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!

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”!

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.

Tax Planning After Death?!

Did you read the title of the article and think that I lost my mind? How could a deceased taxpayer plan anything?! Of course they can’t, but the executor of the estate can use various tax planning techniques to save money, and minimize or shift the amount of tax that a decedent’s estate will pay. Here are just a few tips…

Select a Fiscal Year End-one basic thing to keep in mind when considering the taxation of an estate is that the assets held by a decedent when she/he passed away will generally continue to generate income after death. Think of any dividend paying stock or mutual fund, and you’ll see that dividends will continue to be paid, regardless of whether they’re held by an individual or an estate. An estate is one of just a couple of “tax paying” entities that has the ability to choose a fiscal year end, that is, a year end other than December 31. By picking a different fiscal year end, the estate can effectively defer tax on income retained in the estate, or on income distributed to beneficiaries.

Elect to Include Income From the Decedent’s Trust on the Estate’s Income Tax Return-as I mentioned above, an estate is able to choose a fiscal year end, while a trust must use a calendar year end. By electing to include the income from a decedent’s qualified revocable trust on the estate income tax return, the executor can effectively shift the income (and tax) from one taxable year to another.

Consider Distributions to Beneficiaries to Minimize Tax-this “tool” is almost a no brainer, provided there are no issues with an estate’s ability to make distributions to beneficiaries (such as assets tied up due to legal problems, or family issues). The tax brackets for an estate are so small that an estate will be in the maximum (35%) bracket at $11,650 of taxable income. By contrast, a single taxpayer doesn’t hit the 35% bracket until getting to $388,350 of taxable income. So if it’s at all possible, the estate’s income should be distributed out to the beneficiaries.

File an Initial/Final Return-o.k., even though this one potentially means less fees in my pocket, one thing an executor should consider is filing just one tax return for an estate, in which both the “initial return” and “final return” boxes are checked. For smaller estates that are able to take care of business quickly, and make all the required distributions, this is the way to go, since it will save having to file a return for a second year.

These are just a few of many things that an executor can do, to save tax money on an estate. Please pass this article along to anybody you know who may be dealing with an estate, and post any comments you may have, based on your own experience.

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!

Mistakes Small Business Owners Make That Can Cost Them…DOH!

I was recently the presenter at a small business roundtable discussion that was geared toward small business owners. The facilitator asked me to discuss some mistakes that small business owners make that can cost them money, and to come up with a title. I gave it about a half second of thought, and realized that he already gave me the title, but took out ‘money’ and replaced it with the play on words (dough, and Homer Simpson’s cry when he does stupid things). My presentation lasted about an hour, and I won’t bore you that long, but hopefully some of these items will help you prevent your own “DOH!” moment.

1-Former W-2 employees becoming business owners/independent contractors: When you’re an employee, it’s so easy to just fill out your W-4, claim single-0, married-1, or whatever withholding exemptions, and the employer deducts the taxes for you and pays them in to IRS and the state. All you have to do is file your tax return and get your refund. This all changes when you become a small business owner or independent contractor. There’s nobody to withhold tax and pay it in for you; you need to do it yourself! If you’re an unincorporated entity (sole proprietor, partnership, single or multi-member LLC), you need to pay your taxes in to IRS and state on a quarterly basis, via estimated tax payments. Not only do you have to pay income tax, but on the federal level you also have to pay in self-employment tax.

“DOH!” You can be subject to underpayment penalties if you don’t pay enough tax in during the year. The penalty is 3% of the underpayment, and a late payment penalty and interest can be assessed if you’re not paid in full by April 15th. This “DOH” moment can be avoided with proper planning (with help from your favorite CPA, of course)

2- Employee vs. independent contractor: In this case I’m talking about the people you pay, to do work for you. If you pay somebody as an independent contractor, you give her/him a check for whatever the fee is, and at the end of the year, if you’ve paid that person $600 or more, you give her/him a 1099-MISC. When you pay somebody as an employee, you have to withhold taxes, pay them in to IRS and state, file quarterly payroll tax returns, issue W-2s, pay state and federal unemployment insurance and other benefits. What an expensive headache…makes you want to just pay somebody as an independent contractor, right?

“DOH!” IRS and the states have stepped up their scrutiny of the misclassification of employees as independent contractors, and are coming down hard. The determination of employee vs. independent contractor is ‘facts and circumstances’ driven, and you need to understand this, before potentially owing all sorts of penalties and taxes. This one can cost you BIG time.

3-Not making payroll tax deposits: Sometimes a business owner will have cash flow problems, and will skip making payroll tax deposits, which can be a significant amount of money.

“DOH!” Taxes withheld from employees are not the employer’s money, but are considered ‘trust funds’, and must be deposited on a timely basis. The penalty for failing to do this is 100% of the amount that was supposed to be remitted. What’s more, the “responsible person” for making the tax deposits (generally the business owner) can be held personally liable for any tax not paid. Don’t even think of not making payroll tax deposits.

There are a bunch of other “DOH!” moments that I want to discuss, and now that I’ve gotten into this, I think I’ll continue this next week. If you’re not embarrassed, please leave a comment about a less than bright decision you’ve made while running your business, and please forward this article to anybody you know who could use some good advice. Stay tuned for part 2 next week.

A Capital Idea…Gains and Losses

Now that we’re in the thick of tax season, I want to briefly discuss a topic that affects many taxpayers in this country, capital gains and losses. In my 11/7/11 post, I wrote briefly about the new reporting requirements for both brokers/mutual funds, and taxpayers. In this article, I’d like to discuss in a little more detail exactly what constitutes capital gains or losses.

Did you know that almost everything you own and use for personal purposes, pleasure, or investment is considered a ‘capital asset’ for tax purposes? Well now you know (that, and $2.50 will get you on the NYC subway!) Capital assets include a home, household furnishings, and stocks & bonds, among other things.

When you sell a capital asset, the difference between what you paid for the asset (its basis) and its sales price is capital gain or capital loss. Here’s the fun part…you must report all capital gains. Now here’s the bad part…you may only deduct capital losses on investment property, not on personal-use property. What this means is that you can deduct the loss you had on the sale of your Worldcom stock, but you can’t deduct the loss on the sale of your Ford Pinto.

Capital gains and losses are classified as long-term or short-term, and this is important, since the tax rate on long-term gains is generally 15%, while short-term gains are taxable at your marginal tax rate, which can go as high as 35%. In order to be classified as long-term, the capital asset must have been held more than one year (e.g. a year and a day, or more).

All capital gains and losses are netted out to figure out what needs to be included in your taxable income. If everything nets out to a loss, you can deduct the excess losses on your tax return to reduce your other income (wages, interest, dividends, etc), but there’s an annual limit of $3,000 that can be used. For the unfortunate taxpayers who had huge losses on stocks from the last market crash, the excess of the $3,000 that can be deducted annually can be carried forward and applied in subsequent tax years until used up. If, in subsequent years you have capital gains, the losses that were carried forward can be applied against the capital gains, dollar for dollar.

As I mentioned in my 11/7/11 article, IRS created Form 8949 which must be used starting with 2011 returns, to report capital gains and losses. The totals on the 8949 forms then get carried over to Schedule D, and ultimately on to the 1040.

I hope this helps with your understanding of capital gains and losses, if you were fuzzy about them previously. I welcome any comments you may have on this subject, and please pass along this article to friends, enemies, colleagues, or somebody who could use some extra tax knowledge on what might otherwise be a mundane day!

Education and Taxes

What’s the first word that comes to mind when you think about education…taxes, right? Well, even if it’s not the first thing that you think about, the expenses of higher education for a taxpayer or dependent can save money on taxes, via a deduction or a credit. A deduction will save you taxes based on your top marginal tax rate, so for example, if you’re in the 25% tax bracket, a dollar spent on qualifying education costs will save you twenty five cents in tax. A credit is much more powerful, since it directly reduces your tax, so if you have a tax credit of a dollar, it will save you a dollar in tax. This discussion will tell you about a few ways that Uncle Sam can help you pay for higher education costs.

American Opportunity Credit-this credit can be claimed for four years of post-secondary education per student, with a maximum annual credit of $2,500 per student. The full credit is available to single taxpayers with modified adjusted gross income (MAGI) of $80,000 or less, and married couples filing jointly, with MAGI of $160,000 or less. The credit phases out for MAGIs above those thresholds.

Lifetime Learning Credit-this credit can be claimed for all students enrolled in eligible educational institutions, and is up to $2,000, period, regardless of how many students are claimed on a tax return. Unlike the American Opportunity Credit, there’s no limit on the number of years a student may claim this credit, though only one credit or the other may be claimed in one year, not both. This credit is handy for graduate students (who have already received the maximum of four years of American Opportunity Credit), students who are taking only one course, or people who aren’t pursuing a degree.

Tuition and Fees Deduction-as I mentioned above, credits are more valuable than deductions, but if taking this deduction nets more tax savings than, say, the Lifetime Learning Credit, then you claim the one that saves the most. Similar to the Lifetime Learning Credit, the maximum deduction is $4,000, regardless of how many students are claimed. This deduction phases out with the same thresholds as the American Opportunity Credit.

Student Loan Interest-generally, personal interest paid (other than home mortgage interest) is not deductible. If MAGI is under $75,000 single/$150,000 married filing jointly, interest on student loans to pay for higher education is deductible, up to $2,500 per year.

There are other ways that education expenses can save you tax dollars, and, as with anything having to do with IRS and tax laws, there are numerous requirements, thresholds, and fine print, so make sure you speak to your favorite CPA (hint hint) if you have any questions. Have you saved taxes with higher education expenses? Please leave a comment about how you did it. As always, forward this article to somebody you know who could benefit from it, and let me know other topics you’d like to see me write about.

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