Saturday, June 30, 2012

JUNE IS HERE - TIPS FOR RECENTLY MARRIED TAXPAYERS

Summer wedding season is in full swing. If you recently got married or are planning a wedding, the last thing on your mind is taxes. However, there are some important steps you need to take to avoid stress at tax time. Here are some tips for newlyweds.

  1. Notify the Social Security Administration. Report any name change to the Social Security Administration so your name and Social Security number will match when you file your next tax return. File a Form SS-5, Application for a Social Security Card, at your local SSA office. The form is available on SSA’s website at http://www.ssa.gov.
  2. Notify the IRS. If you move and have a new address you should notify the IRS by sending Form 8822, Change of Address. You may download Form 8822 from http://www.IRS.gov.
  3. Notify the U.S. Postal Service. You should also notify the U.S. Postal Service when you move so it can forward any IRS correspondence or refunds.
  4. Notify your employer. 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.
  5. Check your withholding. If both you and your spouse work, your combined income may place you in a higher tax bracket. You can use the IRS Withholding Calculator available on http://www.IRS.gov to assist you in determining the correct amount of withholding needed for your new filing status. The IRS Withholding Calculator will give you the information you need to complete a new Form W-4, Employee's Withholding Allowance Certificate. You can fill it out and print it online and then give the form to your employer(s) so they withhold the correct amount from your pay.
  6. Choose the best filing status. A person’s marital status on Dec. 31 determines whether the person is considered married for that year. Generally, the tax law allows married couples to choose to file their federal income tax return either jointly or separately in any given year. Figuring the tax both ways can determine which filing status will result in the lowest tax, but usually filing jointly is more beneficial.
  7. Don't forget the non tax items such as wills, beneficiaires of pension plans and life insurance policies.
  8. Health Insurance. If both parties have health insurance at work or private health insurance you need to look at your options.

Friday, June 29, 2012

HEALTH SAVINGS ACCOUNT FORM

Q:  I made a contribution to my health savings account in 2011. I deducted this on the 2011 return. Now I get a form from my health insurance company Form 5498 – SA. How come we get these so late? Is there anything I need to do?

A:  I am unsure as to why you get these so late. I guess it might have something to do with the fact that you can make your contributions up to April 15, 2012, and still have those count for 2011 and of course April 15 is the due date of your tax return (actually April 17 this year). Really there is nothing to do as long as the amount that is shown as a contribution matches what you reported on your 1040. Don’t stress out over this.

HOW DOES A UNMARRIED COUPLE HANDLE A JOINT ACCOUNT FOR TAX PURP0SES


Q:  I want to open a joint savings account with another person. How do we do this and what is the potential issue with splitting the interest for income tax purposes?

A:  Well, no problem opening the account. The issue is that the bank will want a W-9 which has one of your Social Security numbers. That is the person that will get the 1099 showing the full amount of the interest. If the income is material and you want to split it on the two tax returns, we can do what is called a "Nominee 1099." With this whoever gets the original 1099 reports all the income and then we subtract half of the income and include that half on the other persons return. The nominee 1099 is then filed with both returns and with the IRS.
 

Thursday, June 28, 2012

OBAMACARE - WHAT DOES IT MEAN TO YOU

Unless you live in a cave, by now you've heard that the U.S. Supreme Court has upheld the key provisions of the Affordable Care Act, or "Obamacare." In an unexpected twist, the Court ruled that the controversial individual mandate is constitutional, but under the government's power to tax, rather than to regulate commerce.

We don't need to go into the details of the ruling itself -- just turn on your television, and somewhere, somebody is opining on it right now! But we do want to remind you the Court's decision means several new taxes
will go into effect as scheduled:

·         On January 1, 2013, the Medicare Tax will go up by 0.9% for individuals earning over $200,000 ($250,000 for joint filers, $125,000 for married individuals filing separately). 

·         Also on January 1, there will be a new "Unearned Income Medicare Contribution" of 3.8% on investment income, for those earning more than $200,000 ($250,000 for joint filers). 

·         Beginning on January 1, 2014, there will be a new $2,500 limit on tax-free contributions to flexible spending account.

·         Also beginning January 1, 2014 employers with more than 50 employees will face a penalty of $2,000 per employee for not offering health insurance to full-time employees 

·         Finally, the threshold for deducting medical and dental expenses rises from 7.5% of adjusted gross income to 10%. This will make these expenses even harder to deduct without help from advanced strategies like Health Savings Accounts or Medical Expense Reimbursement Plans.
That’s not all.  On January 1, 2013 the so called “Bush Rates” are repealed and we go back to the “Clinton Tax Rates.”  This change impacts every taxpayer.  So, while the constitutional issues of Obamacare may be settled, several planning challenges certainly remain. We'll be following developments carefully in order to help you navigate these new challenges. If you have any questions, don't hesitate to call us at 402.362.6636.  In addition, now that the Supreme Court has ruled we will be planning a local seminar and/or webinar to keep you informed.

Thursday, June 21, 2012

TAXPAYER SAVES $5,000 BY NOT GETTING AN APPRAISAL BUT IT COST HIM $2 MILLION IN TAX

When it comes to large charitable gifts the IRS and the courts are very strict on following the law. As the following couple found out, even if they should undervalue the gift; therefore, cheating themselves of a tax deduction ($4 million), they could lose big time by not paying attention to the rules. The penalty for not properly documenting donations properly is, in most cases, a complete disallowance of the deduction.
The most recent Tax Court case shows the folly of a “sophisticated” taxpayer not following the rules costing them a charitable deduction in excess of $4 million..
Here is a summary of the facts. The taxpayer owned several pieces of property located in the Sacramento, CA area. In 2003, the taxpayers created a charitable remainder trust and donated the property to the trust. In preparing their income tax return, the taxpayer did not get a qualified appraisal for the property. The IRS audited the return and disallowed the charitable donation claimed. The Tax Court just ruled that the IRS was correct.
The interesting part of this case is that the IRS really did not have an argument with the valuation done by the taxpayer. As a matter of fact, they basically conceded that the value was most likely higher than what the taxpayer claimed. However, the taxpayer filled out the form, did not read the instructions and had his entire donation amount disallowed. A qualified appraisal would have probably cost the taxpayer about $5-10,000. This would have allowed the donation and probably saved the taxpayer easily $2 million or more in taxes.

WILL THE BUSH TAX BREAKS REALLY EXPIRE?

Q: You have showed how much it will cost me if the Bush tax cuts are repealed and we go back to the Clinton rules. Any chance Bush will be extended for everyone?

A: President Obama will be campaigning to allow the Bush tax rate cuts to expire for upper income taxpayers. The people that seem to be in the know don't think that this will happen. Believe it our not, there may be a little compromise in Washington.

In exchange for keeping the Bush rates will require the GOP to concede on continuing the payroll tax cut for workers, a debt limit hike, and more spending on jobless benefits and other items.

The compromise will give the next Congress time to start serious work on tax reform, and the results of the November elections will be a big factor in how the overhaul plays out.

Wednesday, June 20, 2012

WATCH SIMPLE CONTRIBUTIONS FOR EMPLOYEES WITH ANNUAL SALARY


Every time I think that I have a good grasp on the tax law I read something that humbles me.

Recently I read a article on SIMPLE IRA plans which surprised me. Matches must be based on a participant’s annual salary, according to IRS, even if the employee joins or leaves the plan in midyear.

For example if a worker with a salary of $60,000 joins the plan on Oct. 1 and contributes $2,000 for the rest of the year,the plan’s matching payin is $1,800...3% of $60,000 (most SIMPLEs have a 3% match). The matching contribution isn’t based on the $15,000 the employee was actually paid. If the worker in this example only put in $1,500, the match would fall to $1,500.

WHY DOESN'T THE PREACHER TALK POLITICS FROM THE PULPIT?


If non profits start talking politics, they could lose their tax exempt status. Now the IRS is stepping up its scrutiny of nonprofits in this election year to ensure they are complying with the rules on intervening in political campaigns.

Charities are barred from participating in political campaigns. Social welfare groups may engage in some political activity, as long as that is not their primary activity.

The IRS has been sending questionnaires about political activities to some groups that are applying for a tax exemption, and leads are pouring in about organizations on both sides of the political spectrum that may be trying to get around the rules.

Saturday, June 16, 2012

HIRE YOUR KIDS – FOLLOW UP

A week ago I blogged the tax advantages to hiring your kids.  Here are a few follow-up suggestions. 
The IRS tends to view employment arrangements between parents and children with a touch of skepticism. So be careful to observe the strict letter of the law when you hire your child for the summer. Here are a few points to keep in mind.
  • Treat your child like any other employee. Make sure the child completes a W-4, fills out time sheets when appropriate and follows other company procedures. Don't give your child special leeway to run personal errands while he or she is on the clock.
  • Pay your child the going rate for the job. Providing an exorbitant salary for an entry-level position or setting a flat rate at the beginning of the summer is likely to draw the ire of the IRS. Establish an hourly rate that is reasonable for the work performed.
  • Follow the payroll tax rules. Impose the usual withholding amounts to your child's wages unless he or she qualifies for exemptions. Issue an annual Form W-2. Don't make any exceptions for your child.
Of course, taxes will be withheld from your child's wages, even if he or she won't have any income tax liability for 2012. But in this case, you can have your child avoid income tax withholding by entering the word "EXEMPT" on Line 7 of Form W-4.
This is only available to a child claimed as your dependent if he or she had no tax liability for 2011 and won't earn more than $5,950 in 2012. If your child exceeds the limit, a new W-4 should be filed.

HUGE PENALTY IF YOU DON’T REPORT FOREIGN ACCOUNTS TO THE IRS

Many taxpayers may have investments overseas.  If this investment is in the form of mutual funds or other passive holdings, there is usually no extra reporting to the IRS or Department of Treasury.  However you can accidentally have an account that might trip you up.  For example, if you have a timeshare that you sell, even though the money normally goes right out of the account to your US account you are subject to the stringent reporting requirements. 

Why?  For a brief time, maybe only one day, you have money from the sale in a foreign account..
Also, if you own a foreign bank account, securities account, etc. and the value of these accounts exceed more than $10,000., than this needs to be reported, both to the IRS and to the Department of Treasury.  The reporting to the IRS is included with your tax return and the reporting to the Department of Treasury is on a separate form that is due by June 30 of each year with no extensions and it must be received by that date, not postmarked.
If you forget to report these holdings, in many cases, the penalty for not reporting these accounts can actually exceed the value of the account, so it is extremely important to review these accounts.  The penalties are high because Congress wants to stomp down on foreign accounts so they set the penalty high.

Friday, June 15, 2012

MOST COMMON TAX CREDITS

Q:  I hear people saying that they are getting a credit that helps them reduce their tax bill.  Where do I go to get these credits?


A:  Actually you don't need to go somewhere to get the credit.  You get the credit by filling out your tax return.  The problem is that you have to qualify (meet certain facts and circumstances) to qualify for the credit. 

A tax credit is a dollar-for-dollar reduction of taxes owed. Some tax credits are refundable meaning if you are eligible and claim one, you can get the rest of it in the form of a tax refund even after your tax liability has been reduced to zero.

Here are the four most common refundable tax credits you should consider to increase your refund on your 2011 federal income tax return:

1. The Earned Income Tax Credit is for people earning less than $49,078 from wages or self-employment. Income, age and the number of qualifying children determine the amount of the credit, which can be up to $5,751. Workers without children also may qualify. For more information, see IRS Publication 596, Earned Income Credit.

2. The Child and Dependent Care Credit is for expenses paid for the care of your qualifying children under age 13, or for a disabled spouse or dependent, while you work or look for work. For more information, see IRS Publication 503, Child and Dependent Care Expenses.

3. The Child Tax Credit is for people who have a qualifying child. The maximum credit is $1,000 for each qualifying child but, if your earned income is too high, the credit is phased out. You can claim this credit in addition to the Child and Dependent Care Credit. For more information on the Child Tax Credit, see IRS Publication 972, Child Tax Credit.

4. The Retirement Savings Contributions Credit, also known as the Saver’s Credit, is designed to help low-to-moderate income workers save for retirement. You may qualify if your income is below a certain limit and you contribute to an IRA or workplace retirement plan, such as a 401(k) plan. The Saver’s Credit is available in addition to any other tax savings that apply. For more information, see IRS Publication 590, Individual Retirement Arrangements (IRAs).

There are many other tax credits that may be available to you depending on your facts and circumstances such as education credits. Unfortunately this is one of the reasons the tax system is so complicated. For more information check out www.IRS.gov

I hope that this helps.

CORPORATE AUDITS ARE COMING


The IRS just announced that they started two rounds of random audits starting in April.  About 2,500 small corporations (assets of less than $250,000) will be eyed as part of the Service’s national research audit program.  Tax returns from 2010 will be reviewed.
A set of audits also is on tap for corporations with assets of more than $10 million and up to $100 million.  The IRS will check a sampling of their returns for a five-year period, starting with returns for 2010.

The IRS will use the results of these exams to update its return selection formulas.

I hope that you are not in the sample. But if you should get selected, remember we are here to help you. 

Friday, June 8, 2012

WANT A TAX BREAK – HIRE YOUR KIDS

By hiring the child to work for the business, it can be a win-win for the family.
Here are the potential perks.
·         Income tax savings. Say that you reduce your compensation by the amount of salary you pay your child. Instead of being taxed to you at rates reaching up to 45 percent this year, the income is taxable to your child. For 2012, your child can earn up to the standard deduction amount of $5,950 without paying any federal income tax. Any excess is taxed at a low 10 percent rate.
o   Example:
§  You pay your child $5,000 to work during the summer before she heads off to college. The entire $5,000 in wages is covered by the standard deduction. In contrast, if you are in a 33 percent bracket, $5,000 in wages would save you $1,650 in tax. In addition, your adjusted gross income (AGI) is also lowered, which means there is less chance that you'll be subject to unfavorable AGI-based phase-out rules.
·         Kiddie tax avoidance. Generally, the unearned income of a child under age 19, or a full-time student under age 24, is taxed at the parents' tax rate to the extent it exceeds an annual threshold ($1,900 in 2012). But this rule doesn't apply to "earned income" that your child is paid in wages.
·         Business tax deduction. You get a business deduction for money that, as a parent, you might have given your child anyway.  The wages you pay the child are deductible by the business just like the wages paid to any other employee of the company. However, when a family member is employed, you must take care to ensure that the wages are reasonable in amount for the services actually provided (see right-hand box).
·         Payroll tax savings. If a child under age 18 is employed by his or her parent in an unincorporated business, the earnings are exempt from FICA tax. This exemption also applies to FUTA tax up until the age of 21. These payroll tax breaks can provide significant tax savings for a parent who is self-employed or a partner in a partnership.
o   An unincorporated business includes a sole proprietorship; husband-and-wife partnership (owned only by you and your spouse); a husband-and-wife limited liability company (LLC); or a single-member LLC, which is treated as a sole proprietorship for federal tax purposes.
o   What if your business operates as another type of entity, such as a C or S corporation? Your child's wages are subject to Social Security, Medicare, and FUTA taxes, regardless of age. That's the bad news.
·         Children Age 18 and Older: After your children reach age 18, the tax advantages decrease, because their wages are then subject to Social Security and Medicare taxes (however no FUTA tax is due until age 21).
o   As the employer, your business must pay its share of the Social Security and Medicare taxes. The employee's share is withheld from your child's paychecks. However, again, the child's standard deduction still shelters up to $5,950 from the federal income tax. And you still collect a nice business write-off that cuts your income tax and self-employment tax bills.
·         Tax-free fringe benefits. As an official employee, the child is in line to receive tax-free company fringe benefits. This may include health insurance coverage, group-term life insurance coverage up to $50,000 and educational assistance plans. As with wages, payments under a qualified plan are tax-deductible by the business.
·         Individual Retirement Arrangements (IRAs). If your child has earnings from a job, he or she can contribute to a traditional or Roth IRA. The maximum contribution for 2012 is $5,000. Because the child's income is low, contributions to a traditional IRA are deductible on the child's return. Contributions to a Roth IRA aren't deductible, but any withdrawals made after age 59 1/2 are tax-free, as long as the account has been open five years. Retirement will seem like a long way off to the child, but this is a good way to save for the future.
Tax-smart idea: Have your child open a Roth IRA and fund it with summertime earnings. They can use these accounts to save money for college, a first home -- and, of course, retirement. By socking away some of their earnings in a Roth IRA, your youngsters can begin a savings plan that can grow into a small fortune.
Roth IRAs allow earnings to build up tax-free. And the tax law allows money to be taken out penalty-free in special circumstances, which include paying for college and buying a first home.
There's a lot to be gained by hiring your child to work for the business, but don't ignore the human element of the arrangement. Make sure it's a good fit for everyone involved.

Thursday, June 7, 2012

PROPOSED JOB BILL COULD CAUSE MORE PAPERWORK

Could the proposed bill mean more work for owners?
The new jobs bill being proposed by Congress includes at least six new responsibilities that could impact the role of every supervisor.
The recently introduced Rebuild America Act (S. 2252) includes the following stipulations:
  • ·         Minimum wage increase.  The wage would increase to $8.10 an hour, then to $8.95, and eventually $9.80 an hour within two years.
  • ·         Require employers to provide employees with paid sick leave. Under the bill, employees would earn one hour of paid sick time for every 30 hours worked, up to a maximum of seven days annually.
  • ·         Tougher restrictions on independent contractors.  This would have a major impact on any organization that pays salespeople as contractors for tax purposes.
  • ·         Fewer overtime exemptions for supervisors.  The legislation would impose civil penalties on any employer that commits unfair labor practices, and keep all supervisors from working employees more than the standard 40 hours.
  • ·         Amendments to the FLSA.  These would make it more difficult for employers to categorize employees under the executive, administrative, and professional exemptions from overtime pay.
  • They would also qualify more employees to put in for overtime during any week in which they exceed their normal hours.
       While the bill will likely be picked apart several times over before it eventually lands on the floor, now’s the time to lobby local Congress reps for any amendments you might like to see to the bill.

(      To read proposed bill in full, or monitor its progress, visit  www.govtrack.us/congress/bills/112/s2252)

WASHINGTON READY FOR FARM BILL

(Hoosier Ag Today) -- HoosierAgToday.com reports, "The Senate's new version of the Farm Bill will see action the Senate floor this month, perhaps as early as this week."  According to the article, Senate Ag Committee Chairwoman Debbie Stabenow (D-MI) told reporters on Monday that Senate leadership is ready to bring the bill to the floor for quick action."  The story notes that "Stabenow is expecting two or three weeks to get the bill passed by the Senate."

To read more of this article: CLICK HERE

Wednesday, June 6, 2012

ENVIRONMENTAL ACTIVISTS ATTACK CROP INSURANCE INDUSTRY

(Politico) -- Politico.com reports that "environmentalists are taking aim at the crop insurance industry, seeking to bolster the case for a cap on premium subsidies when the Senate farm bill hits the floor in June."  According to the story, environmental activists say "Washington is too quick to help large-scale farm production at the expense of investments in conservation and the land itself."  The proposed Senate farm bill would create "a variety of new, highly subsidized insurance options even as it ends the system of direct payments."

To read more of this article: CLICK HERE

Friday, June 1, 2012

CLEVELAND WAITRESS GETS $434,712 TAX REFUND CHECK FROM IRS



Just because you receive a check from the IRS does not mean that the money is yours. The taxpayer rightly turned back the money to the IRS. Here is the information as reported in USA Today.

USA Today, Cleveland Waitress Receives Huge IRS Refund Check by Mistake:

A longtime Cleveland waitress got the surprise of her life this week when an enormous income tax refund check arrived in the mail.When Ginny Hopkins filed her tax return, she expected a refund of $754 — money she really needs to fix her car, among other things. Instead of that check, she found a check mistakenly issued for $434,712 in her mailbox. ...

Hopkins knew that cashing the check could get her in a whole lot of trouble. "They'll put me in Alactraz, waiting on the night shift at Alcatraz," she said. "They'll reopen the place." ...

Hopkins made arrangements Wednesday to return the check to the IRS office at the federal building in downtown Cleveland. Since Hopkins needs the money right away, her friends at the restaurant and WKYC-TV in Cleveland advanced her the money. The IRS said sometimes mistakes like this happen, but it happens less often as more people file their taxes electronically. Hopkins should get her correct refund check in six weeks, the IRS said.