How Bitcoin Could Revolutionise Accountancy

Nick Chowdrey for Coindesk.com writes: (Nick Chowdrey is a business and technology writer and proud digital native. Currently based in Brighton, UK, he is a technical writer at Crunch Accounting and co-founder of Brighton-based bitcoin community, Bitcoin Brighton. Here, he explores whether or not bitcoin could render accountants obsolete) 

Towards the end of last year, CoinDesk published a piece suggesting four career fields bitcoin could replace. One of these careers was accounting. I wanted to investigate further into whether this could actually happen.

It’s no secret that online accounting firms are already disrupting the industry, offering a cheaper and often more convenient service than their ‘bricks and mortar’ ancestors.

Moving accounting online makes the process quicker and more convenient. Users can update their accounts using smartphone apps and ‘optical character recognition’ helps to automate data entry. It doesn’t take too much of a leap to see how the Bitcoin protocol could further enhance these processes.

How bitcoin can help

On a basic level, the payment network could be used by firms to more easily accept international customers. You’d expect this to increase competition and it could eventually lead to offline firms across the world being priced out of the market.

But even if this does happen, surely these online firms will still need to employ some human accountants? Actually, it seems that not only could Bitcoin be used to automate a lot of accounting functions, it could, in some cases, actually do a better job.

For example, one of the most important accounting tasks is balancing the books – checking that incoming and outgoing transactions match an individual or company’s actual bank balance. Modern financial accounting uses a ‘double entry’ system which requires two separate accounts to be updated depending on the transaction.

For example, if you receive a payment of £100 you increase a credits account by 100 and decrease a debits account by 100, and vice versa if you pay someone £100. If the books are balanced, the debit account plus the credit account should equal zero.

Every entry is dated, with additional information added if necessary, making it possible for accountants to go back through the records and find the problem if the books aren’t balanced. This is a straightforward way for people to trust their own accounts.

Increasingly, however, outside parties like tax collectors and investors also need to trust that a set of accounts is accurate and fully disclosed, requiring expensive audit services. This is where bitcoin comes in.

Triple entry

What would be required is for every transaction between a debtor/creditor to be processed through the Bitcoin network, as well as a record being kept in both the debtor and creditor’s private, offline accounts.

This creates a system of ‘triple entry’ bookkeeping where accounting entries are distributed across the Bitcoin network and cryptographically sealed, making the falsification or destruction of the records practically impossible and ultimately reducing fraud.

This would be an excellent way to save time and money for an open and transparent business that wants to, for example, publicly share its accounts with a potential investor; or for a freelancer who needs to submit a tax return.

Also, thanks to projects like Mastercoin and Ethereum, which will enable other properties to be transferred over the Bitcoin network, the cryptographic transactions wouldn’t even have to involve the transfer of any actual bitcoins, or anything of real monetary value.

It would be more like an exchange of contracts that each party cryptographically signs, saying: “I promise that I paid X party X amount of X currency.” Having said this, it would ultimately make more sense for these contracts to execute the actual payments too, which is also perfectly possible.

At this point, it’s worth saying that bookkeeping is by no means the only thing that accountants do. Certainly, at online accounting firms today, accountants take on a more advisory role, spending less time on tiresome data entry and more time speaking to actual clients and investigating their problems.

This could lead to better service, perhaps explaining the increasing popularity of online accountants.

So, will Bitcoin totally replace accountants? I’m not sure it’s possible. Will it streamline and optimise the industry, just as we expect it to do in other areas of finance? I think almost definitely.

If you make money in the sharing economy, the IRS will know

Kathleen Pender for SF Gate writes: Renting a spare room to backpackers or slapping a mustache on your car and transporting bar-hoppers seems like an easy way to make money - until tax season rolls around.

Some people who participate in the sharing economy find this out the hard way, when they get an unfamiliar 1099 form and realize they have to file new schedules with their tax return and pay a cut to Uncle Sam.

The sharing economy - also called collaborative consumption - lets individuals sell, rent or barter a product, space or service using apps or a website. Standing between them and their customers is a company that typically provides payment processing, marketing, a rating or review system and in some cases, liability insurance.

The nascent industry includes Bay Area companies such as Airbnb (home, room or couch rentals); Uber and Lyft (ride-sharing); TaskRabbit and Gigwalk (errand and odds jobs); and Prosper and Lending Club (peer-to-peer lending).

People who make money using these platforms generally do not have taxes withheld from their payments. Depending on how much they earn, they might or might not get a Form 1099 showing their receipts. This form also goes to the IRS. Even if they don't get a 1099, they are supposed to report all income on their tax return, unless it is specifically exempted.

"For the most part, people are ignorant that they even have to pay taxes" on money earned through the sharing economy, says Alberto Escarlate, a partner with theCollaborative Fund, which backs such companies.

Seeking guidance

His firm was getting so many questions about sharing-economy taxes it started a website - 1099.is - to answer some.

The answers are sometimes confusing. Not all companies - even direct competitors - report payments the same way. And because the industry is so new, even accountants are sometimes stumped.

"The tax side was a real pain in the butt," says Alex Stack, who loaned money through Prosper in its early days. "For years I could do (taxes) myself with a 1040EZ. Then I had to get an accountant. Even he couldn't figure out what they were doing."

People who lend money through Prosper are actually purchasing securities that give them the right to principal and interest on a loan or piece of a loan.

Annual statements

After the end of each year, they get a package that might include a 1099-OID (for interest on notes), 1099-B (for notes that were charged off and recoveries of previously charged-off notes) and 1099-MISC (for late fees, bonuses and referral awards).

They also get an annual statement, which is not sent to the IRS, that details their account activity. "That statement could be 50 pages if they bought a whole bunch of loans," saysAaron Vermut, president of Prosper.

Lending Club sends a similar package to investors, but unlike Prosper, it does not include charge-offs on Form 1099-B.

Vermut says taxes have not been a problem for most Prosper investors. "This is an early adopter product, up to now they have been relatively sophisticated," he says.

If you rent out your personal residence for 14 days or less, you do not have to report the income. If you rent it out for more, get ready for some paperwork.

Airbnb issues Form 1099-K to people - called hosts - who rent out homes using its platform.

This form is only a few years old; it was created to unearth income that was not being reported to the IRS.

3rd-party networks

Individuals, businesses and other entities receive a 1099-K because they have either:

-- Received payments via debit or credit card for any amount, or

-- Received payments through a third-party network for more than 200 transactions that totaled more than $20,000 in a year.

"A third-party network is an intermediary that facilitates cash flows between private or commercial parties doing business," says Jerri Langer of the Cokala Tax Group.

PayPal is an example of a third-party network.

Airbnb says it is acting as a "merchant acquirer," not a third-party network and sends 1099-Ks to all hosts - no matter how much or little they have earned - because the threshold for reporting credit card payments is zero.

Most accountants say hosts should report this as rental income on Schedule E, rather than on Schedule C, which is used for business income.

"You could make a case for putting a traditional bed and breakfast on Schedule C," says J. Aaron Christopher, a CPA in Concord. But if you are renting through Airbnb, whether it's "a room, a part of a room or a whole house, the primary activity is Schedule E because it is a residential property."

TurboTax treats it as rental income on Schedule E, a spokeswoman for Intuit says.

Hosts can deduct expenses related to their rental, including Airbnb fees, which are not subtracted from the amount reported on Form 1099-K.

For more information on renting residential or vacation property, seewww.irs.gov/taxtopics/tc415.html.

Ride sharing

Lyft, which connects people using their own cars with passengers, treats drivers as independent contractors. Drivers who give at least 200 rides and earn at least $20,000 from passengers in a year get Form 1099-K. Drivers who earn at least $600 from bonuses, mentor training and reimbursements get Form 1099-MISC. Drivers who meet neither criteria get no tax form.

Uber, which also operates a ride-sharing platform, reports driver income on 1099-MISC, but "we will be transitioning to 1099-K beginning this year," a spokesman says.

TaskRabbit, which finds people to do odd jobs, also treats its workers as independent contractors.

"Unless you have earned over $20,000 throughout the calendar year you will not be receiving a 1099 from us," TaskRabbit says on its website. "You will however receive an earnings statement that will separate out your earnings into the following categories: task price, reimbursements and tips." It adds: "If you earned over $600 last year and received payment by check, you will receive a 1099 for those payments only."

Schedule C

Gigwalk, which is similar to TaskRabbit, reports payments that exceed $600 a year on Form 1099-MISC, but "we will be transitioning to 1099-K beginning this year," a spokesman says.

Money earned through companies such as Gigwalk, TaskRabbit, Lyft and Uber is usually reported on Schedule C.

Taxpayers can deduct expenses related to this income. The net amount is subject not only to income tax but also to self-employment tax, which covers both the employer's share ofSocial Security and Medicare taxes.

Rental income reported on Schedule E is not subject to self-employment tax.   

- You can Read Kathleen Pender at her Blog: click here   or Kathleen Pender 

Online Resources Explaining the New Capital Gain Rates Changes

Anyone can use our search engine and learn all about the new capital gain rate changes. Capital-gains tax rates changed in 2013, with the 15 percent rate getting bumped up to 20 percent on long-term gains for some earners. But in some instances, a zero capital-gains tax may apply. If you'd like to find out where your capital-gains rate stands or may fit into your 2013 tax filing, in addition to our search engine one of the following websites might prove useful.

• Bankrate.com: Breakdown of the different capital gains tax rates and how they apply.http://www.bankrate.com/brm/itax/news/taxguide/review-rates1.asp

• Internal Revenue Service: Covers capital gain and loss rates and topics related to taxable assets. http://www.irs.gov/taxtopics/tc409.html

• Tax Policy Center: Offers guide on how capital gains are taxed.http://www.taxpolicycenter.org/briefing-book/key-elements/capital-gains/how-taxed.cfm

• TurboTax: Explores new capital gains rates that apply to different investment gains and losses. http://turbotax.intuit.com/tax-tools/tax-tips/Investments-and-Taxes/Guide-to-Short-term-vs-Long-term-Capital-Gains-Taxes_Brokerage-Accounts_etc _/INF22384.html

Savings from paying mortgage early trumps tax deductions

"Pete The Planner" for IndyStar writes:  QUESTION

Dear Pete,

My husband and I have been making almost triple payments on our mortgage, in order to pay off our mortgage as quickly as we can. I mentioned this in the break room at work, and several people said it was a bad idea. They said that we would lose our mortgage interest deduction, and this would impact our taxes. I know that we get to deduct our mortgage interest from our taxes each year. So, should we slow down our mortgage repayment in order pay less in taxes?

— Sarah

Sarah: I have to admit, I hear this question/idea quite frequently.

It’s not uncommon for people to do everything in their power to legally avoid the outreached hand of Uncle Sam. Tax deductions were created for a reason, right? Absolutely, but you shouldn’t trip over yourself to get them. If your strategy is to pay mortgage interest in order to keep the tax deduction, you will lose every single time. It’s math. Never argue with math.

For example, if your gross household income is $80,000 and you pay $5,000 in mortgage interest, then your taxable income will become $75,000, after you’ve claimed the mortgage interest deduction on your tax return. Now, let’s say you have a marginal tax rate of 25 percent. Your mortgage interest deduction just saved you $1,250 in taxes. I gotta admit, that's pretty awesome. You paid $5,000 in interest and reduced your taxes by $1,250, for a net outflow of $3,750. Let’s now consider the alternative.

If you don’t have any mortgage interest to deduct, your taxable income will remain $80,000. You don’t get to legally avoid $1,250 in taxes, but you also don’t have to pay $5,000 in mortgage interest. Whereas having mortgage interest to deduct (in our previous example) results in a net cash outflow of $3,750, having no mortgage interest to deduct results in a net cash outflow of $0. The choice is simple. If you keep a mortgage, so that you can deduct the interest, you will pay a net amount of $3,750. If you don’t have a mortgage, you will pay nothing.

I don’t know why this financial myth exists, but it is prevalent. Do you want to know a better (legal) tax-avoidance strategy? Put $5,000 into a tax-deductible Individual Retirement Account. Per our example, you will reduce your taxable income to $75,000, reduce taxes by $1,250, and set $5,000 aside for the future. Using an IRA contribution to reduce taxable income makes much more sense than paying a bank interest to reduce your taxable income. The same strategy would work within a 401(k) or 403(b).

Despite what retailers and incorrect conventional wisdom may say, you can’t actually save money by spending money, or in this case, paying mortgage interest. However, you certainly can save money by saving money. And that’s why you should hustle to pay off your mortgage and seek out every tax deduction that’s based on saving, not spending.

You can read "Pete The Planner" at his site Here.

Know IRA Tax Deduction Limits

Jim Blankenship writes: Your retirement savings ride on your tax-filing status. Here’s what to know this year how much you can kick in to your individual retirement accounts.

You probably use one of the following filing statuses when you ready your federal return for the Internal Revenue Service: single or head of household; married filing separately or married filing jointly.

Statuses’ limits for contributing to your IRA differ. For 2013 and 2014, though, the maximum you can contribute to all of your traditional and Roth IRAs is the smaller of $5,500 ($6,500 if you’re age 50 or older) or your taxable compensation for the year.

Deductibility of contributions also frequently depends on whether you, your spouse or both participate in a retirement plan at work or elsewhere.

Filing single or head of household:

Traditional IRA.  If you’re not covered by a retirement plan at your job, you have no modified adjusted gross income (MAGI) limitation on your deductible contributions. For 2014, if covered by a retirement plan at work you face no limitation on your deductible contributions to a traditional IRA if your MAGI is $60,000 or less.

(Online tools exist for calculating your MAGI.)

If covered by an employment plan and your MAGI falls between $60,000 and $70,000, you are entitled to a partial deduction reduced by 55% for every dollar over the lower limit.

(As in all cases here, if that partial deduction works out to less than $200, you can contribute at least $200 to your account. Contributions grow tax-free. All partial deductions reduced here by 55% also jump to a 65% reduction if you’re over 50; round all amounts after reduction up to the nearest $10.)

When covered by a plan at work and with a MAGI more than $70,000, you can’t deduct your traditional IRA contributions.

Roth IRA. If your MAGI falls below $114,000, you can kick in the entire limit to a Roth IRA. If your MAGI is $114,000 to $129,000, your allowable contribution to a Roth IRA drops ratably by every dollar above the lower end of the range. You cannot contribute to a Roth if your MAGI hits $129,000 or more.

Married filing jointly or qualifying widow(er):

Traditional IRA. If you are not covered by a retirement plan at your job and your spouse is also not covered by a plan, no MAGI limitation applies to your deductible contributions.

Similarly, if you are covered by a work retirement plan and your MAGI comes in at $96,000 or less, no limitation on your deductible contributions to a traditional IRA applies. A MAGI between $96,000 and $116,000 gets you a partial deduction reduced by 27.5% for every dollar over the lower limit, 32.5% if you’re over 50.

If you are covered by a retirement plan at your job and your MAGI exceeds $116,000, you can deduct no traditional IRA contributions.

Suppose you are not covered by a retirement plan at your job and your spouse is? A MAGI less than $181,000 allows to you deduct all of your IRA contributions. If your MAGI runs $181,000 to $191,000, you get a deduction reduced by 55% for every dollar over the lower limit.

If your MAGI exceeds $191,000, you can deduct none of your contributions to your traditional IRA.

Roth IRA. You can contribute the entire limit if your MAGI comes in under $181,000. If your MAGI is $181,000 to $191,000, your contribution declines ratably by every dollar above the lower end of the range. If your MAGI tops $191,000, you can’t contribute to a Roth IRA.

Married filing separately:

Traditional IRA. If you aren’t covered by a retirement plan on the job and your spouse is also not covered by a plan, your deductible contributions face no MAGI limitation. If you are covered by a plan at your job and your MAGI is less than $10,000, you take a deduction reduced by 55% for every dollar.

If your MAGI in this case exceeds $10,000, you can deduct none of your contributions.

If you are not covered by a retirement plan but your spouse is and your MAGI is less than $10,000, you take a deduction reduced by 55% for every dollar over the lower limit. You may deduct no contributions if your MAGI tops $10,000.

Roth IRA. If your MAGI is less than $10,000, your contribution reduces ratably by every dollar. Again, a MAGI of $10,000 or more means you can’t contribute to a Roth IRA.

For IRA MAGI qualification, a person filing as married filing separately who did not live with his or her spouse during the tax year is considered single for filing.

Where to read Jim Blankenship: Jim Blankenship, CFP, EA, is an independent, fee-only financial planner at Blankenship Financial Planning in New Berlin, Ill. He is the author of An IRA Owner’s Manual and A Social Security Owner’s Manual. His blog is Getting Your Financial Ducks In A Row, where he writes regularly about taxes, retirement savings and Social Security.

Inheritance tax liability confusion

Karin Price Mueller/The Star-Ledger  writes: Question. I live in New Jersey. My aunt, who lived in Connecticut, recently died and left me some money. To which state or states do I owe inheritance tax?

— Trying to do the right thing

Answer. We’re sorry to hear about your aunt, and we’re glad you asked the question.

The executor of your aunt’s estate would carry most of the burden of administering her estate, while you as the beneficiary may be less involved, said Christopher Roman, an estate planning attorney with Einhorn Harris Ascher Barbarito & Frost in Denville.

"Assuming your aunt died a resident of Connecticut, the laws of Connecticut will govern the taxation and administration of her estate," he said. "If, based on Connecticut’s estate tax laws, your aunt’s estate owes estate tax to Connecticut, her executor will be responsible for completing the appropriate forms and paying the tax in accordance with your aunt’s will."

For 2014, your aunt’s estate in Connecticut may owe state estate taxes if it’s worth more than $2 million.

And you won’t have to file anything with New Jersey to inherit assets from your aunt’s out-of-state estate and you will not owe separate New Jersey inheritance tax, said Frederick Schoenbrodt, an estate planning attorney with Drinker Biddle & Reath in Florham Park.

He said your question highlights the difference between an estate tax and an inheritance tax. While both taxes apply at a person’s death, many people refer to these two taxes interchangeably, but they actually operate in very different ways, he said.

"An estate tax is primarily based on the total value of a decedent’s estate compared to the state’s estate tax exemption amount," Schoenbrodt said. "By contrast, an inheritance tax is primarily based on the identity of a decedent’s beneficiaries, their relationship to the decedent, and the amount passing to certain classes of beneficiaries."

He said Connecticut has an estate tax, but does not have an inheritance tax, while New Jersey has both.

While that sounds burdensome, Schoenbrodt said, the good news is that while a New Jersey estate must calculate the state estate and inheritance tax liabilities separately, the taxes offset each other in such a way that the estate will pay no more than the greater of the two taxes, not the sum of the two taxes.

The New Jersey estate tax will typically apply if the value of a resident decedent’s estate exceeds $675,000 and assets left to a surviving spouse or charity are generally deductible, he said.

New Jersey’s inheritance tax law operates very differently and can apply to much smaller estates depending on the relationship of the beneficiaries to the decedent, he said. For example, transfers from a decedent to a niece or nephew, called a "Class D" beneficiary, are taxed at 15 percent on any amount up to $700,000 and 16 percent on any amount exceeding $700,000. Transfers up to $500 are exempt, but there is no exemption if the transfer is greater than $500, he said.

Tax tips for those gifting Treasury bonds

HOLLY NICHOLSON for New Observer writes:   Question. I have Treasury bonds that have earned a pretty decent interest and are now worth slightly less than $7,000 each. I’m thinking of gifting these to my three adult grandchildren for their birthdays this year. When I purchased them I put my name and one of their names on three bonds for a total of nine bonds. I know one of them needs the money and will probably cash all three of the bonds as soon as he receives them, but the other grandchildren will probably keep at least one and maybe two of them until they stop earning interest, which will be long after my life span. By gifting now rather than waiting until I die, I figure they can use the money now and I can avoid any tax to my estate.

Can I just give them to the “grands” and be done with it, or do I need to have them reissued in their names alone? Will I be able to deduct the entire value of the bonds or just what I paid for them on my taxes for 2014?

Answer. That’s very generous of you! You probably will not like my responses, but don’t kill the messenger.

First of all, there is no tax deduction allowed for a gift to an individual; only gifts that are made as deductible charitable contributions (see IRS Publication 950 for more information on allowable deductions).

The second difficulty you may have is the value of the bonds. You are allowed to gift up to $14,000 a year to an individual without being required to file a gift tax return (IRS form 709). If you are married, you and your spouse are allowed to gift up to $28,000 to an individual. If the gift of more than $14,000 comes from only one spouse, you must both consent to what the IRS refers to as “gift splitting.” Because the amount of your gift is $21,000, even if you are married, you will both need to file a gift tax return to show that you and your spouse agree to use gift splitting. It will be less complicated if you gift two of your bonds in 2014 and the third one in 2015. This way your annual gift to each grandchild will be $14,000 or less and no gift tax return is necessary.

The third issue with your plan is the taxation of the interest earned on the bond since you purchased it until the day you gift the bond and when it is redeemed. If the bond was purchased with your money and you have a grandchild (or anyone) named as co-owner, you are responsible for the tax on the interest earned when the bond is redeemed. If you had purchased the bonds in each of your grandchildren’s name only, they, as the only owners, would be responsible for the tax on the interest. If you and your grandchildren had purchased the bonds together as co-owners with money from each of you, the taxes owed would be proportionate based on the amount each of you contributed to the purchase price. If you have the bonds reissued in their name only, you will be responsible for taxes on any interest earned from purchase date to date of reissue. The new owner of the bond will be responsible for tax on any interest earned from the date of reissue until redemption. If you gift the bonds and no-one redeems them until your death, the survivor becomes the new owner and is responsible for all the tax owed upon redemption.

Summary: It is a nice gift, but if you gift all three bonds to each “grand” you will need to file a gift tax return, the gift will not result in a tax deduction, and if any of the bonds are redeemed or reissued prior to your death you will have some tax liability.

Holly Nicholson is a certified financial planner in Raleigh. You can read her at Reach askholly.com

Read more here: http://www.newsobserver.com/2014/02/22/3638930/money-matters-tax-tips-for-those.html#storylink=cpy

Read more here: http://www.newsobserver.com/2014/02/22/3638930/money-matters-tax-tips-for-those.html#storylink=cpy