 then the S Corporation would sell to the LLC the real estate at this value and calculate the gain by comparing the $450,000 Fair Market Value to the $340,000 Net Book Value resulting in an $110,000 gain that tax law would require to be reported on the S Corporation return even though clearly a related party transaction (i.e., both businesses are controlled by common ownership).

This will give you a feel for the accounting and tax recognition required when selling between an S Corporation and a LLC that you wholly own each of the business just as how the gain would be reported when selling to an independent party.

If the above calculation results in a financial loss meaning the present Fair Market Value is less than the Net Book Value the tax loss is NOT deductible as IRS tax law treats the transaction as a related party transaction and the loss is not allowed as a tax loss/deduction.

From Alltop Accounting

Published: October 6, 2014

Tax-Filing and Payment Extensions Expire Oct. 15

The Internal Revenue Service today urged taxpayers whose tax-filing extension runs out on Oct. 15 to double check their returns for often-overlooked tax benefits and then file their returns electronically using IRS e-file.

More than a quarter of the nearly 13 million taxpayers who requested an automatic six-month extension this year have yet to file. Although Oct. 15 is the last day for most people, some still have more time, including members of the military and others serving in Afghanistan or other combat zone localities who typically have until at least 180 days after they leave the combat zone to both file returns and pay any taxes due.

“If you still need to file, don’t forget that you can still use IRS e-file through October 15,” said IRS Commissioner John Koskinen. “Many people may not realize they can still file their tax return for free through the IRS Free File program available on IRS.gov. Even if you’re filing in the final days, e-file remains easy, safe and the most accurate way to file your taxes.”

Check Out Tax Benefits

Before filing, the IRS encourages taxpayers to take a moment to see if they qualify for these and other often-overlooked credits and deductions:

  • Benefits for low-and moderate-income workers and families, especially the Earned Income Tax Credit. The special EITC Assistant can help taxpayers see if they’re eligible.
  • Savers credit, claimed on Form 8880, for low-and moderate-income workers who contributed to a retirement plan, such as an IRA or 401(k).
  • American Opportunity Tax Credit, claimed on Form 8863, and other education tax benefits for parents and college students.
  • Same-sex couples, legally married in jurisdictions that recognize their marriages, are now treated as married, regardless of where they live. This means that they generally must file their returns using either the married filing jointly or married filing separately filing status. Further details are on IRS.gov.

E-file Now: It’s Fast, Easy and Often Free

The IRS urged taxpayers to choose the speed and convenience of electronic filing. IRS e-file is fast, accurate and secure, making it an ideal option for those rushing to meet the Oct. 15 deadline. The tax agency verifies receipt of an e-filed return, and people who file electronically make fewer mistakes too. Of the more than 143 million returns received by the IRS so far this year, 85 percent or nearly 122 million have been e-filed.

Anyone expecting a refund can get it sooner by choosing direct deposit. Taxpayers can choose to have their refunds deposited into as many as three accounts. See Form 8888 for details.

Quick and Easy Payment Options

The new IRS Direct Pay system now offers taxpayers the fastest and easiest way to pay what they owe. Available through the Pay Your Tax Bill  icon on IRS.gov, this free online system allows individuals to securely pay their tax bills or make quarterly estimated tax payments directly from checking or savings accounts without any fees or pre-registration. More than 1.1 million tax payments totaling over $2.6 billion have been received from individual taxpayers since Direct Pay debuted earlier this year.

Other e-pay options include the Electronic Federal Tax Payment System (EFTPS) electronic funds withdrawal and credit or debit cards. Those who choose to pay by check or money order should make the payment out to the “United States Treasury.”

Taxpayers with extensions should file their returns by Oct. 15, even if they can’t pay the full amount due. Doing so will avoid the late-filing penalty, normally five percent per month, that would otherwise apply to any unpaid balance after Oct. 15. However, interest, currently at the rate of 3 percent per year compounded daily, and late-payment penalties, normally 0.5 percent per month, will continue to accrue.

Published: October 2, 2014

IRS Issues 401(k) After-Tax Rollover Rules

There are new rules for taking after-tax money out of your 401(k), and they are taxpayer-friendly. Basically, if you have after-tax money in your 401(k) retirement account, you can roll it into a Roth IRA where it will then grow tax-free (as opposed to tax-deferred). You don’t have to pay pro rata taxes on the distribution, accounting for the percentage of the pre-tax money in your 401(k).

What? Does Congress have any idea how complicated they are making things when they write these laws! Trust us, if you have after-tax money in your 401(k), you should be paying attention. The new IRS rules have opened the door to a smart planning move. You’re basically isolating basis to do a tax-free Roth conversion.

“If you can move after-tax money into a Roth and not pay tax, that is a major benefit,” says Robert Keebler, a CPA in Green Bay, Wisc.

“This is the best result we could have asked for, and it will make life easier for owners of these accounts and their advisors,” says tax lawyer Kaye Thomas who is posting a detailed analysis of the Notice on his web site, Fairmark.com. According to Aon Hewitt, 6.6% of 401(k) participants make after-tax contributions when available.

The new rules are all spelled out in Notice 2014-54. Example 4 says it all.

The employee’s 401(k) balance consists of $200,000 of pretax amounts and $50,000 of after-tax amounts (it does not include a Roth subaccount). The employee separates from service (i.e. quits, retires, or is fired) and requests a distribution of $100,000. The pretax amount of the distribution is $80,000 (four-fifths) and the after-tax amount of the distribution is $20,000 (one-fifth). The happy resolution: “The employee is permitted to allocate the $80,000 that consists entirely of pretax amounts to the traditional IRA so that the $20,000 rolled over to the Roth IRA consists entirely of after-tax amounts.”

Note:  The rules that say what portion of your distribution is pre-tax and what portion is after-tax have not changed, Thomas points out. What’s changed is that you can now direct pre-tax dollars to one place and after-tax dollars to another.

Before the new rule there was a convoluted way advisors accomplished this that required taxpayers to roll over the entire 401(k) and have outside funds on hand to counteract 20% income tax withholding. “Plan participants had a way to achieve this result before, but it required an awkward strategy and required them to pay withholding on a plan distribution even though they were intending to roll it to an IRA,” Thomas says, adding, “The new rule allows people to get the favorable result even if they don’t have cash available to replace the dollars that were withheld from the distribution.

One potential gotcha: the distributions have to be scheduled at the same time, or they’ll be treated as separate distributions, and you’re back to square one, with each having a mix of pre-tax and after-tax dollars. But the IRS gives an allowance for “reasonable” administrative delays.

The rules take effect January 1, but taxpayers can rely on them as of September 18, 2014 when they were issued. The IRS also relief for taxpayers who made this move in the past, using the roundabout method, based on a “reasonable interpretation standard.”

By Ashlea Ebeling for Forbes Magazine 

Published: September 18, 2014

The Individual Shared Responsibility Payment

Beginning in 2014, the individual shared responsibility provision of the Affordable Care Act requires each individual to:

  • Maintain a minimum level of health care coverage – known as minimum essential coverage, or
  • Qualify for an exemption, or
  • Make an individual shared responsibility payment when filing their federal income tax returns.

Minimum essential coverage generally includes government-sponsored programs, employer-provided health coverage, and coverage purchased in the individual market, including the Health Insurance Marketplace.  Most people already have health insurance coverage that qualifies as minimum essential coverage, and therefore will not need to make a payment if they maintain their qualified coverage. However, for each month that you or a member of your family is without minimum essential coverage and does not qualify for an exemption, you will need to make an individual shared responsibility payment.

If you and your dependents had minimum essential coverage for each month of 2014, you will check a box indicating that when you file your 2014 federal income tax return.  If you qualify for an exemption, you will attach a form to your tax return to claim that exemption.  If you are required to make the individual shared responsibility payment, you will calculate your payment and make the payment with your return.

If you choose to make an individual shared responsibility payment instead of maintaining minimum essential coverage, this means you will not have health insurance coverage to help pay for medical expenses.

In general, the individual shared responsibility payment for 2014 is the greater of:

  • One percent of your household income above the income filing threshold for your tax filing status, or
  • A flat dollar amount of $95 per adult and $47.50 per child (under age 18) in your family, but no more than $285 per family.

The individual shared responsibility payment is also capped at the cost of the national average premium for bronze level health plans available through the Marketplace that would cover everyone in your family who does not have minimum essential coverage and does not qualify for an exemption – for example, $12,240 for a family of five.  However this maximum fee will only impact the small number of high-income taxpayers who choose to go without health insurance. The payment amount is based on each individual’s personal circumstances, and information about figuring the payment can be found on our ‘Calculating the Payment’ page on IRS.gov/aca.

Example of Payment Calculation

Eduardo and Julia are married and have two children under age 18. No family member has minimum essential coverage for any month during 2014, and no family member qualifies for an exemption. For 2014, their household income is $70,000 and their tax return filing threshold amount is $20,300.

  • Using the household income formula: Subtract the tax return filing threshold amount for 2014 from the 2014 household income, then multiply the answer by one percent (0.01).
     $70,000 - $20,300 = $49,700
     One percent of $49,700 equals $497.00.
  • Using the flat dollar amount formula: Add $95 per adult for Eduardo and Julia to $47.50 per child – for their two children. 
     $95.00 + $95.00 + $47.50 + $47.50 = $285.00

Eduardo and Julia’s shared responsibility payment for the year for 2014 is $497. That’s because the household income formula amount of $497 is greater than flat dollar formula amount of $285, and it is less than the $9,792 annual national average premium for bronze level coverage for a family of four in 2014.

Published: September 17, 2014

Homeowners Tax Tips

Homeowners are eligible for more tax benefits than renters, but you don’t just get these handed to you by the IRS. There are very specific deductions and paperwork that need to be filled out in order to claim these benefits. You will want to research new tax guidelines and laws each year before filing.

  • Mortgage Interest Deduction

    This is a huge one for homeowners. There is a cap of $1.1 million but this includes all mortgages, not just one. You are also able to deduct points on multiple mortgages.

  • Insurance and Taxes

    Private mortgage insurance is also deductible (as well as state and local property taxes) on your federal return. In some locations, and in some cases, you can also get special property tax benefits, usually in lower income communities.

  • Green-energy efficient deductions

    Green energy tax credits are going away, but there are credits for energy efficient doors, windows and HVAC. The cap is still only $500 but it is something. The large deduction for energy efficiency is solar installations. The requirements are that it is your primary residence, not a rental property. The credit is 30% and includes the total cost of panels, installation, wiring, and basically everything. That’s a huge credit!

  • Sale of your home

    Selling your home also offers you many deductions and credits. You can claim the title insurance, advertising and agent or broker fees as expenses of the sale. Also any many repairs you completed within 90 days of the sale with the intent of marketing the property can reduce your capital gains. If you move more than 50 miles from your old home due to job relocation, you could deduct reasonable moving costs.

  • Disaster-casualty losses

    Considering the harsh winter we had last year, this may play out well for many homeowners. If your loss or damages added up to more than 10% of your gross income, you can deduct the overage.

With everything tax and IRS related, you need to have documentation. Always file receipts, take photo inventory of personal property and keep extra copies in a safe place outside of your home. It takes a bit of effort to be able to write off deductions and qualify for credits, but they are worth it come tax filing time.

Published: September 16, 2014

How 6 Types of Retirement Income are Taxed

One of the biggest mistakes retirees make when calculating their living expenses is forgetting how big a bite state and federal taxes can take out of savings. And how you tap your accounts can make a big difference in what you ultimately pay to Uncle Sam.

Conventional wisdom has long held that you should tap taxable accounts first, followed by tax-deferred retirement accounts and then your Roth. This strategy makes sense for many retirees, but be careful if you have a lot of money in a traditional IRA or 401(k). When you turn 70 1/2, you'll have to take required minimum distributions (RMDs) from the accounts. If the accounts grow too large, mandatory withdrawals could push you into a higher tax bracket. To avoid this problem, you may want to take withdrawals from tax-deferred accounts earlier.

Here's how retirement assets are taxed.

Tax-deferred accounts. Prepare to feel pain. Withdrawals from traditional IRAs and your 401(k) will be taxed as ordinary income, which means at your top tax bracket.

Taxable accounts. Profits from the sale of investments, such as stocks, bonds, mutual funds and real estate, are taxed at capital-gains rates, which vary depending on how long you've owned the investments. Long-term capital-gains rates, which apply to assets you have held longer than a year, can be quite favorable: If you're in the 10% or 15% tax bracket, you'll pay 0% on those gains. Most other taxpayers pay 15% on long-term gains. Short-term capital gains are taxed at your ordinary income tax rate.

Interest on savings accounts and CDs and dividends paid by your money market mutual funds is taxed at your ordinary income rate. Interest from municipal bonds is tax-free at the federal level.

Roth IRAs. Give yourself a high five if your retirement portfolio includes one of these accounts. As long as the Roth has been open for at least five years and you're 59 1/2 or older, all withdrawals are tax-free. In addition, you don't have to take RMDs from your Roth when you turn 70 1/2.

Social Security. Many retirees are surprised--and dismayed--to discover that a portion of their Social Security benefits could be taxable. Whether or not you're taxed depends on what's known as your provisional income: your adjusted gross income plus any tax-free interest plus 50% of your benefits. If provisional income is between $25,000 and $34,000 if you're single, or between $32,000 and $44,000 if you're married, up to 50% of your benefits is taxable. If it exceeds $34,000 if you're single or $44,000 if you're married, up to 85% of your benefits is taxable.

Pensions. Payments from private and government pensions are usually taxable at your ordinary income rate, assuming you made no after-tax contributions to the plan.

Annuities. If you purchased an annuity that provides income in retirement, the portion of the payment that represents your principal is tax-free; the rest is taxable. The insurance company that sold you the annuity is required to tell you what is taxable. Different rules apply if you bought the annuity with pretax funds (such as from a traditional IRA). In that case, 100% of your payment will be taxed as ordinary income.

By Sandra Block for Kiplinger

Published: September 15, 2014

Transferring the Title of Your House to Your Child

I want to transfer my house title to my child, what are the costs and tax consequences of doing so?

The costs associated with a deed transfer will vary by state and by how the transfer is accomplished. Filing a deed yourself may be the cheapest method, but it will require quite a bit of homework to ensure you have filled out and correctly filed the appropriate paperwork. Online legal document centers, such as LegalZoom, offer deed transfer services for around $250, plus filing fees. These services typically include title research, creation of the real estate deed and filing of the deed with the county recorder's office. You can also hire a real estate attorney to execute the deed transfer. This might be the most expensive option, but it may also be the least stressful since you would be certain the transfer was executed appropriately.

Tax consequences can end up costing your child more money than if he or she were to inherit the property. Assume you purchased your home years ago for $50,000. Over the years you put $20,000 into the home. It has a current market value of $250,000. Because you transferred the home to your child while you were still living, your cost basis, which would be $70,000, becomes your child's basis. If your child sells the home, he or she would owe capital gains taxes on the difference between the sale price and the cost basis, which would be $180,000. At a capital gains rate of 15%, that would equal $27,000 in taxes. The tax rate will be higher if you owned the home for less than one year, at which point the profit would be taxed as ordinary income.

If your child moves in and lives in the property for at least two out of five years before selling it, up to $250,000 of profit can be excluded. However, $500,000 can be excluded if filing jointly with a spouse. Your child will have to use your cost basis of $70,000, which includes the $50,000 purchase price plus the $20,000 in improvement costs.

If your child inherits the property upon your death, the child will receive the "stepped-up basis" where the value of the property on the date of your death becomes the child's basis. So, if the property has a market value of $250,000 at the time of your death, your child could sell the home for $250,000 and not be responsible for capital gains tax.

It has been suggested that the stepped-up basis rule could be modified in the future. Since tax rules do change, it is important to consult with a qualified tax specialist before making any decisions.

By Jean Folger for Investopedia

Published: September 12, 2014

Paying Tax With Art Is Legal In UK & Mexico, Why Not In US?

In the UK, you can pay your taxes with art. You even get full fair market value credit without selling it or paying tax on your gain. It’s pretty slick. Between 2009 and 2013, £124.5 million worth were handed over under arrangements that allow taxpayers to reduce their tax bill with art. It helps the UK collect too, considering that the UK Treasury is owed more than £35 billion in taxes.

The program is called Acceptance-in-Lieu and it’s becoming more and more popular. It dates all the way back to 1910. It was designed so cultural objects could be bequeathed to the nation instead of cash. You get full fair market value off your tax bill.

Once your artwork or artefact is accepted by the Government, it will be given to a public museum, archive or library. In some cases, you can even specify where you would like it to be housed and displayed. Traditionally, the program was used for paying estate taxes. But starting in March 2013, you can give during life to settle your unpaid tax bills.

All sorts of things have followed this path, including original manuscripts handwritten by John Lennon. The threshold for UK inheritance tax is very low at only £325,000. There have been proposals to increase it to £1 million per person, but that’s still proposed.

In Mexico, the tax law goes a step further, allowing painters, sculptors, and other artists to donate part of their annual production of artwork in lieu of paying taxes. In return, Mexico gains a huge collection of contemporary art. Mexico’s program dates to 1957.

You have to admire the simplicity of it too. Say an artist sells one to five pieces of art in one year. He then donates a work of equal value to the state. The more you sell, the more you hand over for taxes, until an artist gives a maximum of six pieces.

The government likes to think it’s encouraging artists. In effect, the government says, ‘Pay your taxes in artwork. Keep on painting.’  Hundreds of artists take part, and it’s hard to find one with even the faintest hesitation. Many hail the program as unique in the world.

The program supposedly grey out of a 1957 encounter between a tax official and David Alfaro Siqueiros, a muralist and painter of social realism. Hey, paying taxes in paintings would be much better than going to jail!. But regardless of its genesis, the program has been in operation since 1957, garnering 4,394 works of art.

A rotating committee of seven artists and curators evaluates proposed donations to see whether they fairly represent the body of work of a given artist. So it’s not just about money. Apart from the value of the art, experts decide if the work is fairly represents the artist.

More than anyone else, it is artists who like Mexico’s program. It has generated good will among artists, and helps to amass an impressive collection of some of Mexico’s most renowned artists. The program also has beautified the walls and open spaces of public buildings.

By Ron I. Wood for Forbes Magazine

Published: September 11, 2014

Will The New Tax Laws Impact Your Divorce Settlement?

Congress passed the American Taxpayer Relief Act (ATRA) on January 1, to stave off federal tax increases on the middle-class and across-the-board spending cuts that were set to occur automatically if no action were taken, and prevent our economy from plummeting over that “fiscal cliff” we’d been hearing about for weeks.

Unfortunately though, if you’re in the middle of negotiating a divorce settlement agreement, some of the provisions of the new tax law could send you over a fiscal cliff of a different kind – not nationally important, of course, but critical to your own financial future nonetheless.

Taking the time to learn how new tax laws might impact your settlement agreement, and negotiating accordingly, could save you tremendously in the long run.

Two major areas require special attention: changes to income and division of assets.

Income from alimony could bump you into a higher tax bracket.

A major provision of ATRA was to raise tax rates on high incomes. Specifically, if you’re a single filer with an annual income greater than $400,000, you will now pay the new 39.6% tax rate (increased from 35%) on income in excess of that $400,000 threshold.

Divorce will mean significant change to your income structure, possibly including alimony. Alimony (also known as spousal support or maintenance) refers to payments made by the “moneyed” spouse to the “non-moneyed” spouse after a divorce is finalized. It is paid in established intervals (typically monthly), for a time period specified in the divorce agreement.

If your proposed divorce settlement agreement includes alimony payments, in most cases, you will have to declare those payments as taxable income. (Although not commonly done, alimony can be structured as non-taxable income to the recipient and a non-deductible expense to the payor). Be sure you know how your tax situation will play out as a result. You want to make sure the settlement you’re agreeing to is the one that makes the most financial sense for the long term. After all, there may be better ways to assure your post-divorce financial stability.

For example, I often encourage clients to consider an upfront lump sum payment – a one-time payment of a fixed amount – in lieu of alimony. These lump sum payments are neither taxable to the recipient nor deductible to the payor, but the paying spouse will typically try to negotiate a lump sum amount that takes into account the loss of deductibility.

There are several reasons a lump-sum payment can be preferable to traditional alimony payments; however, a lump sum payment is not right for everyone. It requires very careful, deliberate financial management if it is to sustain your lifestyle in the long term.

If income from alimony is a tax concern, you may also want to revisit the balance between child support and alimony payments in your settlement. Child support is neither a deductible expense for your husband, nor taxable income for you. Alimony is usually both. (Payors need to be mindful of complicated IRS rules concerning frontloading and recapture of alimony as it relates to alimony vs child support.)

Remember, too, that alimony can be modified, up or down. The fundamental purpose of alimony is to allow the “non-moneyed” spouse to maintain a standard of living somewhat comparable to what she enjoyed during the marriage.  Yes, even today, the “non-moneyed” spouse is typically the woman, and yes, I think alimony, in many cases, remains just as relevant today as it ever was. Why?

Because the non-moneyed spouse often gave up her potential career and earning power and invested her time and labor into the family.

She also directly or indirectly aided her husband’s career by taking care of the home front which allowed him to invest in his career and increase his earning power. Many women have given up educational and employment opportunities and many women have also helped their husbands (financially or otherwise) go through law or med school or to get other professional training.

Then, after several decades he is at the peak of his earning potential (thanks in part to her), and yet she is relatively unemployable, especially if she is in her 50s and has been out of the work force for all those years.

And even though they may be dividing assets 50-50, he, because of his earning power will replace some or all of those assets over time while she, because of her lack of earning power, will be liquidating assets from day one and will ultimately go broke if she lives long enough.

Therefore, in my opinion, the purpose of alimony is to somewhat equalize this disparity.  (And of course, the same could apply to a man, if he were the non-moneyed spouse.)

There are new tax implications for division of investments and other assets.

I’ve written before about how division of assets can be an exceedingly complex part of the divorce process. Tax considerations account for a lot of that complexity, and the new law adds even more factors to evaluate.

For example, ATRA now sets a 3.8% Medicare surtax on capital gains, dividends and other investment income above $200,000 for a single filer. You’ll want to keep the new tax in mind as you are negotiating the division of stock portfolios and other income-producing investments.

Additionally, for filers who fall in that new 39.6% income tax bracket, the federal capital gains tax rate has been increased from 15% to 20% (plus the aforementioned additional 3.8%, which brings the total to almost 24%, not including your state’s capital gains taxes). This can put a significant dent in the amount you hope to realize from selling assets. The capital gains tax hit should be calculated and weighed carefully before agreeing on how your assets should be divided.

Depending on how much the tax burden would lessen the value of a particular asset to you, it may be more sensible to negotiate for something else, instead. For instance, you may want to consider cash or retirement funds (which have no capital gains tax exposure and, except for Roth accounts, will be taxed only when you withdraw the money) instead of stock or real estate. However, note that capital gains tax can take just as big a bite of proceeds from sale of real estate (once you’ve taken into account the $250,000 exclusion on your primary residence) as of stocks. Make sure you have properties expertly appraised.

A qualified divorce financial advisor can help you navigate the potential pitfalls presented by ATRA and other tax laws, with all their subtleties. You’ll need thorough, expert analysis of all your options before you agree to any settlement –and since this is not your attorney’s primary field of expertise, be sure to have a divorce financial professional on your team to assure you the best possible financial outcome of your divorce.

By Jeff Landers for Forbes Magazine

Published: September 8, 2014

Many Reasons to Offer 401(k)s (Including Owner’s Retirement)

Soon after Sabina Gault got her public relations firm up and running in 2008, she asked for a show of hands from employees interested in having a company 401(k) plan. The consensus? “Nobody wanted it,” said Ms. Gault, whose firm, Konnect Public Relations, based in Los Angeles, had just a few employees at the time.

Two years later, with eight people on her payroll, she raised the question a second time. Again, the response was lukewarm. So she waited.

Finally, in 2013, she made an executive decision about the 401(k): “I said, ‘We’re going to do it no matter what, even if it’s just a few of us.’ ”

While the share of small businesses offering 401(k) plans has picked up since 2008 — when just 10 percent offered the benefit — 401(k) plans are still the exception at small companies. Just one in four firms with 50 or fewer employees has such a plan in place, according to Capital One’s ShareBuilder 401k.

Employers point to a lack of interest among employees coupled with the costs of setting up and administering the plans. That is one reason Ms. Gault waited as long as she did. “It didn’t make sense to pay for something people wouldn’t use,” she said, noting that most of her employees are in their early 20s. Had they been a little older, she said, it might have been more of a priority.

Retirement plans typically take a back seat to salary, benefits like health insurance and other more immediate perks, said Sabrina Parsons, chief executive of Palo Alto Software, a 55-employee business planning software company based in Eugene, Ore. Yet when it comes to recruiting and retaining employees over the long term, “not having a retirement plan is a glaring hole,” she said. “It’s like restrooms in the office; you can’t not have them.”

What’s more, a company-sponsored plan is also the most effective way for small-business owners to save for their own retirements, said Leon LaBrecque, chief strategist and founder of LJPR, a wealth management firm in Troy, Mich. Owners can contribute to individual retirement accounts or to a Roth I.R.A., but the contribution limit for these plans is just $5,500 a year ($6,500 for anyone 50 and older). That is one third the maximum allowed for a 401(k) plan. SEP I.R.A.s, while popular among the self-employed and very small businesses, are generally not a good bet for growing companies; they can be costly, and they require owners to contribute the same percentage to employee plans that they contribute to their own plans.

Fortunately, setting up a 401(k) plan is considerably easier and cheaper than it was just a decade ago. Setup and administrative costs vary from one provider to the next — and increase if the plan offers more customized investment options, hands-on advice and other bells and whistles. Many 401(k) providers, including Sharebuilder 401k, offer basic plans that start around $1,000 a year. And there are tax incentives. Companies with fewer than 100 employees can claim up to $500 in tax credits to offset administrative costs for each of the first three years of a first-time plan.

Owners shopping for a plan will want to balance investment options and services with costs paid by the company and fees paid by the employee. Many providers charge a management fee — to employers or employees — on top of fixed administrative fees. Employers should be wary if fees creep above 1 percent of employee assets. (Additional management fees are charged by the mutual funds or other exchange-traded funds used in 401(k) plans.)

One exception, according to Ms. Parsons: It may be worth paying more to bring in a financial adviser to help select investment options and to give employees hands-on investment advice. “Our thinking is, if you take the time to set up a plan, you want to make sure employees are getting the most out of it,” she said. “We work with a planner who does an informational meeting with the company every quarter and also meets with employees individually.”

Having worked in the financial services industry for much of his career, Darius Mirshahzadeh, president of Endeavor America Loan Services, was particularly aware of fees when it came time to set up a 401(k) for his one-year-old business. The plan, which will be available to employees beginning in August, is administered by the Online 401k, a 15-year-old company with more than 7,000 small businesses on its platform. Its most popular option, the Express(k), charges employers with 50 or fewer employees about $1,200 for the year; employees pay an additional flat fee of $4 a month.

For some employers, though, administrative fees are just the beginning of the expense. The bigger concern for many small businesses is the cost of matching benefits. “The biggest misconception is that employers have to do a match,” said Neil Smith, executive vice president at Ascensus, one of the nation’s largest independent record keepers and administrators for retirement plans. “A match is completely optional in a traditional plan.”

Why the confusion? A provision in the Employee Retirement Income Security Act prohibits companies from allowing the highest-paid employees to contribute disproportionately more than the rest of the work force. Specifically, the average contribution of the highly paid group cannot be more than 2 percentage points higher than the average for rank-and-file employees. If the average employee contributes 5 percent of salary to the plan, for example, the average for the highest-paid employees cannot exceed 7 percent.

Nevertheless, to avoid the administrative inconvenience of complying with this rule, many companies choose so-called safe harbor plans. These plans do require an employer contribution — most common is a dollar-for-dollar match, up to 4 percent — but they give all employees carte blanche to contribute as much as they want to the plan, up to the standard limits.

The standard advice is that most companies that can afford to match probably should. A generous retirement package can be an asset for recruiting and retaining employees, said Mr. LaBrecque, who uses a safe harbor plan for his employees. “I always emphasize that this is part of their compensation package,” he said. “When employees look at it that way, they’re more likely to take full advantage of that match.”

Small businesses that are not quite ready to make that commitment, however, can start with the traditional plan. “You can always switch over to a safe harbor plan once you have more consistent revenue coming in the door,” he added.

For now, Ms. Gault is sticking with a traditional plan — though she does offer employees a 10 percent match on contributions of up to 5 percent of their salary. The perk has proved to be more popular than she expected. Today, she said, roughly half of her 30 employees use the plan to save for their retirement years.

By Sarah Max for the New York Times Small Business

Published: September 5, 2014

How to Properly Handle Your Company’s Meeting Minutes

If you have incorporated your business as an S Corporation or a C Corporation, most states require that you keep careful records of the company’s activities. Every time your board of directors meets, your company needs to keep a record on file for regulatory compliance purposes.

There is a long list of possible transaction and resolutions that you might need to keep on record. This can include anything ranging from:

  • The appointment of a new officer.
  • The resignation of a director.
  • Purchasing insurance.
  • Selling stock
  • Obtaining a line of credit/credit card in the company’s name.

Keeping records can be a lot to keep straight, particularly for the small business owner. However, proper meeting minutes are essential to keeping your corporation in good standing and maintaining your personal liability shield. Below are some of the key things you need to know when it comes to keeping minutes of your meetings.

What are Meeting Minutes?

Meeting minutes keep an official account of what was done or talked about at formal meetings, including any decisions made or actions taken.

They are taken during a formal meeting of the board of directors or shareholders of a corporation, such as initial and annual meetings. Typically, meeting minutes are recorded by the corporation’s secretary (or another individual appointed at the meeting).

What Should be Included in Meeting Minutes?

Your meeting minutes do not need to include every little detail. You just need to document the key information and any decisions made or actions taken. In general, your minutes should be detailed enough to serve as your corporation’s “institutional memory.”

Typical minutes will include the following:

  • Basic information about the meeting: date, time, location.
  • Who attended, along with a special note in the cases where attendees came late or left early.
  • Agenda items with a brief description of each item.
  • Voting actions with a detailed account of how each individual voted, along with any abstensions.
  • Time when meeting was adjourned.

In most cases, you don’t need to create minutes from scratch. You can find free templates online to serve as a starting point. Choose your type of minutes/documentations, fill in the blanks, and print it out, and you will have met your recordkeeping obligations.

Who is Required to Keep Meeting Minutes?

The majority of states require both S Corporations and C Corporations to document major business decisions and the major meetings you hold.

At present, the following states do not require minutes to be kept:

  • Delaware
  • Kansas
  • Nevada
  • North Dakota
  • Oklahoma

Additionally, LLCs are not required to keep minutes.

What Should I do With the Minutes After They are Recorded?

Minutes do not need to be filed with the state, but can instead be kept with your other corporate records, such as articles of incorporations, bylaws, and resolutions.

Like other documents, you should keep minutes on hand for at least seven years. Members of the corporation, such as shareholders, officers, and directors, are entitled to review the meeting minutes upon “reasonable request” to the corporation.

While you don’t need to file these documents with the state, they should still be considered important documents and are essential for protecting your corporation’s good standing and your limited liability status.

From SmallBizTrends.com

Published: August 29, 2014

Explaining Obama's myRA

In his State of the Union address, President Obama announced plans to create a new 'myRA' retirement account aimed at helping millions of Americans to start building a nest egg.

Here's a look at how myRAs will work, according to the White House:

Who can open a myRA? The accounts are targeted at the millions of low- and middle-income Americans who don't have access to employer-sponsored retirement plans. That includes roughly half of all workers and 75% of part-time workers.

The White House says it will "aggressively" encourage employers to offer the program, noting that they won't have to administer or contribute to the accounts. myRAs will initially be offered through a pilot program to workers whose employers sign on by the end of the year.

Once the program reaches full implementation, anyone who has direct deposit for their paycheck will be eligible to sign up, Treasury said.

All workers may invest in the accounts, including those who would like to supplement an existing 401(k) plan, as long as their household income falls below $191,000 a year.

How will the account work? The account will function as a Roth IRA, which allows savers to invest after-tax dollars and withdraw the money in retirement tax-free.

But unlike traditional Roth IRAs, the accounts will solely invest in government savings bonds. They will also be backed by the U.S. government, meaning that savers can never lose their principal investment.

Workers will be able to keep the accounts when they switch jobs or contribute to the same account from multiple part-time jobs. They will also be able to withdraw their contributions at any time without penalty. However, anyone who withdraws the interest they earned in the account before age 59 1/2 will get hit with taxes and a possible penalty, just like a Roth IRA.

Another plus: while private retirement accounts of any size can come with a host of administrative expenses, the myRAs will be free of any fees.

"This deals with the small saver problem," said David John, senior strategic policy adviser at the AARP Public Policy Institute. "Very often the administrative costs of those tiny accounts actually eat into the principal."

How much can I invest? Initial investments can be as low as $25 and workers can contribute as little as $5 at a time through automatic payroll deductions. Like a traditional Roth account, savers will be allowed to contribute up to $5,500 a year under current limits.

Once a participant's account balance hits $15,000, or the account has been open for 30 years, she will have to roll it over to a private sector Roth IRA, where the money can continue to grow tax-free. Workers will have the option to switch to a Roth IRA at any time.

What kind of returns can I expectWhile the accounts will offer a safe place for many first-time retirement savers to put their money, they shouldn't expect big returns.

The White House said the accounts will earn the same rate as the Thrift Savings Plan's Government Securities Investment Fund that it offers to federal workers. That fund earned around 1.5 % in 2012, and had an average annual return of 3.6% between 2003 and 2012.

With an average 2% interest rate, for example, a worker contributing $100 a month would accumulate around $6,300 in savings after five years, including around $300 in interest.

"The good news is you don't have any risk on this account," John said. "The bad news is of course you're not going to have a huge amount of earnings on this account either."

Will this help solve the retirement savings crisis? Retirement advocates are cheering the new savings program as an important step. But no one thinks this alone will fix the fact that millions of Americans have little-to-no retirement savings.

Obama's annual budget will again include a separate proposal to automatically enroll workers in IRA accounts, a long-touted plan which would require Congressional approval.

"This is a start," John said. "Without the actions of Congress, there is a limit on what can be done."

By Melanie Hicken for @CNNMoney

Published: August 25, 2014

4 Mid-Year Tax Tips That Could Save You Big Bucks

You may be spending your weekends at the beach or preparing for your upcoming vacation, but summer is a great time to organize your taxes.

Americans tend to scramble at the end of the year, or in the worst case, at the beginning of April, to prepare their taxes, find charity donation receipts or open retirement accounts; but tax planning is an ongoing process, experts say, which should be documented all year long. While it’s anything but fun to spend a July Sunday compiling receipts and shifting investments, it will help you save money in the long run.

“Everybody procrastinates, but people should just take a rainy day and organize their documents from January to June,” said David McKelvey, partner at accounting firm Friedman in New York. “They will save time at the end of the year.”

Here are four steps you can take to help prepare your 2014 taxes:

Manage your taxable income. For 2014, the top income tax rate of 39.6 percent will apply to individuals with taxable income over $406,751, or $457,601 for joint filers. If you expect your 2014 income to be near that threshold, start thinking of ways to reduce your taxable income by deferring income, contributing to pre-tax investments including to a retirement account, or shifting income to family members in lower tax brackets by giving them income-producing investments. “You want to manage your bracket,” said McKelvey. “It can translate into real savings.” 

High-income earners subject to the alternative minimum tax should also pay close attention to their taxable income and in some cases, they may want to accelerate income. As always, your accountant should offer concrete strategies.

Generate investment losses. The stock market has had a strong run so far in 2014 and chances are, you’ve realized some gains. With the capital gains rate for taxpayers in the top bracket at 20 percent, you should keep track of how much capital gains you’ve realized or plan to realize, and consider selling some depreciated investments to generate losses and offset those gains. You can always repurchase these investments if you wait at least 31 days.

Contribute to retirement. It will help reduce your taxable income, as mentioned above, in addition to help you plan for the future. You can contribute to traditional IRAs, which will be tax deductible. Pretax deferrals to employer-sponsored retirement plans such as 401(k)s also help save taxes. “You pay no tax as long as the funds are in the account, which reduces your taxes for years to come,” McKelvey said. “Plus, tax-deferred compounding can help your investments grow more quickly.”

Plan for medical expenses. As of 2013, the threshold for deducting medical expenses increased from 7.5 percent of your adjusted gross income to 10 percent. You can deduct only expenses that exceed that floor. If they don’t, you can save by contributing to a tax-advantaged health care account such as a health savings account, HSA, or a flexible spending account, FSA. While contributions are pretax or tax-deductible and withdrawals are tax free, some rules and limits apply as to what types of medical expenses qualify. Another change for 2014 you can plan for now is the addition of a 3.8 percent Medicare tax, one of the main consequences of Obamacare for most taxpayers. That tax will kick in for married people making over $250,000.

“Tax planning can create a lot of anxiety,” McKelvey said. “The advantage of starting midyear is that you don’t have to rush.”

By Marina Cole for The Fiscal Times

Published: August 21, 2014

Deducting Moving Expenses

If you move because of your job, you may be able to deduct the cost of the move on your tax return. You may be able to deduct your costs if you move to start a new job or to work at the same job in a new location. The IRS offers the following tips about moving expenses and your tax return.

In order to deduct moving expenses, your move must meet three requirements:

1. The move must closely relate to the start of work.  Generally, you can consider moving expenses within one year of the date you start work at a new job location. Additional rules apply to this requirement.

2. Your move must meet the distance test.  Your new main job location must be at least 50 miles farther from your old home than your previous job location. For example, if your old job was three miles from your old home, your new job must be at least 53 miles from your old home.

3. You must meet the time test.  After the move, you must work full-time at your new job for at least 39 weeks the first year. If you’re self-employed, you must meet this test and work full-time for a total of at least 78 weeks during the first two years at the new job site. If your income tax return is due before you’ve met this test, you can still deduct moving expenses if you expect to meet it.

If you can claim this deduction, here are a few more tips from the IRS: 

  • Travel.  You can deduct transportation and lodging expenses for yourself and household members while moving from your old home to your new home. You cannot deduct your travel meal costs.
  • Household goods and utilities.  You can deduct the cost of packing, crating and shipping your things. You may be able to include the cost of storing and insuring these items while in transit. You can deduct the cost of connecting or disconnecting utilities.
  • Nondeductible expenses.  You cannot deduct as moving expenses any part of the purchase price of your new home, the cost of selling a home or the cost of entering into or breaking a lease. 
  • Reimbursed expenses.  If your employer later pays you for the cost of a move that you deducted on your tax return, you may need to include the payment as income. You report any taxable amount on your tax return in the year you get the payment.
  • Address Change.  When you move, be sure to update your address with the IRS and the U.S. Post Office. To notify the IRS file Form 8822, Change of Address.
Published: August 20, 2014

Why Move To Florida? $200,000 in Tax Savings

Florida can brag about a lot more than its warm weather. Its low tax burden has caught the attention of nearly 2 million people over the last couple decades, and they brought more than $100 billion of income to the state.

People from New York, New Jersey and even Wisconsin have been moving to Florida in droves. Yes, the weather is much nicer in Ft. Lauderdale in January than in Green Bay, but keeping more of your own money seems to be a major influence.

I am not talking about small amounts, either. A recent report published by the John K. MacIver Institute for Public Policy and the National Center for Policy Analysis shows there is a big advantage to moving to low-tax states.

According to the study, a 40-year-old married couple who own a home and earn $75,000 a year would gain $223,735 over the rest of their lifetime if they moved to Florida from Wisconsin.

When weather is taken out of the equation, the Dairy State is still at a loss. It would be advantageous for this same couple to move to three of the four states that share a border with Wisconsin. Only Illinois has a worse tax climate.

In fact, if they chose to move to Minnesota, the couple would gain more than $50,000 in lifetime wealth. This hypothetical couple would be better off in different states, but does that mean people are really leaving Wisconsin?

The answer is an astounding yes. Wisconsin loses $136 million annually in adjusted gross income, totaling nearly $2.5 billion in the last 20 years.

An even bigger problem for Wisconsin is the people who are leaving may be the ones paying the most in taxes.

As the study points out, higher-income residents would find it beneficial to move to other states, but it also finds that lower-income individuals are in a different boat thanks to Wisconsin’s progressive tax system.

A 25-year-old renter making $30,000 a year is better off in Wisconsin than Illinois, Iowa and Minnesota. But, as this taxpayer earns more and purchases a home, it becomes advantageous to move to Iowa or Minnesota. Essentially, the state is penalizing taxpayers for being more successful.

Luckily, there is good news for Wisconsinites. Gov. Scott Walker, Wisconsin Republican, and state lawmakers have made it a priority to reform taxes. The tax code has been simplified – eliminating 17 special interest tax credits and reducing the amount of tax brackets from five to four.

Property taxes have been frozen at 2010 levels and income tax rates have been cut for everyone. In total, the state’s residents have seen $2 billion in tax relief since 2011.

Even with this dramatic shift toward tax reform, Wisconsin is still lagging its neighbors and states across the country. If the state wants to be a national competitor for new businesses, investment and job creation, it must keep reforming its tax code and reducing the overall tax burden.

Just see what Florida has been able to do. When looking at a direct comparison to the Sunshine State’s tax climate, it is amazing that more people – and their money – are not moving away from Wisconsin.

Florida’s median property tax rate is 0.97 percent. Wisconsin’s rate is nearly double at 1.76 percent. Florida residents have no state income tax. Wisconsin’s income tax rate tops out at 7.65 percent.

So why have more states not adopted the Florida model?

The simple answer is that government at every level is addicted to spending. Just look at the national debt, which is quickly approaching $18 trillion. We cannot permit the states to travel down this same path.

By Nick Novak for The Washington Times

Published: August 18, 2014

7 Things You Must Know About Corporate Taxes

Politicians are hopping mad because a spate of big U.S. companies are trying to escape higher tax bills by proposing mergers with foreign firms.

But the real problem, most agree, is the corporate tax code, which hasn't kept pace with the transformation of global business over the past 30 years.

Some people think next year might be the year when Congress finally reworks how companies are taxed.

A wonk can dream.

In the meantime, there will be plenty of rhetoric about the issue. Here are 7 key facts to help you keep things straight.

1. Corporate tax revenue accounted for 10% of all federal tax revenue last year. That's less than a third of what it was at its post-war peak, in 1952, according to the Congressional Research Service.

There are a few reasons for the drop-off, CRS notes. Among them, corporations' profits and the percent of their profits paid in taxes have fallen.

Also, many businesses (partnerships, limited liability companies and so-called S corps) have chosen to file under the individual tax code because they get a better deal that way.

2. Only 6% of businesses file under the corporate tax code. And they account for less than half of all business income, according to CRS.

By contrast, in 1980, 17% of businesses paid the corporate tax and generated nearly 80% of business income.

3. Corporate tax breaks cost U.S. coffers about $150 billion last year. That's a lot. But it's a fraction of the more than $1 trillion of individuals' tax breaks in 2013.

One way both are similar: The 10 biggest breaks account for a large majority of the total cost.

4. The U.S. has the highest tax rate among developed economies. Most U.S. corporate income is subject to a 35% federal tax rate. But the "effective" rate companies pay is often lower after accounting for a company's tax credits, deductions and exemptions.

What's more, companies owe U.S. tax on profits they make in the United States and abroad, minus whatever foreign tax they've paid. But a company can put off paying U.S. tax on foreign profits indefinitely, so long as it doesn't bring those profits back to U.S. shores and reinvest them in the business.

Critics say this high-rate, "worldwide" tax system hurts U.S. companies with foreign rivals.In many other countries, companies typically not only face lower rates but don't owe their home country tax on earnings made offshore.

5. U.S. corporations are not taxed equitably. The tax code favors some activities and investments over others, and creates opportunities for certain firms that others can't use.

For instance, it's good to be a U.S. company working abroad.

"They have opportunities to shift profits from U.S. operations to tax havens that wholly domestic businesses do not," said Martin Sullivan, chief economist at the publisher Tax Analysts.

Even among U.S. multinationals, the playing field isn't quite level.

"Companies with lots of patents, trademarks and other intellectual property have the greatest ability to shift profits to tax havens. That's why tech, pharma and medical device companies all tend to have such low effective tax rates," Sullivan said.

(See, for example, how Apple lowers its rate.)

6. Many big U.S. companies are swimming in untaxed cash. Since U.S. multinationals only owe U.S. tax on foreign earnings when they bring them back to the United States, there's serious incentive to put off that day of reckoning.

End result: Many companies have built up a serious offshore cash stash. Apple, for instance, has more than $100 billion sitting outside the United States.Microsoft  has roughly $93 billion, while Pfizer has an estimated $69 billion, according to Mindy Herzfeld, a contributing editor at Tax Notes International.

7. The pace of U.S. companies looking to leave has picked up dramatically. Between 1983 and 2003, 29 U.S. companies reincorporated abroad in a process known as "inversion." From 2004 to 2013, there have been 47, according to CRS. And this year alone there have been at least 15 proposed inversion deals, Tax Notes reports.

Many lawmakers believe a lower U.S. corporate tax rate could help deter companies from leaving.

Some in Congress are also pushing for the United States to move away from a "worldwide" tax system to a "territorial" one. In a territorial system, corporations would only owe U.S. tax on profits made in the United States. Any profits they make offshore would be taxed by the countries where those profits were made.

In any case, the tax reform proposals put forth so far by some key lawmakers "would leave considerable advantages" for U.S. companies that move abroad, Sullivan said. "So there probably will still be incentive to invert after tax reform."

By Jeanne Sahadi for @CNNMoney

Published: August 15, 2014

4 Types of Tax Records Businesses Should Keep

In order for small businesses to stay on the right side of the Internal Revenue Service, documents related to tax returns and finances must be kept for a number of years. Thorough maintenance of these important records could mean the difference between thousands of dollars in tax debt or worse, jail time.

If the tax collector ever comes knocking, preparation is key. Meticulously kept financial and tax records that include these four types of documents is the best way to keep your business in good standing with the IRS.

1. Tax Returns

Most importantly, small business owners should keep their company’s tax returns for a minimum of three years. Should your return end up on a fraud investigator’s desk, though, the IRS could examine returns up to six years old. If the IRS can prove fraud, the agency has not statute of limitations and can audit back indefinitely.  It may be in the best interest of business owners to keep “final business income returns and related correspondence” indefinitely, as they can assist in filing future returns. If your business claimed a loss due to worthless securities or bad debt reduction, tax records should be maintained for at least seven years.

2. Up-To-Date Business Asset Records

The equipment, vehicles, and real estate you use in your business are all considered by the IRS to be assets. These assets help you and the IRS determine depreciation, amortization, or depletion deductions, along with any losses or gains that came from the acquisition of the property. Accurate purchase, financing, and ownership records should be maintained as long as the asset is being depreciated or amortized. If the asset is sold, records would need to be maintained until the "period of limitations ends from the year you sold or otherwise disposed of that property."

3. Employment Tax Records

For businesses that employ one or more workers, employment tax records must be kept for at least four years after the date the taxes are due or paid, whichever is later. The personal data you used to maintain payroll, like social security numbers and addresses of your employees, is considered part of these tax records. All wages, tips, insurance, and pension payments must also be maintained for this period of time. It is important to remember that information is extremely sensitive, and should be kept with care.

4. Bank Statements and Financial Documents

Your company’s bank statements and portfolio reports should be retained for at least seven years. Essentially, any time your company is involved in a financial transaction, keep those records. Businesses should also keep receipts and invoices to document payments to and from vendors, suppliers, and customers. These records may need to be kept longer if they are considered “supporting documents” for tax purposes. To stay on the safe side, many experts suggest filing financial documents away for six to ten years. Some, like business ledgers and retirement plan records, should be kept permanently.

Regardless of whether your tax return has been meticulously prepared, your business should still keep track of these important documents. Electronic record keeping can help you cut the clutter inside your office while organizing records for easier access.

From the GPP CPA Blog

Published: August 14, 2014

Summer Job? Time to Start a Roth I.R.A.

When teenagers earn money for the first time, there are so many things they can do with it.

In some families, teenagers contribute to basic costs like housing. In others, parents expect summer earnings to replace a weekly allowance. Many teenagers save for their first car, and few among the college-bound escape the pressure to put money away for tuition.

Some parents dictate the terms, while in other families, there’s a negotiation over how to divide the money once a summer job has ended. It’s rare, however, that families consider the possibility of giving a child a running start on retirement savings.

It’s a shame, too. That’s because the boost that comes from opening a retirement savings account as a teenager instead of a few years after college can lead to hundreds of thousands of extra dollars after a half-century of growth.

Most of us have seen basic compound interest graphs before, so we know how the math works for grown-ups who start setting money aside from their first full-time paycheck. But beginning even earlier supercharges the savings for families that can afford it — or who reel in grandparents and others willing to match a child’s contributions.

The process starts with a Roth individual retirement account, and it will need to be a custodial account, with an adult co-signing, if the teenager is under 18. The nice thing about Roths is that you generally pay no taxes on the withdrawals. So the money will grow for many decades and then come out tax-free as long as the rules don’t change. While there are no tax deductions for deposits, that doesn’t mean much to teenagers whose income is so low that they may not pay any income taxes at all.

If you’re trying to persuade children or grandchildren to save rather than ordering them to do so, you could start with some simple numbers. If you take $5,000 in savings from a few summer jobs and put it in a Roth at age 19, it will grow to $52,006 by the time you’re 67 if it grows at a 5 percent annual rate. Wait until 25 to start with that same $5,000, however, and the balance at age 67 is just $38,808. You can plug your own numbers and investment return assumptions into the Roth I.R.A. calculator at dinkytownnet.

Things get more interesting, however, if you pledge that once a Roth is open, you’ll spend a few years helping a young adult max out the $5,500 contribution each year as long as that person earns the $5,500 necessary to make a deposit of that size. If that 19-year-old starts with $5,000 and makes the maximum contribution each year until 67, the ending balance is $1,164,985 if it grows at a 5 percent annual clip. That’s over $330,000 more than what someone would end up with if they waited just six years, until age 25, to start the Roth and then saved the same amount.

An increase of about a third of a million dollars ought to be enough to get any teenager’s attention, even if a dollar won’t be worth as much 50 years from now. For grandparents, uncles, aunts and others looking for a way to make a meaningful contribution to a child’s future financial stability, this is a nice way to do it while directly rewarding hard work. You might match some or all of what teenagers make and even open the account with them. It’s also fine for you to give them the matching funds for the Roth, while all of their actual earnings go toward the car, college or allowance replacement.

Some families do seem to be catching on to these possibilities. At Charles Schwab, 87 percent of all custodial accounts are Roths. Vanguard reports that about 2 percent of Roth I.R.A. contributors over the last five years have been people younger than 20. According to Fidelity, the number of Roth I.R.A. accounts there owned by people under 20 increased 22 percent from the second quarter of 2013 to the second quarter of 2014.

To parents who can’t simply write checks for college tuition, another car or an allowance, matching or even saving a teenager’s earnings in a Roth will probably seem highfalutin. If you fear that every dollar a teenager saves will lead to a need to borrow that much more money for college tuition, then it will be tempting to forgo the potential long-term winnings to keep the shorter-term loan balances as low as possible.

Other parents may worry about the financial aid implications, given that colleges generally want families to turn over a large chunk of student assets each year. The good news here is that when you’re filling out the Fafsa form to determine eligibility for various forms of federal financial aid, a student’s Roth or other retirement account is not part of the calculation.

Scores of colleges and universities do require families to fill out an additional form known as the CSS/Financial Aid Profile. On it, student applicants must report a single total for all their retirement balances as of the end of the previous year. In theory, these schools could take this number into account when determining how much of their own grant money to award the applicant.

But for now, few, if any, colleges appear to be penalizing students for owning a Roth. Eileen O’Leary, assistant vice president for student financial assistance at Stonehill College in Easton, Mass., said she had seen a financial aid applicant disclose a retirement account only once. As far as she knows, asking students to pay more based on any such balance is not widespread. It may well be that so far at least, it’s mostly affluent families (who don’t need aid) who help their teenagers open Roths. Still, she suggests asking about a college’s policy if a financial aid applicant has a Roth or is thinking about opening one.

Kal Chany, who advises families through his firm Campus Consultants in New York City, has had only a handful of college applicants as clients who also had retirement accounts. Even though some of them have had balances upward of $10,000, he knows of no adverse impact on financial aid so far. Still, he said he feared that might change if lots of families started putting their children’s earnings in Roths or matched those earnings with their own money.

For now, however, the risk seems reasonably small for families applying for financial aid. The potential gain over many decades for all families is enormous, especially if the supervision turns the young adult into a regular saver who maxes out the contributions early in life and continues to do so.

Paying for college is enormously challenging, but that problem may end up paling in comparison to what will happen when millions of pensionless people who didn’t save enough in their workplace retirement accounts and I.R.A.s start running out of money. The earlier we start helping the youngest among us avoid that fate, the better.

By Ron Lieber for The New York Times

Published: August 13, 2014

How to withdraw a Power of Attorney and Declaration of Representative

For the third time in three years, the Internal Revenue Service has changed Form 2848, Power of Attorney and Declaration of Representative, which Circular 230 licensed tax professionals use to represent their clients before the IRS. Several major updates to the form anticipate Affordable Care Act compliance and reflect the retirement of e-Services online tools for tax professionals. However, one important change was not found on the form at all – but, rather, in the instructions.

 The IRS changed Form 2848 instructions to point out to practitioners how to get a list of their active authorizations on file with the agency. Authorizations automatically stay on file with the IRS for seven years. But when your client’s engagement is complete, it’s a best practice to withdraw your authorizations to limit your professional responsibility to the client and the IRS.

When your client’s Form 2848 remains on file with the IRS, the IRS will come to you, as your client’s authorized representative, to speak on behalf of your client – even if you’re not engaged to do so. This can present client challenges and disrupt IRS compliance efforts. The IRS expects tax professionals with a power of attorney authorization to be in a knowledgeable position to represent their clients, or withdraw the authorization.

As the Form 2848 instructions now explain, practitioners can request a list of active authorizations by submitting a Freedom of Information Act request to the IRS Centralized Authorization File unit, which keeps track of practitioners’ filed tax authorizations. This FOIA request is called a CAF77 request.

 Submitting a CAF77 request

The IRS requires a specific format for this request and provides a sample CAF77 request letter as a template. The IRS also requires proof of identity with the letter; attach a copy of your driver’s license or a notarized statement swearing to your identity.  

Fax or mail the request to the FOIA office:

Internal Revenue Service
HQ FOIA
Stop 211
2980 Brandywine Road
Chamblee, GA 30341
Fax: (877) 807-9215

You can request that the IRS provide the listing of your authorizations on a CD (in a Windows Notepad text file) or in a paper document.

The listing will show all clients with active authorizations under a single CAF number. If you have multiple CAF numbers, you should request CAF77 listings for each CAF number. The listing will include all Forms 2848 and Forms 8821, Tax Information Authorization, in effect. It will not include the third-party designee from any filed returns.

It usually takes two to four weeks to receive your CAF77 listing. Once you receive the listing, review it for authorizations you’d like to withdraw.

 Submitting an authorization withdrawal request

You can withdraw authorizations individually using the existing instructions on Form 2848. To withdraw multiple authorizations, it’s easier to use a CAF77 listing. Here’s how:

1. On your CAF77 listing, identify and mark out the clients for whom you want to keep authorizations on file. The remaining authorizations will be withdrawn.

2. Include a cover letter explaining that you want to withdraw authorizations for all clients listed, excluding the client information that is marked out. You, as the client’s representative, must sign and date the letter.

3. Send the cover letter and marked-up CAF77 listing to the assigned CAF unit for the state in which you practice. When the CAF unit receives your request, it should withdraw the authorizations you indicated.

After the CAF unit processes your request, the clients for whom you withdrew authorizations may receive Letter 2675C, Power of Attorney Termination Response. But the IRS is inconsistent in following this procedure. Likewise, you may or may not receive correspondence about whether the CAF unit processed your request. In addition, because this process is still manual, sometimes the IRS doesn’t process withdrawal requests at all, leaving authorizations erroneously in effect.

There’s no immediate, direct way to confirm that the IRS withdrew your authorizations. That is why it’s a best practice to regularly submit CAF77 requests to view your authorizations on file.

Many tax professionals have suggested that the IRS facilitate this process by allowing practitioners to view a complete listing of their authorizations and withdraw them in an online account. The IRS has expressed interest in this solution, but has not provided a timeline for development of this functionality.

As reflected in the IRS changes to Form 2848, withdrawing authorizations is an important practice. It provides needed closure to engagements and defines your professional responsibility to the client and the IRS.

By Jim Buttonow for Accounting Today

Published: August 12, 2014

Sales Tax Holiday Sept. 19 - 21, 2014

Legislation was passed (Chapter 2014-38, Section 21, Laws of Florida) to create a 3-day sales tax holiday that will begin at 12:01 a.m., Friday, September 19, 2014, and end at 11:59 p.m., September 21, 2014. During this holiday period, Florida law directs that no sales tax or local option tax (also known as discretionary sales surtax) will be collected on the first $1,500 of the sales price of a new qualifying Energy Star or WaterSense product. The exemption is limited to a single purchase for each specific type of qualifying item having a sales price of $500 or more. There are no quantity limits on qualifying items with a sales price of less than $500. 

Published: August 11, 2014

Job Hunting Expenses

Many people change their job in the summer. If you look for a new job in the same line of work, you may be able to deduct some of your job hunting costs.

Here are some key tax facts you should know about if you search for a new job:

  • Same Occupation.  Your expenses must be for a job search in your current line of work. You can’t deduct expenses for a job search in a new occupation.
  • Résumé Costs.  You can deduct the cost of preparing and mailing your résumé.
  • Travel Expenses.  If you travel to look for a new job, you may be able to deduct the cost of the trip. To deduct the cost of the travel to and from the area, the trip must be mainly to look for a new job. You may still be able to deduct some costs if looking for a job is not the main purpose of the trip.
  • Placement Agency. You can deduct some job placement agency fees you pay to look for a job.
  • First Job.  You can’t deduct job search expenses if you’re looking for a job for the first time.
  • Work-Search Break.  You can’t deduct job search expenses if there was a long break between the end of your last job and the time you began looking for a new one.
  • Reimbursed Costs.  Reimbursed expenses are not deductible.
  • Schedule A.  You usually deduct your job search expenses on Schedule A, Itemized Deductions. You’ll claim them as a miscellaneous deduction. You can deduct the total miscellaneous deductions that are more than two percent of your adjusted gross income.
  • Premium Tax Credit.  If you receive advance payment of the premium tax credit in 2014 it is important that you report changes in circumstances, such as changes in your income or family size, to your Health Insurance Marketplace. Advance payments of the premium tax credit provide financial assistance to help you pay for the insurance you buy through the Health Insurance Marketplace. Reporting changes will help you get the proper type and amount of financial assistance so you can avoid getting too much or too little in advance.

For more on job hunting refer to Publication 529, Miscellaneous Deductions.

Published: August 8, 2014

Basic Tax Tips about Hobbies

Millions of people enjoy hobbies that are also a source of income. Some examples include stamp and coin collecting, craft making, and horsemanship.

You must report on your tax return the income you earn from a hobby. The rules for how you report the income and expenses depend on whether the activity is a hobby or a business. There are special rules and limits for deductions you can claim for a hobby. Here are some tax tips you should know about hobbies:

1. Is it a Business or a Hobby?  A key feature of a business is that you do it to make a profit. You often engage in a hobby for sport or recreation, not to make a profit. You should consider certain factors when you determine whether your activity is a hobby. Make sure to base your determination on all the facts and circumstances of your situation. For more about ‘not-for-profit’ rules see Publication 535, Business Expenses.

2. Allowable Hobby Deductions.  Within certain limits, you can usually deduct ordinary and necessary hobby expenses. An ordinary expense is one that is common and accepted for the activity. A necessary expense is one that is appropriate for the activity.

3. Limits on Hobby Expenses.  Generally, you can only deduct your hobby expenses up to the amount of hobby income. If your hobby expenses are more than your hobby income, you have a loss from the activity. You can’t deduct the loss from your other income.

4. How to Deduct Hobby Expenses.  You must itemize deductions on your tax return in order to deduct hobby expenses. Your expenses may fall into three types of deductions, and special rules apply to each type. See of Publication 535 for the rules about how you claim them on Schedule A, Itemized Deductions.

Published: August 6, 2014

House Approves Bill to Allow Tax-Free Savings for Disability Costs

The House Ways and Means Committee approved bipartisan legislation that would allow families and individuals to participate in tax-free savings programs in order to pay the health care, transportation, housing and educational costs for disabled individuals. The Achieving a Better Life Experience Act of 2013 (HR 647), also known as the ABLE Act, passed the committee by a voice vote on July 31. Chairman Dave Camp, R-Mich., and ranking member Rep. Sander M. Levin, D-Mich., agreed they would find an offset for the bill’s $2-billion cost before it reaches the House floor for a vote.

“I am committed to working with and finding agreement with the ranking member in order to make this bill a reality,” Camp said. “Given the over 370 cosponsors in the House and over 70 cosponsors in the Senate, we owe it to our colleagues – and more importantly, to those with disabilities and their families– to come up with a solution.”

Under the legislation, contributions may be made to an ABLE account to meet the qualified disability expenses of the designated beneficiary, according to an explanation provided by the Joint Committee on Taxation (JCX-95-14). ABLE accounts cannot receive aggregate contributions during a tax year in excess of the amount allowed under Code Sec. 2503(b), approximately $14,000 for 2014. The contributions are also exempt from the generation-skipping transfer tax.

Levin also voiced support for the measure, saying it will provide economic security for millions of disabled Americans and their families. “Whether it is costs associated with transportation or housing or health prevention and wellness, this legislation aims to ease the financial burden by encouraging and assisting families to save money for disability-related expenses,” Levin said.

By Stephen K. Cooper, CCH News Staff

Published: August 5, 2014

Florida Sales Tax: Taxpayer’s Business Activities Established Substantial Nexus With Florida

By making numerous sales and deliveries to Florida consumers, and also systematically and deliberately targeting in-state consumers by advertising in a Florida publication, the taxpayer, a retail heavy equipment dealer located in Georgia, established substantial sales and use tax nexus with the state of Florida. The taxpayer’s physical presence in the state during the audit period was regular and substantial. The taxpayer made numerous sales and deliveries to Florida consumers using its employees and transport equipment. In addition, equipment located in Florida was often accepted by the taxpayer in trade and the taxpayer’s employees retrieved that equipment and contemporaneously delivered new equipment. Most significantly, the taxpayer deliberately and systematically targeted Florida customers by advertising in a Florida publication specifically circulated to potential Florida customers, a successful exploitation of the Florida consumer market. The taxpayer’s sales met the definition of “mail order sales” in that the orders were telephonically received in Georgia, but resulted in the transport of tangible personal property to Florida customers. Moreover, those sales subject the taxpayer to Florida’s taxing authority since two of the statutory indicia of nexus were met: (1) orders were placed by Florida residents for delivery in Florida; and (2) magazine advertising in Florida. As such, the taxpayer’s business activities established a substantial nexus with Florida.

Rhinehart Equipment Co. v. Department of Revenue, Florida Department of Revenue, DOAH Case No. 11-2567 (DOR 2014-002-FOF), August 4, 2014, ¶205-945

Originally Publshed by CCH

Published: August 4, 2014

House Passes the Child Tax Credit Improvement Bill

Married couples with children would no longer face a tax penalty when claiming the child tax credit under a House bill passed on July 25. House lawmakers voted 237 to 173 to approve the Child Tax Credit Improvement Bill of 2014 (HR 4935), introduced by Ways and Means Committee member Lynn Jenkins, R-Kan. The bill would eliminate the marriage penalty in the child tax credit by increasing the income phase-out threshold for couples filing joint tax returns from $110,000 to $150,000 ($75,000 for individuals and married taxpayers filing separately).

The bill would also index for inflation (to the nearest multiple of $50) the phase-out threshold for the $1,000 credit beginning in calendar year 2015. To combat fraud, taxpayers would be required to include their Social Security numbers on tax returns in order to receive the Additional Child Tax Credit (ACTC), which is refundable.

Ways and Means Chairman Dave Camp, R-Mich., noted that the Treasury Inspector General for Tax Administration has reported that the number of filers for the ACTC without a Social Security number grew from 62,000 filers (claiming $62 million in benefits) in 2000 to 2.3-million filers (claiming $4.2 billion in benefits) in 2010. “This is a common-sense provision that will help safeguard taxpayer dollars from fraud, and put it in line with other refundable tax credits, like the Earned Income Tax Credit, which require a Social Security number,” he said.

House Rules Committee Chairman Pete Sessions, R-Tex., said Republicans are fighting to make sure that hardworking American families keep more of their paychecks. “That’s why today the House passed legislation to provide common-sense reforms to ensure that the child tax credit keeps up with the rising cost of living,” ” he said.

According to the Joint Committee on Taxation (JCT), eliminating the marriage penalty in the child tax credit and adding the inflation adjustment would cost $114 billion over the next decade (JCX-92-14). Part of that cost would be offset, in the amount of $24 billion, by requiring the use of Social Security numbers for the ACTC. In total, the JCT estimates that HR 4935 would cost $90.3 billion.

Democrats criticized the bill using arguments about income inequality. “Sadly, this Republican bill would allow provisions that most directly support low-income working parents to expire while expanding the credit to families making up to three times what an average household brings home,” said House Minority Whip Steny H. Hoyer, D-Md. “How perverse, how predictable.”

Under the bill, a married couple making $160,000 with two children would get an additional $2,200 in their 2018 tax refund, according to a study by the Center on Budget and Policy Priorities (CBPP), cited by Ways and Means ranking member Sander M. Levin, D-Mich. The CBPP study estimates that a single mother of two making $14,500 would see her refund cut by $1,750 under the legislation, Levin stated.

The White House has threatened to veto the bill if it passes Congress. The measure would raise taxes for millions of struggling working families while enacting expensive new tax cuts without offsetting their costs, reflecting fundamentally misplaced priorities, the administration said in a July 24 statement. “If Republicans want to show they are serious about helping working families through the Child Tax Credit, they should start by extending current provisions past 2017,” the statement reads.

By Stephen K. Cooper, CCH News Staff

Published: August 1, 2014

This job has the world's worst tax return...

Think filing your tax return is a pain? You've got nothing on American pilots who live abroad.

As they crisscross the globe, IRS rules require expat American pilots to record exactly how long they're flying over the U.S., foreign countries and international waters. Once they land, the pilots have to track exactly when they're working, and when they're off the clock.

Here's why: If they ever face an IRS audit, the pilots will have to prove -- using flight plans or other documents -- exactly how much money they've earned in each jurisdiction, on land or in the air.

For this small slice of the American population, following the IRS rules to the letter means a tax headache that lasts 365 days a year.

"It's insane," said a Hong Kong-based airline pilot, who asked to remain anonymous over fears he would lose his job. "On every flight, I have to log the time I'm over foreign countries, and the time I'm over international waters and the U.S."

In fact, anyone who works abroad on a plane or a ship -- flight attendant, merchant mariner or cruise ship dancer -- can be required to produce those records.

"The IRS wants to see how much of the pilot's time was spent over international waters and in the U.S.," said Sue Folkringa, an accountant at Wolcott & Associates, a firm that specializes in aviation taxes. "Typically, the pilot will have to go through their flight records -- not a welcome task."

Unlike most countries, the U.S. requires its citizens living abroad to file and pay taxes each year. Since expats already pay local taxes, the IRS grants an exemption on the first $97,600 earned in a foreign country.

But here's the catch -- the U.S. government says money made working in or over international waters doesn't count as foreign income.

Take the example of an American expat pilot who flies a 13-hour direct route from Hong Kong to Los Angeles.

Money made during the three flying hours over Asia qualifies as foreign income, but payment earned during the remaining 10 hours over the Pacific Ocean does not. This means the pilot is liable for U.S. tax on about 77% of earnings during that flight.

"Every flight I go on, 12 months a year, I have to sit there and take notes," the Hong Kong-based pilot said. "It just doesn't make sense."

The pilot said he pays an accountant $1,300 a year to prepare his 60-page tax return, because the laws are just too complex.

Folkringa said that while it's up to the pilots to keep records, many don't know they have to until they're targeted by an IRS audit.

The regulations are so obscure that some tax professionals don't even know they exist. Even for specialists, there are plenty of gray areas.

Accountants, for example, say that the U.S. definition of "international waters" is far too vague -- and even contradictory.

Lack of clarity leads some accountants to conclude that international waters begin three miles off the coast, while others say the boundary starts 200 miles offshore. The pilots, meanwhile, are expected to keep track of every entry and exit with pinpoint accuracy.

The IRS did not respond to a request for comment, but the agency website does have some tips. One guide encourages individuals to obtain flight or ship plans in order "to plot the geographical points and determine the actual planned time spent flying over foreign countries."

"Who has that kind of calculation capability at their fingertips?" asked Folkringa.

Vincenzo Villamena, managing partner of Online Taxman, recalled one particularly difficult IRS audit -- his client was working on a Maersk cargo ship hijacked in 2009 by Somali pirates.

Needless to say, the kidnapping made it hard to prove when the sailor was in international waters. (The incident was later turned into a movie called Captain Phillips, starring Tom Hanks).

"It was like, 'Come on, don't you have any sympathy?'" Villamena said. "He was working, and then he wasn't working -- he was kidnapped."

By Sophia Yan for @CNNMoney Hong Kong

Published: July 31, 2014

Florida 1.3% Hurricane Tax to End in January

Florida regulators announced they are ending a 1.3 percent assessment on property insurance premiums 18 months ahead of schedule. The monies had been used to pay off bonds issued by the state’s hurricane catastrophe fund in 2010.

The Florida Hurricane Catastrophe Fund serves as a state-backed reinsurer that provides reinsurance coverage to Citizens Property Insurance Corp. and all insurers providing property insurance in the state. The Cat Fund is required to reimburse property insurers for hurricane losses up to $17 billion per storm season. That coverage is triggered after the insurers collectively reach an aggregate retention of an estimated $7.075 billion for the 2014 hurricane season.

Although no new Cat Fund assessments will be applied to new or renewal business come January 2015, some assessments will continue to be collected. Policies issued or renewed between January 1, 2011 and December 31, 2014 will remain assessed at 1.3 percent and a one percent assessment will also apply to all new and renewal policies issued between January 1, 2007 and December 31,2011

The Cat Fund is currently in the strongest financial position since it was created in the wake of Hurricane Andrew in 1992.

For the 2014 hurricane season, the Cat Fund is projected to have $12.95 billion that consists of an estimate year-end cash balance of $10.95 billion and another $2 billion in pre-event bonds. In the event the Cat Fund needed to raise more money it could do so by issuing post-event bonds that would be backed by an emergency assessment.

The maximum emergency assessment is capped at six percent of all direct written premiums for any given year and up to 10 percent for losses sustained over multiple years.

The so-called “hurricane tax” has been assessed on all property and casualty lines of business covered by both admitted insurers and surplus lines. The only exceptions are workers’ compensation policies, accident and health policies, and medical malpractice policies. Also excluded are policies issued under the National Flood Insurance Program and Federal Crop Insurance Program.

The 1.3 emergency assessment was being collected to pay off the last of a series of bonds the Cat Fund had to issue after the 2004 and 2005 hurricane season when eight hurricanes caused damage in the state.

The 2010A post-event revenue bonds raised $675 million, which was slated to be paid off in the amounts of $342 million in 2015 and $333 million in 2016.

Collectively, the post 2004-2005 bonds, the first ever issued by the Cat Fund, caused a one percent assessment starting in 2007. However, that was increased to 1.3 percent in 2011. All told, the assessments raised $2.9 billion as of May 31, 2014.

Office of Insurance Regulation Spokesman Harvey Bennett said there are several reasons the Cat Fund was able to pay off the 2010A bonds early.

First, Bennett said, is that the Cat Fund settled claims with insurers at lower levels than anticipated. Second, more people have bought property insurance and automobile coverage in the state.

"This really reflects the health of the Cat Fund that they have the ability to pay off the assessment earlier,” Bennett.

Property Casualty Insurers Association State Government Relations Counsel Donovan Brown said the end of the emergency assessments is more good news for the property market.

“Today’s announcement is proof that the Florida property market is moving in the right direction,” said Brown in a statement. “Barring a major catastrophe, PCI and its members are cautiously optimistic that the Florida property market is making great strides.”

By Michael Adams for Insurance Journal

Published: July 30, 2014

Businesses Add 218,000 Jobs in July

Businesses added 218,000 jobs in July, payroll processor ADP said Wednesday, possibly signaling that the government this week will report yet another month of strong employment gains.

That makes July the fourth straight month of private-sector gains above 200,000 but it's fewer than June's 281,000.

Even so, the new numbers add to evidence of the job market's steady improvement, said Moody's Analytics chief economist Mark Zandi, whose firm helps ADP compile its report.

"At the current pace of job growth unemployment will quickly decline. Layoffs are still receding and hiring and job openings are picking up. If current trends continue, the economy will return to full employment by late 2016," he said.

ADP's report came minutes before the Commerce Department announced the economy grew at an seasonally adjusted annual pace of 4% in the second quarter, better than economists expected, after a first quarter contraction that was the worst in five years.

Economists had estimated ADP would report 230,000 new private sector jobs. They expect the Labor Department on Friday to tally a similar number of payroll additions in its more closely watched survey, which includes businesses and federal, state and local governments.

While the two reports capture similar trends, ADP's totals have differed from Labor's private-sector job count by an average of 37,000 a month since Moody's Analytics began working with ADP to compile the data in 2012, according to High Frequency Economics.

Labor reported 288,000 job gains last month and an average 231,000 in the first half of the year, up from 194,000 in 2013, despite mixed economic news in recent months.

ADP's report showed medium-sized businesses, those with 50-499 employees, led the way in hiring with 92,000 more jobs. Small businesses added 84,000 and big businesses had 41,000.

Professional and business services -- a broad employment sector that includes accounting, advertising, legal services and business management -- added 61,000 jobs. Trade, transportation and utilities gained 52,000. Construction increased by 12,000 jobs, financial activities by 9,000; manufacturing, 3,000.

By Doug Carroll and Paul Davidson for USA TODAY

Published: July 29, 2014

A Summer Adjustment Can Prevent a Tax-Time Surprise

When it comes to filing a federal tax return, many people discover that they either get a larger refund or owe more tax than they expected. But this type of tax surprise doesn’t have to happen to you. One way to prevent it is to change the amount of tax withheld from your wages. You can also change the amount of estimated tax you pay. Here are some tips to help you bring the amount of tax that you pay in during the year closer to what you’ll actually owe:

New Job.   When you start a new job, you must fill out a Form W-4, Employee's Withholding Allowance Certificate. Your employer will use the form to figure the amount of federal income tax to withhold from your pay. Use the IRS Withholding Calculator on IRS.gov to help you fill out the form. This tool is easy to use and it’s available 24/7.

Estimated Tax.  If you get income that’s not subject to withholding you may need to pay estimated tax. This may include income such as self-employment, interest, dividends or rent. If you expect to owe a thousand dollars or more in tax, and meet other conditions, you may need to pay this tax. You normally pay it four times a year. Use the worksheet in Form 1040-ES, Estimated Tax for Individuals, to figure the tax.

Life Events.  Make sure you change your Form W-4 or change the amount of estimated tax you pay when certain life events take place. A change in your marital status, the birth of a child or buying a new home can change the amount of taxes you owe. You can usually submit a new Form W–4 anytime.

Changes in Circumstances.  If you receive advance payment of the premium tax credit in 2014 it is important that you report changes in circumstances, such as changes in your income or family size, to your Health Insurance Marketplace. You should also notify the Marketplace when you move out of the area covered by your current Marketplace plan. Advance payments of the premium tax credit provide financial assistance to help you pay for the insurance you buy through the Health Insurance Marketplace. Reporting changes will help you get the proper type and amount of financial assistance so you can avoid getting too much or too little in advance.

Published: July 25, 2014

Fines Capped for Not Buying Health Insurance

Federal officials have capped the amount of money scofflaws will be forced to pay if they don't buy insurance this year at $2,448 per person and $12,240 for a family of five.

The amount is equal to the national average annual premium for a bronze level health plan. But only those with an income above about a quarter of a million dollars would benefit from the cap. Those making less would still have to pay as much as 1 percent of their annual income.

The penalty for the first year starts at $95 per adult or $47.50 per child under 18. The penalty for not buying insurance increases to 2 percent of income or $325, whichever is higher, for 2015. The fines are due when people file their 2014 taxes.

The figures, released late Thursday, are important because the White House has only provided theoretical caps in the past. Conservative lawmakers and groups that are critical of the Affordable Care Act encouraged consumers to skip buying insurance, arguing it would be cheaper to pay a $95 penalty, but often failed to mention the 1 percent clause.

The uninsured will owe 1/12th of the annual payment for each month they or their dependents don't have either coverage or an exemption, according to the IRS.

Federal researchers predict that about 4 million people, including dependents, could be hit with fines by 2016. The Congressional Budget Office had previously projected 6 million would pay fines, but dropped the estimate because more people will be exempt from the law, partly due to changes in regulations.

More than 8 million people signed up for insurance under the Affordable Care Act and many Americans already had insurance through their employers and were not affected by the fine.

If someone is due a tax refund, the IRS can deduct the penalty from the refund. Otherwise, the IRS will let people know what's owed or hold back the amount of the penalty fee from future tax refunds, but there are no liens or criminal penalties for failing to pay.

Some residents, including prison inmates, are exempt from the penalties and others can file for hardship conditions. If people don't earn enough money to have to file a federal tax form, they don't have to buy coverage. The threshold for filing a federal tax return is $10,150.

Premium prices vary widely based on age, gender and zip code so the premium for a bronze plan in South Florida could be much different than the cost of a bronze plan in Kansas.

From The Associated Press

Published: July 24, 2014

Five Basic Tax Tips for New Businesses

If you start a business, one key to success is to know about your federal tax obligations. You may need to know not only about income taxes but also about payroll taxes. Here are five basic tax tips that can help get your business off to a good start.

1. Business Structure.  As you start out, you’ll need to choose the structure of your business. Some common types include sole proprietorship, partnership and corporation. You may also choose to be an S corporation or Limited Liability Company. You’ll report your business activity using the IRS forms which are right for your business type.

2. Business Taxes.  There are four general types of business taxes. They are income tax, self-employment tax, employment tax and excise tax. The type of taxes your business pays usually depends on which type of business you choose to set up. You may need to pay your taxes by making estimated tax payments.

3. Employer Identification Number.  You may need to get an EIN for federal tax purposes. Search “do you need an EIN” on IRS.gov to find out if you need this number. If you do need one, you can apply for it online.

4. Accounting Method.  An accounting method is a set of rules that determine when to report income and expenses. Your business must use a consistent method. The two that are most common are the cash method and the accrual method. Under the cash method, you normally report income in the year that you receive it and deduct expenses in the year that you pay them. Under the accrual method, you generally report income in the year that you earn it and deduct expenses in the year that you incur them. This is true even if you receive the income or pay the expenses in a future year.

5. Employee Health Care.  The Small Business Health Care Tax Credit helps small businesses and tax-exempt organizations pay for health care coverage they offer their employees. A small employer is eligible for the credit if it has fewer than 25 employees who work full-time, or a combination of full-time and part-time. Beginning in 2014, the maximum credit is 50 percent of premiums paid for small business employers and 35 percent of premiums paid for small tax-exempt employers, such as charities.

For 2015 and after, employers employing at least a certain number of employees (generally 50 full-time employees or a combination of full-time and part-time employees that is equivalent to 50 full-time employees) will be subject to the Employer Shared Responsibility provision.

Get all the tax basics of starting a business on IRS.gov at the Small Business and Self-Employed Tax Center.

Published: July 23, 2014

5 Tax Planning Tips for Your Small Business

We’re more than half way through 2014: Where does your business stand in terms of taxes?

Last week, a client of mine had an ugly surprise when I finished his tax return and disclosed he owed a lot of money to the IRS. His first reaction was to be mad at the messenger. However, upon careful reflection, he stated, “Well, I should have come to see you last year when my new product took off the way it did. I knew I was making a lot more money.”

He’s right. Whenever there is a substantial change to your business’s bottom line (in either red or black), it’s time for a visit to your tax pro. In fact, anyone who owns a small business should take advantage of the mid-year off season to sit down with a tax pro to discuss their financial statements and potential tax liabilities.

It’s infinitely easier to strategize and put a plan in place now than to run around at year end upending pails of water on all the little fires that have been brewing all year.

Here are some tips to discuss with your tax pro to improve your tax situation and hopefully keep working capital in your bank account rather than in Uncle Sam’s pocket:

Start a retirement plan. If you’re finally a few bucks ahead and don’t have a retirement fund, now’s the time to start one. Here’s the bonus: it’s deductible!

Consult with a bona fide financial advisor or a representative from your bank to determine whatkind of plan best suits your needs. There are a wide range of vehicles from Individual 401(k) plans to SEP IRAs to SIMPLE plans that may or may not require you to include employees in the plan.

If a plan requires employee participation, do not automatically dismiss it. Opening a retirement plan for your employees could be a meaningful way to give raises that don’t require the additional cost of employer paid payroll taxes. Read IRS Publication 560 for more information.

Analyze your legal structure. Take the time to evaluate whether your business is operating optimally in its existing entity structure. You may have started out as a sole proprietorship and have outgrown it. It is especially important to analyze entity structure if your business is now netting more than $100,000 per year.

Keep in mind that if you incorporate, you will now be required to take money out of the business via payroll rather than simple draws. There is a lot more paperwork involved under this status, but the tax benefits and protection that a corporation offers may prove more beneficial. Always discuss these options with your attorney and tax pro before making a decision.

Provide employee benefits. Employees are our most valuable business asset and should be treated accordingly. There are many employee benefits that are not taxable to either the employee or the business. Check out IRS Publication 15-B, Guide to Fringe Benefits for more information on this topic. You will save money in payroll taxes while you create a happier working environment for your people.

Purchase furniture and equipment. The IRS has always rewarded outlays for capital assets by providing the Section 179 Deduction. This special deduction allows the immediate expensing of capital assets rather than depreciating them over their useful lives. Be warned however. This year, the threshold for purchases decreased from $500,000 to $25,000. However, Congress will be looking at extending that ceiling probably sometime during fourth quarter. You can begin putting money aside for the purchases now.

Perform projections. Take a good look at your financial statements. Run a profit and loss and compare it to the prior year profit and loss through June 30. Are there significant changes? Are you anticipating an increase or decrease in sales and/or expenses through the end of the year? It’s a simple matter to export your data from QuickBooks into Excel where you can play with the numbers to determine what your yearend bottom line will be. Share that information with your tax pro to find out if you must adjust your estimated tax payments accordingly.

By Bonnie Lee for FOX Small Business Center

Published: July 22, 2014

8 Questions Small Businesses Should Ask Their Accountant

For businesses on the search for a new accountant, selecting the right one shouldn’t be taken lightly. For a small business, an accountant can play a critical role in the company’s successes and can lessen an owner’s headaches and stresses.

The process in selecting an accountant can be a difficult one, but it can also be a simple one if you take the right steps initially. First, you need to put together an outline of your accounting needs. Do you have international dealings that complicate things? Do you need to provide audited financial statements to a third party? Basically, is there anything about your financial situation that should warrant a specialist of some type? These questions all factor into what type of accountant you will need.

Next, personal recommendations are often one of the best ways to finding a few potential accountants. Ask those around you – friends, family, an old college contact, etc. – for recommendations of a great accountant. No luck? Try researching local accountants in the area.

Then comes the most important stage – the interview process. Below are eight key areas to consider when conducting your accountant interviews:

  1. What “language” do they speak? You need to be able to be very honest about your level of financial expertise. For some reason, people often feel “embarrassed” if they can’t keep up with an accountant’s financial lingo so they don’t ask questions when they don’t know what they are talking about. It will make for a much better relationship if you are clear up front about your level of financial understanding and ensure the accountant can meet you where you are.
  2. What’s important to you? Set clear expectations of what you’re looking for. If you want someone to provide ongoing financial guidance and this accountant is a once-a-year tax preparer, then you’ve got the wrong person.
  3. Look for value vs. compliance. Remember it’s not all about compliance. Sure, an accountant has to be able to ensure you remain compliant with the government, but there is so much more a great accountant can offer. They can offer business and tax advice throughout the year which can save you money, they can help you budget for the future to ensure your business stays profitable, and they can help you navigate your way out of a challenging time. Don’t just think compliance when you’re looking for an accountant – think valuable (and even priceless) advice. When you’re interviewing a potential accountant, make sure you ask what value they bring beyond compliance.
  4. Ask for references. Don’t be afraid to ask the accountant for some references from other business clients that are happy with their services… and then call them. Ask what they like and don’t like about working with the accountant. Share what you are looking for in an accountant to gauge their reaction on whether or not they think their accountant would be a good fit for you too.
  5. Who will your point of contact be at the firm? Sometimes the accountant does a great job of getting your business… and then you never talk to them again. It’s just you and the receptionist sorting out your business finances. If a more junior person in the firm will be your point of contact, ask how often you will be meeting with the accountant themselves.
  6. How do they price their services? Many people prefer an accountant who provides “value pricing” and doesn’t charge you for every minute they are working on your finances. If you think you may not call your accountant if they bill by the hour (or the minute), seek out someone whose firm has implemented value pricing.
  7. What technology do they use? Believe it or not, DOS is still alive and well in some old-school firms to this very day. There are so many advantages that new technology, especially cloud technology, brings, and if your accountant is stuck in the old ways of doing business they may not be able to advise you on new technologies you could harness to improve your own workflow. Look for someone progressive that is keeping up with the times.
  8. How do they stay current with shifting trends in the market and the accounting profession? You want an accounting firm that is always looking for new ways to do things and is open to change and new ideas. Find a firm that is constantly educating themselves not just on tax, but in ways that they can bring new ideas to your business as well.

Asking these eight questions can help steer you clear of road bumps you may have encountered after selecting an accountant you initially thought was right for your needs. Remember to take your time. You may think you have found the right accountant upon your first interview, only to later find that you like the second or third accountant even better. Getting the accounting results you hope for stems from a solid relationship – starting with the first meeting and clearly establishing your goals together.

By Jennifer Warawa for CPA Practice Advisor

Published: July 21, 2014

Tips on Travel While Giving to Charity

Do you plan to donate your services to charity this summer? Will you travel as part of the service? If so, some travel expenses may help lower your taxes when you file your tax return next year. Here are five tax tips you should know if you travel while giving your services to charity.

1. You can’t deduct the value of your services that you give to charity. But you may be able to deduct some out-of-pocket costs you pay to give your services. This can include the cost of travel. All out-of pocket costs must be:

• unreimbursed,

• directly connected with the services,

• expenses you had only because of the services you gave, and

• not personal, living or family expenses.

2. Your volunteer work must be for a qualified charity. Most groups other than churches and governments must apply to the IRS to become qualified. Ask the group about its IRS status before you donate. 

3. Some types of travel do not qualify for a tax deduction. For example, you can’t deduct your costs if a significant part of the trip involves recreation or a vacation. For more on these rules see Publication 526, Charitable Contributions.

4. You can deduct your travel expenses if your work is real and substantial throughout the trip. You can’t deduct expenses if you only have nominal duties or do not have any duties for significant parts of the trip.

5. Deductible travel expenses may include:

• air, rail and bus transportation,

• car expenses,

• lodging costs,

• the cost of meals, and

• taxi or other transportation costs between the airport or station and your hotel.

For more see Publication 526, Charitable Contributions or as your tax professional. 

Published: July 18, 2014

Home Office Deduction Limitations for S-Corp Shareholder-Employees

25 years ago Congress enacted a law prohibiting the deduction of expenses related to the rental of a portion of one’s home to their employer.  The law was enacted in response to a Supreme Court decision allowing a CPA to offset rents received from his employer with the deduction of insurance, utilities, city charges, pest control, repairs, maid service, and depreciation allocable to the portion of his residence used in the employer’s business activity [Feldman v. Commissioner].  The rental arrangement was viewed as an attempt to circumvent the purpose of Internal Revenue Code Section 280A, which limits deduction of expenses allocable to the business use of one’s home.

Given that office-in-the-home expenses are not allowable if the office is rented to one’s employer, an S Corporation shareholder-employee could deduct office-in-the-home expenses like those enumerated above as miscellaneous itemized deductions.  Often such deductions are of little or no value because of the limitations imposed on Schedule A, and the add back of such deductions in computing alternative minimum taxable income. 

Rather than claiming an office-in-the-home deduction as a miscellaneous itemized deduction, an S Corporation shareholder-employee could have the corporation reimburse the expenses properly allocable to the business use of the home.  Reimbursement of business expenses is provided for under Internal Revenue Code Section 132.  Pursuant to regulations applicable to Section 132, out-of-pocket business expenses should be documented and reimbursed on a current, monthly basis.
 
However, under Section 280A, the deduction for expenses (referring back to the kind enumerated in the first paragraph, above) allocable to the business use of the home is limited to the net income derived from the business activity.  The application of this limitation involving an S Corporation was provided in a 1996 Tax Court Memorandum Decision [Cunningham v. Commissioner]. 

In that instance, the taxpayer’s wholly owned S Corporation deducted expenses allocable to real property owned by the taxpayer and used by the S Corporation as its sole business location.  There was no rental agreement between the taxpayer and the S Corporation.  The Internal Revenue Service argued, and the Court agreed, that the deduction of the expenses allocable to that real property were subject to the income limitation imposed by Section 280A.  [The taxpayer had unsuccessfully argued that the business use portion of the property was separate from the residence portion of the property, which would have exempted the property from the 280A limitations.]  The S Corporation’s deduction of the home office expenses were disallowed because the S Corporation had reported net losses for the years under review.  But all was not lost, because expenses disallowed due to the income limitation would carry-over to subsequent years and could be deducted to the extent of S Corporation net income in those years.

If you may be entitled to an office-in-the-home deduction, confer with a tax professional for proper application of the rules in your particular circumstances.

By Stephen Kimball for HHCPA's Tax Insight Blog

Published: July 16, 2014

Report Required for Sellers of Alcohol and Tobacco Products to Florida Retailers

Every seller (manufacturer, wholesaler, or distributor of alcoholic beverage or tobacco products who sells to a retailer in Florida) must submit a report electronically each year to the Department of Revenue. This annual report is due on July 1st for the preceding reporting period and is late after September 30th.

The report for state fiscal year 2013-14 must include sales to Florida retailers from July 1, 2013 – June 30, 2014. The report is due on July 1, 2014, and will be late after September 30, 2014.

Sellers must submit the reports electronically using the Department's website. Each seller received a notice with their assigned user ID and password to access the system. After logging into the system, you may submit your report by entering your data or importing a data file into the system. 

The electronic filing requirement may be waived under certain circumstances. Contact the Department if you are unable to report electronically. 

What Are the Reporting Requirements?

Each report must contain:

  • The seller's name.
  • The seller's beverage license or tobacco permit number.
  • The retailer's name.
  • The retailer's beverage license or tobacco permit number.
  • The retailer's address, including street address, city, state, and ZIP code
  • The general item type, such as cigarettes, cigars, tobacco, beer, wine, spirits, or any combination of those items
  • The net monthly sales total, in dollars sold to each retailer.

What if I Don't Sell to Retailers?

If you are a licensed wholesaler, distributor, or manufacturer who does not sell alcoholic beverages and/or tobacco products to retailers in Florida, you are not required to submit an annual report to the Department. However, we have no way of knowing that you do not sell alcoholic beverages and/or tobacco products to retailers in Florida. As a result, you may receive a delinquency notice at which time you will need to contact the Department to explain your situation in order to avoid penalty.

We recommend that you submit a zero report showing that you did not sell alcoholic beverages and/or tobacco products to Florida retailers between July 1, 2013 and June 30, 2014. Submitting a zero report serves as notification and enables the Department to avoid issuing you a delinquency notice.

Submitting a zero report is easy:

  • Login to the reporting site with the provided user ID and password,
  • Fill in the requested information and indicate that you did not sell to retailers during this reporting period,
  • Click on Next and then Submit,
  • Save or print the confirmation page for your records.

Why Do Sellers Have to Report This Information?

Section 212.133, Florida Statutes, imposes this annual reporting requirement on sellers of alcoholic beverage or tobacco products to Florida retailers. This information report will be used by the Department of Revenue to identify Florida retailers who may be underreporting sales and use tax on alcoholic beverage and tobacco product sales. For example, the Department will compare net wholesale sales of alcohol and tobacco products with the amount of sales and use tax reported and paid by the retailers.

How Does This Affect Retailers?

Only sellers of alcohol and tobacco products are required to file this information report. Retailers should continue to report and pay sales and use tax electronically or by filing paper returns.

retailer is defined as a person engaged in the business of making sales at retail and who holds a license according to Chapters 561 through 565, Florida Statutes, (F.S.) or a permit under Chapters 210 and 569, F.S.

Published: July 11, 2014

Florida's Back-to-School Sales Tax Holiday Starts Aug. 1

Prepare to legally cheat the tax man Aug. 1-3 when Florida's sales-tax holiday gets underway in time for back-to-school shopping.

New this year, clothing items exempted from the state’s 6-percent sales-tax increases to $100 per item and for computers and accessories, the first $750 or less is now tax-free, according to the Florida Department of Revenue.

Published: July 10, 2014

Answers to Small Businesses Questions About Obamacare

Question: I have two employees in my business and I want to know how I can offer medical insurance to them. Is it something that can be done through Obamacare?

Answer: Two employees constitutes a group for insurance purposes, so you can certainly buy group insurance that will cover you and your employees, says Marcus Newman, vice president of employee benefits at GCG Financial. You aren’t mandated to provide it because you have fewer than 50 employees, but “the products you’ll have to choose from will all be ACA-compliant group plans,” he says.

There is a Small Business Health Options Program (SHOP) exchange under the ACA, specifically for employers with up to 50 employees to offer group health coverage. However, some features of the federal and state SHOPs were delayed late last year as officials shifted focus to the bungled individual marketplace rollout.

If online SHOP enrollment is currently unavailable for your state, you can buy coverage for your workers if you go through a certified broker, Blumberg says. Enroll by the 15th of the month for coverage that starts as soon as the beginning of the following month.

It may be worth investigating the SHOP options, depending on the average wage of your employees. You could be “eligible for significant tax credits to pay the employer portion of the premiums, so that is definitely worth checking out,” Blumberg says.

Adapted from Karen E. Klein's "Smart Answers" for Bloomberg BusinessWeek. 

Published: July 9, 2014

What to Do When the IRS Makes a Mistake

Question: I paid the balance due in full of a 2011 business tax debt in May 2013, but the Internal Revenue Service mislabeled the money and used it to offset another debt my company had incurred. The IRS says I still owe, but I don’t understand how or why I’m responsible for repaying them money they lost, due to mistakes within their own system. What to do?

Answer: In this situation, a lot depends on whether you designated the payment you sent in to be applied to your 2011 business tax debt. If you specified that the money was for payment of that debt, the IRS was required to apply it according to your instructions. If you didn’t designate it, they will put it where it serves their best interest. And they tend to apply it to things like penalties and interest first, so you’re out of luck.

However, if you did designate it and they misapplied it, there are some avenues you—and additional business owners who want to challenge the tax man—can take.

Give them a call. Maybe all it will take is a friendly chat to get your problem resolved. The toll-free business help line operates from 7 a.m. to 7 p.m. on your local time at 800-829-4933.

Pay them a visit. Chat doesn’t go so well? Drop into a taxpayer assistance center near you. The wait could be five minutes or several hours. The way to fasttrack this process is the practitioner priority line, which won’t be open to you. Maybe this is the time to get a pro involved in your case? A benefit of turning to your CPA to resolve these issues are the separate avenues we have to streamline and expedite resolving these issues.

File an appeal. The Office of Appeals is another independent branch within the IRS but another area where you would want to involve a tax professional. Appeals can be heard face-to-face or over the phone. As a firm, we've had success with client appeals: It depends on what you need them for and what your case is. A recent small business client, who was audited and assessed tens of thousands of dollars in additional taxes, won his appeal after a process that took several months. The tax agency doesn’t reimburse winners for the cost of the appeal, but they do “sometimes” pay interest on funds they’re ordered to return.

Take it to court. The end of the line is U.S. Tax Court. It is more formal than the appeals office and, while taxpayers can represent themselves, they are advised to hire attorneys specially licensed to practice there. It’s used when you’ve exhausted everything else.

You may consider investigating those companies that run commercials promising to resolve your dispute with the IRS, but don’t bother. The Federal Trade Commission calls them fraudsters. They charge upfront fees—a major red flag—and hawk programs that don’t work for most taxpayers, if they even take the time to actually work on your behalf after they get your money. Take your issues up with a liscened CPA whom you can trust. 

Adapted from Karen E. Klein's "Smart Answers" for Bloomberg BusinessWeek

Published: July 8, 2014

Summer Weddings Mean Tax Changes

Taxes may not be high on your summer wedding plan checklist. But you should be aware of the tax issues that come along with marriage. Here are some basic tips that can help keep those issues to a minimum:

Name change. The names and Social Security numbers on your tax return must match your Social Security Administration records. If you change your name, report it to the SSA. To do that, file Form SS-5, Application for a Social Security Card. 

Change tax withholding.  A change in your marital status means you must give your employer a new Form W-4, Employee's Withholding Allowance Certificate. If you and your spouse both work, your combined incomes may move you into a higher tax bracket. 

Changes in circumstances.  If you receive advance payment of the premium tax credit in 2014, it is important that you report changes in circumstances, such as changes in your income or family size, to your Health Insurance Marketplace. You should also notify the Marketplace when you move out of the area covered by your current Marketplace plan. Advance payments of the premium tax credit provide financial assistance to help you pay for the insurance you buy through the Health Insurance Marketplace. Reporting changes will help you get the proper type and amount of financial assistance so you can avoid getting too much or too little in advance.

Address change.  Let the IRS know if your address changes. To do that, file Form 8822, Change of Address, with the IRS. You should also notify the U.S. Postal Service. You can ask them online at USPS.com to forward your mail. You may also report the change at your local post office.

Change in filing status.  If you’re married as of Dec. 31, that’s your marital status for the whole year for tax purposes. You and your spouse can choose to file your federal income tax return either jointly or separately each year. You may want to figure the tax both ways to find out which status results in the lowest tax.

Note for same-sex married couples: If you are legally married in a state or country that recognizes same-sex marriage, you generally must file as married on your federal tax return. This is true even if you and your spouse later live in a state or country that does not recognize same-sex marriage. 

Published: July 7, 2014

Those Who Stash Money Overseas Face A Bigger Penalty

New IRS rules raise penalties for some tax evaders but also ease up on those who accidentally failed to report foreign income or assets.

U.S. taxpayers who mistakenly fail to report income or assets held overseas will soon be getting a break from the Internal Revenue Service, while tax evaders who refuse to turn themselves in will face harsher penalties.

The IRS issued rule changes on Wednesday in a move that affects U.S. taxpayers living abroad as well as U.S. residents with offshore accounts. The point of the rule tweaks is to reduce the pressure on taxpayers who fail to report foreign income or assets, but who come forward and admit their error in a timely fashion.

All penalties will be waived for U.S. taxpayers living abroad who mistakenly failed to report their foreign accounts. Meanwhile, taxpayers in the U.S. who have foreign accounts will face fines of only 5% of the total of the assets at issue. Previously, the offshore voluntary compliance programs were not available to taxpayers living in the U.S., while taxpayers living overseas could only take advantage of the reduced penalties if they owed less than $1,500 in unpaid taxes.

The IRS is also increasing penalties for those who evade taxes on their foreign accounts and then don’t come forward quickly. Those who wait until after it becomes clear that federal officials are investigating the bank holding their accounts face penalties of 50% of the balance in those accounts, up from 27.5% previously.

IRS Commissioner John Koskinen said Wednesday that the changes are the result of the IRS’s determination that it was imposing penalties that were “were too harsh or restrictive.” The U.S. government has been pushing for better overall tax compliance from taxpayers with accounts overseas for roughly five years and those efforts have led to the IRS collecting roughly $6.5 billion in taxes, interest and penalties from more than 45,000 taxpayers in that time. But, as The Wall Street Journal reported earlier this week, some of the government’s strong-arm tactics have also resulted in a record number of U.S. citizens living abroad and green-card holders renouncing their allegiance to the U.S. to avoid what they see as overly harsh penalties.

“Our aim is to get people to disclose their accounts, pay the tax they owe and get right with the government. At the same time, for important categories of these non-willful people with offshore issues, a compliance regime that is too harsh won’t net the desired result,” Koskinen said in a statement.

By Tom Huddleston, Jr. for Forbes Magazine

Published: July 3, 2014

Florida Lease Tax Draws Fire in Pensacola

Florida economic developers are in a constant quest for new business that’s being undermined by its sales tax on commercial real estate leases, making it the only state with such a levy.

But Tuesday former Florida House of Representatives Speaker Bo Johnson told a meeting of commercial realtors and others at Pensacola’s Gopher Club that he’s helping document examples of how that tax is costing the state new business, as well as the revenue, jobs and additional taxes that would accompany more enterprise.

“Pensacola and all of Northwest Florida are particularly hurt by the commercial property lease tax because we compete with states right on our borders for new business,” said Johnson, now a commercial real estate broker in Pensacola.

“I look forward to any report that Bo Johnson and commercial Realtors are able to put together,” Florida Sen. Don Gaetz, R-Destin, told the News Journal. But the influential legislator and immediate past Florida Senate president cautioned that any move to reduce the tax must “can’t just be based on a consultant’s study. It must make a case about jobs and other benefits to a wide range of the population.”

The tax has been debated in the Florida Legislature for years but proposals to elminate or reduce it haven’t emerged from various committees to be voted on in either the Senate or House, despite support from Gov. Rick Scott.

The 6 percent tax generates about $1.2 billion in state revenue a year. Thus the main challenge to rescinding it is how to replace that money, said Greater Chamber of Pensacola President Jerry Maygarden. “The tax hurts us in Florida and in Pensacola, but the state will have to get that money from somewhere else. The question is where?”

Johnson said that he’s currently working with other members of Florida’s arm of the national Commercial Real Estate Development Association to document how much potential economic improvement Florida has been losing of late because of the commercial lease tax. Adding to the tax burden, Escambia County tacks on another 1.5 percent to the lease tariff, he said.

“It’s an add-on for business expansion that no other state has,” Johnson said.

But Gaetz said advocates of eliminating or reducing the tax lacked significant legislative support. “Apparently a persuasive enough case has not been made that the tax affects families.”

As an example of such tax relief, Gaetz cited the 2014 Florida Legislature’s passage of a reduction in vehicle registration taxes that’s projected to save drivers more than $200 million a year.

Still, Gaetz said that he supports a reduction in the sales lease tax. “One approach that may have some traction is to eliminate it in stages,” Gaetz said. But bills introduced in the most recent legislative session to trim the tax to 5 percent from 6 percent stalled.

By Rob Johnson for Tallahassee Democrat 

Published: July 2, 2014

New Florida Laws Go Into Effect

Today, the state's record-setting, $77 billion election-year budget went into effect, along with 157 other bills approved by the Legislature and signed by Gov. Rick Scott.

The laws range from the "Florida GI Bill," which is intended to make Florida the most military-friendly state in the nation, to lowering college costs and banning the sale of electronic cigarettes to minors.

Also, starting July 1, private information of people involved with animal research at public research facilities will no longer be public, insurance companies will be prohibited from denying coverage or increasing rates based on a customer's gun ownership, and the state's unpaid poet laureate position will no longer be a lifetime appointment.

A measure (SB 156) to reduce the cost of motor vehicle registration fees goes into effect Sept. 1, while another 34 bills — including one (HB 59) that creates new penalties for those who harm an unborn child at any stage of development — become law on October 1.

For the year, lawmakers sent 255 bills to Scott, with just one getting vetoed: SB 392, which would have allowed the Florida Department of Transportation to raise the speed on some highways by 5 mph.

Here are highlights of the laws that took effect July 1:

Budget

HB 5001, the spending plan, the largest in state history, spreads around a hefty surplus, adding new money to public schools, state colleges and universities, environmental projects and child welfare while leaving room for about $500 million in tax and fee cuts that are already being used as a centerpiece for Scott's re-election campaign.

Military

HB 7015, called the "Florida GI Bill," provides university tuition waivers for veterans, pays for military and guard base improvements, is expected to help increase employment opportunities for veterans. The more than $30 million package requires Visit Florida to spend $1 million a year on marketing aimed at veterans and allocate another $300,000 to a new nonprofit corporation, Florida Is For Veterans, Inc. that would be used to encourage veterans to move to Florida and promote the hiring of veterans.

Guns

HB 523 allows tax collectors' offices to handle concealed-weapon license applications.

HB 525 expands a public-records exemption that shields the identities of people who apply for and receive concealed-carry licenses from the state.

Charities and Marketing

HB 629 gives consumers more information about what charities are doing with their contributions — especially those that raise large amounts of money. The law bars groups that broke laws in other states from soliciting money in Florida, bans felons from raising money for charity, increases reporting requirements for larger charities and requires information from companies that solicit donations for charities by phone.

SB 450 adds unsolicited text messages to the "Do Not Call' program designed to prevent Floridians from receiving unwanted calls from salespeople.

Sports

HB 231 expands to Major League Soccer all-star games an admissions-tax exemption that already applies to events such as all-star games hosted by Major League Baseball, the National Basketball Association, the National Hockey League and the National Football League.

By Jim Turner of The News Service of Florida for FloridaToday

Published: July 1, 2014

On July 1, Many States Will Cut Taxes

Indiana and Rhode Island businesses will see a drop in their corporate tax rates on July 1. In Idaho, people and businesses purchasing software through the "cloud" will be spared sales taxes. And starting tomorrow, Maryland is beefing up tax credits related to cybersecurity, biotechnology and research and development to encourage companies to relocate to the state.

July 1 is the start of most states' fiscal years, and for the first time in years, governors and legislators are cutting some taxes, taking advantage of an improved revenue outlook and banking on the financial breaks to encourage business and job growth in their states. While a few fees and certain sales taxes will go up, the general trend has been to use corporate tax cuts to get the economy churning, said Brian Sigritz, director of state fiscal studies at the National Association of State Budget Officers.

"In 2010, we really saw a lot of tax and fee increases to bring revenues into cash-strapped state coffers," Sigritz said. "This year was the first year (since then) governors actually proposed tax and fee decreases. We've definitely seen a movement to try to reduce taxes and fees and encourage job growth."

While budgets have been tight, the time is right to give businesses a break so they can hire people, said Raymond E. Gallison, Jr., chair of the Rhode Island House Committee on Finance. "The economy's only going to get better if we have businesses creating jobs. One of the biggest problems they've had is access to capital," Gallison said, and the tax relief will free up the cash.

Consumers are getting a bit of a break in some states as well.

In Connecticut, nonprescription drugs will be free from sales taxes, while in Florida, youth bicycle helmets, child restraint systems and booster seats will be tax exempt. California drivers get a 3.5-cent decrease in the gasoline tax. Rhode Islanders will be spared a controversial 10-cent toll on the Sakonett Rover Bridge (although a future, scheduled increase in the gas tax will be levied to pay for upkeep on the structure). And local farmers in Arkansas will see a drop in certain sales taxes associated with agriculture and energy used by farmers.

In other states, sales taxes and fees will go up: North Carolinians will pay a higher sales tax for electricity and a new tax on natural gas, while New Hampshire drivers will pay 4.2 cents more per gallon of gas to fund highway improvements.

"The tax code is one of the few things businesses care about when they're looking for new places to invest," said Scott Drenkard, an economist at the Tax Foundation, a Washington-based research group. "I do think people recognize you can be more competitive as a state (through) the tax code."

By Pew/Stateline for USA Today

Published: June 30, 2014

Understanding Small Business Income Tax Structuring

Some keys to understanding your various tax choices is important for running your business:  

Planning your taxes and selecting your business form:

  • Tax planning. This process evaluates options to determine when, whether, and how to conduct business and personal transactions for minimal taxes. As an individual taxpayer, and as a business owner, you generally can complete a taxable transaction by multiple methods, choosing whichever results in the lowest legal tax liability. While tax avoidance is expected, tax evasion—reducing tax through deceit or concealment—is not.
  • Forming your business. Whether you form a sole proprietorship, a partnership, a limited liability company, or a corporation, there are significant income tax consequences that flow from each. Don't forget to weigh the tax issues against the non-tax issues, such as which form will best help you operate and grow, or which will make it easier for you to pass along the business to your heirs.

Defining your trade or business:

To deduct business expenses, you must be engaged in a "trade or business;" an activity carried on for livelihood or profit. According to the IRS, to constitute a trade or business, a profit motive must be present and some type of economic activity conducted. "Profit" means you’re aiming for a real economic profit, not just tax savings.

Choosing tax year and accounting methods:

As a small business owner, your decisions often have tax implications - whether or not you realize it. Suppose you buy a car for business use, rather than lease it. You can't deduct the purchase price (as you can a lease payment), but you can deduct a portion of the cost annually as depreciation. Some tax-related choices have a more general effect on your business income, namely:

  • Tax year. This determines the time period for which your taxable income will be computed. All the income received or accrued within a single year is reported on that year's return, along with expenses paid or accrued. The end of the tax year is the cut-off point for many tax-saving strategies.
  • Accounting method. Whether you’re a sole proprietor filing Schedule C or a partnership or LLC filing Form 1065, you must report your accounting method to the IRS. There are two basic methods available to most small businesses: Cash and Accrual. In some cases, you may be able to use a hybrid that combines elements of both. Also, owners of certain types of businesses can use special accounting methods under the tax law.
Adapted from BizFilings.com

Published: June 27, 2014

Business Gifts

For many businesses gift giving is just as important as taking clients to lunch. Try telling that to the IRS. There is a $25 limit, per donee, per year, on gifts to individuals. It's pretty hard to find a gift that will impress clients that costs $25 or less. You can of course, give items worth more, you just won't be able to deduct the amounts over $25.

There aren't many loopholes here, but there are some points to consider:

  • A gift to the company that's intended for the eventual personal use of an individual will be deemed an indirect gift to the individual.
  • A gift to the spouse of a business customer is an indirect gift to the customer. There's an exception here. If you have a bona fide business connection the spouse, the gift will qualify as one to the spouse. For example, Sue and Fred Flood both work for Madison Inc. Sue is the president and Fred the chief purchasing agent. You could give both Sue and Fred gifts worth $25 each.
  • If you and your spouse both give gifts, both of you are treated as one taxpayer, even if you have separate businesses, or each of you have independent connections with the recipient. If a partnership gives gifts, the partnership and the partners are treated as one taxpayer.
  • If you provide a client with tickets to a dinner and/or a show, it's considered a gift. On the other hand, if you accompany him to the show, it's entertainment and not subject to the $25 limitation.

Incidental costs are not included in the $25 limit. For example, the cost of engraving, insuring, packaging or shipping the gift. A cost is incidental if it doesn't add to the value of the gift. Ornamental packaging isn't incidental if it has substantial value compared with the cost of the fruit, flower, etc.

The $25 rule doesn't apply to an item that costs $4 or less and has your name clearly and permanently imprinted on the gift and its one of a number of identical items you widely distribute. For example, tote bags with your name. It also doesn't apply to signs, display racks, or other promotional material to be used on the business premises of the recipient.

There are recordkeeping rules here too. You've got to be able to document:

  • The cost of the gift,
  • Date of the gift,
  • Description of the gift,
  • Business reason for the gift,
  • Occupation or other information to show the business relationship to the recipient.

Gifts to employees come under a different rule. De minimis gifts (noncash gifts with a small value such as a holiday turkey) aren't taxable. Otherwise the gift is taxable unless it qualifies as an employee achievement award for service, performance, etc. Special rules apply to these awards.

You've got to be creative to provide some benefits to your clients without running into the limitation. For example, rather than giving holiday gifts, invite them to a party that can be deducted. If you own a women's apparel store, throw a fashion party. A marketing firm could host a seminar at a local restaurant. Review the rules with respect to meals and entertainment first.

Look at your own situation and try to arrive at an approach that will gift you the most mileage for your money.

From Small Business Taxes & Management by the A/N Group, Inc. 

Published: June 26, 2014

Even Small Business Owners Can Use These Tax Breaks

Do you have the right tax structure? 

Consider the IRS data for 2012 tax returns: 1.9 million companies filed as some form of C Corporation, 3.6 million filed partnership returns (presumably many of them being LLCs) and an impressive 4.6 million filed as S Corporations. Before worrying about what big company moved which assets where, have you made sure you are not paying double taxes by being a C Corp? Could you save on payroll taxes if your LLC files as a corporation and elects S Corp status? Have you structured your business to be active, versus passive, in order to avoid the Net Investment Income tax?

Are you using the tax breaks often available to small businesses? 

Have you considered the Small Business Health Care Credit? It has been reported that this credit has low utilization in part because of its complexity. There are a number of available government and association tools that can make calculating this credit less daunting. Are you aware that the rules for the Home Office deduction have been liberalized, and can be utilized by more self-employed business owners? Similarly, are you still taking the per mile deduction for travel when it may be more advantageous to itemize your transportation expenses? What about hiring your spouse and children to work in your business? In many cases, there are ways to legitimately save taxes by having family members on the payroll.

Have you maximized what you can do with fringe benefits? 

There are some basic blocking and tackling techniques with fringe benefits that can save taxes. Whether it is life insurance, disability income insurance or long-term care insurance, there are ways to structure and pay for these benefits that can benefit your personal taxes. And, qualified plans offer a myriad of designs that can be tax-smart as well.  Contrary to popular opinion, there are legitimate qualified plan designs that can disproportionately favor older and/or higher paid employees.

Adapted from Steve Parrish for Forbes Magazine

Published: June 25, 2014

How Washington Spends Your Taxes

Broadly speaking, for every dollar you pay in federal income taxes, about half goes to military spending (27%) and spending on federal health programs (22.7%). The latter covers everything from Medicare and Medicaid to the Children's Health Insurance Program.

The next biggest chunk of your income taxes (13.8%) goes to paying interest on U.S. debt.

After that, 9.8% is used to support unemployment and jobs-related programs, such as career training and temporary assistance for needy families.

Veterans benefits get about 5% of your federal income taxes, as do food and agriculture programs.

Running the government, including overhead costs and spending on various agencies and offices, such as the FBI and immigration services, comes in at 4.5%.

Four percent, meanwhile, goes to housing programs, such as community development block grants, while 2% is spent on education, including everything from Head Start programs to Pell Grants.

And less than 2% is spent on each of the following: science, international affairs, transportation, and energy.

By Jeanne Sahadi for @CNNMoney

Published: June 23, 2014

House Approves Permanent Small-Business Tax Break

The House voted Thursday to make permanent a tax break allowing small businesses to write off up to $500,000 in new equipment purchases.

While the move adds to momentum for congressional efforts to extend a range of now-temporary tax breaks, it also sharpens a conflict between the House and Senate over whether to extend the breaks permanently or temporarily.

Thursday's vote was 272-144, with several dozen Democrats joining Republicans to support the measure.

The list of temporary tax breaks, many of which expired at the end of 2013, has grown over the years and now includes over 50 separate provisions affecting businesses as well as individuals.

By now, the cost of making them all permanent is proving to be prohibitive—almost $1 trillion over the next decade. But many of the breaks are so popular or important that lawmakers are reluctant to eliminate them.

House Republicans are trying to make permanent some of the most significant ones, such as the expensing provision, in an effort to give certainty to businesses as well as government budget writers. The expensing provision gives small businesses the ability to write off equipment purchases up front, rather than depreciating them over a period years. The amount has been set at $500,000 since 2010, but without congressional action would fall to about $25,000 for 2014.

"It's time to make it a permanent part of the tax code," said Rep. Dave Camp (R., Mich.), chairman of the Ways and Means Committee, on Thursday. "Why not do something good for America?…What we really need is permanent policy."

Democrats said House Republicans' effort would force cuts in spending, especially from social programs. They also said putting expensive business breaks on a permanent footing would make it harder to rewrite the tax code.

"This is piecemeal and an ill-considered way to do tax reform," said Rep. Richard Neal (D., Mass.).

The House also passed a second bill, 263-155, to ease the tax burden somewhat on firms that convert from taxable corporate status to small-business status. Small businesses generally are organized so they don't pay a corporate-level tax; instead, the owners pay tax on the profits through their individual returns.

The Obama administration said it opposed making the two provisions permanent. "Republicans are imposing a double standard by adding to the deficit to fund tax breaks for businesses, while insisting on offsetting the cost of measures that help middle-class and working Americans," such as extending emergency unemployment insurance, the White House said.

Senate Democrats want to extend virtually all the breaks for another two years, a path that could be politically easier in a year when major policy changes are proving almost impossible in Congress. The conflict over the so-called extenders appears likely to drag on for much of the year, perhaps until after the November elections.

By JOHN D. MCKINNON for the WALL STREET JOURNAL

Published: June 20, 2014

Supreme Court Issues Decision on IRS Summons Enforcement

On Thursday, the U.S. Supreme Court vacated and remanded a decision of the Eleventh Circuit, in which the appeals court held “that a bare allegation of improper purpose [in issuing a summons] … entitle[s] a taxpayer to examine IRS officials” (Clarke, No. 13-301 (U.S. 6/19/14),  slip op. at 1). Instead, the Court directed the Eleventh Circuit to consider on remand whether the taxpayer has “pointed to specific facts or circumstances that plausibly raise an inference of improper motive” (id.). The unanimous decision explained that every other court of appeals has rejected the Eleventh Circuit’s view.

The summons dispute arose in connection with an IRS examination of the tax returns of Dynamo Holdings Limited Partnership for 2005 to 2007, during which the IRS was focusing on large interest expenses for those years. Although Dynamo agreed twice to extend the statute of limitation during the exam, it refused the third request. After the refusal, the IRS issued summonses to four individuals who the IRS believed had information about Dynamo, none of whom complied with the summonses. The IRS also issued a final partnership administrative adjustment (FPAA), proposing changes to Dynamo’s tax returns for the years at issue. Dynamo challenged the FPAA in Tax Court, and that proceeding is still pending.

When the IRS issued a summons enforcement action in federal district court, Michael Clarke, who had been Dynamo’s chief financial officer, objected that the summonses were issued for improper purposes. The two improper purposes he alleged were that (1) the summonses were issued in retaliation for Dynamo’s refusal to extend the statute a third time and (2) they were issued, after Dynamo had filed suit in the Tax Court, to evade the Tax Court’s limits on discovery.

The district court rejected Clarke’s allegations, holding that his allegation that the summonses were issued in retaliation for the refusal to extend the statute of limitation was “mere conjecture,” and pointing out that the second theory failed as a matter of law because the validity of a summons must be tested when it is issued and Dynamo had not yet commenced its Tax Court case when the summons was issued. The Eleventh Circuit, however, reversed the district court and held that, under its precedent, “a simple ‘allegation of improper purpose,’ even if lacking any ‘factual support,’ entitles a taxpayer to ‘question IRS officials concerning the Service’s reasons for issuing the summons’” (Clarke, slip op. at 5 (citations omitted)). 

As the Supreme Court explained, the Eleventh Circuit’s holding was overbroad and conflicted with precedent in all the other circuits. The Court held that a taxpayer has a right to conduct an examination of IRS officials regarding their reasons for issuing a summons, but only when the taxpayer points to specific facts or circumstances plausibly raising an inference of bad faith. The Court explained that, “Naked allegations of improper purpose are not enough: The taxpayer must offer some credible evidence supporting his charge.” However, the Court further stated that circumstantial evidence can be used to meet this burden (Clarke, slip op at 6). 

In its remand order, the Supreme Court gave the Eleventh Circuit instructions on the deference it should give to the district court’s opinion in its reconsideration of the case. The Court explained that the district court’s decision was entitled to deference, but only if it is based on the correct legal standard, and that the district court’s latitude did not extend to “legal issues about what counts as an illicit motive” (Clarke, slip op. at 8).  

BY SALLY P. SCHREIBER, J.D. for the JOURNAL OF ACCOUNTANCY   

Published: June 19, 2014

Senators Propose 12-Cent Gas Tax Increase

Two senators unveiled a bipartisan plan Wednesday to raise federal gasoline and diesel taxes for the first time in more than two decades, pitching the proposal as a solution to Congress' struggle to pay for highway and transit programs.

The plan offered by Sens. Chris Murphy, D-Conn., and Bob Corker, R-Tenn., would raise the 18.4-cents-a-gallon federal gas tax and 24.4-cents-a- gallon diesel tax each by 12 cents over the next two years, and then index the taxes to keep pace with inflation. The increase would be applied in two increments of 6 cents each.

The plan also calls for offsetting the tax increases with other taxes cuts. Senators said that could be done by permanently extending six of 50 federal tax breaks that expired this year, but they indicated they would be open to other suggestions for offsets.

The plan was immediately embraced by industry and transportation advocacy groups seeking a long-term means to keep the federal Highway Trust Fund solvent. However, it would require a lot of heavy lifting from Congress in the politically-charged atmosphere of an election year to pass such a plan before late August, when the trust fund is forecast to go broke.

Senate Finance Committee Chairman Ron Wyden, D-Ore., has indicated he's looking for means to shore up the fund for about the next six months while working on a long-term plan. That would move debate on a gas tax increase or some other revenue-raising scheme to after the mid-term election in November.

Revenue from gas taxes and other transportation user fees that for decades hasn't kept pace with promised federal transportation aid promised to states. People are driving less per capita and cars are more fuel efficient, keeping revenues fairly flat. At the same time, the cost of construction has increased, and nation's infrastructure is aging, creating greater demand for new and rebuilt roads and bridges.

The last time federal gas and diesel taxes were increased was in 1993 as part of plan to reduce the federal budget deficit. Republicans castigated Democrats for the tax increase, and it was a factor in the GOP takeover of the House and Senate the following year.

Since then, lawmakers have been reluctant to raise fuel taxes despite calls from several blue-ribbon commissions to do so.

"For too long, Congress has shied away from taking serious action to update our country's aging infrastructure," Murphy said in a statement. "We're currently facing a transportation crisis that will only get worse if we don't take bold action to fund the Highway Trust Fund."

Sen. Tom Carper, D-Delaware, who attempted to increase the gas tax increase in 2010, said he was glad to see the idea "gaining more bipartisan support."

Since 2008, Congress has repeatedly dipped into the general treasury for money to keep the trust fund solvent, sometimes waiting until the government was the verge of slowing down payments to states. States have complained that the uncertainty over whether federal aid will be forthcoming has limited their ability to commit to larger projects that take years to plan and construct.

"Congress should be embarrassed that it has played chicken with the Highway Trust Fund and allowed it to become one of the largest budgeting failures in the federal government," Corker said.

The six expired tax breaks identified by the senators as possible offsets for fuel tax increases are a research and development tax credit, certain expensing by small businesses, the state and local sales tax deduction, increasing employer-provided transit benefits to the same level as parking benefits, a deduction for spending by teachers on classroom supplies, and an increased deduction for land conservation and easement donations.

By Joan Lowy for ABC News

Published: June 17, 2014

How To Invest $100, $1,000, Or $10,000

Whether you have $100, $1,000, or $10,000 to invest, you can get started in investing. 

I have $100 to invest:

Buy one share of a stock market Exchange-Traded Fund (ETF) and a good introductory book on investing such as "The Elements of Investing," by Malkiel and Ellis.

Which ETF should you buy and where?

Let me make it easy. Open an account with TD Ameritrade. Opt into the commission-free ETF program. Buy one share of the Vanguard Total World Stock ETF (VT) for about $59.

Congratulations! You now own (a piece of) 5,351 different stocks from about 50 countries.

Now, read the investing book and keep saving money.

Why TD Ameritrade? They make it easy to get started with a low balance without zinging you with fees.

Another option: Betterment.com has a extremely simple sign-up process and will let you invest the whole $100.

They do charge higher fees than TD and require you to invest an additional $100/month minimum until you hit $10,000.

I have $1,000 to invest:

Open an account at Vanguard (make it an IRA or Roth IRA if you’re eligible to contribute to one) and put $1,000 in the target-date fund of your choice.

These funds are cheap and own a diversified mix of stocks and bonds.

Go ahead and drop another $20 on that investing book (or get it from the library). You’ll learn that even with a low-cost, diversified portfolio, sometimes you’ll lose money. Sometimes a lot of money.

That’s no reason to avoid investing.

It’s a good reason to control what you can (keep costs low, diversify, and avoid active management), invest according to your risk tolerance (don’t own 100% stocks if you won’t be able to sleep at night), and stay calm when everyone else is panicking.

I have $10,000 to invest:

The Vanguard target-date fund is still an excellent choice. In fact, it would still be an excellent choice if you had $1 million to invest.

Wealthy folks have access to special investment opportunities that the rest of us don’t.

Lucky for us, those special opportunities (such as hedge funds) are usually much worse than the boring mutual funds and ETFs we have to settle for.

Another option: Wealthfront is a snazzy automated investment management site with a $5,000 minimum and no fees for the first $10,000.

It’s easy to get started, and they offer some tax management features that Vanguard doesn’t.

Keep in mind:

If you have a 401(k) at work, you’re probably better off investing there than in your own account. You might get an employer match, and once you set up payroll deduction, you’ll keep saving automatically without thinking about it.

"The Elements of Investing" can help you choose good funds in your 401(k).

As you accumulate more money in your investment accounts, the rules of good investing don’t change. They just get more important. There’s a big different between losing $100 and losing $10,000 (or $100,000, or more).

By Matthew Amster-Burton for Business Insider

     
Published: June 16, 2014

IRS: 4.7 Million Made At Least $200,000

Close to 5 million tax filers reported adjusted gross income of at least $200,000 in 2011, according to data released Monday by the IRS.

That represents 3.2% of all federal income tax returns.

The vast majority ended up owing U.S. income tax. Roughly 1.8 million paid between 15% and 20% of their income in taxes. Nearly 1.5 million paid between 20% and 25%. And about 900,000 paid more than 25%. Most Americans' effective tax rates are well below 15%.

Not every top-AGI household owed money, however.

Of the high-income returns, 19,563 of them -- or 0.4% -- had no U.S. income tax liability. That's thanks largely to tax deductions, exclusions and credits, all of which combined can eliminate what is owed to Uncle Sam.

But because AGI doesn't cover all income, the 19,563 returns don't reflect all high-income households that owed nothing, said Roberton Williams, a fellow at the Tax Policy Center.

For instance, a high-income household may bring in $500,000 a year, but $400,000 of it comes from tax-exempt income, and therefore is not counted as AGI. And various tax breaks may reduce or eliminate the tax owed on the remaining $100,000.

Published: June 13, 2014

5 Most Common Tax Mistakes

Don't delay your refund by making these common mistakes on your tax return. 

An Unsigned Return

It's the easiest part about doing your taxes, but some people still forget to do it. When you file online you won't be able to submit the return without your typed signature -- two signatures if you're filing jointly.

But when filing on your own, this is often overlooked. "An unsigned tax return is like an unsigned check -- it's not valid," the IRS says.

Wrong Social Security Number

While you should have your own Social Security number memorized by now, taxpayers often enter the wrong numbers for their children or other family members.
If you're unsure of a number, get the Social Security cards out and copy it from that. Otherwise you risk getting your return kicked back to you by the IRS.

Wrong Name

Apparently many taxpayers can't spell their names correctly. The IRS says putting the wrong name on a tax form is one of the most common tax errors.
This mistake also comes up a lot after a person has changed their name -- after getting married or for other reasons -- and the name they write down on a return doesn't match the name in the IRS's system.
To avoid this, make sure you've changed your name with all the relevant authorities, like the Social Security Administration, before filing your taxes.

Wrong Filing Status

You should be pretty certain about whether you're married or single. But what often confuses people is whether to choose head of household or single as their filing status, according to the IRS.
"Primarily, this is happening with divorced parents of minor children," said Dominique Molina, CPA and president of the American Institute of Certified Tax Coaches. "Either confusion as to who legally is entitled to claim the kids sets in, or one parent is illegally attempting to claim the children and the lucrative filing status that accompanies them."

Wrong Bank Account Number

When requesting a refund via direct deposit, you must enter your bank account number on the tax return.
But if even one number is off, the IRS won't be able to transfer your refund into your account and will send you back your return to fix the mistake.

By Blake Ellis for @CNNMoney

Published: June 12, 2014

Treasury to Distribute $3.5 Billion in New Markets Tax Credits

The Treasury Department’s Community Development Financial Institutions Fund plans to distribute $3.5 billion in New Markets Tax Credit awards to revitalize low-income communities.

A total of 87 organizations across the country will receive tax credit allocation authority under the calendar year 2013 round of the New Markets Tax Credit Program.

“The New Markets Tax Credit Program creates jobs and critical investments in low-income neighborhoods and rural communities across the nation,” said acting assistant secretary for financial institutions Amias Gerety in a statement. “Often the New Markets Tax Credit is the most critical piece of the puzzle when trying to finance important economic development projects across the country. Its ability to attract private-sector capital into some of the most economically distressed and underserved communities is a hallmark of this important economic development program.”

The New Markets Tax Credit Program was established by Congress in December 2000. The program allows individual and corporate taxpayers to receive a credit against federal income taxes for making equity investments in vehicles known as Community Development Entities. The credit provided to the investor totals 39 percent of the cost of the investment and is claimed over a seven-year period. The Community Development Entities in turn use the capital raised to make investments in low-income communities.

Over $31.1 billion of New Markets Tax Credit transactions have been reported from the program’s inception through the end of fiscal year 2012, and over 74 percent of these were made in severely distressed communities, according to Dennis Nolan, acting director of the Community Development Financial Institutions Fund. “The New Markets Tax Credit Program is clearly targeting economic development in communities that critically need financing to help create new businesses, affordable housing and jobs,” he said in a statement.

Community Development Entities must apply annually to the CDFI Fund to compete for New Markets Tax Credit Program allocation authority. The 87 organizations receiving awards were selected from a pool of 310 applicants that requested over $25.9 billion in allocation authority. They are headquartered in 32 different states and the District of Columbia, and they have identified principal service areas that will cover nearly every state in the country and the District of Columbia.

By Michael Kohn for Accounting Today

Published: June 11, 2014

IRS Adopts "Taxpayer Bill of Rights"

The Internal Revenue Service today announced the adoption of a "Taxpayer Bill of Rights" that will become a cornerstone document to provide the nation's taxpayers with a better understanding of their rights.

The Taxpayer Bill of Rights takes the multiple existing rights embedded in the tax code and groups them into 10 broad categories, making them more visible and easier for taxpayers to find on IRS.gov.

Publication 1, "Your Rights as a Taxpayer," has been updated with the 10 rights and will be sent to millions of taxpayers this year when they receive IRS notices on issues ranging from audits to collection. The rights will also be publicly visible in all IRS facilities for taxpayers and employees to see.

"The Taxpayer Bill of Rights contains fundamental information to help taxpayers," said IRS Commissioner John A. Koskinen. "These are core concepts about which taxpayers should be aware. Respecting taxpayer rights continues to be a top priority for IRS employees, and the new Taxpayer Bill of Rights summarizes these important protections in a clearer, more understandable format than ever before."

The IRS released the Taxpayer Bill of Rights following extensive discussions with the Taxpayer Advocate Service, an independent office inside the IRS that represents the interests of U.S. taxpayers. Since 2007, adopting a Taxpayer Bill of Rights has been a goal of National Taxpayer Advocate Nina E. Olson, and it was listed as the Advocate’s top priority in her most recent Annual Report to Congress.

"Congress has passed multiple pieces of legislation with the title of 'Taxpayer Bill of Rights,'" Olson said. "However, taxpayer surveys conducted by my office have found that most taxpayers do not believe they have rights before the IRS and even fewer can name their rights. I believe the list of core taxpayer rights the IRS is announcing today will help taxpayers better understand their rights in dealing with the tax system."

The tax code includes numerous taxpayer rights, but they are scattered throughout the code, making it difficult for people to track and understand. Similar to the U.S. Constitution’s Bill of Rights, the Taxpayer Bill of Rights contains 10 provisions. They are:

  1. The Right to Be Informed
  2. The Right to Quality Service
  3. The Right to Pay No More than the Correct Amount of Tax
  4. The Right to Challenge the IRS’s Position and Be Heard
  5. The Right to Appeal an IRS Decision in an Independent Forum
  6. The Right to Finality
  7. The Right to Privacy
  8. The Right to Confidentiality
  9. The Right to Retain Representation
  10. The Right to a Fair and Just Tax System

The rights have been incorporated into a redesigned version of Publication 1, a document that is routinely included in IRS correspondence with taxpayers. Millions of these mailings go out each year. The new version has been added to IRS.gov, and print copies will start being included in IRS correspondence in the near future.

The timing of the updated Publication 1 with the Taxpayer Bill of Rights is critical because the IRS is in the peak of its correspondence mailing season as taxpayers start to receive follow-up correspondence from the 2014 filing season. 

The IRS has also created a special section of IRS.gov to highlight the 10 rights. The web site will continue to be updated with information as it becomes available, and taxpayers will be able to easily find the Bill of Rights from the front page. The IRS internal web site for employees is adding a special section so people inside the IRS have easy access as well.

As part of this effort, the IRS will add posters and signs in coming months to its public offices so taxpayers visiting the IRS can easily see and read the information.

"This information is critically important for taxpayers to read and understand," Koskinen said. "We encourage people to take a moment to read the Taxpayer Bill of Rights, especially when they are interacting with the IRS. While these rights have always been there for taxpayers, we think the time is right to highlight and showcase these rights for people to plainly see."

"I also want to emphasize that the concept of taxpayer rights is not a new one for IRS employees; they embrace it in their work every day," Koskinen added. "But our establishment of the Taxpayer Bill of Rights is also a clear reminder that all of the IRS takes seriously our responsibility to treat taxpayers fairly.

Koskinen added, "The Taxpayer Bill of Rights will serve as an important education tool, and we plan to highlight it in many different forums and venues."

Published: June 10, 2014

Penalty Relief Pilot for Small Retirement Plans Begins in June

The Internal Revenue Service will begin a one-year pilot program this month to help small businesses with retirement plans that owe penalties for not filing reporting documents. By filing current and prior year forms during this pilot program, they can avoid penalties.

The IRS is reaching out to certain small businesses that maintain retirement plans and may have been unaware that they had a filing requirement. The IRS projects that this program will bring a significant number of small business owners into compliance with the reporting requirements.

Plan administrators and sponsors who do not file an annual Form 5500 series return can face stiff penalties — up to $15,000 per return. Those who have already been assessed a penalty for late filings are not eligible for this program. This program is open only to retirement plans generally maintained by certain small businesses, such as those in an owner-spouse arrangement or eligible partnership.

Multiple late retirement plan returns may be included in a single submission. If a retirement plan has delinquent returns for more than one plan year, penalty relief may be available for all of these returns. Similarly, delinquent returns for more than one plan may be included in a single penalty relief request. No filing fee will be charged during the pilot program.

Published: June 6, 2014

More than 150,000 Individuals Pay Their Taxes with IRS Direct Pay

The Internal Revenue Service announced the successful start of its new web-based system — IRS Direct Pay — on IRS.gov, which lets taxpayers pay their tax bills or make estimated tax payments directly from checking or savings accounts without any fees or pre-registration.

“IRS Direct Pay reflects our latest effort to add more online tools to provide additional service options to help taxpayers,” said IRS Commissioner John Koskinen. “IRS Direct Pay simplifies the payment process, and taxpayers can make a payment from the convenience of a home computer.”

To date, more than 150,000 taxpayers have paid more than $340 million in taxes through the new IRS Direct Pay system. With IRS Direct Pay, taxpayers receive instant confirmation that the payment has been submitted, and the system is available 24 hours a day, 7 days a week. Bank account information is not retained in IRS systems after payments are made.

From the “Pay Your Tax Bill” icon at the top of the IRS home page, taxpayers can access IRS Direct Pay, which walks the taxpayer through five simple steps. The steps include providing your tax information, verifying your identity, entering your payment information, reviewing and electronically signing and recording your online confirmation.

IRS Direct Pay offers 30-day advance payment scheduling, payment rescheduling or cancellations, and a payment status search. Future plans include an option for e-mailed payment confirmation, a Spanish version and one-time registration with a login and password to allow quick access on return visits.

Published: June 5, 2014

Is It Worth Getting a Valuation for Your Small Business?

There are a number of valid reasons to get a professional business valuation. And really, assuming your small business is your family’s biggest asset—perhaps other than your home—isn’t it smart to have a realistic idea of what it’s worth? Recent research shows many small business owners are counting on their companies as nest eggs—they’re less likely to have diversified investments because they plan to retire on the proceeds of selling the business.

That said, you should probably ignore those solicitations. “Fishing for work by valuation firms when there is no real need is both unprofessional and a waste of client resources, money, time, and efforts,” Jack Bakken, past president of theAmerican Society of Appraisers, writes in an e-mail.

When would a valuation be needed, other than for a sale? “Most commonly they are done for tax purposes, such as estate settlement, income tax or property tax disputes, or litigation, or to satisfy the annual requirements for Employee Stock Ownership Plans,” he writes. Other situations that could require a valuation include mergers and acquisitions, bankruptcy, estate planning, gifting of minority stock interests, qualifying for a loan, or taking on an investor.

Rick Gould, managing partner at New York City mergers-and-acquisitions companySGP Worldwide, specializes in valuations of creative services companies. He says a typical valuation takes about three weeks and requires substantial probing of the company’s financial documents, management, and operational structure.

Valuations in the U.S. cost between $3,000 and $40,000, depending on the accuracy needed and the complexity of the company involved, according to a February report from independent research firm IBISWorld. Preliminary valuations—which turn out at least a rough number—usually cost $3,000 to $10,000, the report says.

That’s a lot of money for many small companies. The process of pulling together the required financial documents can be time-consuming, and the results can be painful if they don’t live up to expectations. It’s no wonder that “many business owners have absolutely no idea—or the wrong idea—about what their company is worth,” according to Julie Gordon White, principal at BlueKey Business Brokerage Mergers & Acquisitions.

She recommends that entrepreneurs get at least a ballpark estimate of their company’s value on an annual basis, though they don’t have to pay for a certified appraisal. Just having a reliable figure in mind “does wonderful things, like make you more realistic about how you’re spending your money and how that’s affecting profitability, and it helps you make plans for the future,” she says. “Having a number also relates to how you value yourself as an entrepreneur. Are you growing something that just makes money along the way but can’t be transferred to someone else eventually? Or can you make changes so it is profitable enough so that you’ll sell it someday and get that pot of gold that could fund your retirement?”

“The conventional wisdom says that most small businesses sell for between two to three times’ discretionary earnings. That fits my experience over the past 10 years,” she says, though there are some exceptions, notably technology companies that hold intellectual-property rights.

In an era where finding a home’s estimated value is as easy as typing in an address, “it’s crazy that we have 28 million small businesses in this country and a majority of them probably don’t know what they’re worth,” Carter says.

By Karen E. Klein for Bloomberg BusinessWeek

Published: June 4, 2014

Risking a Health Insurance Strategy the I.R.S. May Not Approve

When it came time to renew his company’s health plan last fall, Jerry Eledge found himself in a bind that many small-business owners know all too well.

On one hand, “it’s kind of a moral obligation” to offer insurance, said Mr. Eledge, who runs Community Quick Care, a growing chain of primary health care clinics in the Nashville area. And yet, premiums for his existing plan were going up 20 percent, while other group plans promised as much as a 50 percent increase, even as deductibles and co-pays were becoming less generous. “We found no really good alternatives for 2014 at all,” he said. “Before Gary came along, we weren’t sure what we were going to do.”

Gary is Gary Adkins, an insurance agent in Brentwood, Tenn., who introduced Mr. Eledge to Zane Benefits, a company in Park City, Utah, that offers businesses an online claims reimbursement service. With help from Zane’s software, Mr. Eledge created a new health plan for Community Quick Care. The plan, known as a defined contribution plan, has obvious appeal.

It largely frees the company from the headaches of arranging health coverage by reimbursing employees for insurance they buy on their own. At the same time, it allows the company to help its employees find affordable, often cheaper, options on the individual market through Zane. And, importantly, it promises that the contribution the company makes to its employees’ coverage is tax-free for the employees and excluded from payroll taxes for the employer.

That, however, is a promise Zane Benefits may not be able to keep.

In a technical guidance issued last year and reiterated in May, the Internal Revenue Service issued a clear warning about such health reimbursement arrangements, according to eight health and tax lawyers as well a half-dozen lobbyists and analysts who have followed the Affordable Care Act’s adoption. The guidance “makes it very difficult, if not impossible, for an employer to pay for an employee’s individual insurance with tax-free dollars,” said Seth Perretta, a health and tax lawyer with the Groom Law Group in Washington.

The issue, at least on the surface, is language in the health law meant to make sure there are no dollar limits on the coverage for a person’s basic medical needs, which the law calls essential health benefits. The I.R.S. asserts that a plan reimbursing employees for insurance they buy on their own cannot comply with this prohibition on annual limits because the company’s contribution is by definition limited — even though the health insurance the employee ends up buying would have no annual limits.

The president of Zane Benefits, Rick Lindquist, 29, said Zane’s plan did not violate the prohibition on limits because premiums were not an essential health benefit. “We’ve designed an arrangement that takes into account the guidance, and complies with the statutes and regulations as written,” he said.

Before this year, most companies that wanted to make sure their employees had insurance had little choice but to select and manage the plans because they could not be certain their employees would be able to obtain insurance individually. Now, as the Affordable Care Act creates more options on the individual market, the question of whether to continue offering health insurance has intensified, especially for small businesses.

And Zane Benefits is emerging as the leader of a handful of companies hoping to facilitate that transition. According to Mr. Lindquist, about 2,600 small businesses use Zane’s software to create and manage health reimbursement arrangements, as these plans are commonly called — lured at least in part by the tax exclusion. Community Quick Care pays Zane $12 a month for each of its 30 employees to administer the plan. Mr. Adkins estimates that employees can buy their own plan for as much as 40 percent less than the same coverage would cost as part of a group. Should they receive government subsidies to buy that insurance — and Mr. Eledge estimated up to a quarter of his employees qualify — the savings to the employer can double, Mr. Adkins said.

Lawyers following the issue called Zane’s approach risky at best. “It is abundantly clear that the I.R.S. thinks that you cannot use one of these arrangements to use tax-free dollars to pay for individual health insurance,” said Amy B. Monahan, a law professor at the University of Minnesota.

But Mr. Perretta said the Zane plan exploited a weakness in the guidance, which does not specify whether insurance premiums are an essential health benefit. “The Zane arrangement tries to thread a needle,” he said. “It really lives or dies on that ambiguity.” Elsewhere, he added, the I.R.S. and other agencies have implied that a premium is not an essential health benefit, so for now, Mr. Perretta said, the Zane plan could be legal, “but regulators don’t like it.”

Officials from the Treasury Department and the I.R.S. declined to answer questions about the regulations or Zane’s plan, but a Treasury Department official wrote in an emailed statement, “This type of reimbursement plan generally would fail to comply with the A.C.A.’s prohibition on annual dollar limits.”

Several lawyers who had spoken with I.R.S. officials said the Obama administration was concerned that self-insuring companies could use the plans to shift sicker workers to the individual market, which might destabilize it. Nor do regulators want employees with tax-preferred reimbursement accounts to also have access to exchange subsidies, which the lawyers said would constitute “double-dipping.” Because the tax-free benefit would not appear on an employee’s tax return, an exchange could not consider it when determining whether the employee’s income was low enough to qualify for a tax credit. As a result, employees receiving reimbursements could be treated more generously by an exchange than the law intends.

In fact, it is not clear that employees who sign up for Zane’s plan would be eligible for a subsidy. Zane said they would. All of the lawyers interviewed said they would not. Under the law, employers will report to the I.R.S. who has signed up for company health plans, including reimbursement arrangements. Beginning in 2016, the agency will use these employer statements to determine whether an individual who received a subsidy in the previous year was entitled to it — and if not, the employee will have to pay the government back. Said Linda Mendel, a tax lawyer with Vorys, Sater, Seymour and Pease: “There’ll be some nasty surprises when all this stuff comes together in 2016.”

The Treasury official said the government planned to issue further guidance on the matter. But ultimately, it may be up to one of Zane’s clients to persuade a court that the arrangements are legal. The penalty for an employer violating the market reform rules is $100 a day, or $36,500 a year, for each affected employee, though never more $500,000 total.

Mr. Lindquist said his agents walked clients through all of the legal risks, but he was confident the plan would withstand scrutiny. “If we were worried about that, we wouldn’t offer it,” he said. Mr. Adkins, the insurance agent, said he told his small-business clients who had adopted Zane’s software — there are 150 of them — that they had little to fear. “The purpose of the Affordable Care Act is to get people covered in this country,” he said. “Do you really believe the government is going to penalize that small-businessman $36,000 a year per employee because he had the heart to actually help his employees get as much coverage as they could get?”

And Mr. Eledge, of Community Quick Care, said Mr. Adkins satisfied him, and his accountant, that the plan would stand up. “We like it very clear that everything we do as a company is aboveboard and legal,” he said. “I’m not the kind of guy who says, ‘I.R.S., come get me.’ ”

By Robb Mandelbaum for New York Times Small Business

Published: June 3, 2014

June 16 Deadline Nears for Taxpayers Living Abroad

Taxpayers abroad qualifying for an automatic two-month extension must file their 2013 federal income tax returns by Monday, June 16, according to the Internal Revenue Service.

The June 16 deadline applies to U.S. citizens and resident aliens living overseas, or serving in the military outside the U.S. on the regular April 15 due date. Eligible taxpayers get one additional day because the normal June 15 extended due date falls on Sunday this year. To use the two-month extension, taxpayers must attach a statement to their tax return explaining which of these two situations applies. 

Federal law requires U.S. citizens and resident aliens to report any worldwide income, including income from foreign trusts and foreign bank and securities accounts on their federal income tax return. Separately, U.S. persons with foreign accounts whose aggregate value exceeded $10,000 at any time during 2013 must file electronically with the Treasury Department a Financial Crimes Enforcement Network (FinCEN) Form 114, Report of Foreign Bank and Financial Accounts (FBAR).

Form 114 replaces TD F 90-22.1, the FBAR form used in the past. It is due to the Treasury Department by Monday, June 30, must be filed electronically, and is only available online through the BSA E-Filing System website. This due date cannot be extended and tax extensions do not extend the FBAR filing due date. 

Taxpayers who cannot meet the June 16 deadline can get an automatic extension until Oct. 15, 2014. This is an extension of time to file, not an extension of time to pay. Interest, currently at the rate of three percent per year compounded daily, applies to any payment made after April 15, 2014. In some cases, a late payment penalty, usually 0.5 percent per month, applies to payments made after June 16, 2014.

In some cases, an additional extension beyond Oct. 15 may be available. 

Published: June 2, 2014

Supreme Court To Hear Case On Whether States May Tax Income Earned In Other States

The Supreme Court had a busy day on Tuesday. When the dust settled, however, it had only granted one new case – but it was a big one. The nation’s highest court granted certiorari to Comptroller v. Wynne, setting the stage for a fight that could rewrite tax laws in states across the country.

As noted before, lawyers and judges like to use Latin. Granting certiorari (or “granting cert” for the really cool hipster lawyers) means that the Supreme Court will hear the matter.

Some cases have what’s called “original jurisdiction” in the Supreme Court; those cases, which are defined by statute (28 U.S.C. § 1251) go straight to the Supreme Court. The typical case associated with original jurisdiction would be a dispute between the states. Most cases, however, don’t go that route. To be heard at the Supreme Court level without having original jurisdiction requires the losing party at the appellate level to file a petition seeking a review of the case. If the Supreme Court grants the petition and decides to hear the matter, it’s called awrit of certiorari. And that’s what happened here.

The question presented in the Petition for Certiorari in Wynne is:

Does the United States Constitution prohibit a state from taxing all the income of its residents — wherever earned — by mandating a credit for taxes paid on income earned in other states?

Procedurally, the question found its way to the Supreme Court after the Court of Appeals of Maryland “reached the unprecedented conclusion” that a state is in violation of the Commerce Clause in the U.S. Constitution if it collects income taxes from its residents when the income was earned from sources in another state and is subject to tax by the other state.

In this case, a married couple, the Wynnes, reported taxable net income of approximately $2.7 million. More than half of that amount represented a share of earnings in an S corporation with operations in several states. The Wynnes claimed a credit on their Maryland tax returns for taxes paid to 39 other states but not for any county or local government taxes. The State of Maryland denied the credits and issued a notice of deficiency and the Wynnes appealed. At a hearing, the assessment was affirmed.

Eventually, the Wynnes amended their petition to claim that the tax credit statute was in violation of the Commerce Clause of the United State Constitution. That claim was rejected. At appeal, the Wynnes argued that the state of Maryland was constitutionally required to extend the credit for taxes paid to other states to the county as well as the state, raising the question of whether a state had the unconditional right to tax all income based on residency. The Circuit Court agreed with the Wynnes.

On appeal by the state, the Court of Appeals agreed with the Circuit Court. The Court wrote that, based on its belief that the Constitution prohibits “double taxation” of income earned in interstate commerce, a state may not tax all the income of its residents, wherever earned.

That decision, it was argued by the state, conflicted with a number of “fundamental precepts” involving the “well-established principle” that “a jurisdiction… may tax all the income of its residents, even income earned outside the taxing jurisdiction.” However, in Wynne, the Court of Appeals concluded that the Commerce Clause imposes restrictions on a state’s power to tax its own residents: in other words, Maryland was not allowed to tax all of its residents’ income if the resident paid taxes on that income to another State.

The state argued that this finding was inconsistent with prior law and was, in a word, wrong. The consequences, according to the state’s petition, could be the “significant loss of revenue that will amount to tens of millions of dollars annually.”

And that’s why you should care. Not only does this decision have consequences for Maryland but it “has potential repercussions beyond Maryland,” according to the petitioner. The reply brief for the petitioner specifically notes that “while most states provide full credits for income taxes paid to other states, many local jurisdictions do not.” The result, if the Wynne decision holds, according to the state is that “any jurisdiction taxing its residents’ entire income will face needless uncertainty about the viability of its tax system and its potential exposure to onerous refund claims.”

In other words, an affirmation could cost local and state governments millions of dollars.

The loss shouldn’t matter, according to Dominic Perella, a lawyer with Hogan Lovells who is representing the Wynnes. He said, about the case: “Maryland’s approach is unfair to people who make money in more than one state.”

The question is big enough for the feds to weigh in. The Obama administration issued an amicus curiae brief in April of this year, supporting the petitioner’s position. Amicus curiae is Latin (yes, more Latin) for “friend of the court” and describes an argument made by someone who is not a specific party to the proceedings but believes that the court’s decision may affect its interest. Under the Rules of the Supreme Court of the U.S., “An amicus curiae brief that brings to the attention of the Court relevant matter not already brought to its attention by the parties may be of considerable help to the Court. An amicus curiae brief that does not serve this purpose burdens the Court, and its filing is not favored.”

The feds argued in their brief that “though States often choose to grant tax credits to their residents for income taxes paid in other States, nothing in the Commerce Clause compels a State to offer such credits or otherwise defer to other States in the taxation of its own residents’ income.” Further, “[t]he decision… may lead to challenges to similar tax schemes in other jurisdictions; and is inconsistent with statements made by the highest courts in other States.”

The U.S. Supreme Court clearly agreed that this was a matter that needed to be resolved. Granting cert doesn’t mean that the court believes that the petitioner is correct: the regular court rules apply. There will be arguments and more (!) briefs before the Court reaches a decision.

These matters do not move quickly: you shouldn’t expect oral arguments on this matter until fall of this year. But expect plenty of speculation – and interest – before then.

By Kelly Phillips Erb for Forbes

Published: May 29, 2014

Changes in Circumstances Can Affect Advanced Payments of the Premium Tax Credit

Individuals who purchase health insurance coverage from the Health Insurance Marketplace may be getting advance payments of the premium tax credit to help pay for health insurance coverage in 2014. If they are, it is important to report changes in circumstances, such as changes in income, marital status or family size, to the Health Insurance Marketplace when they happen.

Receiving too much or too little in advance payments of the premium tax credit can affect refunds or balance due when individuals file federal tax returns in 2015. Reporting changes will help avoid getting a smaller refund than expected or even owing money not expected to owe.

Remember: Report changes to the Marketplace as they happen!

Published: May 28, 2014

6 Things to Know About New Revenue Recognition

The release of a long-awaited new revenue recognition standard had financial statement preparers settling in to read hundreds of pages of text, as standard setters celebrated the achievement of producing that text.

Members of FASB and the International Accounting Standards Board (IASB) have a good sense of the most important things to consider as a result of the new standard, beyond the obvious takeaway of greater comparability across industries and jurisdictions.

Here are six things to keep in mind, as communicated by board members during interviews with the media:

1. Disclosures are a big key. Much of the value for investors in the new guidance, according to board members, will come from the additional disclosures that are required.

Disclosures around models used to estimate stand-alone selling prices for various performance obligations—and information on the future pipeline of revenue—will help investors, FASB Chairman Russell Golden said.

Investors also will benefit from the new disclosures on contract assets, contract liabilities, and remaining performance obligations, FASB member Marc Siegel said. “You’ll get a much more multidimensional picture about revenue recognition at a company in the footnotes than you have in the past,” Siegel said.

2. Software, telecom, and real estate will be most affected. Golden and IASB Vice Chairman Ian Mackintosh both listed software, telecommunications, and real estate among the industries that will see the most change among their constituents as a result of the new standard.

Some companies in the asset management industry also will see a significant change in U.S. GAAP, according to Golden. Mackintosh said construction, which currently is subject to certain industry-specific rules, also will see major changes in IFRS.

From a U.S. perspective, companies in the real estate, software, and telecommunications industries are likely to recognize revenue earlier under the new model, Golden said, while some asset managers will recognize revenue later.

3. IFRS will become more rigorous. Much has been made of how the replacement of more than 200 pieces of revenue recognition literature with one comprehensive standard will result in substantial improvement in U.S. GAAP.

But Mackintosh said there will be significant improvements in IFRS, too, beyond simply creating more worldwide comparability.

“We actually felt that our guidance was a bit insufficient,” Mackintosh said. “… We’ve had some practices that have grown that perhaps we wouldn’t regard as ideal. We hope that this new standard, with its focus on performance obligations and when you deliver performance to your customer, will clear up some of the practices that have built up over the years.”

4. The transition resource group will provide some direction. A transition resource group, being created by FASB and the IASB, will provide some answers for preparers in interpreting the standard. But don’t look for the group to lay down prescriptive accounting guidance.

The group will field questions from preparers with the intent of directing them to answers that already can be found within the standard, Mackintosh said. Questions that are not covered by the standard will be referred by the transition resource group back to FASB and the IASB.

Meetings will be held in public and available on the web to maximize the boards’ ability to educate the public. The boards expect the meetings to begin in July, and the members of the resource group are expected to be announced next week, according to Golden.

5. Sales of nonfinancial assets may be represented better. Information provided on the sales of nonfinancial assets to noncustomers will better reflect the economics of transactions under the new guidance in U.S. GAAP, Siegel said.

Take, for example, the sale by a manufacturer of its headquarters building and the land associated with it. Siegel said today’s guidance for that transaction, under FAS 66, requires a very prescriptive, constraining FAS 66 analysis that may not reflect the economics of a transaction.

“Under the new standard, everybody would look at that the same way, and you would recognize and measure the gain on the sale of that real estate in the same way, as this standard would require,” Siegel said. “I think that’s a significant enhancement to a very industry-specific FAS 66 that we have in place today.”

6. The transition date is firm—for now. Some preparers who plan to use the full retrospective transition method are concerned that the effective date won’t give them enough time to install systems needed to capture the information they need.

The standard will take effect for U.S. public companies for annual reporting periods beginning after Dec. 15, 2016, including interim reporting periods. Companies using IFRS will be required to apply the standard for reporting periods beginning on or after Jan. 1, 2017.

That means preparers who are performing full retrospective transition rather than the alternate method may want to have systems in place to capture data for dual reporting by Jan. 1, 2015. Some are concerned that this won’t be enough time, but for now, board members seem intent on keeping the current effective date.

Golden said the boards look forward to understanding preparers’ questions, “but right now, this is the effective date that the boards have put out.”

Mackintosh agreed. “There’s always a balance between giving people plenty of time and getting something done,” Mackintosh said. “I think January 1 of 2017, I think that’s the right balance, and I don’t think we’d be looking to change the date unless something really, really major comes up.”

By Ken Tysiac for teh Journal of Accountancy

Published: May 27, 2014

Jacksonville is Hot for Startups

Jacksonville, Fla., is attempting an image change. It's hoping to swap its reputation as a stodgy old Southern city with that of an emerging hub for startups.

"Jacksonville's a hidden jewel for entrepreneurs," said Theodore Carter, executive director of the city's Office of Economic Development. "We have a young ecosystem here that's very welcoming to innovation and new business."

In the last six years, hundreds of early-stage businesses have sprouted In Jacksonville or have relocated from other states. The city's inexpensive business and labor costs and low taxes -- not to mention warm weather and availability of capital -- are drawing entrepreneurs away from hubs like Silicon Valley and New York.

"VC and angel money is coming back to Jacksonville," said Jeanne Miller, executive director of Jacksonville Civic Council. "And the city also has a growing population of high net worth retirees looking to invest in innovative companies."

She said much of the city's nascent startup activity, largely in tech, health care, and consumer products, is driven by these private-sector efforts.

"The startup culture is just starting to crystallize," said Darren Bounds, who's launched three tech startups in Jacksonville in the last six years. The first lacked traction and shut down; the second received $1.5 million from HR firm Adecco, which took it in house last year.

Bounds' third startup, SportsYapper.com, raised $10 million last spring and launched in September. The app helps sports fans stay connected with friends while watching a game and already has 150,000 users, although it's not yet making money.

"In the Valley, you're constantly competing for talent and money with superstars like Google and Twitter. You can't stand out," Bounds said. "In Jacksonville, you can be a big fish in a small pond."

Carter said the city's relatively young population -- the median age has held steady at 34.5 years for the last decade -- also fuels the startup mentality. "Young people want to control their own destiny. They're increasingly starting their own businesses here."

Elton Rivas is another entrepreneur contributing to Jacksonville's transformation.

Rivas left his corporate job four years ago to start a clean tech company. While it wasn't successful, it inspired him to co-found CoWork Jax (an incubator that housed SportsYapper.com in its early stages) and KYN, an accelerator that mentors more mature startups.

In 2012, he also co-launched One Spark, an annual crowdfunding festival to help match startups with money and resources in the area. In 2013, the five-day event drew 130,000 attendees, 20% who came from outside Florida.

"We already have 700 registered startup projects for this year and about $3.5 million in capital committed from VC firms," he said. Rivas said the success of One Spark is a testament to the changing perception of Jacksonville.

Carter said the city is stepping up its efforts to court entrepreneurs. The city offers training grants, revenue grants and real estate tax abatements.

"We have seven major universities in the area," said Carter. "We're also trying to incentivize these schools to collaborate with business incubators in the downtown area."

But Jacksonville is the largest city by area in the continental United States, which Bounds said poses a unique challenge.

"We have pockets of entrepreneurial activity here that are very disconnected because of distance," he said.

The city is trying to address this by revitalizing the downtown area and developing more incubators where entrepreneurs can collaborate.

By Parija Kavilanz for @CNNMoney

Published: May 23, 2014

Small Business Owners Have a $4.5 Billion Payroll Tax Problem

Every month, employers across the U.S. send money to the IRS to cover payroll taxes—levies drawn from employee pay to cover Social Security, Medicare, and unemployment insurance. Many botch the process. The IRS issued 6.8 million penalties totaling $4.5 billion related to these employment taxes for the year ending last September, according to recently published data from the IRS.

Those numbers are down from 2009, when the IRS issued 7.9 million penalties for $7.1 billion. The government doesn’t say what share of the fines were handed out to small businesses, but large employers are generally better equipped to stay current on ever-changing tax rules.

Why are businesses incurring enough in annual penalties to pay for a new Navy destroyer?

As companies get bigger or smaller and hire different types of employees, the rules they must follow can shift. Tax collectors often change rules on their own accord, meaning a business that paid payroll taxes on a monthly basis one year might be expected to pay every two weeks in the next. “There are so many little rules for a small business owner to stay on top of,” says David McKelvey, a New York-based partner at accounting firm Friedman.

McKelvey advises his clients to outsource payroll services. Payroll companies and accounting firms offering payroll services have the resources to stay current on tax rules and in many cases will guarantee customers against payment of IRS penalties, McKelvey says.

Plenty of small businesses handle payroll taxes on their own. ZenPayroll Chief Executive Officer Joshua Reeves, whose startup provides online payroll software, says 40 percent of U.S. businesses are calculating payroll taxes by hand, according to his company’s research. That’s unsurprising in the context of a recent GoDaddy survey, in which 46 percent of respondents said they don’t use an accountant at all.

Hiring a payroll specialist is a good idea as long as you’re careful about whom you hire, says Barbara Weltman, an independent tax attorney. Payroll companies usually pay tax collectors with money debited from business owners’ accounts. Earlier this year the owner of a California payroll company disappeared with millions of dollars in client funds.

ZenPayroll’s Reeves says small business owners should expect tax rules to change and ought to consult an accountant, the IRS, or other experts on new developments. “Don’t try to do what you did last year,” he says.

By Patrick Clark for Bloomberg BusinessWeek's The New Entrepreneur

Published: May 21, 2014

How States Are Cracking Down on Small Business Tax Cheats

Small businesses and the self-employed stiff the federal government on billions of dollars in unpaid taxes each year, according to IRS estimates of the tax gap. That’s the difference between taxes owed and the amount actually collected. States also have tax gaps: California’s is about $10 billion annually, and the Golden State is investing $670 million over five years in technology to improve its collections, expected to raise an additional $1 billion a year in tax revenue.

California isn’t alone. According to interviews with revenue officers from 30 states published last week by Bloomberg BNA, states are betting on new compliance tools aimed at collecting billions of dollars in unpaid taxes. While those efforts aren’t focused solely on Main Street, there are plenty of developments small business owners would do well to keep up on. Here are four takeaways from the BNA report:

Big data is for tax collectors, too. We hear plenty about how big data can help companies, large or small. Tax collectors are finding new ways to use data, according to BNA. Florida is working on a program to use car sales data collected by its Department of Highway Safety to make sure auto dealerships report sales figures accurately. Tennessee and Texas have similar programs to keep beer and tobacco retailers honest by gathering data from wholesalers. Georgia, Indiana, Louisiana, and Massachusetts are among states working with legal information company LexisNexis to cross-reference tax filers’ personal information against historical addresses.

Licensing leverage. State tax collectors are also working with other agencies to put pressure on delinquent taxpayers. Connecticut is withholding permits to retailers that owe state taxes. New York is working on a similar plan, and North Carolina may soon prevent businesses that owe taxes from getting or renewing liquor licenses.

Good neighbors. Kansas and New Mexico are sharing data with other states to keep tabs on fraudsters, according to BNA. California and New York have entered into a formal partnership: If a taxpayer is due a refund in one state, but owes a tax debt in the other, the refund will be automatically used to pay the state holding the tax debt. Nevada, meanwhile, is watching for residents and businesses that buy expensive items such as cars and aircraft in states that don’t charge sales tax.

Jail time. In Illinois, judges are increasingly willing to lock up tax cheats. A series of investigations targeting gas station owners helped the state collect $90 million in tax revenue and resulted in jail time for unscrupulous business owners.

By Patrick Clark for Bloomberg BusinessWeek's The New Entrepreneur 

Published: May 20, 2014

IRS Said To Make $13B In Improper Refunds

The U.S. government doled out more than $13 billion last year in improper payments of a tax credit meant to help the working poor, according to a government watchdog.

One of the country's largest cash assistance programs, the so-called Earned Income Tax Credit (EITC) allows low-income workers to lower their tax bill by as much as $6,000, which in many cases prompts a significant refund check.

But the Internal Revenue Service estimates that around a quarter of all payments made for the tax credit in the 2013 fiscal year were issued improperly -- resulting in anywhere from $13.3 billion to $15.6 billion in faulty payments, according to a report released by the Treasury Inspector General for Tax Administration (TIGTA).

While the IRS has long acknowledged that the tax credit is a major source of fraud, the TIGTA report found that the agency has made "little progress" in reducing the mistaken payments.

"The IRS can and must do more to protect taxpayer dollars from waste, fraud and abuse," Treasury Inspector General for Tax Administration J. Russell George said in a statement.

In some cases, improper payments could be the result of eligibility confusion. In order to correctly claim the credit, a taxpayer must have a job and their income must fall under certain thresholds.

But some preparers fraudulently overstate claims or file claims for taxpayers who don't qualify for the credit at all. Identity thieves have also gotten in on the action, posing as EITC recipients to receive the credit.

The IRS has previously said that taxpayers claiming the credit are typically twice as likely to face a tax audit.

On Tuesday, the IRS said that it continues to improve and expand its strategies to stop improper EITC payments, "an effort that already protects billions of dollars annually" from identity thieves and other fraudsters.

Since 2011, it has stopped nearly 15 million suspicious returns, protecting over $50 billion in fraudulent refunds, it said.

The agency added that Congressional actions could help by providing the agency with new tools to lower the improper payment rate.

"The IRS remains deeply concerned about the level of improper payments, and a major review currently underway is exploring a wide range of options to distinguish valid claims from excessive ones," the IRS said in a statement.

Originally Published by @CNNMoney

Published: May 19, 2014

TIGTA Finds $2.3 Billion Alimony Tax Gap

The discrepancies between alimony income reported by taxpayers and alimony deductions claimed resulted in $2.3 billion in excess deductions in 2010, the Treasury Inspector General for Tax Administration (TIGTA) reported on Thursday (TIGTA Rep’t No. 2014-40-022 (3/31/14)).

Taxpayers who pay alimony to a former spouse under a divorce or separation decree are allowed to deduct the amount paid from their income; the alimony recipient must report the amount received as income.

TIGTA found that 567,887 taxpayers claimed deductions for alimony paid totaling more than $10 billion in 2010, and for 47% of those returns no alimony income was reported on a corresponding recipient’s return. That amounted to a discrepancy of more than $2.3 billion in deductions claimed with no corresponding income reported.

TIGTA also noted that the IRS does not ensure that taxpayers provide a valid taxpayer identification number (TIN) when claiming an alimony deduction.

TIGTA says that, aside from examining the returns, the IRS has no procedures to fix this tax gap. In fact, TIGTA found that the IRS’s filters exclude returns from examination that may actually represent a high risk of alimony deduction or income noncompliance.

TIGTA recommended that the IRS develop a strategy to address the alimony compliance gap. It also recommended that the IRS’s Small Business/Self-Employed (SB/SE) and Wage and Investment (W&I) divisions work together to evaluate the current examination filters to make sure that potentially high-risk tax returns are not being excluded from examinations. The IRS agreed with this recommendation.

TIGTA also recommended that the IRS revise its procedures to verify that all tax returns claiming an alimony deduction include a valid TIN for the recipient. The IRS disagreed with this recommendation, saying that because it does not have the authority to deny an alimony deduction outside of its deficiency procedures, any validation should be performed in its compliance function.

Finally, TIGTA recommended that the IRS revise its processing instructions to ensure penalties are assessed on returns where an alimony deduction is claimed but no valid recipient TIN is provided. The IRS agreed with this recommendation.

By Alistair M. Nevius, J.D. for the Journal of Accountancy

Published: May 16, 2014

AICPA Opposes IRS Voluntary Tax Preparer Certification

The American Institute of CPAs is pushing back against a proposal by Internal Revenue Service commissioner John Koskinen to offer a form of voluntary tax preparer certification after a series of court rulings invalidated the IRS’s efforts to require mandatory testing and continuing education of preparers.

Last week, the IRS missed a deadline to file a petition with the Supreme Court to overturn district and appeals court rulings that the agency had overstepped its statutory authority in imposing its Registered Tax Return Preparer program. Koskinen has said that the chances of getting the Supreme Court to review the case, known as Loving v. IRS, were unlikely. He now favors offering a voluntary form of certification if Congress fails to give the IRS the authority to regulate tax preparers, which seems unlikely given the current mood on Capitol Hill toward the IRS.

At the AICPA’s Spring Meeting of Council in Scottsdale, Ariz., AICPA president and CEO Barry Melancon said Monday he plans to talk with Koskinen on Tuesday to explain the AICPA’s opposition to a voluntary form of tax preparer regulation.

“It was our hope, based on a meeting that we had at the IRS, that they would not go forward with a proposal in this area,” he said. “Congress is not going to give them authority, which it would take to make it a mandatory system. It now looks like the IRS is absolutely set on going forward with a voluntary tax return preparer registration system, which we believe fails just about all of the objectives that were stated. It’s not going to root out bad preparers because if you’re a fraudulent preparer, [taxpayers are] not going to find out from a voluntary system. It’s not cost effective. It actually takes resources away from some of the service issues that the IRS is facing right now with taxpayers and tax preparers. And frankly, it’s contrary to what the court decision basically said.”

While the court rulings left in place the IRS’s Preparer Tax Identification Number registration system, the AICPA believes it has a better approach to regulating unlicensed tax preparers.

“The fifth point is that we believe that an enhanced or modified PTIN system can actually meet the objectives that they’re trying to create, without creating a new bureaucracy associated with a whole new system that, in the end, we believe will cause confusion in the marketplace because it really won’t mean what the IRS believes a registration process and a certificate from the IRS would mean,” said Melancon. “We are very concerned about the mess that would come out of that being used as a legislative impetus to try to get legislation going forward. Our Tax Executive Committee and our tax staff have been very active on this issue. We’ve had some meetings with the IRS. Frankly, we’re concerned about process as much as anything else.”

Melancon said he is concerned that the IRS is moving too quickly without listening to much feedback, which he noted is different than the approach the IRS has previously taken on such issues. He plans to bring that up in his conversation Tuesday with Koskinen.

“I actually have a conference call with the commissioner tomorrow afternoon to discuss this issue and to make very plain our concerns not only with substance but also with the process on this particular issue,” he said.

Melancon added that the AICPA’s proposals on the federal PTIN system could also function at the state level.

“We believe that our PTIN solution that we have proposed actually would work for a state answer as well, where they could just hook into the PTIN issue and not have to have a replicated environment in the states,” he said.

Melancon said the AICPA has also been asking the IRS to provide more resources for practitioners when they need help. “We know the practitioners have said it’s been a pretty bad tax season because of the inability to interact with the Service,” he said. “From that standpoint, it’s a resource issue, so on the one hand we have concerns about the registration system, but on the other hand we’re actually advocates for the IRS to getting a different resource answer to be able to enhance these issues.”

By Michael Cohn for AccountingToday.com

Published: May 15, 2014

Owed a Refund? There's No Penalty for Filing Late!

Some good news for procrastinators: If you're owed a refund and you don't file your taxes by the 15th, you won't get hit with a penalty.

This has always been the case, but many people don't realize it. The IRS is chomping at the bit to get its tax revenue. It's less concerned about doling out refunds to people who haven't claimed them yet.

So if you are absolutely sure you're owed a refund, you won't get in trouble if you miss the filing deadline.

But if you're wrong and you actually owe money, you'll need to fork over a fine. By both failing to file and failing to pay on time, you will incur a maximum penalty of 5% for each month after the deadline. If you're more than 60 days late, you'll be fined $135, or 100% of the unpaid tax -- whichever amount is smaller.

To avoid even the chance of being hit with these penalties, it's always safer to file on time. Or you can file for a six-month extension if you're feeling pressed for time -- which simply requires filling out Form 4868. But remember, even if you get an extension, you still have to pay 90% of the tax owed by the filing deadline.

"Filing by the April deadline can save you from an unexpected surprise," says Lynn Ebel, tax attorney at the Tax Institute at H&R Block. "If you wait to file ... because you 'know' you are getting a refund and then find that you miscalculated and actually owe money, interest and penalties will have accrued on your debt [by the time you do file]."

And if you wait too long, your refund will become the property of the government. After three years, you can no longer claim a refund. This year, the IRS announced that more than 900,000 people still haven't claimed refunds worth a total of $760 million from 2011. After April 15, they can no longer retrieve the funds.

Originially published by @CNNMoney.

Published: May 14, 2014

Foreign Housing Expense Limitations Issued for 2014

According to the IRS, Hong Kong, Moscow, and Geneva are the three most expensive foreign cities to live in, for purposes of the Sec. 911 foreign housing exclusion. On Monday, the IRS provided its annual list of inflation-adjusted limitations on foreign housing expenses for 2014 (Notice 2014-29).

Sec. 911(a) allows a qualified individual to elect to exclude his or her foreign earned income and certain housing costs from gross income. Sec. 911(c)(1) provides a formula for determining the excludable amount of the individual’s foreign housing costs. Generally, under Sec. 911(c)(2)(A), a qualified individual will be limited to maximum housing expenses of $29,760 in 2014.

However, the IRS can adjust the maximum limitation based on geographic differences in housing costs relative to housing costs in the United States, and since 2006 it has issued annual notices adjusting the limitation for qualified individuals who live in countries with high housing costs compared to U.S. housing costs.

Notice 2014-29 includes a table listing hundreds of foreign locations for which the IRS is allowing an increased limitation on housing expenses. In locations where the amount has increased from the amount in 2013 (listed inNotice 2013-31), the notice also allows taxpayers who incurred housing expenses in 2013 to elect to apply the 2014 limitation amount to the 2013 year.

Published: April 30, 2014

Make Plans Now for Next Year’s Tax Return

Most people stop thinking about taxes after they file their tax return. But there’s no better time to start tax planning than right now. And it’s never too early to set up a smart recordkeeping system. Here are six IRS tips to help you start to plan for this year’s taxes:

1. Take action when life changes occur.  Some life events, like a change in marital status, the birth of a child or buying a home, can change the amount of taxes you owe. When such events occur during the year, you may need to change the amount of tax taken out of your pay. To do that, you must file a new Form W-4, Employee's Withholding Allowance Certificate, with your employer.

2. Keep records safe.  Put your 2013 tax return and supporting records in a safe place. That way if you ever need to refer to your return, you’ll know where to find it. For example, you may need a copy of your return if you apply for a home loan or financial aid. You can also use it as a guide when you do next year's tax return.

3. Stay organized.  Make sure your family puts tax records in the same place during the year. This will avoid a search for misplaced records come tax time next year.

4. Think about itemizing.  If you usually claim a standard deduction on your tax return, you may be able to lower your taxes if you itemize deductions instead. A donation to charity could mean some tax savings. See the instructions for Schedule A, Itemized Deductions, for a list of deductions.

Published: April 29, 2014

With 131 Million Returns Filed, Millions of Amended Returns Expected

As of April 18, almost 46 million returns were e-filed from home computers, more than the total from home computers for all of 2013. The IRS has received more than 131 million returns, of which 88 percent were e-filed.

The IRS also projects that almost five million taxpayers will amend their returns by filing Form 1040X during 2014. Taxpayers who need to amend their returns should file this form only after filing the original return. Generally, for a credit or refund, taxpayers must file Form 1040X within three years, including extensions, after the date they filed their original return or within two years after the date they paid the tax, whichever is later. For most people, this means that returns for tax year 2011 or later can still be amended. 

This year, many same-sex couples may want to consider filing amended returns. A same sex couple, legally married in a state or foreign country that recognizes their marriage, is now considered married for tax purposes. This is true regardless of whether or not the couple lives in a jurisdiction that recognizes same-sex marriage.

For returns originally filed before Sept. 16, 2013, legally married same sex couples have the option of filing amended returns to change their filing status to married filing separately or married filing jointly. But they are not required to change their filing status on a prior return, even if they amend that return for another reason. In either case, their amended return must be consistent with the filing status they have chosen. 

As all amended returns must be filed on paper, allow up to 12 weeks for Form 1040X to be processed. Starting 3 weeks after filing their amended returns, taxpayers can use the “Where’s My Amended Tax Return?” tool on IRS.gov to check the status.

Published: April 28, 2014

Ten Tax Stats for Procrastinating Small Business Owners

Most small business owners pay taxes to the federal government all year round, but April 15 was still a big deadline for millions of business owners. For procrastinators still preparing your filings, here are some numbers that may or may not make you feel better:

• 26 million: Unique visitors to IRS.gov last month, more traffic than to any other government site. (Take that, healthcare.gov.)

• 80 hours: Forty percent of small business owners spent at least that much time dealing with federal taxes last year, according to the National Small Business Association.

• 106,776: The number of very small businesses that were audited last year. (To be precise, these are nonfarm businesses that reported less than $25,000 in gross receipts and didn’t claim the earned income tax credit.)

• $5,500: What auditors demanded, on average, from those businesses in additional taxes.

• $4.5 billion. The amount of IRS penalties handed down last year that related to payroll taxes. 

• $4.1 million: Colorado’s estimated take from taxes on medical and recreational pot sales in February.

• $257.6 million: License fees that the Washington state Liquor Control Board collected in the year ended June 2013 after privatizing its liquor store system.

• $670 million: How much California is spending over five years on technology to boost revenue by collecting unpaid taxes.

• $10 billion. California’s estimated “tax gap,” the difference between what people and businesses owe and what the state collects.

From Bloomberg Small Business News

Published: April 22, 2014

Unpaid Debt Can Affect Your Refund

If you owe a debt that’s past-due, it can reduce your federal tax refund. The Treasury Department’s Offset Program can use all or part of your refund to pay outstanding federal or state debt.

Here are five facts to know about tax refunds and ‘offsets.’

1. The Bureau of Fiscal Service runs the Treasury Offset Program.

2. Debts such as past due child support, student loan, state income tax or unemployment compensation may reduce your refund. BFS may use part or all of your tax refund to pay the debt.

3. You’ll receive a notice if BFS offsets your refund to pay your debt. The notice will list the original refund and offset amounts. It will also include the agency that received the offset payment and their contact information.

4. If you believe you don’t owe the debt or you want to dispute it, contact the agency that received the offset. You should not contact the IRS or BFS.

5. If you filed a joint tax return, you may be entitled to part or all of the refund offset. This rule applies if your spouse is solely responsible for the debt. To request your part of the refund, you should have a qualified CPA prepare and file Form 8379, Injured Spouse Allocation.

Published: April 21, 2014

The Real Story Behind the $3 Tax Checkoff Box

For decades, taxpayers have had the option of checking off a box on their tax returns to earmark money for the Presidential Election Campaign Fund.

The amount you can allocate for the fund started out at $1 and was hiked to $3 in 1994. And while the option was quite popular at the start, the number of people designating money for the fund has been dropping ever since.

In 1977, nearly 29% of taxpayers had opted to contribute to the fund. By 1992, that percentage dropped to 19%. And in 2013, a mere 6% of taxpayers had checked off the box designating $3 toward presidential campaign funding.

As a result, funding received via the checkoff box has dropped from a peak of $71 million in 1994 to $39 million in 2012, the most recent year for which the annual total is available.

Why the decline? A number of factors are likely at play, says Roberton Williams, a fellow at the Tax Policy Center.

For one, there's a common misconception that this money is coming out of the taxpayer's own pocket, so people struggling financially are much less likely to give more money to the government than they have to. But really, the box simply provides taxpayers with a choice to steer $3 of overall tax revenue collected by the IRS for this specific fund -- it doesn't add to someone's tax liability or reduce their refund.

"There's always been the fear, 'is this going to raise my taxes?' Even though the box explicitly says it won't," said Williams.

Another possible reason for dwindling contributions: growing frustration with Washington politics. "People are sick of politics and saying, 'Why should I throw $3 in the pot?," said Williams.

Plus, the most recent presidential candidates -- Barack Obama and Mitt Romney -- refused to draw on money from public funding during their campaigns anyway.

Making matters more confusing: Last week, Obama signed a bill eliminating taxpayer funding for presidential nominating conventions altogether, which is one of three places that money from the Presidential Election Campaign Fund is allocated.

Instead, money that had been previously set aside for these conventions will now be used for pediatric medical research at the National Institutes of Health.

The checkoff box on tax returns isn't going away, however. Taxpayers can still elect to contribute $3 to the overall Presidential Election Campaign Fund.

While that money will no longer be used specifically for nominating conventions, it will be used to match funds for presidential primary candidates during their campaigns and to provide grants for general election nominees, according to the Federal Election Commission.

By Blake Ellis for @CNNMoney

Published: April 16, 2014

Psst…Tax Day is Here and the IRS Won't Forget!

The calendar shows April 15, and you haven't even started on your federal tax return? Chances are, you don't need to fret. If you're due a refund — and about three-fourths of filers get refunds — April 15 isn't much of a deadline at all. The Internal Revenue Service doesn't like to talk about it, but penalties for filing late federal tax returns apply only to people who owe money. The penalty is a percentage of what you owe. If you owe nothing, 5 percent of nothing is…nothing! So, take note! Those in need of our services still have time to contact us! 

If you need more time...

File Form 4868 to get a six-month extension, no explanation necessary. You won't be alone. The IRS expects 12 million extension requests.

Penalties For Not Filing

The failure-to-file penalty is generally 5 percent of your unpaid tax bill for every month, or part of a month, you are late. It kicks in on April 16. In general, the maximum penalty is 25 percent of your original tax bill. There also is a penalty for failing to pay your tax bill, separate from the penalty for failing to file at all, but it's much smaller.

Fast Facts

  • The IRS expected to receive about 35 million returns in the last week before the deadline.
  • Through April 4, 99.9 million returns had been filed, with 78.8 million receiving refunds totaling $220 billion.
  • 90 percent of returns have been filed electronically.
  • Last year, the feds collected $2.8 trillion in taxes and fees.

Who Pays Federal Taxes

  • Individual income tax: 47 percent.
  • Payroll taxes: 32 percent.
  • Corporate income tax: 10 percent.
  • Excise taxes: 3 percent.
  • Unemployment insurance: 2 percent
  • Estate and gift taxes: 1 percent.
  • Customs duties: 1 percent.
  • Miscellaneous: 4 percent.
Sources: Tampa Bay Times, Associated Press, IRS, AP-GfK Poll conducted March 20-24, Treasury report on budget year 2013

Published: April 15, 2014

Tips for Paying Your Taxes

If you owe taxes with your tax return this year, you should know a few things before you file. Here are 10 helpful tips from the IRS about how to pay your federal taxes.

1. Never send cash.

2. If you e-file, you can file and pay in a single step with an electronic funds withdrawal. Your tax preparer will make your tax payment electronically.

3. You can pay taxes electronically 24/7 on IRS.gov. Just click on the ‘Payments’ tab near the top left of the home page for details.

4. You can also pay by check or money order. Make your check or money order payable to the “United States Treasury.”

5. Whether you e-file your tax return or file on paper, you can also pay with a credit or debit card. The company that processes your payment will charge a processing fee.

6. You may be able to deduct the credit or debit card processing fee on next year’s return. It’s claimed on Schedule A, Itemized Deductions. The fee is a miscellaneous itemized deduction subject to the 2 percent limit.

7. Be sure to write your name, address and daytime phone number on the front of your payment. Also, write the tax year, form number you are filing and your Social Security number.

8. Complete Form 1040-V, Payment Voucher, and mail it with your tax return and payment to the IRS. Make sure you send it to the address listed on the back of Form 1040-V. This will help the IRS process your payment and post it to your account. 

9. Remember to enclose your payment with your tax return but do not staple it to any tax form.

Published: April 14, 2014

"My Girlfriend Is A Tax Break"

If you're in a relationship with someone who is dependent on you financially, you might be able to claim them as a tax break.

Wes Fusco, a 35-year-old from Manitowoc, Wisc., had been financially supporting his girlfriend, Danielle Wissbroeker, for more than 10 years. While she took care of their three children and earned no income, Fusco paid the bills and covered her expenses.

But Fusco had no idea that this situation would translate into a tax break until his tax preparer told him that claiming Wissbroeker as a dependent could cut his tax bill by thousands of dollars.

His tax preparer, enrolled agent Don Wollersheim, was right. Girlfriends -- and boyfriends -- can qualify as dependents as long as certain requirements are met.

First, your significant other must earn less than $3,900 per year and live with you throughout the year. You must also pay for more than half of their expenses and they can't be claimed as a dependent by someone else.

If they meet those criteria, then claiming them as a dependent will result in an exemption of up to $3,900. Fusco said he qualified for the full exemption and that this tax break, along with being able to claim his children as dependents, allowed him to receive a refund of more than $8,000 each year for the 10 years he supported his girlfriend.

Fusco and Wissbroeker broke up last May, so this will be the first time in a decade that he can't claim her as a dependent.

One Orlando, Fla., woman used this same strategy, claiming her unemployed boyfriend as a dependent after supporting him for years while he hunted for a job. She also received the full $3,900 exemption.

But these situations are rare. It's typically difficult for a couple to qualify for this deduction because of all the requirements that need to be met -- especially the low-income threshold.

"There aren't a lot of people who really don't make [under $3,900]," said Harlan Levinson, a CPA in Los Angeles.

It's not meant to be claimed by the ultra-rich either: the exemption begins phasing out if you earn more than $250,000 per year.

Lisa Skidmore Sexton, an enrolled agent at Accu-Rite Tax & Accounting in Carlsbad, N.M., said she prepares around 300 tax returns per year and that only one or two of those are for couples where one person can be claimed as a dependent -- typically because they stay at home with the children or are out of work.

This year, she prepared taxes for someone claiming his girlfriend as a dependent. The client works at an oil company and his girlfriend stays home with their three kids and only works small temporary jobs -- earning about $3,800 last year.

Same-sex couples have been employing this strategy for years. Before the Defense of Marriage Act was overturned last year, same-sex couples weren't able to file jointly at the federal level because they weren't recognized as married. So one person would claim the other as a dependent if he or she stayed home with the children and earned no income, said Nanette Lee Miller, head of the LGBT practice at accounting firm Marcum LLP.

Now that married same-sex couples are recognized by the federal government, however, they no longer qualify for the deduction. But if they're not married, the same exemption can be taken -- unless the relationship violates state law.

Enrolled agent Bill Nemeth said he claimed this exemption for an unmarried same-sex couple in Georgia, where one of the men was earning under the $3,900 threshold. Prior to 2004, however, he wasn't able to claim the boyfriend as a dependent because it was against state law for unmarried people in a sexual relationship to live together.

By Blake Ellis for @CNNMoney

Published: April 10, 2014

4 Ways Scammers Can Steal Your Tax Refund

Identity thieves love tax season.

"A thief who has your personal information can file a tax return before you do, collect a fraudulent refund and leave you waiting for many months to get your own refund and clear up the problem," said Neil Chase, vice president of education at LifeLock.

And it's only getting worse. Last year, the IRS launched 1,492 investigations into tax-related identity theft, where criminals used stolen personal information like Social Security numbers to claim fraudulent refunds. That's up 66% from 2012 and more than 400% from 2011.

Here are some of the ways scammers use to steal your identity and how to avoid becoming a victim.

Fake Calls From the IRS

Last month, the IRS said a nationwide phone scam had swindled $1 million from consumers in what the agency called "the largest scam of its kind."

As part of the scheme, callers impersonating IRS agents told victims that they owed taxes and needed to pay by wire transfer or a prepaid card.

Other scams are carried out through email, and ask for personal information like a Social Security number or birthdate -- which can later be used to claim tax refunds.

To protect yourself, be wary of any correspondence from someone claiming to be from the IRS. The agency says it usually reaches out by mail, and it will never ask for personal information via email or phone. If you receive something questionable, reach out to the agency yourself and verify that it's legit.

Rogue Employees

Be careful about giving out your personal information. One bad employee at your doctor's or dentist's office, at a police department, or even a school, could potentially steal your identity.

And don't ever give away more personal information than you need to, says Chase. "Any time anyone asks you for something, ask them why they need it," he said.

Some tax preparers are also scam artists. To avoid being duped, be wary of any preparers who charge fees based on the size of your refund and never let a preparer ask for the refund to be deposited into an account in their control rather than sent straight to you.

To help you detect if you've been scammed, be sure to regularly monitor your bank accounts and credit card statements for any suspicious charges.

Data Breaches

Data breaches -- when hackers break through a company's privacy walls and access private customer information -- are becoming increasingly common.

And once that information is in a fraudster's hands, it's easy for them to file a tax return in your name.

If you know -- or suspect -- that your information was compromised during a data breach, consider signing up for identity theft protection or start vigilantly monitoring your accounts on your own. And be sure to investigate any charges you don't recognize, no matter how small they are.

"If someone has a stolen card, they will often test it with a small transaction to make sure the card is active before making bigger transactions," said Chase.

And because there's a good chance you will be more susceptible to identity theft after a data breach, make sure to strengthen your passwords -- using at least 8 characters, including upper- and lower-case letters and numbers, said Eva Casey Velasquez, president of the Identity Theft Resource Center.

Snail Mail

It's not as common as online identity theft these days, but many fraudsters still use the old-school strategy of stealing mail from mailboxes to piece together the information they need to file a tax return in someone else's name.

Others will even resort to dumpster diving. "It's low-tech, but it's still an easy way for [identity thieves] to get your information, so shred all of those personal documents," said Velasquez.

Another easy way to protect yourself: file early. Many scammers are able to get fraudulent refunds because they file before the victim does. If you file first, the IRS will be forced to investigate when a second return from the same person arrives.

"File first, beat the crooks," said Velasquez.

By Blake Ellis for @CNNMoney

Published: April 9, 2014

Protect Yourself From Shady Tax Shops

Eery year unregulated tax preparers pop up in abandoned storefronts like weeds in a cracked sidewalk. Sprouting in low-income neighborhoods, they promise fat refund checks fast. But even without upfront charges, they can have hidden costs for the unwary.

In Congressional hearings Tuesday, consumer advocates said their investigations found significant levels of fraud and incompetence by paid tax preparers, from about 25 percent to more than 80 percent.

According to the IRS, 81.2 million of nearly 145 million individual tax returns filed for tax year 2011 were completed by a paid preparer. Should one of those preparers make a mistake, or commit outright fraud, the taxpayer is on the hook in the event of an audit. By that time the "For Rent" sign may have reappeared in the tax preparer's former storefront, with no way to find him or her.

In some cases, tax preparers incorrectly boosted the number of deductions the taxpayer would take, the investigations showed. In other instances, preparers listed taxpayers claiming the earned income tax credit as having children they didn't have, fraudulently increasing the credit. Investigators found some preparers then skimmed off the inflated credit for themselves with high, undisclosed fees, before distributing the rest to the taxpayer as a refund.

To avoid one of these scenarios, there are several steps consumers can take to protect themselves.

Sarah-Louise Smith, executive director of Impact Alabama, a campus-based volunteer tax preparation service, also recommends the following:

  • Ask for the preparer's credentials and for how long he's been a tax preparer.
  • Ask to see an estimate of service fees up front.
  • Avoid preparers who charge a percentage based on how big a refund you get.
  • Steer clear of those who say they can get you a bigger refund than others. They could be setting you up for tax fraud.
  • Check that the preparer writes her Preparer Tax Identification Number on the return and signs it.
  • Make sure you have a way to contact the preparer after April 15.

Part of the reason consumers need to beware is a lack of any guidelines or regulations over tax preparers, advocates say.

"Ironically, apart from CPAs and those who are credentialed as 'enrolled agents' by the IRS, the only other preparers in 46 states who are tested for competency are VITA volunteers," said Chi Chi Wu with the National Consumer Law Center, making tax preparers (not CPAs) less regulated in most states than hairdressers.

By Ben Popken for ABC News

Published: April 8, 2014

What to Know about Net Investment Income Tax

Starting in 2013, some taxpayers may be subject to the Net Investment Income Tax. You may owe this tax if you have income from investments and your income for the year is more than certain limits. Here are a few things from the IRS that you should know about this tax:

1. Net Investment Income Tax.  The law requires a tax of 3.8 percent on the lesser of either your net investment income or the amount by which your modified adjusted gross income exceeds a threshold amount based on your filing status.

2. Net investment income.  This amount generally includes income such as:

  • interest
  • dividends
  • capital gains
  • rental and royalty income
  • non-qualified annuities

This list is not all-inclusive. Net investment income normally does not include wages and most self-employment income. It does not include unemployment compensation, Social Security benefits or alimony. Net investment income also does not include any gain on the sale of your main home that you exclude from your income.

3. Income threshold amounts.  You may owe the tax if you have net investment income and your modified adjusted gross income is more than the following amount for your filing status:

 Filing Status                            Threshold Amount
 Single or Head of household            $200,000
 Married filing jointly                        $250,000
 Married filing separately                  $125,000
 Qualifying widow(er) with a child       $250,000

Published: April 7, 2014

IRS: e-File Wins Over Paper Tax Forms

More people are e-filing their taxes this year, accounting for about 91% of the returns filed so far with the Internal Revenue Service, the tax body said this week.

The IRS has received 82 million tax returns through e-file, up 1.8% from last year. It projects to end the year with more e-filings than ever at a little more than 125 million. The IRS expects paper filings to be down 7% this year.

In a release, the IRS calls e-filing the "safest, fastest, and easiest way" to submit individual tax returns. Consumers are likely opting to e-file as they continue to gain more access to computers and smartphones, and become more comfortable with the security of online platforms, says Daniel Eubanks, assistant director of online tax filing platform TaxSlayer.

While he won't give specific numbers, he says TaxSlayer has seen more customers e-file this year than last year.

More filers are also doing their own taxes this year, up 5.9%, while tax returns filed by professionals are down nearly 1%.

The IRS has received a little more than 90 million returns so far, and expects to receive 148 million for all of 2014. The average refund is up 1.5% to $2,831 from $2,790 at this point in 2013.

Those who have their refund direct deposited to their account tend to get more back. Direct deposit refunds are at an average of $2,951 so far, though that's down slightly from last year's $2,959 at this same point in time.

By Hadley Malcolm for USA Today

Published: April 4, 2014

3 Methods for Budgeting Your Tax Refund

According to the IRS, the average tax refund is up 3 percent so far this year, to $3,034. That’s a significant amount of money to receive with no plan in place. Some will receive their tax return and know exactly where they intend to spend that money, whereas others might want to be more strategic with their refund check.

1. Elizabeth Warren’s 50-30-20 Rule

The 50-30-20 budget is a commonly used method to divide up a salary — and it can be used to divvy up your tax return as well.

The 50-30-20 rule divides your net pay into three categories:

  • 50 percent for needs: Think food, water and shelter. Half of your budget should go to expenses like rent, transportation and groceries, as well as mortgage, auto loan and minimum credit card payments.
  • 30 percent for wants: This covers the fun stuff, like going to concerts, dining out and indulging yourself.
  • 20 percent for savings and debt: The smallest portion goes to paying down debt, building an emergency fund and contributing to a retirement nest egg.

The average return of $3,034 would amount to an increase of $1,517 toward needs, $910 toward wants, and $607 toward savings and debt.

2. The 33 Percent Rule

This one is based off the 25 percent rule, which divides your pretax income into four equal parts.

  • 25 percent for taxes: This is normally income that is being withheld. In the case of a refund check, this portion can be absorbed by the three other categories.
  • 25 percent for housing: To cover mortgage or rent payments.
  • 25 percent for debts: A larger portion than allotted by the 50-30-20 rule, but exclusively for paying down debt.
  • 25 percent for living expenses: This covers everything else, including savings.

If we remove non-applicable quarter lost to taxes and allot an even third to the remaining categories, $1,011 of the average $3,034 refund would go toward housing, debt and living expenses, respectively. (And buy yourself something nice with that extra dollar.)

3. Budget for the Necessities 

If you want to splurge a bit with your return, this budget dictates how 75 percent of your tax refund is allocated, allowing for some freedom to spend the other 25 percent.

  • 35 percent to housing: Covers mortgage or rent payments, utilities and insurance.
  • 15 percent to transportation: Includes auto loan payments, insurance, gasoline and maintenance costs.
  • 15 percent to debt: To pay down credit cards, student loans and any other personal loans.
  • 10 percent to savings and investments: Includes contributions to an emergency fund, 401 (k) or Roth IRA.
  • 25 percent to spend: Spend however you want.

With this budget, 75 percent of your tax return would be divided as follows: $1,062 to housing, $455 to transportation and debt, respectively, and $303 to savings. $759 would remain for discretionary spending.

Depending on your particular financial situation, devoting your tax return fully to one financial goal might be more advantageous. Potential uses for your return include: rebuilding your emergency fund, paying off credit card debt, investing in a retirement account, building college savings or filling gaps in your insurance coverage.

Adapted from GoBankingRates.com

 

Published: April 3, 2014

Wacky Deductions for Your Tax Return!

These wacky tax deductions aren't an April Fool's joke!

Deduction: pet moving

The most-tax savvy are probably already aware that you can often deduct moving expenses, but did you know that includes shipping your pet?
Yes, Fido and Whiskers can each deduct a sum from your taxes if you choose to move your animals across the country, as they are considered personal effects. Just be sure to throw your pets an extra bone as a thanks for saving you a couple of bucks on your taxes.

Deduction: clarinet lessons

Famed English clarinet player Acker Bilk once said, “I look at my clarinet sometimes and I think, I wonder what's going to come out of there tonight? You never know.” Though this may be true for the sound of this reedy instrument, you can now know for sure that a clarinet can yield surprising financial and dental benefits. 
A clarinet and lessons can be considered tax deductible if a doctor has recommended playing the instrument as a method of correcting an overbite. 
This isn’t the only strange medical write-off however: others include support stockings, wigs for those who have lost hair due to a disease, and many more. 
Not tax deductible: earplugs for parents of children taking clarinet lessons.

Deduction: bingo

Yes, bingo can be deducted from your tax bill: Bingo-playing taxpayers can deduct the amount lost in a given year, up to the amount that was won. This deduction requires a detailed diary of winnings and losses.
The Internal Revenue Service allows taxpayers to deduct losses for other types of wagering, too. They must keep a detailed diary of the kind of wager, where they placed it, who they were with, and how much they won or lost.

Deduction: Business gifts (under $25)

The IRS is fine with giving gifts, as long as they aren't too lavish.
You’re allowed to deduct up to $25 in costs spent on business gifts for any individual person. You can also widely distribute gifts under $4 that have your name on them – examples listed by the IRS include pens, desk sets, and bags – the sum total can be deducted, even if it's over the $25 limit. 

Deduction: weight-loss programs

Some people who enrolled in weight-loss programs last year can deduct the money they paid in fees, according to the IRS. But not everyone qualifies: to be eligible, taxpayers must have enrolled to treat specific conditions diagnosed by doctors. Even when recommended by a health care professional, the cost of dance lessons, swim lessons, and health-club dues are not deductible, according to the IRS.
Except in very limited cases, diet foods are also non-deductible.

Published: April 1, 2014

An Upside to the Alternative Minimum Tax

If you paid the alternative minimum tax (AMT) with your 2012 return, or your return for an earlier year, you may have earned an AMT credit that you can now use to reduce your 2013 federal income tax bill.

Surprised to hear this? Joint the club. Many folks who have paid the AMT never remember to claim their rightful AMT credits because they don’t know they earned them. 

Here are the ground rules for the AMT credit.

AMT credit basics

The first thing to know is that you earned an AMT credit in a prior tax year only if your AMT bill for that year was partially or entirely caused by: (1) exercising an in-the-money incentive stock option (ISO) or (2) claiming accelerated depreciate write-offs. The first cause is quite common, especially with employees of high-tech outfits. The second cause is not very likely unless you are an owner of a proprietorship, partnership, LLC, or S corporation with fairly heavy investments in depreciable assets. (There are plenty of other things that can cause an AMT bill, but those other things won’t generate a AMT credit for you.)

Bottom line: if you exercised an ISO in a prior year and paid the AMT, the odds are pretty good that you earned an AMT credit. To calculate your credit, print out Form 8801 (Credit for Prior Year Minimum Tax—Individuals) from the IRS website at www.irs.gov and fill the form out.

The second thing to know is that you can only claim the AMT credit on your 2013 return if your regular federal income tax amount for the year exceeds your AMT number. That is because you’re only allowed to use the AMT credit to reduce your regular tax bill (not your AMT bill). Put another way, you can’t claim the AMT credit on your 2013 return if you owe the AMT again. But if you’re in the regular tax mode for 2013, you’re eligible and you should keep reading.

The third thing to know is that your AMT credit cannot exceed the difference between your regular tax bill and your AMT amount for the year you claim the credit. So even though you don’t owe the AMT for 2013, you must still fill out IRS Form 6251 (Alternative Minimum Tax—Individuals, Estates, and Trusts) to calculate your AMT amount. The difference between that number and your regular tax number is the maximum amount of AMT credit you can claim on your 2013 return. Put another way, you can use the AMT credit to equalize your regular tax and AMT numbers for 2013, but that’s it. After taking this limitation into account, any leftover AMT credit is carried forward to 2014. Then you’ll go through the same process all over again when preparing your 2014 federal return.

Example

Say you had to cough up an extra $5,000 for the AMT in 2012. In other words, there was a $5,000 difference between your 2012 regular tax number and the AMT number you calculated on Form 6251. You ran afoul of the AMT mainly because you exercised an in-the-money ISO in 2012. When preparing your 2013 return, you fill out Form 8801 and discover that you earned a $4,500 AMT credit in 2012. Good! Now let’s assume that your 2013 regular tax bill (before considering the AMT credit) is $25,000, and your 2013 AMT number (from Form 6251) is $21,000. You can use $4,000 of your AMT credit to reduce your regular tax bill to $21,000. That amount is what you owe for the 2013 tax year. The unused $500 AMT credit ($4,500 — $4,000 used on your 2013 return) is carried over to your 2014 tax year.

Published: March 31, 2014

Tips for U.S. Taxpayers with Foreign Income

Did you live or work abroad or receive income from foreign sources in 2013? If you are a U.S. citizen or resident, you must report income from all sources within and outside of the U.S. The rules for filing income tax returns are generally the same whether you’re living in the U.S. or abroad. Here are seven tips from the IRS that U.S. taxpayers with foreign income should know:

1. Report Worldwide Income.  By law, U.S. citizens and resident aliens must report their worldwide income. This includes income from foreign trusts, and foreign bank and securities accounts.

2. File Required Tax Forms.  You may need to file Schedule B, Interest and Ordinary Dividends, with your U.S. tax return. You may also need to file Form 8938, Statement of Specified Foreign Financial Assets. In some cases, you may need to file FinCEN Form 114, Report of Foreign Bank and Financial Accounts. 

3. Consider the Automatic Extension.  If you’re living abroad and can’t file your return by the April 15 deadline, you may qualify for an automatic two-month filing extension. You’ll then have until June 16, 2014 to file your U.S. income tax return. This extension also applies to those serving in the military outside the U.S. You’ll need to attach a statement to your return to explain why you qualify for the extension.

4. Review the Foreign Earned Income Exclusion.  If you live and work abroad, you may be able to claim the foreign earned income exclusion. If you qualify, you won’t pay tax on up to $97,600 of your wages and other foreign earned income in 2013. 

5. Don’t Overlook Credits and Deductions.  You may be able to take a tax credit or a deduction for income taxes you paid to a foreign country. These benefits can reduce the amount of taxes you have to pay if both countries tax the same income.

Published: March 28, 2014

Two Tax Credits Help Pay Higher Education Costs

Did you, your spouse or your dependent take higher education classes last year? If so, you may be able to claim the American Opportunity Credit or the Lifetime Learning Credit to help cover the costs. Here are some facts from the IRS about these important credits.

The American Opportunity Credit is:

  • Worth up to $2,500 per eligible student.
  • Only available for the first four years at an eligible college or vocational school.
  • Subtracted from your taxes but can also give you a refund of up to $1,000 if it’s more than your taxes.
  • For students earning a degree or other recognized credential.
  • For students going to school at least half-time for at least one academic period that started during the tax year.
  • For the cost of tuition, books and required fees and supplies.

The Lifetime Learning Credit is:

  • Limited to $2,000 per tax return, per year, no matter how many students qualify.
  • For all years of higher education, including classes for learning or improving job skills.
  • Limited to the amount of your taxes.
  • For the cost of tuition and required fees, plus books, supplies and equipment you must buy from the school.

For both credits:

  • Your school should give you a Form 1098-T, Tuition Statement, showing expenses for the year. Make sure it’s correct.
  • You must file Form 8863, Education Credits, to claim these credits on your tax return.
  • You can’t claim either credit if someone else claims you as a dependent.
  • You can’t claim both credits for the same student or for the same expense, in the same year.
  • The credits are subject to income limits that could reduce the amount you can claim on your return.
Published: March 26, 2014

Time Expiring to Claim $760 Million in Refunds for 2010 Tax Returns

If you did not file a tax return for 2010, you may be one of over 900,000 taxpayers who may be due a refund from that year. If you are, you must claim your share of almost $760 million by the April 15 tax deadline. To claim your refund, you must file a 2010 federal income tax return. Here are the facts you need to know about unclaimed refunds:

  • The unclaimed refunds apply to people who did not file a federal income tax return for 2010. The IRS estimates that half the potential refunds are more than $571.
  • Some people, such as students and part-time workers, may not have filed because they had too little income to require filing a tax return. They may have a refund waiting if they had taxes withheld from their wages or made quarterly estimated payments. A refund could also apply if they qualify for certain tax credits, such as the Earned Income Tax Credit.
  • If you didn’t file a 2010 return, the law generally provides a three-year window to claim a refund from that year. For 2010 returns, the window closes on April 15, 2014.
  • The law requires that you properly address, mail and postmark your tax return by that date to claim your refund.
  • If you don’t file a claim for a refund within three years, the money becomes property of the U.S. Treasury. There is no penalty for filing a late return if you are due a refund.
  • The IRS may hold your 2010 refund if you have not filed tax returns for 2011 and 2012. The U.S. Treasury will apply the refund to any federal or state tax you owe. It also may use your refund to offset unpaid child support or past due federal debts such as student loans.
  • If you’re missing Forms W-2, 1098, 1099 or 5498 for prior years, you should ask for copies from your employer, bank or other payer.
  • The three-year window also usually applies to a refund from an amended return. In general, you must file Form 1040X, Amended U.S. Individual Income Tax Return, within three years from the date you filed your original tax return. You can also file it within two years from the date you paid the tax, if that date is later than the three-year rule. That means the deadline for most people to amend their 2010 tax return and claim a refund will expire on April 15, 2014.
Published: March 24, 2014

IRS Warns of Biggest Tax Scam Ever

As if taxpayers don't have enough to worry about. Thousands of Americans have been conned out of more than $1 million by crooks posing as IRS agents demanding tax payments, according to the U.S. Treasury.

"This is the largest scam of its kind that we have ever seen," said J. Russell George, the Treasury inspector general for tax administration, who says the agency has received more than 20,000 complaints about the fraud.

The sophisticated phone scam has hit victims in every state, tax officials say. Callers claiming to be from the IRS tell intended victims they owe taxes and must pay using a prepaid debit card or wire transfer. The scammers threaten those who refuse to pay with arrest, deportation or loss of a business or driver's license.

To lend the scam credibility, the crooks often know the last four digits of the taxpayer's Social Security number, and the calls are made with spoofed caller identification software that makes it appear the call is originating from the IRS.

In many cases, taxpayers will get follow-up calls that appear to be from their state motor vehicle agency (if a driver's license was threatened) or the police. The scammers also send follow-up emails that mimic the IRS insignia and even appear to be signed by real IRS officials.

"The increasing number of people receiving these unsolicited calls from individuals who fraudulently claim to represent the IRS is alarming," George said. "Particularly during the tax filing season, we want to make sure that innocent taxpayers are alert to this scam so they are not harmed by these criminals. Do not become a victim."

In reality, if you owe taxes, the IRS will contact you by U.S. mail -- not email. The agency never asks for payment via debit card or wire transfer. It never asks you to provide a credit card number over the phone. And it never requests personal or financial information by e-mail, text or social media.

"If someone unexpectedly calls claiming to be from the IRS and uses threatening language if you don't pay immediately, that is a sign that it is not the IRS calling," George said.

If you get a call from someone claiming to be with the IRS asking for a payment, here's what to do:

  • If you owe federal taxes, or think you may owe taxes, hang up and call the IRS directly at 1-800-829-1040.
  • If you don't owe taxes, call and report the incident to the Treasury inspector general of tax administration at 1-800-366-4484.
  • You can also file a complaint with the Federal Trade Commission at www.FTC.gov. Please add "IRS Telephone Scam" to the comments in your complaint.
  • If you get an email that's purportedly from the IRS, do not open any attachments or click on any links in the email. Send it to phishing@irs.gov.
  • Taxpayers should also be aware of other unrelated scams (such as a lottery sweepstakes winner) and solicitations (such as debt relief) that fraudulently claim to be from the IRS. You can read more about identified tax scams at the IRS website, www.irs.gov.
From CBS MoneyWatch

Published: March 21, 2014

Key 2014 Tax Changes To Know

What is different for your taxes this year? Here are a few items you need to know about in this tax season.

First, we'll look at the things that could pull a little bit more money from your wallet.

If you are at the top of the income bracket, you are going to pay more. While the Bush-era tax cuts were extended for most, the top tax brackets returned to 39.6 percent. So if you made more than $400,000 as an individual, or $450,000 as a couple, your tax bill will be higher this year. Additionally, if you are making over $200,000, you will be subject to a Medicare surcharge of 0.9 percent.

Secondly, deductions for medical expenses incurred in 2013 will be harder to get. Previously, you could deduct medical expenses if they exceeded 7.5 percent of your adjusted gross income. That number rose to 10 percent for 2013. So, if you or a family member were in the hospital last year, you will have a harder time writing those costs off.

Now for the good news: Education expenses once again provide an opportunity for a little relief. If you are a parent or student paying for school, the American Opportunity Credit could help you take up to $2,500 off of your tax bill if you paid tuition or fees last year, plus additional deductions for loan interest and other education-related expenses.

If you're a teacher, you can write off up to $250 in out-of-pocket expenses for books and other school supplies. A recent survey showed that on average, teachers spend nearly $500 of their own money on school supplies. If you are a teacher, the extension of this deduction is welcome news.

Finally, if you made energy efficient improvements to your home -- whether it was installing an energy-saving heater or upgrading to more efficient windows, you can qualify for an energy credit of 10 percent of the cost of those changes -- though the lifetime maximum is $500. The deductions vary by improvement, so be careful, but it's definitely something to keep in mind.

From CBS MoneyWatch

Published: March 20, 2014

Tax Q&A: What To Do If You Forgot a Tax Payment

Q. I forgot the January 15th estimated tax payment. It appears that we will owe about $5,000 in tax. What should I do?

A: At this point, you have two options. It is not too late to make your fourth estimated tax payment by filing Form 1040-ES and submitting payment now. Because the penalty for any underpayment of taxes accrues daily, it is better to make a late payment than no payment at all.

However, if you are prepared to file your Form 1040 and pay your entire tax liability now prior to the April 15 deadline, it is not necessary to make the fourth quarter estimated payment.

I emphasize that this requires paying the entire amount of tax owed now, roughly a month early, rather than just the fourth quarter payment.

For further information, consult your certified tax professional. We're always available to assist with your questions and concerns! 

Ellen D. Cook, MS, CPA, assistant vice president for Academic Affairs at the University of Louisiana at Lafayette answered this question, via the American Institute of Certified Public Accountants.

Published: March 19, 2014

Don't Forfeit Past Tax Refunds

Does this sound familiar? A few years back your yearly earnings were pretty low so you figured you wouldn't owe any income tax. Thus, when April 15 rolled around the following year you didn't bother filing a tax return, knowing you wouldn't be penalized.

Big mistake.

Even if your income fell below the threshold at which you'd owe anything, chances are taxes were deducted from your paycheck throughout the year. (Check your year-end W-2 form). If so, you probably left a sizeable tax refund on the table.

And you wouldn't be alone. The IRS estimates that each year close to a million people don't bother filing federal tax returns, thereby forfeiting around $1 billion in refunds they were due -- refunds that average several hundred dollars apiece.

Here's the good news: The IRS generally gives you a three-year window to go back and file a past year's tax return if you want to claim an unpaid refund. For example, to collect a refund for 2010 you have until April 15, 2014, to file a 2010 return. After that, the money becomes the property of the U.S. Treasury.

If you're missing any supplementary paperwork (e.g., W-2 or 1099 forms), you'll need to request copies from your employer, bank or other payer. If that doesn't work, file IRS Form 4506-T to request a free transcript showing information from these year-end documents.

Keep in mind that if you file to collect a refund on your 2010 taxes but have not also filed tax returns for 2011 and 2012, the IRS may hold onto the refund until you file those subsequent returns. Also, past refunds will be applied to any amounts you still owe to the IRS or your state tax agency, and may be used to offset unpaid child support or past-due federal debts, such as student loans.

(Important note: The same three-year time period generally also applies when you need to file an amended tax return because you discovered an error on a previous year's return.)

Another good reason to consider going back and filing a previous year's tax return: the Earned Income Tax Credit (EITC). Chances are, if the reason you didn't file a return was because you didn't earn enough to owe taxes, you may have been eligible for the EITC, a "refundable" tax credit for low- to moderate-income working taxpayers. ("Refundable" means that if you owe less in tax than your eligible credit, you not only pay no tax but also get a refund for the difference.)

As an example, for tax year 2010, a married couple filing jointly with three or more qualifying children whose adjusted gross income was less than $48,263 were eligible for an EITC of up to $5,666. 

By Jason Alderman for the Huffington Post

Published: March 18, 2014

Tax Audit Red Flags

You're very charitable. 
Be careful not to overstate your good deeds. The IRS has calculated the average donation level for each income range, so anything that far exceeds those amounts could cause the agency to take a second look at your return.

You're required to keep receipts for any donations exceeding $250, and to fill out Form 8283 for any non-cash donations exceeding $500.

And be realistic: non-cash donations are where a lot of people often exaggerate, so remember that the items you're giving to Goodwill should be valued at the price someone would actually pay for it -- not the amount you bought it for years ago.

You deduct your home office. 

The home office deduction is one of the most complicated and abused deductions in the tax code, which is one of the reasons the IRS is introducing a new, simplified option for claiming it this year.

In the past, taxpayers who claimed the home office deduction were required to fill out a separate form calculating the percentage of their home's space used solely for the business and the percentage of expenses that apply to the office, which can be very complicated to figure out.

But starting this year, you can simply claim $5 per square foot of workspace, up to 300 square feet. The deduction will be capped at $1,500 per year and the form for claiming it will be simplified.

That doesn't mean there isn't still room for error, however. The IRS's definition of a home office remains unchanged, and this is where a lot of people get confused or try to stretch the rules. So remember, just because you work from home a couple days a week or check work emails from your kitchen doesn't mean you can claim the home office deduction. Your home office must be your primary place of business and used exclusively for work.

You claim bizarre deductions. 

Air conditioning for an excessive sweating disorder, a nose job for a wine taster -- bizarre deductions like these are likely to spark suspicion from the IRS. But don't let that stop you from claiming them if they are legitimate. Both the nose job and the air conditioning unit were allowed, for example.

But others, like used underwear donated to charity or medical bills for pets, were not. So don't stretch the limit too far, and when in doubt, ask a tax professional before turning yourself into a target for the IRS.

You claim the same child someone else does. 

If your ex files their taxes before you and claims your child as a dependent, the IRS is going to be very suspicious when your return comes in claiming that same child as your dependent.

This often happens when a couple gets divorced and one parent has primary custody, but the other still tries to claim the child as their dependent. Or when a grandparent is the sole caregiver, but the parent still claims the child as their own.

Even if you're in the right, the IRS may force you to provide extensive proof that the child you are claiming does indeed qualify as your dependent.

You have money abroad. 

The IRS has been on a crusade to retrieve money that's been illegally stashed in overseas accounts. So even if you have money in a perfectly legal account abroad, you need to report it or you could be in big trouble.

Failing to disclose assets exceeding $10,000 that are held in offshore accounts could result in penalties, including a fine of up to $100,000 or 50% of the account balance, whichever amount is greater.

Your "business" is really a hobby. 

Who wouldn't like to turn their favorite hobby into a business? Year after year, taxpayers continue to report losses on their taxes from businesses that are really just activities they like to do for fun.

But the IRS won't be fooled. The general rule of thumb is that if the venture hasn't earned a profit in three out of the last five years, it's usually not a legitimate business.

Dave Du Pal, vice president of customer advocacy at TaxAudit.com, represented a client in an audit who had set up a side videography business where he filmed weddings and special events. It was his first year in business and he reported a loss. The IRS came after him, saying it was just a hobby and not a business. But after providing documentation of expenses like advertising costs and showing records of meetings with business strategy experts, it was approved and the client was let off the hook.

You fail to report income. 
For many people, reporting income is pretty straightforward. But for those who earn money a variety of different sources, it can be easy to forget a stray account.

Some clients forget about small brokerage accounts they have, and since the IRS receives information from brokerage firms directly as well, there's a good chance you'll be contacted if your records don't match what the IRS receives. Because investment firms aren't required to submit documentation for their clients until the end of the February, it's often a good idea to wait until the beginning of March to file your return to make sure the reporting lines up.

If you worked side jobs and earned more than $600 at any one of them in a year, those employers should send you a Form 1099 so you can report that income on your taxes as well.

Adapted from @CNNMoney

Published: March 13, 2014

Special Exclusion for Cancelled Home Mortgage Debt

If a lender cancels or forgives money you owe, you usually have to pay tax on that amount. But when it comes to your home, an important exception to this rule may apply in 2013. Here are several key facts from the IRS about the special exclusion for cancelled home mortgage debt:

  • If the cancelled debt was a mortgage loan on your main home, you may be able to exclude the cancelled amount from your income. To qualify you must have used the loan to buy, build or substantially improve your main home. The loan must also be secured by your main home.
  • If your lender cancelled part of your mortgage through a loan modification, or ‘workout,’ you may be able to exclude that amount from your income. You may also be able to exclude debt discharged as part of the Home Affordable Modification Program. Visit IRS.gov for more details about HAMP. The exclusion may also apply to the amount of debt cancelled in a foreclosure.
  • The exclusion may apply to amounts cancelled on a refinanced mortgage. This applies only if you used proceeds from the refinancing to buy, build or greatly improve your main home. Proceeds used for other purposes don’t qualify. For example, a loan that you used to pay your credit card debt doesn’t qualify.
  • Other types of cancelled debt do not qualify for this special exclusion. This includes debt cancelled on second homes, rental and business property, credit card debt or car loans.
  • If your lender reduced or cancelled at least $600 of your mortgage debt, you should receive Form 1099-C, Cancellation of Debt, in January of the following year. This form shows the amount of cancelled debt and other information. Notify your lender if any information on the form is wrong.
  • Report the excluded debt on Form 982, Reduction of Tax Attributes Due to Discharge of Indebtedness. File the completed form with your federal tax return.

Published: March 12, 2014

Check Out Small Business Health Care Tax Credit

With business tax-filing deadlines fast approaching, the Internal Revenue Service today encouraged small employers that provide health insurance coverage to their employees to check out the small business health care tax credit and then claim it if they qualify.

Additionally, the IRS has Health Care Tax Tips, designed to provide useful information to employers, families and individuals. These tips include a new Small Business Health Care Tax Credit tip as well as tips covering other Affordable Care Act topics.

The small business health care tax credit was included in the Affordable Care Act enacted in 2010. Under the ACA, eligible small employers can claim the credit for 2010 through 2013 and for two additional years beginning in 2014. For 2010 through 2013, the maximum credit is 35 percent of premiums paid by eligible small businesses and 25 percent of premiums paid by eligible tax-exempt organizations. In 2014, the maximum credit rate rises to 50 percent for small businesses and 35 percent for tax-exempt organizations.

Small employers that pay at least half of the premiums for employee health insurance coverage under a qualifying arrangement may be eligible for this credit. The credit is specifically targeted to help small businesses and tax-exempt organizations provide health insurance for their employees.

Depending upon how they are structured, eligible small employers are likely subject to one of the following three tax-filing deadlines, which fall in coming weeks:

  • March 17: Corporations and S Corporations that file on a calendar year basis can figure the credit on Form 8941 attached to the income tax return.
  • April 15: Partnerships and individuals have until April 15 to complete and file their income tax returns (partnerships on Form 1065 and individuals on Form 1040). Sole proprietors can figure the credit on Form 8941 attached to the individual income tax return. Individuals who have business income and credits reported to them on Schedules K-1—partners in partnerships, S corporation shareholders and beneficiaries of estates and trusts—will report the credit amount directly on Form 3800– no Form 8941 required. The resulting credit is entered on Form 1040, Line 53.
  • May 15: Tax-exempt organizations that file on a calendar year basis can use Form 8941 and then claim the credit on Form 990-T, Line 44f.

Taxpayers needing more time to determine eligibility should consider obtaining an automatic tax-filing extension, usually for six months. 

Businesses that have already filed and later find that they qualified in 2013 or an earlier year can still claim the credit by filing an amended return for the affected years.  A three-year statute of limitations normally applies to these refund claims. 

Some businesses and tax-exempt organizations that already locked into health insurance plan structures and contributions may not have had the opportunity to make any needed adjustments to qualify for the credit for 2013 or earlier years. These employers can still make changes so they qualify to claim the credit on future returns.

Published: March 11, 2014

Itemizing vs. Standard Deduction

When you file your tax return, you usually have a choice whether to itemize deductions or take the standard deduction. Before you choose, it’s a good idea to figure your deductions using both methods. Then choose the one that allows you to pay the lower amount of tax. The one that results in the higher deduction amount often gives you the most benefit.

Here are some tips to help you choose, and the some items and information that you'll need to furnish in order to determine how much your itemized deductions will amount to. 

To figure your itemized deductions:

Deductible expenses you paid during the year may include expenses such as:

  • Home mortgage interest
  • State and local income taxes or sales taxes (but not both)
  • Real estate and personal property taxes
  • Gifts to charities
  • Casualty or theft losses
  • Unreimbursed medical expenses
  • Unreimbursed employee business expenses

Determine your standard deduction:

If you don’t itemize, your basic standard deduction for 2013 depends on your filing status:

  • Single $6,100
  • Married Filing Jointly $12,200
  • Head of Household $8,950
  • Married Filing Separately $6,100
  • Qualifying Widow(er) $12,200

Your standard deduction is higher if you’re 65 or older or blind. If someone can claim you as a dependent, that can limit the amount of your deduction.

Check the exceptions:

Some people don’t qualify for the standard deduction and therefore should itemize. This includes married couples who file separate returns and one spouse itemizes.

Published: March 10, 2014

Facts about Capital Gains and Losses

When you sell a ’capital asset,’ the sale usually results in a capital gain or loss. A ‘capital asset’ includes most property you own and use for personal or investment purposes. Here are 10 facts from the IRS on capital gains and losses:

1. Capital assets include property such as your home or car. They also include investment property such as stocks and bonds.

2. A capital gain or loss is the difference between your basis and the amount you get when you sell an asset. Your basis is usually what you paid for the asset.

3. You must include all capital gains in your income. Beginning in 2013, you may be subject to the Net Investment Income Tax. The NIIT applies at a rate of 3.8% to certain net investment income of individuals, estates, and trusts that have income above statutory threshold amounts.

4. You can deduct capital losses on the sale of investment property. You can’t deduct losses on the sale of personal-use property.

5. Capital gains and losses are either long-term or short-term, depending on how long you held the property. If you held the property for more than one year, your gain or loss is long-term. If you held it one year or less, the gain or loss is short-term.

6. If your long-term gains are more than your long-term losses, the difference between the two is a net long-term capital gain. If your net long-term capital gain is more than your net short-term capital loss, you have a 'net capital gain.’ 

7. The tax rates that apply to net capital gains will usually depend on your income. For lower-income individuals, the rate may be zero percent on some or all of their net capital gains. In 2013, the maximum net capital gain tax rate increased from 15 to 20 percent. A 25 or 28 percent tax rate can also apply to special types of net capital gains.  

8. If your capital losses are more than your capital gains, you can deduct the difference as a loss on your tax return. This loss is limited to $3,000 per year, or $1,500 if you are married and file a separate return.

9. If your total net capital loss is more than the limit you can deduct, you can carry over the losses you are not able to deduct to next year’s tax return. You will treat those losses as if they happened that year.

10. You must file Form 8949, Sales and Other Dispositions of Capital Assets, with your federal tax return to report your gains and losses. You also need to file Schedule D, Capital Gains and Losses with your return.

Published: March 6, 2014

Most Americans Plan to Save Their Tax Refunds

Instead of spending the big tax refunds they're expecting this year, the vast majority of Americans plan to sock the money away.

A high 61% of Americans say they will save or invest their refunds, while 21% plan to pay off debt and another 18% will spend the money on necessities, according to a new TD Ameritrade survey of 1,000 investors. Only 19% of respondents said they expect to make non-essential purchases with their refunds.

For all the grief millennials get, they're actually the ones most likely to save their refund checks -- with more than two-thirds, or 67%, of Generation Y taxpayers ages 25 to 37 saying they plan to save or invest the money.

Almost half, or 45%, of people surveyed by TD Ameritrade said they are expecting to receive a refund. Last year, the average tax refund was $2,744, according to the IRS.

Millennials are more likely to expect refunds partly because they are more likely to have more taxes withheld from their paychecks throughout the year.

Even though a big refund check can be a nice infusion of cash, it often makes more sense to withhold less and boost the amount you're receiving in your weekly paycheck.

"Rather than giving Uncle Sam extra money throughout the year, they may want to consider adjusting their withholdings so they have that money to invest throughout the year," Lule Demmissie, managing director of investment products at TD Ameritrade said in a statement. "A small increase in the amount you invest monthly can add up over time."

The expectation of such big refunds may be why more millennials rushed to file their taxes right away. About 44% of Gen Y respondents said they file their taxes as soon as they get their W-2s, versus only 26% of the remaining respondents.

In general, Americans are diligent about filing their taxes. The majority, or 62%, said they file their taxes before the deadline, even if they don't rush to file right away.

And when asked where they think the government should spend their money, taxpayers cited public education most often, followed by healthcare and job creation.

Published: March 5, 2014

Five Facts about Unemployment Benefits

If you lose your job or your employer lays you off, you may be able to get unemployment benefits. The payments may be a welcomed relief. But you should know that they’re taxable.

Here are some important facts from the IRS about unemployment compensation:

1. You must include all unemployment compensation in your income for the year. You should receive a Form 1099-G, Certain Government Payments. It will show the amount paid to you and the amount of any federal income taxes withheld.

2. There are several types of unemployment compensation. They generally include any amount received under an unemployment compensation law of the U.S. or a state. 

3. You must include benefits paid to you from regular union dues in your income. Different rules may apply if you contribute to a special union fund and those contributions are not deductible. In that case, only include as income any amount you get that is more than the contributions you made.

4. You can choose to have federal income tax withheld from your unemployment. You make this choice using Form W-4V, Voluntary Withholding Request. If you do not choose to have tax withheld, you may have to make estimated tax payments during the year.

5. If you are facing financial difficulties, the IRS offers options. For example, if your income decreased, you may be eligible for some tax credits, such as the Earned Income Tax Credit. If you owe federal taxes and can’t pay your bill, the IRS should be notified as soon as possible. In many cases, the IRS can take steps to help ease your financial burden.

Published: March 4, 2014

Are Your Social Security Benefits Taxable?

Some people must pay taxes on part of their Social Security benefits. Others find that their benefits aren’t taxable. If you get Social Security, the IRS can help you determine if some of your benefits are taxable.

Here are seven tips about how Social Security affects your taxes:

1. If you received these benefits in 2013, you should have received a Form SSA-1099, Social Security Benefit Statement, showing the amount.

2. If Social Security was your only source of income in 2013, your benefits may not be taxable. You also may not need to file a federal income tax return.

3. If you get income from other sources, then you may have to pay taxes on some of your benefits.

4. Your income and filing status affect whether you must pay taxes on your Social Security.

5. A quick way to find out if any of your benefits may be taxable is to add one-half of your Social Security benefits to all your other income, including any tax-exempt interest. Next, compare this total to the base amounts below. If your total is more than the base amount for your filing status, then some of your benefits may be taxable. The three base amounts are:

  • $25,000 - for single, head of household, qualifying widow or widower with a dependent child or married individuals filing separately who did not live with their spouse at any time during the year
  • $32,000 -for married couples filing jointly
  • $0 - for married persons filing separately who lived together at any time during the year
Published: March 3, 2014

Seven Facts about Dependents and Exemptions

There are a few tax rules that affect everyone who files a federal income tax return. This includes the rules for dependents and exemptions. The IRS has seven facts on these rules to help you file your taxes.

1. Exemptions cut income.  There are two types of exemptions: personal exemptions and exemptions for dependents. You can usually deduct $3,900 for each exemption you claim on your 2013 tax return.

2. Personal exemptions.  You can usually claim an exemption for yourself. If you’re married and file a joint return you can also claim one for your spouse. If you file a separate return, you can claim an exemption for your spouse only if your spouse had no gross income, is not filing a return, and was not the dependent of another taxpayer.

3. Exemptions for dependents.  You can usually claim an exemption for each of your dependents. A dependent is either your child or a relative that meets certain tests. You can’t claim your spouse as a dependent. You must list the Social Security number of each dependent you claim. See IRS Publication 501, Exemptions, Standard Deduction, and Filing Information, for rules that apply to people who don’t have an SSN.

4. Some people don’t qualify.  You generally may not claim married persons as dependents if they file a joint return with their spouse. There are some exceptions to this rule.

5. Dependents may have to file.  People that you can claim as your dependent may have to file their own federal tax return. This depends on many things, including the amount of their income, their marital status and if they owe certain taxes.

6. No exemption on dependent’s return.  If you can claim a person as a dependent, that person can’t claim a personal exemption on his or her own tax return. This is true even if you don’t actually claim that person as a dependent on your tax return. The rule applies because you have to right to claim that person.

7. Exemption phase-out.  The $3,900 per exemption is subject to income limits. This rule may reduce or eliminate the amount depending on your income. 

Published: February 27, 2014

Deducting Medical and Dental Expenses

If you plan to claim a deduction for your medical expenses, there are some new rules this year that may affect your tax return. Here are eight things you should know about the medical and dental expense deduction:

1. AGI threshold increase.  Starting in 2013, the amount of allowable medical expenses you must exceed before you can claim a deduction is 10 percent of your adjusted gross income. The threshold was 7.5 percent of AGI in prior years.

2. Temporary exception for age 65.  The AGI threshold is still 7.5 percent of your AGI if you or your spouse is age 65 or older. This exception will apply through Dec. 31, 2016.

3. You must itemize.  You can only claim your medical and dental expenses if you itemize deductions on your federal tax return. You can’t claim these expenses if you take the standard deduction.

4. Paid in 2013. You can include only the expenses you paid in 2013. If you paid by check, the day you mailed or delivered the check is usually considered the date of payment.

5. Costs to include.  You can include most medical or dental costs that you paid for yourself, your spouse and your dependents. Some exceptions and special rules apply. Any costs reimbursed by insurance or other sources don’t qualify for a deduction.

6. Expenses that qualify.  You can include the costs of diagnosing, treating, easing or preventing disease. The cost of insurance premiums that you pay for policies that cover medical care qualifies, as does the cost of some long-term care insurance. The cost of prescription drugs and insulin also qualify. 

7. Travel costs count.  You may be able to claim the cost of travel for medical care. This includes costs such as public transportation, ambulance service, tolls and parking fees. If you use your car, you can deduct either the actual costs or the standard mileage rate for medical travel. The rate is 24 cents per mile for 2013.

8. No double benefit.  You can’t claim a tax deduction for medical and dental expenses you paid with funds from your Health Savings Accounts or Flexible Spending Arrangements. Amounts paid with funds from those plans are usually tax-free.

Published: February 26, 2014

The Premium Tax Credit

The premium tax credit can help make purchasing health insurance coverage more affordable for people with moderate incomes.  To be eligible for the credit, you generally need to satisfy three rules. 

First, you need to get your health insurance coverage through the Health Insurance Marketplace. The open enrollment period to purchase health insurance coverage for 2014 through the Health Insurance Marketplace runs from October 1, 2013 through March 31, 2014.

Second, you need to have household income between one and four times the federal poverty line. For a family of four for tax year 2014, that means income from $23,550 to $94,200.

Third, you can’t be eligible for other coverage, such as Medicare, Medicaid, or sufficiently generous employer-sponsored coverage.

If a  Marketplace determines that you’re likely to qualify for the tax credit at the time you enroll, you have two choices:  You can choose to have some or all of the estimated credit paid in advance directly to your insurance company to lower what you pay out-of-pocket for your monthly premiums during 2014.  Or, you can wait to get all of the credit when you file your 2014 tax return in 2015.

If you wait to get the credit, it will either increase your refund or lower your balance due.

If you choose to receive the credit in advance, changes in your income or family size will affect the credit that you are eligible to receive.  If the credit on your tax return you file in 2015 does not match the amount you have received in advance, you will have to repay any excess advance payment, or you may get a larger refund if you are entitled to more. It is important to tell your Marketplace about changes in your income or family size as they happen during 2014 because these changes will affect the amount of your credit.

Published: February 25, 2014

Beware of Fake IRS Emails and Phone Calls

Tax scams that use email and phone calls that appear to come from the IRS are common these days. These scams often use the IRS name and logo or fake websites that look real.

Scammers often send an email or call to lure victims to give up their personal and financial information. The crooks then use this information to commit identity theft or steal your money. Some call their victims to demand payment on a pre-paid debit card or by wire transfer. But the IRS will not initiate contact with you to ask for this information by phone or email.

If you get this type of ‘phishing’ email, the IRS offers this advice:

  • Don’t reply to the message.
  • Don’t open any attachments or click on any links. They may have malicious code that will infect your computer.
  • Don’t give out your personal or financial information.
  • Forward the email to phishing@irs.gov. Then delete it.

If you get an unexpected phone call from someone claiming to be from the IRS:

  • Ask for a call back number and an employee badge number.
  • If you think you may owe taxes, call the IRS at 800-829-1040. IRS employees can help you.
  • If you don’t owe taxes or have no reason to think that you do, call the Treasury Inspector General for Tax Administration at 800-366-4484 to report the incident.
  • You should also report it to the Federal Trade Commission by using their “FTC Complaint Assistant” on FTC.gov. Please add "IRS Telephone Scam" to the comments of your complaint.

Be alert to scams that use the IRS as a lure. The IRS will not initiate contact with you through social media or text to ask for your personal or financial information.

Published: February 24, 2014

Don’t Fall for the Dirty Dozen Tax Scams

Every year, people fall prey to tax scams. That’s why the IRS sends a list of its annual “Dirty Dozen”. We want you to be safe and informed – and not become a victim.

Taxpayers who get involved in illegal tax scams can lose their money, or face stiff penalties, interest and even criminal prosecution. Remember, if it sounds too good to be true, it probably is. Be on the lookout for these scams. 

Identity theft. Tax fraud using identity theft tops this year’s Dirty Dozen list. In many cases, an identity thief uses a taxpayer’s identity to illegally file a tax return and claim a refund. For the 2014 filing season, the IRS has expanded efforts to better protect taxpayers and help victims. 

Pervasive telephone scams.  The IRS has seen an increase in local phone scams across the country. Callers pretend to be from the IRS in hopes of stealing money or identities from victims. If you get a call from someone claiming to be from the IRS – and you know you owe taxes or think you might owe taxes, call the IRS at 1-800-829-1040. If you get a call from someone claiming to be from the IRS and know you don’t owe taxes or have no reason to think that you owe taxes, then call and report the incident to the Treasury Inspector General for Tax Administration at 1-800-366-4484.

Phishing.  Phishing scams typically use unsolicited emails or fake websites that appear legitimate. Scammers lure in victims and prompt them to provide their personal and financial information. The fact is that the IRS does not initiate contact with taxpayers by email to request personal or financial information. This includes any type of electronic communication, such as text messages and social media channels.

False promises of “free money” from inflated refunds.  The bottom line is that you are legally responsible for what’s on your tax return, even if someone else prepares it. Scam artists often pose as tax preparers during tax time, luring victims in by promising large tax refunds. Taxpayers who buy into such schemes can end up penalized for filing false claims or receiving fraudulent refunds. Take care when choosing someone to do your taxes.

Return preparer fraud.  About 60 percent of taxpayers will use tax professionals this year to prepare their tax returns. Most return preparers provide honest service to their clients. But some dishonest preparers prey on unsuspecting taxpayers, and the result can be refund fraud or identity theft.  Choose carefully when hiring an individual or a company to do your return. Only use a tax preparer that will sign your return and enter their IRS Preparer Tax Identification Number (PTIN).

Hiding income offshore.  While there are valid reasons for maintaining financial accounts abroad, there are reporting requirements. U.S. taxpayers who maintain such accounts and do not comply with these requirements are breaking the law. They risk large penalties and fines, as well as the possibility of criminal prosecution.      The IRS has collected billions of dollars in back taxes, interest and penalties from people who participated in offshore voluntary disclosure programs since 2009. It is in the best interest of taxpayers to come forward and pay their fair share of taxes.

Impersonation of charitable organizations. Taxpayers need to be sure they donate to recognized charities. Following major disasters, it’s common for scam artists to impersonate charities to get money or personal information from well-intentioned people. They may even directly contact disaster victims and claim to be working with the IRS to help the victims file casualty loss claims and get tax refunds.

False income, expenses or exemptions.  Falsely claiming income you did not earn or expenses you did not pay in order to get larger refundable tax credits is tax fraud. This includes false claims for the Earned Income Tax Credit. These taxpayes often end up repaying the refund, including penalties and interest or faces criminal prosecution.

Frivolous arguments.  Frivolous schemes encourage taxpayers to make unreasonable and outlandish claims to avoid paying the taxes they owe. The IRS has a list of frivolous tax arguments that taxpayers should avoid. While taxpayers have the right to contest their tax liabilities in court, no one has the right to disobey the law or ignore their responsibility to pay taxes.

Falsely claiming zero wages or using false Form 1099.  Filing false information with the IRS is an illegal way to try to lower the amount of taxes owed. Typically, fraudsters use a Form 4852 (Substitute Form W-2) or a “corrected” Form 1099 as a way to improperly reduce taxable income to zero. The fraudster may also submit a false statement denying wages and taxes reported by a payer to the IRS.

Abusive tax structures. These abusive tax schemes often involve sham business entities and dishonest financial arrangements for the purpose of evading taxes. The schemes are usually complex and involve multi-layer transactions to conceal the true nature and ownership of the taxable income and assets. The schemes often use Limited Liability Companies, Limited Liability Partnerships, International Business Companies, foreign financial accounts and offshore credit/debit cards.

Misuse of trusts.  There are reasonable uses of trusts in tax and estate planning. However, questionable transactions also exist. They may promise reduced taxable income, inflated deductions for personal expenses, the reduction or elimination of self-employment taxes and reduced estate or gift transfer taxes.  These trusts rarely deliver promised tax benefits. They primarily avoid taxes and hide assets from creditors, including the IRS.

Tax scams can take many forms beyond the “Dirty Dozen”. The best defense is to remain vigilant. Get more information on tax scams at IRS.gov.

Published: February 21, 2014

Form W-2 Missing? IRS Can Help

If you worked as an employee last year, your employer must give you a Form W-2, Wage and Tax Statement. This form shows the amount of wages you received for the year and the taxes withheld from those wages. It’s important that you use this form to help make sure you file a complete and accurate tax return.

Most employers give Forms W-2 to their workers by Jan. 31. If you haven’t received yours by mid-February, here’s what you should do:

1. Contact your employer.  You should first ask your employer to give you a copy of your W-2. You’ll also need this form from any former employer you worked for during the year. If employers send the form to you, be sure they have your correct address.

2. Contact the IRS.  If you exhaust your options with your employer and you have not received your W-2, call the IRS at 800-829-1040. You’ll need the following when you call:

  • Your name, address, Social Security number and phone number;
  • Your employer’s name, address and phone number;
  • The dates you worked for the employer; and
  • An estimate of the amount of wages you were paid and federal income tax withheld in 2013. If possible, you can use your final pay stub to figure these amounts.

3. File on time.  Your tax return is due by April 15, 2014. If you don’t get your W-2 in time to file, a Substitute for Form W-2, Wage and Tax Statement can be used in its place. Estimate your wages and withheld taxes as accurately as you can. The IRS may delay processing your return while it verifies your information.

Published: February 20, 2014

Important Reminders about Tip Income

If you get tips on the job from customers, here are a few important reminders:

  • Tips are taxable.  You must pay federal income tax on any tips you receive. The value of non-cash tips, such as tickets, passes or other items of value are also subject to income tax.
  • Include all tips on your return.  You must include the total of all tips you received during the year on your income tax return. This includes tips directly from customers, tips added to credit cards and your share of tips received under a tip-splitting agreement with other employees.
  • Report tips to your employer.  If you receive $20 or more in tips in any one month, from any one job, you must report your tips for that month to your employer. The report should only include cash, check, debit and credit card tips you receive. Your employer is required to withhold federal income, Social Security and Medicare taxes on the reported tips. Do not report the value of any noncash tips to your employer. 
  • Keep a daily log of tips.  Use Publication 1244, Employee's Daily Record of Tips and Report to Employer, to record your tips.

Published: February 19, 2014

Four Good Reasons to Direct Deposit Your Refund

Would you choose direct deposit this year if you knew it’s the most popular way to get a federal tax refund? What if you learned it’s safe and easy, and combined with e-file, the fastest way to get a tax refund? The fact is almost 84 million taxpayers chose direct deposit in 2013.

Still not sure it’s for you? Here are four good reasons to choose direct deposit:

1. Convenience.  With direct deposit, your refund goes directly into your bank account. There’s no need to make a trip to the bank to deposit a check.

2. Security.  Since your refund goes directly into your account, there’s no risk of your refund check being stolen or lost in the mail.

3. Ease.  Choosing direct deposit is easy. When you do your taxes, just follow the instructions in the tax software or with your tax forms. Be sure to enter the correct bank account and routing number.

4. Options.  You can split your refund among up to three financial accounts. Checking, savings and certain retirement, health and education accounts may qualify.

You should deposit your refund directly into accounts that are in your own name, your spouse’s name or both. Don’t deposit it in accounts owned by others. Some banks require both spouses’ names on the account to deposit a tax refund from a joint return. Check with your bank for their direct deposit requirements.

Published: February 17, 2014

Filing Season 2014 Begins with More Returns Filed

The IRS today announced that tax filings in 2014 have outpaced filings for the same time last year. As of Feb. 7, the IRS received 27.3 million returns, up 2.5 percent compared to the same time last year. Electronically filed returns account for almost 96 percent of those filed so far this year.

Taxpayers, either through tax preparers or from their home computers, have e-filed more than 26 million returns so far this year, up almost 4 percent compared to the same time last year. As of Feb. 7, taxpayers have filed more than 13 million returns from home computers, an increase of 14.7 percent compared to the same period last year.

Refunds are up for 2014, with almost 19.5 million issued this year, an increase of more than 18 percent compared to the same time last year. The average refund as of Feb. 7 is $3,317, up 4.6 percent compared to the same time last year. (Refund averages generally have higher dollar values early in the filing season than later in the year.)

Most refunds are directly deposited into taxpayer accounts; just over 87 percent of all refunds issued were directly deposited as of Feb. 7. 2014.

Published: February 14, 2014

Choosing the Right Filing Status

Using the correct filing status is very important when you file your tax return. You need to use the right status because it affects how much you pay in taxes. It may even affect whether you must file a tax return.

When choosing a filing status, keep in mind that your marital status on Dec. 31 is your status for the whole year. If more than one filing status applies to you, choose the one that will result in the lowest tax.

Note for same-sex married couples. New rules apply to you if you were legally married in a state or foreign country that recognizes same-sex marriage. You and your spouse generally must use a married filing status on your 2013 federal tax return. This is true even if you and your spouse now live in a state or foreign country that does not recognize same-sex marriage. 

Here is a list of the five filing statuses to help you choose:

1. Single.  This status normally applies if you aren’t married or are divorced or legally separated under state law.

2. Married Filing Jointly.  A married couple can file one tax return together. If your spouse died in 2013, you usually can still file a joint return for that year.

3. Married Filing Separately.  A married couple can choose to file two separate tax returns instead of one joint return. This status may be to your benefit if it results in less tax. You can also use it if you want to be responsible only for your own tax.

4. Head of Household.  This status normally applies if you are not married. You also must have paid more than half the cost of keeping up a home for yourself and a qualifying person. Some people choose this status by mistake. Be sure to check all the rules before you file.

5. Qualifying Widow(er) with Dependent Child.  If your spouse died during 2011 or 2012 and you have a dependent child, this status may apply. Certain other conditions also apply.

Published: February 13, 2014

Quick Tips about Taxable and Nontaxable Income

Are you looking for a hard and fast rule about what income is taxable and what income is not taxable? The fact is that all income is taxable unless the law specifically excludes it.

Taxable income includes money you receive, such as wages and tips. It can also include noncash income from property or services. For example, both parties in a barter exchange must include the fair market value of goods or services received as income on their tax return.

Some types of income are not taxable except under certain conditions, including:

  • Life insurance proceeds paid to you are usually not taxable. But if you redeem a life insurance policy for cash, any amount that is more than the cost of the policy is taxable.
  • Income from a qualified scholarship is normally not taxable. This means that amounts you use for certain costs, such as tuition and required books, are not taxable. However, amounts you use for room and board are taxable.
  • If you got a state or local income tax refund, the amount may be taxable. You should have received a 2013 Form 1099-G from the agency that made the payment to you. If you didn’t get it by mail, the agency may have provided the form electronically. Contact them to find out how to get the form. Report any taxable refund you got even if you did not receive Form 1099-G.

Here are some types of income that are usually not taxable:

  • Gifts and inheritances
  • Child support payments
  • Welfare benefits
  • Damage awards for physical injury or sickness
  • Cash rebates from a dealer or manufacturer for an item you buy
  • Reimbursements for qualified adoption expenses
Published: February 12, 2014

Four Common Myths About Taxes

It's not that surprising that there's a lot of misinformation out there about taxes. The U.S. tax code is over 4 million words long and not one of us has the time to go through it all. Most of us treat the tax code like the monster it is, interfacing with it only from a distance and once a year paying homage to it in the form of a tax return.

Since there's so much to know about taxes and so little willingness to learn about them, people sometimes make assumptions about how the system works that turn out to be false. These bits of false information sometimes take on a life of their own and, unfortunately, become common knowledge. This is problematic because a misunderstanding of how the tax system works can have consequences — most personal financial planning requires a basic, and reality-based, understanding of how taxes work. Otherwise, you could find yourself owing a lot more money than you expected — or, at least, worrying about irrelevant details when you should be relaxing.

For Americans already spending nearly 24 hours each year filing taxes, there's no need to add another minute. Here are a couple of common myths and misunderstandings about taxes, and what's really going on:

1. You can audit-proof your return

The Treasury Inspector General for Tax Administration, America's tax czar, estimates that taxpayers will owe $345 billion more than what they claim they owe on their income tax returns for 2013. Unfortunately for the Internal Revenue Service, they won't be able to reclaim all of that money. All told, only about 1% of all tax returns filed are audited.

Unfortunately for tax filers, there's no way to ensure that you won't fall into that 1%. The IRS can, and does, audit people from every income bracket, including those who report no income. In fact, tax professionals are obligated to prepare returns as if they were going to be audited by the IRS, and they are not permitted to make decisions regarding a filing position based on the likelihood that it will be examined. What this means is that tax professionals are bound by sacred oath to not game the audit lottery. They are (technically) not allowed to advise you on the likelihood that your return will be audited based on how you choose to file.

It stands to reason that if the more glaring errors there are with your return, the more likely you are to be audited (or, as the IRS puts it, be subject to "examination.") However, even if you file a perfect return, there is a chance that you'll be selected for additional screening. The good news is that most Americans have a very low likelihood of being selected — less than 1% if you earn anywhere between $1 and $200,000 per year. If you earn more than that, the odds of getting a call from the IRS increase.

2. An audit means scary men in dark glasses at your door

Just mentioning the word "audit" is enough to give some people a headache. Even those who haven't had to endure one flinch when they hear the word, many of them imagining a litany of phone calls from stern government workers and men in dark glasses rifling through their receipts.

But, believe it or not, the IRS would like to go about its business as unobtrusively as possible. Of the approximately 1.48 million individual income tax returns examined (audited) in fiscal 2012, only 24% were examined in the "field," as the IRS puts it. The rest were conducted through correspondence.

"Enforcement of the tax laws is an integral component of the IRS's mission," wrote the IRS in its 2012 data book. "Field examinations are generally performed in person by revenue agents, tax compliance officers, tax examiners, and revenue officer examiners. However, some field examinations may ultimately be conducted through correspondence in order to better serve the taxpayer."

Something that is worth noting is that when businesses are audited, they are way more likely to get a visit from a man in dark glasses than not. Of the 32,701 corporation income tax returns examined in fiscal 2012 (1.6% of total corporation tax returns filed), an incredible 97% were examined in the field. Another fun, but perhaps self-explanatory, fact: 100% of estate tax returns that are audited are audited in the field.

3. Once you retire, you're tax-free

There are a lot of benefits to retirement, but leaving the workforce and entering your golden years doesn't necessarily free you from all the bonds of labor. Odds are (unless you buried your life savings in the backyard) you will still have income in retirement, and if the government is good at anything, it's collecting taxes on income.

The good (bad?) news is that you may fall into a lower tax bracket in retirement, particularly given the sore state of retirement savings in the United States right now (estimates vary, but Americans are running an estimated retirement savings deficit of approximately $6.6 trillion.) This, though, depends on two things: one, how much of your pre-retirement annual income you expect to live on in retirement — and two, your ability to actually save enough money to make that goal a reality. Many experts suggest that you'll want at least 70% of your pre-retirement income in retirement to live comfortably.

You can reduce your tax liability in retirement by establishing a Roth IRA instead of a traditional IRA, and paying your taxes upfront rather than when you withdraw. Whatever you do, keep in mind that if you take the miserly route and withdraw as little money as possible from your retirement accounts, you may be subject to required minimum distributions laws come the age of 70.5. You can face tax penalties up to 50% of the amount you withdraw if you fail to take the minimum amount required from your retirement account each year.

4. Corporations write the majority of Uncle Sam's paycheck

Whether or not individual politicians are bought and paid for by the private sector is a fair question to ask, but Uncle Sam still works for the American people. At least, individual income taxes account for the vast majority of total government receipts.

This fiscal year to date, the government has collected (or withheld) $324.9 billion from the individual income tax and just $79.7 billion from corporation income taxes. As a share of the $694.6 billion receipts collected by the government this fiscal year to date (the government's fiscal year begins in October), personal income taxes account for 46.7%, while corporation income taxes account for 11.5%.

For the full year, the Treasury Department estimates that it will collect $1.4 trillion in individual income taxes and $333.4 billion in corporation income taxes. If the estimate is accurate, individual income taxes will account for about 46.7% of total receipts, while corporation income taxes will account for about 11%.

At its peak, in the 1940s and early 1950s when the government imposed war-time taxes on corporate profits, corporation income taxes accounted for about 23% of total government revenue. Corporation income taxes have fallen dramatically over the past 40 years or so from an all time high of 52.9%, even though the Tax Reform Act of 1986 was designed to increase the share of government receipts collected from corporations and decrease the share collected from individuals.

By Dan Ritter for USA Today

Published: February 10, 2014

The Earned Income Tax Credit Gives Workers a Boost

For nearly 40 years, the Earned Income Tax Credit has been helping low- to moderate-income workers by giving them a boost to their income. Four out of five eligible workers claim EITC, but the IRS wants every eligible worker to claim and get this credit.  

Here are some things the IRS wants you to know about this important credit: 

Review your eligibility. If you worked and earned under $51,567, you may be eligible for EITC. If your financial or family situation has changed, you should review the EITC eligibility rules. You might qualify for EITC this year even if you didn’t in the past. Workers who qualify for EITC must file a federal income tax return and specifically claim the credit to get it, even if they do not have a requirement to file a return.

Know the rules. Before claiming EITC, you need to understand the rules to be sure you qualify. It’s important to get it and get it right.

There are several factors to consider: 

  • Your filing status can’t be Married Filing Separately.
  • You must have a valid Social Security number for yourself, your spouse if married, and any qualifying child listed on your tax return.
  • You must have earned income. Earned income includes earnings such as wages, self-employment and farm income.
  • You may be married or single, with or without children to qualify. If you don’t have children, you must also meet age, residency and dependency rules.
  • If you are a member of the U.S. Armed Forces serving in a combat zone, special rules apply.

Lower your tax or get a refund. The EITC reduces your federal tax and could result in a refund. If you qualify, the credit could be worth up to $6,044. The average credit was $2,355 last year. 

Published: February 4, 2014

Should You Take The New 2013 Simplified Home Office Deduction?

The Internal Revenue Service is touting the new “no-doc” $1,500 home office deduction that’s available for the first time this tax filing season, but don’t fall for it without doing your homework. “Remember, the IRS doesn’t necessarily do anything good for taxpayers unless it also benefits them,” says Cynthia Jeanguenat, an enrolled agent in Virginia Beach, Va. She didn’t alert her clients to the simplified deduction ahead of tax filing season “lest they stop keeping track of their expenses as we train them to do,” she says. “Is it easier? Sure. Is the deduction better? Not that I’ve found,” she adds.

Basically, the simplified method is an alternative to calculating and substantiating your actual expenses. It’s like using the standard mileage rate for deducting business auto expenses instead of the more cumbersome actual expenses (maintenance, gas, insurance). It may not be the best deduction but if you don’t keep records, it’s all you can claim.

To snag the home office deduction using the simplified method, all you have to do is multiply the square footage of your home office space (that’s space used exclusively and regularly for your home-based business) by $5, and that’s what’s deductible. The biggest catch: there’s a $1,500 maximum limit to the deduction you can claim this way.

By contrast, under the actual expenses method, you add up your rent or mortgage interest, renters’ or homeowners’ insurance, real estate taxes and utilities, and multiply that times the percentage of your house allocable to your home office. You can also deduct an allocable portion of general house repairs (say a new hot water heater) but that’s trickier. With either method, you can only reduce your business income to zero; you can’t take a loss.

Note: if you use the simplified method with the $1,500 cap, you separately get to deduct your mortgage interest and real estate taxes on Schedule A–assuming you itemize. Also with the home office deduction, you can switch from using one method one year to the other method another year.

The bigger your home office, the more likely the actual expense method will yield a bigger tax break. For example, Jeanguenat has three clients, a hair stylist, a contractor and a Shaklee rep who all have large areas of their homes devoted towards their home businesses and have been taking deductions for well over the $1,500 max under the simplified method. The hairstylist who converted her garage to a salon took a home office deduction of $4,881 last year.

By contrast, for a consultant client who claims just 5% of his total house square footage as home office space, his actual expenses for his home office come in close to the $1,500 max. But even if it’s over just a bit, why not claim it? “Clients are paying us to make sure they’re paying the lowest amount of taxes required,” Jeanguenat says. Most people who are in business are so used to having to keep receipts and all this information anyway, and with the ability to track expenses online it’s less burdensome than in the past. (Jeanguenat’s one-room home office came in at $1,701 last year so she expects to take the actual expense method again this year.)

Might you use the simplified method even if it results in a lower deduction? “If someone said, ‘I don’t have time to get my expenses together,’ at least now we have an alternative,” she says.

Who else might go for the simplified method? Folks with tiny home offices. Richard Rhodes, an enrolled agent who works out of a 127-square-foot office converted from a spare bedroom in his Hinckley, Ohio home made the calculations for himself and said he’ll be using the new simplified method. “I’m more than doubling what I would have gotten,” he says. He figures he’ll get a $635 ($5 x 127) deduction versus $302.

“You have to figure it out both ways and choose the one that save the taxpayer the most money on their taxes,” he says. So much for simplification.

By Ashlea Ebeling for Forbes

Published: February 3, 2014

IRS Officially Kicks Off Tax Season, Now Accepting Returns

Tax season, that time of year that spurs Americans to gnash their teeth and root out reams of old documents, officially kicked off Friday.

The Internal Revenue Service started accepting and processing paper and online returns, as well as preparing refunds. Individuals have until April 15 to file their tax returns.The tax agency is actually getting a late start this year after the government shutdown delayed the opening of tax season by 10 days to Jan. 31.

More than 148 million individual tax returns will be filed this year, the IRS estimated. About three out of four filers will get refunds, with the average refund last year clocking in at $2,755.

The IRS is encouraging people to file electronically instead of mailing in paper forms. More than four our of five returns are now filed electronically, and those who are due refunds that file electronically and choose direct deposit will get their refunds more quickly, the agency said.

Published: January 31, 2014

Yacht Owners Seek to Salvage Tax Deduction for Second Homes

Kent Webb plans to write off part of the interest he pays to finance what he considers his second home, a luxury fishing boat named the Moonlighter.

Calling such tax breaks loopholes for the wealthy, congressional Democrats have other ideas.

They want to eliminate the 73-year-old North Carolina physician’s deduction as part of proposed tax-code revisions this year, potentially the biggest revamp since 1986 and one in which lawmakers have pledged to scrutinize every tax break.

The second-home mortgage deduction, which also benefits owners of cabins and recreational vehicles, is the boating industry’s biggest tax break and applies to vessels ranging from tiny sailboats to multimillion-dollar yachts.

Besides having at least a temporary toilet and camp stove, the only other Internal Revenue Service qualifying requirement is that taxpayers spend at least 14 nights a year in their second home if they also sometimes rent it out to others.

“It has been a significant factor in my decision-making,” said Webb, whose 60-foot (18.3-meter) yacht was listed for $2.6 million when it was for sale in 2013. “It is so unfair to target people who want to use their boat as a second home.”

Boat manufacturers are gearing up to protect the break, leveraging campaign contributions and drafting form letters for boaters to send to lawmakers. The industry has more than $35 billion in annual U.S. sales of products and services, according to the Chicago-based National Marine Manufacturers Association.

Elimination Advocates
The Ending Subsidies for Yachts Act, barring the deduction for new mortgages on boats, is pushed by two Democrats in the Republican-led House, Representatives Mike Quigley of Illinois and Tim Walz of Minnesota. They highlight estimates from the bipartisan Joint Committee on Taxation that suggest savings of more than $150 million over 10 years, a number that would grow as the deduction is phased out.

The interest deduction for second homes, with an estimated cost of $8 billion a year, is part of the broader mortgage interest deduction, the future of which is up for debate. The break for boats is a tiny proportion of the second-home total.

Taxpayers can deduct interest on up to $1.1 million in mortgages on two homes: a “main home” where they live most of the time and a second home. The IRS doesn’t require them to say how much interest is for the first or second home, and the agency doesn’t have data on the cost of the boating break.

Not Sympathetic
“I’m not sympathetic for a second-home deduction used largely as leisure,” Quigley said. “If we need revenue and we need to make cuts, I have a hard time putting second homes as a priority.”

Quigley said it “verges on the absurd” that boats have to be “subsidized” at the expense of other things such as food stamps and funding for more police and the military. He’d also like to see the deduction eliminated for RVs, although that isn’t written into his legislation.

Representative Candice Miller, a Michigan Republican with longstanding ties to the boating industry and co-chairman of the 114-member Congressional Boating Caucus, declined an interview request about the merits of the tax break.

“It’s been spun as a deduction that’s taken by wealthy people,” said Nicole Vasilaros, director of regulatory and legal affairs for the National Marine Manufacturers Association. “That’s a political tactic.”

Industry Letter
An industry letter drafted for boat owners to send to lawmakers says the proposal is “wrong-headed and would accomplish nothing except putting American boat builders out of work at a time when the industry is still on its knees and not recovered from the worst downturn since the Great Depression.”

After bottoming out in 2010, the boating industry is recovering. Purchases of powerboats— which include yachts, pontoons and fishing vessels—rose 13.8 percent during the third quarter of 2013 compared with the same period a year earlier, according to figures from Statistical Surveys Inc., a research company based in Grand Rapids, Michigan.

Lake Forest, Illinois-based Brunswick Corp., the leading U.S. boat manufacturer, saw its share price increase 58.3 percent in 2013, compared with a gain of 29.6 percent for the Standard & Poor’s 500 Index.

Boating industry advocates say an elimination of the deduction would hurt sales. They point to the industry’s downturn that followed a 10 percent excise tax on boats priced above $100,000 that was started in 1991 and repealed in 1993.

‘Extremely Damaging’
“It could be extremely damaging,” said Chris Berkeley, a loan officer with Intercoastal Financial Group in Fort Pierce, Florida.

The deduction is mostly used by “middle-class” boaters because the wealthy already tend to have multiple homes on land, Vasilaros said. The average boat loan is for $49,000 and more than three-quarters of owners have annual household incomes of less than $100,000, she said, adding that the industry estimates about 5 percent of the 12 million boats registered in the U.S. qualify for the deduction.

The boat manufacturers don’t have data on how many boat owners use the deduction, or their income level, Vasilaros said.

In Webb’s case, the physician said that although he’s used the deduction on previous vessels, he doesn’t on his current one because his primary home mortgage already exceeds the $1.1 million limit. He plans to get a smaller home, then use the tax break for his boat.

Senator Chafee
An effort to do away with the boat provision in 1987 was pushed back in part by then-U.S. Senator John Chafee of Rhode Island, a top shipmaking state.

“If this whole deduction is going to be eliminated for all players, we would not be happy about it,” Vasilaros said. “But it would at least be fair.”

Since 2001, the boat manufacturers association has contributed roughly $850,000 to federal candidates, according to the Center for Responsive Politics in Washington. Brunswick’s political action committee gave about $330,000 to federal candidates during that period.

Last week, at an annual five-day boat show in Chicago, dozens of vessels filled the sprawling McCormick Place convention center. David and Tracy Lindke of Holland, Michigan, were among the shoppers.

The couple already has a 40-foot (12.2 meter) boat named “Stella.” They don’t currently take the deduction, although they said they will if they purchase a bigger boat.

Standing next to a $1.2 million vessel on display at the show, David Lindke predicted the proposal would hurt boat sales and ultimately the government. “You will lose more tax revenue than you would gain,” he said.

Originally published by Accounting Today

Published: January 30, 2014

6 Tips on Filing Taxes for the First Time

Filing a tax return can be daunting for even the most experienced taxpayer. So how is a new taxpayer expected to cope?

First, don't panic. While taxes can be overwhelming, there are some steps a novice taxpayer can take to successfully make it through the first filing season. Here are six tax-filing tips to get you going.

1. Get organized

The Internal Revenue Service is all about documentation. By late January or early February, you should receive a W-2 from each workplace where you received a salary. This form details how much you made, along with how much federal and state income tax and Social Security and Medicare payroll taxes were withheld.
If you worked as an independent contractor, you'll get a 1099-MISC from each job. This statement lists only your earnings. No taxes were withheld, meaning you'll need to figure your income taxes that are due, as well as any possible self-employment tax.
Jillian Johnson, a tax preparer with Jackson Hewitt Tax Service in Orlando, Fla., says it's not uncommon for new taxpayers to show up at her office unsure about what to do with their W-2s or 1099s. Others arrive wanting to file without the proper documents. "Many are kids, working their first jobs," says Johnson.
Melinda Kibler, a Certified Financial Planner with Palisades Hudson Financial Group in Fort Lauderdale, Fla., recommends that taxpayers, new and veteran, create a folder where tax documents can be safely kept for filing.
In addition to the earnings statements, your tax folder should be home to other types of tax forms you receive. These include statements of additional income, such as interest or other investment earnings, as well as documents useful in claiming tax breaks, such as deductible student loan interest listed on Form 1098-E or records of contributions to an IRA.
"In case it would be more beneficial for you to itemize instead of claiming the standard deduction, you should also save records of deductible expenses," says Kibler.
And don't even think about ignoring the tax statements. In most instances, the IRS also gets copies of these tax-related earnings and payments. These amounts are the first things the IRS checks when it begins processing your return.

2. Talk with your parents

If you are a student looking to file your first tax return, stop. Talk with your parents first.
Mom and Dad may be planning to list you as a dependent or claim some of your college costs on their return. Such claim conflicts are common in families where college kids work enough to be required to file a Form 1040.
Tax rules say, however, that when a taxpayer is a dependent of another filer or simply could be claimed as a dependent, that taxpayer isn't allowed to claim a personal exemption on his or her own return. A personal exemption is a dollar amount that every taxpayer can deduct from his or her income, plus any dependents. The bottom line is that an exemption can show up on only one tax return.
There also are issues regarding whether it would be better for parents or the student to claim some education tax breaks.
To avoid creating filing problems for your folks or yourself, look at each of your tax situations and determine the tax-smart way for each of you to file. Chances are your parents could benefit most for these education tax breaks, and if they're helping you pay for college, it would be nice if you let them get first dibs.

3. Decide how to file

You're ready to file. Now you must decide how. More taxpayers each year turn to tax software to complete and file their returns. Inexperienced filers, however, might be more comfortable getting personal help, either from an accountant or a franchise tax operation.
But just because your tax return might be relatively uncomplicated, that doesn't absolve you of due diligence in finding a preparer. Take the time to check out potential tax preparers thoroughly.
Inexperienced filers often are easy targets for tax con artists. To protect yourself from such scams, avoid tax preparers who base their fees on how large of a refund they can get for you.
If cost is a concern, you might be able to file for free through the Free File program. This partnership between the IRS and around 20 tax software companies is open to taxpayers who make less than a certain amount. The earnings limit for the 2014 filing season that begins on Jan. 31 has been bumped up a bit for inflation to $58,000.

4. Don't leave money on the table

New taxpayers should make sure they do not leave money on the table, says Art Agulnek, a senior lecturer who teaches taxation courses in the Naveen Jindal School of Management at the University of Texas at Dallas.
Deductions that are often overlooked, says Agulnek, include:

  • State and local sales taxes. The IRS allows you to deduct these by using figures based on your income and geographic location, or you can use your own receipts if you have the records.
  • Charitable contributions paid through payroll deductions. Employees may retain pay stubs as proof.
  • Child and dependent care credit. You may be able to claim this credit if you paid a provider to care for a dependent while you worked or hunted for a job.
  • Job search expenses. The IRS allows deductions for costs such as travel and resume printing.
  • Earned income tax credit. Families with lower incomes that qualify can claim this credit.
  • Workplace benefits also can help save on taxes, says Wendy Weaver, a Certified Financial Planner at FBB Capital Partners in Bethesda, Md. She recommends workers contribute to their company 401(k) or other retirement plan where employee contributions are made on a pre-tax basis and the money grows tax-deferred. Similar tax-saving employer-provided benefits include Health Savings Accounts or flexible spending accounts.

5. Don't procrastinate

New taxpayers are sometimes intimidated by the process. But don't let that slow your filing process, says Kibler. "You want to leave ample time before the April 15 deadline in case you run into issues, have questions or have trouble getting an appointment with a tax preparer," she says.

6. Don't be in such a hurry

There is, however, a tax timing flip side. Don't be in such a hurry to file, especially if you're getting a refund, that you make a costly mistake. Make sure you have all the information and supporting documentation to complete your tax return correctly. If you're still awaiting data as the filing deadline nears, ask the IRS for more time.
All you have to do is complete Form 4868. The IRS will give you six more months, until Oct. 15, to finish your filing paperwork.
You must, however, pay any tax amount that you think you will owe when you submit Form 4868 by April 15. But at least you'll avoid additional penalties and have ample time to finish up your first IRS tax return properly.

By Kay Bell for BankRate.com

Published: January 23, 2014

10 New Tax Traps to Watch Out for in 2014

Taxpayers in 2014 don't have to worry about a lot of tax surprises. The American Taxpayer Relief Act of 2012 enacted on Jan. 2, 2013, made many existing tax laws permanent and extended other provisions through 2013. But even in the most stable tax and political environments, there's always something to worry about when it comes to taxes. Here are 10 tax traps you need to watch out for in 2014.

1. Get ready to wait early in the year.
The federal government shut down for 16 days last October, but taxpayers are still paying for it. The IRS says Jan. 31, 2014, is the earliest it will be ready to process individual tax returns. You can go ahead and submit your return electronically as soon as you're ready; your e-filer will hold it until the IRS is ready to accept returns. If you're eligible for Free File, that IRS-software manufacturer partnership opens for filers on Jan. 17. If, however, you file a paper return, the IRS encourages you to wait until Jan. 31 to mail it.

2. Get ready to wait later in the year.
Every year or so, some temporary tax provisions are renewed by Congress. In recent years, however, lawmakers have let the laws expire and then renewed them retroactively, most recently in the American Taxpayer Relief Act of 2012, also known as the "fiscal cliff" tax bill. Expect a replay in 2014. Fifty-five tax provisions expired on Dec. 31, 2013. This doesn't affect your 2013 tax return, but tax planning for 2014 will be a different story.

Consideration of these so-called extenders has been complicated by possible overall tax reform and budget considerations, as well as the political intentions of key Capitol Hill players. Leaders of both parties on the House Ways and Means and Senate Finance tax-writing committees want to, among other approaches, extend the expired tax laws as a package ASAP, look at each now-dead tax provision separately, focus on tax reform first or roll the extenders into a larger tax overhaul bill.

Uncle Sam could bring in billions by letting some or all of the extenders fade away. That would mean, however, that individual taxpayers would lose such popular tax breaks as the itemized deduction for state and local sales taxes, the above-the-line deductions for tuition and fees and educators' out-of-pocket classroom expenses. The longer lawmakers wait to make any decision on extenders, the harder it will be to plan and implement your 2014 tax strategy.

3. Watch for added taxes if you're wealthy.
The American Taxpayer Relief Act of 2012 was not kind to wealthier taxpayers, and they will find out the extent of the damage when they file their 2013 returns.

In addition to paying a top ordinary tax rate of 39.6 percent if, as a single filer, your taxable income is more than $400,000 ($450,000 for married couples filing jointly), you could face added taxes. The most dreaded is the new net investment income tax of 3.8 percent, also known as the Medicare surtax because the money goes toward that health coverage program for older Americans. The tax applies to either your modified adjusted gross income or net investment income, whichever is lower, if you earn more than $200,000 as a single taxpayer or $250,000 as a married joint return filer. The net investment income tax will not only take a bite out of taxpayers' bank accounts, but also cause headaches for high-income earners and their tax professionals working through the tax regulations. Topping it off, single taxpayers who make more than $250,000 and jointly filing couples making more than $300,000 will see their personal exemptions and itemized deduction total reduced.

4. Sign up for medical insurance.
The Affordable Care Act will continue to roll out in 2014, meaning that uninsured individuals have some choices to make that could have tax implications. Enrollment for health insurance under Obamacare, as the health reform act is popularly known, goes through March 31, 2014. If you don't buy an insurance plan, you could face a penalty.

The charge for 2014 is either 1 percent of your yearly household income or $95 per uninsured adult and $47.50 per child, up to $285 for a family. You pay whichever amount is higher. If you get insurance for part of the year, your penalty will be prorated. You'll pay the penalty when you file your 2014 tax return in 2015. If you're getting a refund, the IRS will subtract your ACA penalty from the amount you were to get back. If your refund isn't large enough to cover the penalty, the IRS will send you a bill. Ignore that and the tax agency will take the amount out of future tax refunds.

5. File jointly if you're a same-sex married couple.
Married same-sex couples now have the same federal tax filing responsibilities as heterosexual couples. Following the Supreme Court invalidation of the Defense of Marriage Act, the IRS instructed same-sex married couples to file jointly or as a married couple filing separately even if the state where they live does not recognize their marriage. This will simplify same-sex couples' federal filings, but if they must pay state income taxes, depending on their state's law, they could still face filing two state returns as single taxpayers.

6. Claim the simplified home office deduction.
The recession has prompted many workers to start their own businesses, many of which are run from their homes. There's good filing news for these entrepreneurs. For 2013 returns filed in 2014, the IRS is now offering a simplified home office deduction. The new optional deduction is $5 for each square foot of home office space, up to a maximum of 300 square feet. That comes to a maximum $1,500 annual home office deduction. The IRS estimates that this option will save home-office filers who claim it's an estimated 1.6 million hours of paperwork and record keepings collectively. Instead of filling out Form 8829, you'll use a worksheet in the Schedule C instruction book and enter your simplified home-office deduction amount on Schedule C. While the new deduction option will be welcomed by many, note that the requirements to qualify as a home office still apply. For instance, the office space must be used regularly and exclusively for business.

7. Keep an eye on IRS troubles.
The IRS is proposing new regulations for groups seeking 501(c)(4) nonprofit status. This designation was the focus of a Treasury Inspector General for Tax Administration investigation of IRS handling of Tea Party-affiliated organizations seeking the preferable tax status. During subsequent congressional hearings, it was learned that more liberal, progressive groups also were targeted by IRS reviewers. The IRS is proposing limits on these so-called social welfare groups' spending on political campaign-related activities. Expect continued debate on the groups' activities and IRS oversight before any final regulations are issued. Also look for Congress to restart hearings into IRS activity in the tax-exempt organization area as the 2014 election campaigns heat up. And stay tuned for any changes John Koskinen, a retired corporate restructuring expert who was confirmed Dec. 20, by the Senate as IRS commissioner, might make in his new job.

8. Pay attention to tax preparer regulation.
The IRS effort to regulate professional tax preparers will continue in 2014, both in the court system and on Capitol Hill. The agency wants to register all tax preparers who aren't already subject to certain standards (that is, attorneys, Enrolled Agents or CPAs) and require they pass competency exams and take continuing education classes. The IRS believes this will help reduce incorrectly and fraudulently filed returns. Three tax pros filed a federal lawsuit against the IRS, winning the first court round. An appellate court decision is pending. Meanwhile, legislation has been filed in the House to give the IRS statutory authority to regulate tax preparers. Senate Finance Committee Chairman Max Baucus also has suggested such preparer oversight in his tax reform working drafts. A final decision on tax preparer standards could come in 2014, affecting taxpayers who seek professional help in fulfilling their tax responsibilities.

9. Watch out for tax reform.
The last overhaul of the federal tax code was in 1986. Will we finally see major changes in the Internal Revenue Code in 2014? Probably not. Will we hear a lot of talk about tax reform? Yes. It is an election year and talk of taxes makes for good campaign ads. Rep. Dave Camp, R-Mich., and Sen. Max Baucus, D-Mont., are insistent that there will be some tax reform before they leave the chairmanships of, respectively, the House Ways and Means and Senate Finance committees. Both have led a cross-country tour to solicit public input on tax reform, as well as set up a website on the topic. Camp has focused on 11 specific tax reform working groups. Baucus also has coordinated tax reform option papers and recently released some of his ideas in discussion drafts.

10. Take advantage of inflation tax adjustments.
One thing we do know for sure for 2014, inflation had a nominal effect on around 40 tax provisions. Most notable is that income brackets were widened a tad, meaning you can earn a bit more next year without being bumped into a higher tax bracket. Most people claim the standard deduction, and those amounts for each filing status in 2014 were increased slightly, as was the personal exemption amount, going from $3,900 to $3,950. However, the amounts you can contribute to your workplace pension plan and individual retirement account in 2014 have stayed the same as in 2013.

By Kay Bell for BankRate.com

Published: January 22, 2014

Do You Need To File A Tax Return In 2014?

The Internal Revenue Service will process somewhere around 140 million individual tax returns by the time tax season wraps up. Will you be filing one of those returns? And more important, do you need to?

Not every person who received income in 2013 has to file a federal income tax return. There are a number of factors that affect whether you have to file including how much you earned – and the source of that income – as well as your filing status and your age. For most folks, this is pretty straightforward.

If you can be claimed as a dependent on someone else’s return, the rules are a little bit different. Here are some basic guidelines:

  • For single dependents who are under the age of 65 and not blind, you generally must file a federal income tax return if your unearned income (such as from dividends or interest) was more than $1,000; if your earned income (such as from wages or salary) was more than $6,100.
  • For single dependents who are over 65 or blind, you generally must file a federal income tax return if your unearned income was more than $2,500 or if your earned income was over $7,600.
  • For single dependents who are over 65 and blind, you generally must file a federal income tax return if your unearned income was more than $4,000 or if your earned income was over $9,100.
  • For married dependents when either of you are under the age of 65 and not blind, you generally must file a federal income tax return if your unearned income was more than $1,000; if your earned income was over $6,100; or if your gross income was at least $5 and your spouse files a separate return and itemizes deductions.
  • For married dependents when either of you are over 65 or blind, you generally must file a federal income tax return if your unearned income was more than $2,200; your earned income was over $7,300; and your gross income was at least $5 and your spouse files a separate return and itemizes deductions.
  • For married dependents when either of you are over 65 and blind, you generally must file a federal income tax return if your unearned income was more than $3,400; your earned income was over $8,500; and your gross income was at least $5 and your spouse files a separate return and itemizes deductions.

Keep in mind that these rules apply to dependents who are also married, not just simply married taxpayers. For tax purposes, your spouse is never considered your dependent.

You may also have to file for other reasons. The most frequent reason for filing a federal income tax return even when you don’t meet the basic income criteria is for self-employed persons: those who are self-employed must file a federal income tax return if net earnings are at least $400. Other reasons to file include owing special taxes like a recapture tax (such as the homebuyer’s credit), alternative minimum tax (AMT), household employment taxes, taxes on tips you did not report to your employer or on wages from an employer who did not withhold those taxes. You also need to file if you had wages of $108.28 or more from a church or qualified church-controlled organization exempt from payroll taxes.

Don’t forget tax-favored accounts. You need to file if you received HSA, Archer MSA, or Medicare Advantage MSA distributions during 2013. If you took an early distribution from a qualified plan or one in excess of $160,000 from a qualified retirement plan, or if you made excess contributions to your IRA or MSA, you’ll need to file. If you didn’t take your minimum required distribution – and you were supposed to – you’ll also need to file.

Even if you don’t need to file a federal income tax return this year, you may still want to take advantage of tax breaks and credits which might be available: popular credits include the additional child credit and the American Opportunity credit. You might also be entitled to a refund for excess withholdings or a refundable credit such as the earned income tax credit (EITC). And don’t forget the newest credit: the health coverage tax credit (HCTC) – it’s also refundable.

It’s also important to consider that these are the federal rules. The rules for your state might be very different. In my own state of Pennsylvania, for example, we have no personal exemption and thus, taxpayers are subject to tax at the first dollar. It is possible that you might have to file a state (or local) income tax return even if you are exempt from federal income tax so don’t assume otherwise.

If, after all of this, you’re still confused, ask your tax professional at Hershkowitz & Kunitzer, P.A. We're happy to help! 

Originally appeared on Forbes.com

Published: January 21, 2014

Top 5 Tax Mistakes

The time is fast approaching for all of us to check in with Uncle Sam. You know the saying, "Nothing is certain but death and taxes," and the time of certainty is here for taxes. I have compiled a list of the top five ways to make your tax season bleak. Do these things and you are certain to wish you had not.

Don't file a tax return because you don't have the money to pay your taxes.

Always file, even if you do not have the money to pay the taxes you owe. The IRS considers not paying on time and not filing as two separate issues, and a penalty is involved for each. When you file your tax return, you have several options. You can apply for an "offer in compromise," make monthly payments through an IRS installment agreement, or temporarily delay paying. Whichever is best for you, contact the IRS right away to let them know you cannot pay. You should pay as much as you can when you file because the IRS assesses penalties and interest on the amount not paid.

Ignore those letters from the IRS.

Do not ignore mail from the IRS. If you owe taxes, the IRS will collect. Persons who do not communicate with the IRS about inability to pay can expect a "Notice of Federal Tax Lien" to be filed against their property. In lien terms, this is a lien about the size of Alaska. Few carry more weight. The lien attaches all your property, including your house, car and any future property you might obtain. A levy, which is a legal seizure of property to satisfy a tax debt, is another legal means the IRS can use to collect taxes. This means the IRS can seize your car, boat or home and sell it to satisfy your tax debt or it can place a levy on your wages. More good news is that these liens often stay on your records long after the issue has been resolved or until the IRS gets around to removing it. So it's also the gift that keeps on giving!

Pay your tax bill with a high interest credit card.

Although this is a better approach than not paying your taxes at all, you should investigate the best way to borrow the money. Compare the interest rate of your credit card with that of a personal loan from your bank or credit union. The idea is to incur the least amount of money in interest. Try to pay off the loan as soon as possible and do what you can to avoid the same situation next year. To pay your taxes on time, you may need to adjust your withholding on your W-4 with your employer or put aside money each pay period in a savings account.

Get a refund-related loan.

Your impatience could cost you more than you realize. Tax refund products are advertised heavily at this time of year. What the advertising does not tell you about are the fees and steep interest rate associated with that short-term loan. Depending on fees and the amount of the refund, a finance charge can be the equivalent of a 100 percent annual percentage rate. Also, don't forget this is a loan; if the IRS turns down any deductions or credits on your return, you will still be responsible for the full amount of the loan. You do have other options, such as filing electronically if you have a checking account. You can expect your tax refund to be deposited in your account in 10 to 14 days. Another option is to wait approximately four to six weeks to have your refund check mailed.

When you get your refund, spend it as fast as possible.

Spending your refund may not be such a good idea, no matter how tempting. If you have large credit card debt, inadequate savings or limited retirement fund, a better use of your refund may be to pay down debt, open a savings account or establish an IRA. Obviously, I hope that you do not do the above bad practices. However, if you have already misstepped, make sure you know your rights as a taxpayer.

From ABC News

Published: January 16, 2014

Time To Gather All-Important Tax Documents

Now that the holidays are over, it’s time to prepare for the first major financial event of the new year: filing your income taxes.

Tax-filing season begins Jan. 31, a bit later this year than usual. The Internal Revenue Service typically starts accepting returns in mid-January, but last year’s 16-day government shutdown gummed up the preparations and delayed the date on which taxpayers can first file returns and claim tax refunds.

But despite the shutdown, the April 15 deadline is not affected, so now’s the time to start gathering those all-important documents.

“In most cases, the IRS doesn’t require you to keep records in any special manner, but you should keep any and all documents that may have an impact on your federal tax return,” said Clay Sanford, IRS spokesman in Dallas. “It’s important to get into this routine, because you may forget expenses that qualify as deductions unless you record them when they occur.”

Sanford recommends you “retain a record for every line item on a tax return. For businesses, records for purchases, payroll, sales and other transactions come into play, but even if you just file an individual return as basic as a 1040EZ, keep the forms that you used to fill it out.”

Here are the documents you need to prepare for the filing season:

W-2 Wage and Tax statement — This shows how much you earned in 2013, how much of your income was taxable and how much tax was withheld.

You should get your W-2 from your employer by the end of January.

If you’re an independent contractor, you will get a Form 1099-MISC showing your earnings from the company you worked for.

Documents that show other income — These include Form 1099-INT for interest income, Form 1099- DIV for dividends you received. If you used a stockbroker for transactions, you will receive Form 1099-B.

Records for charitable contributions — To ensure the deductibility of your contribution, you must have the right documents to back up how much you’ve donated.

For donations of less than $250, you need a canceled check or credit card receipt showing the amount of your contribution, or written communication from the charity showing its name and the amount and date of the contribution or other records containing this information.

For donations of $250 or more, you also must obtain written proof for every separate transaction. The written acknowledgment must include the amount of the contribution or a description of donated property, along with a description and good-faith estimate of the value of any goods or services you received.

Records supporting other itemized deductions — These include invoices, receipts, canceled checks or other proof of payment for property taxes, mortgage interest, mileage traveled for work and medical expenses, among other things.

“One overriding thing is to know that any deduction you take must be supported and all income must be reported,” said Ken Sibley, certified public accountant at CliftonLarsonAllen in Dallas.

After you’ve gotten all your documents together, don’t delay in filing your return because it can reduce the risk of identity theft, experts said.

“File early,” said Trey Loughran, president of the Personal Solutions unit at credit bureau Equifax. “If you file your tax return first, an identity thief will be denied when trying to use your Social Security number for a fake return.”

The other advantage: The earlier you file, the earlier you’ll receive any refund due you.

According to the IRS, most taxpayers who file electronically and choose direct deposit will get their refund in 21 calendar days or less.

Taxpayers who file a paper return and opt to get their refund as a check will receive theirs in four to six weeks.

But don’t rush to file your return if you don’t have everything together. And before you file, make sure your Social Security number is correct on the documents.

“Even though identity thieves may use a stolen Social Security number to file a forged tax return and attempt to get a fraudulent refund early in the filing season, a taxpayer should file when they have all their necessary documents and are ready to file,” Sanford said.

Originally Published by the Dallas News

Published: January 15, 2014

2013 Tax Changes Affecting Higher-Income Taxpayers

ATRA introduced, or reintroduced, several basic provisions starting in 2013, mostly affecting higher-income taxpayers.

New top ordinary income tax rate. A top rate of 39.6% applies to taxable income over $400,000 for single filers, $425,000 for head-of-household filers, and $450,000 for married taxpayers filing jointly ($225,000 for each married spouse filing separately). The last time the income tax brackets had a 39.6% marginal rate on individuals was in 2000.

Itemized deductions limitation and personal exemptions phaseout. The itemized deductions limitation and personal exemptions phaseout (PEP) have been reinstated. If a taxpayer’s adjusted gross income (AGI) exceeds an applicable amount based on his or her filing status, the taxpayer’s allowed itemized deductions will be limited. The applicable amounts for 2013 are $250,000 for single taxpayers, $275,000 for heads of household, $300,000 for married taxpayers filing jointly, and $150,000 for married taxpayers filing separately. The itemized deductions limitation, also known as the Pease limitation, is a 3%/80% formula, under which itemized deductions are reduced by the lesser of 3% of the excess of AGI over the applicable amount above or 80% of the amount of the itemized deductions otherwise allowable for the tax year. (The limitation had been eliminated for 2010 through 2012.)

Under PEP, a taxpayer’s personal exemptions are reduced by 2% for every $2,500 (or fractional amount) (or $1,250 for married taxpayers filing separately) by which AGI exceeds the applicable amounts above (Sec. 151(d)(3), as amended by ATRA). Like the Pease limitation, the PEP didn’t apply for tax years 2010 through 2012.

Alternative minimum tax. Beginning in 2013, ATRA permanently indexed for inflation the alternative minimum tax (AMT) exemption amount and the thresholds for the 28% AMT rate for individuals and made the AMT offset for nonrefundable credits permanent. The increase for inflation of the AMT exemption amounts for individuals had often been late-enacted relief in years past. For 2013, the exemption amounts are $80,800 for married taxpayers filing jointly, $40,400 for married taxpayers filing separately, and $51,900 for single filers. The inflation-adjusted threshold for the 28% AMT rate is $179,500 for married taxpayers filing jointly and unmarried individuals (other than surviving spouses) and $89,750 for married taxpayers filing separately.

Published: January 14, 2014

What the New Mortgage Rules Mean for You

New mortgage lending rules are going into effect Friday that aim to put an end to the worst mortgage lending abuses of the past.

The new rules are designed to take a "back to basics" approach to mortgage lending and lower the risk of defaults and foreclosures among borrowers, according to the Consumer Financial Protection Bureau, which issued the new rules.

"No debt traps. No surprises. No runarounds. These are bedrock concepts backed by our new common-sense rules, which take effect today," said CFPB director Richard Cordray in remarks prepared for a hearing Friday.

Mortgage lenders are being asked to comply with two new requirements: The Ability to Repay rule and Qualified Mortgages. Here's how they will impact borrowers:

Ability to Repay

  • Lenders must determine that a borrower has the income and assets to afford to make payments throughout the life of the loan. To do so, the lender may look at your debt-to-income ratio, which is how much you owe divided by how much you earn per month, including the highest mortgage payments you would be required to make under the terms of the loan. To calculate your debt-to-income ratio, add up all your monthly obligations -- including student loan, credit card and car payments, housing costs, utilities and other recurring expenses -- and divide it by your monthly gross income.
  • In an effort to put an end to no- or low-doc loans, where lenders issue risky mortgages without the necessary financial information, lenders will be required to document and verify an applicant's income, assets, credit history and debt. For borrowers, that means more paperwork and longer processing times.
  • Underwriters must also approve mortgages based on the maximum monthly charges you face, not just low "teaser rates" that last only a matter of months, or a year or two, before resetting higher.

Qualified Mortgages

  • To make sure you aren't taking on more house than you can afford, your debt-to-income ratio generally must be below 43%. This rule is not absolute. Banks can still make loans to people with debt-to-income ratios that are greater than that if other factors, such as a high level of assets, justify the risk.
  • Qualified mortgages cannot include risky features, such as terms longer than 30 years, interest-only payments or minimum payments that don't keep up with interest so your mortgage balance grows.
  • Upfront fees and charges cannot add up to more than 3% of the mortgage balance. That includes title insurance, origination fees and points paid to lower mortgage interest rates.

The rules also restrict "steering," or practices that give financial incentives to loan officers or mortgage brokers for pushing people into higher-interest loans that they can't afford -- a practice that was all too common leading up to the housing bust, Cordray said.

Lenders don't seem to be too worried about the new rules, according to Keith Gumbinger of HSH.com, a mortgage information provider. "It's no surprise; everybody has been preparing for the change for months," he said. "Because there will be additional underwriting scrutiny, it could gum up the works initially and slow loan processing, but it's really just the codification of things that are already in place."

A significant factor is what's not in the rules. There's no minimum down payment or credit score requirement.

"The qualifed mortgage is not taking a one-size-fits-all approach. It ensures that first time homebuyers can still come to the table," said Kalman.

If the rules required a minimum down payment of, say 10% or 20%, it would eliminate many first time buyers who would have a difficult time raising that much cash.

The lack of a credit score requirement will enable lenders to loosen currently tight underwriting standards in the future should conditions warrant, according to Gumbinger. For the moment, most loans will still have to be backed by Fannie Mae and Freddie Mac, and, with a few exceptions, they won't approve applicants with scores below 620. 

"We think the new rules are balanced and well-drawn. They will offer consumers protection without limiting credit to qualified borrowers," said Gary Kalman, the policy director for the Center for Responsible Lending.

By Les Christie for CNN Money

Published: January 9, 2014

8 Disappearing Tax Breaks

Here are eight of the tax breaks that will be missed the most, and how you can take advantage of them before it's too late.

1. Tuition and fees: A deduction for tuition and fees of up to $4,000 is currently available to parents and students paying for college. More than 2 million taxpayers claimed this break in 2010, saving more than $4 billion, according to the most recent data available from H&R Block.

If you want to take advantage of this tax break before it expires, you'll need to pay your spring 2014 tuition and fees before Dec. 31. That way you can still claim those costs on your 2013 tax return.

2. Teachers' expenses: The Educator Expense Deduction aims to help teachers cover the cost of classroom supplies like notebooks, pens and paper that their school doesn't reimburse them for. Elementary and secondary school teachers can qualify for deductions of up to $250 per year, even if they don't itemize.

Nearly 4 million teachers deducted $915 million in school expenses in 2010.

"If you haven't bought all the supplies you need for your classroom, it might be worth doing that before the end of the year and taking advantage of this credit," said Greg Rosica, Ernst & Young partner and contributing author to the EY Tax Guide 2014.

3. Mortgage insurance premiums: Currently, homeowners are able to deduct their mortgage insurance premiums as residence interest. About 4.2 million taxpayers claimed the tax break in 2010, deducting a total of $5.6 billion in mortgage insurance premiums.

4. State and local sales tax: In states without an income tax, like Florida and Alaska, taxpayers have been able to deduct state and local general sales taxes instead of taking the income tax deduction -- but that won't be an option next year unless Congress intervenes.

In 2010, 57 million taxpayers claimed more than $16.4 billion in deductions this way.

If you live in a state without an income tax and are planning to make a big purchase next year, you may want to do it before the end of 2013 instead, said Rosica. That way, you can claim this deduction before it expires.

5. Donations through your IRA: Retirees older than 70-and-a-half have traditionally been able to make non-taxable charitable donations of up to $100,000 directly from their IRA disbursements. But once this tax break expires, they will need to take the disbursement first, meaning it will be considered part of their taxable income.

6. Energy-efficiency: It's your last chance to get a credit of up to $500 if you made energy-efficient home improvements this year -- including new windows and doors. To see if you qualify, visit EnergyStar.com or ask the company where you bought the items.

The break is only available for people who haven't already claimed received credits totaling $500 in past years (The credit has ranged in value since taking effect in 2006.).

7. Commuter costs: Currently, commuters who take mass transit like trains or buses to work are able to receive $245 a month (or $2,940 per year) in tax-free money toward those expenses. But this perk is scheduled to expire January 1, at which point commuters will only be able to write off just $130 per month - $1,560 a year.

8. Mortgage debt forgiveness: A tax break that has been in effect since 2007 allows struggling homeowners to exclude any debt forgiveness they were granted from a bank when calculating their taxable income.

For the more than 6 million Americans who still owe more on their loans than their homes are worth, the expiration of this tax credit Jan. 1 is bad news. If they get a mortgage modification from their bank or do a short sale of their home after year-end, their tax bill could be thousands of dollars higher than if the modification were completed before year-end.

By Brett Ellis for CNN Money

Published: January 8, 2014

5 Reasons to File Your Taxes Early

If you like to file your taxes early and then chuckle at all the procrastinators who wait until April 15 nears, your day of reckoning is getting close. The earliest day the IRS will begin processing 2013 individual tax returns is Jan. 31, 2014, a date slightly later than usual due to the government shutdown last fall.

What are the advantages of filing early? Here's a list of good arguments from tax preparers.

Get your money now. This is the most obvious reason a taxpayer might want to file as early as possible. But try not to fall into the trap of thinking you need the refund before the IRS can get it to you. Some tax preparation services offer refund anticipation loans, which have steep fees that eat into that refund.

You'll also likely get your money in a shorter amount of time if you file earlier than the person who files a month or two after you, according to Elaine Phelan, a professor of accounting at Siena College in Loudonville, N.Y. Early filers may only have to wait for their refund for 21 days – the average time taxpayers have had to wait in recent years, and sometimes less, according to the Internal Revenue Service – whereas a later filer may have to wait longer, say, 31 days.

"If you work with a paid preparer, they are excited to jump into the new year and will enthusiastically get your taxes done quickly," Phelan says. "If you are expecting refunds, the IRS processing centers are less busy and will process your claim faster, so you might even get that refund sooner."

And, of course, if you file electronically versus putting your form in a mailbox, you should get your money even faster.

It may help with financial aid. "Taxpayers with college-age children need to get their tax information early to get the maximum amount of financial aid," says Lawrence Pon, a tax specialist who owns an accounting firm, Pon & Associates, in San Francisco. He says there is a direct link between the Free Application for Federal Student Aid form and the IRS, so your tax information is sent directly to the financial aid form without you having to provide it yourself.

It may help if you and your ex-spouse are feuding. Hopefully you don't fall into this category, and it's better for each party if you can keep the IRS out of your marital strife, but Pon says that "sometimes divorced people do not agree on who claims the children as a dependent, even though there may be a court order and an agreement. Whoever files first will claim the child, and the other ex-spouse may be out of luck."

You'll lessen your odds of becoming a victim of identity theft. "The sooner you file your return, the less opportunity someone else has to file a return in your name," says Joe Reynolds, identity fraud product manager at Travelers, headquartered in New York.

He points out that some criminals have been known to break into a home or car, steal identification and then file taxes in that person's name, scoring a refund that doesn't belong to them. The odds are slim that that will happen to you, of course, but it is another reason to file earlier rather than later.

Reynolds also advises getting your refund via direct deposit "so criminals can't have it redirected to their address or steal it from your mailbox."

There's more time to catch potential mistakes. If you wade into your taxes now and discover there's paperwork you need that you don't have, or it's simply going to be a more complicated tax year than you anticipated, you may not end up filing early, but now you have more time to spend on your taxes.

Not that there aren't smart reasons to file close to or on April 15, of course. If you owe the IRS money, there's really no financial advantage for you to give it to them any earlier than April 15.

Still, by preparing your taxes early, you'll know earlier how much you owe and will have more time to drum up the money to pay.

If you have a really complicated tax form – in which case you probably have a tax consultant or accountant advising you every step of the way – "many filing issues are resolved as the [tax] season goes on for the IRS," says Tim Gagnon, an assistant academic specialist of accounting at the D'Amore-McKim School of Business at Northeastern University in Boston.

It's possible that if you file too early, Gagnon says, you "may need to amend filing if the IRS changes forms, instructions or interpretations."

Still, for most taxpayers who have refunds coming, filing early rather than later is the smarter decision. It is also psychologically better for many people, Pon says.

"Get the darn task out of the way" is the reason most of his clients opt for early filing, he says. He adds that it's always "nice to get something checked off your to-do list early instead of letting it fester."

Published by US News

Published: January 6, 2014

Commuters Pinched on Tax Break as Congress Deadlock Lasts

Heidi Przybyla and Richard Rubin of Bloomberg wrote on January 6 about another of the fifty-five tax breaks that expired at the end of 2013, this one a commuter tax break worth as much as $115 a month for mass-transit users.

“Both [Republican and Democratic] parties usually come together each year at some point to approve the commuter tax break and others – tax provisions valued at $50 billion a year,” the article stated. “Most of the items, such as the tax credit for research and development, can easily be restored retroactively and handled on tax returns filed in 2015.

“Mass-transit users, who receive their tax break monthly, are harder to make whole,” Przybyla and Rubin continued. “In other words, commuters lose the cash until Congress acts.”

According to the article, commuters can set aside money in tax-free accounts for transit and parking costs each month. The amount was capped at $245 a month last year. While the parking benefit increased to $250 for 2014, the transit benefit dropped to $130, pinching commuters in New York, Washington, and other cities.

Published: January 3, 2014

What The Proposed Ad Tax Could Mean For You

Congress recently proposed a measure that would limit the immediate deductibility of advertising costs as part of a broader tax-reform effort. In a January 6 article for Advertising Age, Andrew Osterland breaks down how the proposed ad tax could affect small businesses and startups.

The proposal, introduced by House Ways and Means Committee Chairman Dave Camp (R-MI) in November 2013, would enable companies to deduct 50 percent of their advertising costs in the year they are incurred, with the remaining 50 percent amortized over the following ten years, Osterland reported. Senate Finance Committee Chairman Max Baucus (D-MT) proposed a five-year amortization period.

“For large companies with big advertising budgets, the policy change would be a nuisance in the short-term but ultimately it would only delay – not limit – the deductibility of advertising expenses,” he wrote.

“The proposal would likely have a more significant effect on startups and small businesses for which cash management is crucial,” Osterland added.

Published: January 2, 2014

5 Year-End Tax Tips to Get You Ready for 2014

The holidays are a busy season for small business owners—and that’s a good thing—but they still need to take the time to do some tax planning so they are ready to meet the tax man in the spring.

Here are five tips to help you close out your small business for the year:

1. Review subcontractor data.
If you paid anyone for services (including incorporated attorneys) more than $600 during the year, you will be required to send a Form 1099 to the recipient by Jan. 31, 2014. Make sure you have your subcontractor’s complete address and either their Social Security number or federal ID number. To prevent problems in obtaining this information in the future, be sure to send each new independent contractor Form W9 upon hiring.

If you use QuickBooks for bookkeeping, set up automatic 1099 creation by going to the top ruler bar and selecting ‘Edit’ then ‘Preferences’ then ‘Tax: 1099.’ Follow the instruction in the pop up box to map the accounts that you must track for 1099 purposes.

Then in the ‘Vendor section’ you can fill in the federal ID numbers or Social Security numbers for the appropriate vendors that are required to receive Form 1099. Double click on the vendor in question and then click on the ‘Additional Information’ tab. In the bottom left corner is a box to check to indicate the vendor is a 1099 recipient. Another box contains a field to complete the vendor’s federal ID number or social security number.

From ‘Reports’ on the top ruler bar, select ‘Vendors’ and run a 1099 detail report to check which vendors have incomplete data. Then contact the vendor to obtain his/her address and ID number

2. Submit expense account data.
If your legal form is corporate, you and your employees should submit expense account data and accept a reimbursement check prior to Dec. 31 to ensure that the corporation will receive a tax deduction for the business expenses being claimed. It’s easy to create an expense account form on a spreadsheet program. The form can be completed monthly or quarterly and make sure receipts are attached in the event of audit.

3. Evaluate your financial standing. 
Review your profit and loss, balance sheet, and general ledger for accuracy and to ensure that all transactions have been recorded. Make sure the bank and credit card accounts have been reconciled and that loan interest has been separated from the principal and is accurately logged onto your books. Check the accuracy of accounts receivable and accounts payable. Write off bad debt for customers who are uncollectable.

4. Review personal expenses.
If your business entity is a sole proprietorship or partnership, then review your personal expenses. Are any business expenses co-mingled? If so, find the receipts or cancelled checks and log in those expenses to your company’s books. More taxpayers pay extra taxes needlessly because they overlook business expenses paid from personal funds.

5. Schedule a professional tax planning session. 
This is especially needed if your profit increased substantially during 2013. We may be able to help you reduce your taxable income by implementing some last minute strategies.

By Bonnie Lee for Entrepreneur.com

Published: December 31, 2013

Pay Less Tax on Capital Gains in 2014: 3 Simple Tips

The explosive move higher for stocks in the past several years has been great for stock investors, who've seen their portfolios largely recover from the 2008 bear market. But the IRS wants its share of your hard-earned investing profits, which means more taxpayers will have to pay tax on capital gains in 2014.

However, by  following a few simple strategies, you can make sure that you pay as little tax on your capital gains in 2014 as you absolutely have to. Let's look at three of those strategies and find out how you can pay less to Uncle Sam in the years to come.

1. In taxable accounts, hold on to your investments for more than a year
The easiest way to reduce your tax on capital gains is to hold on to your investments for more than a year. That qualifies you for long-term capital gain treatment, which includes favorable rates that are lower than what you'll pay for capital gains on investments you hold for a year or less. Short-term capital gains tax rates are the same as your ordinary income tax rate, ranging up to 39.6%. But for long-term capital gains on most qualifying investments, the maximum tax is 20% for those in the highest tax bracket, 15% for those in the four tax brackets from 25% to 35%, and 0% for those in the 10% and 15% brackets.

Not all assets qualify for these particular preferential rates. Gold and silver bullion, as well as exchange-traded funds SPDR GoldiShares Silver, and iShares Gold, are treated as collectibles, for which ordinary income tax rates apply subject to a higher maximum of 28%. Nevertheless, structuring your investments to hold them for longer than a year is the most obvious way to reduce your tax bill on capital gains in 2014 and beyond.

2. For quick trades, use tax-deferred accounts
Capital gains taxes make it expensive to be a short-term trader in a taxable account, but that doesn't mean you have to give up on all your opportunistic trading options. The key to avoiding capital gains with short-term trades is to use IRAs or other tax-deferred vehicles to hold those stocks.

The reason is simple: Even when you sell a winning stock in an IRA, you don't have to pay capital gains tax at that time. What happens instead is that the proceeds from the sale stay in the IRA and are available for reinvestment, and you'll only get taxed when you start making withdrawals from your retirement account. So if you're looking to take advantage of a short-term opportunity, such as a spinoff, special dividend, or buyout offer, buying it in an IRA will avoid a painful tax on eventual gains.

3. Look for capital losses to offset your gains
As in any other year, capital gains in 2014 will be netted against any capital losses you might have for the year. As a result, if you foresee selling some of your winning stocks next year, you should consider selling some of your losing stocks as well to offset those gains.

Tax considerations should only be part of your decision to sell a stock, though. If you sell a stock you like just to reap the loss, you won't be able to claim that loss if you buy the stock back within 30 days. That can lead to missing out on a rebound in that stock, forcing you to repurchase shares at a higher price after the 30-day period ends. Tactics like buying SPDR S&P 500 or other index ETFs to substitute for an individual stock can reduce that risk, but nothing can eliminate it entirely. On the other hand, if you want to get rid of a losing stock for good, it only makes sense to use the tax loss to your best advantage.

It's easy to be tax-smart about your capital gains in 2014. By following these three simple strategies, you can make sure you pay as little tax on your 2014 capital gains as possible.

By Dan Caplinger for The Motley Fool

Published: December 30, 2013

3 Tax Tips You Need to Know Heading Into 2014

The budget deal that Congress and President Obama struck at the beginning of the year to avoid the fiscal cliff resulted in seven tax increases. If you throw in the six tax hikes that are part of Obamacare,  that means there are 13 new taxes that may have hit you in 2013.

1.) The biggest potential taxes for wage earners include:

  • The payroll tax went back to 6.2% (as I’m sure you noticed in your take home wages)
  • The top marginal tax rate increased to 39.6% to from 35% for taxable incomes over $450,000 ($400,000 for single filers)
  • There’s a "phase out" of personal exemptions for adjusted gross incomes (AGI) over $300,000 ($250,000 for single filers). Now you no longer need to have kids to save tax money
  • They increased the tax rate on dividends and capital gains to 20% from 15% for taxable incomes over $450,000 ($400,000 for single filers)
  • People making over $250,000…you get an additional 3.8% surtax on investment income and another payroll tax hike of 0.9%
  • The "Death Tax" rate increased on estates larger than $5 million to 40% from 35%

Is your stomach sick yet? Please don’t shoot the messenger, but it's important to know that your tax return may be exceptionally ugly this year. 

2. Charity

Contributing to charity not only makes you feel good, but is a great way to lower your tax bill--especially if you itemize your deductions. So hurry up and write a check, charge it, give cash.  Do something.Just make sure you do it by Dec. 31 and have a receipt to back up any contribution, regardless of the amount. 

The old rule that you only had to have a receipt to back up contributions of $250 or more is long gone.

And if you have appreciated stock (that includes mutual funds) or property, you can give that away too.  As long as you've owned the asset for more than one year, you get a double tax benefit from the donation: You can deduct the property’s market value on the date of the gift and you avoid paying capital gains tax on the built-up appreciation.

And remember for gift tax purposes, you can transfer up to $14,000 per person in 2013 without incurring any federal gift tax. Spouses together may gift up to $28,000 per recipient.

So start your giving!

3. Investments and retirement

With all the extra taxes on investment income this year, it’s really important to get your net investment income number – which is just your gains less your losses – down. Go through your portfolio and consider selling more losers.  The pros call this “loss harvesting.” You can then use those losses to offset any taxable gains you have realized during the year, and then your net investment income comes down as does your tax bill.

Also make sure to contribute to your IRA. You have until April 15, 2014 to make IRA contributions for 2013, but the sooner you get your money into the account, the sooner it has the potential to start to grow tax-deferred. And remember, that contribution can lower your 2013 tax bill.

If you are self-employed, and have a Keogh plan, you have until the tax filing deadline (including extensions) to make contributions toward your 2013 return.

By Tracy Byrnes for FOX Business

Published: December 27, 2013

Florida and 12 Others To Raise Minimum Wage in 2014

The retail-worker strikes that swept the nation in 2013 did not move Congress to raise the minimum wage, but a growing number of states are taking action.

The minimum wage will rise in 13 states this week, and as many as 11 states and Washington, D.C., are expected to consider increases in 2014, according to the National Employment Law Project. Approval is likely in more than half of the 11, says NELP policy analyst Jack Temple.

The trend reflects growing concerns about the disproportionate spread of low-wage jobs in the U.S. economy, creating millions of financially strained workers and putting too little money in consumers' pockets to spur faster economic growth.

On Jan. 1, state minimum wages will be higher than the federal requirement of $7.25 an hour in 21 states, up from 18 two years ago. Temple expects another nine states to drift above the federal minimum by the end of 2014, marking the first time minimum pay in most states will be above the federal level.

"2014 is poised to be a turning point," Temple says. "States are seeing the unemployment rate is going down but job growth is disproportionately concentrated in low-wage industries. (They're) frustrated that Congress is dragging its feet."

Connecticut, New York, New Jersey and Rhode Island legislatures voted to raise the minimum hourly wage by as much as $1, to $8 to $8.70, by Wednesday. In California, a $1 increase to $9 is scheduled July 1. Smaller automatic increases tied to inflation will take effect in nine other states: Arizona, Colorado, Florida, Missouri, Montana, Ohio, Oregon, Vermont and Washington.

Meanwhile, states such as Massachusetts, New Hampshire, Maryland, Minnesota and South Dakota plan to weigh minimum-wage hikes next year through legislation or ballot initiatives.

In Minnesota, the state House and Senate have each passed bills to raise the minimum wage and plan to iron out their differences early next year after failing to approve similar measures the past two decades.

"You're coming out of a deep recession, and people are landing jobs, but they're low-paid," says state Rep. Ryan Winkler, sponsor of the House bill.

The legislative movement has been partly fueled by walkouts this year in at least 100 cities by fast-food workers who are calling for $15-an-hour pay and the right to form unions. Wal-Mart workers have staged similar protests.

While the demonstrations were not explicitly intended to prompt minimum pay increases, they've made the issue "more urgent," Temple says.

The Bureau of Labor Statistics estimates that 3.6 million hourly paid workers received wages at or below the federal minimum in 2012 — almost 5% of all employees on hourly pay schedules.

President Obama recently said he supports legislation in Congress that would lift the federal minimum wage to $10.10 an hour in three steps over two years and then index it to inflation. But the measure faces an uphill climb in Congress.

Proponents of minimum-wage hikes note that low-wage jobs have dominated payroll growth in the 4-year-old recovery, and increases over the past four decades have not kept pace with inflation.

Opponents say the increases raise employer expenses and will lead to layoffs. "If your costs are going up and you can't raise prices, you have to find a way to produce the same product at a lower cost," says Michael Saltsman, a research fellow at the Employment Policies Institute.

On Jan. 1, the minimum wage in 13 states, including Florida, will increase. Florida will raise the minimum wage to $7.93.

Originally published by USA Today

Published: December 26, 2013

Grant Reform Increases Single-Audit Threshold, Changes Audit Rules

New guidelines unveiled Thursday by the Office of Management and Budget (OMB) raise a key threshold for compliance audits of entities that receive federal award money from $500,000 per fiscal year to $750,000 per fiscal year.

Among other things, the new rules raise the federal awards threshold that triggers compliance audits currently performed under OMB Circular A-133, Audits of States, Local Governments, and Non-Profit Organizations, which are also referred to as single audits or Circular A-133 audits.

As a result of the new rules, states, local governments, and not-for-profit entities will be required to undergo a single audit if they spend $750,000 or more in federal awards in a fiscal year.

Nonfederal entities that spend less than $750,000 in a fiscal year will be required to make records available for review or audit by appropriate officials of the federal agency, passthrough entity, and the U.S. Government Accountability Office.

Approximately 5,000 nonfederal entities will be relieved of the single-audit requirement as a result of the higher threshold, according to a preliminary online inspection version of the rules. The guidelines are scheduled to be published in the Federal Register on Thursday, Dec. 26.

The comprehensive new rules also contain numerous other changes to the requirements for entities spending federal awards and their auditors.

Raising the threshold is part of a larger federal effort to reduce administrative burden, waste, fraud, and abuse. The new rules combine eight previously separate sets of OMB guidance into one for entities that receive a portion of the $600 billion in federal grants that are awarded annually.

According to a blog on the OMB’s webpage, the new guidance is designed to eliminate duplicative and conflicting guidance, encourage efficient use of information technology and shared services, strengthen oversight, and provide for consistency and transparency.

The OMB and its partners also are continuing work to improve outcomes through effective use of grant-making models, performance metrics, and evaluation, according to the OMB blog.

The new rules are expected to take effect for single audits of fiscal years beginning on or after Jan. 1, 2015, according to an alert from the AICPA Governmental Audit Quality Center to its members.

By Ken Tysiac for the Journal of Accountancy

Published: December 23, 2013

Starting Jan. 13, Business Tax Filers Can File

The IRS will begin accepting 2013 business tax returns on Monday, Jan. 13, 2014. This start date applies to both electronically-filed and paper-filed returns.

Business returns include any return that posts on the IRS Business Master File (BMF). BMF returns include a variety of income tax and information returns such as Form 1120 filed by corporations, Form 1120S filed by S corporations, Form 1065 filed by partnerships and Form 1041, the return filed by estates and trusts. It also includes various excise and payroll tax returns, such as Form 720, Form 940, Form 941 and Form 2290. The IRS expects to be able to begin processing any of these business returns on Jan. 13.

The Jan. 13 start date does not apply to unincorporated small businesses that report their income on Form 1040. The start date for all 1040 filers is Jan. 31, 2014. Although the IRS encourages these small businesses to begin preparing their returns now, it will not be able to accept these or any other individual returns or begin processing them until Jan. 31. This includes sole proprietors who file a Schedule C, landlords who file a Schedule E and farmers who file a Schedule F. 

Published: December 20, 2013

Illegal But Taxable

When state and federal laws collide, something's got to give. Under federal law, income from growing medical marijuana is ill-gotten gain. It is, however, taxable, as is all income. In some states, growing cannabis is legal for medical purposes and in Colorado, it's legal – period. That means it can be a source of income and therefore taxable. But that doesn't mean cannabis farmers can claim production costs on their federal return, without admitting to criminal activity. 

Somehow, claiming expenses of growing an illegal substance is worse than reporting the income, said Forbes magazine. Of course, there are some expenses that are always going to be illegal, added Forbes, like the cost of hiring a hit man to bump off the competition. But medical marijuana is subject to an addition to the Tax Code known as Section 280E, which goes back to the 1980s. Under that section, there simply are no legitimate expenses that are claimable.  

Here's a snippet: 

No deduction or credit shall be allowed for any amount paid or incurred during the taxable year in carrying on any trade or business if such trade or business (or the activities which comprise such trade or business) consists of trafficking in controlled substances (within the meaning of schedule I and II of the Controlled Substances Act) which is prohibited by Federal law or the law of any State in which such trade or business is conducted. 

One way medical marijuana growers get around the restriction on claiming expenses is to have another business on the same property, says Forbes, and push the expenses to that business. The example they cite is a care-giving business which occupies most of the premises. That way the property rent – or most of it – is claimed for that business rather than the cannabis production.  

Forbes also says these growers need to keep immaculate records, even more so than other businesses. They need to be clear and transparent, because if there's any appearance of evading taxes, the proprietors may be found guilty of tax evasion. And that carries a possible five years in prison.  

The federal and state laws regarding medical marijuana just don't line up, but this could be easily fixed if there was a motivation. Instead, the industry, which is legal, gets pushed underground, according to Marijuana Business Daily

By Teresa Ambord for AccountingWEB

Published: December 19, 2013

IRS Issues Guidance on Roth 401(k) Rollovers

The Roth 401(k), a hybrid of a Roth IRA and a traditional 401(k), has failed to gain much traction in the workplace. But a provision in the American Taxpayer Relief Act of 2012 (ATRA) was designed to grease the skids. Now the IRS has provided valuable guidance on in-plan Roth 401(k) rollovers. 

Here's the basic lay of the land. With a Roth IRA, qualified distributions made at least five years after the Roth was established are 100 percent exempt from federal income tax. For this purpose, qualified distributions include those made after attaining age 59½; upon death or disability; or use for a first-time home purchase (up to a lifetime limit of $10,000). A Roth 401(k) is essentially a Roth IRA account set up to hold funds in an employee's 401(k) plan. 

Under ATRA, an employee participating in a 401(k) can elect to have the plan transfer any amount "not otherwise distributable" under the plan to a designated Roth account maintained for his or her benefit. In other words, the employee can roll over funds without paying the 10 percent tax penalty for pre-age 59½ distributions, although the transfer is still subject to regular income tax. 

The new IRS Notice clarifies the rules for in-plan rollovers. Some of the main points of interest to practitioners are as follows:

  • Rollovers to a designated Roth account in the same plan are available for elective deferrals in 401(k) and 403(b) plans; matching contributions and nonelective contributions, including qualified matching contributions and qualified nonelective contributions; and annual deferrals made to governmental 457 plans.
  • Amounts rolled over to an employee's designated Roth account are subject to distribution restrictions applicable to the amount before the in-plan Roth rollover. For example, distributions may not be allowed prior to age 59½.
  • There's no income tax withholding requirement for a rollover of an otherwise non-distributable amount. However, an employee making an in-plan Roth rollover may have to increase withholding or make estimated tax payments to avoid an underpayment penalty.
  • A plan amendment providing for in-plan Roth rollovers of otherwise nondistributable amounts is a discretionary amendment that can't be adopted after the last day of the first plan year in which the amendment is effective. However, to give employers more time to implement this for the 2013 plan year, the IRS is extending the deadline to the later of the last day of the first plan year in which the amendment is effective or December 31, 2014, as long as the amendment is effective as of the date the plan first operates in accordance with the amendment. 
  • The Notice also provides a temporary period during which sponsors of safe harbor plans are permitted to make a midyear change to provide for in-plan Roth rollovers of otherwise nondistributable amounts. The period ends December 31, 2014.
  • Subject to the nondiscrimination requirements normally applicable to plan benefits, rights, and features (e.g., the right to make a rollover), a plan may restrict the type of contributions eligible for an in-plan Roth rollover and the frequency of in-plan Roth rollovers. 
  • If an in-plan Roth rollover is the first contribution made to an employee's designated Roth account, the five-year period of participation required for qualified distributions begins on the first day of the first tax year in which the employee makes the in-plan Roth rollover.

Remember that these are just the highlights, contact our office if you have any further questions! 

Originally published on AccountingWEB. 

Published: December 18, 2013

Three Year-End Tax Tips to Help You Save

Although the year is almost over, you still have time to take steps that can lower your 2013 taxes. Now is a good time to prepare for the upcoming tax filing season. Taking these steps can help you save time and tax dollars. They can also help you save for retirement. Here are three year-end tips from the IRS for you to consider:

1. Start a filing system.  If you don’t have a filing system for your tax records, you should start one. It can be as simple as saving receipts in a shoebox, or more complex like creating folders or spreadsheets. It’s always a good idea to save tax-related receipts and records. Keeping good records now will save time and help you file a complete and accurate tax return next year.

2. Make Charitable Contributions.  If you plan to give to charity, consider donating before the year ends. That way you can claim your contribution as an itemized deduction for 2013. This includes donations you charge to a credit card by Dec. 31, even if you don’t pay the bill until 2014. A gift by check also counts for 2013 as long as you mail it in December. Remember that you must give to a qualified charity to claim a tax deduction. 

Make sure to save your receipts. You must have a written record for all donations of money in order to claim a deduction. Special rules apply to several types of property, including clothing or household items, cars and boats. 

If you are age 70½ or over, the qualified charitable distribution allows you to make tax-free transfers from your IRAs to charity. You can give up to $100,000 per year from your IRA to an eligible charity, and exclude the amount from gross income. You can use the excluded amount to satisfy any required minimum distributions that you must otherwise receive from your IRAs in 2013. This benefit is available even if you do not itemize deductions. This special provision is set to expire at the end of 2013. 

3. Contribute to Retirement Accounts.  You need to contribute to your 401(k) or similar retirement plan by Dec. 31 to count for 2013. On the other hand, you have until April 15, 2014, to set up a new IRA or add money to an existing IRA and still have it count for 2013.

The Saver’s Credit, also known as the Retirement Savings Contribution Credit, helps low- and moderate-income workers in two ways. It helps people save for retirement and earn a special tax credit. Eligible workers who contribute to IRAs, 401(k)s or similar workplace retirement plans can get a tax credit on their federal tax return. The maximum credit is up to $1,000, $2,000 for married couples. Other deductions and credits may reduce or eliminate the amount you can claim.

Published: December 17, 2013

12 Key Business Tax Issues For 2014

As business executives outline key programs and initiatives for the coming year, several important international, federal and state tax issues could have a significant impact on their business operations and potentially their corporate reputations and, therefore, should be on their radar screens, according to KPMG LLP, the U.S. audit, tax and advisory firm.

"Almost every business decision has tax – and potentially – reputational implications," said Jeff LeSage, vice chair of tax services for KPMG LLP.  "With up to 40 cents of every dollar at stake, keeping an eye on key tax issues is a competitive necessity for CFOs, board members and tax departments, especially as companies put new plans in motion at the start of the new year."

Among the issues worth watching, according to KPMG: taxation of cloud-related activities, challenges transforming the operational effectiveness of tax departments, the prospect for U.S. and international business tax reform, concerns over base erosion and profit shifting (BEPS), and far-reaching consequences of the implementation of the Foreign Account Tax Compliance Act (FATCA).

"As companies assess these and other developments, leaders should weigh the potential impact on their bottom lines and plan how to best respond to the challenges and opportunities they may present," added LeSage.

The Top 12

Looking ahead, here are a dozen "to dos" identified by KPMG for business leaders in 2014:

  • Manage Efforts Related to the Foreign Account Tax Compliance Act (FATCA) – Implementation has evolved since the enactment of FATCA, but it is clear that implications surrounding this new regime are wide-ranging for foreign institutions, U.S. financial institutions, and non-financial entities that make withholdable payments to non-U.S. entities. Companies will need to continue assessing their FATCA status and their resulting compliance obligations.
  • Monitor U.S. Business Tax Reform Developments – There continues to be a strong desire among some members of Congress, the Obama Administration and the business community for a tax system that is simpler, more competitive and conducive to economic growth. The current debate on government funding and the debt limit has temporarily moved tax reform to the sidelines.  Nonetheless, companies will need to keep a close watch on the issue as it will continue to remain "on the table."
  • Understand Base Erosion and Profit Shifting – Increased concern about base erosion and profit shifting (BEPS) has triggered a public debate about the tax affairs of multinational companies and a call to action at the highest levels of government. Companies need to be aware of public perceptions, guard against reputational risks, and prepare for the reality of potential changes in tax rules and standards.
  • Understand Opportunities Connected with the New Repair Regulations – Beginning January 2014, every business with at least some fixed assets – that is, virtually every business – must comply with the final so-called "Repair Regulations," issued by Treasury and the Internal Revenue Service (IRS) in September 2013, which established the federal tax standards for costs incurred to acquire, maintain or approve, and dispose of tangible property. Certain industries, such as retail, manufacturing, hospitality and utilities, may be particularly affected. Some taxpayers would be wise to review their capitalization policies before 2014 in order to comply with new elections and to enhance potential benefits; others should also consider filing accounting-method changes early for 2012 or 2013 to take advantage of certain provisions in the final regulations.
  • Check Progress of Marketplace Fairness Act – Other major issues in front of Congress, as well as political and business opposition, may have currently moved the Marketplace Fairness Act off the fast-track, but companies need to continue to stay alert to potential tax compliance requirements under the proposed law if the situation changes. The bill, which would allow states to require online and other out-of-state merchants to collect and remit sales and use taxes on products and services they sell, is now in the hands of the House Judiciary Committee, after Senate passage earlier in 2013. The Committee is considering possible changes to the Senate bill.
  • Add Tax in the Cloud to Your Business Conversations – The movement of computing services and resources to "the cloud" is expected to continue to drive both back- and front-office business transformations during 2014. It's critical that tax executives take a more active role in getting a "seat-at-the-table" early for their company's cloud discussions. Not doing so may lead to missed incentives and planning opportunities as well as increased potential for risk and unforeseen liabilities down the road.
  • Navigate a Shifting Landscape for Transfer Pricing – Tax authorities worldwide are continuing to sharpen their focus on transfer pricing arrangements, especially higher-risk/higher-value transactions. Taxpayers should expect heightened enforcement – including increased documentation requirements, examination of uncertain tax positions, expanded tax return disclosures – to continue during 2014 and should consider how they can address these challenges.
  • Include Your Tax Department in Business Operation Transformation – Leaders would be wise to include their tax departments in any business improvement and operational transformation programs they consider to mitigate risk and enhance value opportunities. Moving people, assets or revenue streams can have an impact on direct and indirect taxes and the underlying processes to comply with various tax regulations. Ensuring tax is a part of any business transformation process will help determine that compliance and financial reporting processes are captured and tax management opportunities are spotlighted.
  • Expect Enhanced IRS Scrutiny – Recent announcements from the Internal Revenue Service (IRS) on its plans to change examination procedures for large corporate taxpayers are making enhanced engagement between the IRS and these taxpayers a priority for 2014. Taxpayer-friendly changes to the IRS' Information Document Request (IDR) process that now require IDRs to be more narrowly issue-focused and a call for more taxpayer involvement in the determination of information due dates are balanced by a new set of nearly automatic enforcement triggers – if due dates are breeched – which start a series of delinquency notices, pre-summons letters and summonses.
  • Focus on Unclaimed Property Liabilities – Potentially significant and costly audit assessments for corporate unclaimed property, coupled with an expanded definition of property reportable as unclaimed, make this an issue to watch in 2014. Companies in all industries – especially retailers, financial institutions, insurance companies and even energy suppliers – need to closely evaluate their reporting requirements as unclaimed property remains an important source of revenue for state jurisdictions throughout the country.
  • Use FTZs to Meet International Trade Challenges – As continued economic pressure on international trade leads many companies to look for new ways to strengthen their global competitiveness, the benefits of U.S. Foreign Trade Zones (FTZs) may be an answer for some. These areas, secure within the United States but outside U.S. customs territory, can help companies improve cash flow, manage inventory costs, reduce or eliminate U.S. Customs duties, and generate distribution savings.
  • Better Align Tax-Exempt Activities with Corporate Strategies – The coming year may be a good time for companies to review their corporate responsibility and philanthropy activities, not only to foster compliance with their tax-exempt status, but also to enhance their alignment with business strategy. A strategic review of employee volunteer programs, partnerships with not-for-profit organizations, philanthropy and