Tuesday, March 19, 2013

13 ways to cut your taxes without itemizing

Kay Bell of Bankrate.com writes:  What do teachers, divorcees and people paying off student loans have in common? They can cut taxes, without itemizing.  These filers, along with other taxpayers who fit into special categories, might be able to claim at least one of the dozen-plus deductions found directly on Form 1040 without hassling with Schedule A.  Taxpayers who file Form 1040A can claim a few of these tax deductions on that shorter form, too.

Adjustments, not deductions

Officially, these breaks are identified as adjustments to your income. But they are popularly referred to as above-the-line deductions because you subtract them on Page 1 of your Form 1040 or Form 1040A, just above each form's last line where you enter your adjusted gross income, or AGI.  Taking these deductions will reduce your AGI, which in most cases, directly cuts your overall tax bill because figuring your AGI is the first step in arriving at your final taxable income amount. The less taxable income, the less you'll owe the Internal Revenue Service.
While these deductions mean that Form 1040 filers don't have to hassle with Schedule A, a few above-the-line tax breaks do require you to fill out another IRS form or work sheet. Still, that's a relatively small time commitment to shave some dollars off your tax bill.
Listed below, in the order in which they appear on lines 23 through 36 of Form 1040, are the current above-the-line deductions.

1. Educator expenses. With the educators' expenses deduction, teachers and other public and private school system employees can subtract up to $250 they spent on classroom supplies.
In past tax years, this deduction appeared on line 23. But because of the late passage of the "fiscal cliff" tax bill, officially titled the American Taxpayer Relief Act of 2012, the Internal Revenue Service created Form 1040 with line 23 "reserved." The form's instructions will provide details of what above-the-line deduction to claim here.

2. Certain business expenses. Unreimbursed business expenses also appear on Schedule A as a miscellaneous deduction. But some taxpayers can claim work-related costs directly on line 24 without worrying about a percentage threshold. You do, however, have to fill out Form 2106 or 2106-EZ.  The special taxpayers who qualify for this adjustment are military reservists, performing artists and fee-basis government officials. Although this collection sounds more like the cast of an avant-garde foreign language film than related taxpayers, lawmakers have deemed that anyone who falls into one of these categories deserves special tax treatment. If you are in one of these three fields, check the Form 2106 instruction book for filing details.

3. Health savings account deduction. A health savings account, or HSA, is a medical coverage plan that works much like an individual retirement account. Eligible participants put money into an HSA where it grows tax-free and withdrawals can be made to pay medical, dental and vision-care costs not covered under a corresponding high-deductible health care policy.

4. Moving expenses. If you relocated for job reasons, some of your expenses can be deducted on line 26. You will, however, also have to fill out Form 3903.

5. Self-employment tax. If you're self-employed, you have to pay Social Security and Medicare taxes -- the amount collected from you as an employee and you as an employer. But you get to deduct half of those payments on line 27.

6. Self-employed retirement plans. If you have a self-employment pension plan, such as a Keogh or a Simplified Employee Pension plan (SEP IRA), deduct any contribution amounts on line 28.

7. Self-employed health insurance. As an entrepreneur, you now can deduct 100 percent of health insurance premiums you paid for yourself, your spouse and dependents. Don't forget to count what you paid toward long-term care policies. You get a partial break here, too. Enter the amount on line 29.

8. Penalty on early withdrawal of savings. On line 30, the IRS gives you a break when someone else slaps your hand. If you cashed in a certificate of deposit and paid an early withdrawal penalty, you'll find the amount on the 1099-INT or 1099-OID that the account manager sent you. The IRS lets you subtract that charge from your income.

9. Alimony paid. Divorced filers get a chance to recoup alimony payments on line 31. Be sure to include the Social Security number of your ex-spouse, so the IRS can make sure he or she reports the payments as income. Without the recipient's tax ID number on your return, the deduction could be disallowed.

10. IRA deduction. If you contribute to a traditional IRA, you might be able to deduct at least a portion of your contribution from your income. Precisely how much you can claim on line 32 of Form 1040 depends not only on your contribution amount, but also on your adjusted gross income and whether you or your spouse participate in a company-sponsored retirement plan. It requires some calculation, but run the numbers. This above-the-line deduction could help lower your taxable income.

11. Student loan interest. Up to $2,500 of the interest you paid on a qualified student loan can be subtracted on line 33. The loan can be for you, your spouse or a dependent. Note that there are income limits and married taxpayers who file separate returns cannot claim this adjustment.


12. Tuition and fees. The higher-education tuition and fees adjustment could reduce your taxable income by as much as $4,000. You'll need to complete Form 8917 and then enter the amount of tuition and fees deduction calculated directly in the last section of Form 1040.  The late enactment of the American Taxpayer Relief Act of 2012 also affected this above-the-line deduction. It previously was claimed on line 34, but the IRS was forced to create the form with this line reserved. It is expected that the student loan interest claim will go here. The 1040 instructions will provide details.

13. Domestic production activities. This above-the-line deduction was created to encourage "made in the U.S.A." manufacturing efforts. U.S.-based businesses that manufacture products domestically instead of sending the work overseas might be able to deduct up to 9 percent of the money earned or 50 percent of the wages paid in connection with the production effort, whichever is less. This tax break applies not only to such expected occupations as construction or farming, but also is available to certain creators of software, films or recordings.

You'll need Form 8903 to figure the exact credit that goes on line 35 of your Form 1040.
We're out of designated adjustment lines as we reach the bottom of Page 1, so that's the end of the nonitemizing tax breaks, right? Wrong.

Some specialty adjustments

Although line 36 simply instructs you to total your entries on all the previous adjustment lines, curious taxpayers who take a closer look at Form 1040 instructions will find even more possible ways to whittle away some of their taxable incomes. Sure, several of these adjustments, such as reforestation amortization or repayment of specific supplemental unemployment benefits or court costs for certain unlawful discrimination cases, are for relatively limited tax situations. But a couple of the adjustments affect quite a few taxpayers.  Line 36 is where you enter any pay you got for serving on a jury, but then turned it over to your boss because you got your regular pay while at the courthouse. Contributions to special medical savings accounts offered by some small businesses also are accounted for here. You'll need to fill out Form 8853 to determine the amount to enter on this catchall line.

So take a moment to check out all these other possible above-the-line deductions. Details are in the Form 1040 instruction book. If you're one of the select group of taxpayers to whom these apply, claim the amount and add the special notation spelled out in the instructions to line 36. The extra adjustments could really pay off.  Now it's time to add all these specially annotated line 36 amounts to the deductions claimed on the preceding 13 income adjustment lines. This final number goes on line 37. Once entered there, it's subtracted from the total income amount you entered on line 22. The result: your adjusted gross income.


A few also on 1040A

What if you don't want to or need to use the long Form 1040? You still get a chance to reduce your income if you file Form 1040A instead. Four of these above-the-line adjustments -- educator expenses, IRA contributions, student loan interest and tuition and fees -- also can be deducted on lines 16 through 19 of that slightly shorter tax return. Just as Form 1040 had two lines reserved because of the late passage of the American Taxpayer Relief Act of 2012, Form 1040A does the same. Lines 16 and 19 are reserved for the educator expenses and the tuition and fees above-the-line deductions. Check the Form 1040A for details of which deduction to enter on those lines.
Posted on 9:31 AM | Categories:

IRAs and Taxes, Pt. 1: When Are IRA Funds Taxed?

AdviserOne.com writes:

 Q. When are funds in an IRA taxed?
Funds accumulated in a traditional IRA generally are not taxable until they actually are distributed. Funds accumulated in a Roth IRA may or may not be taxable on actual distribution. Special rules may treat funds accumulated in an IRA as a “deemed distribution” and, thus, includable in income.

A distribution of a nontransferable, nonforfeitable annuity contract that provides for payments to begin by age 70½ and not to extend beyond certain limits is not taxable, but payments made under such an annuity would be includable in income under the appropriate rules.
 
A contribution (excess or otherwise) may be distributed income tax free in certain circumstances(provided, in the case of a traditional IRA, that no deduction was allowed for the contribution). If net income allocable to the contribution is distributed before the due date for filing the tax return for the year in which the contribution was made, it must be included in income for the tax year for which the contribution was made even if the distribution actually was made after the end of that year. With respect to distributions of excess contributions after this deadline, the net income amount is included in income in the year distributed. Any net income amount also may be subject to penalty tax as an early distribution.

An individual may transfer, without tax, the individual’s IRA to his or her spouse or former spouse under a divorce or separate maintenance decree or a written instrument incident to the divorce. The IRA then is maintained for the benefit of the former spouse. Any other assignment of an IRA is a deemed distribution of the amount assigned.

Where an individual rolled over his interest in a tax sheltered annuity to an IRA, pursuant to a QDRO, the subsequent transfer of the IRA to the individual’s spouse was considered a “transfer incident to a divorce” and, thus, nontaxable to either spouse.

A taxpayer was liable for taxes on a distribution from his IRA that he subsequently turned over to his ex-wife in satisfaction of a family court order because it was not a “transfer incident to divorce” and the family court order was not a QDRO because it did not specifically require the transfer of assets to come from the IRA. A transfer of funds between the IRAs of a husband and wife that does not come within the divorce exception is a deemed distribution despite IRC provisions that provide that no gain is recognized on transfers between spouses.

The transfer of a portion of a husband’s IRA to his wife to be placed in an IRA for her benefit that was the result of a private written agreement between the two that was not considered incident to a divorce was not eligible for nontaxable treatment under IRC Section 408(d)(6).
Where a taxpayer received a full distribution from his IRA and endorsed the distribution check over to his soon-to-be-ex-wife, the husband was determined to have failed to satisfy the requirements for a non-taxable transfer incident to divorce and was liable for taxation on the entire proceeds of the IRA distribution. 

Where two traditional IRAs were classified as community property, the distributions of the deceased spouse’s community interest in the IRAs to relatives other than her surviving husband were taxable only to those recipients and not to the husband.

State community property laws, although disregarded for some purposes, are not preempted by IRC Section 408(g). In a case of first impression, the Tax Court ruled that the recognition of community property interests in IRAs would conflict with existing federal tax rules. IRC Section 408(g) requires application without regard to community property laws. By reason of IRC Section 408(g), the former spouse is not treated as a distributee on any portion of the IRA distribution for purposes of federal income tax rules despite the former spouse’s community property interest in the assets. Therefore, a distribution from an IRA to a former spouse is taxable to the account holder unless it is executed pursuant to decree of divorce, or other written maintenance decree under IRC Section 408(d)(6).

Where taxpayers requested that an IRA be reclassified under state marital property law from individual property to marital property, no distribution under IRC Section 408(d)(1) was deemed to have occurred.
The involuntary garnishment of a husband’s IRA and resulting transfer of such funds to the former spouse to satisfy arrearages in child support payments was a deemed distribution to the husband because it discharged a legal obligation owed by the husband.

Where a taxpayer transferred funds from a single IRA into two newly created IRAs, the direct trustee-to-trustee transfers were not considered distributions under IRC Section 408(d)(1). The division of a decedent’s IRA into separate subaccounts does not result in current taxation of the IRA beneficiaries.
If any assets of an individual retirement account are used to purchase collectibles (works of art, gems, antiques, metals, etc.), the amount so used will be treated as distributed from the account (and also may be subject to penalty as an early distribution). A plan may invest in certain gold or silver coins issued by the United States , any coins issued under the laws of a state, and certain platinum coins. A plan may buy gold, silver, platinum, and palladium bullion of a fineness sufficient for the commodities market if the bullion remains in the physical possession of the IRA trustee. A plan may purchase shares in a grantor trust holding such bullion.

If any part of an individual retirement account is used by the individual as security for a loan, that portion is deemed distributed on the first day of the tax year in which the loan was made. Amounts rolled over into an IRA from a qualified plan by one of the twenty-five highest paid employees, however, may be pledged as security for repayments that may have to be made to the plan in the event of an early plan termination. A less-than-sixty-day interest-free loan from IRA accumulations is possible under the rollover rules.
If the owner of an individual retirement annuity borrows money under or by use of the contract in any tax year, including a policy loan, the annuity ceases to qualify as an individual retirement annuity as of the first day of the tax year and the fair market value of the contract would be deemed distributed on that day.

If an individual engages in a prohibited transaction during a year, his or her individual retirement account ceases to qualify as such as of the first day of that tax year; the individual is not liable for a prohibited transaction tax. The fair market value of all the assets in the account is deemed distributed on that day. If the account is maintained by an employer, only the separate account of the individual involved is disqualified and deemed distributed.

The transfer to an individual retirement account of a personal note received in a terminating distribution from a qualified plan and the holding of that note is a prohibited transaction.

The use of IRA funds to invest in a personal retirement residence of the taxpayer is considered a prohibited transaction under IRC Section 4975(c)(1)(D) and, thus, is treated as a distribution.
Whether a purchase of life insurance in conjunction with an individual retirement plan but with non-plan funds constitutes a prohibited transaction apparently depends on the circumstances. The IRS has held that the purchase of insurance on the depositor’s life by the trustee of the account with non-plan funds amounted to an indirect prohibited transaction by the depositor. The IRS also has ruled that the solicitation by an association of individuals who maintain individual retirement plans with the association for enrollment in a group life plan did not result in a prohibited transaction where premiums would be paid by the individuals and not out of plan funds.

Institutions may offer limited financial incentives to IRA and Keogh holders without running afoul of the prohibited transaction rules provided certain conditions are met. Generally speaking, the value of the incentive must not exceed $10 for deposits of less than $5,000 and $20 for deposits of $5,000 or more. These requirements also are applicable to SEPs that allow participants to transfer their SEP balances to IRAs sponsored by other financial institutions and to SIMPLE IRAs.
A distribution of any amount may be received free of federal income tax to the extent the amount is contributed within sixty days to another plan under the rollover rules.

Distributions from traditional and Roth IRAs are not subject to the 3.8 percent Medicare contribution tax imposed under the Affordable Care Act. The tax equals 3.8 percent of the lesser of a taxpayer’s net investment income for the taxable year, or the excess (if any) of the taxpayer’s modified adjusted gross income for the year, over a threshold amount ($200,000 for a taxpayer filing an individual return and $250,000 for a taxpayer filing jointly). Internal Revenue Code Sec. 1411 specifically accepts distributions from IRAs and other qualified plans from the definition of “net investment income.”
Posted on 9:30 AM | Categories:

PART 2 : Intuit and QuickBooks in 2020: 5 MORE Potential Network-Based Services Offerings / (Future Accounting Transactional Connectivity)

 PART 2 of Jason Busch for SpendMatters.com
 (part 1 can be read here).

Jason Busch writes:   Intuit and QuickBooks in 2020: 10 Potential New Network-Based Services Offerings (Part 2)   In the first installment of this series, we covered five initial opportunities for Intuit/Quickbooks to provide additional network-based services to the users of its SMB accounting packages based on its vision and some of the initial steps it is taking with Tradeshift. These are:

  1. E-Invoicing connectivity to larger buying organizations
  2. Supply chain finance/discounting
  3. Supplier registration linked directly into supplier management tools and other networks
  4. Certification/credential management (e.g., diversity, insurance certificates, regulatory compliance, material certifications, environmental/health/safety)
  5. Benchmarking
We continue our analysis by exploring five more use cases for a network/platform that sits between Quickbooks users and larger enterprise buying customers (or third parties working with Intuit in a broader ecosystem that could extend to banking and other partners besides customers). Note, these are Spend Matters ideas and opinions and may or may not reflect the views of Intuit, Tradeshift or other third-parties. 

6.    Accounting/banking repository – Small businesses owners often have significant paperwork headaches around maintaining tax returns (personal and business) and other types of documentation they need to provide to banks for lines of credit/relationship management and their accounting firms. Intuit could provide a network-based repository with appropriate permissions/workflow to enable specified partners (e.g., banks) to have access to specific or aggregated information. For example, if a SMB wanted to explore a new banking relationship, an owner could upload all of their information a single time and the specifics could be shared with approved potential partners and aggregated information could be shared with those which it would like to solicit offers from. On a more basic level, this repository could help manage the monthly, quarterly and year-end “close” beyond simply keeping the books up to date – i.e., providing a repository for additional documentation for accountants, bookkeepers and the like.

7.    Supplier directory/on-board for search – Companies such as ThomasNet and MFG.com have built businesses focused on making suppliers more visible to potential customers, from custom website development through to marketplace visibility and onboarding. Intuit should provide a similar service for QuickBooks users, which on the most basic level, could provide SEO benefits for websites. More advanced use cases would include making supplier capabilities searchable via an Intuit network and ultimately, via other networks integrated with the Intuit platform (e.g., Ariba/SAP) including mapped taxonomies

8.    Leveraged contracts – As QuickBooks users ourselves, we live for the day when Intuit serves up an offer that promises to beat Amazon Prime on pricing (and with similar delivery terms) for basics such as printers, toner, pens, paper and the like. Intuit should be in the business of enabling users of its SMB accounting packages to buy off of contracts based on the aggregate buying power of the broader user base, including preferred terms and conditions. This could even extend to broader related services including vendor managed inventory (VMI) programs and the like. Imagine, for example, a tailored offering by Intuit and Grainger for MRO, focused on specific QuickBooks customer segments

9.    Buying groups and network intelligence – Taking leveraged contracts a step further, the opportunity exists for Intuit to create communities of interest for QuickBooks users that could become ad-hoc buying groups (e.g., a group of 500 companies agrees to a common specification for a SKU and “source” this specification through a free service provided by Intuit, which gets paid on the back-end much like a GPO through the supplier). Further, such services could provide market intelligence on pricing, common RFP specifications, etc. to those using it

10. Contextual Offers – An Intuit platform/network-based offering could provide one-time and contextual offers to users based on their activity. For example, for companies invoicing in foreign currencies, this might include a one-time “pop up” offer to use Tradeshift app partner The Currency Cloud for cross-border transactions and to get a credit of $20 for any currency fees associated with a transaction to try the service. Such a service, through the platform layer that exists in the network, would integrate seamless with the QuickBooks environment, making adoption painless (e.g., as easy as ordering from a non-Amazon supplier that still is part of the “Prime” program). 

With its captive QuickBooks base, Intuit is sitting on a massive opportunity to create greater value for business owners and to line its coffers in the process. Tradeshift may or may not end up being core to this strategy. But regardless, we suspect Intuit will use the coming years as a period of accelerated learning to create an ultimate strategy that by 2020, uses accounting software as bait to catch a much bigger fish without having to troll in new waters.
Posted on 9:29 AM | Categories:

No rush to pay that mortgage off early / With interest rates at record lows, paying a mortgage off early may feel good, but it’s not good financial planning

Emma Sapong for The Buffalo News writes:   If you’ve bought a home, you might be tempted to tackle what in many cases is that looming six-figure mortgage and pay it off in less than three decades.
But retiring your mortgage early doesn’t always make the best financial sense, experts say. Especially when mortgage rates are at near-record lows.

“From a logical and pure financial standpoint, it would make the most sense to get yourself into a 30-year, fixed-interest rate mortgage and pay the minimum due each month,” said Michael Hardy, a certified financial planner and partner at Mollot and Hardy in Amherst.  That same message is echoed during home buyer workshops at Belmont Housing Resources for Western New York.

“It’s really not advantageous to pay it off early,” said Sandy Becker, senior housing program manager for Belmont. “If I had extra money, the mortgage would be the last thing I’d hit.”
If you’ve got extra cash, use it to pay off higher-rate credit card debt or other more costly borrowing. If your debt is under control, think about using the extra cash for investments that could give you a better return than the savings you’ll reap from paying off your mortgage early.
After all, with mortgage rates historically low, borrowing money is cheaper than ever. The ixed-rate for a 30-year mortgage now averages 3.63 percent.   “If you are paying more than the minimum amount due, then you are giving the bank your money to hold,” he said.  He added your house will appreciate in value whether you pay the minimum, or $100,000.  “Therefore, the idea is to pay the minimum mortgage payment due, keep as much of your money as you can, and put it into your retirement or other savings account where you would have the potential to earn some kind of return on your capital,” he said.

Additionally, mortgage interest rates are tax deductible, so an early payoff means missing out on the tax break. When you factor in the value of the mortgage tax deduction, today’s average mortgage rate of 3.63 percent effectively is reduced to an after-tax rate of 2.5 percent.
While the loan amount for a home is usually significantly higher than for a vehicle or a credit card, mortgage interest rates tend to be lower than other debts, Becker said.  “Paying it off early sounds enticing, but your mortgage is the least of your debt worth,” she said. “It’s only wise if your other debts are paid off.”  If they are not, she suggests paying off your higher interest rate debts first before accelerating payments on your mortgage.  Even then, the mortgage can wait because retirement and emergency savings should also be intact, she said.

“You want to make sure you are putting away, so you have money to fall back on in case of job loss or illness; you’ll need that savings more than ever,” Becker said. You shouldn’t become destitute in order to make extra mortgage payments, she said.  While the math and facts support paying the minimum, financial decisions are sometimes more emotional than rational, said Amy Jo Lauber, a certified financial planner and president of Lauber Financial Planning in West Seneca.

“There are the financial factors which are clear, such as saving money because you’re paying less interest, but there are emotional factors that most people don’t know how to navigate,” Lauber said. “For example, some people simply hate having debt and, for them, I try to find a way for them to pay it off so they can be at peace.”  Hardy said he also doesn’t discourage clients who are eager to pay off their mortgages. He tries to explain how it might make more financial sense to pay it off over time, while encouraging them to put away for their retirement.
“In my experience, the biggest mistake people can make is putting off saving for their future in an effort to pay off debt,” he said. “It seems that for many people the debt doesn’t always go away as expected, and then they are faced with another problem, trying to save enough to retire when they are very late in the game.  “So for many clients, we might commit to a combination of paying over the minimum mortgage payment due, plus increasing retirement savings.”

An early payoff?

How paying an extra $50 a month
affects the cost of a 30-year mortgage
for $100,000 at 4 percent interest 30-year loan
Regular monthly payment: $456.33
Time until paid off: 30 years
Total interest paid: $52,531
30-year loan with $50 monthly prepayment
Monthly payment: $506.33
Time until paid off: 25 years, 2 months
Total interest paid: $40,782
Interest savings: $11,749
Posted on 9:29 AM | Categories:

Advisers Help Decide When to Fire an Accountant

Arden Dale for the Wall St. Journal writes:   When trouble crops up on a tax return, a taxpayer faces a dilemma: Is it better to fire the accountant or salvage the business relationship?   Plenty of accountants make errors on tax returns from time to time but most manage to remain on good terms with their affected clients. Make a big mistake or too many, however, and the tax pro can be out of a job.   Financial advisers often help to draw the line between an acceptable mistake and a firing offense. They may spot errors on a tax return or note that an accountant isn't up to preparing a more complicated return. Sometimes, they troubleshoot if the tax pro clearly has a conflict of interest or charges too much. 

"When we start seeing repetitive mistakes, or a misunderstanding of the tax strategy, that's the line where we would go to a client and bring up this conversation," said James Ciprich, a wealth adviser at RegentAtlantic, a fee-only advisory firm in Morristown, N.J., with $2.4 billion under management. 

Next week when he meets with a prospective client, Mr. Ciprich plans to bring up a concern about the man's accountant--raised by variable annuities in his IRA. While the investments offer a tax deduction, they carry large premiums and other expenses, and don't belong in the tax-deferred account. At first, Mr. Ciprich thought an insurance salesperson might be responsible. Then he learned the man's accountant is licensed to sell insurance, and draws a commission from the annuities. 

This tax season, the Internal Revenue Service has a letter-writing campaign to target tax preparers the agency says need to improve. In January, the agency sent letters to some 3,000 accountants and other tax advisers. It said 2011 returns they prepared had a lot of traits that typically indicate errors on Form 1040, Schedule C, used by businesses.
Texas adviser David Diesslin said the letters have created a stir among financial advisers whose clients are affected. Taxpayers either learned of the letters from the targeted accountants themselves, or received letters from the IRS, according to Mr. Diesslin, whose firm in Fort Worth manages $450 million. 

"It's something to watch and evaluate, but the jury is still out depending on the clients' particular situation," said Mr. Diesslin, citing the IRS letter campaign.  He applies what he calls his "three C's of a solid business relationship" when deciding whether a tax pro ought to be fired. If the person isn't creating value, communicating, or the relationship is not comfortable for the client, it's time to part ways. 

Clients of accountants who got the letters are at risk for penalties for inaccurate returns, the IRS said. The agency told recipients it will be "looking for improvements in future returns you prepare," and recommended that some of the accountants brush up on the tax rules through study with IRS-certified instruction.  Advisers have a vested interest in helping clients spot a problem accountant. A whole group of financial professionals can be threatened when one member isn't up to the job. For example, an accountant who can't accurately complete Form 706 to report an estate over $5 million is most likely not the right person to work with the estate attorney and other advisers who serve a client. 

"Financial advisers who see an accountant is screwing up should tell their client exactly what is wrong and get a second opinion from another accountant to confirm," said Bari Z. Weinberger, a divorce lawyer in New Jersey who sees a lot of tax errors in her line of business.
One woman fired her accountant after Ms. Weinberger pointed out that he had cost her $20,000 in taxes that she didn't owe. Though a divorce agreement said alimony would be nontaxable, the accountant had included it as part of the woman's taxable income.
"She fired her accountant and found someone to help her file an amended return--thereby recouping quite a refund," Ms. Weinberger said. 

Because taxes are complicated--and only get more so the more money a client has--financial advisers are quick to note that honest mistakes are inevitable. Nonetheless, there are plenty of unscrupulous tax preparers, along with the merely incompetent. Each year, the U.S. Justice Department brings to light an array of criminal behavior by tax professionals who prey on clients. 

Camico, a company in San Mateo, Calif., that insures accounting firms, see hundreds of complaints against accountants. Each year, some 8,000 CPA firms contact Camico about problem clients and engagements. About 400 of those cases result in claims, some of which end in settlements for millions of dollars.  Wealthy business owners are among those most likely to sue over tax advice, according to Ronald Parisi, executive vice president of risk management at Camico.
Posted on 9:29 AM | Categories:

Does the Federal Tax Code Favor Driving Over Other Modes?

for TSTC writes Complaints that transit is subsidized while roads “pay for themselves” have been proven again and again to be unfounded. But with taxes due in less than a month, Tri-State took a cursory look at available and recently-expired tax credits and deductions related to automobile and transit use in the federal tax code to see if the tax breaks being offered incentivized or had a bias towards automobile use. While we’re sustainable transportation advocates, not tax lawyers or accountants and information in this post does not constitute tax or legal advice, we did find that the federal tax code provides benefits to vehicle owners but offers limited incentives for taxpayers to take transit or bike.
(Note: Because we aren’t tax experts, readers should consult their tax advisers with respect to the availability of any of the benefits mentioned below.)
Current and Recently-Expired Credits and Deductions Associated with:
  • Owning or operating a vehicle:
    • Individuals who donate vehicles to charity can receive a tax deduction.
    • Individuals who are involved in an automobile crash that is not fully reimbursed by the other driver’s insurance and is not the individual’s fault may be able to deduct the unreimbursed amount.
    • Although recently expired, individuals could previously receive tax credits for the purchase or lease of certain fuel efficient vehicles and light trucks such as fuel cell vehicles, alternative fuel vehicles and hybrid vehicles. In addition, individuals can take a tax credit for qualified fuel cell vehicles serviced in 2012.
    • Individuals who drive to work are eligible to take up to $245/month in a pre-tax deduction to cover their parking expenses.
  • Commuting to work by transit/vanpool: 
    • As part of the deal to advert the fiscal cliff that passed in January, transit and vanpool riders can take up to $245/month in a pre-tax deduction to cover their commute expenses. The commuter tax benefit is a retroactive fix for 2012 (when the transit tax benefit was lessened from $230 to $125) and it is not permanent, being offered only until the end of 2013. If not made permanent, the transit tax benefit will revert to a lower level comparable to previous years. Employers of those who use transit/vanpool also benefit from this deduction.
    • Transit/vanpool riders can also take up to $245/month in a pre-tax deduction to pay for their parking expenses.
  • Commuting to work by bicycle:
    • An employee can be “reimbursed up to $20/month for reasonable expenses related to commuting by bicycle.” Employers of bicycling employees can also benefit from this pre-tax deduction. This reimbursement cannot be combined with any other benefit, however. For example, if one bikes and takes transit to work, one must choose one benefit over the other.
In addition, there are certain travel tax deductions available for both personal vehicle use and transit. Some examples include travelling for business purposes and medical appointments. However, these are “miscellaneous itemized deductions” and they are deductible only to the extent they exceed 2 percent of a taxpayer’s “adjusted gross income” for federal income tax purposes, so a taxpayer’s ability to claim these deductions may be limited.
Of course, many of these transit and vehicular tax breaks can be combined. Someone who takes the train  to work, has bought a hybrid vehicle and takes a bus to his medical appointments could (all IRS conditions being met) take the transit commuter benefit, the parking benefit, the fuel efficient vehicle tax credit (when this tax credit was in effect), and deduct the cost of the bus ticket to his doctor’s appointment. And certainly, encouraging Americans to purchase more environmentally-conscious vehicles — should they live in a transit desert — is not bad policy.  However, given the many benefits of vanpooling, riding transit or biking — to the environment, to drivers on the road, to the roads themselves, and, if one is biking, to one’s personal health and to healthcare costs for the community as a whole — it’s a wonder that our taxes don’t encourage these behaviors more.
 
For example, a commuter cannot take the bicycling reimbursement and commuter tax credit together. This doesn’t seem fair, given that some people bike to a transit station, or some may bike a few days a week and take transit the other days. 


As Congress begins discussions about reforming the tax code, the opportunity should be used to either create greater parity in the tax code for non-drivers or greater incentives to make smarter and more sustainable transportation choices.
Posted on 9:28 AM | Categories:

Seven States with No Income Tax

Mike Sauter for 247WallSt. writes: As the deadline for tax season approaches, the residents of seven states are going to have one less thing to worry about than the rest of the country. People who live and file taxes in these states will have to pay no state income tax, something that can cost upwards of a thousand dollars in other states.   While personal income tax is usually the largest source of tax-based revenue for states, there are other sources of revenue. Some of the states without income tax make up for the revenue they are missing through sales and corporate taxes. Other states simply spend less on services to keep a balanced budget. Using recently released tax collection numbers for 2011 from the Tax Foundation, 24/7 Wall St. reviewed the seven states where residents do not pay income tax.

In several of these states, the lower revenue from income tax is made up for in other ways. Alaska and Wyoming, neither of which charge a personal income tax, actually had the first- and third-highest tax revenue per capita, respectively, in 2011. In the case of Alaska, this is in large part due to the corporate income taxes it raises from the natural resources sector. The state collected more than $1,000 in corporate taxes per capita in 2011. No other state collected more than $450, and the average state collected just $129. In the case of Wyoming, the state collects the third-highest revenue per capita from sales tax.
 
Other states, however, are not offsetting the lower revenue from a lack of income tax with other taxes. Florida, Nevada and Texas are all among the bottom five states for revenue per capita. Because of their below-average revenue, spending in these states is particularly low. In 2011, state spending per capita was the fourth lowest in the country in Nevada, fifth lowest in Texas and the lowest in Florida — $4,441, compared to a national average of $6,427 per capita.
In the states with no income tax to maintain solid revenue, like Alaska and Wyoming, spending is — not surprisingly — quite high. Wyoming spent $9,986 per capita in 2011, the second highest in the country. Alaska spent $15,663, by far the most of any state.

Joseph Henchman, Vice President of Legal and State Projects at the Tax Foundation, explained that the trend of low revenue states spending less is not a product of a deliberate choice by these states to operate under a conservative budget. In states like Texas, Florida and Nevada, Henchman said in an interview with 24/7 Wall St., “The decision to have a frugal government probably came before the decision to have a lower tax system.” Unlike Alaska and Wyoming, these states have chosen to spend little per capita, and so tax less as a result.
To find the seven states that do not tax income, 24/7 Wall St. studied data provided by the Tax Foundation. These states do not tax wages earned by individuals, nor do they tax interest and dividend payments. Tax rates are the most recently available, and were provided by the Tax Foundation from its Facts and Figures 2013 report. Tax collection figures are from 2011, as are effective property tax rates. Figures on state expenditure are from the U.S. Census Bureau’s State Government Finances Summary: 2011.

1. Alaska > Tax collections per capita: $7,708 (the highest) > State revenue per capita: $17,630 (the highest) > State spending per capita: $15,663 (the highest) > Federal aid as a pct. of revenue: 24.0% (the lowest) > State sales tax rate: N/A
Despite having no income tax, Alaska actually collected more in taxes per capita than any other state, at $7,708 in fiscal 2011. Because it raised so much in taxes, Alaska had the highest per capita government expenditure of any state in the U.S. during 2011, exceeding $15,000. Additionally, while the state has no individual income tax, it did have the nation’s largest corporate income tax collections, $1,003 per capita. This was more than twice any other state. Tax collections from oil companies operating in the state are currently so high that Governor Sean Parnell is considering lowering taxes to promote increased production.

2. Florida > Tax collections per capita: $1,718 (7th lowest) > State revenue per capita: $3,974 (3rd lowest) > State spending per capita: $4,441 (the lowest) > Federal aid as a pct. of revenue: 36.9% (23rd highest) > State sales tax rate: 6.00% (16th highest)
In 2011, Florida brought in just $3,974 in revenue per resident, the third lowest of all states. Since revenue was lower than most, spending was also. Total expenditures per capita in 2011 was just $4,441, the lowest of all 50 states. That year, just $1,306 per capita was spent on education, among the lowest in the country. In 2011, under the leadership of Governor Rick Scott, the budget was cut further in areas like education and child welfare. Yet in February the Governor introduced a new budget of more than $74 billion that includes pay raises for teachers and state workers and expands health care services for the disabled.

3. Nevada > Tax collections per capita: $2,333 (25th lowest) > State revenue per capita: $3,848 (2nd lowest) > State spending per capita: $4,848 (4th lowest) > Federal aid as a pct. of revenue: 27.1% (5th lowest) > State sales tax rate: 6.85% (8th highest)
At 0.90% of assessed home value, Nevada’s effective property tax rate for 2011 was just below the national average of 1.12%. But after the housing crisis caused property values to tumble, local budgets have been strained by the loss of property taxes. This is especially troubling in a state with no income tax. The state’s revenues totaled just $3,848 per capita in 2011, less than all but one state. This was partly because it received less in government revenues than all but four others, at just over 27% in 2011. Additionally, as one of the nation’s most frugal spenders, Nevada did not need to raise much money. As of 2011, no state spent less on public welfare than Nevada’s $781 per capita.

4. South Dakota > Tax collections per capita: $1,682 (3rd lowest) > State revenue per capita: $5,028 (18th lowest) > State spending per capita: $5,459 (10th lowest) > Federal aid as a pct. of revenue: 45.6% (4th highest) > State sales tax rate: 4.00% (tied for 2nd lowest)
South Dakota only collected $1,682 in taxes per capita in 2011, lower than all but two states. Due to lower tax collections, the state had lower spending on government programs. In 2011, expenditures per capita were just $5,459, significantly less than the $6,427 spent on average by all states across the country. Education expenditures were just $1,578, the eighth lowest of all states and well below the $1,901 spent per capita across the U.S. South Dakota was also more deeply indebted than most states — debt per capita was $4,321, in the top third of all states.

5. Texas > Tax collections per capita: $1,696 (6th lowest) > State revenue per capita: $4,209 (5th lowest) > State spending per capita: $4,905 (5th lowest) > Federal aid as a pct. of revenue: 40.0% (11th highest) > State sales tax rate: 6.25% (13th highest)
Living in Texas can be light on the pocketbook. In addition to having no personal income tax, the cost of living in Texas was the seventh lowest in the country in the fourth quarter of 2012. The median household income in Texas in 2011 was $49,392, slightly lower than the $50,502 nationwide. Government spending in 2011 was just $4,905 per resident, the fifth lowest of all states. The state’s austerity in recent years may be showing signs of loosening, however. Texas legislators are writing a budget that beefs up spending in areas such as public schools and mental health, which have taken a beating in recent years.

6. Washington > Tax collections per capita: $2,566 (19th highest) > State revenue per capita: $5,156 (20th lowest) > State spending per capita: $6,735 (24th highest) > Federal aid as a pct. of revenue: 31.3% (10th lowest) > State sales tax rate: 6.50% (10th highest)
With no income tax, Washington relied heavily on its 6.5% sales tax, the nation’s 10th highest rate. This tactic has worked in the past: in 2011 the state raised $1,559 in sales tax revenue per resident, more than nearly all other states. This accounted for the majority of the $2,566 in taxes collected by the state that year. Localities often depend on the sales tax for revenue as well: the average local sales tax paid by a Washington resident is nearly 2.4%, bringing the total sales tax rate to nearly 9% — fourth highest in the United States. Although sales taxes are often considered to be especially costly for the poor, Washington makes up for this by having the nation’s highest minimum wage, at $9.19 an hour. It is also one of the nation’s stronger states for education spending, at $2,180 per capita in 2011.

7. Wyoming > Tax collections per capita: $4,347 (3rd highest) > State revenue per capita: $10,694 (2nd highest) > State spending per capita: $9,986 (2nd highest) > Federal aid as a pct. of revenue: 39.6% (12th highest) > State sales tax rate: 4.00% (tied for 2nd lowest)
Wyoming, in addition to not collecting any individual income taxes, is one of just four states that does not collect any corporate income tax. This has made it the most business-friendly state in the country for taxes, according to the Tax Foundation. Nevertheless, Wyoming has no problem collecting revenue compared to most of the other states. It generated $10,694 in revenue per capita in 2011, higher than all states except Alaska. As a large energy producer, the state is able to garner oil production taxes. Moreover, Wyoming generated $1,523 in state sales tax collections in 2011, higher than all but two other states. Expenditure per capita in 2011 was $9,986 the second highest of all states.
Posted on 9:28 AM | Categories:

SpaghettiOs, Weddings and Dog Clothes: Xero Accountant Survey Reveals Unique Small Business Tax Write-Offs / Provider of Online Accounting Software Offers Tips to Mitigate Tax Time Troubles for SMBs

Tax season has always been overwhelming for small business owners, which may explain why some small businesses (SMBs) have shown questionable judgment, claiming spaghettiOs, plastic surgery and undergarments as deductions, according to a new survey of accountants. This year poses even greater anxiety based on policy changes from Washington. In fact, the second annual survey from Xero, online accounting software, found that nearly one in four accountants say government regulations and tax policy had the biggest impact on small businesses this year -- more than one in 10 attribute this to uncertainty surrounding the "Fiscal Cliff." 
 
According to the 400 U.S. based accountants polled, the biggest mistake small business owners make is not keeping their financial records up-to-date, followed by a lack of understanding about their tax obligations. To best prepare for the changes ahead while staying on top of traditional challenges, small business owners must know their financials (and financial partners) better. 


"The most common question I'm asked is, 'How can I save more money? I'm scared of all the new tax increases,'" said Jody Padar, Xero partner and CEO and principal of the New Vision CPA Group. "I wish I could provide a universal answer, but the fact is no two businesses are alike and there are many factors involved in financial planning. What I can say in all confidence is to keep a close eye on your finances, find an accountant you like and trust, and see them at least once a month." 


The Cloud Saves You Time & Money Small businesses that employ this approach will not only save time, but most importantly, money. A full 72 percent of accountants feel they could provide better advice if given a real-time view into their client's finances, and nearly one third would be willing to offer discounted fees to sit down to a reconciled ledger. Fortunately, cloud accounting makes this possible, and it's on the rise. In 2013, 43 percent of accountants are planning on offering cloud services, an 11 percent increase from last year. 


"More and more small businesses are realizing the benefits of real-time access to their financials. And our survey provides validation on the importance of cloud-based offerings. We saw impressive adoption in 2012 and expect to continue to grow rapidly," said Jamie Sutherland, Xero President of U.S. Operations. 


Xero has a dedicated network of expert accountants who provide insight and best practices for small businesses. Below are tips from Xero's accounting partners who offer advice that SMBs can employ for tax time and throughout the year. 


TOP TAX TIPS FOR SMBS (FROM XERO ACCOUNTING PARTNERS SURVEYED)


Tip #1: Record Receipts Remotely: Establish and maintain an accurate system for storing your receipts. Today's cloud-storage technologies offer a gamut of easy and affordable ways for SMBs to keep track of their expenses. Xero even has a mobile receipt capture. One click from your camera on an iOS or Android device and bid adieu to the crumpled receipt.


Tip #2: Beautify Your Business: Section 179 of Small Business Expensing allows SMBs to deduct the full purchase price of qualifying equipment and/or software up to $500,000. This is a 2013 tax extension, but it was on the "chopping block." Take no chances come 2014 and bolster your business needs (and upgrade). 


Tip #3: Home Is Where the Smart Is: Starting in 2013, the home office deduction offers a simplified form that caps the home office deduction at $1,500. The new form is a great option for those who choose not to spend the time calculating home offices expenses, depreciation and carryovers of unused deductions. This is NOT a replacement of the traditional home office form. Taxpayers can still file the original form if their home office exceeds $1,500. 


Tip #4: Tax Changes for Tax Time Payroll Tax & Healthcare Tax: What SMBs NEED to know.


        --  Payroll: The American Taxpayer Relief Act did not extend the payroll
            tax, but the 2 percent "break" was only a couple of years old (2011
            & 2012). This change is more of an unfortunate recant, than a tax
            hike.
        --  Healthcare Tax(es): Under the Patient Protection and Affordable Care
            Act (PPACA), beginning in 2013, higher income taxpayers must start
            paying a 3.8 percent additional tax on Net Investment Income (NII).
            Additionally, high earners will incur an Additional Medicare Tax of
            0.9 percent on wage and/or self-employment.
        

Tip #5: Accounting Season Is Every Season: Make time for your accountant year-round, not just during tax season. Select an accountant with a fixed fee and value price that includes tax and accounting services. There is no excuse for improper planning, and proper financial counsel brings peace of mind and money. 


Tip #6: Money for the Taking: Out-of-pocket expenses landed as the number one overlooked deduction followed by auto expenses, according to Xero's survey. So track those miles, save those dinner receipts, and write off that iPhone 5 -- it will all add up in the end. 


For an infographic on the survey results please visit: http://xero.com/infographic/us-tax-2013
About the Survey Zogby Analytics was commissioned by Xero Limited to conduct an online survey of 400 accountants in the U.S. The survey was conducted from February 14 through February 21, 2013. Based on a confidence interval of 95 percent, the margin of error for 400 is +/- 5.0 percentage points. This means that all other things being equal, the identical survey repeated will have results within the margin of error 95 times out of 100.
Posted on 9:28 AM | Categories:

IRS issues guidelines on substitute tax forms in general

The IRS has issued general requirements and conditions for the development, printing, and approval of all substitute tax forms to be acceptable for filing in lieu of official IRS-produced and distributed forms. The IRS accepts quality substitute tax forms that are consistent with the official forms and that do not have an adverse impact on processing. The IRS Substitute Forms Program administers the formal acceptance and processing of these forms nationwide. While the program deals primarily with paper documents, it also interfaces with other processing and filing media, such as electronic filing. Only substitute forms conforming with these requirements will be accepted.

The guidance covers the following forms: (1) tax returns and their related forms and schedules; (2) worksheets as they appear in instruction packages; (3) applications for permission to file returns electronically and forms used as required documentation for electronically filed returns; (4) powers of attorney; (5) over-the-counter estimated tax payment vouchers; and (6) forms and schedules relating to partnerships, exempt organizations, and employee plans.
The guidance does not cover a number of forms, including Forms W-2, W-2c, W-3, W-3c, 941 and Schedule B, 1040-ES (OCR), 1041-ES (OCR), 1096, 1098 series, 1099 series, W-2G and 1042-S. It also does not cover requests for information or documentation initiated by the IRS, forms used internally by the IRS, state tax forms, forms developed by other agencies and general and specific instructions.
What’s new
The following changes have been made since the last revision.

  • Tax deductions and credits have been extended for tax year 2012. The following tax deductions and credits have been extended for tax year 2012 by the American Taxpayer Relief Act of 2012, P.L. 112-240: The election to deduct state and local sales taxes instead of state and local income taxes, Mortgage insurance premium deduction, The deduction for certain domestic production activities in Puerto Rico, Energy efficient appliance credit, Credit for employer differential wage payments, Credit for increasing research activities, Empowerment zone credit, Indian employment credit, Biodiesel and renewable diesel fuels credit
  • Qualified disability trust. For 2012, qualified disability trusts can claim an exemption of up to $3,800. The exemption is no longer phased out.
  • Bankruptcy estate filing threshold. For tax years beginning in 2012, the requirement to file a return for a bankruptcy estate applies only if gross income is at least $9,750.
  • Schedule K-1 (Form 1065). On the Schedule K-1 (Form 1065), we added new item 12 for the partnership to indicate whether the partner is a retirement plan (IRA/SEP/Keogh/etc.).
  • Principal Business Activity (PBA) Codes. In the instructions, the list of Principal Business Activity (PBA) Codes have been revised.
  • No separate payment card reporting requirements. Gross receipts received via payment card (credit and debit cards) and third party network payments are not separately reported on Form 1065 and Form 1120S.
  • Partners that are foreign governments under Code Sec. 892. On page 3 of the form, we added line 20 to Schedule B, asking the filer to enter the number of partners that are foreign governments under Code sec. 892.
  • Minor editorial changes were made as needed. (Rev. Proc. 2013-17, IRB 2013-11, 612, March 11, 2013.)
Posted on 9:27 AM | Categories: