Sunday, December 18, 2011

Charity and Your Tax Bill.


Charitable donations do provide a reduction in your taxes, but it’s not the huge reduction that many people often think they are or expect that they are.
To understand the benefit that charitable donations give to your taxes, first you have to understand how income taxes work. This is something that many people surprisingly misunderstand.
When you earn ordinary income from working at a job, you have to pay income taxes on it. We all know that, of course. What many people don’t quite understand is how the amount you pay is calculated.
Let’s say you are a single person earning $50,000 this year. To figure out how much taxes you have to pay, you have to look at the income tax rate table. For 2011, it looks like this for single people (there’s a different table for married couples):
For income between $0 and $8,500, you pay 10% in taxes.
For income between $8,500 and $34,500, you pay 15% in taxes.
For income between $34,500 and $83,600, you pay 25% in taxes.
For income between $83,600 and $174,400, you pay 28% in taxes.
For income between $174,400 and $379,150, you pay 33% in taxes.
For income over $379,150, you pay 35% in taxes.
So, as I mentioned, we’re looking at a single person who makes $50,000 a year.
For the first $8,500 of that (the $0 to $8,500 bracket), that person has to pay 10% of the income in taxes. That’s $850 for this bracket (that’s 10% of $8,500).
For the next $26,000 of that (the $8,500 to $34,500 bracket), that person has to pay 15% of the income in taxes. That’s $3,900 for this bracket (15% of $26,000).
For the rest of his pay ($15,500), that person is in the $34,500 to $83,600 bracket, which means that person has to pay 25% of that portion of his income in taxes. That’s $3,875 for this bracket (25% of $15,500).
To figure up the person’s total tax bill, they simply add together those pieces, which totals $8,625. This person will owe $8,625 on their taxes this year.
Now, how can a person lower that amount? The most common way is through deductions. The government gives out standard deductions each year on a person’s taxes. For 2011, that amount is $5,800 for a single person. How that works is that you simply subtract that deduction from the total amount of income the person earned for the year. So, this person’s income for tax purposes is actually $44,200.
So, let’s look at this person’s actual taxes after their standard deduction.
For the first $8,500 of that (the $0 to $8,500 bracket), that person has to pay 10% of the income in taxes. That’s $850 for this bracket (that’s 10% of $8,500).
For the next $26,000 of that (the $8,500 to $34,500 bracket), that person has to pay 15% of the income in taxes. That’s $3,900 for this bracket (15% of $26,000).
For the rest of his pay ($9,700), that person is in the $34,500 to $83,600 bracket, which means that person has to pay 25% of that portion of his income in taxes. That’s $2,425 for this bracket (25% of $9,700).
To figure up the person’s total tax bill, they simply add together those pieces, which totals $7,175. This person will owe $7,175 on their taxes this year.
So, that person’s standard deduction on their taxes actually saved him $1,450. The standard deduction may be $5,800, but it only saved the guy $1,450 because the deduction just reduces his total income for the year in terms of taxes.
Charitable giving works exactly the same way. Every dollar you donate to a registered charity becomes a deduction on your taxes, just like a standard deduction.
Let’s say the person above donates $5,000 to his church (a 10% tithe) and $500 to Doctors Without Borders and another $500 to L’arche Tahoma Hope. That’s a total of $6,000 in charitable donations.
So, this person makes $50,000 a year. From that, he can subtract his standard deduction ($5,800) and he can also subtract his charitable donations ($6,000). This means that his taxable income – the amount he pays on his federal income taxes – is $38,200. Let’s look at his taxes now.
For the first $8,500 of that (the $0 to $8,500 bracket), that person has to pay 10% of the income in taxes. That’s $850 for this bracket (that’s 10% of $8,500).
For the next $26,000 of that (the $8,500 to $34,500 bracket), that person has to pay 15% of the income in taxes. That’s $3,900 for this bracket (15% of $26,000).
For the rest of his pay ($3,700), that person is in the $34,500 to $83,600 bracket, which means that person has to pay 25% of that portion of his income in taxes. That’s $925 for this bracket (25% of $9,700).
To figure up the person’s total tax bill, they simply add together those pieces, which totals $5,675. This person will owe $5,675 on their taxes this year.
In other words, this person’s $6,000 charitable contribution saved them $1,500 on their taxes. That’s because the person was in the 25% tax bracket before the donation and in the 25% tax bracket after the donation, which means that they essentially saved 25% of their donation on their taxes. (Sometimes, a donation will drop you to a lower tax bracket, which is fine.)
So, charitable donations are a great thing and they do offer some tax savings, but you don’t save $1 for every dollar you donate. Instead, you often reduce your tax bill roughly a quarter or so for every dollar you donate. That’s still a great little bonus.
Hopefully that clears things up for you!

10 tips worth remembering for year-end tax planning

The window of opportunity for many tax-saving moves closes on Dec. 31. So set aside time with your tax professional to evaluate your situation now, while there’s still time to affect your bottom line for the current tax year. With that in mind, here are 10 things to consider as the curtain closes on 2011.
1. Deferring income to 2012 means postponing taxes. Consider opportunities you might have to defer income to 2012. You might be able to delay a year-end bonus, for example. If you’re able to push what would have been 2011 income into 2012, you may be able to put off paying income tax on the deferred dollars until next year.
2. Paying deductible expenses sooner may help you in 2011. Does it make sense for you to accelerate deductions into 2011? If you itemize deductions, it might help your 2011 bottom line to pay deductible expenses like medical costs, qualifying interest, and state and local taxes before the end of the year, instead of waiting until 2012.
3. Income tax rates will remain the same in 2012. The same six federal income tax rates that apply in 2011 will apply in 2012. So, depending upon your income, you’ll fall into the 10 percent, 15 percent, 25 percent, 28 percent, 33 percent or 35 percent bracket. As in 2011, long-term capital gains and qualifying dividends will continue to be taxed at a maximum rate of 15 percent in 2012. If you are in the 10 percent or 15 percent tax bracket, a special 0 percent tax rate will generally continue to apply.
4. Is AMT a factor?If you’re subject to the Alternative Minimum Tax, special rules apply. For example, the AMT rules can effectively disallow a number of itemized deductions, making it a potentially significant consideration when it comes to year-end planning. You’re more likely to be subject to AMT if you claim a large number of personal exemptions, deductible medical expenses, state and local taxes, and miscellaneous itemized deductions.
5. Consider IRA and retirement plan contributions. Employer-sponsored retirement plans like 401(k) plans and traditional IRAs (if you qualify to make deductible contributions) present an opportunity to contribute funds on a pre-tax basis, reducing your 2011 taxable income. Contributions that you make to a Roth IRA (assuming you meet the income requirements) aren’t deductible, so there’s no tax benefit for 2011. However, qualified distributions are free from federal income tax. The window to make 2011 contributions to your employer plan closes at the end of the year, but you can generally make 2011 contributions to your IRA up to April 17, 2012.
6. Special distribution requirements kick in at age 70½. Once you reach age 70½, you’re generally required to start taking required minimum distributions from any traditional IRAs or employer-sponsored retirement plans you own. It’s important to make withdrawals by the date required. The penalty is steep for failing to do so: 50 percent of the amount that should have been distributed. Barring additional legislation, 2011 will be the last year to take advantage of a provision allowing individuals age 70½ or older to make qualified charitable distributions of up to $100,000 from an IRA directly to a qualified charity (these charitable distributions are excluded from your income and count toward satisfying any RMDs that you would otherwise have to take from your IRA for 2011).
7. Depreciation and expense limits will drop for business owners and the self-employed. If you’re a small-business owner or are self-employed, you’re allowed a first-year depreciation deduction of 100 percent of the cost of qualifying property acquired and placed in service during 2011; this “bonus” first-year additional deprecation deduction will drop to 50 percent for property acquired and placed in service during 2012.
8. Deductions for energy-efficient home improvements will end. This is the last year you’ll be able to claim a credit for energy-efficient home improvements (up to 10 percent of the cost of qualifying property). There’s a lifetime credit cap of $500 ($200 for windows). So, if you’ve claimed the credit in the past, you’re entitled only to the difference between the current cap and the amount you’ve already claimed.
9. Other expiring provisions. Barring additional legislation, this is the last year that you’ll be able to elect to deduct state and local general tax in lieu of state and local income tax, if you itemize deductions. This also will be the last year for both the above-the-line deduction for qualified higher education expenses, and the above-the-line deduction for up to $250 of out-of-pocket classroom expenses paid by education professionals.
10. Get help. Making effective year-end moves requires a solid understanding of the rules that are in effect for both 2011 and 2012. It also requires a comprehensive grasp of your overall financial situation. A financial professional can help you evaluate potential opportunities and can keep you apprised of any last-minute legislative changes. Your tax professional can also prepare a projection to estimate your tax liability.

Monday, December 12, 2011

IRS Announces 2012 Standard Mileage Rates, Most Rates Are the Same as in July

The Internal Revenue Service today issued the 2012 optional standard mileage rates used to calculate the deductible costs of operating an automobile for business, charitable, medical or moving purposes.
Beginning on Jan. 1, 2012, the standard mileage rates for the use of a car (also vans, pickups or panel trucks) will be:
  • 55.5 cents per mile for business miles driven
  • 23 cents per mile driven for medical or moving purposes
  • 14 cents per mile driven in service of charitable organizations
The rate for business miles driven is unchanged from the mid-year adjustment that became effective on July 1, 2011. The medical and moving rate has been reduced by 0.5 cents per mile.
The standard mileage rate for business is based on an annual study of the fixed and variable costs of operating an automobile. The rate for medical and moving purposes is based on the variable costs as determined by the same study. Independent contractor Runzheimer International conducted the study.
Taxpayers always have the option of calculating the actual costs of using their vehicle rather than using the standard mileage rates.
A taxpayer may not use the business standard mileage rate for a vehicle after using any depreciation method under the Modified Accelerated Cost Recovery System (MACRS) or after claiming a Section 179 deduction for that vehicle. In addition, the business standard mileage rate cannot be used for more than four vehicles used simultaneously.
These and other requirements for a taxpayer to use a standard mileage rate to calculate the amount of a deductible business, moving, medical or charitable expense are in Rev. Proc. 2010-51.
Notice 2012-01 contains the standard mileage rates, the amount a taxpayer must use in calculating reductions to basis for depreciation taken under the business standard mileage rate, and the maximum standard automobile cost that a taxpayer may use in computing the allowance under a fixed and variable rate plan.

Monday, October 24, 2011

Employee vs. Independent Contractor – Seven Tips for Business Owners


Employee vs. Independent Contractor – Seven Tips for Business Owners

As a small business owner you may hire people as independent contractors or as employees. There are rules that will help you determine how to classify the people you hire. This will affect how much you pay in taxes, whether you need to withhold from your workers paychecks and what tax documents you need to file.
Here are seven things every business owner should know about hiring people as independent contractors versus hiring them as employees.
1.  The IRS uses three characteristics to determine the relationship between businesses and workers:
  • Behavioral Control covers facts that show whether the business has a right to direct or control how the work is done through instructions, training or other means.
  • Financial Control covers facts that show whether the business has a right to direct or control the financial and business aspects of the worker’s job.
  • Type of Relationship factor relates to how the workers and the business owner perceive their relationship.
2.  If you have the right to control or direct not only what is to be done, but also how it is to be done, then your workers are most likely employees.
3.  If you can direct or control only the result of the work done — and not the means and methods of accomplishing the result — then your workers are probably independent contractors.
4.  Employers who misclassify workers as independent contractors can end up with substantial tax bills. Additionally, they can face penalties for failing to pay employment taxes and for failing to file required tax forms.
5.  Workers can avoid higher tax bills and lost benefits if they know their proper status.
6.  Both employers and workers can ask the IRS to make a determination on whether a specific individual is an independent contractor or an employee by filing a Form SS-8, Determination of Worker Status for Purposes of Federal Employment Taxes and Income Tax Withholding, with the IRS.
7.    You can learn more about the critical determination of a worker’s status as an Independent Contractor or Employee at by selecting the Small Business link.  Additional resources include IRS Publication 15-A, Employer’s Supplemental Tax Guide, Publication 1779, Independent Contractor or Employee, and Publication 1976, Do You Qualify for Relief under Section 530? These publications and Form SS-8 are available on the IRS website or by calling the IRS at 800-829-3676 (800-TAX-FORM).

Wednesday, October 19, 2011

Eight Tips To Lowering Real Estate Tax


Real estate and property taxes are different in each state and city. Nearly three-fourths of our country’s home owners pay over half of their mortgage payments to real estate taxes every year. In several states, the taxes on property and real estate make up for the fact that the state does not charge income taxes. Other states have high property taxes simply because they can take advantage of the taxpayers, at least, that is what the residents of those states claim. A real estate broker will hire someone to determine if a home has been over appraised by taking into account the number of bathrooms and bedrooms a home has, the age of the home, the quality of construction on the home, the square footage, and if there are any up-scale amenities nearby.
Many home owners overpay for their homes. Now is the time to learn about lowering real estate taxes. If you look at the American Homeowner’s Association, you will find an abundance of information about your home, such as, the number of bedrooms and bathrooms your home has, the lot size, your home’s square footage, and so much more. Following is a list of things you can do to help lower your property taxes.
1. Go to your tax assessor’s office and request a copy of your real estate tax rate card. This card will have information regarding your home and will show what improvements have been made to your property. Make sure there are no errors. If there are, get them corrected right away.
2. Don’t make any improvements on your home just before it is assessed, especially if you will need permits. Improving on your home will increase your property value, which will increase your taxes.
3. Make sure you know what home improvements will cost you in taxes. Call the tax assessor’s office to find out how much more your taxes will be if you make home improvements.
4. A beautiful and well maintained home will raise the value of your home. Try not to “beautify” your landscape too much, as it will also raise your taxes.
5. Find out how much your neighbours pay in taxes. If your home is assessed much higher than theirs, ask the assessor’s office why. You can also ask for your home to be re-assessed.
6. If the assessor comes to your home and needs to look around, let him or her. They will always use the highest rate if they cannot properly assess your property. If you have made improvements and they find out about it later, you could be penalized with higher taxes anyway.
7. When the assessor does come to your home, point out what work needs to be done. They generally take into account the improvements that have already been completed and base their rates on those. They won’t look at a cracked foundation or a roof that needs repairs. If they are able to look at the things that still need work, your taxes may be less.
8. If you still believe your property taxes are too high, ask the assessor’s office how to challenge the assessment, or ask for your home to be re-assessed. There is a formal process to appealing the assessment.

Wednesday, August 31, 2011

Six Wisconsin Nonprofits Will Share Office Space, and Maybe Staff As Well

 From The Wisconsin State Journal -

In Madison, Community Shares of Wisconsin will open a new collaborative effort, the Center for Change Project, where nonprofits will not only share office space but will also ultimately share other back office services as well. The Wisconsin State Journal reports that six organizations comprise the initial group: the American Civil Liberties Union of Wisconsin Foundation, BadgerStat, Community Shares of Wisconsin, the League of Women Voters of Wisconsin, the Wisconsin Women's Network and the Wisconsin Nonprofits Association.
The Center for Change Project also plans to connect with local businesses. Community Shares director Crystel Anders told the State Journal that the project “goes beyond just sharing a space. It’s about eventually sharing staff and providing professional resources for nonprofits.” Groups will share printers and other equipment but eventually the goal is for them to share staff and volunteers as well.

Tuesday, August 30, 2011

San Francisco Giants payroll manager arrested for embezzlement


A front office employee of the San Francisco Giants has been arrested on federal charges, accused of embezzling more than a million dollars from player accounts.

Court documents show that a payroll manager for the Giants made one crucial mistake that got her caught, and when the Giants found out, they took quick action by firing her and calling the feds.
Robin O'Connor worked in the Giants front office for four years. She's 41 years old, married, has two small children, and until last month was a payroll manager for the team with an annual salary of $80,000.
The affidavit from an FBI special agent says she embezzled $1,513,836.28 from the Giants' payroll between June 2010 and June 2011. The formal charges -- wire fraud and fraud in connection with a computer.

"They're felonies, so they're not the most serious felonies, but they do carry a penalty of up to five years in federal prison per count," said ABC7 legal analyst Dean Johnson.
The affidavit explains that O'Connor had a Giants' laptop with a payroll program, and she was allowed to work from her American Canyon home.
Here's how the scheme unraveled. Last month, O'Connor applied for a loan to buy a house in San Diego. The affidavit says she forged a letter from the Giants' HR manager, explaining large deposits into O'Connor's account "Because of her outstanding contributions ... that assisted us in accomplishing our goal of winning the 2010 World Series, she was given two additional payments of compensation in May 2011." $100,090.71 and $200,348.89.
When the lender, Bank of America, sent a copy of the letter to the Giants for confirmation, it was over.
"I'm reminded of what prosecutors often say to juries, which is, we don't catch the smart ones, the people who get convicted are people who leave enough evidence behind to prove the case beyond a reasonable doubt," said Johnson.
The affidavit says O'Connor admitted forging the letter and diverting more than $600,000 from player accounts; she made a wire transfer, returning that money to the team. Then, the Giants conducted a review and found $900,000 more misdirected to O'Connor's personal accounts.
There was no answer at O'Connor's home Tuesday, but her and her husband's 2011 model-year cars were there -- a BMW sedan, an SUV (with a Giants' employee parking sticker) and a tricked out Ford F-150 pickup -- all mentioned in court documents.
The I-Team reached O'Connor through her Facebook page: "I really want to speak out about this, but I am not allowed to do this as part of an agreement that I have at the moment... I am sure that you have come to realize in your profession, all is not always as it appears... Lastly I do understand why you are doing this and have no hard feelings. Thanks for letting me know this [the I-Team report] is going to happen."
Her neighbors we spoke with, who also happened to be Giants fans, expressed shock at what happened and disappointment.
"Absolutely surprised. I wouldn't think anyone would do that to our team, the players, they definitely don't deserve that," said neighbor Michael Runas.
The Giants declined an interview, saying the U.S. attorney has asked them to help protect the integrity of the investigation. They would not say which players' accounts were involved. O'Connor has been released on a $500,000 bond. She also surrendered her passport. She's scheduled for arraignment in a month.

Fake-check scam targets artists

  FROM,0,2146387.column -

Fake-check scams have been around for a while. But here's the first one I've seen that specifically preys on artists.

When not editing the magazine Tango Reporter — which, yes, covers the sultry world of tango aficionados — Carlos G. Groppa paints cheerful watercolor landscapes depicting cottages, gardens and other friendly subjects that one could easily imagine seeing on the wall of a hotel room or at the doctor's office.

Groppa, 80, of West Hollywood, sells his original art online. He uses a website called FineArtAmerica, which features the works of about 75,000 artists and facilitates sales of prints and greeting cards if a buyer isn't interested in an original.

Groppa is modest in his asking prices, typically seeking about $100 for an original watercolor. He said he sells about three paintings a month.

"That's not bad," Groppa told me. "But it's not good. Making $300 a month isn't such a big deal."

So it was a pleasant surprise for him to receive an email recently from someone who really seemed to like his work. The buyer, who identified herself as Jane Peterson, listed five paintings that she wanted to purchase.

Groppa informed her that the total price for the works would be $485, plus $25 for shipping.

Then things got a little weird. Peterson replied with a lengthy email explaining that she was in Cancun for her twin sister's wedding. She said she was expecting a baby and was also preparing to move from New Jersey to London, where her husband had been named head of his company's information-technology division.

OK, Groppa thought. A little more information than he required. But a sale's a sale. "I was still very happy," he said.

About a week later he received a check in the mail, but not for the $510 he'd been expecting. Instead, it was for $3,900.22.

"Is this a mistake or a joke?" Groppa wrote Peterson. "Please send me a check for $510."

In response, he got an email from someone named Shawn Wilson, who said he'd be handling shipment of Groppa's paintings to Britain. He instructed Groppa to wire $2,000 from the check he'd received to a London address to cover "insurance, tax, packaging, labeling and shipping."

Suspicious, Groppa said he contacted his bank and asked them to see if everything was hunky-dory. It wasn't.

"The check was fake," Groppa said.

It's a classic scam. The fraudster sends a bogus check for too much money, then asks the victim to deposit it in his account and send money back. In most cases, the victim doesn't know the check is bad until it's too late and ends up sending his own money.

Groppa said he emailed Peterson and Wilson, and told them what he'd learned. "I told them to go to hell," he said, "but I didn't say it that politely."

He received no other emails from the scammers. Peterson, or whoever was using the name, didn't respond to my own email seeking contact.

Sean Broihier, chief exec of FineArtAmerica, told me this wasn't the first time one of his artists had been targeted with the fake-check scam. He said he'd heard about half a dozen or so other such incidents, and assumed many other artists simply haven't reported being approached for the con job.

"But that's not the biggest scam we see," Broihier said. "The main one is a kind of money-laundering scam."

In these cases, he said, the fraudster poses as an artist and posts images online of his work (the images could be of anything). The person, usually based overseas, then uses a fake or stolen credit card number to purchase prints of his own art.

FineArtAmerica sends the prints to a bogus address and wires the "artist" his share of the proceeds. By the time the company finds out that the credit card number was no good, it's too late.

"Someone tries to pull this off at least once a month," Broihier said. "We try to stay on top of it, but it's hard."

He admitted he never expected his online art gallery to become a magnet for thieves. But he's not surprised that scammers have found ways to exploit both his business and his artists, many of whom jump at the prospect of a sale.

"I try to tell people that if they receive a check for $1,000 more than the asking price, don't do it," Broihier said. "But you can't send out that warning every month."

If you ever find yourself in such a situation, whether you're selling art online or wheeling and dealing on EBay or Craigslist, don't take the bait if a big fat check comes your way. Report it to the Federal Trade Commission and then tell the sender what you think.

And, like Groppa, there's no need to be polite.

Friday, August 26, 2011

The IRS can help in disastrous times


In most instances, you can count unforeseen casualty losses as itemized deductions. Of course, you have to fill out extra paperwork and keep good records.
And when a disaster is so severe that it's declared a major disaster area by the president, you get additional choices on when to file the tax claim. This could get you much-needed money for repairs sooner.
Whether your claim is a more routine loss or the result of a presidentially declared disaster, you won't recover dollar for dollar the financial loss you suffered. But every little bit helps. For major disasters, it's usually worth the effort to claim the tax write-off.

What counts as a casualty?

First, your loss must meet IRS deductibility guidelines. The agency classifies a casualty as the damage, destruction or loss of property resulting from a sudden, unexpected or unusual event. The losses can result from natural or man-made disasters.
Natural wear and tear isn't a casualty loss. The IRS won't accept claims for lost property, termite damage to your home or the death of your prize elm tree due to disease.

Figuring the deduction amount

After you've established that your loss is allowable, it's time to figure out exactly how much you can deduct. The IRS sets two limits: First, you must reduce your loss amount by $100, and the remainder then must be more than 10 percent of your adjusted gross income. You also have to subtract any insurance money you got for the loss.
For example, after collecting from your homeowners insurance, you were out of pocket $6,000 in damages from a flood. You subtract $100 from that $6,000 loss, giving you $5,900. Then you subtract 10 percent of your AGI, which for our example, let's say, is $50,000, giving you an amount of $5,000. That leaves you a casualty loss claim on your tax return of $900 ($6,000 - $100 - $5,000 = $900).
You need Form 4684 to figure and report your casualty loss and Schedule A to itemize your loss deduction. Attach both of these to your individual income tax return Form 1040. You don't have to include supporting documents with your return, but you need those records to help you complete Form 4684 and to verify your expenses and losses, if the IRS ever questions the deduction.

Then you have to figure out the "real money" value of your deduction. Deductions don't directly translate into tax dollars saved, so a casualty deduction of $5,000 won't get you a five-grand refund. Rather, deductions reduce your taxable income. The less taxable income you have, the smaller your tax bill. After you determine your casualty loss deduction, you must refigure your taxes using the new taxable income amount to see just how much of a refund you'll get.

Making your claim

Victims in presidentially declared disaster areas -- regions hit especially hard by hurricanes, tornadoes, floods, earthquakes or other calamities -- get special consideration. Tax laws make it easier for affected folks to get some help from the IRS more quickly.
In these cases, taxpayers typically can claim their losses in the tax year the disaster struck, or they can claim it as if it happened the year before. Many taxpayers find that by filing an amended return and claiming the loss for the previous tax year, for example, claiming 2010 wildfire losses on an amended 2009 return, they get a bigger refund. This often is the case for individuals who didn't itemize deductions the prior year.
The deadline for choosing the option of which tax year to claim disaster losses usually is the due date of your current-year return. This means you can file the amended return for the previous year by the filing deadline for the year in which the disaster actually occurred.
For example, if in 2010 you suffered a casualty loss due to a presidentially declared disaster, you can amend your 2009 return up until the current April filing due date (the 18th this year) to claim the losses in that prior tax year.
FEMA maintains a list of current- and previous-year presidential disasters to help you confirm that you're eligible for special tax treatment.
Yes, the paperwork is a hassle. But the IRS provides additional details in Publication 547, Casualties, Disasters and Thefts. The agency also has a workbook to help you track your losses, as well as Publication 2194, Disaster Losses Kit for Individuals, which consolidates the tax-related disaster information you'll need.

Wednesday, August 24, 2011

Generous Depreciation Rules May Be Quickly Coming to an End


If you have been recently contemplating making capital expenditures, it is important to remember that the generous depreciation rules that we have become comfortable with over the last four years may be quickly coming to an end. You will want to keep some important dates in mind to ensure that you don't miss out on maximizing your tax savings.

Bonus Depreciation
For the rest of 2011, taxpayers are able to deduct 100% of the cost of new (rather than used) equipment. This tax incentive was extended into 2012, but the rate is reduced to 50%.

In order to qualify for the 50% and 100% bonus depreciation, the assets purchased must have been originally used by the taxpayer ("new" rather than "used"), and they must have a recovery period of 20 years or less. Most tangible personal property will qualify, such as autos, trucks, machinery, and office equipment. It is important to keep in mind that autos, vans, and trucks may be subject to limitations.

Section 179 Deduction
In 2011, taxpayers can deduct $500,000 in capital expenditures under Section 179 as long as they don't purchase more than the $2 million phase-out threshold. For every dollar of assets purchased above the $2 million phase-out threshold, the deduction will decrease by an equal amount. Starting in 2012, this benefit decreases to $125,000, with a $500,000 phase-out threshold. SUVs are limited to $25,000 in Section 179 deduction, but they can receive the 100% bonus depreciation for any amounts over the $25,000.

For 2011 only, the Section 179 deduction is available for qualified real property improvements. Qualified real property improvements include improvements to the interior of leased or retail nonresidential buildings and restaurant buildings. Interior improvements for leased property must have been completed more than three years after the date the building was first placed into service.

What Now?
It is unlikely that bonus depreciation will be extended past 2012. In addition, the Section 179 deduction will probably remain at the inflation-adjusted $125,000 amount going forward. Therefore, it is very important that you properly time your capital expenditures. Please contact me immediately at 414-277-7789 to discuss the possible tax benefits that can be obtained from your capital expenditures.

Thursday, August 11, 2011

Top ten tax tips when selling your home

The Internal Revenue Service has some important information to share with individuals who have sold or are about to sell their home. If you have a gain from the sale of your main home, you may qualify to exclude all or part of that gain from your income. Here are ten tips from the IRS to keep in mind when selling your home.

1. In general, you are eligible to exclude the gain from income if you have owned and used your home as your main home for two years out of the five years prior to the date of its sale.

2. If you have a gain from the sale of your main home, you may be able to exclude up to $250,000 of the gain from your income ($500,000 on a joint return in most cases).

3. You are not eligible for the exclusion if you excluded the gain from the sale of another home during the two-year period prior to the sale of your home.

4. If you can exclude all of the gain, you do not need to report the sale on your tax return.

5. If you have a gain that cannot be excluded, it is taxable. You must report it on Form 1040, Schedule D, Capital Gains and Losses.

6. You cannot deduct a loss from the sale of your main home.

7. Worksheets are included in Publication 523, Selling Your Home, to help you figure the adjusted basis of the home you sold, the gain (or loss) on the sale, and the gain that you can exclude.

8. If you have more than one home, you can exclude a gain only from the sale of your main home. You must pay tax on the gain from selling any other home. If you have two homes and live in both of them, your main home is ordinarily the one you live in most of the time.

9. If you received the first-time homebuyer credit and within 36 months of the date of purchase, the property is no longer used as your principal residence, you are required to repay the credit. Repayment of the full credit is due with the income tax return for the year the home ceased to be your principal residence, using Form 5405, First-Time Homebuyer Credit and Repayment of the Credit. The full amount of the credit is reflected as additional tax on that year’s tax return.

10. When you move, be sure to update your address with the IRS and the U.S. Postal Service to ensure you receive refunds or correspondence from the IRS. Use Form 8822, Change of Address, to notify the IRS of your address change.

Friday, August 5, 2011

Roth IRAs – Market Sell-offs Prompt Two Vital Questions

The planning topic du jour in 2010 involved converting traditional IRAs to Roth IRAs, capitalizing on favorable tax laws effective in 2010 and depressed market values. Despite all the press and attention devoted to the issue in 2010, very little discussion touched on the importance of 2011.

Recharacterization Opportunity – Must be on or before 10/17/11!
Roth IRA conversions can be viewed as a short-term,“heads you win, tails you tie” wager. Specifically, 2010 conversions can be recharacterized back to a traditional IRA for any reason, as long as the recharacterization occurs on or before 10/17/11.  This is the extended due date for 2010 returns; however, you have until this date even if you did not extend your return or have already filed.

As an example, assume you converted a $50,000 IRA to a Roth in December 2010, and it is now worth $30,000 because of market declines. If you do not recharacterize the conversion, your 2010 return will report ordinary income of $50,000. Unique rules in 2010 allowed you to report this income all in 2010 or half ($25,000) in 2011 and half ($25,000) in 2012,deferring the tax hit. With recent market declines, you may wish to recharacterize the conversion now.

Note: If you do recharacterize some or all of a 2010 conversion, you may still re-convert that money back to a Roth in 2011. However, you must wait at least 30 days to convert the same amounts. In addition, 2011 conversions may not be spread over future years. In other words, you will have to report all of the income resulting from the conversion in 2011. Of course, you now have until October 15, 2012, to determine whether the 2011 conversion worked well or whether to recharacterize again.

2011 Conversion – Must be on or before 12/31/11!
Starting in 2010, anyone could convert to a Roth IRA, regardless of filing status or income level. That opportunity continues in 2011 (and all future years). The only unique feature about 2010 conversions involved the option to defer income into 2011 and 2012. The extension of the Bush Tax Cuts,  coupled with declining market values, make 2011 Roth conversions worthy of discussion. Also, as discussed above, 2011 conversions offer the same “heads you win, tails you tie” feature via the recharacterization rules.

What to do?
Whether you converted in 2010 or are considering a 2011 conversion, please contact us tax benefits and choices you have.

Wednesday, August 3, 2011

Ten Facts from the IRS about Amending Your Tax Return

Ten Facts from the IRS about Amending Your Tax Return
If you discover an error after you file your tax return, you can correct it by amending your return. Here are ten facts from the Internal Revenue Service about amending your federal tax return:
When to amend a return You should file an amended return if your filing status, your dependents, your total income or your deductions or credits were reported incorrectly.
When NOT to amend a return In some cases, you do not need to amend your tax return. The IRS usually corrects math errors or requests missing forms – such as W-2s or schedules – when processing an original return. In these instances, do not amend your return.
Form to use Use Form 1040X, Amended U.S. Individual Income Tax Return, to amend a previously filed Form 1040, 1040A or 1040EZ. Make sure you check the box for the year of the return you are amending on the Form 1040X. Amended tax returns cannot be filed electronically.
Multiple amended returns If you are amending more than one year’s tax return, prepare a 1040X for each return and mail them in separate envelopes to the appropriate IRS processing center.
Form 1040X The Form 1040X has three columns. Column A shows original figures from the original return (if however, the return was previously amended or adjusted by IRS, use the adjusted figures). Column C shows the corrected figures. The difference between Column A and C is shown in Column B. There is an area on the back of the form to explain the specific changes and the reason for the change.
Other forms or schedules If the changes involve other schedules or forms, attach them to the Form 1040X.
Additional refund If you are filing to claim an additional refund, wait until you have received your original refund before filing Form 1040X. You may cash that check while waiting for any additional refund.
Additional tax If you owe additional tax, you should file Form 1040X and pay the tax as soon as possible to limit interest and penalty charges.
When to file Generally, to claim a refund, you must file Form 1040X within three years from the date you filed your original return or within two years from the date you paid the tax, whichever is later.
Processing time Normal processing time for amended returns is 8 to 12 weeks.
Form 1040X and instructions are available at or by calling 800-TAX-FORM (800-829-3676).

Thursday, July 7, 2011

United States: IRS Releases New FAQ Guidance On Reporting Governance Practices On Form 990

The IRS recently released a new list of FAQ and tips for Part VI of Form 990, which requires an exempt organization to provide certain information about its governing board and management, as well as its governance policies and disclosure practices.
Of particular interest is the clarification that questions in Section B (about whether an exempt organization has adopted certain governance policies such as a written conflict of interest policy and a written whistleblower policy) may be answered affirmatively if a committee of the board with the power to do so has approved such policies by the close of the tax year. This should come as welcome news to those exempt organizations that reacted negatively to a 2010 revision to the instructions, which stated that an organization should only answer yes to these questions if its entire governing board adopted the policies. Some exempt organizations complained that requiring full board approval was in contrast to their usual practice of delegating the authority to adopt such policies to a committee of the governing board. An IRS official indicated earlier this week that in addition to making this point clear in the new FAQ, the IRS will be revising the 2011 instructions to Form 990 accordingly.
Some of the other key points of guidance in the new FAQ are highlighted below:
  • Clarification on whether the policies and practices described in Part VI of Form 990 are required by law: The response to FAQ 2 acknowledges that generally, these policies and practices (for example, a written conflict of interest policy) are not required by the Code, but warns exempt organizations that the IRS will use the information reported to assess an exempt organization's noncompliance and risk of noncompliance with federal tax law, and also reminds them that the Code requires exempt organizations to make certain items described in Question 18 publicly available (such as an exempt organization's Forms 990 for its three most recent tax years).
  • No requirement of receipt and review of the Form 990 by the governing board: The response to FAQ 6 acknowledges that the Code does not require an exempt organization to provide a copy of its Form 990 to the governing board or require review of the Form 990 by the governing board prior to its filing. However, the response reminds exempt organizations that they are required to answer Question 10 of Part VI, which specifically asks if the exempt organization took either of these actions prior to filing the form.
  • Deadline for adopting a policy for Form 990 reporting purposes: The response to FAQ 3 provides that where a question specifically asks whether the exempt organization adopted a particular policy as of the close of its tax year, the organization must answer no if the policy was not in place by that time; however, if an exempt organization adopted the policy after the close of the tax year, but prior to filing the Form 990, it may include this information in Schedule O of the form.
  • Extent of due diligence efforts required when evaluating director independence and certain relationships of board members, officers and key employees: The response to FAQ 8 clarifies that an exempt organization need not engage in more than a "reasonable effort" to obtain the information necessary to answer Questions 1 and 2 of Part VI, which request information about director independence and business and family relationships among board members, officers and key employees. The response also provides that an example of a "reasonable effort" would be the annual distribution of a questionnaire to each of these persons asking the necessary information. Importantly, the response states that an exempt organization may rely on the information it obtains in response to such a questionnaire when answering these questions.

Tuesday, June 28, 2011

Annulment in the offing? Here are you tax consequences


It is never too early to start planning for April 15, 2012. As we wind our way through 2011, we should be aware of the always-present income tax consequences affected by our actions on this journey.
Well, what happened to marital bliss? For whatever reason, you have decided to either annul the marriage, or legally separate or file for divorce. If not properly handled, taxes can become a terribly unanticipated problem.
First, we will explore annulment of the marriage. During this discussion we will only consider the legal and tax aspects of an annulment of a marriage.
A decree of annulment holds that no valid marriage ever existed. This results in the following:
You are considered an unmarried person for the whole year and your filing status has changed to Single, or if you meet certain requirements, Head of Household
You must file amended returns (Form 1040X, Amended U.S. Individual Income Tax Return) for all tax years affected by the annulment that are not closed by the statute of limitations.
On the amended return, you must change your filing status to Single, or if you meet certain requirements, Head of Household.
The statute of limitations generally does not end until 3 years after the due date of your original return.
An absolute decree of annulment ends the marital community in all community property states. Even though it holds that no valid marriage ever existed, the decree of annulment usually does not nullify community property rights arising during the “marriage.” You should check your state law for exceptions.
The general definition of community property is all property that has been acquired during the marriage, other than a gift or inheritance (commonly referred to as separate property).
Some basic housekeeping steps should also be acted upon as follows:
• Notify the Social Security Administration (SSA) of any name changes. This will update the records of the SSA to prevent problems when trying to claim Social Security benefits.
• Notify the IRS of any name change and/or change of address, if necessary.
• Review IRS Form W-4 and FTB Form DE-44, to adjust payroll tax withholding by your employer.
• Update all your financial accounts with name change and/or change of address where necessary. This is important because of the mailing of various tax information documents, particularly year end IRS Forms 1099, W-2’s, etc.
• Notify the Post Office of your change of address so you won’t miss getting your mail.
For more detailed information on this subject, refer to IRS Publication 504, Divorced or Separated Individuals and IRS Publication 555, Community Property, both of which can be found on

Sunday, June 26, 2011

The tax law that could make your grandchildren super-rich


Sometimes Congress hands out a break that is so generous it seems it must be a mistake. This one’s a doozy: the ability to receive a tax-free inheritance of $400 million or more.
Thanks to two recent changes in the tax code, investors with huge 401(k) accounts have a way to turn them into tax-free income for their grandchildren’s lifetimes.
This is by far the biggest estate-planning break on record, created even as lawmakers debate over which tax giveaways should be killed to help shore up the federal budget.
“I call this tax break the government’s going-out-of business sale,” says IRA guru Ed Slott, who travels the country teaching advisers and accountants how to squeeze benefits out of the Roth IRA. “This is a tax break you could drive 10 Mack trucks through. It’s an incredible opportunity to do a totally tax-free transfer of wealth.”
This massive estate-tax break was created last year in two steps. First Congress lifted a $100,000 income restriction on who can convert a 401(k) or IRA to a Roth IRA, allowing even the wealthiest investors to convert. Then late in the year, it raised the generation-skipping transfer tax exemption (GST) to $5 million until 2013. The exemption was previously $3.5 million, and was scheduled to drop to $1 million this year before Congress stepped in.
Both of these provisions on their own create possibilities for significant tax savings. But used in combination, the results are exponentially greater.
The Roth IRA has always been on a different playing field compared with alternatives because it allows gains to be withdrawn tax free. Money taken out of a 401(k), regular IRA or other retirement accounts are subject to income-tax rates.
Also, the Roth doesn’t require that minimum distributions be taken after turning age 70½, as other plans do. So if you don’t need retirement plan assets to live on, the Roth preserves it best for heirs.
Not everyone jumps at the chance to convert to a Roth IRA because you have to pay income taxes on the assets moved into the account. So if you plan to live off of retirement account assets, a conversion might not make sense. But from an estate planning perspective, when there are decades of gains ahead, the tax bill can be a small price to pay for big benefits down the road.
With the new GST exemption, the estate planning benefits that can be wrung out of a Roth are eye-popping. Consider an extreme case: A wealthy individual converts a large 401(k) account to a Roth IRA and names a grandchild as the beneficiary. The grandchild, at age 1, inherits the Roth, whose assets have grown to $5 million. Because of the new $5 million GST, the Roth assets would not be subject to estate tax or generation-skipping transfer tax.
Under Roth rules, an heir must take required minimum distributions, but the distributions can be stretched over a lifetime, and assets left in the Roth can continue to grow tax free. Based on a 1-year-old’s life expectancy of 81.6-years, assuming an average annual return of 8 percent, Slott calculates that the grandchild’s lifetime income from the Roth would be $408 million — “completely free of estate, gift, income and capital gains taxes,” he says.
If both grandparents left a big Roth account to the same grandchild, the tax-free inheritance would be almost twice that amount, depending on the age of the grandchild when the second Roth is inherited.
You don’t have to have stratospheric wealth to get in on these great estate planning benefits. Consider: A $100,000 Roth inheritance would let a grandchild pocket more than $8 million, tax-free. This would have been possible even under the old GST tax exclusion, but the old Roth rules, which prohibited conversions from IRAs and 401(k)s for those with incomes above $100,000, would have prevented many from taking advantage of the opportunity.
With the new $5 million estate tax exemption, passed along with the GST exemption last year, the Roth has become a turbocharged, tax-favored inheritance tool for any generation. But the benefits are even more pronounced when the Roth income is spread over the long expected lifetime of a grandchild.
Grace Allison, senior vice president and tax strategist at Northern Trust, cautions that the upfront tax bill on Roth conversions can take the shine off of this strategy, so it’s critical to crunch the numbers. If you convert $5 million, at the highest tax rate of 35 percent, you’ll have to hand over about $1.7 million.
That kind of tax bill is mind-numbing for most people, but in the universe where ultra-wealthy people are trying to preserve their multimillions, $1.7 million may seem like a small amount, considering how much will be saved in taxes in the long run.
In the extreme example above, the total tax savings would be in the neighborhood of $100 million over the grandchild’s lifetime, probably much more
Did Congress intend for this big generational benefit? Although the government could surely use wealthy taxpayers to pay big upfront tax bills on Roth conversions right now, the amount it would forgo in taxes on inherited money over decades would be staggering.
Whether intentional or not, opportunities to combine the Roth with the GST exemption are limited: The exemption is scheduled to drop to $1 million in 2013.
And it’s always possible that tax reforms will rescind these tax breaks before that. Roberton Williams, senior fellow at the Urban Institute, says that if any drastic changes are made, it will be Congress’s mess to figure out how to honor previous tax breaks in Roth accounts. In the meantime, get ’em while you can.

Wednesday, June 8, 2011

Financial tips for teens with summer jobs


If your son or daughter has a summer job, here are some tips for maximizing income and instilling good financial habits:
This may be the first time the worker is faced with a W-4 form. If summer earnings, combined with any other income that is earned during the year, are not enough to incur income tax then he or she should claim exemption from withholding. This avoids having to wait until tax time to reclaim the tax that was withheld unnecessarily.
This is a great time to learn the value of saving. Part of each paycheck should be put into a savings account for the “future.” That could mean money for college, a car or some other goal that is down the road. Learning to have the patience to wait for the prize is important for young people. Saving is as easy as putting an agreed-upon percentage of pay or fixed dollar amount into a savings account each pay period. If possible, set up a direct deposit from the employer to the bank. Otherwise make a bank deposit as soon as the paycheck comes to reinforce the habit of saving first before spending the paycheck.
If total income for the year is going to be more than $8,500, such that your son or daughter may owe income tax, consider making an IRA contribution with some of the earnings. That will lower their tax bill and give them a great start towards retirement. If the worker is not going to have taxable income consider a Roth IRA contribution instead. Although contributions are not tax-deductible, Roth IRAs are an even more powerful retirement tool than traditional IRAs because all of the earnings are tax-free at withdrawal.

Saturday, June 4, 2011

Bill Would End Taxing Benefits for Domestic Partners


A bipartisan group of House lawmakers introduced a bill that would have health-care benefits for domestic partners treated in the same way as those for a married couple.
Legislation introduced late Thursday by Democratic Reps. Jim McDermott of Washington and Earl Blumenauer of Oregon, along with New York Republican Reps. Richard Hanna and Nan Hayworth, would stop health-care benefits from being considered income for tax purposes. As a result, a person with a domestic partner enrolled in his or her work-sponsored health-care plan no longer would incur a tax liability for those benefits.
"It's wrong to punish American companies for doing the right thing," Mr. McDermott said Friday. "As things stand, a company has to pay higher payroll taxes and the employee is hit with a huge tax penalty that their married co-workers are exempt from."
Under current law, someone whose spouse is on his or her employer-provided health-care plan doesn't pay income taxes on the value of the health-care benefits, while someone with a domestic partner does. On average, an employee with a domestic partner ends up paying an additional $1,700 each year in federal taxes on health-care benefits, according to think tank Third Way, citing a 2007 study conducted by the Williams Institute.
For example, a man with a salary of $50,000 whose wife is on his office health-care plan and receives $10,000 worth of health-care benefits still pays income taxes based only on that $50,000. Meanwhile, someone in a domestic partnership in the same situation would have to pay federal taxes on the full $60,000. A company then also owes more payroll taxes on the higher sum.
Mr. McDermott originally introduced the bill in 2001, but momentum has built since then as more companies have started allowing employees to add domestic partners to their health-care plans. On Tuesday, a coalition of 77 companies and trade associations—including Alcoa Inc., Microsoft Corp., Intel Corp., AT&T Inc. and Citigroup Inc.—sent the lawmaker a letter supporting the bill.
"Companies like ours in increasing numbers have made the business decision to provide health benefits to such beneficiaries," stated the letter from the Business Coalition for Benefits Tax Equity. "Unfortunately, federal tax law has not kept pace with corporate change in this area, and employers that offer such benefits and employees who receive them are taxed inequitably."
The bill would also provide equal tax treatment for health benefits given to nonspouse dependents, which can include adult children or grandchildren. A similar one is being written by a bipartisan group in the Senate.

Wednesday, June 1, 2011

Federal Income Tax Discharged in Bankruptcy Unless Non-payment was Intentional, Appeals Court Says


The U.S. Court of Appeals, Sixth Circuit, recently ruled that an Ohio doctor could discharge her federal income taxes in chapter 7, based upon the government’s inability to prove that her failure to pay the income taxes was intentional.  This case, Beneficial Mortgage Corp., et al. v. Storey, No. 09-3848 (6th Cir. May 16, 2011), involved the U.S. government’s attempt to obtain tax liens upon the doctor’s real estate after her chapter 7 case was discharged.
Tax returns the doctor filed for 1995, 1996, 1997, 2000, 2001, 2002, 2003, 2004, and 2005, showed taxes owed, but the taxes were not paid.  In 2002, the doctor filed chapter 7 and listed the IRS as a creditor.  The appeals court noted that the bankruptcy law’s section 507(a)(8) allows income taxes to be discharged if (1) a return is filed, (2) the taxes are more than three years old, and (3) the taxes were not assessed within 240 days before the chapter 7 was filed.
The appeals court also noted that section 507(a)(1) prevents the discharge of any income tax for which a fraudulent return was filed, or where the debtor “willfully attempted in any manner to evade or defeat the tax.”  The government argued that the simple facts that the doctor had filed tax returns showing that she owed income taxes, and had purchased real estate in 1994, and had earned income during the years in question, proved that she had willfully evaded her income taxes by failing to pay them.
The appeals court disagreed, holding that while non-payment of taxes is relevant evidence, standing alone it cannot constitute willfully evading income taxes.  “Mere nonpayment, without more, evidences not dishonesty but the defining characteristics of all debtors — honest and dishonest, alike — insufficient resources to honor all of one’s obligations,” said the court.  The non-payment had to be “knowing and deliberate” to constitute willfully evading or defeating income taxes within the meaning of bankruptcy code section 507(a)(1).
Accordingly, the appeals court ordered that the doctor’s income taxes were discharged for the years for which she otherwise qualified, 1994 through 1997.

Monday, May 30, 2011

Identity Theft Involving IRS Is Mushrooming.


Dealing with the IRS is stressful enough. So is dealing with identity theft.
For a large and growing number of Americans, there’s a fresh hell: dealing with both at once.
Since 2008, the IRS has identified about 470,000 incidents of identity theft affecting more than 390,000 taxpayers, Sen. Bill Nelson (D., Fla.) said at a Senate Finance Committee hearing on Wednesday.
The problem appears to be expanding rapidly. In 2008, there were about 52,000 incidents involving the IRS, according to the Government Accountability Office. In 2010, there were 245,000.
Many of the cases involve scammers using stolen Social Security numbers to file fraudulent returns in hopes of getting a quick refund check. But some cases also involve people using fake Social Security numbers for work, resulting in unexpected reported income for the real Social Security number holder.
Either way, the phenomenon can be a nightmare for victims.  For everyone, it’s another sign of how complicated and vulnerable the income-tax system can be.
At a separate House hearing on Wednesday, lawmakers considered the growing problem of improper and fraudulent payments under several popular tax credit programs that are aimed at helping lower-income people. Some of those claims also seem to be coming from people who are disguising their identity.
False refund claims by prison inmates are a particular source of aggravation for officials, in part because of the difficulty of solving the problem. Mr. Nelson said he’s working on ways to strengthen information-sharing in order to crack down on scams.



When you become self employed, you must decide what form of business entity to establish. The basic categories include: sole proprietorship, partnership, C corporation, LLC (Limited Liability Company), and S corporation. 
It’s important to discuss entity selection with both your attorney and your tax pro, before deciding what structure is best for your business. Each option offers advantages and disadvantages, so don’t take the decision lightly. Every business situation is unique and requires a full study to make the most beneficial determination.
Below are some of the advantages and disadvantages of the Sub S corporate structure, but do not just run with my ideas thinking you’ve found the best solution-- unless you are running straight to both your tax pro and your attorney to discuss further.
Also remember, most attorneys do not know tax law backward and forward and a tax pro should not be sought out for legal advice. These are separate fields and both professionals have enough knowledge of the other’s just enough to be dangerous.
With that in mind, let’s explore.
But first, one more aside: If you select an LLC business structure, you can elect to be treated for tax purposes as any of the above entities. At the federal level there is no tax return for an LLC--it’s what you call a check-the-box entity. If, as an LLC, you elect to be treated as a sole proprietorship, you will file a Schedule C with your individual income tax return, if a partnership you will file a Form 1065 –partnership income tax return, if a C corporation you will file a Form 1120 corporate income tax return, and if you elect sub S corporation, you will file a form 1120S, sub S corporate income tax return. The tax rules regarding whichever entity you select for tax purposes will apply to your LLC.
When you file your incorporation papers, you must remember to complete Form 2553 to elect treatment as a sub S corporation. I have seen a failure to file mistake made many times. A business owner sets up the corporate paperwork with his attorney. The tax pro isn’t in the loop and the form isn’t filed timely with the IRS. The IRS then classifies the corporation as a C corp, applying the rules for that entity, which may unnecessarily cost the taxpayer thousands of dollars in taxes. Fortunately, the IRS has taken a more lenient attitude in the past several years, allowing taxpayers to late file the form and make it retroactive to the origin of the corporation.
As a sub S corporation, you as the owner/operator will have to go on payroll and set a reasonable pay rate for yourself and report and pay payroll taxes. Your pay will be deducted as a business expense on the corporate income tax return. Any profit from the sub S corporation above and beyond all ordinary and necessary business expenses, (including your W2 wages), will not be taxed at the corporate level. Instead, the profit (or loss) will flow out to you and any other shareholders on a Schedule K-1 where it will be included as passive income on your form 1040.
The advantage here is that passive income is not subject to the 15.3% self-employment tax which funds your Social Security and Medicare accounts. Sole proprietors and partners in a partnership are required to pay this tax on profits. Also, as passive income, sub S income can offset passive losses. This means that if you are in a high-income bracket, and have losses on rental real estate for example, you can apply those losses to your sub S income.
If you were a sole proprietor or a partner, those rental real estate losses may very well be suspended and carried forward to future years because your income levels are too high and your business profits aren’t classified as passive income. For example: You own three rental properties that report a loss on Schedule E of $50,000 and your sub S income on your K-1 is $200,000. You can apply the rental losses to the sub S income and pay taxes on only $150,000. If you instead were a sole proprietor, you would be required to pay taxes on $200,000 and carry forward $50,000 of passive rental real estate losses to future years. Ouch!
Your wheels are turning. You are considering becoming a sub S corporation, giving yourself a salary of $30,000 on which you will essentially pay the 15.3% self-employment tax although it will be called payroll taxes at that level. Then you’ll take the remainder of your profit; let’s say $200,000 as passive income, free of that big tax hit. Beware! Several years ago the IRS landed on all fours on attorneys doing just that. The project consisted of reclassifying the passive income as wages and hitting them with expensive payroll tax bills along with penalties and interest. Its point being that the wages taken were not reasonable in light of the profit. After all, how many attorneys would go to work for a profitable corporation at a salary of $30,000 per year?
Another caveat: It may not be prudent to go to the expense as well as the increased paperwork requirements of incorporating if your profit is less than $100,000 per year or if you are the type that refuses to keep up with paperwork. Failure to comply with the complex rules and paperwork requirements of corporate life may well blow your corporate structure and the legal shelters it provides right out of the water. That’s why I admonish you to visit both an attorney and a tax pro before diving in.

Sunday, May 22, 2011

Taxes are finished; which documents should you keep or pitch?

You’re done with the taxes for another year. Time to dump the all the receipts and paperwork associated with preparing the return, you think. Not so fast. You might need some of that documentation if you get audited; without it, tax benefits that you claimed could be disallowed.
The IRS generally has three years after you file your federal return in to commence an examination of that return. The major exceptions are cases where a large portion of income is omitted (a six-year limit can apply then) and cases of willful failure to file returns or purposefully fraudulent returns (where no time limit applies).
Here’s what I recommend for record retention for income tax purposes. What you keep to satisfy loan agreements, for employment in certain industries or government, or for other specialized purposes may be more involved.
  • Six to seven years – Tax returns and backup documentation for both income and deductions. Pay special attention to mutual fund and brokerage year-end statements which are often revised. Keep cancelled checks and receipts or acknowledgements to support deductions.
  • One year – Monthly bank records, brokerage statements, pay stubs and other financial data summarized at year-end by a Form W-2, 1099 or other official tax reporting form. Verify that your monthly activity agrees with amounts on those forms.
  • Indefinitely – until at least three years after disposing of a particular property – Employer retirement plan documents (even if you no longer work for the company, as long as you are entitled to benefits); IRA contribution records for any accounts that include “after-tax” amounts; purchase records for stocks, mutual funds or any other securities; documentation of the purchase price and major improvements for your home and any other real estate; and similar documentation for big ticket items such as jewelry, antiques or collectibles. Keeping these records also helps to prove value in the event of loss or damage), both for tax and insurance purposes.

How to Fill out a W-4 Form

I remember when I got my first job and was handed a W-4. I had no idea what it was or how to go about filling it out. For starters, the whole "allowance" thing threw me off. As far as I was concerned, an allowance was something my parents gave me for doing chores when I was a kid.
Then there was the "exemption from withholding" language that made no sense to me. Was I, or was I not, exempt?
I'm sure plenty of high school and college graduates are asking the same questions now as they start their first jobs and fill out a W-4 form for the first time. So let's go over the basics:
Why do I need to fill out a W-4? The information you provide on the form helps your employer figure out how much federal income tax to take out -- or withhold -- from your paycheck.
What's an allowance? An allowance reduces your taxable income. The more allowances you claim, the less tax will be withheld.
So on the W-4 Personal Allowances Worksheet you can enter a "1" on line A for yourself if your parents aren't claiming you as a dependent on their W-4 forms (ask them). Then on line 5 on the actual W-4 form, you can enter a "1." However, you'll be given the option to claim more allowances. The question is whether you should.
I don't want to pay a lot of taxes, so shouldn't I claim as many allowances as possible? No. You can, for example, claim an additional allowance if you're single and have only one job and have less tax withheld. But if you don't pay Uncle Sam during the year, you'll owe at tax time in April. Recent grads who are single and have no dependents will probably get their tax withholding right by claiming "1" allowance.
If you claim "0" allowances, though, you'll probably have too much withheld and will get a fat refund next spring. It sounds tempting, but you'll have less money to spend during the year, and you'll be giving the government an interest-free loan by letting it withhold too much from each of your paychecks.

Retirement Plans, IRAs and Annuities: Avoiding the Early Distribution Penalty

The tax law imposes a 10 percent penalty on early distributions from retirement plans, individual retirement arrangements (IRAs) and annuities. Congress designed the penalty as a disincentive for early retirement and pre-retirement withdrawals. There are, however, numerous exceptions to the penalty, some age related and some not.
The penalty applies to distributions from qualified plans, tax-sheltered annuities (TSAs), eligible state or local government plans, IRAs, Roth IRAs, designated Roth accounts, nonqualified plans funded by trusts or annuities and personally purchased annuities. The penalty does not apply to distributions from eligible tax-exempt organization plans or nonqualified plans not funded by a trust or annuity. Note that the term “taxpayer” as used in this article means any participant in an employer retirement plan (other than a beneficiary) or the owner of an IRA, Roth IRA or annuity.
The early distribution penalty applies only to amounts that are includible in gross income. Thus, for example, it does not apply to the nontaxable portion of any distribution, nor does it apply to the portion of a distribution rolled over tax free from one plan or IRA to another plan or IRA or from one Roth IRA to another Roth IRA. Furthermore, the penalty does not apply to qualified rollover contributions from a plan or arrangement to a Roth IRA or designated Roth account, even if the rollover is taxable.

Congress has provided many other exceptions to the penalty, exceptions that may vary somewhat with the type of plan or entity making a distribution. This article first addresses those exceptions that are common to all plans and annuities and then discusses exceptions peculiar to specific types of plans or annuities. (Note that the Internal Revenue Service (IRS) has not issued any final or proposed regulations dealing with the penalty and its exceptions and the IRS abandoned a previous regulation project.)
Common Exceptions
The Age and Death Exceptions
Under the most significant generally applicable exception, the 10-percent penalty tax will not apply to any distributions on or after the date the taxpayer reaches age 59½. It does not matter whether the taxpayer is then retired. The penalty tax also does not apply to distributions to beneficiaries or to a taxpayer’s estate after the death of the taxpayer.

The Disability Exception
The penalty does not apply to distributions to a taxpayer after he or she is disabled. However, the disability of a spouse will not qualify a taxpayer for the exception, even in a community property state. A taxpayer is disabled if he or she cannot do substantial work because of a physical or mental medical condition that will last for a long and indefinite period or from which the taxpayer will probably die.

For this purpose, a taxpayer can do substantial work if the taxpayer is capable of working at his or her pre-disability or pre-retirement occupation or a comparable occupation, with appropriate remediable treatment. Determination of the taxpayer’s capability must take into account the taxpayer’s education, training and work experience but most importantly the nature and severity of the impairment. Thus, the regulations provide that a taxpayer “ordinarily” cannot perform substantial work if the taxpayer suffers from one of the following specific impairments:
  1. Loss of use of two limbs or physical loss or atrophy of a limb due to certain progressive diseases.
  2. Heart, lung or blood disease causing breathlessness, pain or fatigue on slight exertion.
  3. Inoperable and progressive cancer or other terminal illness.
  4. Severe loss of judgment, intellect orientation or memory due to brain damage or abnormality.
  5. Mental disease requiring continued institutionalization or constant supervision.
  6. Severe loss or diminution of vision, permanent and total loss of speech or total uncorrectable deafness.
The courts tend to apply these regulatory standards narrowly. For example, the Tax Court has held that a taxpayer suffering from clinical depression did not qualify for the disability exception because he continued to trade stocks for himself and others. The court said the taxpayer was engaged in gainful activity because he intended to make a profit from his trading, even though his efforts yielded an overall loss. (The court did not consider the possibility that the taxpayer’s condition may have diminished his ability to make a profit.) The court also found that the taxpayer’s periodic consultation with psychiatrists did not rise to the level of institutionalization or constant supervision (item 5 above).

In another case, the Tax Court held that a taxpayer did not qualify for the disability exception because he did not show that his clinical depression was irremediable. The court stated that an impairment is remediable if reasonable treatment would allow gainful activity. In this case, the taxpayer actually continued to engage in gainful activity. By contrast, a taxpayer did qualify for the disability exception after contracting AIDS and then suffering a nervous breakdown, as did a taxpayer suffering from multiple sclerosis.

Unfortunately, the courts frequently find that taxpayers have offered inadequate evidence of disability. For example, the receipt of private disability insurance payments and the taxpayer’s uncorroborated testimony were insufficient to support the disability exception. The Tax Court also denied the exception to a Christian Scientist whose religious beliefs prevented him from obtaining and offering a medical diagnosis of his condition. Similarly, the court held that evidence of disability was insufficient even though the taxpayer:
  1. Had lost custody of a child he was unable to nurture and
  2. Actually qualified for Social Security disability in a subsequent tax year.
The Substantially Equal Payment Exception
The 10-percent penalty tax will generally not apply to a series of substantially equal periodic payments received annually or more frequently. The periodic payments must start after retirement for qualified plans, TSAs and eligible state or local plans. However, they may start either before or after retirement for IRAs, Roth IRAs, some funded nonqualified plans and personally purchased annuities.

A taxpayer or beneficiary must receive the substantially equal payments over the taxpayer’s lifetime, the joint lifetimes of the taxpayer and beneficiary, a period equal to the taxpayer’s life expectancy or a period equal to the joint and survivor life expectancy of the taxpayer and beneficiary.

Of course, annuity payments of equal amount over the specified periods will generally qualify as substantially equal.

5 Tax Changes That Could Surprise You

As nearly everyone who has ever filed a 1040 form knows by now, Washington ended the year by sending a bunch of goodies to America's taxpayers: a two-year extension of lower tax rates, a one-year break on Social Security taxes and yet another short-term "fix" to the dreaded alternative minimum tax.
But don't let that lull you into complacency. Tax experts are already warning that the good news only goes so far. Over the next two yAears, new rules and Washington's failure to find a long-term fix for old problems means that it will still be easy to trip up on taxes. Taxpayers who buy and sell stock can expect more-detailed forms to help calculate capital gains and losses, a change that shifts more responsibility to brokers. At the same time, people looking to get money back from Uncle Sam for going green might have to lower their expectations.
Overall, experts say, the year-end tax deal helped individuals by extending an assortment of breaks, including tax credits for adoption and for the care of children under 13, and relief from the so-called marriage penalty. Of course, critics of the deal note that the price of all this is steep, since it adds to the nation's already hefty $14 trillion debt. What's more, Congress and the president settled things only for two years, at best. Before you know it, they'll be arguing again about what taxes to raise, what taxes to lower and what to leave alone just in time for the 2012 presidential election. That kind of uncertainty is challenging.

Here are some changes that could take unsuspecting taxpayers by surprise.
Cost basis:
A crucial ingredient in figuring out gains and losses that must be reported at tax time, "cost basis" is the original price of the shares, adjusted for things like commissions, fees and stock splits. In the past, brokers reported to customers and the Internal Revenue Service proceeds from stock sales in a given year, but it was up to investors to figure their gains and losses. Starting this year, brokers have to report the cost basis of individual stocks, a move that shifts the math work from customers, who may not have the skills, to the brokers. But investors are still left with a decision when they buy and sell shares of a company in different batches, or "lots": which to identify as being sold first. Selling a batch purchased at a higher price can mean a lower tax. And once you get a handle on the new rules for stocks, get ready for more: Starting in 2012, brokers have to report cost basis for mutual funds and exchange-traded funds.

Energy credits:
The tax deal extended energy credits for home improvements such as insulation but the credits are much less generous. Now homeowners can claim only up to a $500 lifetime credit instead of last year's $1,500, and they face new limits on some projects, like $200 for replacing windows barely enough to cover the cost of one double-paned window.
Property taxes:

There's no standard deduction for property taxes this year, so you'll have to itemize to get the deduction. People who don't have enough deductions to itemize will be out of luck.

IRA donations:
A provision for people who are 70 or older to donate up to $100,000 to charity each year from their IRA is back. (There's no deduction for the contribution, but it doesn't count as income.) But don't move too fast: Accountants say it's still better for some donors to give appreciated assets outside the IRA and take the full deduction for the contribution.

Alternative minimum tax:
While the December tax deal saved an estimated 21 million Americans from forking over this tax, the break is only for 2010 and 2011. That means lawmakers will probably be hashing it out again some time before the year is out. On the bright side, tax experts say the aggravation of dealing with the AMT, year in and year out, could finally spur a move for a permanent solution.

Thursday, May 19, 2011

Tax Break for Self-Employed Likely to Vanish

Paula Fleming, a freelance copy editor in Minneapolis, spends $3,600 a year on bare-bones health insurance for herself and her husband. For the 2010 tax year, for the first time, she could deduct that amount from her income when she pays the self-employment tax, the 15 percent levy all freelancers are required to contribute to Social Security and Medicare, saving her $540. Fleming's not counting on the same break for the 2011 tax year, though, because Congress passed it solely for 2010 in last year's Small Business Jobs Act.
Despite politicians' calls for tax reform and oft-professed devotion to small business, prospects for passing two tax fixes that self-employed business owners like Fleming have sought for years are shrinking, small business advocates say. One bill would make the health insurance tax break permanent, bringing the self-employed in line with payroll workers, whose health insurance is fully deductible. The other would simplify the home office deduction, a proposal that has been around for at least a decade.
It's a perfect storm of politics right now. You have a divided house in Congress and you have a Presidential election coming up. The only expectation you can have is gridlock. Twenty-two million Americans are self-employed business owners, and more than half work from home, she says.

$1.9 Billion in Tax Savings

The health insurance deduction for 2010 will mean $1.9 billion in tax savings for people who work for themselves, according to an estimate by the Joint Committee on Taxation. It also corrects a quirk in the tax code that leaves this segment—already on the hook for contributions to Social Security and Medicare that are normally split between worker and employer­—as the only businesses whose health-care costs are not fully deductible.
Simplifying the home office deduction would give home-based business owners the option of a standard $1,500 write-off instead of the complicated calculations required to claim the deduction now. In an online survey of 300 members in April, the National Small Business Assn. found that only 47 percent who qualified took the home office deduction. The rest skipped it because they thought it would raise their chances of being audited or because it was too complex.
Both proposals have support from business lobbying groups and have had bipartisan sponsors in several Congresses. That doesn't mean they'll go anywhere. I think they are likely not to move.Their best chance to pass is as part of a broader overhaul of the tax code. The prospects of a larger tax bill get dimmer and dimmer as we move into the summer.

Deficit Concerns

Representative Ron Kind (D-Wis.), who has co-sponsored both bills and introduced similar legislation in previous sessions, says success depends on the cooperation of Republicans in the House, who fought last year's jobs act that included the one-year health insurance deduction. "They may not be that opposed to just letting everything expire," Kind says. Getting the health insurance deduction extended is "a tremendous priority" for California Republican Representative Wally Herger, who introduced the bill in the current session, says spokesman Matt Lavoie.
Washington's heightened sensitivity to increasing the deficit means that lawmakers would have to pay for any bill to extend the deduction with spending cuts or other sources of revenue. "The one challenge that anything faces now is a revenue issue," says Bill Rys, tax counsel at the National Federation of Independent Business, which supports the deduction. He cites the effort to repeal 1099 reporting requirements—seen as a paperwork nightmare for small companies—that both parties and the President supported, which was still delayed for months by squabbles over how to offset the cost. Rys describes both the health insurance deduction and the home office simplification as "common-sense" fixes with bipartisan support. "It really achieves a goal that a lot of people are talking about here in Washington, which is simplifying the tax code."
For Fleming and other self-employed workers, it's a matter of fairness. For one year, she was eligible for the same tax benefits for health insurance costs that other businesses got. It doesn't make sense for them to be rescinded.

Tuesday, May 17, 2011

Solo 401(k) lets self-employed shelter more of their income

Rules for the solo 401(k) allow you to play the roles of both employer and employee, allowing you to contribute more to the plan than you could to a SEP-IRA.
If you're self employed and yearning to shelter some of your income from taxes, you probably know all about SEP-IRAs, the retirement plan for small-business owners.
But do you know about so-called solo 401(k)s?
Probably not, unless you can afford to put a substantial amount of your income into tax-sheltered accounts. If you do, solo 401(k)s can offer some advantages.
They give you a lot more options.
The solo 401(k) rules allow you to play the roles of both employer and employee, allowing you to contribute more to the plan than you could to a SEP, or simplified employee pension plan.
To be specific, a SEP allows you to contribute up to 20% of net self-employment income to the plan, maxing out at $49,000 in contributions per year.
But with a solo 401(k), as your own employee, you can contribute as much as 100% of your earnings to the solo 401(k), up to $16,500 in contributions annually (that goes up to $22,000 annually if you're over the age of 50). Then, in the role of your own employer, you can contribute an additional 20% of the business' net income as a profit-sharing contribution.
The ability to contribute in this lavish manner would be of concern only to the smashingly successful. But if that spells you, the individual 401(k) is definitely worth a look.
Consider a hypothetical 52-year-old with $150,000 in net business income. If he used a traditional SEP, the most he could contribute to the tax-sheltering account would be $30,000 (20% of the $150,000).
Now consider a hypothetical businesswoman in the same situation who chooses a solo 401(k). She'd be able to contribute $22,000 as the employee, plus $30,000 more as the employer, sheltering a total of $52,000 annually. That extra $22,000 in contributions to the plan would cut her federal income tax bill by nearly $6,200, assuming she's in the 28% federal tax bracket. If she's in a high-tax state, such as California or New York, she would save considerably more.
For those who are as concerned about future taxes as they are about those that they pay now, the solo 401(k) has another unique feature. It allows you to set up your employee contributions Roth-style. That means you don't get to deduct those contributions when they are put into the account, but when that money is taken out of the plan in retirement it's 100% tax free. (The employer, profit-sharing portion of the contributions would be, as usual, tax sheltered before retirement and then subject to taxes in your golden years.)
For people who want to put aside substantial savings, the solo 401(k) is clearly the best option.
What's the catch? If you want all the bells and whistles, setting up a 401(k) can be cumbersome and costly.
You can set up solo 401(k) accounts with big mutual fund companies, such as Vanguard and T. Rowe Price, which each charge about $20 a year to set up and administer the plans. It's about the same rates as for their SEPs. But both fund companies note that with solo 401(k)s, you may have to fill out additional IRS forms once your retirement plan balance exceeds certain levels.
And neither Vanguard nor T. Rowe Price offers the option of borrowing from solo 401(k) accounts. If that flexibility is important to you, you may have to pay some hefty fees.
ShareBuilder, for example, charges $125 to $195 to set up a solo 401(k) with a borrowing option. There's an additional $75 administrative fee if you do end up taking out a loan.
ShareBuilder also charges a $15 monthly fee to anyone with less than $250,000 under management. A 401(k) loan that reduced your balance to below that threshold could trigger the monthly fees, making that type of loan a very costly way to borrow.