Summertime Child Care

No more pencils, no more books, no more teacher’s dirty looks…school’s out for summer. If you’re old enough to remember the Alice Cooper song, you can blame me when you’re still humming it six hours from now!

Now that another school year is coming to a close, how are you going to keep the kiddies occupied and out of trouble for the next few months? Chances are, you and your spouse will both be working during the lazy hazy crazy days of summer, and you’ll have to pay for child care, so why not have Uncle Sam pay for part of the cost? The federal Child and Dependent Care Tax Credit is applicable for summertime child care too, so take advantage of it, but first you need to know how it works. Here are some important points:

1-you have to pay for care so you (and your spouse if filing jointly) can work or actively look for work. The spouse can meet this test for any month that he/she is a full-time student or physically or mentally incapable of self-care.

2-you must have earned income, and if you’re filing jointly, your spouse must have earned income too. Earned income is generally wage and self-employment income.

3-the care must be for one or more qualifying people. In the case of this article, since I’m writing about children, they must be under age 13 and be claimed as a dependent.

4-the care can be provided at home, at a daycare facility, or even at a day camp. If it’s inside your home, then you also have to think about the household employer requirements.

5-the credit is a percentage of the qualified expenses that you for the qualifying person. This percentage starts at 35% and drops to a minimum of 20%, depending on income.

6-up to $3,000 of expenses for one person or $6,000 for two or more qualifying people can be used to compute the credit.

7-the cost of overnight camps or summer school tutoring doesn’t qualify, nor does anything paid to a spouse or other dependent. If either spouse receives dependent care benefits from an employer, special rules apply.

8-the credit is claimed on Form 2441, and basic information on the provider will need to be entered on this form, so make sure you have the provider’s name, address, and identifying number (social security or employer i.d. number). Keep good records to substantiate the credit claimed.

I’ve had many clients over the years who had unrealistic expectations of how much money they were going to save by claiming this credit. Realistically, if you have two or more eligible kids, $6,000 is the maximum amount of child care expenses you can use to compute the credit, and if your income is over $43,000, the percentage for the credit will be 20%, so the maximum credit you can get is $1,200, which isn’t a lot. Obviously it’s better than nothing, and it’s a credit so it will reduce your tax dollar for dollar, as opposed to a deduction which will only reduce your tax by whatever marginal tax rate you’re at. But with good record keeping you’ll save a few bucks, and will be able to afford to give each of your kids (and your spouse) their very own copy of Alice Cooper’s “School’s Out”.

Please forward this article to all parents who incur child care expenses, and have a good summer.

No more pencils, no more books…

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”!

Should Your Independent Contractors Really Be Employees?

About a half year ago, I wrote about some mistakes that small business owners make https://mycpajay.wordpress.com/2012/03/19/mistakes-small-business-owners-make-that-can-cost-themdoh/. One of the items that I briefly discussed was classifying employees as independent contractors, which has become an issue that IRS and state unemployment funds have zeroed in on, in recent past. This article will discuss the issue in a little more detail, and give a few tips on how to stay on the right side of the law.

Here are some interesting stats:

-a 2005 Bureau of Labor Statistics report indicated that contractors made up only 7.4% of all workers, or about 10.3 million workers

-a 2011 study found that 16 million workers were classified as independent contractors, and predicted a higher use of contractors in the next ten years

-a 2000 Department of Labor study found that 10-30% of all employers misclassified workers, and in 2008, IRS found that when employers asked IRS for proper classification, only 3% of workers in question were actually independent contractors, and not employees. You don’t need to be a math whiz to see that most workers are employees!

Considering that it can be about 30% cheaper to call somebody an independent contractor, you can understand why people would want to take that route, even if a person really should be considered an employee. To throw a little fear into you, a 2009 Government Accountability Office report said that 71% of IRS worker misclassification examinations resulted in a change of the worker status. Based on that, the odds are not on your side if you misclassify an employee as a contractor, and you’re called in for an audit. So what can you do to better your odds of classifying correctly?

Review Form 1099s for proper classification-Form SS-8 (Determination of Worker Status For Purposes of Federal Employment Taxes…) is a great guide for determining who has control over the worker, which is one of the main determinants of whether the worker is independent or not. Figure out whether similar workers are categorized differently.

Review workers who received Form W-2 are now treated as contractors-If there’s a reason why somebody who had been an employee is now considered independent, make sure you’ve got a clear, documented explanation for the change.

Review your vendor list, check register, and accounts payable-you can add to your troubles if you were required to file Form 1099-MISC for people who actually are independent, but you didn’t. Penalties can add up. Starting with 2011 business returns, there are now two specific questions about this, so if you have 1099 filing responsibilities, don’t forget to do it.

As I mentioned at the beginning, the employee vs independent contractor issue is something that’s receiving more and more attention, and probably won’t go away any time soon, so make sure you’re doing the right thing, to save yourself from potential major headaches in the future.

Please pass this article on to any small business owner you know, who may benefit from this information, and leave a comment if you’ve had any experiences with this issue, or were audited.

Jay E Reiner CPA PLLC, 1400 14th St N, Arlington, VA 22209

Gambling and Taxes

If you like to gamble, then I have a wager for you. I’ll bet that you can learn something new about gambling and taxes from this article!

Whether you’re into rolling the dice, horse racing, cards, slot machines, or even betting on the Super Bowl or playing bingo, did you know that your gambling winnings are fully taxable and must be reported on your tax return? Did I win the bet yet?

Here’s some information about gambling and taxes:

1-Gambling income isn’t just limited to casinos or horse racing, but also includes lottery winnings, raffles, and even the fair market value of prizes, such as cars and trips.

2-The payer (casino, race track, etc) is required to give you a Form W-2G (Certain Gambling Winnings) if you receive $1,200 or more in winnings from bingo or slot machines, more than $5,000 from a poker tournament, or $600 or more in other gambling winnings (and the payout is at least 300 times the amount of the wager). There are other instances where Form W-2G is required, but I’ve covered the more common ones.

3-Generally you will report your gambling winnings on the “other income” line of your tax return (Form 1040).

4-You can claim your gambling losses to the extent of your winnings, as an itemized deduction on Schedule A, under “other miscellaneous deductions”. Note that this type of deduction is not subject to the 2% adjusted gross income limitation that’s applicable to items such as tax preparation fees, safe deposit box fees, and unreimbursed employee expenses. While you may have gambling losses, you’re not allowed to net them against the income; you must report the income as I indicated in #3, and report the losses as I just described.

5-You must keep accurate records to substantiate any gambling losses. These records can include receipts, tickets, statements, a diary, and any other documentation you have. As with any tax deduction, if you’re audited and don’t have adequate substantiation, the deduction will be disallowed.

I hope you found this information useful, whether I won the bet or not. Please forward this along to any of your gambling buddies, and happy (but responsible) gambling!

Spring Cleaning, a Little Late

It’s hot as hell outside, and you just want to hibernate in the air conditioning. Trying to figure out what to do while you’re chilling out? How about organizing your tax records?! If you start organizing yourself now, come this tax season, you’ll be cool as a cucumber, and ready to make your favorite CPA’s day, with all of your organized records. IRS has some recordkeeping tips for individuals and small business owners.

What to Keep – Individuals

IRS recommends keeping records that support items on your tax return for at least three years after the return has been filed. Some of these records are bills, credit card and other receipts, invoices, auto mileage logs, canceled or imaged checks, and any other records to support deductions or credits claimed on a tax return. You should also keep records relating to property at least three years after you’ve sold or otherwise disposed of the property. Examples of this include a home purchase or improvement, stocks and other investments, IRA transactions, and rental property records.

What to Keep – Small Businesses

Similar to individuals, for small businesses, IRS recommends the three year timeframe for retention of business records. Examples of these include records that document gross receipts, proofs of purchases, expenses, and assets. These can include cash register tapes, bank deposit slips, purchase and sales invoices, credit card charges, Forms 1099-MISC, canceled or imaged checks, account statements, petty cash slips, and real estate closing statements. Electronic records can include databases, saved files, emails, faxes, and others.

IRS generally doesn’t require records to be kept in any special manner, but common sense would indicate that having a designated place to keep your tax records is a good idea. If you have all of your records in one place, it will make your job a lot easier when preparing to meet with your CPA, or if you should be one of the unfortunate souls who receives an IRS notice, or need to substantiate something for an audit.

The morale of the story is, even when it’s brutally hot and humid outside, you can be one of the coolest people around, when you have your tax records in order (at least this CPA will think you’re cool!). How organized are your tax records? Leave a comment, telling us the good, bad, and the ugly! Please forward this article along to anybody who you think needs to get their tax @#$% together.

S Corporations and Reasonable Compensation

If you’re a small business owner, you may have heard the term “S corporation” or “S corp”. If you haven’t, then I’m guessing that you haven’t had a conversation with a CPA lately. Small businesses choose to make an “S” election to eliminate the self-employment tax on net income that a sole proprietor, single or multi-member LLC, or partnership would ordinarily be subject to. While there is this valuable tax benefit (13.3% for 2012) to being an S corporation for tax purposes, it’s extremely important to be aware that the savings on self-employment tax is not a giveaway by IRS, and if you’re not careful, it can cost you.

While it’s very tempting to just claim the net income from your S corp on your personal tax return, and only pay income tax (and no self-employment tax) on that income, IRS wants to see you pay yourself a “reasonable compensation” if you perform services for your S corp. If you’re the 100% shareholder and only person involved in your S corp, it would be difficult to claim that you provided no services for your own business, so you need to take a salary, the same way that you would pay a salary to an employee, since you’re in reality an employee of your own S corp. As such, you also become involved with filing quarterly payroll tax returns, making federal and state unemployment contributions, and issuing yourself a W-2 at the end of the year.

If you’re a small business that has made the S election, and are thinking “the heck with taking a reasonable compensation”, be advised that this is something that has seen a lot of noncompliance and abuse in recent past, and it’s on IRS’s radar. They’ve won many court cases on this subject, in spite of the fact that the Internal Revenue Code doesn’t explicitly define what “reasonable compensation” means, even though they’ve issued a fact sheet about compensation for S Corporation officers (just Google “FS-2008-25”).

Making an S election can be a source of significant tax savings, even with the additional costs of using a payroll service to issue paychecks to you and file payroll tax returns, and having a CPA prepare a separate tax return for the business (Form 1120S). It may be worth your while to invest a few dollars in having your tax professional run a side by side comparison of how much total tax you’d pay without having the S election vs. how much you’d pay with the election.

Please share this article with fellow business owners, and leave a comment on your own experience with being an S corp.

2012 Tax Planning

Summertime, and the livin’ is easy… You’re probably thinking about trips to the beach, and adult beverages with little umbrellas in them, but you know what I’m thinking about? Tax planning! Yeah baby, there aren’t many better ways to spend a summer day than thinking about saving money on your taxes. Well, maybe a nice cold beer wouldn’t hurt either!

If you recall back in 2010, there was a lot of uncertainty over tax planning, because nobody knew if the “Bush tax cuts” were going to be extended or not. Well, we’re in the same exact boat again, because the two year extension that was enacted in 2010 expires at the end of 2012. Plus ca change, plus c’est la meme chose…if you don’t understand French, just pop the phrase into Google. Or to quote Aerosmith, “it’s the same old story, same old song and dance, my friend”.

Here are a few things to consider this year

Roth conversions-if tax rates go up in 2013 (as Bush tax cuts expire), anybody considering making a Roth conversion should do it in 2012, while the rates are still lower. Then any future earnings will be tax-free (assuming Congress doesn’t eliminate Roths some time in the future).

Realizing capital gains-as with ordinary income tax rates, expiration of the Bush tax cuts will mean that the long-term capital gains rate will increase from 15% to 20%, so realizing gains in 2012 will mean less tax to pay on the gains. Any investment could then be re-purchased if desired.

Tax-exempt bonds-hand in hand with the possible tax cut expiration is the beginning of a new Medicare tax of 3.8% on investment income (interest, dividends, capital gains, etc) for people with adjusted gross income over $200K single/$250K married filing jointly. One way to reduce that is to move investments to tax-exempt bonds. The income on those isn’t subject to the Medicare tax.

Gifts-currently there’s a gift tax exclusion of just over $5 million. This is set to revert to $1 million in 2013 under the current law. What this means is that 2012 is the last chance to make a lot more gifts to children or others, without incurring gift tax.

Accelerating and deferring-the CPAs usual tax planning mantra is to advise clients to accelerate deductions and defer income from the current year to the following year. With tax rates set to increase in 2013, the opposite would hold true, that is, take the income now (so it’ll be taxed at a lower rate), and defer deductions (so they’ll reduce taxable income at a higher rate). Accelerate? Defer? Too soon to tell, but this is something to consider as year-end nears, and especially after the November elections, when both sides of the aisle will probably show their cards.

In summary, is there a lot of uncertainty when it comes to tax planning? You betcha. In spite of that, it’s always a good idea to think of these things sooner rather than later. Well thought out decisions are always better than knee-jerk reactions, and once the calendar turns over to 2013, a lot of planning opportunities will be gone, so while you’re sitting in that inflatable kiddie pool with a beer in your hand, be thinking about taxes, o.k.?

What are your thoughts about tax planning, or the end of the “Bush tax cuts”, or beer? Post a comment, and please forward this article to friends or colleagues who you think could benefit from it.

Miscellaneous Tax Stuff

Now that tax season’s over, it’s time to get back to other parts of life that got pushed to the side from January to April. One of those is writing articles for this blog. One thing I wrote about a number of months ago was ‘miscellaneous tax stuff’, and I think it’s time to do that again, so here goes…

Gift Taxes-did you know that if you make a gift of money or property to somebody else, you may need to file a gift tax return? You didn’t know that? Well, they say you learn something new every day, so you’re good to go! Check out a brief IRS YouTube video for more information, at http://www.youtube.com/watch?v=bPnR3U8Wk04

W-2 Reporting of Employer-Sponsored Health Coverage-beginning in 2012, employers must report the cost of group health coverage on employees’ W-2s (sent to employees by 1/31/13). IRS has more information at http://www.irs.gov/newsroom/article/0%2c%2cid=257101%2c00.html

Start Planning Now for Next Year’s Tax Return-it’s never too soon for tax planning. Here are some things you can think of now
-did you have a large overpayment or balance due on your 2011 tax return? You should think about adjusting your withholdings, to have less/more tax withheld
-organize your recordkeeping, to make it easier at tax time. I think that part of the stress people feel when it comes to taxes has to do with searching for information they need. If you have a set place to put all tax related papers, you won’t have to remember where you put everything. And keep your prior year returns nearby, too.
-if you’re close to itemizing deductions, think about “bundling” your deductions into one year. This could include making an early mortgage payment or paying property tax before its due date.
-start thinking about (JayTheCPA) finding a tax professional (JayTheCPA) sooner, rather than later. Did you like my subliminal advertising?!

Name Changes After Marriage or Divorce-if your surname changed due to marriage or divorce, check out this IRS YouTube video for more information http://www.youtube.com/watch?v=LibPOtwWAGc

Estimated Taxes-this is something that new business owners forget about, until it’s tax time, and they find out that not only do they owe a load of tax, but a penalty too, for not making quarterly estimated tax payments. Check out this IRS YouTube video http://www.youtube.com/watch?v=DM5XxKCATv0

I hope you found at least one piece of ‘stuff’ helpful to you. Please pass along this information to somebody else who may benefit, and let me know if you have any interesting tax stuff to share!

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