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”!

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!

Oh S#$%, I Screwed Up My Tax Return!

No…not me, my return is perfect! But if you’re one those people who got in over your head, trying to do a return on TurboTax when you had no idea what you were doing, or you had an incompetent tax preparer omit things from your return, it’s not the end of the world, and you won’t go to jail for it either! So take a deep breath, and read on.

It’s a fact of life that people make mistakes, even when it comes to tax returns. After filing your returns, you may discover that you forgot to claim all those charitable contributions you made, or you realized that you forgot to include the W-2 income (and withholdings) from that job you left at the beginning of last year, or the broker sent you a corrected 1099 package. These are just a few examples, but the point is, there are many things that you may remember (or come to your attention) after you already filed your tax returns. The vehicle for making the corrections is filing Form 1040X (Amended U.S. Individual Income Tax Return) with IRS. Don’t forget to amend your state tax return too. Not all states have a separate form for amending the original return, so check with the tax department of the state you live in, to find out how to do it (or have your favorite tax professional help you out!). Note that an amended return doesn’t have to be filed for reasons such as mathematical errors (IRS will probably catch those, and send a notice), or if you forgot to attach a form that you should’ve attached (they’ll let you know about this, too).

Form 1040X can be used to amend whatever original federal return you filed, meaning that if you filed Form 1040, 1040A, 1040EZ, or even 1040NR, you can use the 1040X to make corrections. The 1040X isn’t ‘year specific’ like the 1040 is, meaning there isn’t a 2011 Form 1040X, rather, there are boxes at the top of the form for you to check which year you’re amending. If you have multiple years to amend, you must submit a separate 1040X for each year, and check the year that you’re amending. IRS recommends (and I personally concur) that if you’re amending more than one year, put each year in a separate envelope. That way, if one year gets lost in the mail, they won’t all get lost.

The structure of Form 1040X is fairly simple. There are three columns; the first one is for entering amounts from various lines on your original return, the second one shows the changes you’re making, and the third shows the corrected amounts. In addition to the form itself, you must attach any schedules that have changed from your original submission. Using one of the examples above, if you omitted charitable contributions on your original return, you must attach Schedule A (Itemized Deductions) to your amended return, to show the change. In addition to any attachments, there’s a section on page 2 of the return where you need to put an explanation of why you’re amending the return. And continuing the above example, you would write something like “original return omitted charitable contributions of $100,000” (yes, you were very charitable!)

Depending on whether you’re amending the return to include income or deductions that were missed on your original return will determine whether you owe additional tax or you will receive a refund. It’s all determined as part of the computations on page 1. If you have a balance due, pay it with the amended return, and IRS will send you a bill for any interest or penalties you owe. If you’re due a refund, it’ll be mailed at some point, after the return is processed. IRS indicates an 8 to 12 week processing time for amended returns. The other thing to remember is that if you’re amending a return to claim a refund, you must file it within three years of the date you filed the original return, or within two years of the date you paid the tax, whichever is later.

The moral of the story is, if you screwed up your return, don’t fret; it can be fixed. And next time, think about having a competent, trained professional (like Jay the CPA) prepare your taxes.

Please share this article with others who may benefit from the wisdom contained herein(!) And if you’ve had any interesting personal experiences with amending tax returns, please leave a comment.

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…The Sequel

O.K., I lied. Two weeks ago, when I did the first part of this discussion, I said that I’d post part 2 the following week. I’m a week late, but I’ve had other things on my mind, like tax season, and keeping my clients happy. I think I have a good excuse.

Anyhow, if you recall, a couple of weeks ago, I started talking about ways that small business owners can get themselves into hot water, and how to avoid it. The following are a few more things…

1-Filing tax returns late: When tax returns are filed late, penalties and interest will be computed on any tax due. This is applicable for payroll tax returns, sales tax, income tax, pretty much any tax that can be levied. Don’t be under the wrong idea that filing an extension for any tax return will keep you safe. An extension only gives you more time to file the return itself; it’s not an extension of time to pay any tax. The late filing penalty will cost you 4 ½% per month, late payment is ½% per month, and interest is 3%. Additionally, pass-through entities (S corporations, partnerships, LLCs), while paying no tax of their own, can be assessed a penalty of $195 for each late filed K-1.

“DOH!” Just take care of filing all of your tax returns on time, and you can avoid all of these charges. It’s so easy!

2- Penalties: While I’m discussing the above, let me tell you about other penalties that you can owe, when you deviate from the straight and narrow. To name a few-failure to deposit taxes, negligence, substantial understatement, accuracy related, failure to have JayTheCPA prepare your return…April Fool’s, just kidding about the last one!

“DOH!” The point I do want to make here is that you really don’t want to mess around with tax preparation, or fall behind in tax filings. The additional charges can add up really quickly, and all of them are completely avoidable, by taking care of things timely.

3-Home office deduction: Over the years I’ve had many clients tell me that they don’t want to claim a home office deduction for their business, because they think it’s a red flag for an audit. It’s not necessarily a red flag but the rules for claiming a home office deduction are specific, in particular the rule that the area in your house/apartment must be used “regularly and exclusively” for business. What this means is that if you’ve got a desk set up in the den, which your family also uses to watch TV, or you work at the dining room table, where the family also takes meals and entertains, that’s not regular and exclusive use.

“DOH!” If your work space fits into IRS’s requirements, not only will your home office deduction save you on income tax, but it’ll save you on self-employment tax too, which is currently about 13 percent. It’s a completely legitimate deduction that should be taken, when applicable.

4-Not using a CPA: It’s my blog, and I’m allowed just a little bit of self-promotion, right? Let me start this with a statement; I don’t know much about I.T., printing, banking, law, or medicine. Or lots of other things, for that matter. I’m not qualified to do any of those. How about you; what qualifies you to be a bookkeeper/accountant/CPA/tax preparer? Probably not much, which is why you should have a CPA as part of your professional team.

“DOH!” You can pay a CPA more later, to clean up the mess that you made with your taxes or your books, or you can pay less now to have a qualified bookkeeper help you with the books, and a CPA help you with the returns. You can try to use Google to research things yourself, but do you really have the time? Can you keep up to date with tax laws? Kids, don’t try this at home!

I hope you’ve found this and the prior installment of “DOH!” moments helpful. Please pass this information along to somebody who might benefit by these sage words of wisdom, so you don’t wind up looking like this little guy, after you’ve been spanked by IRS with penalties!

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!

Dirty Dozen Tax Scams

IRS released their “Dirty Dozen Tax Scams for 2012”, and it isn’t pretty. Individuals participating in these scams face penalties, interest, and possible criminal prosecution, so they’re not to be treated lightly. For the average law abiding taxpayer, the risk isn’t really from participating in one or more of these scams, rather it’s by being a victim of one. Briefly, here are a few of the dirtier scams.

Identity Theft-IRS says that identity theft cases are among “the most complex” ones they handle, but they’re “committed to working with taxpayers who have become victims of identity theft.” What happens is that identity thieves use stolen social security numbers and personal information to file fraudulent tax returns to obtain a tax refund. The trouble begins for a taxpayer when they file their legitimate return after a fraudulent return has been filed with her/his social security number. It’s usually at that point that the theft/fraud is detected, and the work begins to sort it all out. IRS recommends that anybody who believes their personal information has been stolen and used for tax purposes should call their Identity Protection Specialized Unit. More information can be found on IRS’s special identity theft page at http://www.irs.gov/identitytheft.

Phishing-we’ve all probably already seen plenty of emails purporting to be Fedex, Bank of America, U.S. Postal Service, etc, telling us that our mail was undeliverable, our credit card record needs updating, or some other urgent thing that we need to click on a link for. These things are all phishing scams, and the sole aim is to steal our personal information. IRS is warning taxpayers that they NEVER, I repeat, NEVER contact taxpayers by email, so if you ever receive an email saying that it’s IRS contacting you about your taxes, do not pass go, do not collect $200, do not click on any links, do not do anything but DELETE that email. Have I made myself clear?! What you can do is forward that email to phishing@irs.gov, and they will investigate it. IRS has more information available at http://www.irs.gov/privacy/article/0,,id=179820,00.html

Return Preparer Fraud-unfortunately one bad apple can make taxpayers wonder about all the other legitimate tax preparers out there (yours truly included). Here are a few things to look out for that may indicate the preparer is unscrupulous
-doesn’t sign the return or put an identifying number on it
-doesn’t give you a copy of your tax return
-promises a larger than normal refund
-charges a percentage of the refund as a fee
-encourages the taxpayer to place false information on a return, such as false deductions.

For purposes of brevity, I’ll wind things up now. The key thing to remember here is to always stay alert with your personal information, and if something smells fishy, it probably is. IRS has a YouTube video with more information about this topic. You can see it at http://www.youtube.com/watch?v=10D1XqVmIW0

Please pass this information along to others, since this is something that could affect all taxpayers. Let me know if you have any questions, and if you have any comments, please post them to this blog. Be careful out there!

Uncle Sam Owes You!

The other day, IRS announced that it has $153.3 million in undelivered tax refund checks.  There are 99,123 taxpayers who are due refund checks that couldn’t be delivered because of mailing address errors.  These undelivered checks average out to $1,547 per check, which (in my mind) isn’t chump change!

How the heck does this happen, you ask?  The usual culprit is IRS having an old expired address on record, and no address to forward to.  They will always deliver to the last known address that they have on record, and if you’re no longer there (and any post office forwarding order has expired), that refund check will be sent back.   If you believe that Uncle Sam owes you a tax refund that you haven’t received, go to IRS’s home page (IRS.gov) and click on the “Where’s My Refund” link.  You’ll need to enter information about the return that you believe you’re due a refund on (don’t worry, it’s a secure web page), and you’ll be informed of the status of that refund.

IRS suggests a couple of ways to make sure you always get the refund due you.  The first is to notify them when you move, by updating your address on Form 8822 (Change of Address), which can be found at http://www.irs.gov/pub/irs-pdf/f8822.pdf .  Alternatively (and preferred by IRS) you should file your tax return electronically, and choose to have your refund directly deposited into the bank.  You can speak with your favorite CPA about all of this.

In the same announcement, IRS also reminded taxpayers that they do not contact taxpayers by e-mail about pending refunds, and do not ask about personal or financial information through e-mail.  If you ever receive an e-mail from a sender professing to be the Internal Revenue Service, do not reply, do not open any attachments, and do not click on any links; it’s a phishing scam.  So be careful!

Please pass this article along to everybody who’s a taxpayer (probably everybody you know), because you never know who could use an extra $1,547 (average) in their pocket, or bank account.  Do you have any good stories about undeliverable or misplaced IRS refunds or correspondence?  Please leave a comment, and also let me know if you have any topic you’d like to see me write about in the future.

 

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