Posts Tagged ‘Tax’

Unusual Year for Tax Planning

Today is the day.  It’s VOTING day and likely one to go down in history as a game changer.  We have two very different options and two very different paths for our future.  I find it interesting how much social media has contributed to this election.  Almost everyone is talking about it and I feel it has increased the conversation that was lacking in prior years.  My generation (20-35 year olds) needs to step up, and I feel social media has helped start it.  When you see people talking about politics, it encourages you to pay attention and maybe even do some research.  I personally have done more research this year than all my prior voting years combined, and I for one think it’s a good thing.

 

Why am I talking about the elections? Because depending on who wins tonight (both president and congress) decides how we start guessing what the future holds… as far as taxes, that is.  Everyone agrees, our combined tax rates are at the lowest levels in recent history (some of you may remember the days when the top federal tax rate was 91%!).  It’s very likely that tax rates will increase, especially for the “wealthy”.  Usually tax planning involves finding ways to reduce the tax liability by deferring income and accelerating deductions.  It may not be the right choice this year.  Believe it or not, it may be a year to INCREASE the tax liability!  You read it right!  Pay more taxes.  Why?  Because you may be in a higher tax bracket next year and in future years.  This isn’t the right strategy for everyone.  Tax planning is complicated and should always involve your tax advisor.  We will start discussing possible strategies in the weeks to come that may be helpful to you when developing a tax plan with your tax advisor.

Don’t forget to vote!

Supreme Court Decision on Health Care Act

The Supreme Court upheld the individual mandate of the Affordable Health Care Act by a 5-4 vote.  (Read the decision here).  What is interesting is their conclusion and basis for such a vote.  Most of the arguments made were centered on the Commerce Clause yet the Supreme Court voted against the argument saying Congress has no authority over individuals who choose not to engage in commerce.  Commerce requires the activity of trade.  If you aren’t buying anything (in this case health insurance), then you are not engaging in commerce and therefore Congress has no power.  The ruling was based on Congress’ power to tax.  Now the Obama administration went through great efforts to stress the “fact” that the penalty for not buying insurance was NOT a tax, it was a penalty.  This is obviously for political reasons and the Court says you have to call it what it actually is, and that’s a tax.  What concerns me is what else can Congress tax me for not doing or buying?

At the end of the day, the Court probably wanted to stay out of the political game, as they are supposed to stay out of it.  Whether you are for the Act or against it, the Court is making a silent statement.  If you want to change the law, do it at the polls.  VOTE.

B is for Bad Debt (Personal)

We often think of bad debt in the business sense.  However, from time to time we run into a non business or personal bad debt.  Believe it or not, the IRS allows you to deduct this loss… but there’s a catch.  It is treated as a short term capital loss and therefore is subject to the capital loss limitations (you cannot deduct more than $3,000 of net capital losses from income per year).

In order to deduct the loss, you must prove the debt had value at the beginning of the year and no value at the end of the year.  You must make a reasonable attempt to collect the debt and make a demand for repayment in writing.  If the debtor is unable to pay, request a written statement from him stating that he will not be able to meet his obligation and the reason why.

 A statement outlining the following must be attached to the tax return in order to take the personal bad debt.

  1. Description of the debt, amount and date due
  2. Debtor’s name and taxpayer’s relationship to debtor (cannot be a child or similarly related party)
  3. Description of efforts made to collect the debt and,
  4. Explanation of why the debt is now worthless (such as bankruptcy)

As always, seek advice from your tax preparer when writing of a non business bad debt.  If prepared improperly, the IRS likely will not allow the deduction.

This is Your Blog Too!!

I can’t believe this blog will celebrate its two year anniversary in April.  I think we should have a party!  Oh wait, we already do… it’s our “end of tax season” party.  We’ve had our ups and downs but I’m proud of us for sticking with it.  Our staff stays very busy and sometimes posting a blog is challenging.  Things got pretty quiet during my four months of maternity leave last year, but I’m back!  I know you are excited! 

We created this blog to help you; our readers, our clients, our friends.  We know you are bombarded with information.  Tax and accounting can sometimes be intimidating topics.  Our goal is to keep you informed so you can be better business owners, employees and asset managers.  You can help us by giving us your feedback and requests.  If you have a question related to a particular blog already posted, leave a comment.  You can always email us questions on requested topics.  There are no dumb questions.  I’d bet money that if you have a question, many others have the same one.

One of my personal goals this year is to ramp up the blog again.  I want it to be resource for our readers. 

So bring on the questions!

Debt Deal but no new taxes… for now

Well, it finally happened.  Sort of.  A deal has been made on the debt ceiling issue and supposedly there will be no new taxes.  Congress agreed to make $917 billion in spending cuts (over 10 years) and the President is able to raise the debt ceiling by $400 billion.  Future debt ceiling increases of $500 billion have also been authorized.  No one actually likes the deal, but apparently it is as good as it’s going to get according to Congressional leaders.

Where are the $900 billion in spending cuts going to hit?  Well, that is up to a joint committee to determine.  This “committee”, which has not yet been established, has until November to make its recommendations for a vote by Congress.  If unsuccessful, automatic spending cuts would occur which have already been established.

They say that there will be no tax increases.  The problem is, those Bush-era tax cuts that were extended last minute… (remember that chaos?) are set to expire December 31, 2012.  Do you think they forgot about that?  I highly doubt it.  In addition, there are tax increases which will mostly affect the high income earners that are set to begin in 2013.  I’m sure Congress is counting on those tax increases. 

I personally struggle with the continued last minute deals that really don’t make a difference except to calm down the immediate crisis.  Politicians are letting their political aspirations limit their actual potential impact for good in our government.  Everything they do and pass is for a temporary fix.  They extended the Bush tax cuts for only two years… they extended the estate tax and AMT issues out for two years… they refuse to actually take on the tax system and give it a much needed tax reform.  I can’t be too harsh.  The “Gang of Six”, made up of six Senate members, has been working on a comprehensive tax reform plan.  However, it’s far from being ready for proposal to Congress.  At this point, it’s hard to say where those efforts will lead us. I understand that with the two main parties having such differing opinions on tax issues, this task is not an easy one.  But no one can deny that something has to be done.  

For more information see the ‘Debt Ceiling breakdown of deal’ on CNN’s website

IRS Requesting Small Business Databases (i.e. QuickBooks & Peachtree)

Do you own a small business using QuickBooks or Peachtree as your accounting software?  Most likely you have stored critical unrelated financial information within the framework of the software.  By unrelated financial information we are referring to customer/client lists, personnel data, confidential client information, and other information used for business purposes.

Jump forward a few months from now and imagine receiving a letter from the IRS giving your business an examination notice (meaning you’re under audit).  How concerned would you be, or your clients for that matter, if the IRS requested your software database containing all this unrelated financial data?  Unfortunately this request is occurring more frequently and is being explained as the IRS’ attempt to modernize.  The IRS has purchased copies of various small-business accounting software to accomplish this task.  Requesting the electronic files is now standard operating procedure.

In recent years the IRS has ramped up efforts to more aggressively collect taxes from small businesses.  Statistics show that small businesses are one of the largest contributors to the “tax gap” (taxes owed but not paid or reported).  What better way to close the gap than to increase audits on small businesses where non-compliance is an issue?  Let’s face it…large corporations have their own accounting armada to keep everything straight with laws, regulations, and the taxes they pay.  Small businesses don’t have that luxury.

The main concern we have in providing IRS access to an accounting database is whether the auditor will stay within the scope of the requested information.  Do you want to IRS potentially contacting one of your clients?  Seeing what they purchase from you? Seeing what you purchase from vendors?  The fact that you are being audited is not something to brag about, but client relationships could be affected if some of their private information is handed over.  How would you feel if your personal information was handed over to IRS?  What would you do if you found out?  Another concern would be your reputation if  word got out that your business was under audit.  Questions could arise regarding the circumstances of the audit (randomly selected as opposed to improper filing). 

If a company turns over complete electronic records, there is no way of knowing what the IRS will do with that information.  The IRS has not addressed this issue except to say “privacy of return information” is of utmost importance to the agency.  Virtually all professional organizations in our industry are vehemently opposing this policy.

In subsequent posts we will discuss ways to approach this dilemma if you are audited and IRS requests your data base.

Deducting Charitable Contributions

In order to deduct charitable contributions, the charitable organization must be created or organized in the US (including the states, District of Columbia and possessions of the US) or must be provided by a treaty (side note – have you ever tried to read a treaty?  Not fun!).  Many generous people want to give for causes around the world and there is absolutely nothing wrong with it.  It is commendable!  However, in order for charitable contributions to be tax deductible, you need to give it to a bona fide US charitable organization which can direct the funds to those in need around the world.  Some think that Catholic churches located in other countries would qualify because they are arms of the Roman Catholic Church, a universal organization.  Tax courts have repeatedly rejected this argument. 

 Also beware of giving money to an individual or earmarking a donation for a specific individual.  You cannot give money to your church or other charity to give to a specific family in need. While it is a charitable act, it is not tax deductible.

Estate Tax Reinstated

The 2010 Tax Relief Act reinstated the estate tax for deaths on or after January 1, 2010, and before January 1, 2013. Under this new law, the maximum estate tax rate is 35%, with an exclusion amount of $5 million.

 The executors of decedents who passed away in 2010 may elect the reinstated estate tax option or the no estate tax, carryover basis / limited step-up basis provisions.

 For estates under $5 million in taxable value, executors will probably choose the estate tax option with a $5 million applicable exclusion and the full step-up in basis.  These estates will pay no estate tax and the heirs will inherit the assets at fair market value. 

For very large estates, the election to apply the no estate tax and carryover basis provisions as if the 2010 Tax Relief Act was never enacted will probably render the most savings.  These large estates will not pay estate tax but will have a step-up basis limited to $1.3 million for non-spouse heirs, and an additional $3 million for surviving spouses.

For mid-sized estates (estates between $5 million and $10 million) the analysis will be more complicated.  Executors will need to take into account many factors to determine whether it is better to pay estate tax in 2010 or inherit most assets with carryover basis. 

See your tax professional if you have lost a loved one in 2010.

A Big Twit!

To all you tweeters out there, did you know that the IRS is a tweeter?  That’s right!  IRS has jumped into social media.  Now you can get federal tax news on your iphone!  I wonder how much of our tax dollars this costs the US annually? 

We are far too busy to “Tweet” even in the slow summer months! How many federal employees do you think are needed for the IRS to keep up in Tweets? 

The IRS Twitter news feed, @IRSnews (http://twitter.com/IRSnews), provides the latest federal tax news and information for taxpayers, including tax tips, tax law changes and information on IRS programs.  They also have a Twitter feed for tax professionals, @IRStaxpros (http://twitter.com/IRStaxpros). 

I wonder how many followers they have?

2010 Tax Relief Act – Payroll Tax Cut

On December 17, 2010, the Tax Relief , Unemployment Insurance Reauthorizations and Job Creation Act of 2010 (2010 Tax Relief Act), was signed by President Obama. The 2010 Tax Relief Act extends the Bush-era individual and capital gains/dividend tax cuts for all taxpayers for two years. The bill also provides for an AMT “patch”, a one year payroll tax cut, bonus depreciation for 2011 and 2012, a top federal estate tax rate of 35 percent with a $5 million exclusion, and more.

For most individuals , the most immediate impact of the new law will be  the payroll tax cut and  the extension of the reduced individual income tax rates.

The 2010 Tax Relief Act reduces the Social Security (FICA) portion of payroll taxes collected from employees and self-employed individuals from current 6.2 percent to 4.2 percent for 2011 only.  So what does this mean in real dollars?

If you earn the maximum amount of $106,800 that is subject to FICA tax, you will save $2,136 next year. Anyone earning less will save 2 percent of wages or net self–employed income.  See your tax professional with any questions you may have regarding the new legislation.

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