Reminder: 2nd Quarter Estimated Taxes Due

 

If you have not already done so, now is the time to review your tax situation and make an estimated quarterly tax payment using Form 1040-ES. The second quarter due date is now here. Normal due date: June 15th (2014: Due date is Monday the 16th since the 15th falls on a weekend) Remember you are required to withhold at least 90% of your current tax obligation or 100% of last year’s federal tax obligation.* A quick look at last year’s tax return and a projection of this year’s obligation can help determine if a payment might be necessary. Here are some other things to consider: Underpayment penalty. If you do not have proper tax withholdings during the year, you could be subject to an underpayment penalty. The penalty can occur if you do not have proper withholdings throughout the year. So a quick payment at the end of the year may not help avoid the underpayment penalty. W-2 withholdings have special treatment. A W-2 withholding payment can be made at any time during the year and be treated as if it was made throughout the year. If you do not have enough to pay the estimated quarterly payment now, you may be able to adjust your W-2 withholdings to make up the difference. Self-employed. Remember to account for the need to pay your Social Security and Medicare taxes as well. Creating and funding a savings account for this purpose can help avoid the cash flow hit each quarter to pay your estimated taxes. * If your income is over $150,000 ($75,000 if married filing separate), you must pay 110% of last year’s tax obligation to be safe from an underpayment penalty.

Surprises That Tax Us

 

Picture this; for the past few years you have picked up your tax return and have had a small but nice refund. Now imagine your surprise, when next year, you are required to send in a fairly big check to settle your tax bill. Believe it or not, this message is almost as hard to deliver to a taxpayer as it is to hear it. Here are some tips to help ensure tax changes do not come as a surprise to you.

A spouse passes away. The tax surprise related to this event tends to hit older taxpayers the hardest. In the year of death the tax impact in not usually felt. The year following death, the tax surprise hits hard because of the following tax changes:

• You lose standard deductions
• You lose an exemption
• You move from a joint filing status to single (or head of household)

A child is no longer eligible. Just when you think you have it figured out, a child who generated a tax break for you no longer does. Here are some age requirements for popular tax benefits:

• Dependent Care Credit: under age 13
• $1,000 Child Tax Credit: under age 17
• Earned Income Tax Credit: under age 19 (24 if a qualified student)

Earnings with social security benefits. If you are recently retired, collecting Social Security Benefits, and then start working part-time, you are also in for a tax surprise. These extra earnings could not only make your benefits taxable, it could result in a reduction of benefits received.

Other life events. Other life events could provide a tax surprise for you. While some may have positive tax consequences, like a new birth, or becoming head of household, others might surprise you and result in additional tax. Other common life events include retirement, death, and entering/leaving school.

Capital gains surprises from mutual funds. Often sales of investments are a planned event. Unfortunately, many mutual funds sell assets and then you receive a capital gain statement with a surprise taxable event.

New tax laws. 2014 tax law changes create special complications. A number of tax breaks expired at the end of 2013. This includes the educator deduction, state general sales tax deduction, tuition deduction and mortgage insurance deduction. If you took any of these tax deductions in 2013 you can expect a change to your tax return next year unless Congress acts to reinstate any of these provisions.

Want to avoid these surprises? Spend some time now reviewing your anticipated tax situation for 2014. By doing so, perhaps a planned “pleasant” surprise can be in store for you next year.

Alimony Mis-match Getting IRS Audit Attention

 

The U.S. Treasury Department recently released an audit report revealing a disturbing level of non-compliance in alimony reporting on tax returns. This non-compliance will result in vast increase in tax return reviews now and in the years to come. Here is what you need to know.

The study

The Treasury Inspector General for Tax Administration (TIGTA) recently conducted an Audit of 2010 tax returns that claimed an alimony deduction. What they found:

• Over 560,000 taxpayers reduced their income for alimony paid in 2010.
• 47% of the claimed alimony deduction tax returns did not match required income reporting from those who received the alimony.
• The discrepancy was more than $2.3 billion in unreported 2010 income.

Please note: You may reduce your income for qualified alimony payments. Those that receive alimony must include the payments as income on their tax return. As a clarification, in most cases, spousal maintenance is considered alimony by the IRS. While child support is not considered alimony.

Further, the audit determined that the IRS does not adequately track this non-compliance, nor are proper penalties being assessed when the person paying alimony does not correctly report the Social Security Number (SSN) or Tax Identification Number (TIN) of the person receiving the funds.

Things to consider

If you receive alimony. You must report this income on your tax return. If you are receiving income from an ex-spouse that you believe is child support, have documentation to support this claim.

Mis-match audits will rise this year. The IRS has corrected their audit filters to capture major alimony mis-matches for the 2013 tax year. Given this, you should expect a notice or audit if there is a major alimony discrepancy.

Penalties are coming. If you do not correctly report the SSN or TIN of the person receiving alimony you will now start to see penalty notices. The programming error in the IRS system has been corrected. So get a correct identification number for the person who receives your alimony payments and report it on your tax return.

Keep documentation close. Since you know the risk of audit in this area is high, keep your documentation handy. If paying alimony, having it automatically deducted from your paycheck will help you accurately report your payment amounts.

File a tax return. In 2010, $937.2 million of the claimed alimony deductions had no corresponding income tax returns filed reporting the income. This non-reporting area is a highly recommended audit target for the IRS.

Talk to your ex. While possibly an unpleasant task, a quick discussion regarding claimed alimony can identify whether you have a reporting problem. Hopefully, this communication can solve any potential problems prior to the involvement of the IRS.

Small Businesses: Plan for Lower Section 179 Expense

 

Top-line: In 2014, the annual expense limit for Section 179 is now $25,000, down from $500,000 in 2013. You will need to plan accordingly.

Background

Section 179 of the tax code allows businesses to immediately expense qualified capital purchases versus depreciating (recovering) their cost over time. Qualified purchases can be new or used equipment and certain software placed in service during the year. This benefit can be maximized as long as total qualified asset purchases by your business do not exceed $200,000 (formerly $2 million) during your 2014 tax year.

What’s the Problem?

For years the threshold for qualified purchases was much higher than the lower Section 179 amount in 2014. The old Section 179 provision allowed for small businesses to upgrade equipment while lowering their current year tax obligation. Many small businesses like dentist offices, veterinarians, chiropractors and others used this provision in the tax code to help manage their cash flows through reduced taxes while purchasing needed equipment.

Time to Plan

Users of Section 179. If your business currently uses Section 179 as a tax planning strategy, you need to review your anticipated capital purchases for the year. Consider prioritizing your needs to ensure the most important capital purchases are at the top of your list.

Delay your Purchases? There is a slight possibility that Congress will act during the year to increase the Section 179 limits once again. This retroactive nature in Congress has been in place for the past number of years, so this is not out of the question. Consider delaying purchases until later in the year if you think this might happen.

Is Section 179 for you? Please remember that taking advantage of this provision in the tax code only changes the timing of expensing your capital purchases and not the over all deduction of your purchase. If you think Congress will continue to raise taxes to help balance the budget, your future income could be exposed to a higher tax rate. By using standard recovery periods for your capital purchases (typically three, five, or seven years), you are saving some expense for later (higher tax) years. In this case using Section 179 expensing may not be the right decision for your business.

Feel free to call for help to review your situation, especially if you are planning major capital purchases in the near future.

Heart to Heart Talks With Members of Congress

Wow … how inspiring it is to go to Capital Hill and actually get to talk one on one with those we elected to Congress! That is what I did this last week and it was the experience of a lifetime, except that I’ll do it again next year and the year after and the … well you get my point.

As for our elected officials, it is important that we personally address them making their constituents desires known. I hope next year more of you will take the opportunity to share with me your feelings on what needs to happen with the tax code. Taxes are here to stay but we still have a voice in regards to how we would like to see it enacted.

As an Enrolled Agent (EA), a tax expert licensed by the Federal government itself, specifically in the area of tax, who better to go to Congress and express our thoughts? As the IRS is to enforce the tax laws passed by Congress, Enrolled Agents were created for the citizens, as their voice before the IRS. This is why EA’s are best suited to advocate on your behalf and that is what I was able to do last week.

Tax reform is of the utmost importance but to ask for a complete overhaul would be like trying to eat an elephant all at once rather than one bite at a time. So we had to strategically approach our representatives with the items of the most importance which we felt would garner a greater buy in from both sides of the aisle.

Let me share with you the three main goals outlined during our visit to Capital Hill:

1)   Permanently approve Extenders. There are certain deductions, which Congress has to pass each and every year, sometimes making them retroactive. This uncertainty in deductions makes it difficult each year from a tax planning perspective. We asked for stability by permanently approving these extender deductions.

2)   Tax preparer oversight. Did you know that anyone could prepare tax returns for money? I mean to say, did you know that your hairstylist is required to have a license and several hours of training to cut your hair but a tax return preparer needs none? Enrolled Agents are the only voluntary tax preparer licensing that subjects themselves to extensive tax code training along with passing a 12-hour exam focused exclusively on tax law. Most citizens are unaware that not all tax preparers are created equal. It is important that if you are looking for a tax expert, to use an Enrolled Agent. No other certification has the extensive tax training and will many times fall short in one aspect or another leaving you to pick up and pay for those pieces.

3)   The final item on our agenda was to request that the Enrolled Agent credential be protected by the tax code. The goal here is to prevent certain professions from misleading the public as to the true designation of a tax professional. Due to state licensing of CPA’s there has been a push at the state level to restrict federally licensed EA’s from advertising their tax professional designation. One can only presume to know why they would want to restrict the EA’s from advertising their federal qualifications, but realistically this only harms the general public from being able to make an informed decision on who to engage to meet the federal tax filing requirements. We want the tax code to restrict the states from discriminating against the true tax professionals merely based on the fact that the states do not license or oversee the EA. The IRS is charged with overseeing EA’s and with that oversight comes a rigorous 12-hour tax specific exam, along with continuing education directly related to the tax field that the CPA’s are not required to neither pass nor obtain. It is only in the best interest of the tax paying citizens to know that the Enrolled Agents are the Tax Experts. CPA’s are only licensed at the state level as public accountants entrusted with a different set of requirements regarding the accounting professional and not required to be either a tax professional or federally licensed specifically in the area of tax.

The goal was to meet with the Congressman and Senators that represent Arizona, and more specifically the area I am from. This allowed me to stand before them not only as an Enrolled Agent but also a constituent. We had the privilege of meeting with the following:

Congresswoman Krysten Sinema – I met with her personally and she was very receptive to the points we were making. She was very agreeable that in an effort to protect taxpayers that Tax preparers should be required to obtain licensing.

Congressman Matt Salmon – I met with him personally and although he was very reserved he seemed very interested in tax reform. He was very interested in having the ability to call our office to ask questions and receive input on specific tax law that is being reviewed. He found it important to get input from not only those that actually implemented the laws but from those that are also licensed specifically in the tax code.

Senator John McCain – As the Senator was in Arizona speaking at the opening of the new VA hospital we were able to speak with his Legislative Correspondent, Jennifer Scheaffer. The meeting went well and we hope to have Mr. McCain’s support.

Senator Jeff Flake –The Senators Legislative Assistant, Kristen Fallon, was very excited to learn that we have offered our assistance as it relates to tax laws or giving advice should a constituent call the Senators office with a tax concern. She continues to be supportive of “fixing” the extender problem and supports Senator Flake to this end.

All in all the meetings on Capital Hill were wonderful, enlightening, and constructive. We look forward to doing this each year as a voice and advocate for our clients so we respectfully insist you send us your thoughts on tax reform. If enough people are on the same page we just might be taking it to Capital Hill next year!

Tammy

Annual Tax-Exempt Filing Due May 15th

 

If you are involved in a tax-exempt organization or know someone who is, this is a reminder that the annual filing requirement is quickly approaching. The rule: Every tax-exempt organization must file an annual return (990 series) on the 15th day of the fifth month following their year end. That means calendar based charitable groups have until May 15th to file. The penalty: If the organization does not file their annual return for three consecutive years, they automatically have their tax-exempt status revoked. Who should worry: Any tax exempt organization except churches and church related organizations. So soccer booster clubs, PTAs, youth sports organizations, community organizations and more need to do this every year. The small organizations: If your average annual receipts are $50,000 or less, you can simply file Form 990-N (e-postcard). Privacy: Remember not to include your Social Security number with any filings. Often these tax Forms are in public domain. So any private information is available for identity thieves. What’s Your Status? The IRS offers an online tool to check the status of your organization. Here is the link. A quick check of organizations you are members of can lead to a quick phone call to ensure they get their filings done.

Indirect IRA Rollovers. Change is Coming

 

Topline: When rolling over funds from one IRA to another (typically Traditional IRAs, Roth IRAs, SEP IRAs and Simple IRAs), it is best to use a direct rollover versus an indirect rollover. As confirmed in a recent tax court ruling, taxpayers are limited to ONE INDIRECT rollover per 12 months. This limit applies no matter how many IRA accounts you own. Background Many taxpayers have numerous Individual Retirement Accounts (IRAs). You can move funds from one qualifying account to another without paying taxes on the rollover as long as you follow the rollover rules. If the rules are not followed, the funds are deemed a distribution and taxes plus a potential early withdrawal penalty may be owed. There are two primary methods for rolling over the funds from one account to another: Direct Rollover. Using this method, the taxpayer never takes possession of the rollover funds. Instead, one institution transfers the funds out of one account and sends them directly to the institution that has the receiving account. Since the taxpayer never takes possession of the funds, there is little chance the IRS would see the transfer as a distribution. Indirect Rollover. In this case, the funds are withdrawn from the IRA and sent to the account holder. The account holder then deposits the same amount into the new account. As long as the transfer takes place within 60 days, it is a valid transfer and no taxes are owed. The taxpayer bears the burden of proof that the transfer was completed within the required timeframe. Aggregate once per year rule In a recent court case, the IRS put their foot down on unlimited INDIRECT transfers of funds.* In their ruling they stated that a taxpayer is entitled to make one indirect transfer per 12-month period regardless of the number of IRA accounts. Any additional transfers are not valid and will be deemed a distribution from your IRA. Why the rule? Some taxpayers were using a number of rollovers of the same dollar amount from account to account to give themselves a short-term loan. In the tax case, the defendant removed funds from one IRA. He used the money for a couple of months. He then took the same amount from a second IRA and replaced the money originally removed from the first IRA. He then took the same amount from a third IRA to replace the funds in the second IRA. Finally, the last IRA had its funds replaced. Effectively giving him use of the funds for up to 120 days. The court ruling effectively eliminated the ability to make these kinds of transfers. Effective change The court ruling creates a change in the IRA indirect rollover rules beginning on January 1, 2015. Effective that date, you may only conduct one indirect IRA rollover per 12 month period. IRS publications will be revised to reflect this change. Because of this, it is best to employ a direct rollover of funds from one IRA to another using a qualified financial trustee to avoid any potential problems. This ruling does not apply to all conversions and rollovers. Please contact the financial institution receiving the rolled over funds for details on their process to ensure it is handled correctly.

Monthly Client Newsletter

ith the 2013 Tax filing season behind us, the 2014 tax planning season is just beginning. Included this month are two areas where advanced planning can reduce your tax bill. There is also an update from the IRS on the tax treatment of virtual currencies like Bitcoin for those of you using or contemplating their use. A checklist of ideas on how to improve security of your identity rounds out this month’s newsletter. Should you know of someone who may benefit from this information please feel free to forward this newsletter to them.

Planning: Leverage Kiddie Tax Rules Now is the time to take action on reducing next year’s tax bill. One area to help reduce your tax obligation is leveraging your kids to the fullest by understanding the “kiddie tax” rules. Background The term “kiddie tax” was introduced by the Tax Reform Act of 1986. The rules are intended to keep parents from shifting their investment income to their children to have it taxed at their child’s lower tax rate. In 2014 the law requires a child’s unearned income (generally dividends, interest, and capital gains) above $2,000 be taxed at their parent’s tax rate. Applies to Children under the age of 19 Full-time students under the age of 24 and providing less than half of their own financial support Children with unearned incomes above $2,000 Who/What it does NOT apply to Earned income (wages and self-employed income from things like babysitting or paper routes) Children that are over age 18 and have earnings providing more than half of their support Older children married and filing jointly Children over age 19 that are not full-time students Gifts received by your child during the year How it works The first $1,000 of unearned income is generally tax-free The next $1,000 of unearned income is taxed at the child’s (usually lower) tax rate The excess over $2,000 is taxed at the parent’s rate either on the parent’s tax return (Form 8814) or on the child’s tax return (Form 8615) Planning thoughts So while your child’s unearned income above $2,000 is a problem, you will still want to leverage the tax advantage up to this amount. Here are some ideas: Maximize your lower tax investment options. Look for gains in your child’s investment accounts to maximize the use of your child’s kiddie tax threshold each year. You could consider selling stocks to capture your child’s investment gains and then buy the stock back later to establish a higher cost basis. Be careful where you report a child’s unearned income. Don’t automatically add your child’s unearned income to your tax return. It might inadvertently raise your taxes in surprising ways by exposing more income to the Alternative Minimum Tax or reducing your tax benefits in other programs like the American Opportunity Credit. Leverage gifts. If your children are not maximizing tax-free investment income each year consider gifting funds to allow for unearned income up to the kiddie tax thresholds. Just be careful, as these assets can have an impact on a child’s financial aid when approaching college age years. Properly managed, the “kiddie tax” rules can be used to your advantage. But if not properly managed, this part of the tax code can create an unwelcome surprise at tax time.

2015 Health Care Savings (HSA) Account Limits Announced The savings limits for the ever-popular Health Savings Accounts (HSA) are now set for 2015. The new limits are outlined here with current year amounts noted for comparison purposes. What is an HSA? An HSA is a tax advantaged savings account to pay for qualified health care costs. The account consists of wages contributed on a pre-tax basis. There is no tax on the funds contributed or investment earnings as long as the funds are used to pay for qualified medical, dental and vision expenses. To qualify for this tax-advantaged account you must be enrolled in a “high deductible” health insurance program as defined by HSA rules. The limits Health Savings Account (HSA) Limits 2014 NEW! 2015 Change Maximum Annual Contribution Self $3,300 $3,350 +$50 Family $6,550 $6,650 +$100 Add: 55+ catch up contribution $1,000 $1,000 nc Health Insurance Requirements Minimum Deductible Self coverage $1,250 $1,300 +$50 Family coverage $2,500 $2,600 +$100 Out-of-pocket Maximum Self coverage $6,350 $6,450 +$100 Family coverage $12,700 $12,900 +$200 Note: HSAs require a qualified High Deductible Health Plan (HDHP). To qualify, a health insurance plan must meet minimum deductible requirements that are typically higher than traditional health insurance. In addition, your coverage must have reasonable out-of-pocket payment limits as set by the above noted maximums. Not sure what an HSA is all about? Check with your employer. If they offer this option in their health care benefits, they will have information discussing the program and its potential tax benefits.

Virtual Currency is Property per IRS In recent Internal Revenue Service Notice 2014-21, virtual currencies like Bitcoin have been classified as property. The IRS is aware of the growing popularity of this medium of exchange and that it is not considered legal tender by any government. The IRS notice hopes to clarify how you must treat your use of this new technology. The outcome for users is not good. Here is what you need to know; As property. Property is subject to gains and losses. So if you use a virtual currency like Bitcoin, you must keep track of the original cost of the coin and its value when you use it. As a capital asset you must also know whether your gain or loss on use of the virtual currency is short-term or long-term. As income. Wages paid in virtual currency are taxable to the employee, must be reported on a W-2, and are subject to employment taxes. Virtual currency income received as an independent contractor has self-employment tax rules applied and must follow Form 1099 reporting requirements. A currency? Per the IRS, no. Businesses have the ability to calculate foreign currency gains and losses on their financial statements. This foreign currency gain or loss calculation is not available for virtual currencies like Bitcoin. Determining value. If you purchase or sell something using a virtual currency, you need to determine the fair market value of the transaction using a valid virtual currency exchange and translating it into U.S. dollars. Miners have income. Miners are those who receive Bitcoins and other virtual currencies by validating transactions and maintaining public Bitcoin ledgers. If you are someone who “mines” virtual currency, you create income upon receipt of the currency. This is a taxable event. As the technology of alternative methods to exchange goods and services evolves, so will your need to understand it. Should someone offer to provide you with Bitcoins for products and services, you will now know there are tax implications to saying yes.

Check your Credit …Change your Passwords As consumers in the digital age we have repeatedly had our confidence in the security of our identity and financial information tested. First it was the dramatic increase in identity theft at the IRS. Then the major data breach at companies like Target, Neiman Marcus, Yahoo and others. Now we hear that a bug called Heartbleed has made secure web sites anything but secure. Here is a checklist of things to consider; Change your user ids every three to six months Change your passwords every three to six months Close potentially compromised accounts Replace compromised debit and credit cards Understand your risks of theft (for instance your financial risk on credit theft is different than debit card fraud) Consider a credit monitoring service Monitor your social media footprint Update your computer security software Review your credit reports Correct any errors on your credit reports Review your children’s accounts and credit reports Report suspicious activity in your accounts Shred confidential information before tossing it Do not share logins and passwords Create separate credit card and banking accounts for internet transactions Consider using a PO Box for mail Other resources FREE credit report. Each year you are entitled to receive a FREE credit report from the major credit report companies. To receive yours go to: AnnualCreditReport.com IRS Identity Theft: Tips for taxpayers Federal Trade Commission: Identity theft help

As always, should you have any questions or concerns regarding your situation please feel free to call.

Keeping the Tax Underpayment Penalty at Bay

 

With the 2013 tax year behind you, now is the time to plan appropriately to make sufficient estimated tax payments. An underpayment of estimated tax may apply if you still owe $1,000 or more in additional tax after accounting for withholdings and estimated payments made throughout the year. Remember, to avoid underpayment penalties you are required to prepay either;

• 100% of last year’s tax obligation* OR
• 90% of next year’s tax obligation

* If your income is over $150,000 ($75,000 if married filing separate), you must pay 110% of last year’s tax obligation to be safe from an underpayment penalty.

If you think you will need to make periodic payments to the IRS over the year to avoid the penalty, here are some pointers:

• Payments are due quarterly. The payment dates are:
  • 1^st Quarter: 4/15
  • 2^nd Quarter: 6/15
  • 3^rd Quarter: 9/15
  • 4^th Quarter: 1/15 of the following year.

  Should any of these dates fall on a weekend, the Form 1040 ES payment is due on the next business day.

• Add to withholdings. If it looks like your paycheck withholdings will be too low, adjust the amount withheld. One of the benefits of this approach, is that withholdings deducted from a paycheck are not date sensitive, while quarterly estimated payments made late can still cause an underpayment penalty.
• Front load payments. Often it is hard to project your income if you own a small business. If possible, pay a little extra in the first or second quarter to avoid the underpayment penalty exposure by paying the estimated payments later in the year.

If you have not already done so, please call to help assess your situation.

Virtual Currency…Every Bit Counts

 

In recent Internal Revenue Service Notice 2014-21, virtual currencies like Bitcoin have been classified as property. The IRS is aware of the growing popularity of this medium of exchange and that it is not considered legal tender by any government. The IRS notice hopes to clarify how you must treat your use of this new technology. The outcome for users is not good. Here is what you need to know;

• As property. Property is subject to gains and loses. So if you use a virtual currency like Bitcoin, you must keep track of the original cost of the coin and its value when you use it. As a capital asset you must also know whether your gain or loss on use of the virtual currency is a short-term or long-term.
• As income. Wages paid in virtual currency are taxable to the employee, must be reported on a W-2, and are subject to employment taxes. Income received as an independent contractor has self-employment rules applied and must follow Form 1099 reporting requirements.
• A currency? Per the IRS, no. Businesses have the ability to calculate foreign currency gains and losses on their financial statements. This foreign currency gain or loss calculation is not available for virtual currencies like Bitcoin.
• Determining value. If you purchase or sell something using a virtual currency, you need to determine the fair market value of the transaction using a valid virtual currency exchange and translating it into U.S. dollars.
• Miners have income. Miners are those who receive Bitcoins and other virtual currencies by validating transactions and maintaining public Bitcoin ledgers. If you are someone who “mines” virtual currency, you create income upon receipt of the currency. This is a taxable event.

As the technology of alternative methods to exchange goods and services evolves, so will your need to understand it. Should someone offer to provide you with Bitcoins for products and services, you will now know there are tax implications to saying yes.