5 accounting mistakes that put your small business at risk

From the Freshbooks Blog Lindsay Lupchak writes:  Accounting mistakes can impede the growth of your small business and put it on shaky ground. Unfortunately, mistakes are all too common, especially for new or young businesses.

In this roundup, five accounting experts from the FreshBooks Accountant Network share the most common accounting mistakes they see from small business owners. They also provide insight on how to avoid making these bad-for-business bloopers yourself.

Mistake #1: Not staying on top of receivables

“Getting paid is always an exciting part of running a business. What isn’t as exciting however, is keeping track of your receivables.

“When you issue an invoice, a receivable is recorded—meaning that a customer owes you money. Checking your receivable listing you’ll see that customer’s balance as outstanding. As soon as you receive payment from that customer, it should be applied against the invoice to mark it as paid. In practice however, this is easier said than done, and customer deposits are often left to reconcile later on since there’s never enough time in a day.

“At tax time you’re left with a bunch of customer deposits sitting in your revenue account and a receivables report that doesn’t make sense. The consequences? Hours wasted updating the receivables listing, overpaying on your taxes, and high bad debts. Making it a point to follow up on your receivables—and apply payments to invoices on a monthly basis—can save you tons of resources in the long run.

“Want to skip out on the manual updating of invoices as paid? Consider using a combination of cloud accounting software and accepting online payments, since this process will automate your receivables process, helping you get paid faster and sleep easy at night.”

Mistake #2: Not keeping expense receipts

“Many business owners fail to save copies of business expense receipts, which can result in a series of tax, accounting, and cash flow problems. How many times have you looked at your bank account statement and had no clue what that $100 charge is? Is it supplies, a business meal, equipment—or is it a personal expense you accidentally paid for using your business card? Not having an actual receipt that can give you details about the charge can result in incorrectly reported tax expenses and a high tax bill if you’re ever audited.

“How can you correct your receipts problem? Save a receipt of every business purchase. That process may seem very cumbersome, so here are a few tips to make it easier and less time-consuming: only use your business bank or credit card to pay for business expenses; have an envelope in your bag/car where you can put all your receipts instead of putting them in your pocket, purse, or worse, trash can; once a week/month go through the receipts stored in the envelope and file them to your tax folder or save digital copies in the cloud.

“Or better yet, add these expenses while you’re on the go. FreshBooks has a very helpful feature I personally use that allows you to add your expenses and even attach digital copies of the receipt from anywhere you are—your desktop or your mobile device.”

Mistake #3: Not recording cash expenses

“It is crucial for entrepreneurs to track all expenses related to running a small business so these costs can be subtracted from total income at tax time and to keep a better sense of overall profitability throughout the year. While credit cards, debit cards, and checks from your business’s bank account are easily linked into FreshBooks, it’s easy to overlook expenses paid in cash. Most commonly, some of these expenses are not recorded and thus forgotten—causing the business owner to overstate income for the year! Be sure to develop a method for tracking these cash expenditures. Ask for a receipt from the vendor to enter into FreshBooks when you return to the office or log the expense immediately using the FreshBooks app on your smart phone.”

Mistake #4: Not hiring a professional to handle taxes

“Small business owners often try to save money by doing their own taxes. In reality, not hiring a professional can cost big bucks down the road. You may not claim all the deductions you qualify for, or you might underpay your tax bill—leading to penalties and other fees.

“Spending the money to hire a professional means you’ll have an expert who knows what they’re doing, and can apply the right tactics for your financial situation. They can keep updated on the ever-changing tax laws and help you plan ahead for potential tax hikes.

“Paying for a professional bookkeeper can also help keep your costs of an accountant at a minimum, since they do all the prep work. Plus having another pair of eyes is never a bad thing, especially when it comes to finances and taxes. The success of your small business depends on the accuracy and organization of your financial paperwork.”

Mistake #5: Not getting on the same wavelength as your accountant

“So, you’re sitting there with your accountant, in a fancy office, listening to this:
 ‘EBITDA is strong, way up from last year.’ You shift in your seat. You nod. 
It continues, ‘Add in D & A, and your bottom line is still positive. And here’s the kicker, thanks to loss carry forwards, tax liability is nil.’

“It’s the bane of many small business owners. Not so much the part about meeting with professionals who love spouting jargon and buzzwords. No, that’s not the problem. The issue, actually, is that most small business owners are too shy to tell their accountants that they might as well speak Romulan.

“You’re a small business owner. You’re not a financial professional.
 And nowhere does it say you have to be up-to-date on all the latest accounting blather. Besides, buzzwords, jargon and fancy strategies are why you pay your accountant. Translating all that techno-talk into language you understand should be part of the package.

“Think about it. 
Would you rather hear this? ‘We used accelerated capital cost allowance to bring your tax liability to nil.’ 
Or this? ‘There’s a temporary tax program that lets us completely write off all of the new computer equipment you buy. So if you need a new IT kit, buy it now cause we’ll use that cost to get your tax bill down.’

“Bottom line is, if you and your accountant speak the same language then she’s part of your team. She’s watching your back, and she’s providing advice you can bank on.”

Wealthy Widows Need to Plan for the New 3.8% Medicare Tax

 Bryan Wisda for Nerd Wallet writes: The new 3.8% Medicare Tax which took effect this year (part of ObamaCare) applies to unearned income.  Essentially this is a tax which applies to income earned by your investment portfolio. The tax only applies to those defined by the tax code as “high income” individuals.  For widows filing as single tax payers this tax will apply if your Adjusted Gross Income (AGI) is greater than $200,000 ($250,000 for joint tax payers).  Your AGI can be found on the last line of the first page of your federal tax return. This tax also applies to trusts and estates whose AGI is greater than $11,650 as of 2012.  Fortunately this tax only applies to trusts and estates on income which is not distributed to beneficiaries.

The 3.8% Medicare Tax only applies to the lesser of your net investment income or the amount your AGI exceeds the threshold. Net investment income is very broadly defined.  It includes interest, dividends, annuities, rents, royalties, any income from a passive business, and any capital gain.  Essentially it applies to all income not earned (via a job).  The tax does not apply to distributions from a qualified retirement account like a 401k or IRA.

In order to manage the new 3.8% Medicare Tax first depends on who exposed to the tax you are.  So first you must determine if your AGI is likely to exceed the threshold of $200,000.  Then you must evaluate how much “net investment income” you have.

Evaluating Potential Exposure

Below are several examples of women who may have exposure to the new 3.8% Medicare Tax….

Sally — Sally has net investment income of $75,000 plus $100,000 of other income (social security, pensions, etc) for a total AGI of $175,000.  She is below the basic threshold of $200,000 for the 3.8% Medicare Tax to apply to her and therefore she will not owe anything under the 3.8% Medicare Tax.

Evelyn –  Evelyn has net investment income of $50,000 plus $250,000 of other income for a total AGI of $300,000.  Thus she has $100,000 of in excess of the threshold amount.  Since the 3.8% Medicare Tax is owed on the lesser of net investment income ($50,000) or the excess of AGI over the $200,000 threshold she will owe tax.  Specifically she will owe $1,900 ($50,000 x 3.8%).

Rachel — Rachel has net investment income of $200,000 plus $75,000 of other income for a total AGI of $275,000.  Her AGI exceeds the threshold by $75,000.  Since the 3.8% Medicare Tax only applies to the lesser of net investment income or the amount by which AGI exceeds the threshold, Rachel will pay the 3.8% Medicare Tax on only $75,000.

Margaret — Margaret has net investment income of $40,000 plus $175,000 of other income for a total AGI of $215,000.  Accordingly, the 3.8% Medicare Tax will apply to only $15,000 for the same reasons as Rachel.

Betty — Betty has net investment income of $0 and other income of $225,000 for a total AGI of $225,000.  In this case, although Betty’s AGI exceeds the threshold by $25,000 there will be no tax due because her net investment income is $0.  If there is no net investment income there’s nothing for the 3.8% Medicare Tax to apply towards.  In Betty’s case it is notable that her earned income exceeded $200,000 and she may still be subject to the new 0.9% Medicare tax on earned income per ObamaCare.

The examples above can be reduced to a relatively straightforward framework for evaluating whether or not you will be subject to the new 3.8% Medicare Tax.

1. Do you have AGI in excess of the threshold of $200,000 ($250,000 for joint returns)?  If not, there is no need to proceed further.
2. Do you have any net investment income?  If there is no net investment income there is nothing to which the tax can be applied toward.  No need to go any further.  If you do have net investment income, then…..
3. Determine the lesser of net investment income or the excess of AGI over the threshold.

What about my trust?

In the case of trusts (and estates) the 3.8% Medicare Tax on unearned income may also apply, subject to a similar, but slightly different, set of rules.  With trusts/estates the 3.8% Medicare Tax is assessed on the lesser of:

1. Undistributed net investment income; or
2. the excess of the trust/estate’s AGI over the threshold amount

The threshold amount for trusts/estates is dramatically lower ($11,650 as of 2012).  This means trusts/estates which retain income amy actually be at far greater exposure risk to the 3.8% Medicare Tax than individuals are.  As a small consolation, the threshold amount for trusts/estates is indexed annually for inflation.

The biggest difference for trusts/estates is that it only applies to undistributed net investment income.  Thus the income is retained by the trust versus paid out to a beneficiary.

The 3.8% Medicare Tax does not apply to tax-exempt trusts, charitable remainder trusts, and trusts created entirely for the benefit of public charities.  However, any distribution of net investment income from one of these trusts to an individual may still result in the 3.8% Medicare Tax being applied to the individual (i.e. in the case of a charitable remainder trust).

It is important to note the 3.8% Medicare Tax will not apply to grantor trusts because the trust’s income and deductions will be reported on the grantor’s tax return.  It will the grantor who must evaluate exposure to the 3.8% Medicare Tax for grantor trusts.

Impact of the 3.8% Medicare Tax

The most direct impact is the tax itself.  Notably this tax combines with whatever other taxes may apply to the income being taxed.  Thus capital gains taxes are subject to the applicable capital gains tax rate plus the 3.8% Medicare Tax.

3.8% Medicare Tax Crossover Zone

One problem that arises when planning for, and evaluating, the 3.8% Medicare Tax is so-called “crossover zone.”  The “crossover zone” applies when net investment income begins to push above the applicable threshold line.  This causes an increasing amount of investment income to be subject to the tax even if no further investment is earned.

For example, Susan has $150,000 of other income and $50,000 of net investment income.  Under the 3.8% Medicare Tax rules she will not owe any of the tax because her AGI would be right at the threshold of $200,000 as a single tax payer.  However, if Susan takes $20,000 in capital gains her AGI would be pushed to $220,000, her net investment income goes to $70,000 and $20,000 would be applied to the 3.8% Medicare Tax.

Let’s look at another example with Diane.  Diane, is a young working widow.  She earns a salary of $150,000 per year and has net investment income annually of $50,000.  At the end of the year she receives a $25,000 Christmas bonus at work.  She is now above the threshold and $25,000 will be applied to the 3.8% Medicare Tax in addition to the normal taxes she pays.

Reducing Your Exposure

To the extent that the 3.8% Medicare Tax only applies to “net investment income” above threshold levels here are some things you can do to reduce your “net investment income.”

1. Income from Municipal Bonds is not applicable toward net investment income.  If you are close the threshold you may want to consider shifting all, or part of, your fixed income allocation to municipal bonds.
2. Maximize deductions which lower AGI.  Here are some potential deductions which reduce AGI: educator expenses, health saving account (HSA) contributions, certain self-employment expenses, alimony paid, IRA contributions, and tuition.
3. Defer or accelerate income.  For example, if you know you aren’t going to have as much other income next year it may make sense to delay a capital gain so as to keep yourself under the threshold.  Alternatively, if you know your other income or net investment income is going to be high next year try to take more income this year.
4. Rental real estate investments are wonderful investments for the 3.8% Medicare Tax as the the 3.8% Medicare Tax only applies to the “net” income and not the “gross” income.  Most real estate investments take advantage of depreciation to lower their net income and therefore reduce exposure to the 3.8% Medicare Tax in doing so.  …watch out for the capital gains and depreciation recapture on the sale of the property though.
5. Convert investments into conduits which aren’t subject to the 3.8% Medicare Tax.  Investment vehicles like IRAs, Roth IRAs, 529 plans, Health Savings Accounts, and Coverdell Educational Savings Accounts (aka Educational IRA).  Non-qualified deferred compensation may also be appealing.
6. It starts to become worthwhile to explore the benefits of making non-deductible contributions to a Traditional IRA.  Ordinary income tax is due on the growth of the IRA when distributed but the 3.8% Medicare Tax is permanently avoided.  There are a few complications with non-deductible contributions to an IRA so work with your advisor closely on this strategy.  ….it is important to note this same strategy does not work with an annuity.  Distributions from annuities still falls into the 3.8% Medicare Tax.  So be careful when opting to use an non-qualified annuity to try to avoid the 3.8% Medicare Tax.
7. Use a life insurance policy.  For starters, growth in a life-insurance policy is tax deferred.  When it comes time to extract money from a life insurance policy money is first distributed from contributions which is not subject to tax.  When distributions start to exceed contributions many people will then opt to take a loan against the policy which can help them avoid tax.  The caveat is that the policy must remain in force until death; if the policy ever lapses gains must be recognized and the 3.8% Medicare Tax may apply.  It is not recommended that a life insurance policy be used to avoid the 3.8% Medicare Tax …the tax is only 3.8% so there must be other reasons to purchase a life insurance policy.

Words of Caution

At the end of the day the tax is only 3.8%.  On a $100,000 investment earning $8,000 in income the tax would only be $304 (a net impact of 0.304%).  Changing investments that reduce expected return by more than 0.304% can result in less wealth than just paying the tax.  This is extremely relevant in the context of annuities, life insurance and mutual funds due to internal expenses of the products.

Also, shifting income can unintentionally cause you to bump up a tax bracket.  To avoid a 3.8% tax it doesn’t make sense to move up a tax bracket.  For example, a large Roth IRA conversion might help avoid the 3.8% Medicare Tax in the future by reducing future AGI in retirement years but if the conversion shifts your income into the 35% tax bracket when you are normally in the 28% bracket the loss on the potential returns of the current tax paid negates the savings from simply avoiding a 3.8% tax.

Conclusion

Widows must be especially cognizant of the new 3.8% Medicare Tax.  There threshold for the 3.8% Medicare Tax is the same as a single taxpayer ($200,000 currently) and thus become subject to the tax quicker than a married couple.  It makes sense to work with your wealth management team so you understand your potential implications under the new 3.8% Medicare Tax laws.

TaxJar Releases Sales Tax Tool for eCommerce Accountants / TaxJar Pro shows accountants exactly where sales were made, how much tax was collected and when state tax filings are due, saving hours of manual busywork

TaxJar, a developer of sales tax management software for small-and-medium sized online sellers, announced today that the company has released TaxJar Pro, an automated local sales tax reporting tool designed specifically for accountants who serve ecommerce clients with accounts on Amazon, Shopify, eBay, Etsy and PayPal. By automatically showing where sales were made, the amount of tax collected and state filing due dates, TaxJar Pro saves time for accountants and money for clients.

Launched in June 2013, TaxJar is the most automated tool that provides a detailed, local view of sales tax collected for ecommerce merchants. After TaxJar’s debut, the team noticed that lots of accountants were signing up for the service. Many even contacted TaxJar to see if they could create a “super account” that would allow them to manage local sales taxes for multiple clients. 

“The idea of TaxJar Pro was driven by our customers,” said Mark Faggiano, CEO of TaxJar. “Accountants were telling us that filing state taxes for ecommerce businesses took an average of 5 hours per client because they had to manually examine each sale and determine where goods were shipped. With TaxJar, we knew accountants could reduce this entire process to 30 or 40 minutes.”

In order to fine tune TaxJar precisely to accountant’s needs, the TaxJar team invited George Sleeman, EA, owner of Tax Man To You, to help test and design a Pro service. According to Sleeman, TaxJar transformed the way that he handles state tax compliance for clients:

“I am based in Colorado Springs and I have clients in other states that all sell on Amazon through the Fulfillment by Amazon (FBA) warehouses,” said Sleeman. “Since my clients are responsible for sales tax in the states that have FBA warehouses, TaxJar has made life much easier. I no longer have to go through spreadsheets and reports to determine what was delivered to where. I can go to my clients profile through my linked accountant access and TaxJar tells me what was sold into what taxing jurisdiction. It saves me tons of time, and my clients a lot of money because it takes me less time. TaxJar also has made it easier to file the sales tax returns by sorting the sales by reporting period.”

When accountants like Sleeman sign up for TaxJar Pro, they can invite clients to personally link their Amazon, Shopify, eBay, Etsy and PayPal accounts to TaxJar. This means that clients never have to share their personal passwords or access to any of their ecommerce accounts. Accountants like Sleeman can then access sales tax reports for each client from a single interface. 

“Customer support at TaxJar has been awesome,” added Sleeman. “They have spent the time to make sure this program works well and they also listen to suggestions. I look forward to working with TaxJar for a very long time.”

Don't Leave Tax Breaks on the Table

Jason Alderman for the HuffPo writes: If someone told you there's a way for you to potentially save hundreds -- if not thousands -- of dollars on your income taxes by simply spending a few minutes reviewing your benefits and tax paperwork, would you think it sounds like a late-night TV marketing scam? It's not.

You've still got a couple of months to tweak your employer-provided benefits and line up a few tax deductions that'll have you smiling next April 15.

Here are a few strategies to consider:

Beef up your 401(k) contribution. If you haven't already maxed out on contributions for 2013, ask your employer if you can increase contributions to your 401(k), 403(b) or 457 plan for the remainder of the year. Most people can contribute up to $17,500 in 2013 (a $500 increase over 2012), plus an additional $5,500 if they're over 50.

If you contribute on a pretax basis, your taxable income is reduced, which in turn lowers your taxes. If you contribute using after-tax dollars, you'll pay tax on the amount now, but the entire account value, including interest earned over the years, will be non-taxable when you retire. Either way, if your employer offers matching contributions (essentially, free money), you should contribute at least enough to take full advantage of the match. This online calculator can help you estimate the impact additional contributions will have on your taxes.

Use up your FSA balances. If you participate in employer-sponsored health care or dependent care flexible spending accounts (FSAs), which let you use pretax dollars to pay for eligible expenses, be sure to spend the full balance before the plan-year deadline (sometimes up to 75 days into the following year); otherwise, you'll forfeit the remaining balance. If it looks like you'll have a surplus, consider which 2014 expenses you could pay before December 31, 2013.

You can use your health care FSA for things like copayments, deductibles and medical devices (e.g., glasses, contact lenses and braces); note that except for insulin, over-the-counter medicines are only eligible with a doctor's prescription. Read IRS Publication 502for a complete list of allowable and non-allowable expenses.

Medical deductions. If you itemize deductions, be aware that only unreimbursed medical expenses above 10 percent of your adjusted gross income will qualify for a Schedule Adeduction in 2013, up from 7.5 percent in previous years. (However, for taxpayers 65 and older, the threshold remains at 7.5 percent through 2016.)

If you're right on the edge of qualifying, you may want to bundle elective expenses in the same year you have other high medical costs. For example, if you expect to have a lower income -- or higher medical expenses -- next year, you could delay buying new glasses or starting orthodontia until after January 1, 2014.

Charitable contributions. If you plan to itemize deductions this year, charitable contributions made to IRS-approved organizations by December 31, 2013, are generally tax-deductible. (See the IRS's Exempt Organizations Select Check to view eligible organizations.) If you've got extra cash now and want to lower your 2013 taxes even further, consider moving up donations you would have made in 2014.

Gifts. Most people probably will never reach the $5.25 million lifetime gift tax exemption limit -- beyond which you would have to pay the 40 percent gift tax. But, if you're feeling generous, remember that if you give someone gifts worth more than $14,000 this year, you'll need to file a Gift Tax Return along with your federal tax return, even though you won't necessarily owe any taxes on the amount. (Married couples filing jointly can give $28,000 per recipient.)

Annual gifts under those amounts don't count toward the lifetime maximum. Rules for gift and estate taxes are complex, so read IRS Publication 950 and consult your financial advisor.

Roth IRA conversion. People at any income level can convert part or all of their existing traditional IRAs or 401(k) plans from previous employers into a Roth IRA. With a Roth, you pay taxes now, but future earnings will accumulate tax-free. If your retirement is a long way off or you believe your income tax rate at retirement will be higher than it is today, such a conversion might make sense.

Remember, however, that converted balances (for pretax savings and their earnings) get added to your taxable income, thereby increasing your taxes -- and possibly boosting you into a higher tax bracket for the year. Just make sure you don't need to borrow money -- especially from a retirement account -- to pay for the additional tax burden today; otherwise you could undo the potential long-term tax advantage of converting to a Roth IRA.

If you're not sure how it will pencil out, this Roth 401(k) conversion calculator might help. Or consult a tax or investment professional for the best strategy in your particular situation.

Before the holiday madness kicks in, take a few minutes to see whether any of these situations apply to you. You'll thank yourself next April 15.

4 Tax Breaks Every College Student Should Know About Read more: http://www.businessinsider.com/college-student-tax-breaks-2013-10#ixzz2ijqua0xO

Mandi Woodruff  for Business Insider writes: In the last three decades, college enrollment has increased 11%, while tuition has shot up 200%, a recent report finds. Today's college students will graduate into a mediocre job market with median student loan debt of $23,300.

Facing such bad odds, it has never been more important for college students and recent grads to keep as much of their earnings as possible. Yet the U.S. Government Accountability Office reported that Americans left behind nearly $800 million in college tuition tax benefits in 2009 — an average of $466 per person. 

With the national student debt near $1 trillion, it's a good time to revisit some of the most lucrative tax breaks out there for college students. 

The American Opportunity Credit. Students are eligible to claim up to $2,500 for the first four years of post-secondary education. And since 40% of the credit is refundable, that means students can get back up to $1,000 on their refund — even if they don't owe any taxes, according to the IRS. What qualifies: Tuition and fees, course-related books, supplies, and equipment. Income: Couples filing jointly who earn less than $160,000; single-filers who earn less than $80,000.

The Lifetime Learning Credit. Students earning less than $60,000 (single-filers) or $120,000 (married, filing jointly), can claim up to $2,000 education-related expenses.

Tuition and fee deductions. Like the American Opportunity Credit, students earning less than $80,000 (single) or $160,000 (married, filing jointly) can deduct up to $4,000 in tuition and fees on their annual tax returns. Use it while you can — this tax break is set to expire at the end of 2013 unless lawmakers extend it. 

Student loan interest deduction. If you've taken out a federal or private student loan, you're eligible to deduct up to $2,500 worth of interest paid on the loan as an "above-the-line" exclusion from your income. You don't have to itemize your deductions in order to claim it. 

Note: College students can only claim one of the above tax credits per year, but parents supporting more than one child in college can claim tax credits on a per-student basis. 

100 years of the 1040 form

Robin Einhorn for SF Gate writes: The first federal income tax return, the Form 1040 for 1913, was four pages - with lots of white space. Taxpayers figured their taxes on the first page after totaling their income on the second and their deductions on the third. The fourth page offered the instructions. Allthe instructions.

Why are our income taxes so complicated today? Is there any escaping the rigmarole of an income tax that is essentially a jobs program for accountants, lawyers and the programmers who now bring tax-filing skills to our home computers? It wasn't always this way.

The 1913 tax was intended to tax the rich, and only the rich, because the other federal taxes were regressive levies on consumption. The plan was a small income tax - 1 percent "normal tax" plus "surtax" rates up to 6 percent - to make it look as if the rich paid their share.

World War II transformed the federal income tax from a "class tax" into a "mass tax."

In 1936, 5.4 million Americans filed returns. In 1946, 52.6 million did. The war also introduced withholding from wages and salaries plus the idea of tax filing as claiming a refund.

One cause of income tax complexity was high rates. Rates shot up during World War I, the top rate rising from 7 percent in 1913 to 77 percent in 1917, though only for income over $1 million, the equivalent of $15 million today. After major cuts in the 1920s, the top rate jumped back in 1936 to 79 percent on income over $5 million ($80 million today). But this was largely symbolic; only 61 taxpayers had $1 million incomes and only one, John D. Rockefeller, had a $5 million income.

The top rate peaked during World War II; in 1944, about 1,800 taxpayers paid 94 percent on income over $200,000 ($2.6 million). Large cuts in 1964, 1981 and 1986, with further jiggling, produced our current 39.6 percent on income over $441,000.

High tax rates drove complexity as people in high brackets pressured Congress to cut their taxes through shelters and other loopholes. The result was inevitable: a bloated tax code and an army of accountants and lawyers to navigate it for elite clients. But this kind of complexity had little impact on ordinary taxpayers.

Until 1970, the instruction booklets remained at fewer than 20 pages, half of them devoted to tables that let filers look up rather than calculate their taxes. The Internal Revenue Service also simplified matters for working people. From 1948 to 1972, filers who chose the Short Form 1040A left the arithmetic to the IRS.

The other major source of complexity affects the working poor. Starting in 1974, but especially since the 1990s, Congress has embedded the nation's leading poverty program in the income tax. The Earned Income Tax Credit was originally intended to offset the Social Security payroll tax for low-income workers, but since 1992 it has been a much larger poverty program than traditional welfare (Aid to Families With Dependent Children and its successor, Temporary Assistance for Needy Families).

The Earned Income Tax Credit is also larger than food stamps - the Supplemental Nutrition Assistance Program now targeted by congressional Republicans. It has survived the cutbacks that have savaged these programs in part because it rewards work.

It is unavailable to people not in the labor force and rises with labor income up to a phase-out level. It works as a poverty program because it is "refundable," meaning that beneficiaries can get back more in tax refund than they paid in withholding during the year.

The Earned Income Tax Credit is also only available to people who file returns, including many who might not otherwise file since they don't owe any tax. Because its amount hinges on the composition of households, moreover, it imposes a maze of thorny questions - mainly about who counts as a "qualifying child" - on the people most likely to have trouble wading through them.

The result is huge growth of the tax preparation business in low-income neighborhoods, where residents can least afford it.

We might prefer mourning to celebration on the 100th birthday of the Form 1040, but the income tax is the only reason Americans can even pretend that the rich pay their share of the tax burden. Annoying paperwork is the price of this measure of social justice.

Tax Facts

Why is it form 1040? Because the Treasury Department already had 1,039 forms.

Why refunds? The legal obligation to file hinges on owing tax, but today most people over-withhold. About 80 percent of tax filers collect refunds, which actually means extending interest-free loans to the federal government during the year (you can stop doing this by changing your W4).

Tax help: For those who qualify for the Earned Income Tax Credit, there is a free alternative to hiring a tax preparer. The Volunteer Income Tax Assistance Program mobilizes IRS-trained volunteers to help low-income filers. In 2011, 88,000 volunteers filed 3.2 million tax returns at 12,000 sites across the country. For help or to volunteer in California, go to https://ftb.ca.gov/individuals/vita.

Clients Buying Film Tax Credits

From the Wall St Journal Wealth Adviser we read: 

Voices: Jini Thornton, on Clients Buying Film Tax Credits

Voices is an occasional column that allows wealth managers to address issues of interest to the advisory community. Jini Thornton is chief executive of Envision Business Management Group in Atlanta.

Everyone acknowledges that we have to pay taxes. But who doesn't want to pay less? Advisers can help their clients who have a large state tax bill offset those taxes by buying tax credits from the film industry.

These tax credits are given to people in the film and TV industry as incentives to come into a particular state and make their movie or TV series there. Producers are able to sell these credits to general business owners or individuals who are looking for tax strategies to offset their state taxes. They then use the money from the tax credit sales to fund their projects.

It's important to note that these are state tax credits, which can vary from state to state. In Georgia you can buy these tax credits for about 80 cents on the dollar, and then use them to get a dollar credit. The good news is you can buy as much as you need, whether that's $10,000 worth or $100,000 worth. However, there are a couple things to keep in mind.

These credits are sold through a broker, and it's very important to have a reputable broker who can facilitate the sale of tax credits between film and television producers and private individuals. The reputation of your broker is critical, and it is important that advisers do some research and talk to their peers to see who they use and can recommend. If you're buying from a broker who is not reputable, the consequences can be very severe to your client.

Therefore, you need to make sure the TV or film producers meet the state requirements to receive film tax credits. To that end, when you purchase tax credits, the producers must provide a comfort letter from an independent CPA firm. These letters basically say, "We've reviewed this, everything is in line. You should feel comfortable being able to purchase these credits." It's the responsibility of the filmmaker who is getting ready to sell their credits to obtain that comfort letter showing that all the paperwork has been filed by the state.

Generally there is a minimum amount of tax credits, set by the production companies or brokers, that you will have to buy. For example, you may have to purchase at least $5,000 worth of credits. So be sure that your client has the available cash to purchase whatever minimum is required.

This is an underused strategy that other advisers may not know about, and a great tool to give you a competitive advantage over your peers. It keeps your current clients happy and attracts new clients looking to save on their tax bill.