Sunday, May 26, 2013

Do Deductions Trigger an Audit?

Tom Herman for the Wall St. Journal writes:  Q:Your recent article in The Wall Street Journal Sunday noted the audit likelihood based on income level. However, I am curious as to audit likelihood based on whether one files using itemized deductions versus the standard deduction.
J.D., Fredericksburg, Texas
A:It may be tempting to assume that you never have to worry about getting audited as long as you claim the standard deduction, instead of itemizing. After all, the theory goes, most people who take the standard deduction aren't the big fish with complex returns that the Internal Revenue Service is most likely to scrutinize.
But there can be many other reasons for an IRS audit.
Audits "certainly do take place for non-itemizers as well," says an IRS spokesman. "About two out of three taxpayers claim the standard deduction, but that doesn't mean there can't be other issues on a return related to various types of income—business or investment income, for example, or various tax credits claimed."
As I mentioned in a recent column, the IRS uses many filters and tests to decide which individual income-tax returns to audit. Among them is "document matching." The IRS compares information reported by taxpayers on their returns against what is reported separately to the government by employers, financial institutions and others.
If there is a significant "mismatch," or if you didn't report taxable income, be prepared for IRS questions. That's the case whether or not you take the standard deduction.
There could be many other reasons for an IRS audit. For example, the IRS might pick your return based on a tip from an informant claiming you omitted taxable income. Or small-business owners might get audited for claiming questionable business deductions on Schedule C.
Or you might get audited because you claimed a tax credit or some other benefit you aren't entitled to take. Studies have shown significant problems relating to the earned income tax credit, a program designed to help the working poor.
Posted on 10:46 AM | Categories:

Tax planning for young adults

Karin Price Mueller/The Star-Ledger  writes: Q. My daughter just started a new job earning about $60,000 a year. What would be a good way to plan for taxes? She is 24 and lives at home with no deductions. — Proud Parent


A. Seems like the voice of experience is seeping through your question, and that’s great for your daughter.

"As many of us vaguely remember, it was a shock when we first started making serious money and realized what a big chunk of those earnings is either taken or must be set aside for taxes," said Clare Wherley, a certified financial planner and certified public accountant with Lassus Wherley in New Providence.

Before we get to your daughter specifically, Wherley said, the most important point to keep in mind about taxes these days is that the rules change. She said historically, there have been major changes to the federal tax code every 30 or so years. The last major overhaul was in 1986, so Wherley said she expects there will probably be big changes in the next few years.
"Therefore, because taxes are an important part of life, the most important step in planning is to take the time and make the effort to really understand the provisions of the tax code," she said. "Probably the best way to do that is to take a basic tax course or spend some time with someone who does have a good understanding."

Wherley said when an individual has a good basic understanding of the tax code, they realize that Congress utilizes the tax code to manipulate the behavior of the American public. For example, she said, in the 1970s when we had the first oil and gas crisis, Congress passed a law to allow credits for energy savings.

"Credits for installing insulation, replacing windows, or taking other such measures were a huge factor in encouraging Americans to reduce fuel consumption," she said. "We’ve seen similar credits made available in the last few years, but on a much smaller scale."
Another example is tax-deferred savings in IRAs. She said Congress wants the American people to save more for their own retirement.

Wherley said the smartest planning move your daughter can make to reduce her income taxes now is to contribute to a retirement plan such as a 401(k).

Michael Steiner, a certified financial planner and certified public accountant with RegentAtlantic Capital in Morristown agrees.

"Your daughter can achieve both the savings and tax reduction objectives in one shot," he said. "Additionally, if the employer has a plan and also offers a match, then she will have hit the trifecta of savings, reduced taxes and company contributions to the plan."
For 2013, individual can contribute up to $17,500 to their 401(k) plans, Steiner said. Any amounts deferred into a retirement plan also reduce the wage income that is subject to taxes. Employer matching contributions are also exempt from taxes, he said.
Posted on 10:46 AM | Categories:

Retirement Basics: Traditional vs. Roth Accounts

Cathering Hawley for the HuffPo writes: Last time we looked at the differences between two types of retirement accounts: a 401(k) and an IRA. This week I'd like to examine the characteristics of traditional retirement accounts (such as a 401(k) or IRA) vs. Roth retirement accounts. So which type is more appropriate for you?
 
Here's a recap of traditional retirement accounts from last week's post. You deposit earned income into the account. The account balance grows (we hope) and this growth is not taxed. When you take the money out after you've reached retirement age, withdrawals are taxed according to your income at that time. There is also a hefty penalty if you take funds out before age 59 1/2. 

Some employers offer a Roth option for your 401(k) or other type of retirement account. Even if it's not offered through your employer, anyone can open a Roth IRA at a brokerage house. Each account type has specific requirements for yearly contributions, so check to be sure you're meeting the account's parameters.

Similarities:
1. You must have earned income to contribute to either a traditional or Roth retirement account.
2. Investment gains are not taxed in either account.

Differences:
A Roth retirement account is different from its traditional counterpart in a few key ways.

1. In a Roth account, your money is taxed now. That's right, it's taxed before it goes in the account. When you take money out of the account at retirement age there is no tax because you already paid income tax before the money was contributed.

2. Contributions to a Roth can't be deducted.

3. There aren't any required minimum distributions (RMDs). In other words, you can leave money in the account for as long as you want.

4. Contributions to a Roth account are less restrictive than a traditional account and can be taken out without penalty after a five year period. This makes it a tool that can potentially be used for other goals besides retirement (if appropriate).
The IRS has more information on Roth IRAs here. Additionally, it's recommended that you check with your tax professional regarding the specifics of your unique situation.

Which account should you contribute to?
As a general rule of thumb, Roth contributions are good if you have lower income now than you anticipate having in the future. If your tax bracket goes up in retirement, then contributing to a Roth is most effective. If your tax bracket is lower in retirement than when you're working, a traditional retirement account will leave you with more funds (all other things remaining equal).

If you need flexibility with the funds, a Roth might serve you well. However, it's important to note that there are limited circumstances where this is appropriate. It's difficult to get funds back into the account to grow for retirement. Therefore, you only want to take those funds out if you've done careful planning to be sure you're balancing multiple goals.

I often recommend that clients split the difference. Meaning they contribute some retirement funds to a traditional account and some to a Roth account. Because we don't know what tax legislation will be in the future, having money in two different "buckets" gives you more flexibility for tax planning. One advantage to the Roth is that the tax consequences are already known.

Next week's post, the final of our retirement basics series, will take a somewhat different direction. Instead of the merits of different account types, I'll address the main things to consider for retirement savings and investing given your age so that you can most effectively SaveUp!
This post was written by SaveUp's personal finance contributing writer, Catherine Hawley, CFP.
Posted on 10:46 AM | Categories:

It's Never Too Soon to Start Planning Your Retirement

Of course, there are dozens of more specific questions that flow from retirement planning. And at any point in time, there are the ups and downs of the financial markets to navigate.
But the major themes are, for the most part, variations of that single underlying question.
At an early age, it's about how to get started and build good saving habits. During peak earnings years, it's about maximizing your potential, such as paying down debt and working toward big goals, such as covering future health-care costs. And on the verge of retirement, the questions revolve around your post-retirement income strategy—especially the important decision of when to take Social Security.
Here are some of the big retirement questions, if you're...
...In Your 20s

In the early years of working, retirement seems an eternity away. And for most people, starting salaries don't allow much room for savings. But at this age, now is the time to start building good saving habits and a base from which a nest egg can grow for decades to come.
"It's the power of compounding," says Allan Roth, a Colorado Springs, Colo., financial adviser.
Young savers shouldn't be discouraged by experts saying they need to put upward of 12% of their income away.
"The main thing is getting used to the idea of saving," says Christopher Jones, chief investment officer at Financial EnginesFNGN -0.14% which provides investment advice on retirement accounts.
For those working at companies that match employee contributions to a 401(k) plan, "make sure you're at least getting the company match," says Mr. Jones. "Otherwise, you're leaving money on the table and that's just foolish."

And it doesn't take having a company plan or a big pile of money to start saving in a retirement account. T. Rowe Price Group TROW +0.09% and Vanguard Group both offer target-date mutual funds, which invest in a blend of stock and bonds that are tied to a future retirement date, with minimum investments of $1,000.
...In Your 30s and 40s
Let's face it, raising kids, buying and maintaining a home, paying for college—for most folks it's all they can do to keep their heads above water.
But stay disciplined and keep taking advantage of the company match. Mr. Roth recommends taking a portion of any raises and putting that money away for retirement.
...In Your 50s and
Early 60s

For many people, these are peak earning years and potentially a time when the kids are off the household payroll. It's time to make some serious headway on retirement savings and to look at where you stand compared with your objectives.
A big question to tackle—have you accounted for health-care costs in your savings goals? Whether it's through long-term-care insurance or through simply putting more money away—also known as self-insuring—it's a question that shouldn't be ignored.
The reality is that unless something significantly changes in the way health-care costs for seniors are managed in the U.S., this can be a big number.
Take a married couple age 65. Last year, the Employee Benefit Research Institute calculated that the couple would need at least $163,000 to stand a 50% chance of covering lifetime out-of-pocket health-care expenses, including Medicare and Medigap premiums, and drug expenses. It would take at least $283,000 to up the odds of covering lifetime expenses to 90%.
For some, a bigger salary may lead to greater comfort with borrowing more money. Ignore that temptation and instead seize the opportunity to reduce big debts, such as mortgages and credit cards, so you'll have more flexibility during retirement.
And for anyone over age 50, tax rules allow for increased contributions to 401(k)s and individual retirement accounts.
For 2013, so-called catch-up contributions are allowed to total $5,500 for a traditional IRA. "You can go into power-savings mode," says Maria Bruno, a senior investment analyst at Vanguard's investment strategy department.
...62 or Over
It's time to make some serious decisions and assess what your income streams are going to look like after collecting that final paycheck.
It's more than just figuring out how to make your savings last.
Among the biggest decisions is when to take Social Security benefits. The underlying question, says Ms. Bruno, "is how can I maximize my payout?"
That includes weighing both the levels of retirement benefits when alive and any survivor benefits after the death of a spouse.
It's a complex calculation, says Financial Engines' Mr. Jones. For a couple, when different ages and benefits are considered, there are some 8,000 different choices, Financial Engines figures.
But there are some rules of thumb. Assuming there is a comfortable nest egg, for a single person in good health, it makes sense these days to defer taking Social Security until age 70, says Mr. Jones.
Here's why: For every year you delay taking full benefits, your eventual Social Security payout will go up by as much as 8%.
While there's always the temptation to collect Social Security simply because it's there now, compare that guaranteed increased benefit to any investment available in the markets today.
"It's a screamingly good deal," says Mr. Jones.
For couples, it's preferable that the higher earner delay taking Social Security as long as possible.
Not only will that boost their payouts while alive, but under Social Security's rules, after the death of one spouse, the survivor gets the higher of the two benefits.
And, of course, there's the question of when to retire. These days, it's increasingly common to phase into retirement slowly, by working part time in some fashion rather than going straight to the golf course full time.
There's the benefit of staying engaged and active. And financially, working makes big sense when it comes to making sure your nest egg lasts.
You "earn a little extra and have less time to spend," says Mr. Roth.
Posted on 10:44 AM | Categories:

Outright’s Online Accounting for Small Business Owners – Review

Jan Brass writes:  The meteoric rise of the Internet economy has generated an entire class of entrepreneurs who work mostly by themselves. This has created huge market for online accounting solutions catering to small businesses. Such individuals would like to spend a minimal amount of time on tedious bookkeeping and don’t require many of the advanced features provided by many well-known professional accounting solution such as QuickBooks. Outright is the perfect package for them since it automates just about every aspect of accounting and seamlessly takes care of issues such as sales tax, income tax, and 1099K forms.

At its core, Outright is an income and expense reporting system. Its focus is primarily geared towards preparing your business for tax time as well as giving you a clear insight into its profit and loss. One of the benefits of using Outright is its ability to pull data from major financial institutions as well as many online services such as PayPal and Amazon. So all you have to do is add your bank details and authorize Outright to access your transactions. This is updated every night so you always have the most recent consolidated data at your fingertips.


But it’s not enough to merely have an accurate record of all of your business transactions. In order to prepare reports for the IRS, you need to categorize them accordingly. Scheduled C lays down the proper reporting format and Outright can help you do all this automatically so that you’re not swamped at the end of the year. If you’re using the same account for your personal and business expenses (a common, if not ideal situation for solo entrepreneurs), you can easily remove the former with the click of a button so as to ensure that you provide the most accurate data possible to the government.

Perhaps one of the most interesting features of Outright is its ability to integrate with other online accounting solutions such as FreshBooks. So instead of having to manually reenter all of your invoices, you’re able to import them automatically using a simple plug-in. These two solutions – Outright and FreshBooks – complement each other.

At any point of time you can easily take a look at your profit and loss statement to see how your business is progressing.


You can start using Outright for free with no limit to the trial period and you don’t even need to provide any of your credit card details. You pay only when you require Outright to manage your taxes and for that it’s $9.95 per month.

A couple of years ago, the IRS instituted something known as 1099K – a form that is sent to you by online payment processors such as PayPal and Amazon if you have more than $20,000 worth of transactions and have sold more than 200 items. If you’re unprepared for it, it can be a big headache. But Outright automatically handles this for you so as to minimize the risk of an audit – something that every business dreads.

So if you’re a small business owner looking to simplify the recording of your income and expenses, take a hard look at Outright. It doesn’t cost you anything and it makes reporting and integration with FreshBooks a breeze.
Posted on 10:44 AM | Categories:

LEADING CHARITY SELECT AQILLA'S CLOUD ACCOUNTING TECHNOLOGY (AND THEY'VE NEVER LOOKED BACK).

From Aqilla Accounting we read: Back in 2009 Leap Confronting Conflict faced a number of key business issues. Grants were outstripping the capabilities of their existing systems.
With a need to boost income Leap invested time and money in upgrading membership systems
Working hard to meet targets in terms of service delivery, the organisation faced a mountain of paper based information (some 7000-8000 records). A challenge came with the governmental review of grants which saw income fall dramatically.
At the same time the Charities Commission demanded a number of improvements as part of the regular audit process. The paper systems and legacy accounting system (Quickbooks) that Leap was using at the time could no longer cope. So the management team turned to modern cloud based solutions. SalesForce.com was the first cloud system to be introduced.
This was rolled out across the country providing full documentation of activity, progression, bidding and preparation. All contracts of supply and delivery were stored electronically in this new web based system. It was then the turn of finance. Quickbooks proved incapable of being integrated with SalesForce, whilst FinancialForce lacked the required functionality especially in terms of providing analysis by project and funding source.
After a great depth of quality research, Leap decided that Aqilla matched their requirements. There was an immediate benefit in terms of financial reporting and analysis. The basics were in place from day one including full SORP reporting.
Looking back at the solution the management team at Leap conceded the system did do all that was asked including the provision of management and project information down to providing a full net profit and loss for each one on demand for any given period. Transactions are automatically processed including receipts of donations, course invoices, purchase invoices, payments and orders. The system saves a huge amount of time and staff administration – estimated to be in the range of £40k per year. Purchase invoices are circulated for authorisation and scanned documents are saved in Aqilla.
Remittances are circulated to suppliers via email at the push of a button. Using a cloud or web based accounting solution resolved the issue of having to have in house file servers. Accessible from any location (all you need is a browser) the users report very fast response times. The Auditors subsequently gave Leap a glowing report on their administration.
The system is working well and continues to deliver results in a timely and effective manner.
Posted on 10:44 AM | Categories:

BillQuick New Release – Making A Good Accounting Tasks Automation Solution Better

From Buiness2Community we read:

If someone were to ask me about the elements that make up a good SaaS solution, constant iteration would be top of my list.

In an industry where speed and agility is of essence, most solutions rush the first iteration of their product quickly out the door. Which is fine, as long as they iterate later.
Unfortunately, that is rarely the case.

BillQuick, an accounting software solution we reviewed earlier, seems to be an exception. They have released the latest iteration of their software with a bunch of cool new features.

As I had mentioned in my previous review of the solution, BQE is focused on streamlining daily business tasks. Shafat Qazi, chief executive officer and founder of the company, had identified automating repetitive tasks as one of the core features of the solution.

The new enhancements are focused on taking that concept further. According to their press release, the new release are focused on creating friction-free software that is intelligent, intuitive, and interactive. In terms of features, this means that you can look forward to powerful live Gantt charts that detail vital aspects of your project’s health in a beautiful and interactive manner and automated conversion of To-Do items into time entries and real-time tracking of schedules. You can also forecast workloads and revenue, view additional performance analytics, and automate tasks like job rescheduling and invoice generation.


BillQuick New Release – Making A Good Accounting Tasks Automation Solution Better image Automated Task Assignments 1024x676
“We’re very conscious of the challenges firms encounter trying to monitor project tasks and balancing employee workloads,” says Qazi. “As a result, we have given customers powerful tools to help them allocate resources efficiently and complete projects on time, which is the absolute key to achieving peak profitability.”

It is hard not to see why. Quite simply, automation of routine tasks, such as invoice generation and scheduling, saves time and effort for managers. In addition, it provides additional intelligence and data about their accounting functions. It also increases employee productivity by enabling them to focus on tasks that matter.

“Service professionals are extremely interested in optimizing their realization rates,” says Khalel Dumaz, who works with the company, “Any time they spend dealing with overhead and management tasks is time they are not applying directly to a billable client.” According to him, this is the reason, BillQuick developed the features to “make every hour count and minimize mundane, repetitive tasks which change a firm’s focus.

He says the new features are meant to provide company with tools to make informed decisions about their future. “We felt a mandate to supply customers with these tools,” he says.
In my previous review, I had concluded that smart programming can make tasks easy. Guess what? BillQuick just got easier (and better!)
Posted on 10:43 AM | Categories:

QuickBooks Online Review – Reliable, Recognized, Double Entry Bookkeeping Online

From Business2Community we read: QuickBooks by Intuit is now available in an online version to allow you to keep track of your accounting and bookkeeping tasks all in one place.

We will see in this QuickBooks Online review how you can get immediate access to secure online accounting software and the ability to keep everything organized in one place. I got the chance to try it and am impressed by how easy and effective the program is.

Track Expenses And Manage Accounting In One Place

With QuickBooks Online, you don’t need to worry about spreadsheets with confusing formulas and piles of paperwork. You can get access to everything you need in one cloud-based application. You will be able to track your sales and expenses, create custom-made invoices, accept credit card payments, sync bank accounts and credit cards, turn on payroll, use a variety of helpful apps and be tax-ready for the next tax season.

Business Owners Save Time And Money With QuickBooks Online

QuickBooks online can be used by anyone but as a business owner, you will find the most benefits to using the program. You will be able to access payroll and pay your employees in just 3 steps, accept credit cards through the online program, tablet, or mobile phone, and even customize your own invoices. The streamlined cloud-app has other features as well, like reports, paying bills, project estimates, and writing checks.

Access To Apps And Data

There are a variety of exceptional apps that can be linked to your QuickBooks Online account, including Bill.com, SalesForce and eCommerce Cloud. Aside from the long list of apps, you can also import your contacts and get access to different types of financial data. Contacts can be imported from just about anywhere, including Outlook, Gmail, and Microsoft Excel.

The Basics: What Does it Look Like?

Signing up and getting immediate access to the QuickBooks Online software program is quick and easy. Once you sign up, you will be automatically directed to the dashboard. From here, you get an overview of your company information, customers, contacts, vendors, employees, banking information, reports, invoices, and the app center.
QuickBooks Online Review – Reliable, Recognized, Double Entry Bookkeeping Online image Home 3 zps45251680
To add, edit or view your vendors, click on the Vendors tab. This allows you to see a list of your vendors, search for the one you want, and get access to purchase orders, enter bills, pay bills, pay a single vendor, or view vendor credits.
QuickBooks Online Review – Reliable, Recognized, Double Entry Bookkeeping Online image vendors zps12690c97
Click on the Banking tab to write a check, view your credit card expense reports, add bank accounts, access cash expenses, make a deposit, download transactions and access bank registers.
QuickBooks Online Review – Reliable, Recognized, Double Entry Bookkeeping Online image banking zps3ae10f82

Advantages and Disadvantages

QuickBooks Online offers many advantages and very few disadvantages. The list of benefits include having a 60-day money back guarantee, a safe and secure website for entering your information, automatic data back-up, free expert advice, no installation or downloading required, and a simple set-up. The only disadvantage I noticed while accessing it is that because you don’t install the program, you will be relying on your Internet to be in working order to use the software. However if your Internet is down, you can still access it from a tablet or mobile phone.
The other issue with QuickBooks, and this is true with most true Accounting software packages, is the learning curve. You may need to hire someone to help you set it up properly such as a Certified QuickBooks ProAdvisor. Most CPA firms have someone that can assist you with proper set up. Proper set up is crucial to ensuring that you keep your books accurately.

Will It Fit Your Budget?

QuickBooks Online offers three easy plans, all of which include a 30-day trial that doesn’t require entering credit card or banking information. The three plans include the Simple Start plan, Start Your Business plan (the most popular choice) and the Grow Your Business plan. All three plans charge low monthly amounts.

Is It For You?

If you’re a business owner who is having difficulty keeping your finances on track, need budgeting help, or like cloud-based applications, you will find many benefits to using QuickBooks Online. With a free trial and no obligation, there’s no reason not to give it a try.
Ratings: ease of use 5/5, features 5/5, value 5/5 and ease of deployment 4.5/5
Posted on 10:43 AM | Categories:

The 1 Chart That Reveals Just How Grossly Unfair The U.S. Tax System Has Become

Mark Gongloff for the HuffPo writes: Apple CEO Tim Cook waved a magic wand in front of America on Tuesday, vanishing our outrage over how shamelessly companies avoid paying taxes, leaving the rest of us to foot the bill. As a public service to you, here is a chart that should enrage you about corporate tax rates all over again! (Story continues below chart of RAGE.)



federal revenue

Notice the beige stripe that is shrinking steadily? That stripe is the percentage corporate taxes contribute to total federal revenue. And notice the olive-green stripe that has swollen to be larger than the beige stripe used to be? That is the contribution of payroll taxes to federal revenue.

What this shows is how dramatically corporate tax contributions have shrunk in the past several decades, and how our personal taxes have risen to fill the gap. Payroll taxes now make up 35 percent of all federal government tax receipts, up from 11 percent in 1950. Corporate income taxes, meanwhile, now make up less than 10 percent of federal revenue, down from about 26 percent in 1950.

To 'splain those numbers a little more clearly: We who are on the payrolls of companies now bear way more of a tax burden than those companies bore decades ago. Those companies, meanwhile, bear less of a burden than we ever did.

And this doesn't include individual income tax, which accounts for about 46 percent of total federal tax receipts, roughly the same as 60 years ago.

Update: This chart of course does not reflect the fact that employers typically cover half of the payroll taxes collected by the government. Assuming companies pay half of the payroll taxes in this chart, the total tax burden for individual Americans is reduced to about 63 percent of total federal revenue, instead of 81 percent, as I estimated in an earlier version of this story. But that is up from about 45 percent in 1950.

And the total corporate contribution to federal revenue, including employers' share of payroll taxes, has dwindled from 32 percent in 1950 to about 17 percent today. Employer contributions to payroll taxes make the unfairness of the tax code slightly less unfair, but the trend is still clear and dramatic: Corporations are paying a lot less than they used to.

This chart was produced for a September 2012 report (download-y PDF file) about corporate tax avoidance by the Senate Permanent Subcommittee on Investigations. Walter Hickey of Business Insider helpfully republished the chart on Tuesday, in honor of Cook's testimony before the same subcommittee.

Cook was there to techsplain how Apple holding $102 billion of cash offshore isn't really tax avoidance so much as good old fashioned ingenuity. Also, have you forgotten the shiny objects Apple makes (including the dreamy MacBook Air on which this here story was typed)? By the end of the hearing, Sen. Rand Paul (R-Ky.) had demanded that Congress apologize to Apple for the inconvenience, and Sen. John McCain (R-My Lawn) was reduced to gently jibing Cook about how often he has to update his apps.

And Rand Paul is kind of right, you guys, as is Tim Cook: We should not be so mad at Apple for doing what the law allows. We should be mad that the law allows Apple and other companies to keep billions of dollars of cash offshore and out of the government coffers, where it could be helping the unemployed and our crumbling infrastructure and such. Another thing we can get mad about is how the "corporate tax reform" that Cook and other corporate leaders are always banging on about will actually serve to make it so companies pay even less in taxes than they do now.
Posted on 10:43 AM | Categories: