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.

Sunday, May 15, 2011

Reverse Mortgages - Estate Planning and Income Taxes

A reverse mortgage is a loan program in which the homeowner receives payments from the lender rather than making payments on a loan.

To qualify, you must be at least 62 years old and own your home free and clear, or have a very small loan balance relative to the value of your home. A formula is used to calculate the amount of money that can be loaned against your home based on your life expectancy and the amount of equity in your home.

The older you are and the more equity you have, the larger the loan amount. The idea of the reverse mortgage program is to give senior citizens money to live on without being forced to sell their home when their equity runs out.

Homeowners can receive money from the reverse mortgage in monthly payments, or, if they prefer, they can get a lump sum of cash.

The monthly cash payments (or lump sum) that you receive from a reverse mortgage are not taxable income because you (or your heirs) have to pay the money back when the home is sold. It is just like any other kind of loan. Borrowed money is not "income" because it is a debt obligation that has to be repaid.

Now, let's look at how a reverse mortgage affects your interest deduction. We all know that the interest paid on your home mortgage is tax deductible each year. It is the last great tax shelter available to the average American.

But what happens when you don't pay your mortgage interest each year, as is the case with a reverse mortgage?

You don't lose the interest deduction, you merely have to wait until the interest is actually paid before you can claim it.

For example, if a homeowner had accumulated $60,000 worth of unpaid interest on his reverse mortgage and decided to sell his house, he could claim a $60,000 mortgage interest deduction for the tax year in which the home sale closed.

Some homeowners use this feature of reverse mortgages as an estate planning tool. Financial planners sometimes use reverse mortgages to reduce the estate tax burden on their clients.

Even though no payments are required on a reverse mortgage, financial planners sometimes have their clients pay down some or all of the accumulated interest in tax years when it is advantageous for them to do so.

In some cases, an estate planner will have his clients take out a reverse mortgage and use the proceeds to buy a single payment "last-to-die" insurance policy that would pay off the reverse mortgage. The money left over would then be given to the heirs.

When the estate is settled, the tax-free insurance proceeds would pay off the reverse mortgage principal, and the accrued mortgage interest will be used to offset estate taxes. So, in essence, the estate planner has moved money from the taxable pile to the nontaxable pile by acquiring a reverse mortgage at no cost to his client and providing some cash up front for a gift to the children or other heirs.

As you can see, the tax consequences of a reverse mortgage can get a little complicated if you are using sophisticated estate planning strategies, so please consult a professional tax adviser before making any final decisions.

If you are just using a reverse mortgage to generate cash to live on until you pass on, however, you won't have to worry about the income tax consequences. The unpaid interest will be deducted from the sale or refinance of your home by your heirs.

Employee versus Independent Contractor

The IRS is stepping up audits on employee classification. It is very important to make the proper decision about employee classification.

If an employee is incorrectly identified as an independent contractor you may be liable for the self employement taxes that you should have paid plus penalties.If you are unsure don't feel bad you are in common company. Congress’ General Accounting Office (GAO) has estimated that 38 percent of employers examined misclassified "independent contractors". Both WalMart and FedEx have lost lawsuits or paid penalties relating to misclassification of employees.

The general rule is that an individual is an independent contractor if , the person for whom the services are performed have the right to control or direct only the result of the work and not the means or methods of accomplishing the result.In determining whether the person providing service is an employee or an independent contractor, all information that provides evidence of the degree of control and independence must be considered.

Facts that provide evidence of the degree of control and independence fall into three categories:
Behavioral: Does the company control or have the right to control what the worker does and how the worker does his or her job?
Financial: Are the business aspects of the worker’s job controlled by the payer? (these include things like how worker is paid, whether expenses are reimbursed, who provides tools/supplies, etc.)
Type of Relationship: Are there written contracts or employee type benefits (i.e. pension plan, insurance, vacation pay, etc.)? Will the relationship continue and is the work performed a key aspect of the business?

Behavioral control refers to facts that show whether there is a right to direct or control how the worker does the work. A worker is an employee when the business has the right to direct and control the worker. The business does not have to actually direct or control the way the work is done – as long as the employer has the right to direct and control the work.

The behavioral control factors fall into the categories of:
Type of instructions given
Degree of instruction
Evaluation systems

Types of Instructions Given
An employee is generally subject to the business’s instructions about when, where, and how to work. All of the following are examples of types of instructions about how to do work.
When and where to do the work.
What tools or equipment to use.
What workers to hire or to assist with the work.
Where to purchase supplies and services.
What work must be performed by a specified individual.
What order or sequence to follow when performing the work.

Degree of Instruction
Degree of Instruction means that the more detailed the instructions, the more control the business exercises over the worker. More detailed instructions indicate that the worker is an employee.  Less detailed instructions reflects less control, indicating that the worker is more likely an independent contractor.
Note: The amount of instruction needed varies among different jobs. Even if no instructions are given, sufficient behavioral control may exist if the employer has the right to control how the work results are achieved. A business may lack the knowledge to instruct some highly specialized professionals; in other cases, the task may require little or no instruction. The key consideration is whether the business has retained the right to control the details of a worker's performance or instead has given up that right.

Evaluation System
If an evaluation system measures the details of how the work is performed, then these factors would point to an employee.
If the evaluation system measures just the end result, then this can point to either an independent contractor or an employee.

If the business provides the worker with training on how to do the job, this indicates that the business wants the job done in a particular way.  This is strong evidence that the worker is an employee. Periodic or on-going training about procedures and methods is even stronger evidence of an employer-employee relationship. However, independent contractors ordinarily use their own methods.

Financial control refers to facts that show whether or not the business has the right to control the economic aspects of the worker’s job.
The financial control factors fall into the categories of:
Significant investment
Unreimbursed expenses
Opportunity for profit or loss
Services available to the market
Method of payment

Significant investment
An independent contractor often has a significant investment in the equipment he or she uses in working for someone else.  However, in many occupations, such as construction, workers spend thousands of dollars on the tools and equipment they use and are still considered to be employees. There are no precise dollar limits that must be met in order to have a significant investment.  Furthermore, a significant investment is not necessary for independent contractor status as some types of work simply do not require large expenditures.

Unreimbursed expenses
Independent contractors are more likely to have unreimbursed expenses than are employees. Fixed ongoing costs that are incurred regardless of whether work is currently being performed are especially important. However, employees may also incur unreimbursed expenses in connection with the services that they perform for their business.

Opportunity for profit or loss
The opportunity to make a profit or loss is another important factor.  If a worker has a significant investment in the tools and equipment used and if the worker has unreimbursed expenses, the worker has a greater opportunity to lose money (i.e., their expenses will exceed their income from the work).  Having the possibility of incurring a loss indicates that the worker is an independent contractor.

Services available to the market
An independent contractor is generally free to seek out business opportunities. Independent contractors often advertise, maintain a visible business location, and are available to work in the relevant market.

Method of payment
An employee is generally guaranteed a regular wage amount for an hourly, weekly, or other period of time. This usually indicates that a worker is an employee, even when the wage or salary is supplemented by a commission. An independent contractor is usually paid by a flat fee for the job. However, it is common in some professions, such as law, to pay independent contractors hourly.

Type of relationship refers to facts that show how the worker and business perceive their relationship to each other.

The factors, for the type of relationship between two parties, generally fall into the categories of:
Written contracts
Employee benefits
Permanency of the relationship
Services provided as key activity of the business

Written Contracts
Although a contract may state that the worker is an employee or an independent contractor, this is not sufficient to determine the worker’s status.  The IRS is not required to follow a contract stating that the worker is an independent contractor, responsible for paying his or her own self employment tax.  How the parties work together determines whether the worker is an employee or an independent contractor.

Employee Benefits
Employee benefits include things like insurance, pension plans, paid vacation, sick days, and disability insurance.  Businesses generally do not grant these benefits to independent contractors.  However, the lack of these types of benefits does not necessarily mean the worker is an independent contractor.

Permanency of the Relationship
When a worker is hired with the expectation that the relationship will continue indefinitely, rather than for a specific project or period, this is generally considered evidence that the intent was to create an employer-employee relationship.

Services Provided as Key Activity of the Business
If a worker provides services that are a key aspect of the business, it is more likely that the business will have the right to direct and control his or her activities.  For example, if a law firm hires an attorney, it is likely that it will present the attorney’s work as its own and would have the right to control or direct that work.  This would indicate an employer-employee relationship.

There is no “magic” or set number of factors that “makes” the worker an employee or an independent contractor, and no one factor stands alone in making this determination. Also, factors which are relevant in one situation may not be relevant in another.

The keys are to look at the entire relationship, consider the degree or extent of the right to direct and control, and finally, to document each of the factors used in coming up with the determination.

When someone is unsure of the status they can file form SS-8 with the IRS and they will make the determination. This can take up to 6 months but if you anyone in a business that continually hires the same types of workers to perform particular services may want to consider this option.

Saturday, May 14, 2011

New Tax Breaks for the Business Use of a Car

Are you buying a new car for business? Uncle Sam has tax deals for you. This year, there's an even bigger break than in the past for buying a behemoth gas-guzzler. If you're buying a smaller car, there's a new reason to buy one costing more than $31,000 instead of less. There's also a new nudge for leasing over buying.
That's the upshot of recent guidance from the IRS concerning two changes in the law Congress made last year. The rules apply to cars bought after Sept. 8, 2010, and before Jan. 1, 2012. ... Here's a quick review of rules old and new.
• What's deductible. Unless a car is used 100% for business, expenses aren't fully deductible. Taxpayers must figure the percentage of business versus personal use and apply the business percentage to total expenses to arrive at the deduction. ...
• Other deductions. Unreimbursed tolls and parking fees are deductible as a miscellaneous expense (by employees) or on Schedule C (by the self-employed), as long as they aren't for commuting.
• How to figure the deduction. Taxpayers usually have a choice: Either deduct a flat 51 cents per business mile (in 2011), or write off IRS-approved depreciation plus actual costs for gas, maintenance and insurance, among other things. ... Using the flat allowance might make sense for a hybrid owner who uses little gas, while actual costs often work best for those with less-efficient cars.
• Depreciation deductions. ... The bottom line: This year Congress is running a large "bonus depreciation" special on cars weighing more than 6,000 pounds, such as the Cadillac Escalade and Nissan Armada. Taxpayers may deduct 100% of the car's cost in the first year—subject to the personal use disallowance, of course. Even better: If this deduction creates a loss, it may be used against other wages or carried back to generate a refund. ... Depreciation is far less generous for cars weighing less than 6,000 pounds. Cars costing more than $15,300 get first-year depreciation of $11,060 this year, but those costing more than $30,625 get more in years two through six than those costing less.
• Buy or lease? ... [E]xperts say to look hard at leasing if you want an expensive car weighing less than 6,000 pounds and plan to replace it every two years or so.

Friday, May 13, 2011

Five Audit-Proofing Tax Tips for the Self Employed

When you’re self employed filing a Schedule C with your tax return, your chances of being audited are greater than if you were a wage earner.
Why? Because the IRS suspects that you will attempt to either hide income or write off personal expenses as business deductions. Let’s face it, if all you are reporting on your tax return is income from a W2, what’s there to audit? Even if you input the numbers wrong, the IRS will match it up with the copy it got from your employer and send you a correction letter along with an adjustment to your refund or tax liability. According to various reports, audits of the self-employed are on the rise, here’s what you can do to keep the taxman off your back:
1. Use a professional software system to track the income and expenses of your business. Your credibility increases in the eyes of an IRS agent if your tax return is based on professionally-prepared financial statements, especially if maintained by an outside firm. You can use the same software to track your personal income and deductible expenses as well.

2. Document red flags. You are allowed to deduct all “ordinary and necessary business expenses” which translates into thinking in terms of “Would I make this purchase if I didn’t have this business?” If the answer is no, than you more than likely have a deductible business expense. But it’s important to know the rules and to have proper documentation to substantiate the deduction. Some expenses receive considerably more scrutiny than others.
The IRS loves to investigate automobile expenses as taxpayers are required to keep a mileage log, which can be a lot of work. Even though I have met only client who kept a log, I’ve represented clients in numerous audits and found other ways to substantiate the deduction to the satisfaction of the auditor. Here are some tips:
- If you use an appointment book or calendar, save it along with your copy of the tax return. A mileage log can be reconstructed from those pages.
- Save vehicle repair receipts as the odometer reading is recorded on them and total mileage for the year can be extrapolated if there is more than one receipt.Record your beginning and ending odometer reading in your appointment book on Jan. 1 and again on Dec. 31.
- Travel, meals and entertainment expenses are close runner ups when it comes to scrutiny. Go to and read Publication 463 to determine what you can and can’t deduct. Here’s what you need to know:
- Travel, especially to vacation destinations like Las Vegas or Hawaii should be documented with more than purchase receipts to prove business intent. Save things like flyers advertising the trade show or the continuing education seminar or letters from prospective clients at that location in your tax file to prove the purpose of the trip was primarily for business.
- On receipts for meals and entertainment mark the name of the person entertained and a brief note describing the business purpose.With more people working remotely, home office expenses have become another favorite target of the IRS. Here’s what you should know:
- Take photographs of the house and the office area. The photos will serve two purposes: they will show the proportion of the business area compared to the personal living area to substantiate the amount of space claimed as well prove that there is in fact a business area.
- Know the rules: The home office must be your principle place of business and must be used exclusively and on a regular basis for business purposes.

3.) Document sources of all income. If you are audited, the first thing the IRS agent will do is add up all of the deposits from your personal and business bank accounts. If more money went into the bank than was declared on your tax return, the agent will want to know where the money came from and whether or not the income is taxable. If you use QuickBooks for your personal and business books, you will automatically tie out this income, but you still need proof. If the income you record is not taxable (e.g. gifts, inheritances, loans, transfers from personal funds) keep a copy of the check or document that accompanies the income to prove the source is not taxable.

4.) Let a professional prepare your income tax return. Self-prepared returns are more likely to be audited because the IRS thinks a nonprofessional has limited knowledge. Tax law is complex. And if you are self-employed, no matter how small your business, your tax return is now a complex creature.

5. Rethink your legal form. Corporations, LLCs, and partnerships are less likely to be audited, but that should not be the sole reason to incorporate. Discuss this option with a tax professional and your attorney before making any changes.

Monday, May 9, 2011

How to Prevent Financial Fraud at Your Business

Small business owners reported $8 billion in fraud losses in 2010, mainly related to hacked credit cards and bank accounts, according to a new study of about 900 small business owners and self-employed individuals by Javelin Strategy & Research, a research firm in Pleasanton, Calif. Of that $8 billion, some $5.43 billion was out-of-pocket expenses incurred due to fraud, including lost business, legal fees, and insurance payouts, Just as a general rule: As the economy drops, the fraud rate increases, and as the economy increases, the fraud rate decreases. So part of the decline is due to increasing sales and GDP in late 2010. Part is unfortunately due to the fact that some small and midsize businesses closed during the economic downturn.
But there's also been improved education about credit-card fraud, and the larger small companies are instituting best practices in line with payment card industry compliance and tighter regulation. There was also a decline in existing card fraud, which small businesses are about 50 percent more likely to suffer than consumers.
The credit-card number seems to be a higher-value target for fraudsters, who may view debit cards as more secure or perhaps inherently more risky to put into play.
There is a substantial gap between reported losses from fraud and the total cost of dealing with a fraud. It seems that cost has never been completely accounted for. It's a huge amount of dollars that's lost by financial institutions, card issuers, merchants, and insurance companies due to a fraud that's perpetrated.
For instance, the state of Texas announced this year that an unencrypted data file containing 3.5 million records was left inadvertently on a publicly accessible server. The records included names, addresses, Social Security numbers, and driver's license numbers as well as dates of birth.
What happens is that scammers put together a very personalized e-mail asking you to confirm a recent purchase or confirm your driver's license number. They want you to click on a harmful link or open an attachment that looks like a Word document but actually puts something on your machine called a key logger, so the next time you type in your bank account and password, they can get that data.
It's very common for friendly fraud to be involved in small and medium-size businesses. You know the people in the company, they know you. Everyone may be working on the same computer system where bank account information is stored right along with marketing and product data. Owners tend do things like give their passwords out to employees who are believed to be trusted old friends.
Every business should do regular, complete antivirus sweeps with updates. Don't just get a free trial of antivirus software and let it lapse. Keeping your antivirus software up to date doesn't stop all the fraud, but it goes a long way toward catching the obvious ones.
Education is also important. I hope financial institutions will work with business owners. Not to turn them into IT people, but just to let them know not to open unknown e-mails or not to click on unknown links to watch a "fun video."
And if you click on an e-mail and you get a warning that says, "Do not open"—don't do it. It sounds crazy, but I know people who think if they've got antivirus software, they can click on anything and they're protected.
Sign up for real-time alerts on all your accounts, including online banking. Bankers and card issuers typically allow a robust set of alerts to let you know immediately if fraud is suspected.
Of course, antivirus software and plug-ins that secure your computers against "man-in-the-browser" attacks, which include those key loggers I mentioned.

Saturday, May 7, 2011

Simple Rules For Tax Disputes

No one wants to wind up in a tax dispute.  You want to file your returns and hope everything goes off without a hitch.  You want every income item to match up, every claimed deduction or credit to be approved, and every schedule you attach to pass muster.  And you’re willing to do everything you can to avoid an audit.
This isn’t limited to income tax returns.  It applies to payroll tax returns, gross receipts, excise, sales and use returns.  No matter how secure you feel in your tax positions, who wants to go to the time, expense and aggravation of having to debate issues or even prove up items?  No one.
But in the real world, some percentage of tax returns will be examined.  It is an increasingly small percentage these days, though some say the rich are different.  Despite periodic pendulum swings in audit rates, the overall audit rate will probably continue to decline.  Most taxpayers take that as good news.
Yet the nature and scope of tax audits is also changing.  Traditionally, some audits were full-on office or field audits.  You or your accountant or tax lawyer would sit with an auditor in your home, business or at the local IRS office to pour through your receipts and other records.
Such full-blown audits are a rarity today.  With the exception of large companies that may encounter these extensive reviews, the vast majority of audits today are by correspondence.  A correspondence audit is considerably less threatening, but also considerably less interactive.  You don’t have an unlimited number of chances to explain and justify what you’ve claimed before the proposed adjustments are written up and shipped off to the next level of the IRS.
However you end up in an audit, here are suggestions to make your experience easier.
1.  Make Every Response Timely.  Don’t get crossways with the IRS by failing to respond on time.  Some IRS notices or letters will not have a specific date for response, but most do.  Often the deadline will be 30 days.  Whatever the deadline, respond in time.  If you can’t, call to get an extension and confirm your extension in writing.
All of this may sound rigid, but the IRS is a huge organization and you’ll be dealing with people handling a huge caseload.  Some letters or notices cannot be extended, such as an IRS Notice of Deficiency, also called a 90 day letter (which must come via certified mail).
 2.  Attach Documents.  Don’t just explain why you’re entitled to whatever tax point is in question.  Whenever possible, attach copies of receipts or other proof.  The IRS is used to hearing arguments, but if you can support the arguments with documents you’ll be better off.
In fact, if you have multiple documents, send copies of them all.  In general, the more documents the better.  Keep copies of everything. 
3.  Be Organized.  Don’t ramble and don’t whine in your correspondence.  State your case clearly and make your arguments cogently.  Refer to the documents you are attaching.  If possible, provide a key to the exhibits or use exhibit tabs. 
Remember that your submission will be your first chance to make an impression on the IRS agent.  You want to make your first impression a good one.
4.  Professional Help?  Consider getting professional help.  You may not need professional help until your case gets beyond the audit stage.  Still, if significant money is involved, you probably should have professional help even at the audit stage.  Sometimes a thorough approach early on can obviate later proceedings.

Friday, May 6, 2011

College Aid can affect Income taxes

While evaluating those college financial aid offers, be aware that there are more numbers to consider than the ones on the page. Tax consequences can both add to and subtract from your college aid.
On the negative side, scholarships, grants and fellowships can be taxable to the student if they exceed the qualified expenses outlined by the IRS.
With tuition, fees and books, you need a fairly large financial aid package to get over the limit. The most important thing to remember is room and board do not count as qualified expenses.
On the plus side, many taxpayers can take one of two tax credits or a tax deduction for tuition and fees paid for during the previous year.
But one question I had this year with a client was who takes the credit -- the student or the parent? You sometimes have to run an analysis to see which gives you the most tax savings.
Let's break down both sides of this taxing question.
According to IRS publication 970, "Tax Benefits for Education," if a student's financial aid -- generally a combination of school, state and federal grants and scholarships -- is greater than tuition, fees, books and other required course expenses, taxes are owed on the remainder of the aid. This includes aid such as institutional or private scholarships, federal Pell and Fulbright grants, the Texas grant and athletic scholarships.
Not included in this group are tuition reductions by the school, if the student teaches or does research for the school. Veterans education benefits (even if they include housing) are also not taxed, nor is attendance at the service academies, since attending is a job and cadets get tax withholding in their paychecks.
The big thing to remember is that nontuition-related expenses, like room and board, transportation and other typical living expenses not mentioned above, cannot be covered by financial aid that is tax-free.
Students will receive IRS Form 1098T from the school to show any scholarships or grants awarded by the school, she said. It's up to the student (or parent) to figure out whether any aid is taxable.
If the entire scholarship is excluded, you don't have to file. But the taxable portion of a scholarship is considered earned income.
The good news is that the student can still take a standard deduction, even if still listed as a dependent on parents' taxes. The 2011 standard deduction for a dependent on someone else's tax return is the greater of $950 or the student's earned income plus $300, up to $5,800.
That means the student can get up to $5,800 in taxable aid and still not have to pay tax on it.
For example, say a student gets $15,000 in scholarships and grants from the school, but tuition, fees and books come to only $10,000. That's $5,000 in taxable aid. But since the standard deduction can go as high as $5,800, there's no tax due.
Add on a summer or school job that paid $2,000, however, and total earned income is now $7,000. Subtract the standard deduction and that's $1,200 in taxable income. The lowest federal income tax rate is 10 percent, so that would mean $120 in tax owed.
I would definitely take whatever help is given in financial aid. Just be aware of the tax consequences.
Keeping track of financial aid for the academic year, which is typically split into two semesters spanning two tax years, can be a challenge. Just remember in your second, third and fourth years of school to consider your aid from the previous semester.
Also be sure to keep tuition and book receipts, just like any other tax-deductible items, in case the IRS challenges you.
When considering financial aid packages, another piece to include is the type Uncle Sam can give you in the form of tuition credits and deductions.
Last year, the American Opportunity credit was expanded to include up to four years of college for up to $2,500 in qualified college education expenses (tuition, fees and required books and supplies).
The credit, which was extended last year to go through 2012, is per student, and parents can qualify with income limits up to $90,000 for a single parent and $180,000 for married couples. One big advantage to the American Opportunity credit is that it is refundable up to 40 percent. This means that even if you don't owe taxes at the end of the year, you can get up to 40 percent of this credit given to you in the form of a tax refund.
A second credit that can be taken instead of the American Opportunity is the Lifetime Learning credit, which is less (up to $2,000) and is per return, meaning even if you have several members of your family in school, you can still only claim this credit once a year.
This credit is more flexible in that you do not have to be pursuing a degree to claim it and there are no limits on the number of years in school it can be used, making it a good choice for graduate students.
Income limits for the Lifetime Learning credit are $60,000 single and $120,000 married filing jointly.
Either credit should be considered in calculating your student's overall financial aid, if you fall under the income limits. While you will have to pay the tuition, fees and books it covers upfront, you could get a benefit from the credits come tax time.
Finally, tuition and fees can be deducted, although the deduction is not as much tax savings as the credit would create. To qualify for this deduction, your income has to be under $80,000 for a single filer and $160,000 for married filing jointly.
The deduction can take your income subject to tax down by as much as $4,000.

Thursday, May 5, 2011

Where's My Income Tax Refund?

"Where's my refund?" That's the question likely on the minds of the tens of thousands of Wisconsinites who waited until the last two weeks of the filing season to file their tax returns.

Many of these last-minute filers are in the waiting zone -- awaiting receipt of their federal income tax refunds, the Internal Revenue Service said. Taxpayers who combine electronic filing with direct deposit generally receive their refunds within seven to 10 days of filing their returns. Those who e-file and opt for a paper check generally receive it within three weeks of filing. Taxpayers who file using a paper return and don't opt for direct deposit generally receive their paper check through the mail within six weeks of filing. Refunds from amended returns are typically issued in eight to 12 weeks.

The IRS has made the waiting easier by providing taxpayers with several options to check refund status.

"Where's My Refund?" on the IRS website, gives online access to refund information for both direct deposit and paper check refunds. Those without computer access can call the IRS Refund Hotline, 800-829-1954. Internet-connected visually impaired taxpayers who have the Job Access With Speech screen reader with a Braille display can also access Where's My Refund? online.

Apple and Android smartphone users who have downloaded IRS2Go can check their refund status using the IRS app launched earlier this year.

Information on refund status is generally available to taxpayers about 72 hours after the IRS acknowledges receipt of their e-filed returns, or three to four weeks after mailing a paper return.

The Where's My Refund? tool will not provide refund information for current tax year amended tax returns (1040X) and business tax returns, or prior year returns.

To check the status of a refund using Where's My Refund? on the website or using IRS2Go, taxpayers need to provide the following information from their tax returns:

  • Social Security number (or individual taxpayer identification number).
  • Filing status.
  • Refund amount shown on the tax return.
Once personal information has been entered, several responses result, including:
  • Acknowledgement that the return was received and is being processed.
  • The mailing date or direct deposit date of the refund.
  • A notice that the IRS could not deliver the refund because of an incorrect address. In this instance, change or correct the mailing address online using Where's My Refund?
If the U.S. Postal Service returns a paper refund check as undeliverable, taxpayers may be able to use Where's My Refund? to change the address the IRS has on file. Or, they may complete and submit IRS Form 8822, Change of Address. Form 8822 can be downloaded and printed from the IRS site or ordered by calling 800-TAX-FORM. The completed Form 8822 should be sent to the address on the form.

In most cases, if more than 28 days have passed since the IRS mailed the refund, taxpayers can file an online claim for a replacement check.

Tuesday, May 3, 2011

Big name tax preparation services are a waste of money

You need your personal taxes done and they’re not that complex, so you think you’ll just run right over to H&R Block, Jackson Hewitt, Liberty Tax Service, or some other tax preparation franchise. It’s easy and they must be good or they wouldn’t have so many locations and be in business so long, right?
Wrong. The fact of the matter is that you’re taking a big risk if you have your taxes done at one of the large tax return sweatshops or a similar smaller service. These companies have a few major drawbacks that most consumers are unaware of:

The prices they charge are generally too high. Even the simplest of tax returns can cost you well over $100, and that type of fee is just too much. Add in some things like a rental property or an in-home business, and watch your tab for the tax return run up fast.

The name of the game at the tax return franchises is turning out as many tax returns as fast as they can, at the lowest possible cost. This means that most of the employees are inexperienced data entry clerks who really know next to nothing about the tax law. They couldn’t spot an opportunity or a problem with your tax situation if their life depended on it. Do you really want to risk having your taxes prepared by someone who took a day-long class to learn how to enter data into a computer program?

The “accuracy guaranteed” gimmick is all hype. Your tax preparer is supposed to accurately calculate your taxes. They don’t need to offer a worthless guarantee like this. Simply put, the taxpayer gets no value.

Don’t fall for the “we’ll check last year’s return” scam. This is just a way to get you in the door, and really doesn’t help you. For the average taxpayer, the IRS will notify you if you’ve missed some income or deductions, or if you’ve made some other type of error.  You don’t need a low quality tax preparer to do that for you. It’s just baid.

Avoid the bells and whistles. These places make a lot of their money by selling you other products, like refund anticipation loans or other nifty-sounding services to get your money to you fast. Selling these worthless products is how they really make their money. The fees for these things are way too high and not worth the cost. If you file your taxes electronically and request direct deposit of your refund, you should have your money from the IRS within a few weeks. Why waste money on a service you don’t really need when you can get your refund so quickly for free?

What’s the alternative to the H&R Blocks and the Jackson Hewitts? If your tax situation is very simple, you can purchase tax software to do the taxes on your own. If you’re not comfortable with that, look for a local Certified Public Accountant who does lots of income tax returns. They are generally much more experienced with taxes and can be priced very competitively.

One note about filing on your own. Don’t fall for the “free software” gimmick from companies like Turbo Tax, TaxACT, or H&R Block. Nothing is ever really free. They will typically offer you access to the federal tax return portion of the software for free, but if you want to e-file or do a state return, you’re going to end up paying. (And since almost all states have income taxes, it’s likely you’re going to need to do a state return.) You’ll probably still want to use their software, and that’s fine. Just understand that by the time you’re done, you’re probably going to be paying something for the software.

Monday, May 2, 2011

Three Fundamental Questions About Paying for College

This month marks the beginning of high school graduation season and the start of something new for many families: college.
Over the years, I’ve learned how differently two parents (that is, when there are two parents in the picture) can feel about sending their children to college and figuring out how to pay for it. In recent conversations, I’ve heard more than once that couples were surprised to discover that they didn’t agree when it came to their children and education.
Why the surprise?
They just assumed that they both felt the same way and talked around the issue for years instead of talking about it directly.
If you haven’t had this conversation and put together an education plan for your children, take the time to do it now. We’ve heard story after story about the rising cost of college, and planning can make a massive difference. But long before you start doing the math, it’s important to talk about three things to make sure everyone is in agreement.
1. Should They Go?
Often we just assume that everyone should go to college, but that goal may be worth rethinking in some cases. There has been plenty written on the merits of trade school, starting a business or going straight into the work force. For some people, the best education may be real life.
I’m not advocating that your children skip college, but you do need to discuss all the options, and those options may vary by child. A good friend always said he believed his son would go to law school, but it became apparent later that it wasn’t the best thing for him. The son went to work in a trade, but his two daughters did go.
2. When Should They Go?
My wife and I took extended breaks during our college years and believe we’re better for it. In Europe, it’s common for many graduating students to take a gap year before entering university.
This proactive break (I’m not encouraging your children to play video games for a year) has started gaining some traction in this country as parents ask themselves, “What’s the rush?” Maybe there’s an opportunity to work a bit or to volunteer for some extended service. I remember returning to school more committed and serious about college because of my experience.
3. Should You Pay?
People avoid or skip this discussion completely, often because it’s the one that triggers the strongest emotions. Some people want to pay for any school where their children win acceptance, regardless of cost. Other parents feel strongly that their children need to earn and pay for their own education. Often these feelings reflect personal experiences, and it’s worth talking about all of them to make sure you understand what’s at the root of your instinctive reactions.
You also need to consider how paying for education impacts other financial goals. Don’t take the cost of college out of context as you measure where you’re at now compared to where you want to be in the future.
Just like every financial goal, preparing to meet the costs of college takes time for most families. Your strategy may be different than your neighbor’s, but you probably can’t afford to wait. Eighteen years passes a lot faster than you think.

Sunday, May 1, 2011

Boston Asks Nonprofits to Triple 'Payments in Lieu of Taxes'

For the first time, Boston’s major tax-exempt institutions — its premier hospitals, universities, and cultural centers — are being asked to make regular voluntary payments to the city based on the value of their property to help offset the rising cost of city services and cuts in state financial aid.
Although many of the city’s nonprofit organizations have been making so-called Payments In Lieu of Taxes for decades, this marks a major change to a system that feels to some organizations uncomfortably close to tax bills. Boston officials recently mailed letters to leaders at 40 major nonprofits asking them to pay up to 25% of what they would owe if their property were not tax-exempt. ...
The new revenue-raising plan — the first of its kind in the nation — is based on the estimated cost of providing basic city services, such as police and fire protection, snow removal, and emergency medical treatment, which account for roughly 25 percent of the city’s budget. And it is designed to gradually increase annual financial payments to the city by the major tax-exempt organizations from the $15 million they paid this year to $48 million over a five-year ramp-up period.
That is still significantly less than the $404 million nonprofits would pay if they were not tax-exempt. New assessments of the property owned by the city’s 40 largest major nonprofits show that its collective value is $13.6 billion, or the equivalent of more than half of the city’s commercial tax base, which is about $25 billion, according to Boston’s Assessing Department.
But support for the plan — the product of a mayoral task force that included representatives from nonprofits — appears mixed among the organizations being asked to pay.
Some nonprofit leaders voiced unequivocal support for the initiative during interviews with the Globe, asserting that their success depends in large measure on attracting visitors — students, hospital patients, and culture lovers — to a safe, well-managed city.
“My primary goal in life is to make Boston University a better institution, but it can only be a better institution if the city thrives,’’ said Boston University president Robert A. Brown .
Eric Buehrens, the interim president and chief executive officer at Beth Israel Deaconess Medical Center, said the hospital is also committed to the new Payments In Lieu of Taxes (PILOT) plan, even though it calls for Beth Israel Deaconess to increase its contribution from $167,000 this year to $750,000 next year and to $3.1 million after five years.