We’re more than halfway through the year, and it’s not too early to begin tax planning. Starting now gives you time to tweak your tax strategies for the year if you’re off track.
Higher-income Americans should take special notice this year because of rule changes in the American Taxpayer Relief Act of 2012.
For one thing, the law raised the top income tax bracket from 35 percent to 39.6 percent. For some, the tax rate on long-term capital gains and dividends rose from 15 percent to 20 percent.
Both changes affect single taxpayers with taxable income over $400,000 and joint filers with income over $450,000.
The higher rates are already in effect, and affected taxpayers should be paying estimated taxes based on those rates, said Mark Luscombe, principal tax analyst at CCH Tax & Accounting North America, which publishes information for tax professionals.
Taxpayers at certain income thresholds also face limits on personal exemptions and itemized deductions and may face new Medicare surtaxes.
If your income isn’t subject to withholding, you will have to pay estimated taxes. This includes income from self-employment, interest, dividends, alimony, rent and gains from the sale of assets, prizes and awards. You also may have to pay estimated tax if the amount of income tax being withheld from your salary, pension or other income isn’t enough.
If you don’t pay enough through withholding or estimated tax payments, you may be charged a penalty. If you don’t pay enough by the due date of each payment period you may be charged a penalty even if you are due a refund when you file your tax return.
If you are filing as a sole proprietor, partner, S corporation shareholder or self-employed individual, you should use IRS Form 1040-ES, Estimated Tax for Individuals to figure and pay your estimated tax.
Credit for child care
If you paid for child care this summer while the kids were out of school, those expenses may qualify for a tax credit that can save you money on your tax bill.
The Child and Dependent Care Tax Credit is available not only while school’s out for the summer, but also throughout the year. But you must meet certain conditions:
You must pay for care so you — and your spouse if filing jointly — can work or actively look for work. Your spouse meets this test during any month he or she is a full-time student, or physically or mentally incapable of self-care.
You must have earned income, such as wages and self-employment. If you’re married and filing jointly, your spouse must also have earned income. There’s an exception to this rule for a spouse who is a full-time student or who is physically or mentally incapable of self-care.
You may qualify for the credit whether you pay for care at home, at a day care facility outside the home or at a day camp.
However, expenses for overnight camps or summer school tutoring don’t qualify. You can’t include the cost of care provided by your spouse or a person you can claim as your dependent.
Be sure to keep your receipts and records to use when you file your tax return next year. Make sure to note the name, address and Social Security number or employer identification number of the care provider. You must report this information to claim the credit.
Investment losses
Look at any investments that have cost you money and consider selling them before the end of the year to offset investment profits. To parlay capital losses into tax savings, you have to sell your investment and take the loss.
If you incur losses from the sale of investments, you may subtract those losses from your capital gains, which are profits on the sale of investments.
If your capital losses exceed your capital gains, you can deduct only up to $3,000 of those losses in a tax year against ordinary income. Any excess will be carried over until it can be offset against future capital gains or be deducted as a loss against ordinary income, with a limit of $3,000 a year.
Be careful not to go overboard in “harvesting” your investment losses. Make sure you’re not making an investment decision based solely on a tax basis.
Beware of Medicare taxes
This year, higher-income taxpayers may need to factor in more Medicare taxes in tax planning.
Not only will the Medicare tax increase on earned income above certain levels, but a new tax will also be imposed on certain investment income.
The Medicare tax has been 2.9 percent on earned income for the self-employed and 1.45 percent for employees, whose employers pay the other 1.45 percent.
Under the new law, both the self-employed and employees owe an additional 0.9 percent on earnings above $200,000 for singles and $250,000 for joint filers.
Also, if your investment income tops certain thresholds, you may owe a 3.8 percent Medicare tax on the excess.
Home office deduction
The home office deduction has been one of the most complicated tax breaks to figure out. But the Internal Revenue Service wants to make it easier for small business owners to keep records and claim the deduction.
So starting this year, you may use a simplified option when figuring out the deduction.
For example, the simplified method gives you a standard deduction of $5 per square foot of your home used for business, up to 300 square feet. The deduction is capped at $1,500 per year.
With the regular method used to determine the deduction, you have to keep records of such expenses as utilities, rent, mortgage payments and real estate taxes.
How do you determine which method is better for you?
“If a taxpayer typically has a larger home office deduction than the simplified method would allow, they should continue to use actual expenses,” Luscombe said. “Otherwise, the simplified method might be more beneficial.”
Sunday, July 28, 2013
Friday, July 26, 2013
IRS eyes payroll tax avoidance tactics via S corporations
Payroll tax collection continues to vex the Internal Revenue Service despite several court cases that have resulted in rulings favorable for the IRS regarding unreasonably low compensation. A recent high profile case was David E. Watson, P.C. v. United States on which the Eighth Circuit ruled in 2012. Watson was an indirect partner in a CPA firm, practicing through an S corporation that paid him $24,000 of salary per year and between $175,000 and $203,000 in profit distributions. The court adjusted his compensation to $93,000.
It isn’t hard to see why shareholders of S corporations attempt to justify wage levels below what the IRS considers “reasonable compensation” (assuming the understated compensation is below the FICA wage base). Both the S corporation and employee save the 7.65% FICA and Medicare taxes on the wages not reported.
Another recent case is Herbert v. Commissioner. Herbert received between $24,000 and $29,000 of wages for the years 2004 through 2006. In 2007, he received $2,400 of wages. Although the Tax Court noted that the corporation lost money or earned very little income in each of the years, and the corporation closed down in 2009, the Court increased the taxable compensation for 2007. The IRS wanted to reclassify all of the draws from the S corporation for 2007 as additional wages (i.e., an additional $52,600). Ultimately, the judge averaged the petitioner’s wages for 2002 through 2006 to arrive at $30,445 as a reasonable wage. (The business was owned by someone else in 2002 and 2003.)
It didn’t help matters that Mr. Herbert used the draws to pay corporate expenses personally. He lost, misplaced or never kept receipts for many corporate expenses he paid with cash. The Court accepted Herbert’s testimony that he in fact paid significant corporate expenses with cash using funds received from the corporation. Nonetheless, the judge also believed that the wages of $2,400 were too low.
The result? Herbert was found to have under-reported his wages, even though the amount of cash drawn out of the corporation covered corporate expenses. If he had maintained a better set of books, paid all of the corporate expenses with corporate (rather than what became to be personal) funds, he wouldn’t have had distributions from the corporation to himself.
Although the wages were quite low, the fact of the matter is the business was failing. There wasn’t an adequate cash flow to pay wages and expenses. By shuffling funds and taking money personally, Mr. Herbert created a payroll tax liability where such liability shouldn’t have existed.
Payroll tax reduction or avoidance is, perhaps, a major reason for the popularity of S corporation status for an operating entity, even though the formation of an LLC under state law provides similar liability protection for the sole proprietor. The IRS projects that 4.6 million Forms 1120-S will be filed for 2012, compared to 3.6 million Forms 1065 (partnership).
As part of its tax reform efforts, Congress is evaluating the continuing treatment of the bottom-line S corporation as not subject to payroll taxes or self-employment tax. The AICPA will be closely monitoring any developments and keeping you up to date through its tax reform page and other communications.
Sunday, July 21, 2013
Preventing Embezzlement- QuickBooks Controls & Procedures
FROM sunburstsoftwaresolutions.com -
Small businesses are particularly vulnerable to theft simply because they don’t have the resources or security controls in place to stop them.
Employee theft is extremely common; unfortunately, we hear about it or read about it in the newspapers all of the time.
While it is fair to say, most people don’t steal, embezzlement does happen; so it only makes good business sense for you to consider what you can do to minimize your employees’ opportunities to steal.
Below are some general internal procedures that many business owners who use QuickBooks can implement quite easily.
Who should be the QuickBooks Administrator? As the business owner, you should create the QuickBooks Admin account and password and be the Administrator for your own QuickBooks company data file. All too often we have seen or heard from many business owners that their CPA or QuickBooks ProAdvisor is the Administrator of their QuickBooks file and that they don’t even know what the Admin password to their own data file is; quite frankly we do not agree with this practice. Your books are YOUR books, just like your business is your business. You should not give that kind of control to anyone.
We have heard of instances where the business owner and the CPA/ProAdvisor has had a “falling out” and the business owner cannot perform even the simplest of Administrator functions because they do not know the Administrator password and the former CPA/ProAdvisor will not tell them what that password is. This results in the business owner having to pay for password retrieval.
Set Up the External Accountant User. QuickBooks 2009 and newer has the ability to create an External Accountant User. Create two different External Accountant Users, one that is actually for your accountant and one that is for you. Learn how to use the Client Data Review tool to monitor what is going on in your QuickBooks file when you aren’t there to see.
Who should know the Administrator password? Your CPA/ProAdvisor or in-house bookkeeper should know what the Administrator password is; otherwise you could be pulled off the jobsite to perform menial tasks.
The Administrator Account should NOT be used when entering daily transactions. The Administrator account is a special purpose user account and should be treated as such.
Each QuickBooks user should have their own QuickBooks user login account. As the QuickBooks Administrator you should create a user account for each person who will have access to your company data file, this includes a user account for yourself which you will use when entering transactions. When you create user accounts you are the one who controls who can access what information.
A word of caution for Enterprise users, the permission setting in the Enterprise version are much tighter than in Pro or Premier and you do need to be careful when setting up user permissions or you can effectively prevent an employee from performing the tasks that you do want them to be responsible for.
When should the Administrator Account be used? We recommend that you use the Administrator login account when reconciling the monthly checking and credit card accounts; and then on an “as needed” basis, as there are times when it is required that you, your CPA, or bookkeeper must be logged into QuickBooks in single-user mode as the QuickBooks administrator – such as changing companywide preferences in QuickBooks or granting permission for a third-party application to access your QuickBooks company data file.
Set closing dates and use the Closing Date Exception Report. On a monthly or quarterly basis, after you have reconciled the bank and credit card statements or after the quarterly payroll tax reports have been completed; set a closing date with a password; closing dates are found from the Edit menu -> Preferences -> Accounting -> Company Preferences tab. This will prevent accidental or unauthorized changes to previously reconciled transactions, because only those people who know the password will be allowed to make changes, and get them into the habit of using the memo field to indicate why a cleared transaction was changed. You can then run a Closing Date Exception Report, found from the Reports menu -> Accountant & Taxes -> Closing Date Exception Report.
Monitor Accounts Receivable Reports. Implement a procedure that by a specified time on Friday that you receive anOpen Invoice Report, found from the Reports menu -> Customers & Receivables -> Open Invoices. You should review this report and then leave it for your mailroom clerk for Monday morning, so that she can make notes of payments received during the week and return it to you after mail time on Friday. You can then compare the previous week’s report to the current weeks report for any discrepancies. For example, the mail clerk indicates that payment for Invoice number 1001 was received on Tuesday, but the current Open Invoice Report shows that it is still outstanding.
Monitor your Accounts Payable Reports. Don’t leave it up to someone else to decide which bills get paid and which ones will be delayed….you could be in for an unpleasant surprise!
How often does your company pay its bills – weekly, bi-weekly, monthly? Implement a procedure in which you receive anUnpaid Bills Detail Report, found from the Reports menu -> Vendors & Payables -> Unpaid Bills Detail by a specified time on a certain day of the week with the current bank balance indicated.
Review the report and YOU decide who gets paid and who doesn’t; maybe even make a few phone calls if cash flow is tight. The day before it’s time to pay the bills, ask for the current bank balance and make any necessary adjustments. Leave this marked up report for your Accounts Payable clerk for the morning that they are to cut the checks. Keep in mind that taking advantage of early payment discounts could help pay for other upcoming bills.
Third Party Tools – Check out AuditMyBooks, a QuickBooks 3rd party tool, which double-checks your accounting records for problems.
The suggestions contained in this article are not designed to turn you, the business owner, into an untrusting boss but rather are suggestions to help you maintain control of your business and its financial affairs.
Wednesday, July 17, 2013
How to Pay Less in Taxes
Karl Frank's new book, "Go Tax Free," might be a hyperbole, but he says almost all taxpayers can take steps to significantly reduce the amount of money they hand over to Uncle Sam every year. "Most people pay more than we have to, and that's a shame. It doesn't take a whole lot of planning and foresight to reduce your tax burden, but you have to do the work," says Frank, a certified financial planner and president of A&I Financial Services LLC in Englewood, Colo.
Now, with plenty of time before the end of the year, is the time to figure out how. Frank says the group that's most primed to cut their taxes are professionals, which he describes as "folks who are already spending below their means and who don't need budgeting help, but who aren't so wealthy that they can hire a team of advisers."
As for the ethics of minimizing your tax burden, Frank says there's nothing wrong with simply taking advantage of the existing tax code. "You have the ability to act with your own integrity and do everything appropriately … We all want more choice and control," he says.
Frank writes about the most universally-applicable techniques, but he emphasizes that everyone's situation is different, and anyone attempting a complex tax move, like taking out an annuity, should consult a financial professional. The worst tax advice, he says, involves blanket statements. "There are no absolutes, and planning thrives in the exceptions … it's really about an expert doing a good job getting to know you," he says.
Still, there are some common areas where Frank says people tend to overpay in taxes. Here are five ways many people can reduce their tax burden:
1. Save more money for retirement.
Frank recommends using individual retirement accounts, either the traditional or Roth variety, to pay fewer taxes while squirrelling money away for retirement. With a traditional IRA, users deduct contributions from their taxes and don't pay anything on the earnings until the money is distributed. With Roth IRAs, after-tax money enjoys tax-free earnings. "I would love to see more people get their money into a Roth IRA. Almost everybody can do it, but there are some income limits," Frank says. Those income limits start at $112,000 for heads of households.
2. Take advantage of other types of savings and investment vehicles.
In general, municipal bonds enjoy a triple tax exemption at the county, state and federal levels, which leads Frank to call them a "great tax planning tool." Still, he warns that bonds will get hurt if interest rates go up (and default is also possible), so there is some risk involved.
Stocks enjoy other tax advantages, too, especially if you plan to pass them on to heirs. "You can buy a stock today, and it's growing tax-deferred, and when you die, your kids can inherit it and get a step-up in basis," which reduces their tax burden, Frank says. The step-up in basis essentially counts the asset at its value at the time of inheritance, and not original purchase.
3. Start your own business.
Frank credits his own relatively light tax burden partly to the fact that he's a business owner. "Business owners have more choice and control over their taxes than anyone else," Frank says. Business owners can keep money in the company to pay fewer taxes, he says, as well as count certain expenditures as company expenses.
4. Have kids.
"From a tax planning perspective, don't skip out on having kids," Frank says. In fact, he says his daughter, now 21, saved his finances back when she was born. At the time, her birth (and status as a dependent) allowed him to qualify for the earned income tax credit, which was $3,000. "It changed my life," says Frank, who adds that most people who qualify for the earned income tax credit don't take it. (Low- to moderate-income working taxpayers are eligible.)
Parents can also take advantage of other tax benefits, such as 529 college savings plans where money can grow tax-free and pre-tax flex spending accounts for child care costs.
5. Buy a home.
Homeowners enjoy mortgage deductions, which can significantly reduce their tax burden, especially if they are in high tax brackets. Frank points out that as taxpayers age, they lose out on more and more tax deductions – the mortgage deduction fades away as homeowners pay off their mortgages, and parents of grown children who are no longer dependents give up those child-related deductions.
Frank writes about the most universally-applicable techniques, but he emphasizes that everyone's situation is different, and anyone attempting a complex tax move, like taking out an annuity, should consult a financial professional. The worst tax advice, he says, involves blanket statements. "There are no absolutes, and planning thrives in the exceptions … it's really about an expert doing a good job getting to know you," he says.
Still, there are some common areas where Frank says people tend to overpay in taxes. Here are five ways many people can reduce their tax burden:
1. Save more money for retirement.
Frank recommends using individual retirement accounts, either the traditional or Roth variety, to pay fewer taxes while squirrelling money away for retirement. With a traditional IRA, users deduct contributions from their taxes and don't pay anything on the earnings until the money is distributed. With Roth IRAs, after-tax money enjoys tax-free earnings. "I would love to see more people get their money into a Roth IRA. Almost everybody can do it, but there are some income limits," Frank says. Those income limits start at $112,000 for heads of households.
2. Take advantage of other types of savings and investment vehicles.
In general, municipal bonds enjoy a triple tax exemption at the county, state and federal levels, which leads Frank to call them a "great tax planning tool." Still, he warns that bonds will get hurt if interest rates go up (and default is also possible), so there is some risk involved.
Stocks enjoy other tax advantages, too, especially if you plan to pass them on to heirs. "You can buy a stock today, and it's growing tax-deferred, and when you die, your kids can inherit it and get a step-up in basis," which reduces their tax burden, Frank says. The step-up in basis essentially counts the asset at its value at the time of inheritance, and not original purchase.
3. Start your own business.
Frank credits his own relatively light tax burden partly to the fact that he's a business owner. "Business owners have more choice and control over their taxes than anyone else," Frank says. Business owners can keep money in the company to pay fewer taxes, he says, as well as count certain expenditures as company expenses.
4. Have kids.
"From a tax planning perspective, don't skip out on having kids," Frank says. In fact, he says his daughter, now 21, saved his finances back when she was born. At the time, her birth (and status as a dependent) allowed him to qualify for the earned income tax credit, which was $3,000. "It changed my life," says Frank, who adds that most people who qualify for the earned income tax credit don't take it. (Low- to moderate-income working taxpayers are eligible.)
Parents can also take advantage of other tax benefits, such as 529 college savings plans where money can grow tax-free and pre-tax flex spending accounts for child care costs.
5. Buy a home.
Homeowners enjoy mortgage deductions, which can significantly reduce their tax burden, especially if they are in high tax brackets. Frank points out that as taxpayers age, they lose out on more and more tax deductions – the mortgage deduction fades away as homeowners pay off their mortgages, and parents of grown children who are no longer dependents give up those child-related deductions.
Tuesday, July 16, 2013
How to Reduce Your Tax Liability in 2013
FROM MAINSTREET.COM
Single taxpayers have several options to reduce their tax liability each year, enabling them to save more money.
If purchasing a house is not in your immediate plans, tax professionals recommend various methods to lower the amount you pay to the IRS annually.
Investors should take advantage of their employee retirement plans, which are commonly known as 401(k)s or 403(b)s, said Michelle Mullen, a CPA with Briggs & Veselka Co., based in Houston, Tex. The money invested into a 401(k) or 403(b) is tax deferred, which means you do not have to pay taxes on the amount until you reach retirement age and make a withdrawal. The 2013 limit for contributions is $17,500.
Even allocating as little as 3% of your salary into a 401(k) plan adds up quickly, but Mullen suggests stashing away 15% of your salary.
"I recommend that investors save absolutely as much as they can afford," she said. "If you form a savings habit early when you are not making that much money, you won't miss it. Start now. Every little bit counts. If you are already established in your career, it's never too late to start saving and tax planning."
Some companies encourage you to save more money by matching your contributions, which maximizes your savings.
"The first rule is to take advantage of your employer retirement plan," Mullen said. "If you are single without any dependents, you are likely to be in the 25% tax bracket. It is absolutely crazy to pass it up, especially if an employer matches your contributions, which is free money."
Some companies offer a Roth 401(k). Although you don't get a deduction for your contributions, the funds you withdraw when you reach retirement age will be tax free, said Ed Gardner, a CPA and CFP at Edward M. Gardner PC, based in Houston.
Some companies offer both options to put funds into a 401(k) or a Roth 401(k). If you feel that you will be in a higher tax bracket when you retire, a Roth 401(k) contribution might be a good choice.
Another priority is to take advantage of your company's health savings account (HSA). These accounts allow you to allocate a portion of your salary that has not been taxed for medical purposes such as your co-payment during a doctor's visit or for prescription drugs. In order to qualify for a HSA, you must be covered by a high-deductible health plan.
If your medical or prescription bill tallies up to $100, it will cost you only $75, because you would have received a $25 tax benefit, assuming a 25% tax bracket, from contributing the $100 to HSA, said Mullen. The maximum a single person can contribute to a HSA for 2013 is $3,250 which includes employer contributions.
While some investors are "nervous about saving too much," the HSA is a "portable" investment vehicle, she said. This allows you to move the account to your next employer.
While receiving a tax credit for buying a hybrid vehicle is no longer an option because the automakers reached the limit set by the U.S. government, there are credits for those buying a plug-in electric car that can be as high as $7,500 depending on the model and your tax liability, Mullen said.
Single taxpayers have an advantage by choosing where they want to work and live. Relocating to one of the seven states that do not collect an individual state income tax can be an added bonus. If you get a job offer from Texas, Alaska, Florida, Nevada, South Dakota, Washington or Wyoming, it might be worth considering a move to one of those states. You can also deduct the costs of your move, such as hotels, gasoline, mileage and paying for tolls, said Corinne Hillman Vahalik, an attorney at Vahalik & Vahalik, P.C., which based in Brookshire.
If you are not living in one of those seven states, you can lower your tax bill by investing in tax free bonds in your retirement accounts or other tax-free income investments, said Vahalik.
"This option will typically generate a lower rate of income than more aggressive investments, but the investor does not have the tax liability on the earnings," she said.
Some employees who work for multi-national corporations have the opportunity to work abroad. You may be eligible to exclude up to $97,600 of your income and avoid paying federal tax on that portion of your earnings, said Mullen. Some countries abroad do not collect income tax. Another added benefit is that your company may pay all or a portion of your living expenses.
"Don't move for purely for that reason, but it is a good factor to consider," she said.
If you are still paying off student loans, you can deduct the interest you are paying of up to $2,500 per year, depending on your income level, said Vahalik.
Another option is to see if your company offers the educational assistance tax program. If you are taking courses, companies can give their employees up to $5,250 for free each year, said Gardner. Since this amount does not appear as part of your salary, you are not taxed for it.
Educators can deduct what they spend for supplies and other materials for the classroom. Even if you don't itemize, you can deduct up to $250 for those expenses, said Vahalik.
If you are dabbling in a side business, any net earnings over $400 are taxed, she said.
"While all income should be evaluated if you are self-employed, the very small side businesses may not generate self-employment tax," Vahalik said.
If you are searching for a job, any of costs incurred in the hunt can also be deducted.
Before next year rolls around and it is time to file your taxes again, examine whether your tax refund is too high, said Gardner. Instead, adjust your withholdings so you "increase your take home pay so you are not giving extra money to the government. Use the money to pay off credit cards or save it in a tax-free account."
If you are planning on making contributions to your favorite non-profit, consider doubling your donation this year instead of splitting it into the next two years, he said.
Donating stock to a non-profit is another option to lower your tax liability because you can deduct the value of the stock and any gains it has received, Gardner said. Otherwise, when you sell the stock, you incur a capital gains tax and are "giving up money," he said.
Homeowners who are making upgrades have several options. If you purchase alternative energy equipment such as solar hot water heaters, geothermal heat pumps or wind turbines can receive a 30% credit on the cost of equipment, Gardner said.
If you are purchasing double-paned windows, installation or energy efficient doors or an air conditioner, the energy credits have been extended through 2013 for a maximum lifetime credit of $500, he said.
The middle of the year is a good time to look at your return from last year and examine your deductions, Gardner said. Or talk to a tax advisor who can make recommendations on how to lower your tax liability since all contributions, donations and purchases must be made by the end of December.
"Get into a positive habit of gathering tax information on a regular basis, so you can find more deductions with better records," he said. "It all adds up and you can easily save $100 on your taxes. If you want to save on taxes, keep better records
Single taxpayers have several options to reduce their tax liability each year, enabling them to save more money.
If purchasing a house is not in your immediate plans, tax professionals recommend various methods to lower the amount you pay to the IRS annually.
Investors should take advantage of their employee retirement plans, which are commonly known as 401(k)s or 403(b)s, said Michelle Mullen, a CPA with Briggs & Veselka Co., based in Houston, Tex. The money invested into a 401(k) or 403(b) is tax deferred, which means you do not have to pay taxes on the amount until you reach retirement age and make a withdrawal. The 2013 limit for contributions is $17,500.
Even allocating as little as 3% of your salary into a 401(k) plan adds up quickly, but Mullen suggests stashing away 15% of your salary.
"I recommend that investors save absolutely as much as they can afford," she said. "If you form a savings habit early when you are not making that much money, you won't miss it. Start now. Every little bit counts. If you are already established in your career, it's never too late to start saving and tax planning."
Some companies encourage you to save more money by matching your contributions, which maximizes your savings.
"The first rule is to take advantage of your employer retirement plan," Mullen said. "If you are single without any dependents, you are likely to be in the 25% tax bracket. It is absolutely crazy to pass it up, especially if an employer matches your contributions, which is free money."
Some companies offer a Roth 401(k). Although you don't get a deduction for your contributions, the funds you withdraw when you reach retirement age will be tax free, said Ed Gardner, a CPA and CFP at Edward M. Gardner PC, based in Houston.
Some companies offer both options to put funds into a 401(k) or a Roth 401(k). If you feel that you will be in a higher tax bracket when you retire, a Roth 401(k) contribution might be a good choice.
Another priority is to take advantage of your company's health savings account (HSA). These accounts allow you to allocate a portion of your salary that has not been taxed for medical purposes such as your co-payment during a doctor's visit or for prescription drugs. In order to qualify for a HSA, you must be covered by a high-deductible health plan.
If your medical or prescription bill tallies up to $100, it will cost you only $75, because you would have received a $25 tax benefit, assuming a 25% tax bracket, from contributing the $100 to HSA, said Mullen. The maximum a single person can contribute to a HSA for 2013 is $3,250 which includes employer contributions.
While some investors are "nervous about saving too much," the HSA is a "portable" investment vehicle, she said. This allows you to move the account to your next employer.
While receiving a tax credit for buying a hybrid vehicle is no longer an option because the automakers reached the limit set by the U.S. government, there are credits for those buying a plug-in electric car that can be as high as $7,500 depending on the model and your tax liability, Mullen said.
Single taxpayers have an advantage by choosing where they want to work and live. Relocating to one of the seven states that do not collect an individual state income tax can be an added bonus. If you get a job offer from Texas, Alaska, Florida, Nevada, South Dakota, Washington or Wyoming, it might be worth considering a move to one of those states. You can also deduct the costs of your move, such as hotels, gasoline, mileage and paying for tolls, said Corinne Hillman Vahalik, an attorney at Vahalik & Vahalik, P.C., which based in Brookshire.
If you are not living in one of those seven states, you can lower your tax bill by investing in tax free bonds in your retirement accounts or other tax-free income investments, said Vahalik.
"This option will typically generate a lower rate of income than more aggressive investments, but the investor does not have the tax liability on the earnings," she said.
Some employees who work for multi-national corporations have the opportunity to work abroad. You may be eligible to exclude up to $97,600 of your income and avoid paying federal tax on that portion of your earnings, said Mullen. Some countries abroad do not collect income tax. Another added benefit is that your company may pay all or a portion of your living expenses.
"Don't move for purely for that reason, but it is a good factor to consider," she said.
If you are still paying off student loans, you can deduct the interest you are paying of up to $2,500 per year, depending on your income level, said Vahalik.
Another option is to see if your company offers the educational assistance tax program. If you are taking courses, companies can give their employees up to $5,250 for free each year, said Gardner. Since this amount does not appear as part of your salary, you are not taxed for it.
Educators can deduct what they spend for supplies and other materials for the classroom. Even if you don't itemize, you can deduct up to $250 for those expenses, said Vahalik.
If you are dabbling in a side business, any net earnings over $400 are taxed, she said.
"While all income should be evaluated if you are self-employed, the very small side businesses may not generate self-employment tax," Vahalik said.
If you are searching for a job, any of costs incurred in the hunt can also be deducted.
Before next year rolls around and it is time to file your taxes again, examine whether your tax refund is too high, said Gardner. Instead, adjust your withholdings so you "increase your take home pay so you are not giving extra money to the government. Use the money to pay off credit cards or save it in a tax-free account."
If you are planning on making contributions to your favorite non-profit, consider doubling your donation this year instead of splitting it into the next two years, he said.
Donating stock to a non-profit is another option to lower your tax liability because you can deduct the value of the stock and any gains it has received, Gardner said. Otherwise, when you sell the stock, you incur a capital gains tax and are "giving up money," he said.
Homeowners who are making upgrades have several options. If you purchase alternative energy equipment such as solar hot water heaters, geothermal heat pumps or wind turbines can receive a 30% credit on the cost of equipment, Gardner said.
If you are purchasing double-paned windows, installation or energy efficient doors or an air conditioner, the energy credits have been extended through 2013 for a maximum lifetime credit of $500, he said.
The middle of the year is a good time to look at your return from last year and examine your deductions, Gardner said. Or talk to a tax advisor who can make recommendations on how to lower your tax liability since all contributions, donations and purchases must be made by the end of December.
"Get into a positive habit of gathering tax information on a regular basis, so you can find more deductions with better records," he said. "It all adds up and you can easily save $100 on your taxes. If you want to save on taxes, keep better records
Friday, July 12, 2013
7 tips for getting the most out of Quickbooks
FROM http://www.bizjournals.com/
QuickBooks is a powerful tool that many small business owners rely on to keep their financial records up to date. But are you getting the most out of your software investment? Here are a few tips to help you increase efficiency and maximize your use of QuickBooks.
Tip #1: Use QuickBooks on the Go with Remote Access
Intuit (the company behind QuickBooks) understands busy professionals sometimes need to work on the go. Remote access options for QuickBooks have expanded, and you can now log into your file from anywhere – even while meeting with your accountant! Remote access methods include QuickBooks Online, desktop sharing and QuickBooks hosting on the cloud.
Tip #2 - Download Data Whenever Possible
Downloading banking and credit card activity directly into QuickBooks is a huge timesaver, even when factoring in initial set-up time. Downloading data minimizes the chance of human error and records activity quicker than inputting it manually.
Tip #3 - Set a Closing Date Password to Protect Data
On a regular basis and before you send your QuickBooks file to your accountant for year-end closing, make sure to set a closing date password. This safeguard will prevent users from accidently changing closed data periods by requiring anyone trying to make a change to enter the password in order to save the transaction in QuickBooks.
Tip #4 - Memorize Transactions
Are you tired of entering the same transaction every month in QuickBooks? QuickBooks has the capability to memorize recurring transactions (invoices, bills, checks, etc.) and set them for automatic posting daily, weekly, monthly, quarterly and annually.
Tip #5 - Use the Find Feature to Locate Transactions Faster
If you’re looking for a particular invoice, do you open the form and click “Previous” until the form appears on the screen? This can be a long and tedious process. Using the Find feature is the most efficient way to find transactions in QuickBooks. This tool will search for almost any transaction-level data, depending on your filters.
Tip #6 – Add Depth to Financial Reporting with Class Tracking
Using class tracking in QuickBooks gives a business one more dimension – a way to categorize and track business activity that is meaningful in your particular company. Assigning a class to transactions allows you to report on each class separately. You should use classes to group transactions into categories that are different from your chart of accounts. As with most features in QuickBooks, planning up front to determine which classes your business needs will make them the most effective.
Tip #7 – Expand Functionality with QuickBooks Add-ons
Many add-on products are available to expand the functionality of QuickBooks. For example, Bill.com for QuickBooks Online enables you to receive electronic bills (or scanned paper bills) and pay vendors electronically from your desktop or mobile device, with transactions automatically entered into QuickBooks Online, so you can have a paper-free bill-pay process. Another helpful add-on is Transaction Pro Importer, a web service that makes it easier to import an Excel or CSV data file into QuickBooks Online.
Try these seven tips to save yourself time, money and frustration and make sure your company is getting the most out of QuickBooks.
QuickBooks is a powerful tool that many small business owners rely on to keep their financial records up to date. But are you getting the most out of your software investment? Here are a few tips to help you increase efficiency and maximize your use of QuickBooks.
Tip #1: Use QuickBooks on the Go with Remote Access
Intuit (the company behind QuickBooks) understands busy professionals sometimes need to work on the go. Remote access options for QuickBooks have expanded, and you can now log into your file from anywhere – even while meeting with your accountant! Remote access methods include QuickBooks Online, desktop sharing and QuickBooks hosting on the cloud.
Tip #2 - Download Data Whenever Possible
Downloading banking and credit card activity directly into QuickBooks is a huge timesaver, even when factoring in initial set-up time. Downloading data minimizes the chance of human error and records activity quicker than inputting it manually.
Tip #3 - Set a Closing Date Password to Protect Data
On a regular basis and before you send your QuickBooks file to your accountant for year-end closing, make sure to set a closing date password. This safeguard will prevent users from accidently changing closed data periods by requiring anyone trying to make a change to enter the password in order to save the transaction in QuickBooks.
Tip #4 - Memorize Transactions
Are you tired of entering the same transaction every month in QuickBooks? QuickBooks has the capability to memorize recurring transactions (invoices, bills, checks, etc.) and set them for automatic posting daily, weekly, monthly, quarterly and annually.
Tip #5 - Use the Find Feature to Locate Transactions Faster
If you’re looking for a particular invoice, do you open the form and click “Previous” until the form appears on the screen? This can be a long and tedious process. Using the Find feature is the most efficient way to find transactions in QuickBooks. This tool will search for almost any transaction-level data, depending on your filters.
Tip #6 – Add Depth to Financial Reporting with Class Tracking
Using class tracking in QuickBooks gives a business one more dimension – a way to categorize and track business activity that is meaningful in your particular company. Assigning a class to transactions allows you to report on each class separately. You should use classes to group transactions into categories that are different from your chart of accounts. As with most features in QuickBooks, planning up front to determine which classes your business needs will make them the most effective.
Tip #7 – Expand Functionality with QuickBooks Add-ons
Many add-on products are available to expand the functionality of QuickBooks. For example, Bill.com for QuickBooks Online enables you to receive electronic bills (or scanned paper bills) and pay vendors electronically from your desktop or mobile device, with transactions automatically entered into QuickBooks Online, so you can have a paper-free bill-pay process. Another helpful add-on is Transaction Pro Importer, a web service that makes it easier to import an Excel or CSV data file into QuickBooks Online.
Try these seven tips to save yourself time, money and frustration and make sure your company is getting the most out of QuickBooks.
Saturday, July 6, 2013
Mid-Year Tax Planning: Accounting for New Tax Rules
FROM BRADENTONTIMES.COM
The American Taxpayer Relief Act of 2012 (ATRA), passed in early January, permanently extended a host of expiring tax provisions. It also largely set the rules for tax planning for 2013 and beyond. As you take stock of your tax situation this year, here are a few new wrinkles to keep in mind.
New top tax rate
The six tax brackets (10%, 15%, 25%, 28%, 33%, and 35%) that applied for the last several years have been made permanent for most individuals. That's really good news, since it removes a great deal of uncertainty going forward (it's always easier to plan when you know what the tax rates will be the following year).
But higher-income individuals and families will have to contend with a new top federal income tax bracket starting this year, paying tax on a portion of their income at a rate of 39.6%. The new 39.6% rate applies to individuals with taxable income exceeding $400,000; married individuals filing joint federal income tax returns with taxable income exceeding $450,000; married individuals filing separate returns with taxable income exceeding $225,000; and individuals filing as head of household with taxable income exceeding $425,000.
Higher rates on investment income for some.
Most individuals won't see any change in the rate at which they're paying tax on long-term capital gains and qualifying dividends. If you're in the 10% or 15% marginal income tax bracket, a special 0% rate will generally apply. If you are in the 25%, 28%, 33%, or 35% tax brackets, a 15% maximum rate will generally apply.
If you're in the new top 39.6% tax bracket, though, it's going to be a little different starting this year--that's because in 2013 a new maximum rate of 20% will generally apply to some or all of your long-term capital gains and qualifying dividends.
And keep in mind that a new Medicare contribution tax now applies to some or all of the net investment income of individuals with more than $200,000 in modified adjusted gross income ($250,000 for married couples filing a joint federal income tax return, and $125,000 for married individuals filing separate returns). The Medicare contribution tax is 3.8%, and is in addition to other taxes that apply.
Other considerations
This year, if your adjusted gross income (AGI) is greater than $250,000 ($300,000 if you're married and file a joint return, $150,000 if married filing separately, and $275,000 if you file as head of household), your personal and dependency exemptions will be phased out in part or in full. Similarly, your itemized deductions may be limited.
If you itemize deductions, note that the AGI threshold for deducting qualified medical expenses on Schedule A increased this year from 7.5% to 10% for most individuals. If you or your spouse will be 65 or older by the end of the year, though, the 7.5% threshold will continue to apply for 2013.
The rules allowing qualified charitable distributions from IRAs were extended through 2013. This popular provision allows individuals age 70½ or older to make qualified charitable distributions of up to $100,000 from an IRA directly to a qualified charity; the charitable distributions are excluded from income and count toward satisfying any required minimum distributions for the year.
Make time to plan
It's never easy to set aside the time to analyze your current tax situation and project how you'll be affected by recent changes. But it's important to do so while you still have time to implement a plan and take action. This year, it's particularly important to consider all of your options if your income level brings you within range of one or more of the new provisions targeting higher-income individuals
The American Taxpayer Relief Act of 2012 (ATRA), passed in early January, permanently extended a host of expiring tax provisions. It also largely set the rules for tax planning for 2013 and beyond. As you take stock of your tax situation this year, here are a few new wrinkles to keep in mind.
New top tax rate
The six tax brackets (10%, 15%, 25%, 28%, 33%, and 35%) that applied for the last several years have been made permanent for most individuals. That's really good news, since it removes a great deal of uncertainty going forward (it's always easier to plan when you know what the tax rates will be the following year).
But higher-income individuals and families will have to contend with a new top federal income tax bracket starting this year, paying tax on a portion of their income at a rate of 39.6%. The new 39.6% rate applies to individuals with taxable income exceeding $400,000; married individuals filing joint federal income tax returns with taxable income exceeding $450,000; married individuals filing separate returns with taxable income exceeding $225,000; and individuals filing as head of household with taxable income exceeding $425,000.
Higher rates on investment income for some.
Most individuals won't see any change in the rate at which they're paying tax on long-term capital gains and qualifying dividends. If you're in the 10% or 15% marginal income tax bracket, a special 0% rate will generally apply. If you are in the 25%, 28%, 33%, or 35% tax brackets, a 15% maximum rate will generally apply.
If you're in the new top 39.6% tax bracket, though, it's going to be a little different starting this year--that's because in 2013 a new maximum rate of 20% will generally apply to some or all of your long-term capital gains and qualifying dividends.
And keep in mind that a new Medicare contribution tax now applies to some or all of the net investment income of individuals with more than $200,000 in modified adjusted gross income ($250,000 for married couples filing a joint federal income tax return, and $125,000 for married individuals filing separate returns). The Medicare contribution tax is 3.8%, and is in addition to other taxes that apply.
Other considerations
This year, if your adjusted gross income (AGI) is greater than $250,000 ($300,000 if you're married and file a joint return, $150,000 if married filing separately, and $275,000 if you file as head of household), your personal and dependency exemptions will be phased out in part or in full. Similarly, your itemized deductions may be limited.
If you itemize deductions, note that the AGI threshold for deducting qualified medical expenses on Schedule A increased this year from 7.5% to 10% for most individuals. If you or your spouse will be 65 or older by the end of the year, though, the 7.5% threshold will continue to apply for 2013.
The rules allowing qualified charitable distributions from IRAs were extended through 2013. This popular provision allows individuals age 70½ or older to make qualified charitable distributions of up to $100,000 from an IRA directly to a qualified charity; the charitable distributions are excluded from income and count toward satisfying any required minimum distributions for the year.
Make time to plan
It's never easy to set aside the time to analyze your current tax situation and project how you'll be affected by recent changes. But it's important to do so while you still have time to implement a plan and take action. This year, it's particularly important to consider all of your options if your income level brings you within range of one or more of the new provisions targeting higher-income individuals
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