Accountants and financial advisors may be breathing a sigh of relief that there were no major new tax-law changes this year, but that doesn't mean they're happy about the higher taxes their clients are paying now compared to just a few years ago.
Some clients whose situation did not change at all paid $6,000 or more in 2013 vs. 2012.
There is less emphasis on estate taxes because the exemption—$5.43 million per person—is so high now.
But income taxes are higher. The top bracket is now 39.6 percent for people earning $400,000 as singles and $450,000 for married couples filing jointly.
High earners also pay a 3.8 percent Medicare surtax on their net investment income if their modified adjustable gross income is more than $200,000 for singles and $250,000 for married couples. And there's the 0.9 percent Medicare payroll withholding tacked on to the incomes of people earning $200,000 if single and $250,000 if married.
Take a multiyear approach
Tax planning is better done looking out three or five years. If you see some sort of trend coming up—will there be an increase in income or a reduction in income—you can tailor your deductions or deferrals.
For example, if your income is high this year and you expect it to increase in coming years because your career is on a roll, it's better to accelerate deductions when you can to offset some of those higher earnings through higher charitable contributions, prepayment of state income tax or selling securities at a loss.
Another option is to postpone some of that income, perhaps by maxing out 401(k) plan contributions or moving out the sale date of stock options into a year when you have less income.
You want to ask yourself, 'Do I pull the lever [on deductions or income] now, or will I be in a better position to take advantage of them later on?
Location matters
It's not just real estate where location is key. To avoid adding to their clients' tax burdens, tax planners make sure to place income-producing investments, such as bonds and real estate investment trusts, in tax-sheltered accounts, including 401(k) plans and individual retirement accounts.
The income from those investments is taxed as ordinary income and could push a taxpayer into the higher categories if they are hovering on the edge. But when it's in a retirement account, no tax is owed until the funds are withdrawn (or in the case of Roth IRAs, no tax will ever be owed after the contributions are made).
Prove you’ve met the mandate
Starting with your 2014 tax returns, you'll need to prove that you are covered by a health insurance plan that meets that standards of the Affordable Care Act or pay a penalty. To do that, you'll need a form that you submit with your tax return to avoid the penalty, the crux of the plan's so-called individual mandate.
The penalties are pretty nominal the first year. But the penalties will rise over time.
For tax year 2014, the penalty is $95 or 1 percent of your taxable income, whichever is greater; in year two it goes up to $325 or 2 percent; and in year three it's $695 or 2.5 percent.
The rule of thumb used to be that you gave away as much as you can during your lifetime, but there are real advantages in keeping things in your estate now.
Fewer estate taxes, but watch the state tax
The higher estate-tax exemption means that few people pay the federal estate tax now. Many professionals are rethinking their traditional advice.
By keeping appreciating assets inside the estate, heirs have the opportunity to get a step up in basis when they inherit them. So if a stock, for example, appreciates from $100 to $1,000 during a person's lifetime, the clock starts over for heirs at the time they inherit it. When heirs sell those securities, their cost basis is on the date they inherited the assets.
Some people may no longer have to pay the federal estate tax but still need to pay it in the state where they live, because the exemption limits may be lower.
Every state has different rules about estate taxes. That comes up a lot when dealing with clients that have beneficiaries that don't live in the same state.
Showing posts with label Income Tax. Show all posts
Showing posts with label Income Tax. Show all posts
Monday, February 2, 2015
Sunday, February 1, 2015
This tax season, don’t overlook these potential deductions
Tax time is on its way. And according to professional income tax preparers, the road is littered with missed opportunities.
The biggest mistake individual filers make as the April 15 filing deadline nears is not taking all the personal deductions they’re entitled to take, they say. People may not be aware of them, while many miss out by not keeping records of their deductions during the year.
Child care expenses, license tabs and unreimbursed job-related expenses often are missed. Some out-of-pocket medical costs, including health insurance premiums, co-pays and prescription costs, also are missed.
Besides interest on home mortgages and property taxes on one’s home, some filers don’t realize that the real estate taxes they pay for cabins and bare land also are deductible. The cost of safety deposit boxes can even be claimed, as long as they hold qualifying documents. Some teachers fail to claim the up to $250 allowed for money they spend on their classrooms. Some nurses forget to deduct the cost of their scrubs.
But the biggest misses come in failing to keep track of charitable contributions.
“They don’t keep track of the little checks. “They’re better at the bigger ones that are over $250. But under $250, people are bad about it. And a lot of people miss deductions because of that.”
Contributions of clothes, household items and other in-kind donations of goods to nonprofits such as Goodwill Industries and the Salvation Army often are missed. Just be sure to get a receipt with the estimated value of the donated items.
The number of miles driven to and from medical appointments and for hospital stays often are missed. So is the use of a personal vehicle to do volunteer work.
“If you’re driving for charitable work, keep a log keeping track of those miles.
Missed education credits
Parents with dependent children in college often know they can can get a refundable tax credit for the tuition and related fees they pay.
“What they forget is all the books and all the expenses at colleges, noting that up to $4,000 of those college-related expenses can be claimed to get a maximum of $2,500 in refundable credits.
College students who are self-supporting and pay their own college costs are even less aware of the credit, often failing to list their tuition and fees as well as the cost of books.
Health insurance mandate
But the biggest change in this year’s income tax filing is the result of the Affordable Care Act.
Everyone who files a return must now show proof of having essential health insurance coverage. For those who have plans through their employer, it’s already noted on their W-2s. But those who purchased health coverage through a health insurance marketplace will need their Form 1095-A in order to finish their tax returns.
“If they don’t have health insurance, they will be penalized.
The penalty is $95 or 1 percent of their income, whichever is greater. But the penalty can be avoided for those who qualify for exemptions.
Life events — such as getting married, getting divorced, having a baby, buying a house, starting a business, retirement or a death in the family — make tax returns more complicated. But tax planners say they can help people navigate those changes as well as help in yearlong tax planning.
“A lot of times we can help with not only what is happening today, but with planning for the future.
The biggest mistake individual filers make as the April 15 filing deadline nears is not taking all the personal deductions they’re entitled to take, they say. People may not be aware of them, while many miss out by not keeping records of their deductions during the year.
Child care expenses, license tabs and unreimbursed job-related expenses often are missed. Some out-of-pocket medical costs, including health insurance premiums, co-pays and prescription costs, also are missed.
Besides interest on home mortgages and property taxes on one’s home, some filers don’t realize that the real estate taxes they pay for cabins and bare land also are deductible. The cost of safety deposit boxes can even be claimed, as long as they hold qualifying documents. Some teachers fail to claim the up to $250 allowed for money they spend on their classrooms. Some nurses forget to deduct the cost of their scrubs.
But the biggest misses come in failing to keep track of charitable contributions.
“They don’t keep track of the little checks. “They’re better at the bigger ones that are over $250. But under $250, people are bad about it. And a lot of people miss deductions because of that.”
Contributions of clothes, household items and other in-kind donations of goods to nonprofits such as Goodwill Industries and the Salvation Army often are missed. Just be sure to get a receipt with the estimated value of the donated items.
The number of miles driven to and from medical appointments and for hospital stays often are missed. So is the use of a personal vehicle to do volunteer work.
“If you’re driving for charitable work, keep a log keeping track of those miles.
Missed education credits
Parents with dependent children in college often know they can can get a refundable tax credit for the tuition and related fees they pay.
“What they forget is all the books and all the expenses at colleges, noting that up to $4,000 of those college-related expenses can be claimed to get a maximum of $2,500 in refundable credits.
College students who are self-supporting and pay their own college costs are even less aware of the credit, often failing to list their tuition and fees as well as the cost of books.
Health insurance mandate
But the biggest change in this year’s income tax filing is the result of the Affordable Care Act.
Everyone who files a return must now show proof of having essential health insurance coverage. For those who have plans through their employer, it’s already noted on their W-2s. But those who purchased health coverage through a health insurance marketplace will need their Form 1095-A in order to finish their tax returns.
“If they don’t have health insurance, they will be penalized.
The penalty is $95 or 1 percent of their income, whichever is greater. But the penalty can be avoided for those who qualify for exemptions.
Life events — such as getting married, getting divorced, having a baby, buying a house, starting a business, retirement or a death in the family — make tax returns more complicated. But tax planners say they can help people navigate those changes as well as help in yearlong tax planning.
“A lot of times we can help with not only what is happening today, but with planning for the future.
Monday, January 26, 2015
Getting Organized for Tax Preparation
The holiday season is behind us; our New Year’s resolutions are in place and now we must get ready to meet with our tax pro to file 2014 income tax returns. If you started a 2014 income tax file at the beginning of last year and have been filing away important tax documents throughout the year, you may find the task will not be too daunting. The backup data you require will be at your fingertips. If you kept your personal finances on an accounting program such as QuickBooks or Quicken, you will be able to generate reports that provide the data your tax professional requires to prepare your income tax return.
But if you must sit down instead and review your check registers and other receipts, the following tips should help you get organized quickly.
Start by labeling a file folder “2014 Income Taxes” to hold copies of cancelled checks, credit card statements and other back up data for the numbers you will be using on your tax return.
If your tax pro sent you an organizer, it is best to complete the appropriate fields within the organizer and return that along with your back-up documentation. But if you, like so many others, have your own system and do not use the organizer, then plow ahead compiling your data as you did in years past. Remember however, that your tax preparation fee is based on how organized you present your data as well as on the number of forms involved and the complexity of your tax situation. If you provide your tax pro with well-organized, complete, and totaled data, your fee may be lower. Discuss your presentation with your tax pro for organizational tips.
Most organizers have boxes to fill in with the information from your W2. Do not bother to fill in that data. Instead, simply staple your W2(s) to that page in the organizer. If a client presents me with a W2, I input the data directly from the W2. I never bother with what is listed on the organizer; there may have been transpositions or incomplete fields. The same principle applies to all other data requests that are backed up with 1099s or K-1s. Simply provide the document.
This will save a lot of time doing copy work.
In lieu of using the organizer you might prefer a spreadsheet program that can list all data and provide accurate totals. Refer to the organizer to make sure that you have not missed an important reportable item. The organizer normally contains columns with prior year data. This will jog your memory as to what deductions to look for as you review your financial data.
This year, because of Obamacare, there are two additional tax forms that may be required to file with your tax return. Your tax pro will likely provide an ACA questionnaire or worksheet for you to complete along with the organizer. If you did not have health insurance coverage for the entire year, you may be required to pay a penalty. Your tax professional will need dates of coverage and amounts paid listed by month in order to make the calculation or to determine if you are exempt from the penalty. Because tax pros have been put in a position to police the Affordable Care Act, your tax preparation fees will likely be slightly higher than last year. If you or your employer provided health care coverage for the entire year, you will not be required to break down the monthly costs.
As you organize your data think in terms of audit proofing your tax return. Make sure that you put receipts and cancelled checks in your tax file in the event of audit. Also be sure that all charitable contributions are backed up with an acknowledgement letter from the nonprofit. This is required and must be in place before filing the tax return. You cannot obtain the letter years later when you are audited. The IRS will disallow the deduction. If you have deductible automobile, travel and entertainment expenses – all red flags in the eyes of the IRS – be sure to have other documentation in your tax file to provide a bona fide tax deductible purpose for the expense. To substantiate automobile mileage you should have a mileage log, but absent that, you should have at least an appointment book or some other documentation showing dates, destinations, and number of miles traveled.
In this day and age, it’s rare to see an actual paper appointment book. Review your electronic calendar and on paper make a list of dates, destinations and miles driven to substantiate the expense. Keep this information in your tax file.
If you purchased or refinanced your home, second home, or a rental property during 2014, provide your tax pro with the settlement papers from escrow. There may be deductible items such as points or property taxes paid that provide a tax benefit.
Once you have compiled your data, review the organizer to ensure that you have completed all requirements for filing your return.
And start a tax file for 2015. If you take auto expense deduction, log in the beginning odometer reading from your vehicle. Then make a note in your calendar to log in the ending odometer reading on December 31. As the year progresses, file all documents, cancelled checks, and receipts in the tax file that are related to your 2015 income tax return. You’ll be pleased at how easy this will make tax preparation next year at this time!
But if you must sit down instead and review your check registers and other receipts, the following tips should help you get organized quickly.
Start by labeling a file folder “2014 Income Taxes” to hold copies of cancelled checks, credit card statements and other back up data for the numbers you will be using on your tax return.
If your tax pro sent you an organizer, it is best to complete the appropriate fields within the organizer and return that along with your back-up documentation. But if you, like so many others, have your own system and do not use the organizer, then plow ahead compiling your data as you did in years past. Remember however, that your tax preparation fee is based on how organized you present your data as well as on the number of forms involved and the complexity of your tax situation. If you provide your tax pro with well-organized, complete, and totaled data, your fee may be lower. Discuss your presentation with your tax pro for organizational tips.
Most organizers have boxes to fill in with the information from your W2. Do not bother to fill in that data. Instead, simply staple your W2(s) to that page in the organizer. If a client presents me with a W2, I input the data directly from the W2. I never bother with what is listed on the organizer; there may have been transpositions or incomplete fields. The same principle applies to all other data requests that are backed up with 1099s or K-1s. Simply provide the document.
This will save a lot of time doing copy work.
In lieu of using the organizer you might prefer a spreadsheet program that can list all data and provide accurate totals. Refer to the organizer to make sure that you have not missed an important reportable item. The organizer normally contains columns with prior year data. This will jog your memory as to what deductions to look for as you review your financial data.
This year, because of Obamacare, there are two additional tax forms that may be required to file with your tax return. Your tax pro will likely provide an ACA questionnaire or worksheet for you to complete along with the organizer. If you did not have health insurance coverage for the entire year, you may be required to pay a penalty. Your tax professional will need dates of coverage and amounts paid listed by month in order to make the calculation or to determine if you are exempt from the penalty. Because tax pros have been put in a position to police the Affordable Care Act, your tax preparation fees will likely be slightly higher than last year. If you or your employer provided health care coverage for the entire year, you will not be required to break down the monthly costs.
As you organize your data think in terms of audit proofing your tax return. Make sure that you put receipts and cancelled checks in your tax file in the event of audit. Also be sure that all charitable contributions are backed up with an acknowledgement letter from the nonprofit. This is required and must be in place before filing the tax return. You cannot obtain the letter years later when you are audited. The IRS will disallow the deduction. If you have deductible automobile, travel and entertainment expenses – all red flags in the eyes of the IRS – be sure to have other documentation in your tax file to provide a bona fide tax deductible purpose for the expense. To substantiate automobile mileage you should have a mileage log, but absent that, you should have at least an appointment book or some other documentation showing dates, destinations, and number of miles traveled.
In this day and age, it’s rare to see an actual paper appointment book. Review your electronic calendar and on paper make a list of dates, destinations and miles driven to substantiate the expense. Keep this information in your tax file.
If you purchased or refinanced your home, second home, or a rental property during 2014, provide your tax pro with the settlement papers from escrow. There may be deductible items such as points or property taxes paid that provide a tax benefit.
Once you have compiled your data, review the organizer to ensure that you have completed all requirements for filing your return.
And start a tax file for 2015. If you take auto expense deduction, log in the beginning odometer reading from your vehicle. Then make a note in your calendar to log in the ending odometer reading on December 31. As the year progresses, file all documents, cancelled checks, and receipts in the tax file that are related to your 2015 income tax return. You’ll be pleased at how easy this will make tax preparation next year at this time!
Saturday, January 24, 2015
Seriously, start planning for 2015 tax returns now
Did you mail out those checks to charities before year-end? Did the beneficiaries of your annual tax-free gifts cash their checks? Did you sell those energy stocks and use the losses to offset gains elsewhere in your portfolio?
There are plenty of tax-smart strategies that required action before the end of the year, but it's never too early to think about managing your taxes and minimizing the hit to income. In a low-yield environment, tax-efficient investing and sensible tax planning is all the more valuable. Financial advisors are always on the lookout to save their clients money on their tax bill.
Here are some things to consider when it comes to taxes in 2015.
Know your income thresholds:
Much of tax planning over the last two years has been about adjusting to the changes resulting from the American Taxpayer Relief Act of 2012 and the Affordable Care Act. The first created a new top marginal tax rate of 39.6 percent for taxpayers earning more than $400,000 ($450,000 for married couples) in 2013. It also increased the capital gains tax rate for those taxpayers from 15 percent to 20 percent. The brackets are indexed for inflation, meaning the top rate now applies to income over $413,200 for 2015.
The higher tax rate likely applies to about 1 percent of the population. However, the new 3.8 percent investment income tax and additional 0.9 percent surtax on income that is helping to finance the President's health-care plan hits a lot more people.
The taxes apply to individuals making more than $200,000 ($250,000 for married couples) annually, and that threshold is not indexed for inflation.
"It's going to get tougher every year, and it's going to hit more and more people," said Jim Heitman a certified financial planner and owner of Compass Financial Planning.
Carol Kroch, managing director of wealth and philanthropic planning at Wilmington Trust, predominantly advises ultra-high-net-worth clients who are far beyond the new tax thresholds. However, for clients at or near those thresholds, she suggests they pay attention to details that can save them taxes.
"People can do some nipping and tucking to their advantage," Kroch said. "It's not a huge tax, but over time it has an impact, and some taxpayers can time a number of things to avoid higher taxes."
Timing gains and losses
One opportunity available every year is timing the gains and losses in your investment portfolio.
For example, if your income is close to the $200,000 Obamacare threshold or the higher figure for the top tax bracket, consider waiting until next year to sell positions that will push you over the threshold. There is market risk to the strategy, but it's worth considering.
Harvesting tax losses on investments is another option. While there haven't been a lot of opportunities on that front in the last several years, the recent uptick in volatility in the stock market and turmoil in the energy sector specifically presents some chances.
"It's been hard to find losses over the last several years, but the recent pop in volatility has allowed us to capture some losses," Heitman said. Investors can offset capital gains with losses and up to $3,000 in ordinary income as well.
Other timing opportunities for taxpayers, depending on their expectations for income this year versus future years, include accelerating an interest payment on a mortgage or paying real estate taxes for the first quarter of 2016 in December.
"If you're expecting higher income this year [versus next], accelerate your January interest payment into this year," said David Plotts, director of financial planning at Glenmede.
Gifts that give
Charitable gifts are also a means to lower your income and possibly avoid higher marginal rates. Cash gifts are fully deductible by taxpayers up to 50 percent of their adjusted gross income. Gifts of appreciated stock are deductible up to 30 percent of AGI, with the added benefit of avoiding capital gains taxes on the shares.
Another opportunity that both Plotts and Kroch recommend to their clients is to take advantage of the $14,000 that taxpayers can annually gift to another individual tax-free. There is no carry-forward of the exemption, so if taxpayers don't use it, they lose it.
"A married couple with $10 million in assets who have 10 grandchildren can transfer $280,000 tax-free from their estate to them without using up any of their lifetime exemption," Kroch said. "It can add up to a lot."
The estate-planning uncertainty was largely resolved by the American Taxpayer Relief Act, which pegged the exemption at $5 million (indexed for inflation) per individual and set the tax rate on estates above that threshold at 40 percent.
Many wealthy Americans set up expensive trust structures in 2012, expecting that the exemption would drop significantly. It didn't. "There was a rush of estate planning at the end of 2012, and I think there was some buyer's remorse," Plotts said.
Trusts generating significant income face the highest marginal tax rate on income just over $12,300, as well as the investment income taxes.
Plotts is recommending clients revisit the planning strategies and structures put in place at the end of 2012. With interest rates still low, grantor-retained annuity trusts remain very good ideas for wealthy people, he suggested.
GRATs are fairly simple low-cost vehicles, as far as trusts go. They are set up as an annuity to the donor for a fixed term, with the donated principal expected to earn a rate of return determined by the Internal Revenue Service.
If the assets in the trust earn more than the theoretical rate of return, the remainder goes to the beneficiary tax-free. The applicable rate is currently 2 percent, meaning there's a high probability that the assets will earn more than that and the beneficiary will get a sizable benefit tax-free.
"GRATs are still a top play," Plotts said. "With a rate increase likely on the horizon, it's a good time to get them in place."
Thursday, January 22, 2015
Dependency Exemption for Children of Divorced Parents
The income tax results of this topic are often overlooked during the divorce process, especially considering the personal and emotional toll incurred at the time. But, it is also could be a time for tax planning.
The rules for claiming a child are set in stone, and are not ambiguous. First, one or both parents must provide more half the cost of the child’s support. That is, a grandparent can’t be providing more than half of the child’s support and the parents expect to claim the child.
Second, the default rule is that the exemption automatically goes to the parent having custody of the child. However, the custodial parent can release his or her claim to the exemption on Form 8332. The parents can decide between themselves who will claim the exemption. This issue is often negotiated between the parents, and made part of the divorce or separation agreement. The exemption can even alternate between the parents on a year-by-year basis, if they like, provided Form 8332 is prepared and signed by the other parent.
If each parent has custody for part of the year, the custodial parent is considered to be the one who has custody for the greater portion of the year. “Joint custody” is a common term in separation and divorce agreement and for legal purposes, the spouses may be considered to have the child 50% of the time each. The Tax Code for dependency exemptions does not marry to this definition. The dependency exemption will go to the parent with the greater physical custody for that year. Where the custody is supposed to be 50/50, it will be extremely difficult to determine who has the most physical custody during the year. The relief for this is simply for the spouses to prepare and sign Form 8332 for each year. Consider it an insurance policy in the event of an audit. The completed form must be attached to the parent’s tax return who is claiming the child’s dependency exemption.
As for tax planning, the spouse who will benefit most from deducting the exemption should take it. That is, arrange for the parent who will save the most tax from the exemption. Then, the tax savings from the exemption can be shared. However, if the situation is less than cordial, it might be difficult to agree who gets what, so we have suggested just putting the tax savings into the child’s college fund or bank account.
The worst case scenario we run across is were both spouses claim the child’s dependency exemption. This not only throws a monkey wrench into the E-File process, but now the IRS will get involved on a very personal level in an attempt to solve the question. That situation is time consuming and expensive and should be avoided if possible.
For anyone going through a divorce or separation, it is a tumultuous time. But, it is important that you and your legal counsel are familiar with, and consider the economic effects of your child’s dependency exemption.
Tuesday, January 20, 2015
Due-diligence considerations for 2014 individual income tax returns
FROM http://www.cpa2biz.com/
Laws and guidance on some new issues in the “virtual” and “sharing” economy, in the new health care law, and changes to foreign reporting rules are interesting on many fronts, including whether practitioners should modify the questions they ask clients to ensure proper compliance. This article suggests which questions to ask to ensure due diligence.
1. Do you own or use any virtual currency?
Virtual or digital currency, such as bitcoin, has been around for a few years. What is new is Notice 2014-21, where the IRS states that this convertible currency should be treated as property for tax purposes (rather than as a currency). The notice also provides that “mining” a virtual currency (which is the process for obtaining the virtual currency by solving mathematical problems) produces income upon receipt using the fair market value (FMV) at that time. Treatment of virtual currency as property means that when it is used, such as to buy goods, its basis and FMV must be determined to measure the resulting gain or loss. The holding period of the asset and character of the income (ordinary or capital) must also be determined. Practitioners will need to find out whether and how clients are using virtual currency, if the clients’ records are sufficient, and the tax effects of these transactions.
2. Do you rent out property, such as through an online exchange?
Web-based accommodation businesses, such as Airbnb, make it relatively easy (and enticing) for property owners to become landlords. These new landlords may not understand the tax consequences of short-term rentals. Thus, a conversation about rental rules (Sec. 280A and Sec. 469, both of which may limit deducting losses) is warranted. Beyond federal and state income tax considerations, clients may need guidance regarding possible obligations for local taxes, such as business license and transient occupancy taxes.
3. Did you receive a Form 1095-A?
Form 1095-A, Health Insurance Marketplace Statement, is a new form for 2014, and is related to the new health care law. Clients who receive this form for the first time might not know to provide it to their tax preparer. Individuals who enrolled in a federal or state exchange to obtain health insurance will receive this form, which provides information for determining the Sec. 36B premium tax credit for the individual and his or her family. Individuals eligible to claim the premium tax credit on their returns or who received it in advance (through reduced monthly premiums) will need to complete new Form 8962, Premium Tax Credit (PTC), and attach it to their Form 1040, U.S. Individual Income Tax Return, or 1040A, U.S. Individual Income Tax Return. (The credit cannot be claimed on Form 1040-EZ, Income Tax Return for Single and Joint Filers With No Dependents.) Clients who received Form 1095-A are likely to want an explanation of the credit and its effect on their federal tax liability, as these health care rules are new for 2014.
4. Did you and everyone in your family have health care coverage for every month of 2014?
Another new health care rule that first applies for 2014 is the individual shared-responsibility payment (Sec. 5000A). This provision, which affects all individuals, requires individuals to have “minimum essential coverage.” To implement this rule, there is a new line on the 2014 tax form (line 61 on Form 1040; line 38 on Form 1040A; and line 11 on Form 1040EZ), which will require the preparer to find out who is in a client’s “shared responsibility family” (Regs. Sec. 1.5000A-1) and whether they had minimum essential coverage for each month of the year.
If anyone did not have coverage for any month, the next question is whether an exemption applies. If an exemption does not apply to all or some of the noncoverage months, the shared-responsibility payment must be computed. Exemptions are claimed on Form 8965, Health Coverage Exemptions. Worksheets in the Form 8965 instructions assist with calculating the payment, which is reported on line 61 of Form 1040 (or equivalent line on the other 1040 forms).
Preparers will need to determine what questions to ask clients and when they will want to obtain additional documentation or have a conversation with the client. The number of questions needed may vary depending on the client.
Example 1: Gail is single, age 75. It is likely that Gail is on Medicare Part A, which is considered minimum essential coverage. The preparer asks all clients what type of health coverage they had for each month of 2014. Gail responds that she had Medicare Part A. Given that this is a reasonable answer, the preparer should not have to ask other questions.
Example 2: Tom and Jane have two dependent children under age 18. Both Tom and Jane work full time for large employers and have each been at the same place of employment for several years. Their Forms W-2, Wage and Tax Statement, for 2014 have figures in Box 12 with code “DD” indicating that the employers provide health coverage. The preparer asks all clients what type of health coverage they had for everyone in their family for each month of 2014. Tom and Jane indicate that Tom was covered by his employer’s insurance, and Jane and the children were covered by insurance from Jane’s employer. Given that this is a reasonable answer, further supported by information on the W-2s, the preparer should not have to ask other questions.
Example 3: Jerry is single, age 32. He changed jobs during 2014 and had a period of unemployment. The preparer asks all clients what type of health coverage they had for each month of 2014. Jerry answers that he is not sure. The preparer will need to follow up with Jerry to discuss what minimum essential coverage means (perhaps using the IRS chart). For any months for which Jerry did not have coverage, questions must be asked about exemptions. Using the IRS chart should be a good starting point. The preparer might also want to use IRS Publication 5156, Facts About the Individual Shared Responsibility Provision, to help the client in answering the coverage and exemption questions.
Preparers should consider how they want to ask the questions necessary to complete line 61. They may want to create a worksheet (see the sample worksheet below) as a starting point. To best ensure that the answers are reliable, clients likely need to be educated about the shared-responsibility payment to understand its purpose and when it does and does not apply. Some IRS resources may be useful to include in this background explanation:
IRS Individual Shared Responsibility Provision webpage with additional links; and
IRS Publication 5187, Health Care Law: What’s New for Individuals & Families, on the premium tax credit and the individual shared-responsibility payment.
The IRS also has health reform resources for tax professionals, including best practice guides for the credit and payment.
Preparers will also want to determine when they want to obtain documentation, such as a health insurance card, beyond what they may already have (such as Form 1095-A or W-2). For the 2015 tax year, clients are likely to have more documentation about their coverage, such as Form 1095-B, Health Coverage, and/or Form 1095-C, Employer-Provided Health Insurance Offer and Coverage, than they do for 2014.
5. Do you have foreign assets?
For many years, a standard question for clients has been whether they have a foreign bank account. Today, that question is too narrow. The Foreign Account Tax Compliance Act (FATCA), P.L. 111-147, added a new reporting requirement under Sec. 6038D using Form 8938, Statement of Specified Foreign Financial Assets. In addition, reporting for FinCEN Form 114, Report of Foreign Bank and Financial Accounts (FBAR), has expanded to require more than information on a directly owned account at a foreign bank. Preparers should review the instructions for these forms to be sure the questions clients are asked are sufficiently comprehensive to fully address these reporting obligations.
Also, a 2014 court case held that an individual’s online gambling accounts held by a foreign casino were required to be reported on the FBAR (Hom, No. C 13-03721 WHA (N.D. Cal. 6/4/14)). The rationale was that the accounts functioned as banks. A similar rationale might hold for other types of accounts. For example, virtual currency an individual holds through an account or “wallet” set up by a foreign entity might be reportable on the FBAR.
Standard questions
The five questions above concern issues that are new or different for 2014. This 2014 tax update should also remind practitioners of the importance of long-standing due-diligence areas, such as for charitable contributions and mortgage interest. Court cases continue to hold that charitable contribution deductions are denied if the required documentation is lacking or incomplete or the valuations are incorrect (see, e.g., Chandler, 142 T.C. No. 16 (2014), and Smith, T.C. Memo. 2014-203). Thus, questions need to be asked to determine that documentation and valuations are valid.
Mortgage interest due-diligence questions include whether the Sec. 163(h) dollar limits were exceeded and whether debt is properly secured by the house. A 2014 case found that a note from a relative to purchase a home did not produce qualified residence interest because the note was not recorded and, thus, was not secured (Dong, T.C. Summ. 2014-4).
Laws and guidance on some new issues in the “virtual” and “sharing” economy, in the new health care law, and changes to foreign reporting rules are interesting on many fronts, including whether practitioners should modify the questions they ask clients to ensure proper compliance. This article suggests which questions to ask to ensure due diligence.
1. Do you own or use any virtual currency?
Virtual or digital currency, such as bitcoin, has been around for a few years. What is new is Notice 2014-21, where the IRS states that this convertible currency should be treated as property for tax purposes (rather than as a currency). The notice also provides that “mining” a virtual currency (which is the process for obtaining the virtual currency by solving mathematical problems) produces income upon receipt using the fair market value (FMV) at that time. Treatment of virtual currency as property means that when it is used, such as to buy goods, its basis and FMV must be determined to measure the resulting gain or loss. The holding period of the asset and character of the income (ordinary or capital) must also be determined. Practitioners will need to find out whether and how clients are using virtual currency, if the clients’ records are sufficient, and the tax effects of these transactions.
2. Do you rent out property, such as through an online exchange?
Web-based accommodation businesses, such as Airbnb, make it relatively easy (and enticing) for property owners to become landlords. These new landlords may not understand the tax consequences of short-term rentals. Thus, a conversation about rental rules (Sec. 280A and Sec. 469, both of which may limit deducting losses) is warranted. Beyond federal and state income tax considerations, clients may need guidance regarding possible obligations for local taxes, such as business license and transient occupancy taxes.
3. Did you receive a Form 1095-A?
Form 1095-A, Health Insurance Marketplace Statement, is a new form for 2014, and is related to the new health care law. Clients who receive this form for the first time might not know to provide it to their tax preparer. Individuals who enrolled in a federal or state exchange to obtain health insurance will receive this form, which provides information for determining the Sec. 36B premium tax credit for the individual and his or her family. Individuals eligible to claim the premium tax credit on their returns or who received it in advance (through reduced monthly premiums) will need to complete new Form 8962, Premium Tax Credit (PTC), and attach it to their Form 1040, U.S. Individual Income Tax Return, or 1040A, U.S. Individual Income Tax Return. (The credit cannot be claimed on Form 1040-EZ, Income Tax Return for Single and Joint Filers With No Dependents.) Clients who received Form 1095-A are likely to want an explanation of the credit and its effect on their federal tax liability, as these health care rules are new for 2014.
4. Did you and everyone in your family have health care coverage for every month of 2014?
Another new health care rule that first applies for 2014 is the individual shared-responsibility payment (Sec. 5000A). This provision, which affects all individuals, requires individuals to have “minimum essential coverage.” To implement this rule, there is a new line on the 2014 tax form (line 61 on Form 1040; line 38 on Form 1040A; and line 11 on Form 1040EZ), which will require the preparer to find out who is in a client’s “shared responsibility family” (Regs. Sec. 1.5000A-1) and whether they had minimum essential coverage for each month of the year.
If anyone did not have coverage for any month, the next question is whether an exemption applies. If an exemption does not apply to all or some of the noncoverage months, the shared-responsibility payment must be computed. Exemptions are claimed on Form 8965, Health Coverage Exemptions. Worksheets in the Form 8965 instructions assist with calculating the payment, which is reported on line 61 of Form 1040 (or equivalent line on the other 1040 forms).
Preparers will need to determine what questions to ask clients and when they will want to obtain additional documentation or have a conversation with the client. The number of questions needed may vary depending on the client.
Example 1: Gail is single, age 75. It is likely that Gail is on Medicare Part A, which is considered minimum essential coverage. The preparer asks all clients what type of health coverage they had for each month of 2014. Gail responds that she had Medicare Part A. Given that this is a reasonable answer, the preparer should not have to ask other questions.
Example 2: Tom and Jane have two dependent children under age 18. Both Tom and Jane work full time for large employers and have each been at the same place of employment for several years. Their Forms W-2, Wage and Tax Statement, for 2014 have figures in Box 12 with code “DD” indicating that the employers provide health coverage. The preparer asks all clients what type of health coverage they had for everyone in their family for each month of 2014. Tom and Jane indicate that Tom was covered by his employer’s insurance, and Jane and the children were covered by insurance from Jane’s employer. Given that this is a reasonable answer, further supported by information on the W-2s, the preparer should not have to ask other questions.
Example 3: Jerry is single, age 32. He changed jobs during 2014 and had a period of unemployment. The preparer asks all clients what type of health coverage they had for each month of 2014. Jerry answers that he is not sure. The preparer will need to follow up with Jerry to discuss what minimum essential coverage means (perhaps using the IRS chart). For any months for which Jerry did not have coverage, questions must be asked about exemptions. Using the IRS chart should be a good starting point. The preparer might also want to use IRS Publication 5156, Facts About the Individual Shared Responsibility Provision, to help the client in answering the coverage and exemption questions.
Preparers should consider how they want to ask the questions necessary to complete line 61. They may want to create a worksheet (see the sample worksheet below) as a starting point. To best ensure that the answers are reliable, clients likely need to be educated about the shared-responsibility payment to understand its purpose and when it does and does not apply. Some IRS resources may be useful to include in this background explanation:
IRS Individual Shared Responsibility Provision webpage with additional links; and
IRS Publication 5187, Health Care Law: What’s New for Individuals & Families, on the premium tax credit and the individual shared-responsibility payment.
The IRS also has health reform resources for tax professionals, including best practice guides for the credit and payment.
Preparers will also want to determine when they want to obtain documentation, such as a health insurance card, beyond what they may already have (such as Form 1095-A or W-2). For the 2015 tax year, clients are likely to have more documentation about their coverage, such as Form 1095-B, Health Coverage, and/or Form 1095-C, Employer-Provided Health Insurance Offer and Coverage, than they do for 2014.
5. Do you have foreign assets?
For many years, a standard question for clients has been whether they have a foreign bank account. Today, that question is too narrow. The Foreign Account Tax Compliance Act (FATCA), P.L. 111-147, added a new reporting requirement under Sec. 6038D using Form 8938, Statement of Specified Foreign Financial Assets. In addition, reporting for FinCEN Form 114, Report of Foreign Bank and Financial Accounts (FBAR), has expanded to require more than information on a directly owned account at a foreign bank. Preparers should review the instructions for these forms to be sure the questions clients are asked are sufficiently comprehensive to fully address these reporting obligations.
Also, a 2014 court case held that an individual’s online gambling accounts held by a foreign casino were required to be reported on the FBAR (Hom, No. C 13-03721 WHA (N.D. Cal. 6/4/14)). The rationale was that the accounts functioned as banks. A similar rationale might hold for other types of accounts. For example, virtual currency an individual holds through an account or “wallet” set up by a foreign entity might be reportable on the FBAR.
Standard questions
The five questions above concern issues that are new or different for 2014. This 2014 tax update should also remind practitioners of the importance of long-standing due-diligence areas, such as for charitable contributions and mortgage interest. Court cases continue to hold that charitable contribution deductions are denied if the required documentation is lacking or incomplete or the valuations are incorrect (see, e.g., Chandler, 142 T.C. No. 16 (2014), and Smith, T.C. Memo. 2014-203). Thus, questions need to be asked to determine that documentation and valuations are valid.
Mortgage interest due-diligence questions include whether the Sec. 163(h) dollar limits were exceeded and whether debt is properly secured by the house. A 2014 case found that a note from a relative to purchase a home did not produce qualified residence interest because the note was not recorded and, thus, was not secured (Dong, T.C. Summ. 2014-4).
Sunday, January 18, 2015
Tax season is here again
Fire up the calculator. Starting Tuesday, you can officially file your federal income taxes for 2014.
It’s the first time in two years that the IRS has opened its tax-filing season on time. Given recent IRS hiring cuts and new federal tax law changes, opening promptly is a “stunning achievement,” said IRS Commissioner John Koskinen, in a conference call last week with reporters.
This year, the IRS expects about 150 million taxpayers will file a federal return. If you’re among them, there are some changes and tips worth noting:
Health care compliance
One of the biggest changes this year is that all U.S. taxpayers and their dependents must declare that they had 2014 health care coverage, as required under the federal Affordable Care Act.
“Most people – more than 80 percent – will only be required to just check a box and file as normal,” Koskinen said.
There are three possible scenarios:
▪ If you have health care coverage, check the “full year coverage” box, which is on Line 61 of the regular Form 1040.
▪ If you’re not covered, you must request an exemption, generally limited to those who are incarcerated, are Native Americans, of certain religious faiths or have other special circumstances. (See IRS Form 8965 for details.)
▪ For each month that someone in your household did not have health care coverage, you’ll be required to make a “shared responsibility payment,” part of the penalties designed to encourage more Americans to get health care coverage. For 2014, that annual payment is $95 per adult and $47.50 per child, capped at a family maximum of $285.
▪ If you bought ACA health care coverage for the first time, such as through a marketplace like Covered California, and received a tax credit to subsidize your premiums, you’ll need to report that at tax time. Some taxpayers received advance payments of their tax credit, which typically went directly to their health care provider to reduce their monthly premiums.
In those cases, you’ll be receiving a new IRS Form 1095-A in the mail. Use it to reconcile what was received in premium assistance with annual income. You might owe more; you might be due a refund.
Don’t file any tax return until you’ve received the new Form 1095-A from your health care marketplace, such as Covered California, the IRS commissioner urged last week. Otherwise, your tax return could be inaccurate and you might face penalties or have to file an amended return.
Surf, don’t call
The IRS is blunt this year in urging taxpayers to get federal tax help online, rather than picking up the phone.
“We expect our phones to be extremely busy, and there will frequently be extensive wait times of a half-hour or more, so I would caution taxpayers to use our phone lines only as a last resort,” Koskinen said. Instead, he said, consumers should use the IRS website, www.irs.gov, to get answers to basic questions, request forms and find free tax-preparation help.
Also, starting in February, there will be more than 12,000 sites across the country where seniors and those earning less than $53,000 a year can get free help in preparing their federal tax returns. (See box.)
This year the IRS has 14 companies offering Free File, the no-cost tax preparation and e-filing program for those earning $60,000 or less. About 70 percent of all taxpayers qualify to use Free File, the IRS says.
Avoid the audit
Despite budget and staffing cuts, Koskinen said the IRS still expects to conduct about 1 million audits of taxpayer returns. The best way to avoid being one of them, he said, is to file as accurately as possible.
“The roulette wheel spins and you don’t want the white ball to land on you,” he said. If you’re making a conscious decision to cheat on your taxes, “We’re not going to be happy with you.”
Faster refunds?
The IRS says 90 percent of tax refunds will be issued in less than 21 days. “The best way to ensure a quick refund is to e-file your return,” said Koskinen. “That’s because we expect processing delays for paper returns as a result of our budget constraints.”
To receive a refund promptly, request “direct deposit” into a savings or checking account, rather than a paper check that’s mailed.
It’s the first time in two years that the IRS has opened its tax-filing season on time. Given recent IRS hiring cuts and new federal tax law changes, opening promptly is a “stunning achievement,” said IRS Commissioner John Koskinen, in a conference call last week with reporters.
This year, the IRS expects about 150 million taxpayers will file a federal return. If you’re among them, there are some changes and tips worth noting:
Health care compliance
One of the biggest changes this year is that all U.S. taxpayers and their dependents must declare that they had 2014 health care coverage, as required under the federal Affordable Care Act.
“Most people – more than 80 percent – will only be required to just check a box and file as normal,” Koskinen said.
There are three possible scenarios:
▪ If you have health care coverage, check the “full year coverage” box, which is on Line 61 of the regular Form 1040.
▪ If you’re not covered, you must request an exemption, generally limited to those who are incarcerated, are Native Americans, of certain religious faiths or have other special circumstances. (See IRS Form 8965 for details.)
▪ For each month that someone in your household did not have health care coverage, you’ll be required to make a “shared responsibility payment,” part of the penalties designed to encourage more Americans to get health care coverage. For 2014, that annual payment is $95 per adult and $47.50 per child, capped at a family maximum of $285.
▪ If you bought ACA health care coverage for the first time, such as through a marketplace like Covered California, and received a tax credit to subsidize your premiums, you’ll need to report that at tax time. Some taxpayers received advance payments of their tax credit, which typically went directly to their health care provider to reduce their monthly premiums.
In those cases, you’ll be receiving a new IRS Form 1095-A in the mail. Use it to reconcile what was received in premium assistance with annual income. You might owe more; you might be due a refund.
Don’t file any tax return until you’ve received the new Form 1095-A from your health care marketplace, such as Covered California, the IRS commissioner urged last week. Otherwise, your tax return could be inaccurate and you might face penalties or have to file an amended return.
Surf, don’t call
The IRS is blunt this year in urging taxpayers to get federal tax help online, rather than picking up the phone.
“We expect our phones to be extremely busy, and there will frequently be extensive wait times of a half-hour or more, so I would caution taxpayers to use our phone lines only as a last resort,” Koskinen said. Instead, he said, consumers should use the IRS website, www.irs.gov, to get answers to basic questions, request forms and find free tax-preparation help.
Also, starting in February, there will be more than 12,000 sites across the country where seniors and those earning less than $53,000 a year can get free help in preparing their federal tax returns. (See box.)
This year the IRS has 14 companies offering Free File, the no-cost tax preparation and e-filing program for those earning $60,000 or less. About 70 percent of all taxpayers qualify to use Free File, the IRS says.
Avoid the audit
Despite budget and staffing cuts, Koskinen said the IRS still expects to conduct about 1 million audits of taxpayer returns. The best way to avoid being one of them, he said, is to file as accurately as possible.
“The roulette wheel spins and you don’t want the white ball to land on you,” he said. If you’re making a conscious decision to cheat on your taxes, “We’re not going to be happy with you.”
Faster refunds?
The IRS says 90 percent of tax refunds will be issued in less than 21 days. “The best way to ensure a quick refund is to e-file your return,” said Koskinen. “That’s because we expect processing delays for paper returns as a result of our budget constraints.”
To receive a refund promptly, request “direct deposit” into a savings or checking account, rather than a paper check that’s mailed.
Monday, January 12, 2015
Users Say TurboTax Deluxe Is Less Deluxe Than It Used to Be
FROM NEW YORK TIMES:
TAXPAYERS buying commercial software to prepare and electronically file their 2014 income tax returns should double-check that the version they are purchasing fits their needs.
TurboTax, the tax software from Intuit, drew ire from consumers when they learned that its “deluxe” desktop offering, available by download or on CD, had curtailed functions for some tax schedules that previously had been included. To get the program’s full question-and-answer help to complete the schedules, users must upgrade within the program to a version with an extra cost of $30 to $40.
Edgar Dworsky, publisher of the Consumer World website, said this year’s deluxe desktop version doesn’t offer step-by-step interview help for filling out Schedule C (for self-employment and small business income), D (investments) and E (rental and partnership income). Deluxe desktop users may not realize until they are part way through their taxes that they must pay an extra fee to upgrade and finish, he said.
“I think people are going to be surprised,” Mr. Dworsky said, “because the change was not communicated well.”
Consumers have been complaining and posting negative reviews on Amazon.com and in other online forums.
Colleen Gatlin, an Intuit spokeswoman, said TurboTax customers who used the deluxe desktop version to report investment or rental property income generally must use either the “premier” or “home & business” versions, while those who are self-employed must use “home & business.” (However, some simple investment and business situations, like dividends from investments in mutual funds, are still supported in deluxe, she said.)
TurboTax, which has 29 million customers, made the changes last year to its online service, which allowed users to prepare and file returns without downloading programs onto their computer, she said. Customers are migrating away from the desktop offerings, she said, and 80 percent of them now use the online product.
“Bottom line,” she said, “only a small percentage of desktop customers, who make up about 20 percent of all TurboTax customers, will be impacted by these changes.”
Nevertheless, H&R Block jumped at the chance to lure some users away from its larger rival. Block is offering anyone who bought TurboTax’s basic or deluxe software a free download of its own deluxe software. (Block says it has 7.1 million do-it-yourself customers; more than five million use the online product and two million use its desktop software.)
Here are some questions about tax software for filing 2014 taxes
■ How do I take advantage of the no-cost upgrade offer?
To get the free H&R Block deluxe program, you must provide proof, such as an invoice, that you bought a TurboTax basic or deluxe program and email it to switchtoblock@hrblock.com. The company will then send a link for a free download. (Block’s deluxe software sells for $44.95 as a download on its website).
TurboTax is working with unhappy customers “case by case,” said Ms. Gatlin. Mr. Dworsky of Consumer World said he called Intuit to complain and was offered a free upgrade. He advised others who were unhappy to do the same thing.
■ What if I don’t need any of those complex tax schedules?
If you have a simple tax return, you may be eligible for free electronic preparation and filing of your federal taxes from some of the major software providers. TurboTax, for instance, offers free online software and electronic filing for taxpayers using Form 1040 A or 1040 EZ and is also including free state software and filing. TaxAct, another provider, offers a free federal preparation and filing option for simple and complex returns.
Free filing options are also available from the public/private Free File Alliance if you make $60,000 or less.
■ What is this year’s federal tax filing deadline?
Wednesday, April 15. The opening of tax filing season is on Jan. 20
TAXPAYERS buying commercial software to prepare and electronically file their 2014 income tax returns should double-check that the version they are purchasing fits their needs.
TurboTax, the tax software from Intuit, drew ire from consumers when they learned that its “deluxe” desktop offering, available by download or on CD, had curtailed functions for some tax schedules that previously had been included. To get the program’s full question-and-answer help to complete the schedules, users must upgrade within the program to a version with an extra cost of $30 to $40.
Edgar Dworsky, publisher of the Consumer World website, said this year’s deluxe desktop version doesn’t offer step-by-step interview help for filling out Schedule C (for self-employment and small business income), D (investments) and E (rental and partnership income). Deluxe desktop users may not realize until they are part way through their taxes that they must pay an extra fee to upgrade and finish, he said.
“I think people are going to be surprised,” Mr. Dworsky said, “because the change was not communicated well.”
Consumers have been complaining and posting negative reviews on Amazon.com and in other online forums.
Colleen Gatlin, an Intuit spokeswoman, said TurboTax customers who used the deluxe desktop version to report investment or rental property income generally must use either the “premier” or “home & business” versions, while those who are self-employed must use “home & business.” (However, some simple investment and business situations, like dividends from investments in mutual funds, are still supported in deluxe, she said.)
TurboTax, which has 29 million customers, made the changes last year to its online service, which allowed users to prepare and file returns without downloading programs onto their computer, she said. Customers are migrating away from the desktop offerings, she said, and 80 percent of them now use the online product.
“Bottom line,” she said, “only a small percentage of desktop customers, who make up about 20 percent of all TurboTax customers, will be impacted by these changes.”
Nevertheless, H&R Block jumped at the chance to lure some users away from its larger rival. Block is offering anyone who bought TurboTax’s basic or deluxe software a free download of its own deluxe software. (Block says it has 7.1 million do-it-yourself customers; more than five million use the online product and two million use its desktop software.)
Here are some questions about tax software for filing 2014 taxes
■ How do I take advantage of the no-cost upgrade offer?
To get the free H&R Block deluxe program, you must provide proof, such as an invoice, that you bought a TurboTax basic or deluxe program and email it to switchtoblock@hrblock.com. The company will then send a link for a free download. (Block’s deluxe software sells for $44.95 as a download on its website).
TurboTax is working with unhappy customers “case by case,” said Ms. Gatlin. Mr. Dworsky of Consumer World said he called Intuit to complain and was offered a free upgrade. He advised others who were unhappy to do the same thing.
■ What if I don’t need any of those complex tax schedules?
If you have a simple tax return, you may be eligible for free electronic preparation and filing of your federal taxes from some of the major software providers. TurboTax, for instance, offers free online software and electronic filing for taxpayers using Form 1040 A or 1040 EZ and is also including free state software and filing. TaxAct, another provider, offers a free federal preparation and filing option for simple and complex returns.
Free filing options are also available from the public/private Free File Alliance if you make $60,000 or less.
■ What is this year’s federal tax filing deadline?
Wednesday, April 15. The opening of tax filing season is on Jan. 20
Saturday, January 10, 2015
Finding a Tax Preparer
With so many options in your neck of the woods, how can you be sure you’re hiring the right professional to file your taxes?
You want the process to be as quick and painless as possible without any big surprises. You also want to be able to trust that your tax professional is up on all of the new laws and will be able to complete your taxes with 100 percent accuracy.
Another factor in trying to find a great tax professional is cost. According to a recent survey by the National Society of Accountants, solo tax preparers charged an average of $226 for the usual itemized federal form 1040 and state income-tax form last tax season, compared with $260 for preparers at larger firms with three or more full-time staffers.
Why a CPA?
A certified public accountant who specializes in performing individual income tax returns may be your best option. To find a CPA, check with friends and family members for local professionals they have dealt with.
You also can use the American Institute of Certified Public Accountants’ website tool “Find a CPA” to track one down.
Some are more focused on bringing on business clients, so be sure to call for an appointment and ask if the CPA handles individual income tax matters.
Enrolled Agents
Unlike CPAs, who can handle a variety of financial activities, EAs focus solely on taxes. They must have worked for the IRS for at least five years or passed exams on tax codes and calculations.
Enrolled agents might work for themselves or in a CPA firm or storefront office. The National Association of Enrolled Agents’ website offers an online locator.
National Chains
Storefront operations can be adequate for simple, straightforward returns. The average fee for a name-brand tax company client is less than $200, which can be lower than a CPA or enrolled agent who may charge application and document-preparation fees.
According to the websites of these national tax preparers, employees in franchise offices of the chains have usually passed at least a several-week course, and work is reviewed by experienced supervisors.
Wednesday, January 7, 2015
Hidden TurboTax charges have users screaming
TurboTax users off to an early start on their tax returns are fuming in online reviews that the popular software has added a series of charges to use certain tax forms. And on Tuesday a consumer advocate amplified the complaints by slamming the company for not being more upfront about the new charges.
The $59.99 TurboTax Deluxe edition, made by Intuit (INTU), no longer includes questions you need to answer to fill in sections that include self-employment information, investments and rental income (Schedule C, D, and E), according to Edgar Dworsky, who runs ConsumerWorld.org and was formerly in charge of consumer education for the Massachusetts Attorney General's Office.
"What a clever ploy. Yank out key parts of the program that people have used for years, and then charge them more money to get back the missing pieces," he said in a statement. "Imagine the reaction of perhaps millions of regular TurboTax users who may learn partway through doing their taxes that they have to pay an upgrade fee just to get the same functionality they've always enjoyed. They are not going to be happy."
Upgrading will cost $30-$40 more if done while doing your taxes. Otherwise, to use TurboTax with those functions will mean buying versions that list for $89.99 or $99.99.
"I have been a loyal TurboTax customer since sometime in the 90's," one reviewer wrote on Amazon (AMZN). "I am angry about the deliberate disabling of critical features in TurboTax Deluxe ... Raising the price is something I would object to but it's just a price increase. It's the disingenuous explanation that shows such contempt for the intelligence of customers which prompts me to give a one star rating, only because it's not possible to give zero stars."
Dworsky said it would have made a big difference if TurboTax came with some sort of notice that explained the changes rather than to surprise users as they work on their returns. He noted that some users who complained have been given free upgrades.
TurboTax Vice President Bob Meighan posted this statement in response to the mounting negative reviews:
The decision to change our product functionality was not an easy one. We understand this change is not popular, especially when it affects you. Taking something away is always tough, but we had to make this change at some point to provide consistent product functionality across our desktop, Online and mobile TurboTax solutions. Last year almost 10 million of our customers (out of 28M) prepared their return using multiple TurboTax solutions, which for some caused confusion and frustration as a result of the different functionality. We put off this change for over 5 years, but couldn't defer it any longer. The changes we implemented this year on desktop were already part of the other TurboTax platforms. While this may be irrelevant to you, it will become an issue for many others in the future as most customers will eventually prepare their return on multiple devices (prepare on one device, review on another and maybe even file from another). I'm sure we can help you out if you contact us at 800-445-1875 (8am - 8pm EST M-F).
5 New Year's Resolutions to Save on Taxes
Another year has rolled in and it's time to make those ever-challenging New Year's resolutions. Sometimes resolutions can be hard to keep. But when money is at stake, I bet the odds of compliance increase. Here are some New Year’s resolutions that are worth keeping in order to keep your money in your pocket, rather than in Uncle Sam’s:
1. Pack away 2014. This one is easy. Take all those receipts, stuff them in an envelope or in file folders or place in a plastic tub marked 2014 and shove it in the shed. I suggest going through the receipts first. Some that don’t need to be around for legal or tax reasons can be discarded. If there is a tax purpose, create a file for 2014 Income Taxes and place the receipts in this file. Later in the month you can add your W2, 1099s, K-1s and other important tax documents that arrive in the mail for preparation of your 2014 Income tax return. Also set up files for 2015 for bank account statements, credit card statements and general categories that you want to track. During the year, file away receipts and other documents as they come in in order to enjoy an orderly and easily accessible financial life.
2. Make a 2015 Tax File. It’s never too early to prepare for 2015 income taxes. In fact, you will be glad you did. Throughout the year you can slide receipts for medical expenses, property tax payments, vehicle registration fees, and other tax data into the file. It is especially critical to keep copies of acknowledgement letters from nonprofit organizations for charitable contributions made. This has been a major audit point for the IRS the past several years. Copies of cancelled checks and credit card receipts are not enough. By inserting tax documentation as you go during the year, you cut down on the angst and stress of preparing your data for the tax return. Almost all of the work has been done; the data has been pre-assesmbled and you can just pick up the file and head out to your tax appointment come tax time.
3. Set up QuickBooks. If your personal tax situation is complex, for example, you own one or more rental properties and you itemize deductions, it might be prudent to set up your tracking on accounting software. Bill paying, tracking, checkbook reconciliation are facilitated as well. Plus, you can generate financial reports that summarize income and expenses for each rental property. And you can view financial statements that disclose household spending. This is great for creating future budgets and for discovering where all that money went.
4. Tax Planning. In this day and age with the complexity of tax law, it is important to stay ahead of the game. This involves a midyear sit down with your tax professional to review the current year and set up a game plan to minimize your tax hit. This is especially true if you experience any significant changes in finances: divorce, marriage, buying and selling real estate, cashing out stock, IRA withdrawals, changing jobs, losing a dependent, losing a job. Don’t let the following April 15 slap you in the face. When you see your tax pro this season set up a post season appointment for planning.
5. Make your Estimated Tax Payments. Almost everyone with a tax liability who does not receive a W2 at year end is a candidate for estimated tax payments. This includes those who are self-employed or who make their living from investments. Your tax pro will set you up with quarterly vouchers to prepay your current year tax liability. Estimated tax payments are required if your federal liability is greater than $1,000. You may also have a requirement at the state level as well. Check with your state taxing agency or tax pro to determine if you do. It can be easy to blow off paying the estimates when other things like a new car or a vacation beckon. However, you can be penalized for not prepaying your liability and you may end up in tax trouble if you cannot come up with the total due by April 15. It might be advisable to have a separate “tax savings account,” in which to deposit money for disbursing quarterly to the IRS and the state.
Happy New Year! May your year bring you prosperity and lower tax liabilities!
Tuesday, January 6, 2015
Why the 2015 Tax-Filing Season Will Be Tougher Than Usual
The 2015 tax-filing season is almost upon us. The Internal Revenue Service (IRS) announced at the end of December that it will begin accepting tax returns for the 2014 fiscal year starting Jan. 20.
But the 2015 tax season could see some major hang ups for taxpayers. It’s the first time taxpayers will have to include information in their tax returns to meet the requirements of the Affordable Care Act. On top of the newly complicated tax code, Congress cut the IRS’ budget and the agency is operating with fewer personnel.
IRS Opens 2015 Tax Season With Fewer Resources
The IRS announced Dec. 29 that it will be opening the 2015 tax season as scheduled on Jan. 20. It was unclear in December if the IRS would be able to begin the tax season as usual, due to legislation to extend certain tax breaks that was not signed into law until Dec. 19.
“We have reviewed the late tax law changes and determined there was nothing preventing us from continuing our updating and testing of our systems,” said IRS Commissioner John Koskinen in a statement from the IRS. “Our employees will continue an aggressive schedule of testing and preparation of our systems during the next month to complete the final stages needed for the 2015 tax season.”
But the IRS is operating on less money and manpower, reports CNN Money. The IRS’ budget for 2015 is 10 percent lower than it was in 2010, even though costs for the agency have increased since. IRS staffing is down 8 percent, while money allocated for staff training was cut by more than 85 percent.
Affordable Care Act Complicates 2014 Tax Code
Cuts to the IRS’ budget might have been less worrisome, save for the new rules introduced by the Affordable Care Act (ACA) and other legislation. As tax filers deal with new forms and rules for the first time, it’s expected to be a particularly confusing and frustrating tax year for many filers; but the IRS will have less manpower and resources to offer support.
The 2015 tax season marks the first return that taxpayers will fill out following the enactment of the Affordable Care Act, which includes many provisions that relate directly to taxes. Taxpayers will be required to provide proof of 2014 insurance coverage, as well as indicate whether they received tax credits to help cover insurance costs.
“The ACA is going to result in more confusion for existing clients and many taxpayers may well be very disappointed by getting less money and possibly even owing money,” said Charles McCabe, president of Peoples Income Tax and the Income Tax School, to The Wall Street Journal.
Some taxpayers who received health insurance subsidies will be disappointed to see a smaller refund if the tax credits they received were too large — or might even find that they owe the government money. H&R Block estimates that up to 6.8 million Americans will end up owing money after completing their tax returns because they were given larger health insurance tax credits than needed through the ACA.
Saturday, December 27, 2014
10 Last-Minute Ways to Save on Your Taxes This Year
In between your holiday shopping and New Year's plans, make time for these time-sensitive tax moves.
1. Be Charitable Now
By donating to charity, you can trim next your tax bill next April. You must itemize to get a write-off, and the organization must be a qualified charity. Check at IRS.gov.
Then you simply need to get a check in the mail by Dec. 31. Or put the gift on a credit card before year-end and pay the bill in January. Make sure you have a receipt, be it a cancelled check or your credit-card statement. But if you donate $250 or more, you must get a written record from the charity.
If you give away clothes or stuff from around the house, you’ll be able to deduct the fair market value, as long as the goods are in good condition or better.
“The end of the year is a great time to donate some items to charity,” says financial planner Trent Porter. “Your good deed will be rewarded with a bigger tax refund and a clean closet”
2. Be Charitable Later
If you’re in search of a big deduction in 2014, but you’re not ready to support a single charity now, here’s a good option. With as little as $5,000, you can set up a donor advised fund with a brokerage of fund company such as Fidelity or Schwab. You get the upfront tax savings, the money is invested, and you can then donate a portion of the fund to the charities of your choice for years to come.
“These accounts make it easy to use appreciated securities and other assets to fund your philanthropy, thus avoiding paying capital gains tax on the appreciation,” says financial planner Eric Lewis.
3. Invest in Education
A year of tuition and fees at even a public college will cost you more than $23,000 today. You need all the tax breaks you can get.
If you’re saving for school in a 529 college savings plan, that money grows tax-free, and withdrawals are tax-free as long as the money goes toward higher ed.
You can’t deduct those contributions on your federal return. But in 34 states and the District of Columbia, you can qualify for at least a partial deduction or a credit on your state tax return, as long as you fund the account by Dec. 31. Look up your state’s rules at savingforcollege.com.
4. Speed Up Deductions
A popular strategy for cutting your tax bill is to move up as many deductible expenses as you can. This is especially smart if your income will be high this year—say you cashed out winning investments or sold property.
One simple way is to donate more to charity. You can also make your January mortgage payment in December, which will give you extra interest to deduct. You could also prepay your property taxes, or send in estimated state and local taxes that you would otherwise pay in January. Or pay next year’s professional dues and subscriptions to trade publications.
Don’t employ this strategy, however, if you expect to be in a higher tax bracket in 2015. In that case, the deductions will be more valuable to you next year.
5. Top Off Retirement Plans
In 2014, you can save $17,500 in a 401(k) plan, or $23,000 if you’re 50 or older. If you haven’t saved that much, see if your employer will let you make an extra lump-sum contribution before Dec. 31. If you can’t, make sure you hit the max next year by raising your contribution rate now. The limit will rise to $18,000 in 2015, or $24,000 if you’re 50 or older.
You have until next April 15 to fund a traditional or Roth IRA for 2014, but the sooner you save the more time you’ll have to get the benefit of tax-deferred growth. What’s more, planning ahead might make for better investment choices. A recent Vanguard study found that last-minute IRA investors are more likely to simply park the money in cash and leave it there.
You can contribute $5,500 dollars to an IRA in 2014, or $6,500 if you’re 50 or older.
If you run your own business and want to save in a solo 401(k), you must open that plan by Dec. 31, though you can still fund it through next April 15.
6. Look for Losers
Nearly six years into this bull market, long-term stock investors are sitting on big gains. Maybe you cashed in a profitable stock or mutual fund this year. Or you trimmed back your winners when you rebalanced your portfolio. Unless you sold within a retirement account, you’ll face a tax bill come April. And the best way to cut that is to offset your investment gains with investment losses.
By pairing gains with losses, you can avoid paying capital gains taxes. If you have more losses than gains, you can use up to $3,000 worth to offset your ordinary income, and then save the rest of the losses for future years.
However, don’t let tax avoidance get in the way of sound investing. You should sell a stock or fund before year-end because it doesn’t fit with your investing strategy, not just because you have a loss.
If you want to buy the investment back, you must wait 31 days. Do so sooner, and the IRS will disallow the write-off (what’s called the “wash sale” rule).
7. Part With Big Winners
If you donate winning stocks, bonds, or mutual funds directly to a charity, you can enjoy two tax breaks. You won’t owe any taxes on your capital gains. And you can deduct the full market value of the investment on your 2014 return.
8. Tap Your IRA
With a tax-deferred plan like an IRA, once you hit age 70 1/2 you must take out some money every year. You have to take your first distribution by April 1 the year after you turn 70 1/2. Then the annual deadline for your required minimum distribution, or RMD, is Dec. 31.
This rule doesn’t apply to Roth IRAs, and if you have a 401(k) plan and you’re still working, you can usually wait until you do retire to start withdrawing money.
The IRS minimum is based on your account balance at the end of last year and your current life expectancy. Your broker or adviser can help you with the calculation, but you’re responsible for making the withdrawal. If you fail to do so, you’ll owe a 50% penalty on the amount you should have withdrawn.
You can also donate your RMD directly to charity and avoid paying income taxes on the withdrawal. In mid-December, Congress extended that rule, which had expired, for at least one more year.
9. Spread the Wealth
Making outright gifts is a smart move tax-wise, says Ann Arbor financial planner Mo Vidwans. Your heirs are less likely to face estate taxes down the road—and you can help out your kids or grandchildren when they need it the most. In 2014, you can give as many people as you want up to $14,000 tax-free. If both you and your spouse both make gifts, that’s $28,000.
If you’re funding 529 plan, you can frontload five years worth of gifts and put $70,000 into a child’s account now.
10. Pay Taxes Now and Never Again
With a traditional individual retirement account, your contributions are tax deductible, but you’ll owe income taxes on your withdrawals. A Roth IRA is the opposite: You invest after-tax money, but your withdrawals are 100% tax free.
Before year-end, you can convert a traditional IRA to a Roth. You’ll have to pay taxes on the conversion in 2014. But then you’ll never owe taxes on that money again.
Converting to a Roth is an especially smart move if your income was down this year and you’re in a low tax bracket. If you have a low-income year, do a Roth conversion. “Whenever I see a tax return with negative taxable income I cringe, because it’s such a wasted opportunity.”
And if you later change your mind, you have until the extended tax-filing deadline next October to switch back to a traditional IRA. I recommend undoing any conversion that puts you above the 15% federal tax bracket.
1. Be Charitable Now
By donating to charity, you can trim next your tax bill next April. You must itemize to get a write-off, and the organization must be a qualified charity. Check at IRS.gov.
Then you simply need to get a check in the mail by Dec. 31. Or put the gift on a credit card before year-end and pay the bill in January. Make sure you have a receipt, be it a cancelled check or your credit-card statement. But if you donate $250 or more, you must get a written record from the charity.
If you give away clothes or stuff from around the house, you’ll be able to deduct the fair market value, as long as the goods are in good condition or better.
“The end of the year is a great time to donate some items to charity,” says financial planner Trent Porter. “Your good deed will be rewarded with a bigger tax refund and a clean closet”
2. Be Charitable Later
If you’re in search of a big deduction in 2014, but you’re not ready to support a single charity now, here’s a good option. With as little as $5,000, you can set up a donor advised fund with a brokerage of fund company such as Fidelity or Schwab. You get the upfront tax savings, the money is invested, and you can then donate a portion of the fund to the charities of your choice for years to come.
“These accounts make it easy to use appreciated securities and other assets to fund your philanthropy, thus avoiding paying capital gains tax on the appreciation,” says financial planner Eric Lewis.
3. Invest in Education
A year of tuition and fees at even a public college will cost you more than $23,000 today. You need all the tax breaks you can get.
If you’re saving for school in a 529 college savings plan, that money grows tax-free, and withdrawals are tax-free as long as the money goes toward higher ed.
You can’t deduct those contributions on your federal return. But in 34 states and the District of Columbia, you can qualify for at least a partial deduction or a credit on your state tax return, as long as you fund the account by Dec. 31. Look up your state’s rules at savingforcollege.com.
4. Speed Up Deductions
A popular strategy for cutting your tax bill is to move up as many deductible expenses as you can. This is especially smart if your income will be high this year—say you cashed out winning investments or sold property.
One simple way is to donate more to charity. You can also make your January mortgage payment in December, which will give you extra interest to deduct. You could also prepay your property taxes, or send in estimated state and local taxes that you would otherwise pay in January. Or pay next year’s professional dues and subscriptions to trade publications.
Don’t employ this strategy, however, if you expect to be in a higher tax bracket in 2015. In that case, the deductions will be more valuable to you next year.
5. Top Off Retirement Plans
In 2014, you can save $17,500 in a 401(k) plan, or $23,000 if you’re 50 or older. If you haven’t saved that much, see if your employer will let you make an extra lump-sum contribution before Dec. 31. If you can’t, make sure you hit the max next year by raising your contribution rate now. The limit will rise to $18,000 in 2015, or $24,000 if you’re 50 or older.
You have until next April 15 to fund a traditional or Roth IRA for 2014, but the sooner you save the more time you’ll have to get the benefit of tax-deferred growth. What’s more, planning ahead might make for better investment choices. A recent Vanguard study found that last-minute IRA investors are more likely to simply park the money in cash and leave it there.
You can contribute $5,500 dollars to an IRA in 2014, or $6,500 if you’re 50 or older.
If you run your own business and want to save in a solo 401(k), you must open that plan by Dec. 31, though you can still fund it through next April 15.
6. Look for Losers
Nearly six years into this bull market, long-term stock investors are sitting on big gains. Maybe you cashed in a profitable stock or mutual fund this year. Or you trimmed back your winners when you rebalanced your portfolio. Unless you sold within a retirement account, you’ll face a tax bill come April. And the best way to cut that is to offset your investment gains with investment losses.
By pairing gains with losses, you can avoid paying capital gains taxes. If you have more losses than gains, you can use up to $3,000 worth to offset your ordinary income, and then save the rest of the losses for future years.
However, don’t let tax avoidance get in the way of sound investing. You should sell a stock or fund before year-end because it doesn’t fit with your investing strategy, not just because you have a loss.
If you want to buy the investment back, you must wait 31 days. Do so sooner, and the IRS will disallow the write-off (what’s called the “wash sale” rule).
7. Part With Big Winners
If you donate winning stocks, bonds, or mutual funds directly to a charity, you can enjoy two tax breaks. You won’t owe any taxes on your capital gains. And you can deduct the full market value of the investment on your 2014 return.
8. Tap Your IRA
With a tax-deferred plan like an IRA, once you hit age 70 1/2 you must take out some money every year. You have to take your first distribution by April 1 the year after you turn 70 1/2. Then the annual deadline for your required minimum distribution, or RMD, is Dec. 31.
This rule doesn’t apply to Roth IRAs, and if you have a 401(k) plan and you’re still working, you can usually wait until you do retire to start withdrawing money.
The IRS minimum is based on your account balance at the end of last year and your current life expectancy. Your broker or adviser can help you with the calculation, but you’re responsible for making the withdrawal. If you fail to do so, you’ll owe a 50% penalty on the amount you should have withdrawn.
You can also donate your RMD directly to charity and avoid paying income taxes on the withdrawal. In mid-December, Congress extended that rule, which had expired, for at least one more year.
9. Spread the Wealth
Making outright gifts is a smart move tax-wise, says Ann Arbor financial planner Mo Vidwans. Your heirs are less likely to face estate taxes down the road—and you can help out your kids or grandchildren when they need it the most. In 2014, you can give as many people as you want up to $14,000 tax-free. If both you and your spouse both make gifts, that’s $28,000.
If you’re funding 529 plan, you can frontload five years worth of gifts and put $70,000 into a child’s account now.
10. Pay Taxes Now and Never Again
With a traditional individual retirement account, your contributions are tax deductible, but you’ll owe income taxes on your withdrawals. A Roth IRA is the opposite: You invest after-tax money, but your withdrawals are 100% tax free.
Before year-end, you can convert a traditional IRA to a Roth. You’ll have to pay taxes on the conversion in 2014. But then you’ll never owe taxes on that money again.
Converting to a Roth is an especially smart move if your income was down this year and you’re in a low tax bracket. If you have a low-income year, do a Roth conversion. “Whenever I see a tax return with negative taxable income I cringe, because it’s such a wasted opportunity.”
And if you later change your mind, you have until the extended tax-filing deadline next October to switch back to a traditional IRA. I recommend undoing any conversion that puts you above the 15% federal tax bracket.
Friday, December 26, 2014
The tax implications of getting married
Your marital status for the entire year is determined as of Dec. 31. This means it doesn’t matter what day you tie the knot, you will be taxed as if you were married for the entire year. So why is the timing of your marriage such an important tax planning decision? There can be a “marriage penalty” when you and your new spouse combine incomes when you file your income tax return. Although it may not be romantic to discuss the tax cost of getting married, the marriage penalty is real for many dual income couples so you should understand what you may be facing in additional taxes.
Logically, you would think that a married couple would incur the same tax liability as two single taxpayers earning the same amounts of income. But as we know, many things in tax law do not make logical sense, and this is one of them. Tax brackets above the 15 percent level are more favorable for single taxpayers than they are for married taxpayers. For example, in 2014, you and your soon-to-be spouse, filing as single, can each have $89,350 of taxable income (or $178,700 combined, assuming equal income levels) before you are subjected to the 28 percent tax bracket. However, once you marry, your combined taxable income over $148,850 will be taxed at a 28 percent rate.
Couples who are married and earn similar amounts of income, especially high earners, will feel the greatest impact from the marriage penalty.
Here is a comparison of 2014 tax bracket levels higher than the 15 percent rate between married filing jointly and filing individual returns.
•The 28 percent rate starts at $148,851 for married couples filing jointly and $178,701 for two single taxpayers.
•The 33 percent rate starts at $226,851 for married couples filing jointly and $372,701 for two single taxpayers.
•The 35 percent rate starts at $405,101 for married couples filing jointly and $810,201 for two single taxpayers.
•The 39.6 percent rate starts at $457,601 for married couples filing jointly and $813,501 for two single taxpayers.
So, since you are marrying this year, be aware that it may negatively impact your income tax liability. You should project your income as a married couple so that you can determine the additional tax (if any) you may have when you file your 2014 returns next year.
Here are several other important steps you need to take before tax time rolls around:
•Contact the Social Security Administration if you plan on changing your name. Doing so will ensure that your Social Security Number and your new name match when you file your next tax return.
•If you have, or are going to have, a new address, be sure to notify the U.S. Postal Service. You should also notify the Internal Revenue Service. This is important because the IRS only corresponds via the U.S. Postal Service, they will not contact you via email or phone.
•Report any name and address changes to your employer(s) to make sure you receive your Form W-2, Wage and Tax Statement, after the end of the year. You should also run the numbers to determine the correct amount of withholding needed for your new filing status. To adjust your withholdings, you will need to complete a new Form W-4 for your employer(s) so they withhold an appropriate amount from your pay.
•Generally, married filing jointly is more beneficial than married filing separately. However, you should determine which filing status will result in the lowest overall tax liability — combined federal and state — and file accordingly.
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