To Err is Human, To Deduct Divine

I think I erred once, but it turns out I was just plain wrong! Anyhow, this article isn’t about erring, but about claiming some of those divine tax morsels, deductions!

If you’re a new small business owner, you may not know what the @#$% is deductible and what isn’t. Even if you’re not a new owner, there could still be deductions available that you may not have thought of. I’ll give you a little bit of free advice right now…contact a CPA! I have to try; after all, it is my blog. O.K., since I’m such a nice guy, I’ll give you a few ‘freebies’.

Business Meals-unfortunately only 50% of what you spend on business meals is deductible, but 50% is better than zero! The key to getting the deduction is to keep good records, which includes having an entry in your calendar or organizer showing the name of the person you’re dining with, and having a receipt with the date. I’m often asked about whether you need to keep every business meal receipt, and isn’t there a minimum amount, below which you don’t need a receipt? My answer is “don’t argue with me, just keep your receipts”. No, I’m not really that tough, but the fact is, if you’re ever audited, and you tell the auditor that all of your business meals were $20 so you didn’t keep any receipts, you’re gonna get your deduction tossed out. It’s better to be able to substantiate most of your meals than none of them, so keep your receipts; it’s really not difficult to do.

Cell Phones-or smartphones; who doesn’t use them these days? Yes, I understand that you use yours to yack with your friends, send text messages, write a five-star review of your favorite CPA on Yelp (thank you everybody!), and IRS understands it too. If you use your cell phone for business, don’t be afraid to take some sort of deduction for it.

Cost of Incorporating-if you set up a corporation or LLC, the cost of doing that (attorney fees, filing fees, etc) is deductible. There are certain rules for how much can be deducted and when, so consult a professional (another shameless plug; gotta love it).

Business Use of Car-when it comes to using your car for business, remember one thing; commuting is never deductible, so if you drive from home to the office (or vice versa), forget it. On the other hand, if you drive to a client site or to one of those business meals, that auto use is deductible. The rules to follow for claiming a business auto deduction are too numerous for this article; just know that it’s something to take advantage of.

Cabs and Public Transportation-I took the Metro last week to go to a client in DC. Am I going to take a deduction for the cost of that round trip fare? You’re damned right I’m going to. And you should too, if you’re taking a bus, train, cab, etc to a client, or to that business meal.

CPA-yes, another shameless plug, but you can write me off…as a tax deduction..that is..not as a person, or trusted advisor. Think of it as Uncle Sam paying part of my bill!

Those are but a few of the many things that you can claim as a deduction as a small business owner. Employees of others may also be able to claim some of these deductions, but there are a few more hoops to jump through to be able to do that. I hope you found this helpful, and please pass this along to somebody you think might benefit from this information. If you’ve got any favorite deductions you’d like to share with the masses, please leave a comment. Now get out there and start deducting, woo hoo!

Identity Theft and Taxes

I tried to think of a snappy title to this post, but the truth is, identity theft is serious s#$%, and when combined with income tax fraud, it can be financially and emotionally devastating, so I’ll skip the levity and get right to it.

Tax return identity theft is when someone uses a taxpayer’s personal information (name, social security number) to file a fraudulent return to claim refunds on that return. The returns are usually filed early in the filing season, before most taxpayers have received all of the W-2s and 1099s they’re expecting. Taxpayers are usually unaware that anything has happened until they file their return, and then receive a notice from IRS that a return was already filed with the taxpayer’s social security number. In 2011, approximately 75% of all returns filed had refunds due, averaging about $3,000. In May 2012, IRS had identified about 2.6 million returns for possible identity theft, and they recently reported about 450,000 active identity theft cases.

IRS’s Publication 4535 (Identity Theft Prevention and Victim Assistance) states that people who have had their identity stolen can spend months or years (and their hard earned money) repairing their good name and credit record, and may lose job opportunities, be refused loans, education, housing or transportation, and may even be arrested for crimes they didn’t commit! An immediate result of a fraudulently filed return by an identity thief is the delay of a refund due, from the legitimately filed return, until IRS can sort things out with the real taxpayer.

What steps can you take to minimize becoming a victim of tax return identity theft, or other identity theft?

-Don’t carry your Social Security card with you, or any document with your SSN on it.
-Don’t give out your Social Security number to any business, just because they ask for it. Question why it’s needed and how it will be used.
-Check your credit report at least every 12 months.
-Secure your personal information at home, and get yourself a shredder. Shred everything that you think has anything remotely resembling personal information, including unsolicited credit card offers.
-Protect your personal computers with firewalls and anti-spam/virus software, and regularly change passwords for accounts with sensitive information (such as banks, brokers, credit cards).
-Don’t give out personal information over the phone, by mail, or on the internet unless you are the one who initiated contact or you’re sure you know who is asking. And remember, IRS will NEVER contact taxpayers by email, so if you receive an email that says it’s from IRS, forward it to phishing@irs.gov to alert IRS.
-Whenever possible, ask for masked SSNs on insurance cards or any other place where the SSN is used as an identifying number. Beginning this tax season, my tax software vendor is enabling me to mask SSNs on returns. You can bet that I’ll use this feature on every client return copy that I send out, plus the pdf file will be passworded.

What do you do if you find that your identity has been stolen (either via a fraudulent tax return or otherwise)?
-Contact the Federal Trade Commission at ftc.gov/complaint.
-File a report with the local police.
-Close any affected bank or credit card accounts.
-Inform the major credit bureaus, and consider putting a freeze on the accounts.
-Contact the IRS Identity Protection Specialized Unit at 800-908-4490. They will have you file Form 14039 (Identity Theft Affidavit).
-Respond to all IRS notices you receive in the mail, using the phone numbers listed on the notice.

As with any crime, identity theft can be a harrowing experience. I hope this information helps, and please forward it along to anybody you feel might benefit from the information I’ve provided.

Cliff Diving 101

Who needed to watch the ball drop in Times Square, if you were looking for New Year’s Eve excitement? We had Congress giving us plenty of excitement (and heart attacks) with their dillydallying about the “fiscal cliff”. For better or for worse, the American Taxpayer Relief Act of 2012 was signed into law on January 2, 2013, and thank you very much, but I’ll stay out of any political discussion as to whether it’s good or bad for American taxpayers. What I will do is summarize a few of the key provisions of the “Act”, for your reading pleasure/misery.

Individual Income Tax Rates

The Act retains the 10%, 15%, 25%, 28%, and 33% marginal tax rates that had been in effect previously. The 35% tax bracket will end at $400K of taxable income (single) and $450K taxable income (joint). Above those thresholds, the 39.6% rate that was in effect “pre-Bush-tax-cuts” will kick in.

Estate and Trust Tax Rates

The top rate for estates and trusts rises to 39.6%, for taxable income over $11,950. As you can see, the top tax rate kicks in at a comparatively low taxable income amount, so executors and trustees are advised that whenever possible/practical, the income should be distributed out of estates/trusts to beneficiaries, especially when the beneficiaries are in a lower tax bracket than the estate/trust.

Long-term Capital Gains and Qualified Dividends

In recent tax years, long-term capital gains and qualified dividends have generally enjoyed a relatively low 15% tax rate. This will continue under “The Act”, but (always a but, eh?!) in cases where taxpayer’s taxable income (including the gains and the dividends) exceeds that magic threshold of $400K single/$450K joint, long-term gains and qualified dividends will be taxed at 20%.

15% Tax Rate Bracket for Joint Filers

The size of the 15% bracket for joint filers remains at 200% of the size of the 15% bracket for single taxpayers. Before all you single taxpayers run off to get married, keep in mind that this 200% amount does not apply to higher brackets, and remember what as I said above, about the top 39.6% bracket for joint taxpayers being only $50K higher than it is for single taxpayers, so there will definitely be some “marriage penalty” effects.

Standard Deduction For Joint Filers

The standard deduction for joint returns will remain at 200% of the standard deduction for single taxpayers, woo hoo!

Itemized Deduction Phase-Outs

This is something that we haven’t had to face for a few years, and it’s baaack! Beginning in 2013, when Adjusted Gross Income, (not taxable income) exceeds $250K single/$300K joint, itemized deductions will generally be reduced by 3% of AGI. The net effect here is to actually increase your effective tax rate. It’s been estimated that taxpayers in the 33% bracket will effectively pay 33.99%, those in the 35% bracket will effectively pay 36.05%, and those in the 39.6% bracket will effectively pay 40.79%!

There are a lot more provisions to the Act, but I think I’ve been more than sadistic enough by telling you about the items above. For CPAs like me, each of these tax acts should really be called “The Tax Preparer Job Security Act”, since it keeps all of us busy, sorting through provisions, and advising our clients.

Questions? Comments? Gripes? Feel free to leave a comment. Stay tuned for more “stupid Congress tricks”!