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Comments on Tax Laws and Changes

 

January 31, 2014

IRS Finally Opens

IRS Finally Open for Business! Hey guys. I just wanted to let everyone know that the IRS is finally processing tax returns and we’ve already received several confirmations back from them. We expect most refunds to take 2-3 weeks again this year, but hold out some hope that the IRS will get its act together and give you back your money faster!

Our schedules are already starting to fill up, so please call if you want an appointment. You don’t need an appointment, but may have to wait, sometimes quite a while, if all the preparers are booked up when you get here.

And one last thing. My wife tells me all these emails I send out about taxes are depressing! Say it ain’t so! Taxes should be fun and enjoyable, so I’m going to try to make you smile at least a little…

 

January 1, 2014

Notes from the Desk

If you were looking for some good news about taxes this year – sorry!  The best I can say is that there aren’t a lot of changes for most taxpayers. The changes for 2013 mostly affect high income taxpayers. There is a list of credits and deductions that are expiring on Dec 31, 2013 included in the newsletter (we’ll post on the website in early January), but those changes won’t take effect until 2014. Starting January 1, 2014, though, there are major changes coming for all taxpayers. The Affordable Care Act is looking to be VERY expensive and as MY taxpayers know, the government gets ALL its money to give away from YOU. Despite the wordage from Washington, there just aren’t enough One Percenters in the country to pay for the new Health Care Law – and so a lot of the tax money Washington needs will come from taxes on the middle class. Washington is being pretty quiet about the new Sneak-a-tax, but as you consider how this is affecting you, be thankful you aren’t an arrow maker who, under the new ACA, must now pay a tax of 48 cents on every shaft – just one of thousands of new Sneak-a-tax’s!

The word you will hear your preparer use most often this year is “phase-out”. 

• Should you have an education credit because you have a child going to college?  There’s a phase-out for that.
• Do you have interest on student loans you are paying off? There’s a phase-out for that.
• Did you get married, have a baby, increase your dependents in some other way? There’s a phase-out for that.
• Are you going through the expenses of adoption? There’s a phase-out for that.
• Did you have a lot of medical expenses?  Are you paying more for health insurance? There’s a phase-out for that.
• Are you counting on your mortgage interest, property taxes, donations to pay less in taxes? There’s a phase-out for that.

And One More Thing!!  IRS has announced that ONCE AGAIN they cannot be ready for Tax Season on time.  We will be available to prepare your tax return in January, but the expected opening day for sending 2013 tax returns to the IRS is Jan 31st.  IRS has eliminated the Cycle Chart, so we can guess, but we can’t tell you for sure, when your refund will deposit to your bank. Also, IRS has told us that additional computer checks to determine ID fraud will slow down refunds. We don’t expect the first refund checks to be released until the third week of February. The later date for IRS opening shortens the tax season by about three weeks and puts a heavier demand on your preparer’s time.  Oh, Joy! It’s going to be a fun ride!  See you in the Spring!

 

March 25, 2013

Why Me?!  Reasons the IRS Might Audit You
("I Don't Want to be a One-Percenter!")

While the IRS only audits about 1% of all tax returns, that's small consolation when you're a one-percenter!  The most common question we get is "Why Me?"  A very small percentage of all audits are completely random.  Usually audits are triggered by "Red Flags" on a tax return.  Our experienced preparers know these red flags and will advise you accordingly, but sometimes they are simply unavoidable.   Here are just a few of the most common red flags:

	High Income (over $200k)
	Unreported Income
	Hobby/Business Losses
	Cash Business
	Business Use of Cars
	Travel and Entertainment Expenses
	Foreign Bank Accounts
	Large Charitable Gifts
	Home Office Deductions
	Rental Real Estate Losses

If one or more of these categories is yours, we are here for you.  We will help you prepare your return to minimize your audit potential and we can represent your case should the IRS pull your number.

 

Feb 3, 2013

Happy Birthday!

Our Income Tax was born 100 years ago today! 
And every year, we all get to go to the birthday party!  :p

 

Jan 18, 2013

Who Pays Taxes

(CNSNews.com) – Americans making over $50,000 paid most of the federal taxes that were paid in the U.S. in 2010.

According to statistics compiled from the Internal Revenue Service (IRS) by the Tax Foundation, those people making above $50,000 had an effective tax rate of 14.1 percent, and carried 93.3 percent of the total tax burden.

In contrast, Americans making less than $50,000 had an effective tax rate of 3.5 percent and their total share of the tax burden was just 6.7 percent.

Americans making more than $250,000 had an effective tax rate of 23.4 percent and their total share of the tax burden was 45.7 percent.

Out of the 143 million tax returns that were filed with the IRS in 2010, 58 million – or 41 percent – of those filers were non-payers.

In other words, only 85 million actually paid taxes.

But Tax Foundation data also shows that people who didn’t pay any income tax received $105 billion in refundable tax credits from the IRS.

Additionally, statistics from the Tax Foundation shows that the federal tax code is 3.8 million words long – 3.5 times longer than all seven books of J.K. Rowling’s famous Harry Potter series combined.

According to Scholastic.com, the total word count of all seven Harry Potter books is 1,083,594 words with Harry Potter and the Sorcerer’s Stone being the shortest (76,944 words) and Harry Potter and the Order of the Phoenix the longest (257,045).

In contrast, the federal tax code is 3.8 million words, almost a tripling of its size since 2001 when the Joint Committee on Taxation estimated the tax code to be 1,395,000, and almost doubling its size since the Tax Foundation's estimates in 2001.

 

Jan 14, 2013

Moving the Cliff

And so Congress avoided the cliff.  Of course they did.  There really wasn’t much doubt that they would, but it created a frenzy for the media!  And aren’t we all just pleased as punch??  As a result, there isn’t much new for 2012 that wasn’t there for 2011.  Taxes for 2013 is a whole new story, but Congress has a year to work on the revisions.  Any bets on whether there will be another looming crises in December next year?  : )

What’s back in there for 2012 that will now expire in 2013?

	Educator Expense Deduction of $250
	College Tuition Deduction
	Sales Tax (vs state income tax) as an itemized deduction
	Residential Property Energy Credit

Good News:  Debt Forgiveness on your personal residence continues to be excludable for 2012 and 2013.

Best news:  AMT (the “Nasty” tax) was permanently extended and linked to inflation increases for each year.  (We would have preferred to see it just go away, but a permanent fix is better than an every year temporary fix).

Bad news:  The refundable adoption credit was not renewed.  Adoption expenses are back to being a credit on the return with a carry forward of up to five years for credits you can’t use in 2012.

Worst news:  Tax Rate increases to 39.6% for those with adjusted gross income of $400,000 and more, but they aren’t alone – 77% of all taxpayers will be paying more in taxes.  The estimate is that those earning $50K-$60K will pay $822 more in taxes; those earning $100K will pay an extra $2274; millionaires will pay $170,341 additional tax on average.

 

Jan 10, 2013

When the IRS requires you to send in form 1099-MISC

(Tax Facts provides payroll services to our clients, and we are currently doing annual reports as well as issuing W2’s and 1099’s.  Let us know if you need assistance.)

If during the calendar year you hired contractors in the course of running your trade or business, you may have to issue them a 1099-Misc. The IRS makes this requirement so that you remind folks you pay to include such payments on their tax returns. You also need to furnish the IRS with a copy of the 1099-Misc.

 Who does not get a 1099? 

	The recipient is a corporation
	You included the payment in a W-2 form (to an employee)
	The payment is for a tangible product (office supplies, computers, etc), or
	The total payments during the calendar year were less than $600.

 Who needs to get 1099? 

	The payments were Professional fees made to an attorney, doctor or other professional, as long as they are made in the course of your trade or business. Do not issue a 1099 for payments that are for personal expenses.
	Any person you paid $600 or more who perform services for you in your business or trade.
	Payments to corporations are included only if they are for medical, health care, legal or fishing activities (yes, fishing!).
	Payment of $600 or more in rent for office space, machines, equipment or land in the course of your trade or business will also require a 1099-Misc if the payment was made to an individual or partnership, not a corporation.

What is a payment?

Payments include commissions, fees, interest, rents, royalties, annuities and any other type of compensation or income to a single recipient.

The IRS deadline for mailing 1099 forms for payments made in 2012 is Jan. 31, 2013.

OOPS!   If you inadvertently fail to issue a proper Form 1099 by Jan 31st, the IRS can assess a $300 penalty. The penalty for each intentional failure can be $500 or more.

It's important to note that individuals are not required to send 1099-MISC for personal payments. Individuals are not required to send a 1099-MISC to an independent contractor to whom you have made a personal payment unrelated to your trade or business. So you don't have to issue a 1099-MISC to your landscaper or house painter....not yet anyway.

 

December 4, 2012

The Fiscal Cliff! -- “Ticking time bomb” … “Prophecy and Prognosticators” …
“Fiscal cliff” … “Total confusion”

 On December 31, 2010, the Bush-era tax cuts expired and Congress did what Congress does best: they kicked the can down the road.  Meanwhile, Congress (with a little prodding from the President) continued to do what they do second best: spend our hard-earned dollars like drunken – well, you get my drift.  There was a Congress a few years ago that said “wait a minute!  You can’t keep overspending!” and capped how much the government could spend, so when the Debt Limit came up each time in the past three years – you guessed it, Congress did what it does best (see above).

The President's re-election set in motion debate over: 1) the fate of the Bush-era tax cuts, 2) nearly $100 billion in automatic spending cuts, and 3) the more than 50 expiring tax “gimmies”, including the alternative minimum tax (AMT) relief for 60 million taxpayers (about half of all taxpayers).  I’m predicting that Congress will STILL do what it does best, but the President wants your money and eventually he will get it.

LOOMING DEADLINES

Effective January 1, 2013:

1.       Bush-era tax rates as extended by the Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act of 2010 expire.

2.       Payroll tax holiday ends.  Take home pay will be immediately reduced when the employee-share of OASDI returns to 6.2 percent instead of 4.2 percent.

3.       Across the Board spending cuts take effect under the Budget Control Act of 2011.

4.       The Affordable Care Act begins its funding with new taxes and higher deduction limits

Assuming the Mayan Calendar isn’t correct, predictions for deductions that hit most taxpayers:

Likely to be renewed by year-end:

	State and local sales tax deduction
	Teachers' classroom expense deduction
	AMT patch for lower and middle income wage earners

Extenders on the fence (and probably gone) include:

	Deduction for qualified mortgage insurance premiums
	Residential energy property credit

Tax-related provisions in the Affordable Care Act scheduled to take effect in 2013:

	3.8 percent Medicare contribution tax on interest and dividends
	0.9 percent additional Medicare tax from your W2 for higher wage-earners
	$2,500 contribution limit on health flexible spending accounts
	Increased threshold for itemized medical expenses (except for seniors)
	Tax on medical devices (hearing aids, wheelchairs, canes, diabetes/Blood Pressure testing equipment. What about contacts and glasses?)

Other likely targets:

	·         Limit on charitable deductions
	·         Limit on personal residence mortgage interest
	·         Higher tax rates on Capital Gains

* * *   Year-end tax strategies for all taxpayers   * * *

	Although lower and middle income tax rates may not increase, they will not go down.  Tax rates right now are at the lowest that they will be for the foreseeable future and credits and deductions are at the highest.  It makes good sense to:
	·         Make as many donations to charity as you can afford
	·         Use up the rest of your flex spending plan at work
	·         Move money in a CD or savings account to an IRA, if you qualify.
	·         Sell the profitable stocks you’ve held for a long time.

 

The Even Higher Fiscal Cliff!
 HIGHER- INCOME TAXPAYERS

Impact

Under President Obama's proposal, the 36 and 39.6-percent rates would start at a bracket level of $200,000 for single filers, $250,000 for joint filers, and they would be keyed to adjusted gross income (AGI) rather than taxable income.

Additionally, after 2012, higher-income taxpayers would be subject to the Personal Exemption Phaseout (PEP) and the limitation on itemized deductions.  The President would limit the value of otherwise allowable deductions to 28 percent of AGI for those in the 36 and 39.6 percent tax brackets.

Capital Gains and Dividends

The President's proposal would increase the tax rate on capital gains to 20 percent for single individuals with incomes over $200,000 and married taxpayers filing a joint return with incomes over $250,000. Single individuals with incomes over $200,000 and families with incomes over $250,000 would pay tax on their dividends as ordinary income.

For dividends, the increase in tax rate for higher-income taxpayers represents almost a 300 percent increase when a top 39.6 percent rate is combined with the new 3.8 percent Medicare contributions tax on net investment income (NII). Combined with a jump in the capital gains rate from 15 percent to 20 percent (23.8 percent with the NII tax), some economists are predicting a massive market sell-off at year end as taxpayers engage in basis-resetting strategies and reallocation of portfolio assets.

* * *   Tax strategies for Higher–Income Taxpayers before the end of the year   * * *

	·         Pull bonuses or commission income from next year into this year,
	·         Sell profitable stocks for appreciation and capital gains (then buy it back if you love the stock)
	·         have closely-held corporations and S-Corporations declare special dividends,
	·         close business sales or acquisitions,
	·         execute family gift-giving strategies

Business Taxation

Unless extended, the current expensing amount for new business equipment of $139,000 is scheduled to fall to $25,000 and the current $560,000 investment limit is scheduled to fall to $125,000.  Bonus depreciation at its current 50 percent rate is scheduled to expire on December 31, 2012.  It is doubtful if there will be a new Bonus depreciation proposed.

 

September 18, 2012

Decisions!  Decisions!

 The clock is ticking and we are down to the last quarter of 2012.  It is time to take a look at how the year is going and make some choices.  

·         Review your 401k/pensions.  Are you on course to putting in the most you can afford?  If not, contact your employer or HR and increase the amount withheld for the rest of the year ($17,000 limit or $22,500 if 50+yrs old). 

·         Are you self-employed with no pension plan?  You have until October 1 to set up a SIMPLE, if you don’t already have one in place.  A SIMPLE will allow you to put up to $11,500 ($14,000 if 50+yrs old) and is easy enough for you to manage without paying a chunk to an administrator.   

·         Required Minimum Distribution (RMD) from your IRA.  If you are required to make a withdrawal from your IRA, You WILL pay tax on the distribution this year, but you can re-invest that deposit into a RothIRA and it will continue to grow tax-free.  The RothIRA does not have a RMD and because it is funded with already taxed dollars, there will be no tax when it is withdrawn. 

·         Contributions.  There are a lot of people hurting out there, and because the economy is bad, donations to charities have also dropped.  Christmas is traditionally a big season for donating, but perhaps you can donate earlier.  Clean out your closets (remember that items must be in good, usable condition).  Watch store sales and buy toys or clothes with a plan to donate them later.  Help out a local food bank with your surplus canned goods.  Keep receipts where possible and a list of donated items with the date donated, date purchased (if you can remember!), original cost (if you can remember!) and donated value.  Another great idea is to take digital pictures with timestamps of all donated items.  There is a link to a list of donated values at my website: www.taxfacts.com.  If you are hurting too, consider volunteering.  Your time is not deductible, but your mileage (bus fare) is and any out-of-pocket expenses are (McDonalds for Big Sisters or mentoring?). 

·         Did you sell stock this year?  Now is the time to review your portfolio.  If you sold for a loss earlier this year, sell some profitable stock to offset the loss.  If you had a profit earlier this year, go ahead and sell your losers! 

 

ID Theft 

ID theft has become so rampant that the IRS has established a special section to deal with the problem.  As preparers, we can often spot a case of ID Theft when we e-file the return and get a reject back that:  

a)      The social security number of someone (spouse or dependent) on the return has already been used

b)      The return rejects as a duplicate return (a return has already been filed) 

So what can you do?  If yours is a proven case of ID Theft, the IRS will send you a letter with a personal PIN to use when you file.  Bring it with you!  If you lose it, the IRS WILL NOT reissue the PIN, and your refund will be delayed.  If you get a PIN and don’t use it when you file, your refund will be delayed (And I’m talking federal government delay - that’s a LO-O-NG, time!).   If the ID Theft is news to you, you can file an IRS Identity Theft affidavit – Form 4039 (of course there’s a form for that!) and wait –and wait – and wait.  (Sorry, nothing moves fast in government). 

 

Affordable Care Act 

In March 2010, the Affordable Care Act was signed into law.  In 2011 and 2012, the “goodies” kicked in –  

1)      No penalty for pre-existing conditions for children under 19 (for adults after 2014)

2)      Children under 26 can remain covered on their parents’ policy (unless they are eligible under another policy)  

But AFTER THE ELECTION (coincidence?), the nasty stuff kicks in.  Starting in Jan 2013 –  

1)      A new 2.3% federal tax on any medical equipment (Cane? Wheelchair? Testing devices?)

2)      Medicare tax will go up for higher income (HI) workers ($200K single/$250K married filing joint)

3)      Capital gains tax will increase from 15% to 20%

4)      Dividends will be taxed at ordinary tax rates

5)      Flex Spending Accounts (FSA plan with your employer) are limited to $2500

6)      Deduction for medical expenses on tax return must exceed 10% of gross income (current is 7.5%)

7)      A $2 per life covered fee will be charged to the issuer of a health insurance policy (pass-through?)               

And it gets worse!  Beginning in 2014, all taxpayers must prove they had health insurance in every month of 2014 or pay a penalty as part of the tax return.  Employers must also pay a penalty for not providing a health insurance plan for their employees, but many of them will drop the higher cost policies for lower coverage or discontinue the coverage and pay the lower cost of the penalty.  We may also see small business layoffs since the penalty applies to employers with 50 or more employees.

 

Expiring Tax Provisions 

These tax deductions expired on Dec 31, 2011 and are not available for your 2012 tax return unless Congress acts to extend them before the end of the year: 

·         Energy Credit for energy efficient home improvements

·         Educator Expense deduction of up to $250 as an adjustment to income

·         Deduction for mortgage insurance premium payments (PMI)

·         Sales tax deduction instead of state and local income tax deduction

·         Adoption Credit is still available but not refundable

·         College tuition deduction (although education credits are still available)

·         Business Credits for research and development, new hire tax credit, work opportunity credit 

These tax provisions will expire on Dec 31, 2012: 

·         Adoption Credit and employer adoption assistance program

·         Forgiveness of debt cancellation for your personal residence (bankruptcy? Short sale?)

·         Child and Dependent Care Credit will revert to $2,400 (currently $3,000)

·         Child Tax Credit will revert to $500 (currently $1,000)

·         Child Tax Credit no longer refundable

·         Employer provided education assistance program

·         Education Credits reduced

·         Marriage Penalty Relief

·         Phaseout relief for itemized deductions

·         Phaseout relief for personal exemptions

·         Work Opportunity Credit for unemployed veterans 

 

Foreign Bank Accounts and Assets Report (FBAR) 

Any US individual, company, trust, or estate who has $10,000 or more in a foreign financial account (or signature authority over a financial account) at any time during the year must report the account to the US Treasury.   

·         A US individual is a US citizen, a resident alien for any part of the year, a nonresident alien who elects to be treated as a US resident for tax purposes, or a bona fide resident of Puerto Rico or American Samoa.

·         Signature authority could mean that you are listed on your parents’ or your daughter’s foreign account even though you don’t ever access the account.

·         A foreign financial account is located outside the US and could be a foreign branch of a US bank or a foreign bank.

·         A foreign asset can be:

ü  stock issued by a foreign corporation,

ü  an interest in a foreign partnership, trust or estate,

ü  a pension from a foreign employer (whether or not you are collecting it)

ü  mutual funds, hedge funds, private equity funds

ü  foreign owned real estate  

Please tell your tax preparer if you think you may have a reporting requirement.