Tax Detectives, on the Case

The IRS is busy playing detective! But are they building cases, clue by meticulous clue, like the supersleuths of television's CSI? Or are they falling on their faces like the bumbling Inspector Clouseau?

Last month, a federal judge gave the IRS permission to serve a "John Doe" summons on the California Board of Equalization, demanding names of residents who transferred real estate to children or grandchildren for little or no consideration. The IRS sought the names as part of a nationwide effort to find taxpayers who transfer property to relatives without filing gift tax returns. (The IRS had already rounded up information from Connecticut, Florida, Hawaii, Nebraska, New Hampshire, New Jersey, New York, North Carolina, Ohio, Pennsylvania, Tennessee, Texas, Virginia, Washington state and Wisconsin -- but California officials objected that state law prohibited them from ratting out residents without court approval.)

Most people don't know much about gift tax, for the simple reason that most people won't ever pay gift tax. Gift tax law lets you give up to $13,000 per year to as many people as you like. Once your gifts to any single person (other than your spouse) top $13,000 in a year, you're required to file gift tax returns. Your cumulative lifetime gifts count against your estate tax "unified credit," which is the amount you're allowed to leave free of estate tax. And once your cumulative lifetime gifts top $5,012,000, you owe a 35% tax on the excess. If you're gifting to a grandchild or some other person more than one generation removed, you might even owe an extra35% "generation-skipping" tax.

How does that lead the IRS to combing state property records like a sleazy private investigator tracking down a cheating husband? Well, transferring property into an heir's name is a common estate-planning move. Let's say you own a beloved vacation home, or a stock portfolio, and you don't want to see it burdened by probate. You can just add your child's name to the deed or account as "joint tenant with right of survivorship," and at your death, voila, the property automatically passes to your child. But there's a catch -- transferring property like that counts as a "complete gift." If that property is worth $1,000,000, you've just made a $500,000 gift!

This particular IRS "project" is already yielding results. The IRS filed an affidavit in the California case stating that they had examined 658 taxpayers who transferred property to relatives -- and concluded that 238 of them should have filed Form 709 to report the gift. Twenty of those 238 were assessed actual tax because the transfers pushed them over their lifetime exemption.

This isn't the first time the IRS has used the "John Doe" summons to flush out members of suspect groups. Back in 2002, the IRS subpoenaed MasterCard and Visa to find taxpayers using debit cards tied to accounts in offshore tax havens. And in 2008, they used it to find taxpayers hiding Swiss bank accounts. The Internal Revenue Manualputs strict limits on this tool. But if today's efforts succeed in finding lost revenue, we can probably expect to see more in the future.

There are a couple of lessons here. First, many financial moves -- like transferring property into your kids' names -- have hidden tax consequences that are easy to miss. And second, the IRS has more ways than you realize tofind those consequences. So don't take chances, especially when they might land you on the wrong end of an IRS subpoena! You know how the utility company tells you to "call before you dig"? Well, call us before you dig, and we'll help you avoid all sorts of nasty surprises!

Nickles and Dimes

Last Thursday, cellphone carrier Verizon Wireless announced a new $2 fee for one-time payments made online or over the phone. On Friday, the Federal Communications Commission immediately announced they were "concerned about Verizon's actions" and planned to look into the matter. At the same time, over 158,000 visitors signed an online petition demanding that Verizon drop the fee. In fact, the website hosting the petition expressed shock that "while you are instituting this new fee, Verizon paid zero federal income tax from 2008-2010, and actually got almost a billion dollars in rebates from taxpayers." Verizon immediately beat a hasty retreat and dropped the proposed fee.

Verizon is hardly the only corporate giant to float new fees, only to see them immediately fall back to earth. Back in September, Bank of America announced plans to charge a $5 monthly fee for customers making debit card purchases -- then, after howls of customer protest, backed off just five weeks later. Other banks, which had tested similar debit card fees, killed their fees too in the wake of the protests.

There's a pattern developing here. In today's struggling economy, companies can't impose the broad-based price hikes they really want. So they settle for nickel-and-diming us with junk fees. Unfortunately for them, consumers are pushing back -- and at least with Verizon and the banks, the customers are winning.

There's a similar pattern at work in today's Washington.Candidates can talk 'till they're blue in the face about bold sweeping change, like Rick Perry's 20% flat tax and Herman Cain's attention-grabbing "9-9-9" plan. (If you close your eyes right now, I bet you can still hear Cain saying "9-9-9" in your head.) But in today's hyper-partisan Congress, the actual legislators in charge ofimplementing all those bright ideas can't find the consensus to name a Post Office, let alone remake the tax code in any meaningful way. So they settle for nickel-and-diming the system -- extending the payroll tax holiday for a miserly 60 days instead of a full year, and paying for it by levying fees on mortgages sold to Fannie Mae and Freddie Mac rather than by raising taxes on million-dollar earners. Even when legislators extend new breaks, they tend to be for small amounts, like the $800 "Making Work Pay" credit or $1,500 for home energy improvements. New tax breaks also tend to be short-lived: the 2009 deduction for sales tax on new cars lasted 10½ months, and the much-ballyhooed "Cash for Clunkers" program lasted just 56 days.

The problem, of course, is that Washington's version of nickel-and-diming us adds up fast. A couple of bucks for online bill payments here and $5 for monthly debit-card usage there? Maybe it cuts into your Starbucks budget. But closing tax breaks hurts. As former Senate Minority Leader Everett Dirksen famously said, "A billion here, a billion there, pretty soon you're talking real money." And IRS "customers" can't threaten to take their "business" somewhere else like customers at the bank.

2012 is an election year, of course, which means we can expect even less in the way of substantive action -- at least for the next 10 months. But that may all change after November 6, as the Bush tax cuts expire after December 31. If the upcoming election leaves Washington as divided as it is now, we can expect a repeat of last summer's debt-ceiling battle. Our job is to keep on top of all the news to safeguard your nickels and dimes, regardless of what happens in November. And that means planning. Remember, being proactive, now, is the key to keeping your tax bill as low as possible in 2012 and beyond. So, if one of your New Year's resolutions is to get out in front of the tax nickel-and-dimers, give us a call!

New 1099K Impacts Your Tax Return

This year, companies that process credit and debit cards as well as third-party network payments such as PayPal, Amazon.com and Google are required to report to merchants and to the IRS the gross amount of the transactions they've processed. If the small business exception, which is fewer than 200 transactions totaling less than $20,000, does not apply to you and you receive Forms 1099-K, be sure to handle them properly on your tax return.

Continue reading at 1099K Impact on your tax return.

If you have any questions about the tax law changes, business tips, or how to become a client, please call us at 954-591-8290 or use our Contact form.

Happy New Year - A Gift for You

Welcome to 2012.

On January 1, 2012 numerous tax law changes took effect.  Some good, some not so good.  If you have any questions, please do not hesitate to contact us.

Now is a good time of the year to change the oil in your car.  Your mechanic will provide you with a receipt with your cars' current mileage.  This can be used as evidence to establish the ending mileage for 2011 and the beginning mileage for 2012.

There is no need to keep track of those pesky, fading receipts.  Take a picture with your phone's camera and upload it to your "2012 Business Receipt" folder on your FREE DropBox account.

The IRS requires you to track your mileage and expenses.  As our New Year's gift to you, you can download our 2012 Tax Diary.  Use it to track your mileage, appointments, and meal expenses.

If you have any questions about the tax law changes, business tips, or how to become a client, please call us at 954-591-8290 or use our Contact form.

We're Number One!

We're Number One!New Year's day is almost here, and for millions of Americans, that means college football bowl games. Fans and alumni across the country are gearing up to root for their favorite school. LSU fans cry "Geaux Tigers!" 'Bama fans chant "Roll, Tide, Roll!" But only one team will be champion come January 9.

Regardless of which gridiron gladiators we support for the BCS championship, Americans are #1 in another competition. That's right, Americans cheat their government out of more tax dollars than the citizens of any other country in the world!

A recent study by the Tax Justice Network, a British think-tank dedicated to transparency in international finance, shows the U.S. government lost $337 billion annually to tax evasion. We're followed by Brazil ($280 billion), Italy ($238 billion), Russia, Germany, France, Japan, China, U.K., and Spain. Overall, the study finds that worldwide tax evasion tops $3 trillion, or 5% of the world's economy.

However, while Americans are #1 in absolute dollars lost to cheating, we're not actually the biggest fibbers. The report attempts to quantify the size of each country's "shadow economy" that hides from official view to avoid tax. Russia is the biggest loser here, with 44% of its Gross Domestic Product (GDP) lurking underground and evading tax. Brazil is next, with 39% of its economy hiding in the shadows. Our own shadow economy, at 8.6% of GDP, is actually the smallest of those top ten tax evaders listed above.

Looking at it from a different perspective, next to the cost of financing government, the cost of financing health care is perhaps our country's biggest fiscal challenge. The Tax Justice Network's report draws an interesting contrast between each country's cost of tax cheating and cost of health care. Worldwide tax evasion costs an average of 55% of worldwide health care costs. But that average encompasses an enormous range. Here in the U.S., for example, tax evasion drains the equivalent of just 15% of our national health care budget. By contrast, in Bolivia, where the "shadow economy" accounts for 66% of GDP, tax evasion costs that nation more than four times the amount of their annual health care spending.

American tax cheats may even show a conscientious side. The Charities Aid Foundation, a British organization dedicated to encouraging efficient charitable giving, just released their World Giving Index 2011 report. They found that the U.S. is #1 in charitable giving, out of 153 countries surveyed. "Using data from Gallup's Worldview World Poll," the report says, "the results show that the USA is officially the most charitable nation in the world." Now there's something we can all take pride in this holiday season!

The irony here is that there are so many legal ways to pay less tax that nobody needs to cheat. Proactiveplanning is the key to paying less tax without having to hide in the shadows. As 2012 dawns, remember that we're here to deliver that planning -- for you, and for your family, friends, and colleagues as well.

Planning: Employee Business Expenses

Now may be a good time to evaluate the expenses you incur as an employee in connection with your work. While your employer may be reimbursing you for some of these expenses, there may be others for which you are bearing the cost yet not utilizing the tax benefit. Through proper substantiation, it is possible that you may be able to obtain greater reimbursement from your employer. Alternatively, you may be entitled to deduct such expenses as miscellaneous itemized deductions.

 In order to be reimbursed and/or deducted, trade or business expenses must be ordinary, necessary, and reasonable. They also must be properly substantiated. Examples of qualifying expenses include:

• Travel, transportation, meal, or entertainment expenses
• Safety equipment, small tools, or supplies
• Uniforms required by your employer that are not suitable for everyday wear
• Required protective clothing
• Dues to professional organizations
• Subscriptions to professional journals
• Certain job hunting expenses
• Certain expenses for the business use of your home
• Computer costs
• Work-related educational expenses

You may also benefit from a review of the business expenses related to the use of your home. If you qualify for the home office deduction, you may be able to deduct part of your home’s normal operating expenses, such as utilities and insurance. The tax-savings opportunities available to you are dependent not only on the type of work you do at home, but where in your home you perform it.

The rules for deducting these expenses, as well as substantiating your deduction, vary according to the type of expense involved. It is important to retain all records and receipts that document the time, place, and business purpose of each expense. Please contact our office at your earliest convenience to schedule an appointment.

2011 Planning: Tax Solutions for S Corporations

An S corporation, such as yours, is a pass-through entity that is treated very much like a partnership for federal income tax purposes. As a result, all income is passed through to your shareholders and taxed at their individual tax rates. However, unlike a C corporation, an S corporation’s income is taxable to the shareholders when it is earned whether or not the corporation distributes the income. Because an S corporation has a unique tax structure that directly impacts shareholders, it is important for you to understand the S corporation distribution and loss limitations, as well as how and when items of income and expense are taxed, before developing your overall tax plan.

 In addition, some S corporation income and expense items are subject to special rules and separate identification for tax purposes. Examples of separately stated items that could affect a shareholder’s tax liability include charitable contributions, capital gains, Sec. 179 expense deductions, foreign taxes, and net income or loss related to rental real estate activities.

 These items, as well as income and losses, are passed through to the shareholder on a pro rata basis, which means that the amount passed through to each shareholder is dependent upon that shareholder’s stock ownership percentage. However, a shareholder’s portion of the losses and deductions may only be used to offset income from other sources to the extent that the total does not exceed the basis of the shareholder’s stock and the basis of any debt owed to the shareholder by the corporation. The S corporation losses and deductions are also subject to the passive-activity rules.

 Other key points to consider when developing your comprehensive tax strategy include:

• the availability of the Code Sec. 179 deduction at the corporate and shareholder level;
• reporting requirements for the domestic production activities deduction;
• the tax treatment of fringe benefits;
• below-market loans between shareholders and S corporations; and
• IRS scrutiny of distributions to shareholders who have not received compensation.

We can assist you in identifying and maximizing the potential tax savings. Please contact our office at your earliest convenience to arrange an appointment.

2011 Planning: Maximizing Itemized Deductions

Successful tax planning includes a review of your available deductions and the impact of your filing status on your option to itemize. It is important that all of the technical requirements for your deductions are met. In addition, certain items are deductible only to the extent they exceed a percentage threshold. By reducing your adjusted gross income, you increase the amount of itemized deductions you can claim, because the floor limitation amounts are reduced accordingly.

 A strategy commonly used in year-end individual tax planning is to determine the best timing for claiming itemized deductions. Generally, it is beneficial for taxpayers to defer income and accelerate expenses. This strategy may enable you to itemize your deductions if you claimed the standard deduction in the past. This year, some certainty for planning purposes is provided due to the extension of the reduced individual income tax rates through 2012 by the Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act of 2010 (Tax Relief Act of 2010).

 In addition to the reduced tax rates, the Tax Relief Act of 2010 also extended numerous other tax benefits, including:

• Marriage penalty relief
• Repeal of the itemized deduction and personal exemption phaseouts
• Itemized deduction for state and local general sales taxes in lieu of state and local income taxes
• Mortgage insurance premium deduction
• Above-the-line deduction for certain out-of-pocket classroom expenses
• Above-the-line higher education tuition deduction and other education-related incentives
• Alternative minimum tax (AMT) patch
• Nonrefundable tax credit offset of entire regular and AMT tax liability
• Tax-free IRA distributions to charity

 However, the additional standard deductions for state and local real property tax, motor vehicle sales tax, and net disaster losses are no longer available.

 Tax planning for higher-income taxpayers is more complicated. Generally, you must reduce your otherwise allowable itemized deductions if your adjusted gross income exceeds a specified threshold amount. However, the phase-out of itemized deductions and personal exemptions for higher-income taxpayers is eliminated through 2012 by the Tax Relief Act of 2010. The failure to take the alternative minimum tax (AMT) into account may also jeopardize your tax planning strategy, as the AMT continues to negate many itemized deductions. The Tax Relief Act of 2010 increased the AMT exemptions amounts for the 2010 and 2011 tax years, which provides some relief from this tax burden.

 Although maximizing your itemized deductions is an important aspect of tax planning, there are other issues that you may need to consider in light of your overall tax scenario. We hope to provide you with planning options that enable you to achieve the greatest tax savings possible. Please contact our office at your earliest convenience to make an appointment to discuss your tax planning options.

Tax Changes for 2011

Whether you file as an individual, a corporation, a small business owner, or are self-employed, as the end of the year draws near, you're probably thinking ahead to tax season and filing your taxes.

Most tax provisions of course, remain the same (IRA contribution limits for example), but a few such as personal exemptions have been adjusted for inflation and others have been extended due to legislation and are set to expire at the end of 2012.

From tax credits, exemptions and deductions for individuals and Section 179 expensing for small businesses, here's what you need to know about tax changes for 2011.

Individuals

From personal deductions to tax credits and educational expenses, many of the tax changes relating to individuals remain in effect through 2012 and are the result of tax provisions that were either modified or extended by the Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act of 2010 that became law on December 17, 2010.

Personal Exemptions
The personal and dependent exemption for tax year 2011 is $3,700, up $50 from 2010.

Standard Deductions
In 2011 the standard deduction for married couples filing a joint return is $11,600, up $200 from 2010 and for singles and married individuals filing separately it's $5,800, up $100. For heads of household the deduction is $8,500, also up $100 from 2010.

The additional standard deduction for blind people and senior citizens is $1,150 for married individuals, up $50, and $1,450 for singles and heads of household, also up $50.

Income Tax Rates
Due to inflation, tax-bracket thresholds will increase for every filing status. For example, the taxable-income threshold separating the 15-percent bracket from the 25-percent bracket is $69,000 for a married couple filing a joint return, up from $68,000 in 2010.

Estate and Gift Taxes
The recent overhaul of estate and gift taxes means that there is an exemption of $5 million per individual for estate, gift and generation-skipping taxes, with a top rate of 35%. For married couples the exemption is $10 million.

Alternative Minimum Tax (AMT)
AMT exemption amounts for 2011 are slightly higher than those in 2010 at $48,450 for single and head of household fliers, $74,450 for married people filing jointly and for qualifying widows or widowers, and $37,225 for married people filing separately.

Marriage Penalty Relief
For 2011, the basic standard deduction for a married couple filing jointly is $11,600, up $200 from 2010.

Pease and PEP (Personal Exemption Phaseout)
Pease (limitations on itemized deductions) and PEP (personal exemption phase-out) limitations do not apply for 2011, but these are set to expire at the end of 2012.

Flexible Spending Accounts (FSA)
The Affordable Care Act, enacted in March, established a new uniform standard, effective January 1, 2011, that applies to FSAs and health reimbursement arrangements (HRAs).

Under the new standard, the cost of an over-the-counter medicine or drug cannot be reimbursed from the account unless a prescription is obtained. The change does not affect insulin, even if purchased without a prescription, or other health care expenses such as medical devices, eye glasses, contact lenses, co-pays and deductibles.

The new standard applies only to purchases made on or after Jan. 1, 2011, so claims for medicines or drugs purchased without a prescription in 2010 can still be reimbursed in 2011, if allowed by the employer's plan.

A similar rule went into effect on Jan. 1, 2011 for Health Savings Accounts (HSAs), and Archer Medical Savings Accounts (Archer MSAs).

Long Term Capital Gains
In 2011, long-term gains for assets held at least one year are taxed at a flat rate of 15% for taxpayers above the 25% tax bracket. For taxpayers in lower tax brackets, the long-term capital gains rate is 0%.

Individuals - Tax Credits

Adoption Credit
A refundable credit of up to $13,360 for 2011 is available for qualified adoption expenses for each eligible child.

Child and Dependent Care Credit
If you pay someone to take care of your dependent (defined as being under the age of 13 at the end of the tax year or incapable of self-care) in order to work or look for work, you may qualify for a credit of up to $1,050 or 35 percent of $3,000 of eligible expenses.

For two or more qualifying dependents, you can claim up to 35 percent of $6,000 (or $2,100) of eligible expenses. For higher income earners the credit percentage is reduced, but not below 20 percent, regardless of the amount of adjusted gross income.

Child Tax Credit
The $1,000 child tax credit has been extended through 2012. A portion of the credit may be refundable, which means that you can claim the amount you are owed, even if you have no tax liability for the year. The credit is phased out for those with higher incomes.

Energy Tax Credits for Homeowners
Energy tax credits for homeowners expire at the end of 2011 and are not as generous as in previous years. In addition, a taxpayer who has claimed an amount of $500 in any previous year is not eligible for this tax credit.

Homeowners can claim an Energy Star window tax credit of up to $200 maximum as well as a water heater tax credit, which includes electric, natural gas, propane, or oil, up to a maximum of $300. The same maximum ($300) applies to air conditioners, but insulation, doors, and roof credits are capped at $500. The furnace tax credit (includes natural gas, propane, oil, or hot water) and is capped at $150 maximum and efficiency must be at 95%.

Earned Income Tax Credit (EITC)
The maximum EITC for low and moderate income workers and working families is $5,751, up from $5,666 in 2010. The maximum income limit for the EITC has increased to $49,078, up from $48,362 in 2010. The credit varies by family size, filing status and other factors, with the maximum credit going to joint filers with three or more qualifying children.

Individuals - Education Expenses

Coverdell Education Savings Account
For two more years, you can contribute up to $2,000 a year to Coverdell savings accounts. These accounts can be used to offset the cost of elementary and secondary education, as well as post-secondary education.

American Opportunity Tax Credit (Higher Education)
The expansion of the Hope Scholarship Credit by the American Opportunity Tax Credit has been extended through 2012. For 2011, the maximum Hope Scholarship Credit that can be used to offset certain higher education expenses is $2,500, although it is phased out beginning at $160,000 adjusted gross income for joint filers and $80,000 for other filers.

Employer Provided Educational Assistance
Through 2012, you, as an employee, can exclude up to $5,250 of qualifying post-secondary and graduate education expenses that are reimbursed by your employer.

Lifetime Learning Credit
A credit of up to $2,000 is available for an unlimited number of years for certain costs of post-secondary or graduate courses or courses to acquire or improve your job skills. For 2011, the credit is fully phased out at $122,000 adjusted gross income for joint filers and $61,000 for others.

Student Loan Interest
For 2011 and 2012, the $2,500 maximum student loan interest deduction for interest paid on student loans is not limited to interest paid during the first 60 months of repayment. The deduction begins to phase out for higher-income taxpayers.

Tuition and Related Expenses Deduction
For 2010 and 2011, there is an above-the-line deduction of up to $4,000 for qualified tuition expenses. This means that qualified tuition payments can directly reduce the amount of taxable income, and you don't have to itemize to claim this deduction. However, this option can't be used with other education tax breaks, such as the American Opportunity Tax Credit, and the amount available is phased out for higher-income taxpayers.

Individuals - Retirement

Roth IRA Conversions
There is no longer an income limit for taxpayers who want to convert regular IRAs into Roth IRAs. The difference is that taxpayers who convert to Roth IRAs in tax year 2011 must pay taxes on the conversion income now instead of deferring it in later years as was the case in 2010.

Businesses

Standard Mileage Rates
The standard mileage rate increases to 51 cents per business mile driven (19 cents per mile driven for medical or moving purposes and 14 cents per mile driven in service of charitable organizations) for the first half of 2011. From July 1, 2011 to December 31, 2011 however, the rate increases to 55.5 cents per business mile. This increase is a special adjustment by the IRS and reflects higher gasoline prices.

Health Care Tax Credit for Small Businesses
Small business employers who pay at least half the premiums for single health insurance coverage for their employees may be eligible for the Small Business Health Care Tax Credit as long as they employ fewer than the equivalent of 25 full-time workers and average annual wages do not exceed $50,000. The credit can be claimed in tax years 2010 through 2013 and for any two years after that. The maximum credit that can be claimed is an amount equal to 35% of premiums paid by eligible small businesses.

Section 179 Expensing
In 2011 (as well as 2010), the maximum Section 179 expense deduction for equipment purchases is $500,000 ($535,000 for qualified enterprise zone property) of the first $2 million of certain business property placed in service during the year. The bonus depreciation increases to 100% for qualified property. If the cost of all section 179 property placed in service by the taxpayer during the tax year exceeds $2 million, the $500,000 amount is reduced, but not below zero.

Please contact us if you need help understanding which deductions and tax credits you are entitled to. We are always available to assist you.

End of Year Tax Planning on Sale

The holidays are here, and millions of Americans kicked off the season with “Black Friday” shopping. Braving the crowds and the cold, facing scorn from family they’ve left behind, they line up at obscenely early hours (or duck out of Thanksgiving dinner before the pumpkin pie is even served) to save $20 on a DVD player or $40 on a flat-screen television.

It’s sad, but true, that most Americans spend more time planning their “Black Friday” shopping than they spend planning their taxes. But that can be an expensive mistake!

What if the IRS had a sale? What if the IRS let you discount your taxes by thousands of dollars, this year and every year to come? And what if they let you do it from the comfort of your home or your office, without lining up in the pre-dawn hours of a chilly November morning? Would you give thanks for a sale like that?

You’re probably not holding your breath for the scrooges at the IRS to hold a “sale.” The good news is, you don’t have to wait for that to happen. You just need a plan. Tax planning is the key to paying the legal minimum. And a good tax plan can pay for a holiday season full of gifts and fun.

Call me today at 954.591.8290 or fil out our Contact form, for your free Tax Analysis. We’ll find the mistakes and missed opportunities that may be costing you thousands today, and show you how “Black Friday” tax planning can save thousands more tomorrow. We guarantee you’ll give thanks for the savings, or we’ll donate $50 to your favorite soup kitchen. So call now to schedule your Analysis.