Tuesday, November 12, 2013

Six tips for reducing taxes on investments

Jerry Lynch for CNBC writes: The first time we meet with a new client, we ask for tax returns and quarterly investment statements that includes how much they paid for their securities. I review the return with them line by line, showing them how they are making money, and how much it is costing in taxes. W-2 income, which is money that you get from work, is very hard to control and really the only thing you can do is the 401(k) plan. Investment income is very controllable and for many successful people, their investments are costing them a fortune!
Many of our clients are in very high tax brackets, so the goal is not just focused on higher returns, but more importantly, reasonable returns in a tax-efficient manner. In New Jersey and many other states, it is possible to have a marginal tax rate with the federal and state income tax, of over 50 percent. If your investments are not tax efficient, this means you can lose half of your money from returns to Uncle Sam and friends!
Let's use as an example New Jersey, which doesn't even have the highest tax rate on investments. Here is a quick summary of the tax rates on investment income:

New Jersey marginal tax rates on investment income

IncomeFederalSurchargeStateTotal
$100,00025%0%6.37%31.37%
$250,00033%3.80%6.37%43.17%
$500,00039.60%3.80%8.97%52.37%
Source: JFL Total Wealth Management
So as you can see, the rates can get very high — even if you are not making a huge income. Having a proactive tax strategy can easily save you thousands each year.
Here are six tips for reducing the amount of money you're paying in taxes on your investments:
1.Do not buy a stock or fund unless you plan on keeping it for a year! When I review a client's Form 8949 that lists all the trades, I often find hundreds of short-term trades where they lose up to half the gain if they are right. At minimum, buy the stock for at least 1 year — or don't buy it!
2.Time your sales. If you need to sell a stock or fund because you have a large gain, review where you have losses that you can sell to offset these gains. The goal is to have losses offset all your gains plus an additional $3k that you can use to offset your regular earned income. This is known as "harvesting losses."
3. Reduce or eliminate taxable interest. Banks are paying almost nothing and on top of that, you are losing half of that in taxes. Look at tax-free money-market accounts and tax-free muni bonds, which generally have higher returns on an after-tax basis.
4. Sell higher-costing securities. Let's say that you have been buying Apple for years at all different prices ranging from $100 to $700. Sell specifically the $700 shares and now you have a "loss" for income-tax purposes, even though your stock is worth more than you paid for it. Most people use either "average price" or "first in, first out" and generally that increases the taxable gain.
5. Watch "turnover ratios" in mutual funds. This tells you how often a money manager turns over their portfolio. An index fund is basically zero vs. an actively-traded fund, where the ratio can be over 100 percent. At 100 percent or more, that entire gain is taxable at your highest possible rate vs. an index fund that is taxable mainly when you sell it — and at lower capital gains rates.
6. Give it away. If you are giving money to charity or family, give them appreciated stock so you do not have to pay taxes on the gain. Charities do not care if you give them dollars or doughnuts, as long as it converts into money. Family members may be able to sell the stock and pay no taxes (10- or 15-percent tax bracket), or a lower capital-gains rate than you if they are not subject to the new higher tax rates.
Jan. 1 is right around the corner. You have a few weeks to really impact your taxes for 2013, so take advantage of it. A vacation is always better when it is paid by the savings on your tax return!
Posted on 7:22 AM | Categories:

Accountants feeling the love as vendors design more programs and products with these professionals in mind.

Seth Fineberg for Accounting Today writes:  Accountants must be feeling the love, or at least they potentially will, as a growing number of vendors appear to be designing more programs and products with these professionals in mind. But why now?

I plan to give you my take on this trend, which has happened before, and see if we can connect it somehow to the current business environment or a sign of greater things to come.
Certainly there’s been a fair amount of vendor-generated news this week, some newer cloud accounting/ERP players coming to market or creating attention in particular. Of note would be the emergence (or re-emergence) of Reston, Va.-based GCE, and then there’s VersAccounts from Toronto, which garnered some former Sage executives as advisory board members.
But what struck me most, or has been affecting my thoughts of late, has been the specific attention accountants are getting – or may potentially get – from the vendor community. These are not new players, I might add, and some have made efforts before, but not quite like this.
First, there’s Inuit. I know, if you are a ProAdvisor you would probably come out on the side of Intuit always being there for accountants and listening to you and heeding your advice on where their products (well, QuickBooks anyway) should be headed. They’ve made accountant versions of this and that, and it’s all well and good.
However, I’m not certain many people know about this, which is not surprising because they haven’t made a big splash about it – at least not yet – but over the past few months Inuit has been building a team designed to reach out the Top 200 CPA firms in the country in order to work with them to get them “into the cloud.”
The business unit is known as the Accountant & Advisory Group, and their prime directive is to work with these top firms that have QuickBooks desktop clients and help them transition to QuickBooks Online.  The team was recently joined by Kim Hogan, who has several years working directly with the CPA community, first helping ensure that the Fujitsu ScanSnap was their scanner of choice, and then as the West Coast sales force of cloud-based workflow product maker XCM Solutions. She was the first to acknowledgethat Inuit is building a “dream team” of sorts behind this effort.
The Accountant & Advisory Group is currently headed by former CCH sales and marketing vice president Ray Barlow, and was recently joined by another former CCH colleague, business developer and strategic relationship director David Bergstein. The growing team also hosts former director of national accounts at Thomson and CCH Jim Clement. Expect it to get larger.
So why now? Well, it depends who you talk to. For me, I’m thinking it’s two-fold. First off, Intuit wants to be seen as innovating or leading in some way. In the U.S., they still do have the lead when it comes to the minds of accountants and the software that their small business clients work with. But that tide is, well, not so much changing as it is getting more rocky, even for a giant like Intuit.
Right now, there are far too many smaller fish eating away at Intuit’s business – all of whom, as it happens, representing cloud-based offerings. Intuit knows that this is where business computing is moving and it does have an online product that seems to have a sizable user base. But that could change and I’m certain they are not having that, so one of the best things to do is to get the right people on it to help ensure that said product -- QuickBooks Online – is the go-to, much in the way the desktop QB has been all of these years.
What’s more, Inuit CEO Brad Smith has in recent conversations revealed that while the company is not “abandoning” the desktop users: It will be transitioning them to the cloud. Even future enhancements to the desktop product will contain “cloud” features or connect users in some way. Again, in steps the trusted advisor to help ease the process. At least, this is what Inuit is hoping.
What’s more is that you now have Intuit connecting QuickBooks Online users directly with ProAdvisors from within the product, which is something -- I am assuming non-coincidentally -- Xero has been doing for some time.
Then we have Sage. Now, for the most part, we simply haven’t seen – not in recent history anyway -- much in the way of any products from Sage that are specifically designed for the accountant or CPA. That, according to them, is about to change.
Now there may be some skeptics out there, perhaps having felt that Sage “bailed” on accountants after Client Write Up 3.71. This, to me, doesn’t sound like the same thing.
For a few years now, Sage, with the aid of its Sage Accountants Network program and Jennifer Warawa heading up the program, the company has been able to get on – or back on — the radar of accountants. While efforts have been valiant, even bringing on Tom Hood and the Business Learning Institute to help firms work on core skills, the SAN has mainly offered accountants a way to be a “connector” and an “advocate” of Sage products, rather than have anything designed specifically for them. That is about to change.
Warawa was recently promoted to head up a new group called Sage Accountant Solutions, whose main goal is to deliver products for accountants here much like, she claims, Sage has in other markets. The first will likely be an accountant edition of its entry-level cloud accounting product Sage One, but if Sage’s plans come through there will be several more available for the profession by the time Sage Summit rolls around next summer.
Again, this is all very interesting and again I ask, why now? Well, for Sage I think they also realized that accountants and CPAs are a core group they need to interest if they are going to remain a competitor in the SMB space. I don’t think they ever did not realize this, actually, but hey, actions speak louder than words and, in this case, it may be products specifically designed for them rather than just getting to know and recommend.
Intuit and Sage aren’t the only ones by far, but they are among the bigger names that boast actual accounting software that, in recent history, are looking to gain the favor of the accounting community. I suspect we will see more in the future, particularly from known ERP brands.
Posted on 7:22 AM | Categories:

Florida Tax-Haven: Is It All It's Cracked Up to Be?

Leigh Held for Mainstreet writes: End of the year taxplanning can be a disheartening task. Some lucky factions of people are left with excess cash on their balance sheets. There are a few common ideas that are always thrown around when talking about excess income. One of them is Florida real estate.
Florida seems like a mythical tax haven for a business owner. It is often sold as a state where the condos range from affordable to luxury, and there is no state income or inheritance tax. Yet how much of Florida's tax facts are myth and how much are fact?
Howard Hammer, a CPA with Fiske & Company, a financial firm in South Florida, broke this issue down from the beginning.
"Getting a tax break in Florida all comes down to being domiciled there," he said. "Domicile" is a term that is used to define the taxpayer's true home.
"A person would have to show that they vote in that state," Hammer explained. "They would have to show they have a driver's license in that state, and that they are in that state more than 183 days out of the year." Additionally, the government looks to see if your heart is in that state. This means a taxpayer is keeping his major possessions in that state such as cars and boats. It's also important if the taxpayer has children that they are attending school in that state. The government will even go so far as to check to see if a person has purchased a burial plot in the state of Florida.
However, for those who are domiciled in Florida the tax breaks are very real. For a person earning $1,000,000 in New York, he would pay $127,000 in state taxes. In Florida, he would pay nothing. There is also no inheritance tax. Hypothetically, if a person had to pass an estate on to a younger generation all his assets could be passed tax-free in Florida. There is also no tax on income earned by a trust either. If a trust is being set up, the fiduciary must be located in Florida.
"The advantage of purchasing a property here depends on the state where you reside," Hammer cautioned. "Be careful with out of state of state properties. Just by being a Florida resident does not make you exempt from taxes in other states."
Posted on 7:15 AM | Categories:

Understanding the 'Kiddie Tax'

Jason Alderman writes: For something whose nickname sounds so innocent, the "kiddie tax" certainly can wreak havoc on unprepared taxpayers' yearly returns.


Congress first introduced the kiddie tax as part of the Tax Reform Act of 1986 to discourage wealthy parents from sheltering their investment income in accounts under their children's names, thereby avoiding paying taxes on the amounts. The rules have been tweaked periodically ever since.

Although the kiddie tax once applied only to the unearned income of children under 14 (hence the nickname), it now impacts all children under age 19 (as well as full-time students under 24), provided their earned income does not exceed half of the annual expenses for their support.
Moreover, the kiddie tax is not just a wealthy person's problem: Any outright gifts parents or grandparents bestow on young children, whether to avoid triggering the gift tax or simply out of generosity, could actually be generate investment earnings that would be subject to the kiddie tax if they exceed a threshold amount.

Here's a primer on how the kiddie tax works and whom it impacts:
As it does with adults, the IRS differentiates between income children earn (paper routes, summer jobs, etc.) and unearned investment income they receive such as interest, dividends and capital gains – usually by way of accounts opened in their names by parents.
Taxation of the first $1,000 of a child's unearned income is generally offset by the $1,000 standard tax deduction for dependents and thus won't be taxed; the next $1,000 is taxed at the child's own income-tax rate (e.g., it's 10 percent for taxable income up to $8,925). However, all unearned income over $2,000 is taxed at the parent's marginal tax rate, which can be as high as 39.6 percent for married couples with taxable income over $450,000.

There are two ways to report your child's investment income to the IRS: File a separate return for your child using IRS Form 8615; or include it on your own tax return, using IRS Form 8814 – the latter only works if they had no earned income to report. The tax owed will be the same either way.

Important note: Although including your children's investment income on your return may be more convenient, doing so could increase your adjusted gross income so much that you become subject to the alternative minimum tax or ineligible for certain income-based deductions and credits. For example, eligibility for the American Opportunity Tax Credit begins phasing out for individuals whose modified adjusted gross income exceeds $80,000 ($160,000 for married couples).
Other kiddie tax rules:
  • To be considered full-time students, children must attend school full time during at least five months of the year.
  • The kiddie tax does not apply to children who: are 19 to 23 and not full-time students; provide more than half of their own support from earned income; are over 24 and still dependents of their parents; or under 24 but married and file a joint tax return. These children are all taxed like adults at their own tax rate.
Remember, gifts themselves are never taxable to the recipient. If a gift generates unearned investment income, however, that's when taxation comes into play. Also, any gifts over $14,000 per individual, per year, will trigger the gift tax – although most of us will never come close to the $5.25 million lifetime gift exemption.
For more details on tax filing requirements for children, see IRS Publication 929, "Tax Rules for Children and Dependents.".

Posted on 7:14 AM | Categories:

Bill.com Raises $38M As Banks Look To Leverage Digital Payment Adoption In The Business World / Bill.com Picks Up Another $38M Funding

Alex Williams for TechCrunch writes: Bill.com, a platform that connects payments and receivables and manages cash flow, has raised $38 million in an oversubscribed round led by new investor Scale Venture Partners.
The round also included participation from Bank of America, American Express, Fifth Third Bank, CheckFree founder Pete Kight, and Commerce Ventures. Bill.com’s previous investors all participated in the funding, which now brings its total raised to $80 million.
The funding round is significant, considering the number of financial institutions participating in the financing. CEO and Co-Founder René Lacerte said in an interview yesterday that banks process electronically about 80 percent of consumer payments while businesses do just 20 percent. But the business sector is gaining momentum and the banks want to leverage that adoption. The problem: they don’t have the expertise or the focus as a business to manage the messy connectivity required for managing complex data workflows. With Bill.com they can provide customers with the services needed to automate back-office operations.
The Bill.com platform uses APIs to connect banks and accounting services such as Xero.  The service helps customers collaborate to create connections that encompasses an ecosystem of partners and application partners tha are connected through a network of data pipes that filter data accordingly. Until recently this data has largely been cemented in spreadsheets, invoices and other traditional back-office means of doing business.
Providing services for payables, receivables and cash management rests at the core of what the company provides its customers and it will invest accordingly with the new funding. For payables, as an example, Bill.com will add more features for the larger companies it is attracting to its platform. In terms of receivables, the company will integrate with CRM providers to allow sales orders to be turned into invoicing through the Bill.com platform. It will also enable customers to extend their own platforms to their clientele and, by default, build out the Bill.com service. Additionally, cash flow capabilities will be enhanced with more visualization features.
The Bill.com platform is the company’s greatest challenge but also its greatest asset. As it grows, the platform will also have to be fortified. Like with any SaaS, that means tradeoffs and a slower rate of development, which exposes it to competition in the form of younger, nimbler competitors.
Bill.com has developed a service that abstracts the deep complexity of back-office operations. That level of automation gives it the capability to be at the forefront of the digital transformation of business commerce. Its challenge is staying ahead and not getting bogged down with an information architecture that slows development too much.
With hefty funding, Bill.com has room to grow, but it is still a ways from reaching a milestone such as an IPO, It will have to boost revenues in face of deep competition from the likes of Netsuite, QuickBooks and Concur, all established players with deep market penetration.
-

Bill.com Picks Up Another $38M Funding

Brian Kepes for Forbes writes:  Bill.com, a cloud-based vendor delivering an integrated set of invoicing based workflow today announced it has secured another $38M in funding to take the total of venture funding it has raised thus far to $80M. The funding comes from previous backers August Capital, Napier Park Global Capital, TTV Capital, Jafco Ventures, Emergence Capital and DCM and also includes new funders Scale Venture Partners (ScaleVP). Interestingly it also attracted some financial industry backers in the form of Bank of America, American Express, Fifth Third Bank, Pete Kight, founder of CheckFree, and Commerce Ventures
Bill.com offers a number of different features, all aimed at helping businesses manage their accounting – bill payment, invoicing and cash flow features are all included in the application. Since its founding seven years ago, the company has grown from strength to strength – it now manages more than 10 million bills per year across its payments, workflow and document management functions. It’s also seeing over half of its customers move from predominantly check based payments to ePayments – a fact that will have helped get the banking industry funders over the line.
Bill.com’s Banking Platforms allows banks to integrate directly with Bill.com – unlike traditional solutions which take an invoice-based perspective on cashflow, Bill com enables banks to be part of the entire cash flow management process – across payables, receivable and cash flow projections – this de-risks the role of the banks, as well as providing an added value service between banks and their customers.
Cashflow is one area that is still a major problem for businesses, especially small and mid-sized ones. The traditional accounting vendors really haven’t managed to build good cash flow forecasting tools, and even the new accounting vendors such as Xero, do little in the way of cash flow forecasting. Having a vendor focused solely on invoice life-cycle management gives the opportunity for this difficult area to once and truly be solved.
The jury is out however on whether these sort of tools are viable as standalone products or whether, over time, they’ll be subsumed into the accounting tools. While Bill.com’s funding to date is generous, it still leaves it the options of either trying to scale a standalone company, or be acquired at a reasonable price that is palatable for the acquirer, and still leaves the investors feeling satisfied. Time will tell which direction proves the right one for this company.
Posted on 7:14 AM | Categories:

3 Tax Moves to Make Before the End of Year

Donna Fuscaldo for Fox Business writes: They say two things are certain in life: death and taxes. While you can’t control when you’ll die, you can limit how much you owe Uncle Sam. The April 15 tax deadline might seem far away, but tax experts say now is the time to get your investments in order to limit your tax liability.
“It’s certainly not too late to use the tax code to help improve your overall investment outcome,” says John Sweeney, executive vice president at Fidelity Investments. “The biggest opportunity for investors of all ages is to contribute the maximum to whatever tax-deferred accounts they have to reduce their taxable income.”
From maximizing your retirement savings to unloading underperforming stocks to offset gains, here’s a look at three end-of-the-year tax strategies investors should be thinking about.
Tax Strategy 1: Contribute the Maximum in Your 401(k)
Employees of all ages should strive to take full advantage of company matching programs when it comes to 401(k) contributions. For instance, if your company will match up to 5% of 401(k) contributions, budget to at least contribute that amount.
“Your employer may not have done the best job communicating details about benefits such as matching 401(k) contributions, or you may not have taken the time to learn them. But now’s the time; this is free money,” says Rao Garuda, president and CEO of financial planning company Associated Concepts Agency. “If your employer is offering a 50% match on your first 6% of contributions to the 401(k), you should be contributing at least 6%. Educate yourself on your company’s plan so you can take full advantage.”
Tax Strategy No. 2: Convert to a Roth IRA
A traditional IRA is a tax-deferred investment tool that lets you grow money tax free. But when the time comes to withdraw funds from the account, you’ll be hit with taxes, possibly at a higher tax rate than today’s rate. One way to avoid taxes from withdrawals is to convert the traditional IRA into a Roth IRA.
With a Roth IRA, you pay the taxes when you deposit the money at the current rate, and won’t face any taxes when you withdraw the money down the road. After all, who knows where tax rates will be in the future.
“Roth IRAs are a tax-diversification strategy that allows you to pay current year taxes and put those assets in a ‘post-tax status,” says Sweeney.  He adds that a Roth IRA can often be advantageous for younger investors, who have a longer time before retirement, and could face significantly higher tax rates.
Tax Strategy No. 3: Engage in Tax Loss Harvesting
The stock market has had a strong year, good news for investors’ bank accounts but not so good when it comes time to pay capital gains taxes on that upside. One way to reduce the amount you’ll have to pay the IRS is to engage in tax loss harvesting whereby you offset gains by selling off some of the stocks you lost money on during the year.
“If you pair some of the gains with the losses in your portfolio, you can neutralize your tax bill,” says Sweeney, noting the loss doesn’t have to be a stock but can also be a real estate investment.
Keep in mind that the IRS looks at investments either as short term or long term holdings. Anything held for less than one year is considered a short-term investment and is treated as ordinary income and will be included as income in your tax rate.
Any stocks held for more than one year is considered a long-term investment and taxed at a different rate, says Sweeney. “Make sure the securities are held for a long enough period so that they are considered long term and taxed at that lower rate.”
While there’s still time to do some tax loss harvesting, Sweeney says in an ideal world the investors will be doing it all year long. “It’s not a fourth quarter sport. Dips in the market may come in the first, second and third quarters as well.”
Posted on 7:14 AM | Categories:

Muni Bonds For Income And Tax Savings

John Spence for TheStreet writes: It's tough to find yield in fixed-income markets but one currently unloved sector to potentially consider is municipal bonds, especially for taxable accounts.


Individuals living on a fixed income are heading into the sixth year of safe bank deposits paying less than 1%.aThe so-called tax equivalent yields of diversified muni bond funds and ETFs are very attractive at a time when money market funds are yielding next to nothing and interest rates remain very low.
For example, the $3.1 billion iShares National AMT-Free Muni Bond ETF (MUB) has a taxequivalent distribution yield of 5.67% when the highest federal individual income tax rate of 43.4% is assumed. That's why muni bonds have long been a favorite of high-net-worth investors. The income thrown off by most muni debt is exempt from federal income taxes.
"We use muni bonds in taxable accounts," said Matthew Pierce, founder and portfolio manager at Island Light Capital, which manages the Income Portfolio on Covestor's platform. "We like the relative safety of muni bonds compared to corporates, and they can make sense when Treasury yields are low."
However, many investors are skittish on muni bonds in the wake of Detroit's bankruptcy filing and concerns over Puerto Rico's economy and debt obligations. These developments highlight the shaky finances of many local and state governments after the credit crisis. Also, muni bonds came under in pressure in late 2012 when fiscal cliff negotiations went down to the wire amid speculation the asset class could lose its tax benefits.
The recent news on Detroit and Puerto Rico has put investors on edge. Muni bond mutual funds and ETFs have seen net outflows for 24 straight weeks.
Yet when it comes to worries over the credit quality of muni bonds, Pierce notes that defaults are "historically very low, especially relative to corporate debt." For muni bonds, the default rate is less than 1%.
"The default risks of muni bonds may be less than you think," Pierce said. Also, getting access to muni bonds via index funds and ETFs provides diversification. For example, iShares National AMT-Free Muni Bond ETF (MUB) has only 3.1% of its portfolio in Puerto Rico.
Muni bond funds certainly aren't risk-free and they are impacted when interest rates rise. Still, overblown credit worries may be causing individuals to miss out on decent yields, especially affluent investors in taxable accounts.
Posted on 7:14 AM | Categories:

Attention vendors: Less marketing, more solutions / A bit of a CPA Rant

Jody Padar for ACCOUNTING TODAY writes: I’m a CPA. A professional knowledge worker. Not a software marketer. 
Yes, I use software to do my job but it’s just one of the many tools in my toolbox. The most important tool I have is my ability to interpret data. I help my clients either reduce their taxes or grow their business. My job isn’t to “do bookkeeping” but to be their most trusted advisor. Your software accounting package (in the cloud or not) really has a limited impact on my clients or me.
Now, granted, the data we enter has to be correct so that we can get a complete and accurate set of financials. As a result, the software product we choose needs to work well and our clients need be able to use it properly and with ease. Bells and whistles just add to my efficiency—and if the tool is in the cloud, even better; it improves the collaboration I have with my clients.
It’s no secret many vendors on the market are vying for the top spot, wanting to be the provider with the best package. Many accountants have a tendency to jump all-in with particular software, whether that is Xero or QuickBooks, Sage One, Wave, or Kashoo. Whatever happened to addressing specific needs by picking the solution that is the best fit for the client?
Whatever happened to good old Excel? Don’t tell me you are done with clients giving you information this way. We all know many CPAs take information via Excel and manipulate it in a way they can use it. It’s as simple as this at my firm: If a client comes into our office with Excel we will convert them to a cloud accounting package. If they don’t want to convert, we won’t accept them as a client.
But I know we are not the average CPAs.
I also know most accountants allow their clients to take the lead in their relationship when it really should be the other way around. I know many clients who are not capable of doing any accounting and really don’t need much more then invoicing. Yet many accountants don’t even think about suggesting a package like FreshBooks or Bill.com. 
As the “accounting wars” play out, I will sit back and watch. I can’t help but think our leading software providers act like kids as they fight for their product to win over the market. I see this competition as a good thing; I am thrilled that finally there is some real competition in a space that has too long been monopolized by one company.

Xero CEO Rod Drury and Intuit CEO Brad Smith













I have a long history with QuickBooks – I used to promote and train for them and I formed the Chicagoland QuickBooks user group that has more than 50 paid members. I still have many clients who use the software. But, if Intuit had continued to innovate like they were doing in the early ’90s maybe they wouldn’t feel the need to fight back with road shows, coughing up extra dollars they haven’t had to spend on marketing in years.
My hope for vendors is this - to quit marketing about who is better and work even harder on a product that will blow us away.  Every vendor in the market right now has work to do—there is no perfect solution. Software is just a tool.
And if I have to, I can always pull Excel out of my bag of tricks – especially since the program is collaborating in the cloud these days.
Posted on 7:13 AM | Categories:

US Bill Introduced To Simplify Mobile Workers' Taxation

Mike Godfrey for Tax-News.com writes:   United States businesses have welcomed the introduction into the Senate of a bill, the Mobile Workforce State Income Tax Simplification Act, which would simplify tax reporting requirements for those workers who are employed in multiple state jurisdictions.


States currently have widely varying and inconsistent standards regarding the requirements for employers to withhold income tax and for employees to file personal income tax returns when traveling to a state, where they are non-resident, for temporary work periods.

Employees who travel outside of their state of residence for business purposes are thereby subject to onerous administrative burdens because, in addition to filing federal and resident state income tax returns, they may also be legally required to file an income tax return in every other state into which they have traveled, even if they were there for only one day. Similarly, employers are required to incur extraordinary expenses in their efforts to comply with the states' widely divergent withholding requirements for employees' travel to non-resident states for temporary work periods.

The House of Representatives passed, on a bipartisan basis, a similar bill earlier in 2012, but a companion piece of legislation was not discussed or offered in the Senate at that time. The proposed bipartisan Senate bill, introduced by a group of Senators led by Sherrod Brown (D –Ohio) and John Thune (R – South Dakota), now looks to rectify that situation.

Under the Mobile Workforce State Income Tax Simplification Act, an employee's earnings would only be subject to tax in the state(s) within which the employee is present and performing employment duties for more than 30 days during a calendar year.

"This common-sense legislation will help simplify and standardize tax filing for employees and employers that conduct business in multiple states," Brown said, while Thune stressed that "employees and employers shouldn't be burdened with complex tax reporting requirements because jobs in the modern economy involve work in multiple states."

"Our legislation," Thune added, "would establish a clear 30-day threshold test for state income tax purposes, preventing individuals from having to sort through the complicated tax reporting burdens from the multiple states where they travel for work. This legislation will greatly simplify state income tax filings, is fairer to those residents in states without an income tax, and should help to encourage tax compliance."

The proposed bill is supported by over 250 organizations and business groups. For example, National Retail Federation Vice President and Tax Counsel Rachelle Bernstein commented that "the current morass of state laws dealing with state income tax burdens for workers on business travel outside their home states creates confusion and undue compliance burdens for both employees and employers. This burden can be particularly onerous for the retail industry. Buyers for both large and small retailers frequently travel out of state to visit vendors or attend trade or fashion shows."

Christina Crooks, Director of Tax Policy for the National Association of Manufacturers, also confirmed that "manufacturing requires flexibility and a mobile workforce, (whose) work can often take them around the country, crossing state lines to engage in routine repairs, upgrades and other tasks." The proposed bill "could help ease the tax burden currently plaguing American manufacturers simply because their employees travel outside of their home states on work assignments."

In addition, Barry C. Melancon, President and CEO of the American Institute of Certified Public Accountants, expressed support for the bill as a measure that "strikes a balance between interests of the states in taxing work done within their borders and the needs of businesses to be able to operate efficiently. It will ensure that the primary place(s) of business for an employee are where that employee pays state income taxes."
Posted on 7:11 AM | Categories:

The 0.9% Obamacare Tax That's About To Hit You

Ashlea Ebeling for Forbes writes: It’s hard to keep all the new Obamacare taxes straight, but there’s one that some couples won’t see until they file their 2013 taxes next April, and bizarrely it could mean a surprise tax bill or a refund. It’s the 0.9% Medicare surtax on wages and self-employment income (not to be confused with the separate new 3.8% net investment tax on capital gains, dividends and passive income).
Can you lessen the bite of the 0.9% surtax? In some cases, yes, if you act before year-end, says Mark Nash, a partner in PWC’s Private Company Services practice in Dallas.
The surtax—or additional Medicare tax (it is levied on top of the Medicare tax you already pay)–is effective Jan. 1, 2013 and applies to wages and self-employment income above $250,000 per couple or $200,000 for a single. It applies to active income from a general partnership, but retirees get a break—distributions from retirement accounts and SocialSecurity benefits aren’t assessed the surtax.
Once you earn over $200,000, you’ll see the withholding for the 0.9% surtax on your paystub. Employers are obligated to collect the tax–without regard to the employee’s filing status or outside compensation.
So if you’re a high-earner single with a corporate job, it’s straightforward. You pay 1.45% Medicare tax on the first $200,000 of compensation plus 2.35% (1.45% plus the additional 0.9%) on compensation in excess of $200,000. (This is on top of the Social Security tax rate of 12.4%–6.2% paid by the employee and 6.2% by the employer—calculated on the “wage base” up to $113,700 in 2013.)
Note: the impact of the additional Medicare tax goes up the more your salary goes up because unlike Social Security tax, there is no cap on the amount of compensation subject to Medicare tax, notes Mark Luscombe, a federal tax analyst with CCH, aWolters Kluwer business, in the CCH 2013 Year-End Tax Planning Guide.
What gets complicated is if you hold more than one job, or have a day job and self-employment income on the side, and that pushes your total income above the threshold. Couples where one spouse is over the threshold and one is under, or where both spouses are under the threshold but combined they are over it, can all face underwithholding problems too.
Here’s an example. If both spouses make $200,000, they’re exempt on only $250,000, which means they’re underwithheld by $1,350. That’s what they’ll owe come April if they don’t adjust their W-4 withholding or pay in estimated tax payments to pay in now. If they don’t take these corrective measures, they’d owe a penalty of about $27 calculates Kaye Thomas, founder of Fairmark.com.
For a couple with one high-earner spouse who sees the withholding on his paycheck and a spouse earning $100,000, they’ll owe $900 in April.
Who gets a refund? A high earner spouse with a stay-at home or low-earner spouse. Say the high-earner spouse brings in $250,000 and the spouse is retired. The high-earner spouse’s employer would be withholding on that extra $50,000, and it would be extra withholding. Bizarrely, you can’t fix this by asking your employer to stop withholding for the surtax—nor can you fix the underwithholding example by asking your employer to withhold the surtax. Instead you have to adjust your W-4 to withhold more or less regular income tax.
“You’re supposed to have figured this out,” says Nash, who has been helping clients run the numbers to plan for the surtax. Here are some ideas.
For wage earners, deferring the exercise of options or deferring some income as part of a nonqualified deferred compensation plan into next year could keep you under the threshold for this year. Unfortunately, the way the calculations work, stashing more in your 401(k) won’t help reduce the amount of your wages subject to the surtax.
Self-employed individuals have more room to finesse or bunch their income. They could defer billing and collections until January 2014 and/or accelerate expense payments into 2013 to offset 2013 income. To the extent S Corp owners draw more than $200,000 in salary, they could take more as S Corp distributions and less as salary, but within reason. “You can’t manipulate this without any conscious at all,” says Nash. (The Medicare base tax is 2.9% for the self-employed, so the surtax increases the total Medicare tax to 3.8% on self-employment income.)
Another warning: if you’re just under the threshold, watch out. The threshold amounts are not indexed for inflation, so the tax will snare more people each year.
The Internal Revenue Service has a Questions and Answers guide to the additional medicare tax here.
Posted on 7:11 AM | Categories: