The ‘Do-Nothing’ City Council

Welcome to Slantville. Slantville is a very small city in the middle of the state. Nothing much happens here, and hasn’t for the past 50 years, since the they build the interstate. Slantville has a population of about 50,000, mostly older folks who have lived here their entire life. But the last couple of years has seen a few new younger families relocating to the small, unhurried life in a small city. And most of these new residents happened to very civic minded and wanted to see the little city grow and improve.

So a couple of year ago, a few of the younger residents began circulating talk that the city council was a ‘Do-Nothing’ city council. And the fact is – it was true. They had not passed a new ordinance in 5 years (and that was to increase the penalty for littering). But as the talk was going around about the ‘Do-Nothing’ city council, some of the older residents begin to side with the younger ones. “The city council should be working and doing things to earn their pay, even if it is a small salary”, they said.

So with the onset of city council elections, a new city council was sworn in. This new city council in no way resembled the old city council. This city council was much younger and ready to do something. They had to show that this was not a ‘Do-Nothing’ city council.

The city council went to work and decided that Main Street needed a little spruce-up. They passed an ordinance that each business in town must have a uniform trash can beside the front door. Then they went so far as to define a business as any ‘enterprise or individual that sold goods or services to any other enterprise or individual’. So every business got a new trash can (at a cost of $200 each). Then it was realized that even the mayor had to put a trash can at his front door, since his wife baked pies and sold them to the local food market. Freddy, on the poor side of town had to buy one too since he mowed lawns for a living. Even old Mrs. Malone had to buy a trash can – she took care of kids during the day in her home. The net result was that about half of the homes in Slantville now had new trash cans sitting by their front door and in total, the residents spent about $2 million on new trash cans.

Not wanting to be known as a ‘Do-Nothing’ city council, they decided that there should be a new park built to honor Mr. Slant, who had been mayor of Slantville for almost 20 years. It was he for whom the town was named. A parcel of land was decided on and purchased. Then bids went out for the baseball field, tennis court, basketball court, and playground equipment. The total cost of this was $3.5 million. It was a very nice park though!

Then the city council turned their attention to the old City Hall building. This building had been built in 1960 – and it looked it. It could definitely use a face-lift. So after crunching numbers, it was decided that in the long run, it would be better to tear down the old building and build a new City Hall. The cost of the new City Hall was $13 million.

The residents begin to say that this was surely not like the city council they used to have. These folks were actually getting some stuff done. They were making the town look nicer and maybe that would entice some new residents to move in, or bring more businesses in. Things were really looking up.

The next year was even more aggressive. There was $5 million spent for new LED traffic lights, even though the old ones worked just fine and they had enough of the light bulbs for 5 more years. There was landscaping around the new City Hall and in the vacant lot next to the library. And there was the ordinance that all businesses on Main Street had to be open Sunday afternoon for any tourists that may happen through.

It became apparent that this new city council had spent a whole lot of money doing things and the city did not have that much money. The spending of the past had not been a whole lot, and so money was not a problem. Things were different now. So in order to make up for some of the large outlays, the city council instituted a business license fee of $100 per year for each of those businesses that had to buy the new trash cans. Property taxes also had to be raised a “small amount” to offset the cost of a nicer looking town. Also a quarter percent increase in the city sales tax was passed.

In two years, the new city council, the answer to the ‘Do-Nothing’ city council had spent over $250 million. And they had raised the cost of living and doing business in Slantville by $50 million, or about $1000 per resident. A few of the businesses had closed or moved to Smithson (10 miles away) saying it was getting too expensive to operate in Slantville. And quite a few families moved away to get somewhere with lower property taxes. Many of the residents begin to question if this was a good thing, or not. Things had been so nice in Slantville, for so long. They could go about running their business, baking pies, mowing lawns and not have to worry about what they would be required to purchase next year. There begin to be talk of wanting a ‘Leave Us Alone’ city council.

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Tax Preparation Tips

With tax season upon us, I thought I’d take some time to list some things to make the tax preparation ordeal a little easier for both you and the tax preparer.
First, let me issue a small disclaimer, something you may not know. You, the taxpayer, are responsible for all the numbers on your tax return. When you sign your tax return, or Form 8879 (for e-filing), you are agreeing that all the figures on the tax return are correct to the best of your knowledge. We, as tax preparers, are responsibile for how those numbers are reported and where, but the accuracy of the amounts belong to the taxpayer. That being said, the tax preparer is responsible to perform due diligence, to make sure to the best of his ability that the amounts being reported on the tax return are correct.
Now on to the tips.

Complete the tax organizer (if you were given one). Usually, this organizer contains information carried over from the previous year’s return and can act as a reminder of documentation you need to provide. And this year, it most likely contains questions about your health insurance – which could affect your taxes. If you don’t write anything on the organizer, don’t send it back to the tax preparer!

Organize your tax information. Keep all related information together. Group your W-2s, 1099Bs, 1099Rs, etc. This is not a must, but might reduce the amount of time needed to prepare your return. Plus, it helps you see if you omitted anything. Did you include all the interest from all those savings accounts?

Include a summary of medical expenses (not each receipt). Give totals for prescriptions, doctors, hospitals, insurance premiums, long-term care premiums, etc.

Include a summary of rental property expenses. Give totals for each type of expense – insurance, maintenance, repairs, management fees, etc.

Include a summary of business expenses. Give totals for each type of expense – advertising, auto (include a mileage summary), supplies, labor, etc.

Be sure to include all the pages of the year-end tax information you get. This would include mortgage interest, brokerage accounts, interest income, etc.

Be sure your preparer knows about any changes in your businesses. For example, you bought rental property, sold rental property, bought a new vehicle, started a new business, incorporated an existing business. These are all important and must be taken into account.

Carefully read any requests for additional information. It’s all important, so don’t just read the first line or paragraph.

The tax preparer does not usually need to see all your receipts for things like medical, but be sure you keep a copy of them. Occasionally, the preparer may ask to see some additional documentation, such as medical receipts. For example, if the client has a total income of $25,000 and says he had medical expenses of $50,000, I will probably want to see some proof of that $50,000 (a part of due diligence).

Also, keep any documents that support the figures on the tax return. Use this thought – if I had to prove that (pick a number) on my tax return, could I? If you took a home office deduction, do you have the information to prove your utility deduction? Can you prove your vehicle mileage? Do you have documentation to prove you gave $1500 worth of clothes to Goodwill?

Most tax preparers now scan all the documentation you give them. So don’t staple things together. It takes additional time to remove staples. If something needs to be held together, use paperclips. Also, try to be sure that all the documentation you provide is in fairly good condition – meaning no waded up receipts, or papers that look like they have been used as a paper towel. It is hard to send a wad of paper through a scanner.

Be willing to accept electronic copies (if possible). Tax returns, along with all the appropriate schedules and back-up worksheets, can use a lot of paper when printed. It saves paper if you will be able to receive an electronic file and only print it when you need to, and what is required.

If you are preparing your own return, then you can wait until April 14 to start on it. Don’t expect your tax preparer to be so accommodating when you finally give them your documents two days before the filing deadline. Most preparers that I know have an April 1st deadline. If they don’t have your information by April 1, then don’t expect to have a return ready by April 15.

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January 2015 Newsletter

Congress approves tax extenders through 2014

In its final session of the year, Congress extended a long list of tax breaks that had expired, retroactive to the beginning of 2014. But the reprieve is only temporary. The extensions granted in the Tax Increase Prevention Act of 2014 remain in effect through December 31, 2014. For these tax breaks to survive beyond that point, they must be renewed by Congress in 2015, setting up another lengthy debate.

Although certain extended tax breaks are industry-specific, others will appeal to a wide cross-section of individuals and businesses. Here are some of the most popular items.

  • The new law retains an optional deduction for state sales taxes in lieu of deducting state and local income taxes. This is especially beneficial for residents of states with no income tax.
  • The maximum $500,000 Section 179 deduction for qualified business property, which was scheduled to drop to $25,000, is preserved. The deduction is phased out above a $2 million threshold, up from $200,000.
  • A 50% bonus depreciation for qualified business property is revived. The deduction may be claimed in conjunction with Section 179.
  • Parents may be able to claim a tuition-and-fees deduction for qualified expenses. The amount of the deduction is linked to adjusted gross income.
  • An individual age 70½ and over could transfer up to $100,000 tax-free from an IRA to a charity. The transfer counts as a required minimum distribution (RMD).
  • Homeowners can exclude tax on mortgage debt cancellation or forgiveness of up to $2 million. This tax break is only available for a principal residence.
  • The new law preserves bigger tax benefits for mass transit passes. Employees may receive up to $250 per month tax-free as opposed to only $130 per month.
  • A taxpayer is generally entitled to credit of 10% of the cost of energy-saving improvements installed in the home. Other special limits may apply.
  • Educators can deduct up to $250 out of their out-of-pocket expenses. This deduction is claimed “above the line” so it is available to non-itemizers.

The remaining extenders range from enhanced deductions for donating land for conservation purposes to tax credits for research expenses and hiring veterans.

Finally, the new law authorizes tax-free accounts for disabled individuals who use the money for qualified expenses like housing and transportation, as well as providing greater investment flexibility for Section 529 accounts used to pay for college.

IRS announces 2015 mileage rates

The IRS has announced the mileage rates that are to be used for business, medical, moving, and charitable driving in 2015. The rate for business driving increases from last year’s 56 cents a mile to 57.5 cents a mile. The rate for medical and moving mileage decreases from the prior year’s 23.5 cents a mile to 23 cents a mile. The general rate for charitable driving remains at 14 cents a mile.

 

Do you owe the “nanny tax”?

A good domestic worker can help take care of your children, assist an elderly parent, or keep your household running smoothly. Unfortunately, domestic workers can also make your tax situation more complicated.

Domestic workers of all types generally fall under the “nanny tax” rules. First, you must determine whether your household helper is an “employee” or an “independent contractor.” If you provide the place and tools for work and you also control how the work is done, your helper is probably an employee. For example, at one end of the spectrum, a live-in housekeeper is probably an employee. At the other end of the spectrum, a once-a-month gardening service may qualify as an independent contractor.

If your household worker is an employee, then you, as the employer, may be required to comply with various payroll tax requirements. For the years 2014 and 2015, the important threshold amount is $1,900. If you pay your employee $1,900 or more during either year, you are generally responsible for paying social security and Medicare taxes on your worker’s wages. In addition to social security taxes, you may be required to pay federal and state unemployment taxes as well as other state taxes. With these taxes go various deposit and filing requirements, including the requirement that you provide your employee with an annual W-2 form that shows total wages and withholding. February 2, 2015, is the deadline for providing W-2 forms to workers to whom the nanny tax applies for 2014.

As you might expect, most people need assistance complying with the nanny tax rules. If you need details about the rules or help in dealing with them, contact our office.

 

Circle these tax dates on your 2015 calendar

It’s tax return filing season once again. Among the tax deadlines you may be required to meet in the next few months are the following:

  • January 15 – Due date for the fourth quarterly installment of 2014 estimated taxes for individuals, unless you file your tax return and pay any taxes due by February 2.
  • February 2 – Employers must furnish 2014 W-2 statements to employees. Payers must furnish payees with Form 1099s for various payments made. (The deadline for providing Form 1099-B and consolidated statements is February 17.)
  • February 2 – Employers must generally file annual federal unemployment tax returns.
  • March 2 – Payers must file information returns, such as Form 1099s, with the IRS. This deadline is extended to March 31 for electronic filing.
  • March 2 – Employers must send Form W-2 copies to the Social Security Administration. This deadline is extended to March 31 for electronic filing.
  • March 2 – Farmers and fishermen who did not make 2014 estimated tax payments must file 2014 tax returns and pay taxes in full.
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Saving On Tax Preparation Fees

There are ways to save money on just about everything we buy. If I really want to get a car for less money, I don”t buy one with leather seats, sun roof, and built-in WiFi. If I want to save money buying a house, I don’t buy one with a 4-car garage. If I want to save some money on college, I go to a community college first, then a state university, not a private college.

Of course, not getting the extra stuff must be balanced with what your needs are. If I need a truck to pull a horse trailer, I need to be willing to spend the extra $4-5 thousand to get a diesel engine. If I have two vehicles, a boat, a motorcycle, a golf cart, and a huge riding mower, I should probably spend the extra money to get a 4-car garage.

So how does this help me save money on getting my taxes prepared? Basically, the things and activities you do during the year have an effect on what it costs to have your taxes prepared. If you want to save money on tax-preparation, don’t do these things:

  • Don’t have your own business. Having your own businesses requires a Schedule C and usually a Schedule SE to be prepared. This includes income from the business as well as expenses.
  • Don’t buy equipment for your business. Buying equipment requires Form 4562 and that requires a depreciation schedule.
  • Don’t own rental property. Having rental property requires a Schedule E for all rental income and expenses, as well as depreciation of the rental property itself.
  • Don’t buy and sell stocks. Stock trading requires a Schedule D and Form 8949 with the purchase price and the selling price of each transaction.
  • Don’t be a day-trader. Each stock trade must be included on the tax return. The more trades, the more time it takes to enter all the transactions.
  • Don’t have a farm or ranch. A farm or ranch requires a Schedule F which documents the income and expenses of each property.
  • Don’t have oil & gas royalties. Each oil & gas royalty property is considered rental property and must entered on Schedule E.
  • Don’t take Education Credits due to tuition & education expenses. This requires a Form 8863.
  • Don’t claim Earned Income Credit. This requires Schedule EIC and Form 8867.
  • Don’t give goods to charities such as Goodwill. This requires a Schedule A, and if more than $500 is donated, a Form 8283 is required.
  • Don’t deduct medical expenses, mortgage interest, property taxes, or cash donations. These require a Schedule A.

If you want to save money on tax-preparation, DO these things:

  • Be organized. Have everything in neat order and grouped together by type of information.
  • Keep all the receipts at home and just give the tax-preparer a summary of the receipts.
  • Have a business financial statement ready for the tax-preparer. Adding everything up, and categorizing all the expenses saves time.
  • Have all your tax information marked clearly as to what it is and how it relates to your tax return. For example, of you have 1099s for rental property, mark which rental property this 1099 pertains to.
  • If you have been given an organizer to complete, fill it out completely and answer all the questions to the best of your ability. There are questions on the organizer which may not mean much to you, but could be important in filing your return correctly.
  • Read completely any correspondence you get requesting additional information. Don’t skim the letter, then only answer the first question, while ignoring the next four. All that information in important.
  • Keep good and complete records concerning business mileage, income, and expenses.
  • Inform your tax-preparer of any changes for the year BEFORE the tax return is prepared. For example, don’t wait until after the return has been prepared that you inform the preparer that you sold that one rental property.

 

The price you pay for tax return preparation is pretty much a combination of the cost of equipment and time required to complete the return. You, as a client, don’t have much influence over the cost of equipment, you have more control over the time spent preparing the return. Some forms just automatically take a certain amount of time no matter what shape the information is in. But if there is a lot of adding, sorting, grouping of your information, that adds to the time required.

I’ve used some irony here to get my point across. Obviously, the more complex your finances, the more complex, and expensive, your tax return will be. Hopefully, you have gotten some ideas that you can use.

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December 2014 Newsletter

No bankruptcy protection for inherited IRAs

Your retirement funds are protected from creditors even if you file for bankruptcy, with only a few limitations. This protection extends to funds in all government-qualified pension plans, including IRAs (traditional and Roth), 401(k)s, 403(b)s, Keoghs, profit sharing, money purchase, and defined benefit plans. A recent U.S. Supreme Court decision has held, however, that an inherited IRA is not a “retirement fund” and therefore doesn’t qualify for bankruptcy protection.

An inherited IRA is a traditional or Roth IRA that a deceased owner has bequeathed to a beneficiary. It differs from a “true” retirement account in three ways:

  1. The beneficiary is not allowed to contribute additional retirement funds to the inherited IRA.
  2. The beneficiary, regardless of age, may withdraw funds from an inherited IRA in any amount and at any time without penalty.
  3. The beneficiary, regardless of age, is required to take annual minimum distributions from any inherited IRA.

Based on the above characteristics, the Court unanimously concluded that with respect to beneficiaries, inherited IRAs are “not funds objectively set aside for one’s retirement” and instead constitute a “pot of money that can be used freely for current consumption.”

Although the Court didn’t specifically address it, there is a possible option available if (and only if) the beneficiary is the spouse of the decedent. Spouses are permitted to roll over funds from inherited IRAs into their own IRAs, which would presumably bring those funds back under bankruptcy protection. The funds would, however, become subject to the rules that apply to non-inherited IRAs, such as penalties for withdrawals before age 59½.

Certain other strategies may be available if you have inherited or are likely to inherit an IRA and you are interested in possible bankruptcy protection. Call us for an appointment to discuss your options.

Some very last-minute tax moves to consider

There’s not much time left to make tax-saving moves for 2014. Some ideas to consider:

  • Make your January mortgage payment before December 31 to squeeze an extra interest deduction into 2014.
  • Make tax-free gifts to use your annual gift tax exclusion for 2014. This year you can give up to $14,000 to as many individuals as you like without tax consequences. These gifts to individuals are not deductible by you; nor are they taxable to the recipients.
  • Sell appreciated stock to offset capital losses taken earlier in the year and vice versa. Any excess loss can offset up to $3,000 of ordinary income in 2014, and losses greater than that can be carried to future years.
  • Use your credit card to pay tax-deductible expenses by December 31 if you’re short of cash. You can deduct the expenses on your 2014 return even though you pay your credit card bill in 2015.
  • If you’re required to take a minimum distribution from your retirement plan, do so by December 31 or you face a 50% penalty. If you just turned 70½ this year, you could wait until April 1, 2015, to take a first distribution.
  • If a wedding or divorce is in your year-end plans, be aware that your marital status as of December 31 determines your tax status for the whole year. Changing the dates of a year-end event may save taxes.

To discuss these or other tax-cutting moves you might want to consider, give us a call now before it’s too late to act.

Setting your salary: What’s the right amount for a small business owner?

One of the greatest perks of owning a small business is flexibility. You can set your own hours and salary. You can plot the firm’s trajectory without consulting your boss, upper management, or even corporate policy. But that same flexibility may become a curse if handled unwisely. A small business owner without discipline and a well-thought-out strategy may fall into serious financial trouble. Employees in larger firms often rely on the human resources department to establish pay scales, retirement plans, and health insurance policies. In a small company, all those choices – and many more – fall to the owner, including decisions about personal compensation.

While there’s not a one-size-fits-all formula for determining how much to pay yourself as a business owner, here are three factors to consider:

  • Personal expenses. Determine how much you’re willing to draw from personal savings to keep your household afloat as the company grows. For a start-up company, owner compensation may be minimal. Beware, however, of going too long without paying yourself a reasonable salary. Be sure to document that you’re in business to make a profit; otherwise the IRS may view your perpetually unprofitable business as a hobby aimed at avoiding taxes.
  • The market. If you were working for someone else, what would they pay for your skills and knowledge? Start by answering that question; then discuss salary levels with small business groups and colleagues in your geographic area and industry. Check out the Department of Labor and Small Business Administration websites. In the early stages of your business, you probably won’t draw a salary that’s commensurate with the higher range of salaries, but at least you’ll learn what’s reasonable.
  • Review and continually update your firm’s cash flow projections to determine the salary level you can reasonably sustain while keeping the business profitable. As the company grows, that level can be adjusted upward.

For assistance with this issue or other business concerns, contact our office.

Warmest wishes for a happy holiday season and a prosperous 2015

Thank you for the opportunity to serve you this past year. Your business is appreciated, and your referrals are welcome. Please mention our name to friends and business associates who may need our services.

Posted in Bookkeeping Tips, Income Tax, Individual, IRA, Management Tips, Payroll Tips, Profitability Tips | Leave a comment

The Price Of Flour In Abilene

Most of us have heard that line – ‘What’s that got to do with the price of tea in China?’ This week, I going talk about the price of flour in Abilene and how that affects us.

Let’s pretend that the city fathers in Abilene just passed a law that poses an excise tax on each ton of flour that passes through the city. Now Abilene happens to be a great transportation hub (pretend) and there are a lot of train cars, truck trailers, and airline shipping that passes through the city limits. Let’s see what happens as a result of this new law.

Bob owns a restaurant in Abilene. Since he cooks many different items, he uses a lot of flour. In fact, his cost of flour has increased 50%. So in order to keep all his employees working and to be able to make enough himself to live on, he has had to increase his prices on just about everything he sells by about 25%. This has caused many of the local business folks to spend more on their lunches. So much so, that many have cancelled, or severely cut back on planned vacations this year.

One might wonder why the local business folks didn’t just bring their lunch to work instead of eating at Bob’s restaurant. The cost of a loaf of bread has increased about 25% also. So did cake mixes, biscuit mixes, crackers, everything that has flour as one of the ingredients. Also the cost of school lunches went up. Many parents are now cutting back on other expenses to offset the increased costs.

Sue owns the local dress shop and was not concerned with the new excise tax since she doesn’t sell anything that concerns flour. But she has noticed a drop in business. Customers have told her that they would love to buy the new clothes, but they are having to watch their budget because of the increased food costs. Not only has Sue’s business decreased, but her personal food costs have increased.

Upon hearing of the excise tax on flour and knowing that the funds raised were going to be used to build a new park that would have bicycle trails, Don was really excited. Done owns the local toy store and was looking forward to selling many new bicycles that parents would want for their children. But just like Sue and the dress shop, business slowed down – way down. So much so, that Don had to get rid of five employees.

Each company that shipped through Abilene had to raise the prices they charge for shipping. This was because they had to implement systems to keep track of what was being shipped and had to be reported to the City of Abilene – even if they had never shipped a pound of flour – ever. Some companies even stopped shipping to Abilene at all. In total there were about 50 individuals who had worked for these companies and were now unemployed.

The city had not expected those shipping companies to move out of Abilene, so the income from the excise tax was not as much as expected. The city had to raise the city sales tax to make up the difference.

Fred owns a bakery in Sweetwater, many miles from Abilene. His flour costs have increased because the flour he buys is shipped through Abilene and now has an excise tax on it. So the price of his bread has increased. Fred ships his bread to about 15 states in the South. Mary, who lives in Tampa loves the bread that Fred makes. She noticed a price increase, but since she loves the flavor of Fred’s bread, she will cut her expenses by not having her nails done quite as often.

Natalie, who owns the nail salon in Tampa does not have a clue about the price of flour in Abilene, but it has affected her business. Probably a lot of things have a lot to do with the price of tea in China.

If this sort of scenario interests you, I recommend reading ‘Atlas Shrugged’ by Ayn Rand. It is a pretty long read, but well worth it.

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Firm Changes

This next tax season will see some changes for my firm. The biggest change is the use of a client portal. This is where you would be able to login through the internet to my client portal and be able to see, print or download all the tax returns and source documents that I have on file for you. It also gives you the ability to upload documents instead of sending them through emails.

Another change is that I will be requiring everyone to sign an Engagement Letter. This is just a form that specifies what is to be done, such as a tax return. It outlines what is expected of each party and who is responsible in the case of tax penalties, interest, etc. Think of it as the agreement you sign when you take your car in to get it worked on.

I will also be requiring an auto mileage worksheet for those who claim business auto expenses. Part of the information reported on this worksheet will be total miles driven for the year, the number of business miles, and do you have written documentation for these miles.

There may also be a worksheet that may be required for the Affordable Care Act (also known as ObamaCare). If you have purchased health insurance through the Federal or State Exchange, have had reduced premiums, or do not have insurance, we may have to spend some time going through a set of questions. And it may require some additional documentation.

With all the tax law changes, it seems the tax preparers are being assigned a duty of ‘policeman’ for the IRS. Tax preparers (I included) are being bombarded with additional requirements which forces us to impose additional requirements on our clients. Tax preparers have a obligation to prepare tax returns as accurately as possible. This involves exercising what we call ‘due diligence’.

What is ‘due diligence’? Generally, ‘due diligence’ may be framed as a question: Did the practitioner exercise professional care to ensure that – based on the knowledge of the practitioner – the taxpayer’s return is true, correct and complete?

For example, if I begin to prepare your tax return and I see that you have $10,000 of mortgage interest, and only $5,000 total income, I would want to find out how you are paying for that mortgage since obviously, you don’t even have enough income to pay the interest. How are you living?

If I don’t know much about your personal life, I might ask to see some proof that you have your grandson living with you since you are claiming him as a dependent. This proof might be school records, medical bills, something to show that he does indeed live with you.

‘Due diligence’ could be summed up as: Does it pass the ‘smell test’?

I don’t like being a policeman for the IRS, but I do like being a CPA. And unfortunately, the role of a tax preparer is approaching that of a policeman. Not exercising due diligence could cost a CPA many hundreds of dollars in fines, or even our ability and license to practice accounting.

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Loopholes

Loophole – An ambiguity or inadequacy in a system, such as a law or security, which can be used to circumvent or otherwise avoid the intent, implied, or explicitly stated, of the system.

Almost two years ago, I wrote an article on tax loopholes. Normally, we think of a loophole as something that was just overlooked in the current law. An example, In 2005 Wal-Mart planned a store in Maryland. While the law in the county restricted the size of a retail store to 75,000 square feet. Wal-Mart considered a plan that would dodge this restriction by building two separate smaller stores. Though Wal-Mart later withdrew this controversial plan, the plan highlighted a legal loophole.

So the intent of this law was ‘no big stores’. Wal-Mart had found a way around the intent of the law.

In the tax code, the general intent is that ALL income in taxable. Now an early loophole in this might have been bartering income. “I’ll give you my goat in exchange for a year’s worth of eggs.” No money actually changed hands, so it could be argued that there was no income. That loophole has been fixed as all barter income is now taxable.

But actually, most of what we think of as ‘loopholes’ are there intentionally. In our mind, we tend to think that if someone (or some company) gets out of paying a tax, then it is due to a loophole. Based on this thinking, I would say that probably about 99% of the people in the United States have used some ‘loophole’ to avoid paying some amount of tax at some point in their life.

But how can that be, you say. Think about this. The intent of the tax code is that ALL income is taxable. How many of you get Social Security benefits, and are not taxed on that income? Some are taxed on their Social Security income (based on total income), but most are not taxed. So is this a ‘loophole’? Do you get to take other items out of your income so you don’t have to pay taxes on ALL of it? If you have a lot of medical bills, some of your income is not taxable. Make contributions to charity, pay property taxes? It could make some of your income not taxable. Did you sell some stocks at a loss? That made some of your income not taxable. Did you have income from being self-employed? Then a small percentage of that income was deemed as not taxable.

In reality, there are probably very few actual loopholes in the tax code. Congress is usually pretty quick to plug the ones that come to light – since it usually means money to the government. But if you think of a loophole as a way to pay less taxes, the tax code is full of them. And most people use them at one time or another.

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November 2014 Newsletter

IRS repeats warnings about identity theft

The IRS is again warning taxpayers to be on the alert for tax scams. According to IRS Commissioner John Kaskinen, millions of taxpayers have already been taken in by scammers impersonating IRS agents.

Whether initiated by sophisticated overseas operators or homegrown con artists, all bogus IRS schemes have a similar objective in mind: to steal your identity and gain access to your accounts. Phony IRS agents often use common American names and fake badge numbers. To enhance legitimacy, they may provide limited personal information about you, such as the last four digits of your social security number or birth date. Others may manipulate caller ID to show that the call originated from Washington, DC. If you reply to a call-back number, an answering machine may announce that you’ve reached the criminal investigation division of the IRS. A fraudster may even become aggressive and threaten jail time if you don’t comply with his demands, then hang up and direct a co-conspirator to call back in the guise of a local policeman.

Some employ a different tactic, offering a carrot instead of a stick. You may be told that the IRS owes you some money. But to get your proffered refund you’ll need to disclose bank account numbers and other personal information.

Crooks have used e-mail and other forms of electronic communication as well to perpetrate the scam. The text may include links to sham websites designed to mimic official sites, encouraging you to fill in forms with confidential data such as bank account numbers and passwords. E-mail attachments may contain malicious code designed to infect your computer or allow unauthorized access to your financial information.

How can you tell whether the IRS is really contacting you? The agency’s official website (www.irs.gov) makes it quite clear: The IRS “does not initiate contact with taxpayers by e-mail to request personal or financial information. This includes any type of electronic communication, such as text messages and social media channels.” The IRS website further states that the agency “will always send taxpayers a written notification of any tax due via the U.S. mail.” IRS agents will never ask for credit card, debit card, or prepaid card information over the telephone. Nor will they ask for PINs, passwords, or other confidential access information.

If you think you might actually owe taxes, call the IRS directly. If you receive a call that appears bogus, ask for a call back number and employee badge number. Then report the details to the Treasury Inspector General for Tax Administration and the Federal Trade Commission (FTC) using their “FTC Complaint Assistant” at FTC.gov.

 

Self-employment gives you some tax breaks

When it comes to taxes, being self-employed has some advantages. Whether you work for yourself on a full-time basis or just do a little moonlighting on the side, the government has provided you with a variety of attractive tax breaks.

  • Save for retirement. When you’re self-employed, you’re allowed to set up a retirement plan for your business. Remember, contributing to a retirement plan is one of the best tax shelters available to you during your working years. Take a look at the SIMPLE IRA, SEP IRA, or Solo 401(k), and determine which plan works best for you.
  • Hire your kids. If your business is unincorporated, employing your child under the age of 18 might make sense. That’s because your child’s earnings are exempt from social security, Medicare, and federal unemployment taxes. This year, your son or daughter can earn as much as $6,200 and owe no income taxes. You get to deduct the wages paid as a business expense.
  • Deduct health insurance. Are you paying your own medical or dental insurance? How about long-term care insurance? As a self-employed individual, you may be able to deduct 100% of the cost of these premiums as an “above the line” deduction, subject to certain restrictions.
  • Take business-use deductions. Self-employed individuals can also deduct “mixed-use” items directly against their business income. Use your car for business and you can deduct 56¢ per business mile driven. The business-use portion of your computer purchases, Internet access, and wireless phone bills is also allowable. And if you meet the strict requirements, claiming the home office deduction makes a portion of your home expenses tax-deductible.

Please give us a call to find out more about the tax breaks available to self-employed individuals.

More businesses are using part-time workers

Recent job statistics indicate that more employers are using part-timers to deal with variations in workload and for short-term projects. Here are a few tips your business will find useful if you hire part-time workers.

  • Communicate clearly with the part-timer. Explain the person’s duties, the hours and benefits, and the individual to whom the part-timer will report.
  • Tell your full-time staff why you’re hiring the part-timer. Make it clear what that person will and won’t be expected to do.
  • Provide introductory training for the part-time worker. Assign someone the new person can turn to with everyday questions.
  • Monitor the part-timer’s progress. Provide feedback on performance and recognition for doing a good job.

Pay attention to these points if you want hiring part-time workers to be a good choice for your company.

Contact us soon for a year-end tax review

An important part of our service to you is to help identify actions you can take before year-end to minimize your 2014 income tax bill. Accelerating or delaying income and deductions, contributing to retirement plans, and taking investment losses are just a few of the strategies you might want to consider. There are also tax credits that require careful planning or they may be lost. If you’d like to discuss tax-cutting options that fit your particular situation, please contact us soon for a year-end planning review.

Posted in Business Development, Business Tips, Decision-Making Tips, Income Tax, Individual, IRA, Management Tips | Leave a comment

The HealthCare Penalty

Since a large portion of this newsletter focuses on health care, I thought I would put together some examples of what the penalties would be if you had no health insurance.

For these examples, we assume that the taxpayer had no insurance for the entire year and there are no exemptions. These examples are also based on my understanding of the rules and calculations.

1. Bob & Sue with two kids under 18. Their Adjusted Gross Income (AGI) is $30,000.

Their penalty is calculated as follows:
Income – $30,000
Less Filing threshold – (20,300)
Income base – 9,700
Income based penalty – $97 (9700 x .01)
Basic Penalty – $285 (95×2 + 47.50×2)
Bob & Sue’s penalty would be the higher of the Income based penalty or the Basic Penalty. In this case the higher is the basic penalty of $285.
2. Bill & Lois with two kids under 18, and AGI of $70,000:
Income – $70,000
Less Filing Threshold – (20,300)
Income base – 49,700
Income based penalty – $497 (49,700 x .01)
Basic Penalty – $285 (95×2 + 47.50×2)
Bill & Lois’ penalty would the higher Income based penalty of $497.
3. Cindy is a single mom with two kids under 18, and AGI of $50,000:
Income – $50,000
Less Filing Threshold – (13,050)
Income base – 36,950
Income based penalty – $369 (36,950 x .01)
Basic Penalty – $180 (95 + 47.50×2)
Cindy’s penalty would the higher Income based penalty of $369.

Some things to keep in mind:
There are exemptions and tax credits available for lower-income folks. These figures will be different if you have had insurance part of the year. The penalties for 2015 will at least double.

The bottom line:
The 2014 tax return will be more difficult to prepare. If you prepare your own return, allow for additional time to figure out how all the calculations and worksheets fit together. If you have a tax preparer complete your return, be ready to write a larger check for tax preparation as it will take additional time.

Posted in Income Tax, Individual | Leave a comment