Friday, April 5, 2013

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Posted on 8:16 AM | Categories:

Millions Of Americans Can Cut Their 2012 Tax Bills--And Don't Know It

Ashlea Ebeling for Forbes writes: Are you one of the 13.5 million Americans covered by a high deductible health insurance plan coupled with a Health Savings Account?  Pay attention.  You may still have a good way to cut your 2012 tax bill—and you probably don’t know about it. If you contributed less than the legal maximum to your HSA account through payroll deductions during 2012, you can still top out your 2012 contributions now and cut your 2012 taxes.
What? Your employer didn’t tell you about this? That’s not surprising, because you don’t make this after-year-end contribution through your employer. Instead, you send the money directly to the bank that holds the HSA account, just as you contribute directly to an individual retirement account. (If your HSA is administered through UnitedHealthcare and its Optum Bank,  you may have gotten, and ignored, an email explaining how you can do this. Even if you didn’t get an email, your HSA administrator should be happy to take your money directly. If you can’t find directions on its site for how to do this, call and ask.)
HSAs come with a unique triple tax benefit: you sock away money pretax, it grows tax free, and when you take money out to pay for medical expenses, it comes out tax free.  You can use HSA money to pay current medical bills or leave it growing tax free and use it tax free for uncovered medical and dental expenses in retirement.
“You can save a boatload of money in taxes,” says Paul Fronstin, director of health research with the Employee Benefits Research Institute. And yes, millions of folks have more room to contribute for 2012. For 2012, you and your employer combined can put a total of $6,250 pretax into your HSA if you have family coverage, or $3,100 if you’re covered as an individual. On top of that, if you’re 55 or older, you can put in another $1,000 for each year until you’re eligible for Medicare. Yet of those with individual insurance coverage, 15% contributed nothing to their HSAs in 2012 and 31% contributed less than $1,500, according to an EBRI report available here.  (For 2013, you can contribute up to $6,450 for family coverage or $3,250 for individual coverage.)
One reason this after-the-fact play is useful to many people is that if you’re on a tight budget, you might not have wanted to lock up too much money in advance in an HSA.  Your employer plan will define the rules around when and how frequently you can make changes in your payroll contributions going to your HSA, notes Maureen Fay, senior vice president in the Aon health & benefits consulting practice. But typically, you have to set your contributions before the start of each year (during “open enrollment”) and then can only make changes if you have a “life event” like getting married or having kids.
Fronstin offers up a real life example of how useful contributing after the end of the year can be. Back in the fall of 2011, during open enrollment, a single woman he knows elected to divert $100 a month of her salary into her HSA during  2012. But she ended up incurring $2,000 in out of pocket expenses in 2012–$800 more than what she had stashed away pretax. Now—before April 15, 2013–she can add the extra $800 to her HSA earmarking it as a 2012 contribution (again, you can do this online with most HSA administrators) and deduct an extra $800. What if she’s short on cash? She can turn around and request a distribution from her HSA for the $800 to cover the expenses she incurred out of pocket in 2012.
In effect, you’re funneling your own money through the account in order to get the tax break, much as you do with a flexible spending account. The big difference is that with an HSA, unlike an FSA, you have the option of leaving the money in the account because there is no “use-it-or-lose-it” rule as there is with FSAs  and with an HSA you have the option of topping up your contributions after the end of the year.
Whether you contribute via salary deferral during the year or in a lump sum now, the end tax result is the same—every dollar you put in reduces your federal income tax bite and usually your state income tax bite too. Even better, this is what’s known as an “”above the line” deduction, meaning it is claimed on the front page of your 1040, before you calculate your adjusted gross income. With a lower AGI you might qualify for other tax breaks that are phased out for higher income folks—benefits like the deduction for interest on student loans and the $2,500 American Opportunity College tax credit.
Important note: Even if you apply for an extension and don’t file your 2012 tax return until October, the contribution to your HSA for 2012 must be made by April 15.  You report your HSA contributions (both employer and direct) onForm 8889. (Instructions for the not-so-simple form are here.)
There’s yet another obscure option. You can direct some or all of your federal income tax refund into your health savings account by putting the routing and account number right on your tax return. For more details on splitting and directing your refund, see the instructions for IRS Form 8888.
Contributions that come in electronically from the IRS are counted in the year that they are received, so directing your 2012 tax refund into your HSA will count as a 2013 contribution. While this is an opportunity to boost your HSA contributions, be careful, warns Roy “Mr. HSA” Ranthun, who led the Treasury’s implementation of HSAs and now runs HSA Consulting Services. If you overfund your HSA, you must pay a 6% excise tax on excess contributions, although you can avoid the excess contribution penalty if you withdraw the excess contribution and earnings by the due date of your tax return, including extensions, for that year and report the earnings as income. You can download Ranthun’s “Common Sense Guide To HSAs” here for free.
Of course you get the biggest tax savings if you pay your deductibles out of pocket and leave the HSA money growing for years tax free. “If you took the time to set up an account, you should try to maximize it” says Jude Coard, a tax partner with Berdon LLP in New York, who sees HSAs growing in popularity among small business owners.
But not everyone has the cash flow to do that. So whether you’re looking for a long term tax shelter, or just to save a few bucks on taxes now, if you’ve got an HSA and room to contribute more for 2012, Uncle Sam has a special tax break for you.

Posted on 8:12 AM | Categories:

Avoid Tax Mistakes / Taxes Become Strategic for Financial Planning in 2013

Weston Financial writes: We believe tax strategies for financial and investment advice will be resurgent in 2013. With domestic and international markets still weighing global risks to economic growth, investors will increasingly want to take taxes into account in their financial planning strategies. They will need to be mindful of both transactional and longer-term tax planning, and they need to be wary of certain tax “rules of thumb” that often are inappropriate or (worse) just plain error.


Notwithstanding the progress Capitol Hill is (or isn’t) making regarding deficit reduction, investors should not assume that all is settled on the tax front. Even if revenue-neutral changes are all we see for the next few years, many so-called “loopholes” may be closed, or the tax laws “simplified”, on the rocky road to fiscal responsibility. These changes, while not clearly visible today, must be anticipated to some extent in structuring one’s financial affairs.
Integrating tax considerations into one’s financial affairs involves two broad types of tax strategies, transactional and long-term.
  • Transactional tax strategies cover the immediate tax implications of a proposed investment or transaction. Structuring a transaction requires an understanding not only of the tax laws and rates, but of the specifics of all aspects of the investor’s tax situation.
  • Long-range tax strategies address the long-range tax considerations that will affect the investor – varying income levels over time and with phase of life, asset withdrawal years and amounts, and general tax principles and structures. Structuring tax flexibility into one’s affairs must be considered, to adapt to possible law changes. Even though long-range tax forecasts are necessarily inexact, they often can alert the investor about the likelihood of facing differing tax environments over time, and suggest how to take advantage of these differences.
Both kinds of strategies may, over the long run, contribute significantly to an investor’s after-tax returns and, ultimately, to their net worth – even if hard to measure precisely.

Common tax errors

Sometimes it’s easier to learn from mistakes than from perfection. Below we’ve outlined eight categories of misguided tax thinking that we believe could be costly. Skim the key headings for the top-level points, and know that income tax planning guided by a competent advisor can reduce the odds of tripping over these potential pitfalls.
Focusing excessively on tax minimization or avoidance: It’s not what taxes you pay, but what you keep after taxes. Considerations of both risk and return can illustrate this:
  • Similar risk, different taxation of return: Sometimes it can make sense, for example, to hold high-grade taxable corporate bonds instead of tax-free municipal bonds, if the after-tax return is higher. Tax aversion for its own sake can be costly here.
  • Incurring increased risk to lower taxes: Waiting for long-term capital gains rates on concentrated positions (such as employer stock or options) can save on taxes, but requires holding the undiversified asset longer than desired. The extra risk may not be worth the tax savings.
Confusing your marginal, effective or average, and situational rates: Being unclear on how exactly you are taxed can lead to poor decision-making. Phil Michelson, for example, recently made news (and noise) about leaving California because he thought (incorrectly) that he was paying over 62% in taxes.
    Many flavors of confusion exist regarding tax rates.
  • Top stated “marginal” rate: Investors often err in understanding the tax rates they face. Often they believe that everything they earn is subject to the top marginal rates – ignoring the benefits of the lower brackets. Crossing into a higher bracket does not cause every dollar to be taxed at the higher bracket – only the excess over the bracket limit.
  • So – that last dollar of income won’t cause a dramatic increase in your total taxes. Don’t avoid earning it.
  • Average or effective rate: This concept combines the benefits of lower brackets, plus the impact of deductions. It divides total tax bill by gross income, and it is a much more sensible rate to think of when looking at total tax bite – for example, in gauging pre-tax retirement income needs. Focusing upon marginal rates would overstate your required income and distort your retirement planning.
  • Situational rates: Knowing the exact incremental tax from a proposed tax event requires knowing about virtually every aspect of your tax situation. There are many eccentricities in the tax law. Do not make assumptions, or you may face an April surprise – complete with interest and penalties.
Below are a few examples of situational rates that might influence your financial decision-making – or at least your tax payments:
  • Itemized deduction phase-outs: Essentially a surtax on income, capped at times by the level of certain deductions. Don’t decrease your deductions to avoid this – it won’t generally work, especially if your state has an income tax or you own property.
  • Multiple states: If you are subject to taxes in more than one state, ignoring income allocation rules could cause your state income taxes to be higher than necessary.
  • Kiddie tax and related: Gifting investment assets to children may not spare them being taxed at your rates. Similarly, trust tax brackets (steeper than individual brackets) may make holding back distributions tax-disadvantaged (more below under “tax location”).
Creating capital gains or losses without a non-tax purpose: Investors with losses often ask whether they should create gains to consume carry-forward losses. The general answer is “no” (there are exceptions for, e.g., grantor trusts and surviving spouses). Even if tax rates are rising a bit, at least four factors mitigate against this – 1) the losses might well be used to shelter gains caused by ordinary investment activity in a few years, 2) the gains might never otherwise be realized – either through step-up in basis, gift to charity, or other circumstances, 3) selling and then buying back restarts the holding period (you’re short-term for another year), 4) selling and repurchasing can cause transaction costs and fees, and (5) it doesn’t reduce your taxes by even a single dollar.
The opposite strategy, creating losses by selling and then repurchasing different investments (to avoid the wash-sale rule), can be beneficial but similarly is not universally appropriate. You may be forced to repurchase investments that are your second choice, simply because you sold during a dip; you will restart the holding period, and may create transaction costs; and you may be temporarily uninvested during the transaction, thus missing market participation.
Failing to adequately consider tax location in funding or withdrawing from accounts: Look at your whole tax structure, over time, in managing your portfolio – taxable accounts, IRAs and qualified plans, and Roth IRAs. Consider creating new tax-advantaged investment locations, such as cost-efficient variable annuities or charitable remainder trusts if they fit with your goals, liquidity requirements, and resource levels. Some examples:
  • Should growth assets always be placed in IRAs and 401(k)’s? These are long-term accounts, and so the thinking is that long-term assets such as equities are appropriate. But they convert all forms of income to ordinary income, taxed at higher rates - eventually. So, if you have the ability to hold some of your growth assets in a taxable account (where only the dividends are taxed, until sale) and your income-oriented investments in the taxdeferred vehicle, year-to-year you may be keeping more of your portfolio. Again, this is situational and depends upon your exact circumstances.
  • Should you always delay IRA withdrawals in favor of drawing down taxable accounts? You may experiencelow-income years that would result in low-tax withdrawals from IRAs and the like. For example, in the years immediately after retirement but before you start taking Social Security, it might be worth drawing on a large IRA – to avoid higher taxation later.
  • Should income from trusts be accumulated? Trusts allocate the taxation of income between the trust and the beneficiary. They reach the highest brackets in 2013 at $11,950 of income, at which point the 39.6% rate, plus the 3.8% for net investment income, are triggered.
    Some trusts allow for income to be accumulated, instead of distributed. While this may at times seem wise in order to prevent the beneficiary from “squandering” the distribution, it costs the beneficiary in the long run, if the beneficiary is in a lower tax bracket, as it may “squander” tax dollars. Consider alternative methods of regulating trust income.
Failing to look at taxes over multiple years: This question pertains to the timing of income recognition, the creation of deductions, and the timing of payments. Generally you’ll want to minimize total tax over the multi-year period, not\ simply the current year’s taxes.
  • Deferring income and its taxation isn’t always best. Sure, if receipt of income is delayed (e.g. from an IRA distribution or sale of an asset), your taxes on the current year are also delayed. But – will it cost you less in that later year? Taxation now may be cheaper.
  • Accelerating deductions isn’t always best, either. Accelerating deductions will generally lower your taxes for the current year. But those deductions, if they can be delayed, may prove more valuable in a later year. In particular, if the deduction in question isn’t allowed for the alternative minimum tax (e.g. state estimated income tax payments), and you are subject to the alternative minimum tax in the current year, generally you should delay payment of that item.
  • Permanent or timing difference: Some tax impacts (such as the adjustment for incentive stock option premium) go away over time. Thus, a current-year increase may be more than offset by decreases in later years, or at the point of sale.
  • Estimated taxes and safe harbor rules: Your minimum tax payment requirements are based upon your taxes for either the current year or the prior year – whichever is lower. While not technically changing the amount of tax due, paying too fast means you lose income on the prepayment – while paying too slowly costs you “interest” (technically called penalties) on the tardy payments.
Coordinate your tax payments with these requirements – and with considerations relating to timing of taking deductions, as discussed above.
Failing to keep current on tax laws: It’s hard to keep current on every new law, and then to know if it’s going to apply to you. Take for example, the new tax on net investment income (NII) of 3.8% when NII causes modified adjusted gross income to exceed $250,000 for a couple filing jointly. You may think this doesn’t apply to you generally, but there could be years where, due to special events such as sale of a rental property, or large severance pay, or big bonus, that you suddenly find you are over that line – and the NII tax kicks in.
If you can’t keep up with it all – hire an advisor who can do it for you.
Failure to perform enough detailed record-keeping and tracking: While not very exciting, there are some areas where taxpayers can easily leave money on the table if they don’t track some key details. Two examples: 
  • Non-deductible IRA contributions: Improper tracking exposes the taxpayer to higher federal and state taxes later on.
  • Alternative minimum tax basis: Most commonly missed relating to incentive stock options, ignoring this can cost the taxpayer when the stock acquired is finally sold.
Pursuing one enticing tax planning idea when other strategies may be superior: Sometimes the latest device or rule, or one that’s about to go away (pressure to use it while it lasts!), isn’t your best approach. Take, for example, direct IRA charitable rollovers for individuals subject to required minimum distributions (i.e. over age 70 ½). These rollovers allow (through the end of 2013) a direct payment from your IRA to charities, without the payment counting as either income or deduction. Sometimes this direct charitable rollover is best, but sometimes other strategies (e.g. contribution of appreciated property) are superior, because you get to give away the unrealized gain while keeping the deduction. Check out the differing approaches and find the one that maximizes your tax benefits in your specific situation.
Tax planning, over multiple years, working with an experienced tax advisor, can help avoid these mistakes. Do not let the complexity paralyze you – there are benefits to acting, even under uncertainty. The interactions of these different changes are complicated, and the exact impact is difficult to estimate. Planning now can only open up possibilities.
Posted on 8:12 AM | Categories:

IRS Tax Q&A: Federal law treats same-sex couples different


USA Today writes: Question: I live in Washington state, where gay marriage is legal, we have no state income tax, and we are a community property state. My partner and I have been together for 12 years, but we have not yet converted our domestic partnership to marriage since it became legal in December. In previous years we have both filed our federal returns as single, but this year we bought a house together and we are wondering what the proper way would be for us to file our federal income tax?
Annette Nellen, CPA Answers: Federal law does not treat same-sex or registered domestic partners (RDPs) who are married under state law as married. Thus, such couples may not file their federal income tax return as married filing jointly (MFJ) or as married filing separately (MFS). So, being married under state law will not change your filing status under federal law.
Because you live in Washington state though, being married or RDPs changes how much income you each report on your federal returns. The IRS will follow state community property laws and has provided guidance for RDPs and same-sex couples in three such states: California, Nevada and Washington. 
Basically, spouses or RDPs in these states split their community property income, with each spouse or partner reporting half of it on their federal returns. The IRS has provided several FAQs, as well as Publication 555, and Form 8958, to help in determining how to report community property income (as well as deductions and credits) on each spouse's federal tax return.
You each still file a separate return (not a joint return). Note that there could be changes to the filing rules depending on the outcome of the U.S. Supreme Court's decision on the constitutionality of the Defense of Marriage Act (DOMA).
For the mortgage interest, if you are married or RDPs in Washington, you can show the split of the mortgage interest on Form 8958 (and report your share on yourSchedule A, with a reference to "See Form 8958"). If you are not RDPs or a married couple in Washington, you each determine your share of the mortgage interest and you each deduct your share that you paid.
One of you likely received a Form 1098, Mortgage Interest Statement, with only one name and Social Security Number on it. The IRS suggests that the other payor attach a statement to their return explaining that they paid part of that Form 1098 amount and provide the name and address of the person who received the Form 1098, and how much of the mortgage interest each owner paid. On Schedule A, Line 11 for mortgage interest, add "See attached" so the IRS knows the statement explaining the interest amount is on the return (since the IRS does not have a Form 1098 for that owner). For details, see IRS Publication 936, page 9. For more information:
Annette Nellen, CPA
San Jose State University, San Jose, Calif.

Posted on 8:12 AM | Categories:

How does IRS check unpaid taxes?

Avvo.com is the web's largest legal Q&A forum, directory and legal marketplace connecting hundreds of thousands of consumers and lawyers every month.  Avvo writes: My friend began paying taxes last year - he owes for 10 years back, but he just paid back for the last 3 years. He works as a self employee and earning 40-80 K/year. What are the chances they are going to catch him if they ever will ? How come they did not noticed 10 years of unpaid taxes and 1099 forms people gave him every year? Couldn't they see by his SSN there are some missing taxes of past years?How does IRS check for such a delinquency?


Tax Lawyer #1 Response: The IRS receives 1099 reports for independent contractors. As a self-employed individual, your friend may not have received 1099s. Many companies fail to properly follow the 1099 regulations and submit reporting to the IRS. If he did receive these forms, the IRS would have a record of it. The Statute of Limitations on Collections is 10 years from the date of filing. Since he has not filed, the statute has not begun to run. This is why the IRS may not have come after him on the deficiency yet -- they have all the time in the world. 


Tax Lawyer #2  Response:  Never second guess the IRS. They hold all the cards and can ignore or suddenly take actions as they please.


Tax Lawyer #3 Response:  Giving advice at second-hand is always perilous, so your friend should check with his own competent local tax adviser(s) on his case - he definitely should not just do it himself and not expect some further issues down the road.  That being said, your friend should consider also filing his returns, and paying the taxes, penalties and interest on those returns, for the remaining 3 years before the 3 years he's already filed and paid (assuming that he did file his returns for the past 3 years as well as just paying the taxes). The reason for this is that, as a general matter, the IRS has an administrative policy of only requiring nonfilers to file the last 6 years of delinquent returns; there are exceptions and this is a discretionary policy so there are no guarantees that they won't go further back, but starting with the last 6 years is usually a good idea). Provided your friend's case is as simple as you describe and he didn't engage in any tax fraud or tax evasion, the IRS will in all likelihood only expect the last 6 years' worth of delinquent returns (and payment of the taxes, of course). 


As for why the IRS hasn't come after your friend so far: who knows. Why the IRS comes after some people but not others, even when they're in similar situations, is one of the great mysteries of life. Rather than questioning that, however, your friend should be taking advantage of that fact to get his returns in and taxes paid before the IRS comes looking for him. Once the IRS has come looking for a taxpayer, it becomes harder to work things out with the IRS if, for example, a taxpayer needs a payment plan or wants to make an offer in compromise; the collections people at the IRS will also be less sympathetic. 

So, bottom line: congratulations to your friend for starting to get his tax-house in order, but he needs to carry through with that momentum and finish things by, at the least, filing and paying for the other 3 years he didn't do already. Finally, your friend needs to make sure that he stays in compliance going forward and files his future returns on time and pays his taxes on time - including estimated taxes that have to be paid during the year - because the IRS will certainly monitor, and may audit, his returns for the next few years to make sure that he stays in compliance.
Posted on 8:11 AM | Categories:

What are the pros/cons of doing my own tax return?

Claudia Buck for the SacBee writes:  Question: What are the advantages or disadvantages to doing your own taxes electronically rather than going to a professional tax preparer?
- Donald
Sacramento
Answer: First, a disclaimer: I'm biased. I make my living providing tax planning and tax preparation services and have done so for over 25 years. Before that I spent 6 years auditing income tax returns for the IRS.  That being said, let's start with the advantages of preparing and filing your own tax returns electronically. I am assuming you mean using the IRS' free tax-filing service (http://www.irs.gov/uac/Free-File:-Do-Your-Federal-Taxes-for-Free) and the FTB's CalFile option (https://www.ftb.ca.gov/individuals/efile/allsoftware.shtml): 
The main advantage: It's free.
Now let's talk about the disadvantages:
-- Unless your taxes are very simple (ie. you are single, you don't have any children, your only income is from wages, you don't have any deductible expenditures and didn't pay any education-related expenses), you run the risk of making costly mistakes without knowing it.
--If your taxes are not extremely simple, you are liable to spend an inordinate amount of time figuring out how to prepare your return.
--You are liable to miss tax saving deductions and credits without knowing it.
--If you have questions, you either have to try finding the answers yourself or call the IRS and FTB tax help lines, which this time of year means spending lots of time on hold. This assumes you know what questions to ask.
--If you receive a notice from the IRS or FTB regarding your return after you have filed it, you have to figure out what the notice means and how to respond to it.
--Income tax has its own language. Words that have one meaning in general usage may mean something entirely different in the world of income taxation. What you think you know, you may not know.
Here are a few advantages of using a professional tax preparer:
--You get the benefit of his/her training and experience to prepare your return as timely as possible.
--You reduce the chance of errors when using an experienced, well-trained tax professional.
--You reduce the possibility of missing valuable deductions or credits that might legitimately lower yourtax liability.
--You may get some suggestions about how to save taxes going forward that you might not have known about.
--You have someone to ask questions.
--If you receive a notice from the IRS or FTB regarding your tax return, you have someone knowledgeable to deal with it on your behalf.

So what are the potential disadvantages of using a professional tax preparer?
--You have to pay fees.
--You have to decide who to use, which can be daunting since professional tax preparers range from unlicensed individuals to multi-national accounting firms.
--You face the possibility of using a bad preparer - or a good preparer who makes an error preparing your return.
Almost 60 percent of people filing federal income tax returns use a tax preparer, according to the IRS (Publication 4822, Taxpayer Filing Attribute Report). Except in fewer and fewer cases, there is no such thing as a simple income tax return, given the growing complexity of this country's tax laws. Throw in California's 200-plus differences from the federal rules and you face a tax-filing landscape full of traps for the unwary.

Read more here: http://blogs.sacbee.com/personal-finance-ask-the-experts/2013/04/what-are-the-pros-and-cons-of-doing-my-own-tax-return.html#storylink=cpy
Posted on 8:10 AM | Categories:

Can You Write Off Taxes on a House Without a Mortgage?

Michael Marz for Demand Media writes: Most homeowners who are paying off a mortgage take advantage of the mortgage interest and real estate tax deductions. However, the two deductions are unrelated, and there's no reason why you can't take one without the other. So if your home is paid off already, you might save some money by writing off your local property taxes if it's beneficial for you to itemize instead of taking the standard deduction.


DEDUCTIBLE PROPERTY TAXES

In most jurisdictions, the local government charges homeowners a property tax that's calculated based on a uniform rate multiplied by each home's value. If you pay these property taxes on your home each year, and you don't receive special services or privileges for it, you can deduct all payments on your federal tax return each year. The only other requirement for taking the deduction is that you be the person who is legally responsible for the tax payments. Therefore, if you pay the property taxes for a friend, relative or even your landlord if it's part of a lease agreement, you can't take the deduction.

NONDEDUCTIBLE TAXES

Other taxes or fees you pay to your local government that don't qualify for the deduction might be bundled with your property tax payments, so when preparing your tax return, you might need to determine which payments are deductible property taxes and which are not. Commonly, these payments will be for things such as garbage collection and water usage fees. You might also make payments to your local government for special projects that actually increase the value of your home, which are also nondeductible. For example, if your city decides to build a sidewalk on your block and assesses a one-time tax on you and your neighbors, you can't include the payment in your property tax deduction.

YEAR OF SALE

If you just purchased a house for cash, inherited it or are ready to put it up for sale, the property taxes that you're responsible for paying in the first or last year of ownership can still be deducted. However, regardless of any agreement you have with the buyer or seller to pay the property taxes during any period you're not the legal owner, none of those payments are deductible to you. The tax law only allows the deduction for those months you're liable for the property tax payments. Therefore, if the property taxes on your house are $1,000 per month, and you transfer title to the home on September 1, you can only deduct $8,000, even if you actually pay for the full year.

SCHEDULE A REQUIRED

Because the only way to take the deduction for property taxes is on Schedule A, you must elect to itemize your deductions. But depending on how much your property taxes are and what your filing status is, the standard deduction might end up saving you more in tax than itemizing. And in the absence of a mortgage, which for many taxpayers is the source of a substantial itemized deduction, you might need other deductible expenses such as charitable contributions, job-related expenses and state income taxes to bring the total on Schedule A high enough to surpass the standard deduction.
Posted on 8:09 AM | Categories:

An Investor Ponders the Payroll Market (Paychex, ADP, & Intuit) and writes "5 Reasons You Will Like Paychex" (from an investment standpoint)

This is kind of interesting, a different assessment of the Accounting Payroll market with the big players.  ,  a member of The Motley Fool Blog Network  (entries represent the personal opinion of the blogger and are not formally edited)  writes: Paychex (NASDAQ: PAYX) is a leading provider of payroll, human resource and benefits outsourcing to over 567,000 small to medium sized business. Needless to say, this business is largely dependent on the economic recovery and unemployment rate. In the last couple of years, lower employment growth and interest rates have been headwinds for the company. 

However, just like the economy, Paychex is moving ahead slowly, corroborated by its 3Q12 results. In my opinion, it can be considered a good long-term investment with several years of growth ahead, as the economy and unemployment rate improve. Let me quickly go through five points that support my thesis.


Future Growth
Payroll is an integral part of any company; as the economy improves businesses grow and there is an increasing urge to outsource the payroll duty so that companies can focus on growth.
Paychex’s core business, payroll service, just like the economy, has been witnessing slow growth. In 3Q12, the segment’s revenue grew 2% vs. 1% in the previous quarter. This was mainly due to an increase in checks per payroll of 2.3%, higher than 1.8% in 3Q11. As the unemployment rate falls and the overall economy improves, this segment will definitely be poised for future growth.
Its smaller business, human resource services (30% of total income), grew 10% in 3Q12 and 13% in FY11. This segment has been witnessing strong growth in the last few quarters due to new business lines, and I believe it will continue be a strong driver of future profits.
Another inconspicuous factor that affects Paychex’s business are the current interest rates. Let me explain - Paychex withholds money, which is yet to be remitted to tax or regulatory agencies or client’s employees. As it holds this money, it earns interest on these reserves. Currently, interest rates are at an all time low, resulting in flat interest on clients' funds in 3Q12. As interest rates rise, this can prove to be another revenue generating opportunity.
Focus on Small Business
Paychex is considered to be the bellwether of small and midsized companies. It caters to businesses with less than 100 employees and is a well-known payroll processor for these businesses. One may consider this as a hindrance, but Paychex can stand to gain as small businesses generally grow at a higher rate. Further, the Affordable Care Act, which requires small and midsized businesses to have ready access to payroll data, will prove to be a good opportunity for Paychex.
Dividend
Currently, Paychex has a strong dividend yield of 4% with a payout ratio of 84%. This is supported by its pristine balance sheet and strong cash flow generation.
Balance Sheet
Paychex’s balance is debt-free with $570 million cash. Further, it has been able to increase its free cash flow in eight of the last 10 years, which has enabled it to increase its dividend in seven of the last 10 years (lower cash flows and flat dividends were witnessed during the recessionary period of 2008-2010).
Competitive Advantage
Paychex faces strong competition from Automatic Data Processing (NASDAQ: ADP) and Intuit (NASDAQ: INTU).
Automatic Data Processing is a much larger company and handles companies with size and revenue 10 times that of Paychex. It also has a strong dealer services segment, which caters to automotive and truck dealers across the world. Despite the recession, both companies have been able to increase their earnings, but Automatic Data Processing has outperformed Paychex. Paychex’s dividends have increased by an average 4% in the last five years whereas Automatic Data Processing’s dividends have increased 10% (it also paid a special dividend of $4.9 in 2007). The reason for this dividend growth is the strong growth in its EPS from $2.34 in FY08 to $2.82 in FY12, partly on account of share buybacks.
But I do not consider Automatic Data Processing a serious threat to Paychex, mainly due to its target customers. Automatic Data Processing generally caters to bigger companies, while Paychex is well known among the small and midsized companies. Further, competition in the small and midsized business is relatively lower, and Paychex is already a market leader. Paychex also has a competitive advantage with respect to its margins. Despite its higher revenues, Automatic Data Processing has a much lower operating margin (18% in FY12) vs. Paychex (38% in FY12) and Intuit (28% in FY12).
The latest and strongest threat to Paychex is from companies that develop do-it-yourself payroll software and equipment. Intuit, which is the largest provider of online payroll service with their QuickBooks Payroll solution, is one of them. The online software is available for just $20 on a monthly basis and is used by over 1 million companies. It has increased its revenue in the last five years by CAGR of 6% vs. Automatic Data Processing’s 4% and Paychex’s 1.5%. But I believe Paychex has a competitive advantage, as there will still be some companies that will outsource their payroll requirements due to increasing compliance and regulatory requirements.
Conclusion
Given the fact that changing from one processing vendor to another is a burdensome process, Paychex’s market share remains intact. Further, Paychex has a strong retention rate (80% in FY12), which gives it pricing power over its customers as well as a downside protection. This way it can make modest price increases during good times as well as maintain its pricing during recessionary periods.
As explained above, Paychex has many factors working in its favor, and its low PE is another feather in the hat. Hence, take advantage of the current run in the stock and hold it for the long run.
Posted on 8:09 AM | Categories:

Target: Getting to the 0% tax bracket in retirement / The 3 Types of Tax Portfolios that Exist Now.

Susan L Moore Vault for Inside Tucson Business writes: Retirement is for the rest of your life. The only thing better than a healthy, happy retirement is a tax-free retirement.

With government spending seeming to have no limits, the consequences of the future tax burden are severe. Targeting a low or zero percent tax bracket for retirement will let you enjoy your own money.

First, let’s examine the three types of tax portfolios that exist now.
1. The taxable portfolio: Consists of investments such as stocks, bonds, mutual funds, money market and CDs. Typically owners pay taxes on these investments every year as they grow. So, why have them? They provide liquidity needed for emergencies or unexpected circumstances. Financial experts generally agree you should have about six months of funds to cover unexpected expenses.
2. Tax deferred portfolio: Taxed as ordinary income upon distribution, it will be most effected by the increase in tax rates over time. Tax deferred portfolios consist of:
• IRA. If your goal is the zero percent tax bracket, allowing your IRA to grow unchecked can thwart efforts to reach the zero percent tax bracket. Ask you CPA what your standard deduction is and what your personal exemptions are.
Let’s say it totals $20,000. You could therefore withdraw up to $20,000 from your IRA without incurring taxes as long as you are at least age 59½.
A married couple retiring today (absent any other tax deductions) has a standard deduction of $11,900 (2012 tax year) and personal exemptions of $3,800 each. Therefore, they can withdraw up to $19,500 from their IRA without paying taxes. Determine how many years you have to retirement. Add 3 percent for inflation to target the amount of money you want to have in your IRA to offset what you will be required to start taking at age 70½ when required minimum distributions begin. If you anticipate your distributions will be higher than the combined standard deduction and personal exemptions, consider systematically converting portions of your IRA to a Roth. Yes, you will pay taxes now but it will enable you to have a tax-free distribution at retirement.
• 401(k). Because many employees receive matches from their employers, it’s easy for them to routinely allocate all of their retirement dollars to this account. By growing this account through excessive contributions, you compound the same tax problem experienced with the IRA.
The solution is to consider contributing up to the employer match but not more. The downside is you will lose tax deductions while working. However, the purpose of a retirement account is not to receive tax deductions but to maximize cash flow in retirement, when you can least afford to pay taxes.
3. The tax-free portfolio. There are two qualifications, it must actually be tax-free from federal, state and capital gains taxes and distributions from the portfolio should not count against the Social Security tax threshold. As a caveat, municipal bonds, widely renowned as tax-free investments, fail on both counts. So, what’s left?
Roth IRA
• Contributions up to basis can be withdrawn pre-59½ with no penalty
• Growth on contributions can be withdrawn tax free after 59½
• Distributions do not cause Social Security to be taxed
• There are no required minimum distributions at 70½.
• You may contribute $5,000 per year under age 50 and $6,500 age 50 or older to your Roth
• You can convert any amount of your existing 401(k) or IRA to a Roth at any age
Cash Value Life Insurance
• Death benefit passes to heirs tax-free
• Dollars can be distributed pre-59½ without penalty
• There are no required minimum distributions at 70½
• Contributions are tax-deferred
• Distributions can be tax free and cost free through a combination of withdrawals to basis and zero percent loans on growth.
• There are no contribution limits
• There are no income limitations
• Distributions do not cause Social Security to be taxed
A successful accumulation strategy will enable you to draw tax-free streams of income from a Roth IRA, Cash Value Life Insurance and a traditional IRA (up to the standard deduction and personal exemptions) as well as Social Security. That should put in the zero percent tax bracket, giving you peace of mind and protection even in the fact of higher taxes in the future.
Posted on 8:09 AM | Categories:

Do Just About Anything with FreshBooks for iPhone (small business & freelancer financial management)


Joe Casabona for AppStorm.net writes: In my early days of freelancing, I ran a pretty simple operation. Most of my clients were friends and my expenses amounted to less than the standard deduction (in the USA at least). I used an Excel sheet for both my invoices and my expenses. Then things started to pick up a bit and I realized that I needed something a little more robust than a spreadsheet.

A friend of mine introduced me to FreshBooks and I never looked back. It’s great invoicing software that added expense tracking shortly after I joined, as well as a slew of other features. The only thing they were really missing was a good mobile app. Well recently, that changed, too, with FreshBooks Cloud Accounting.
The Basics
It make have taken them a while to get there, but the FreshBooks Cloud Accounting app for the iPhone is rock solid. It’s always a disappointment when you get an official mobile app that doesn’t do it’s best to mimic the “full site” experience; FreshBooks for iPhone is far from disappointing.
Freshbooks Intro and Home Screens
Freshbooks Intro and Home Screens
2ndSite Inc, the creators of FreshBooks, managed to include all of the functionality the webapp has to offer, and even better, they did it in a very well designed, user friendly way. Let’s take a look.

Clients & Invoicing

Let’s start with the main attraction: creating and managing invoices. When you first open the app, you’re brought to a screen that has a set of icons on it as well as some information regarding outstanding invoices and notifications. The first is for Invoicing. Press that and you’re taken to a list of all of your active invoices, with easy ways to view archived and even deleted invoices. You can press an invoice to manage it.
Invoice List and Single View
Invoice List and Single View
From the invoice viewing screen you can edit the invoice, delete it, enter payments and even resend it. It’s pretty incredible that there is no functionality lost here from web to mobile. If you go back to the Invoice listing page, you can even create new invoices. This also gives you the ability to do everything you can do from the web interface.
Create Invoices and Clients
Create Invoices and Clients
Speaking of clients, if we head back out to the Home screen and press the Clients icon, we’ll get a similar experience to the one we get with Invoices: very clean, easy to use and with no functionailty lost.
We can view a list of all of our clients, individual clients (including their outstanding balance) and we have the ability to create new invoices, estimates and projects right from the Client’s screen. We also have the ability to add new clients.
Single Client Listing and Create a New Client
Single Client Listing and Create a New Client
A really nice touch with the Add New Clients screen is that you can import contacts right from your iPhone.

Estimates

Closely related to Invoices are Estimates, which allow you to easily send and manage quotes. They function the same exact way as Invoices, except that if an Estimate is accepted, you can mark it as such and convert it to an invoice.
I should note that this is not a real estimate (but I wish it was).
I should note that this is not a real estimate (but I wish it was).

Projects & Time Tracking

FreshBooks also gives you the ability to manage projects and track time. Much like the rest of the app, Projects will present you with a list of your projects. You also see how much of the project is complete and how many unbilled hours you have. Selecting a project will bring up more information, as well as the ability to edit, delete, Track Time or even generate an invoice.
View Projects
View Projects
Under the Track Time you will see a list of all the individual times you’ve tracked as well as what project they’re associated with. There is also, of-course, a timer that allows you to track time right from the app.
Time Tracker (or timer, as some might call it).
Time Tracker (or timer, as some might call it).

Expenses

Expenses might be my favorite part of the entire app. On the surface, it’s got the familiar use cases as the other sections: View all, view one, delete, etc. You can even assign an expense to a client.
View and Add Expenses
View and Add Expenses
The real fun comes with recording an expense. I may not have mentioned it up until this point, but I really appreciate that when you’re using fields for pricing, FreshBooks brings up a numberpad and not the keyboard. It makes input a lot easier.
Who doesn't love the movies?
Who doesn’t love the movies?
When you add a new expense, you can add all of the usual things: price, category, taxes, notes, etc. However, unique to the mobile app, you can also add a photo of the receipt. You can do this either by taking a photo or choosing one from your library. I thought this was an incredibly nice touch that really shows the developers were thinking about their users and the platform on which they were developing.

Reports

There is one more main icon, which is labeled Reports. Smartly, the developers have chosen (in this version at least) to recommend that the user views reports on a computer. There can be a lot of information in those reports and viewing on a small screen might get annoying. However, the developers do give the user two options: Launch Safari anyway, or have the reports emailed to them. Once again, I think this was a nice touch as it makes viewing reports a few steps easier.
Reports Screen
Reports Screen

Conclusion

If you couldn’t guess by now, I think the FreshBooks Cloud Accounting app is absolutely fantastic. It is well designed, easy to use, and doesn’t cut any corners. All of the functionality you can do on the web you can do in the app. That is not an easy feat and the developers should really be commended for it. I honestly don’t know how this app can get any better. If you use FreshBooks, this app is a must!
Posted on 8:08 AM | Categories: