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Summary

Frank Zerjav, a Certified Public Accountant since 1972, is the founder and CEO of two firms, Zerjav & Associates and the Advisory Group. Based in the Westport area of west St. Louis County, Missouri, these entities represent a national clientele, many who are professionals and business owners in the areas of health care, computer technologies, real estate, retail, engineering, and law. Frank Zerjav and his team of tax professionals count nearly 2000 professionals and business owners among their clientele. Both firms offer a range of services, including tax preparation and planning, entity structuring, business succession planning, and accounting system implementation. Together with his associates, Frank Zerjav employs tax strategies designed to prevent an audit by the US Internal Revenue Services. He also represents clients facing an audit, tax problem, or related controversy with both federal and state tax agencies. He protects his clients' rights and assets by using proven techniques and advanced examination methods. His goal is to prevent financial losses arising from interest assessments, penalties, or additional assessments. In many cases, Frank Zerjav has protected the interests of his mostly high-net-worth clients who own a professional practice or business. On several occasions, these clients thought they had no recourse against the IRS, but he was able to prove otherwise. Apart from running Zerjav & Associates and the Advisory Group, Mr. Zerjav frequently speaks before national audiences on tax planning strategies. He also maintains a financial stake in several privately held companies in various sectors, including management, finance, business services, accounting, and real estate. Mr. Zerjav was educated at St. Louis University, where he earned a Bachelor of Science in Commerce and an MBA, with a concentration in finance.

Work experience

FOUNDER, CEO

ADVISORY GROUP

Manager

ZERJAV & ASSOCIATES

Education

BS IN COMMERCE

SAINT LOUIS UNIVERSITY

MBA

SAINT LOUIS UNVIERSITY

Tax Tips Newsline - January 2015

TAX TIPS NEWSLINE  _____________________      

                                                              JANUARY 2015

 

Produced monthly for clients of the Advisory Group Associates

Our Mission:  Sharing ideas that make a real difference.

 

This “TAX TIPS NEWSLINE” is compiled by its founder, Frank Zerjav CPA and team of Professional Tax Associates, and then it is sent by email each month because you need tax and compliance knowledge.  It’s a big part of your life and the entities that you operate.

 

ORGANIZE 2014 DATA: During January, 2015, we are Emailing each client/taxpayer their Tax Organizer to be used to compile your 2014 records and efficiently deliver this data and information for preparation of an accurate tax return.  This "Tax Organizer" often shows you what was reported in the prior year. Please answer the questions and complete this accurately. It is also a good idea to use pencil.

 

Do not wait to send us your 2014 data. Often Schedules K-1 from partnerships etc. are not issued until April.  Best practice is to bring us what you have by Saturday, February 7, 2015, even if your forms 1099 and brokerage statements have not yet been received. (See Client Appreciation Brunch.) The goal is to have adequate time to let us process an accurate tax return.  If you have any questions, please do not hesitate to contact us.  Please notify us promptly of any address, e-mail, and telephone contact changes!

 

 

Bring your data and “Tax Organizer” for discussion and preparation.

 

Saturday, February 7th, 10am until 2pm

 

At the offices of Advisory Group Associates,   1980 Concourse Drive, St. Louis, MO 63146.

 

Please R.S.V.P.  At: 314-205-9595.

 

Inside this Month's Issue

 

  • 2015 Standard Mileage Rate
  • Reminders – Compliance Issues
  • Most Often Overlooked Tax Deductions
  • Outsourcing Accounting to Save Money
  • Tax Treatment of Employer-Provided Cell Phones or IPADS
  • About the Solo 401(k) Retirement Plan
  • Tax News
  • Hire Spouse to Work in a Family Business
  • Wide Range of Solutions & Services Offered

 

2015 STANDARD MILEAGE RATES

 

Beginning on January 1, 2015, the standard mileage rates for the use of a car (also vans, pickups or panel trucks) will be:

 

  • 57.5 cents per mile for business miles driven
  • 23 cents per mile driven for medical or moving purposes, down half a cent from 2014
  • 14 cents per mile driven in service of charitable organizations, same as 2014

 

The standard mileage rate for business is based on an annual study of the fixed and variable costs of operating an automobile.  The rate for medical and moving purposes is based on the variable costs as determined by the same study.  The charitable rate is set by law.

 

Taxpayers always have the option of calculating the actual costs of using their vehicle rather than using the standard mileage rates.

 

A taxpayer may not use the business standard mileage rate for a vehicle after using any depreciation method under the Modified Accelerated Cost Recovery System (MACRS) or after claiming a Section 179 deduction for that vehicle.  In addition, the business standard mileage rate cannot be used for more than four vehicles used simultaneously.

 

As a reminder, the IRS requires you to keep a daily log to support business miles claimed.

 

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REMINDERS – COMPLIANCE ISSUES

 

  1. Forms 1099 need to be filed annually to report payments totaling $600 or more, during the calendar year that are made to non - employee contractors or payments of interest, rent, etc. The Advisory Group can also produce necessary quarterly payroll and annual employment tax reports, including Forms 1099 and Wage Forms W-2, for a small processing fee.

 

  1. We want to remind you that owner employees that are active MUST withdraw a reasonable salary. Contact us to help compute the net paycheck for the salary level you determine or to discuss adoption of a retirement plan that helps to lower your tax burden and let you keep more of what you earn.

 

  1. We also want to remind owners of S-Corporations that IRS Notice 2008-1 requires special reporting on Wage Forms W-2 of any amounts paid under the Company’s Section 105 Medical Reimbursement Plan. The entity can pay for health, disability and long term care premiums that are deducted as compensation on Form 1120-S. Amended Wage Forms W-2 may be required to report these Section 105 reimbursements.

 

  1. Another compliance issue involves the late filing penalty that will be assessed for all tax returns not filed by their due date (including extensions). The new law asserts penalties on late filed tax returns that do not even owe taxes.  The penalty can be as much as 100% of  the amount of any unpaid tax due.

 

  1. Another reminder regarding the generous 2014 $5,340,000 lifetime gift tax exemption: The existing law includes provisions for inflation adjustments.  Under Rev Proc 2011-52 the $5,340,000 lifetime exemption is scheduled to increase to $5,430,000 for 2015.  The annual gift exclusion amount stays at $14,000 for 2015.

 

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MOST OFTEN OVERLOOKED TAX DEDUCTIONS

 

Don’t let a knowledge gap prevent you from taking advantage of these money-saving tax breaks.  Here are some of the most often overlooked tax deductions.  Claim them if you deserve them and keep more of what you earn!

 

State Sales Taxes:  Although all taxpayers have a shot at this write-off, it makes sense primarily for those who live in states that do not impose an income tax.  You must choose between deducting state and local income taxes or state and local sales taxes.  For most citizens of income-tax states, the income tax is a bigger burden than the sales tax, so the income-tax deduction is a better deal.

 

The IRS has tables that show how much residents of various states can deduct, based on their income and state and local sales tax rates.  But the tables aren’t the last word.  If you purchased a vehicle, boat or airplane, you get to add the sales tax you paid to the amount shown in the IRS table for your state.

 

The same goes for any homebuilding materials you purchased.  These add-on items are easy to overlook, but big-ticket items could make the sales-tax deduction a better deal even if you live in a state with an income tax. 

 

Reinvested Dividends:  This isn’t really a tax deduction, but it is an important subtraction that can save you a bundle.  If, like most investors, your mutual fund dividends are automatically used to buy extra shares, remember that each reinvestment increases your tax basis in the fund.  That, in turn, reduces the taxable capital gain (or increases the tax-saving loss) when you redeem shares.  Forgetting to include the reinvested dividends in your basis results in double taxation of the dividends.  Once when they are paid out and immediately reinvested in more shares and later when they’re included in the proceeds of the sale.  Don’t make that costly mistake.  If you’re not sure what your basis is, ask the fund for help.

 

Out-of-Pocket Charitable Contributions:  It’s hard to overlook the big charitable gifts you made during the year, by check or payroll deduction (check your December pay stub).

 

But the little things add up, too, and you can write off out-of-pocket costs incurred while doing work for a charity.  For example, ingredients for casseroles you prepare for a nonprofit organization’s soup kitchen and stamps you buy for your school’s fundraising mailing count as a charitable contribution.  Keep your receipts and if your contribution totals more than $250, you’ll need an acknowledgement from the charity documenting the services you provided.  If you drove your car for charity, remember to deduct 14 cents per mile.

 

Student-loan interest paid by Mom and Dad:  Generally, you can only deduct mortgage or student-loan interest if you are legally required to repay the debt.  But if parents pay back a child’s student loans, the IRS treats the money as if it was given to the child, who then paid the debt.  So, a child who’s not claimed as a dependent can qualify to deduct up to $2,500 of student-loan interest paid by Mom and Dad.  He or she doesn’t have to itemize to use this money-saver.  Mom and Dad can’t claim the interest deduction even though they actually foot the bill since they are not liable for the debt.

 

Job Hunting Cost:  If you’re among the millions of unemployed Americans who were looking for a job in 2014, we hope you kept track of your job-search expenses…or can reconstruct them.  If you’re looking for a position in the same line of work, you can deduct job-hunting costs as miscellaneous expenses if you itemize.  Such expenses can be written off only to the extent that your total miscellaneous expenses exceed 2% of your adjusted gross income.  Job-hunting expenses incurred while looking for your first job don’t qualify.  Deductible job-search costs include, but aren’t limited to:

 

  • Food, lodging and transportation if your search takes you away from home overnight
  • Cab fares
  • Employment Agency Fees
  • Costs of printing resumes, business cards, postage and advertising.

 

The Cost of Moving for Your First Job:  Although job-hunting expenses are not deductible when looking for your first job, moving expenses to get to that job are.  And you get this write-off even if you don’t itemize.

 

To qualify for the deduction, your first job must be at least 50 miles away from your old home.  If you qualify, you can deduct the cost of getting yourself and your household goods to the new area.  The 23 cents a mile rate applies, boost your deduction by any amount you paid for parking and tolls for driving your own vehicle.

 

Military Reservists’ Travel Expenses:  Members of the National Guard or military reserve may tap a deduction for travel expenses to drills or meetings.  To qualify, you must travel more than 100 miles from home and be away from home overnight.  If you qualify, you can deduct the cost of lodging and half the cost of your meals, plus an allowance for driving your own car to get to and from drills.  For qualifying trips during 2014, the standard mileage rate is 55 cents a mile.  In any event, add parking fees and tolls.  And, you don’t have to itemize to get this deduction.

 

Deduction of Medicare Premiums for the Self-Employed:  Folks who continue to run their own businesses after qualifying for Medicare can deduct the premiums they pay for Medicare Part B and Medicare Part D and the cost of supplemental Medicare (medigap) policies.  This deduction is available whether or not you itemize and is not subject the 10% of AGI test that applies to itemized medical expenses. 

 

Child-Care Credit:  A credit is so much better than a deduction; it reduces your tax bill dollar for dollar.  So missing one is even more painful than missing a deduction that simply reduces the amount of income that’s subject to tax. 

 

You can qualify for a tax credit worth between 20% and 35% of what you pay for childcare while you work.  But if your boss offers a child care reimbursement account – which allows you to pay for the childcare with pre-tax dollars- that might be a better deal.  If you qualify for a 20% credit but are in the 25% tax bracket, for example, the reimbursement plan is the way to go.  (In any case, only expenses for the care of children under age 13 count.)

 

You can’t double dip.  Expenses paid through a plan can’t also be used to generate the tax credit.  But get this:  Although only $5,000 in expenses can be paid through a tax-favored reimbursement account, up to $6,000 for the care of two or more children can qualify for the credit.  So, if you run the maximum through a plan at work but spend even more for work-related child care, you can claim the credit on as much as $1,000 of additional expenses.  That would cut your tax bill by at least $200.

 

State Tax Paid Last Spring:  Did you owe tax when you filed your 2013 state income tax return in the spring of 2014?  Then, for goodness sake, remember to include that amount in your state-tax deduction on your 2014 federal return, along with state income taxes withheld from your paychecks or paid via quarterly estimated payments during 2014.

 

Refinancing Points:  When you buy a house, you get to deduct in one fell swoop the points paid to get your mortgage.  When you refinance, though, you have to deduct the points on the new loan over the life of that loan.  That means you can deduct 1/30th of the points a year if it’s a 30-year mortgage.  That’s $33 a year for each $1,000 of points you paid—not much, maybe, but don’t throw it away.  Even more important, in the year you pay off the loan – because you sell the house or refinance again, you get to deduct all as yet un-deducted points.  There’s one exception to this sweet rule:  If you refinance a refinanced loan with the same lender, you add the points paid on the latest deal to the leftovers from the previous refinancing, and deduct that amount gradually over the life of the new loan.

 

Jury Pay Turned Over to Your Employer:  Many employers continue to pay employees’ full salary while they serve on jury duty, and some impose a quid pro quo.  The employees have to turn over their jury pay to the company coffers.  The only problem is that the IRS demands that you report those jury fees as taxable income.  To even things out, you get to deduct the amount you give to your employer.  But how do you do it?  There’s no line on the Form 1040 labeled jury fees.  Instead the write-off goes on line 36, which purports to be for simply totaling up deductions that get their own lines.  Add your jury fees to the total of your other write-offs and write, “jury pay” on the dotted line to the left.

 

American Opportunity Credit:  This tax credit is available for up to $2,500 of college tuition and related expenses paid during the year.  The full credit is available to individuals whose modified adjusted gross income is $80,000 or less ($160,000 or less for married coupled filing a joint return).  The credit is phased out for taxpayers with incomes above those levels.  This credit is juicier than the old Hope Credit.  It has higher income limits and bigger tax breaks, and it covers all four years of college.  And if the credit exceeds your tax liability, it can trigger a refund.  (Most credits can reduce your tax to $0, but not get you a check from the IRS.)

 

Deduct those Blasted Baggage Fees:  In recent years airlines have been driving passengers batty with extra fees for baggage and for making changes in their travel plan.  All together, such fees add up to billions of dollars each year.  If you get burned, maybe Uncle Sam will help ease the pain.  If you’re self-employed and traveling on business, be sure to add those cost to your deductible travel expenses.

 

Credit for Energy-Saving Home Improvements:  Although this credit has been scaled back, it still exists and might save you some money if you made energy saving home improvements during 2014.  The credit is worth 10% of the cost of qualifying energy savers including new windows and insulation.  The maximum credit is $500 and, if you claimed this credit in the past, you’re probably out of luck now. 

 

There’s also no dollar limit on the separate credit for homeowners who install qualified residential alternative energy equipment, such as solar hot water heaters, geothermal heat pumps and wind turbines.  Your credit can be 30% of the total cost (including labor) of such systems installed through 2016.

 

Additional Bonus Depreciation:  Business owners can write off 50% of the cost of qualified assets placed in service during 2014.  This break applies only to new assets with recovery periods of 20 years or less, such as computers, machinery, equipment, land improvements and farm buildings.  So don’t miss out on this big tax benefit if you placed business assets in service during 2014.

 

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OUTSOURCING ACCOUNTING TO SAVE MONEY

 

Outsourcing accounting work, along with other office work, saves your company money for:

 

Unemployment Taxes, Hiring and Training, Health care Benefits, Paid-Time Off, Infrastructure (desk space, office equipment, etc), and Utilities.

 

Many companies and individuals in a variety of fields now offer outsourcing services for growing businesses.  People who work from a central office or from their own homes do the same tasks in house employees used to do, at significant savings. 

 

You might consider outsourcing one or more administrative and management tasks to individuals or firms.

Outsourcing Accounting Work.  When you price outsourced accounting services, you’ll see all the money you can save.  Contact the Advisory Group (314) 205 – 9595 for your free price quote to see how much it would cost for a full fledged accounting department to manage your books from a remote location.

 

When you outsource, your bookkeeper is dedicated to your financial accounting services.  That individual doesn’t answer phones, book trips, make coffee, or do anything else that administrators might do.

 

Your bookkeeper is devoted to keeping your books; generating financial reports and helping you get a better handle on your company’s cash flow, because knowledge is power.

 

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TAX TREATMENT OF EMPLOYER-PROVIDED

CELL PHONES OR IPADS

 

 

As part of the Small Business Jobs Act of 2010, cell phones have been removed from the definition of listed property. The IRS has released guidance to clarify the treatment of employer-provided cell phones as an excludible fringe benefit. Tax-free treatment is available without burdensome recordkeeping requirements.

 

Employer-provided cell phone. When an employer provides an employee with a cell phone primarily for noncompensatory business reasons, the business and personal use of the cell phone is generally nontaxable to the employee. Recordkeeping of business use of the cell phone is not needed to receive tax-free treatment.

 

Cell phones provided by employers to an employee to promote morale, attract a prospective employee, or a means of providing additional compensation to an employee do not qualify as noncompensatory business reasons.

 

Employer reimbursements. Reimbursements received by an employee from an employer who requires the employee to have a cell phone for business purposes are tax-free reimbursements. Tax-free treatment does not apply for unusual or excessive expenses or to reimbursements made as a substitute for a portion of the employee’s regular wage.

 

Key tax break for iPads. The IRS has informally indicated that iPads and other tablets will be treated like cellphones when employers provide them to employees. Thus, employees won’t be taxed on the value of personal use, as long as the devices are provided primarily for business reasons rather than as a form of compensation. Similarly, reimbursements made by employers to employees for personally owned iPads generally should not be subject to tax when used primarily for business.

 

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ABOUT THE SOLO 401(k) RETIREMENT PLAN

 

 

Most limits for retirement plans didn’t budge much for 2014.  But some small business owners can take matters into their own hands.

 

Strategy: Set up a “solo 401(k) plan.”  If you qualify, you can effectively benefit from both “employee” and “employer’ contributions to your account.  In many cases, this dual tax qualifier can’t be beat because it often allows you to sock away more money than any other type of retirement plan.

 

With the usual defined contribution plan used by small business owners—such as a Simplified Employee Pension (SEP) or garden-variety profit sharing plan—the employer’s deductible contribution is capped at the lesser of 25% of compensation or $52,000 ($57,500 if you’re age 50 or older).

 

The maximum compensation that may be taken into account for these purposes is $260,000. But that’s as far as it goes.

 

In contrast, an employee participating in a traditional 401(k) plan can make an elective deferral contribution to the plan within the annual limits and the employer may match part of the contribution, usually up to a single-digit percentage of your salary.

 

A solo 401(k) offers even more. You may defer up to $18,000 of compensation to your account, plus an extra catch-up contribution of $6,000 is allowed if you’re age 50 or older—the same as with elective deferrals to a traditional 401(k) limits on deductible employer contributions still apply, but here’s the kicker.  Elective deferrals to a solo 401(k) don’t count toward the 25% cap. So you can combine an employer contribution with an employee deferral for greater savings.

 

Note that a solo 401(k) may offer other advantages. For instance, the plan can be set up to allow loans and hardship withdrawals. Also, you might roll over funds tax-free from another qualified plan if you previously worked somewhere else.  In addition, the 401(k) offers greater asset protection for business owners and professionals compared to holding IRAs.

Tip: Contributions are discretionary.  Therefore, you can cut back on your annual contribution -or skip it entirely—if your business is having a bad year.

 

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TAX NEWS

 

Review T&E reimbursements.  The tax law limits deductions for T&E expenses, including meals. But if an arrangement involves a third party - say a leasing company - who does the limit apply to?  According to the IRS, the parties can determine which one is subject to the limit. Absent such an agreement, the 50% limit applies to the party making the reimbursements

 

Beware of phony email from ‘IRS.’ We’ve said it before; we’ll say it again:  Never send personal financial data in response to unsolicited email. The IRS says scam artists are sending emails to random people, telling them they’re due a refund or under investigation. The message directs people to a fake IRS website that asks for personal data. In reality, the IRS won’t contact you via email.

 

Need an old tax return fast? Contact your tax advisor. A special IRS service lets tax practitioners receive transcripts of clients’ tax returns electronically in minutes. Taxpayers can still receive a free paper transcript of their returns within 7 to 10 days by calling the IRS at (800) 829-1040.

 

Know the difference between gifts and compensation. If you give a favorite employee a big check at Christmas, you might consider it a gift, but the IRS will likely consider it income. That could be true even if the employee and owner are family. In one case, the IRS said payments to an owner’s daughter (who was an employee) were for past services, not a gift. Talk with your tax pro if you face a similar dilemma.

 

Stockpile Section 529 funds for the future.  The amount you transfer to a Section 529 plan on behalf of a beneficiary qualities for the annual gift-tax exclusion. Under the exclusion, you can give away up to $14,000 a year - or $28,000 for joint gifts made by a married couple - to an account for the beneficiary without paying any gift tax.

 

Strategy: Front-load your contributions to a Section 529 -plan. The tax law allows you to give the equivalent of five years’ worth of contributions up front with no gift-tax consequences. The gift is treated as if it were spread out over the five-year period.

 

For instance, you and your spouse might together contribute the maximum $140000 (5 X $28,000) on behalf of a grandchild this year without paying any gift tax. If you have five grandchildren entering college soon, together you can contribute $140,000 to their Section 529 plans, completely free of any gift-tax consequences.

Tip: Any excess above the annual gift-tax exclusion may be sheltered by the lifetime gift-tax exemption.

 

Find your comfort level. Are you confident about having saved enough for retirement? According to the Employee Benefit Research Institute’s 23rd annual Retirement Confidence Survey, more than half of the respondents had some measure of confidence that they would have enough saved to be comfortable in retirement (13% very confident and 38% somewhat confident), 21% were not too confident and 28% were not at all confident.

 

Wage ceiling in 2015.  The Social Security Administration (SSA) announced that the wage ceiling will increase to $118,500 for 2015, up from $117,000 in 2014. At least the Social Security and Medicare tax withholding rates will remain the same.  The rates are 7.65% on  amounts up to the wage ceiling (6.2% -for the Social Security tax plus 1.45% for the Medicare tax) and $1.45% on amounts above that threshold (for the Medicare tax). However, at higher wage levels, the 0.9% additional Medicare tax raises the Medicare tax withholding rate to 2.35%.

 

Social Security benefits rise.  While the Social Security wage base is going up,  so are Social Security benefits. According to the Social Security Administration almost 64 million Social Security recipients are getting a 1.7% cost-of-living bump in 2015. This means that the average retired worker will see a $22 increase to $1,328 a month while the average married couple will be boosted by $36 to $2,176.  The maximum monthly Social Security check for a single baby boomer claiming benefits in 2015 at the full retirement age of 66 jumps to $2,663, up from $2,642 in 2014.

 

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HIRE SPOUSE TO WORK IN A FAMILY BUSINESS

 

Tax Issue

A sole proprietor can deduct health care costs that are paid for an employee as a business expense. By deducting the expenses directly on Schedule C (or Schedule F for a self-employed farmer), the deduction reduces both income tax and self-employment tax. It also reduces the FICA tax of an employee. Since the sole proprietor is not considered an employee of the business, his or her own health care expenses (and health care for members of his or her family) are not deductible on Schedule C or F. Rather, the self-employed individual can claim an above-the-line deduction on the front of Form 1040 for health insurance paid. The self-employed health insurance deduction reduces income tax, but not self-employment tax. The self-employed health insurance deduction also does not work under a medical reimbursement plan. Health care expenses not covered by insurance that are paid on behalf of the sole proprietor (and his or her family) are deductible on Schedule A, subject to the 10% AGI limitation.

 

Applicable Tax Law

  • Medical expenses are generally deductible on Schedule A as an itemized deduction, subject to the 10% AGI limitation.
  • The self-employed health insurance deduction allows a sole proprietor to deduct his or her health insurance premiums as an above-the-line deduction on the front of Form 1040, rather than as an itemized deduction on Schedule A. The deduction (other than for tax year 2010) does not reduce the sole proprietor’s self-employment tax. The deduction is limited to health insurance and does not include out-of-pocket medical expenses that are not covered by insurance.
  • Employer-provided health insurance and Sec 105 health reimbursement arrangements offered to employees is excluded from employee wages and deductible by the employer. If a sole proprietor is an employer and hires his or her spouse as a bona fide employee, health benefits provided to the employee-spouse are excluded from the spouse’s wages and deductible by the sole proprietor on Schedule C (or Schedule F). The deduction reduces both income and self-employment tax.
  • In order for a spouse of a sole proprietor to be treated as a bona fide employee, close scrutiny is required to determine whether a bona fide employer-employee relationship exists and whether payments are made on account of the employer-employee relationship or on account of the family relationship. The employee-spouse must perform actual services for the business and be paid an actual wage as an employee.
  • An employer-employee relationship cannot exist unless the employer has the right to control the activities of the employee.
  • Other factors that support the employer-employee characterization include consistent work by the employee for the employer, the payment of employee benefits, services provided by the employee that are integral to the business operations, employee training provided by the employer, and the existence of an employment contract.
  • If the employer establishes a medical reimbursement plan, the plan must be in writing [Reg. §1.105-11(b)(1)(i)], the employer must inform all employees of the plan, and the employees must meet the participation requirements of the plan.

 

Tax Planning Strategies

Deduct health insurance directly on Schedule C or F. A sole proprietor can deduct the cost of his or her health care directly on Schedule C or F by hiring his or her spouse to work in the family business. A deduction for 100% of the cost of providing health coverage for the sole proprietor (and his or her family) may be claimed by doing the following:

  • The sole proprietor hires his or her spouse as a bona fide employee of the business.
  • The employee-spouse performs services for the business as an employee.
  • The sole proprietor provides family accident and health coverage for all employees of the business, including the employee-spouse.
  • The cost of health coverage and medical expense reimbursements are excluded from the employee-spouse’s gross income and are deductible as a business expense by the sole proprietor. (Rev. Rul. 71-588)
  • The sole proprietor is then covered by the plan as a member of the employee-spouse’s family.
  • If the sole proprietor offers accident and health coverage through a self-insured medical expense reimbursement plan, deductible expenses include reimbursed medical expenses for health insurance premiums and other costs not reimbursed by insurance. A medical reimbursement plan converts expenses that would otherwise be Schedule A itemized deductions subject to the 10% AGI limitation into deductible business expenses.

 

Other fringe benefits. If the spouse is hired as a bona fide employee of the sole proprietor, other fringe benefits deductible by the business and excluded from the employee-spouse’s income could be provided, including group term life insurance, meals and lodging, and transportation benefits.

 

Not subject to FUTA. If the spouse is hired as a bona fide employee of the sole proprietor, taxable wages paid to the employee-spouse are not subject to federal unemployment taxes (FUTA).

 

Retain family income. If the spouse is hired as a bona fide employee of the sole proprietor, money used to pay the wages of the employee-spouse remain within the family of the sole proprietor, in contrast to wages paid to a non-family employee to perform the same job.

 

 

 

 

Possible Risks

 

  • The IRS is very aggressive in trying to claim the employee-spouse is not a bona fide employee of the business. The payments made under the accident and health plan must be on account of the employer-employee relationship and not on account of the family relationship. There are many facts and circumstances that could go against the taxpayer if the employer-employee relationship is not firmly established.

 

  • The compensation paid to the employee-spouse needs to be reasonable for the services performed. Compensation includes wages paid and the medical reimbursement plan. There is no fixed standard for determining reasonable compensation. It is determined on the facts and circumstances of each case.

 

  • If the spouse is actually an independent contractor of the business rather than a bona fide employee, the cost of accident and health insurance benefits that are provided to the spouse are not excluded from the spouse’s gross income.
  • The IRS could claim the spouse is actually a co-owner of the business rather than an employee. Factors that indicate co-ownership include joint ownership of business assets, joint sharing of profits, and joint control over business operations.

 

 

 

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TAX     ACCOUNTING     ADVISORY

_____________________________________________________________________

 

 

Providing a wide array of specialized non-traditional solutions plus offering traditional CPA services including:

 

Real Estate Transactions

 

Entity Structuring

 

Asset Protection Solutions

 

Business & Tax Advisory

 

Strategic Business & Tax Planning

 

Proactive Comprehensive Accounting Solutions including data and payroll processing.

 

Representation for Resolution of Tax Problems involving levy, liens, audit defense, payment plans, un-filed tax returns, penalty abatement and offers in compromise.

 

Tax Return Preparation for Individuals, Professionals, Business Owners, Corporations, Partnerships, Estates, Trusts and Exempt organizations.

 

Our experienced team of dedicated Accounting Professionals are committed to providing personal attention, quality work, reliable and helpful services to make complex accounting and compliance tasks easier, gain greater financial control and increase profitability by providing timely, accurate and complete accounting, payroll and tax preparation services.  This allows you more time to focus on growing your enterprise.

 

Tax Professionals consult on all aspects of tax compliance, advisory and planning, including individual, corporate, partnership, fiduciary, trust, gift and tax exempt organization tax returns.  These tax related services are provided by Zerjav & Associates, Certified Public Accountants, which has an alternative practice structure that is a separate and independent entity which works together with Advisory Group Associates to serve clients’ needs.

 

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Tax Professional Standards Statement. The TAX TIPS NEWSLINE is published monthly to provide general educational tax compliance tips, information, updates and general business or economic data compiled from various sources.  This document supports the marketing of professional services and does not provide substantive determination or advice affecting specific tax liability.  It is not written tax advice directed at the particular facts and circumstances of any taxpayer.  Nothing herein shall be construed as imposing a limitation from disclosing the tax treatment or tax structure of any matter addressed.  To the extent this document may be considered written tax advice, in accordance with applicable requirements imposed under IRS Circular 230, any written advice contained in, forwarded with, or attached to this document is not intended or written to be used, and cannot be used, by any taxpayer for the purpose of avoiding any penalties that may be imposed under the Internal Revenue Code.

 

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Tax Tips Newsline - February 2015

TAX TIPS NEWSLINE  _____________________      

                                                              FEBRUARY 2015

 

Produced monthly for clients of the Advisory Group Associates

Our Mission:  Sharing ideas that make a real difference.

 

This “TAX TIPS NEWSLINE” is compiled by its founder, Frank Zerjav CPA and team of Professional Tax Associates, and then it is sent by email each month because you need tax and compliance knowledge.  It’s a big part of your life and the entities that you operate.

 

ORGANIZE 2014 DATA:  On January 22, 2015, we Emailed each client/taxpayer their 2014 Tax Organizer to be used to compile 2014 records and efficiently deliver this data and information for preparation of an accurate tax return.  Please let us know right away if you did NOT receive this email.

 

Do not wait to send us your 2014 data. Often Schedules K-1 from partnerships etc. are not issued until April.  Best practice is to bring us what you have by Saturday, February 7, 2015, even if your forms 1099 and brokerage statements have not yet been received. (See Client Appreciation Brunch.) The goal is to have adequate time to let us process an accurate tax return.  If you have any questions, please do not hesitate to contact us.  Please notify us promptly of any address, e-mail, and telephone contact changes!

 

 

Bring your data and “Tax Organizer” for discussion and preparation.

 

Saturday, February 7th, 10am until 2pm

 

At the offices of Advisory Group Associates,   1980 Concourse Drive, St. Louis, MO 63146.

 

Please R.S.V.P.  At: 314-205-9595.

 

Inside this Month's Issue

 

  • Tips on Who should File a 2014 Tax Return
  • Start Preparing for 2015 Now
  • Office-In-Home Tax Breaks
  • Tax Breaks for Students
  • Health Care Reform - What You Need to Know
  • Tax Savings Strategies Checklist
  • Business Tax Strategies
  • Tax Strategies - FAQ
  • Wide Range of Solutions & Services Offered

 

 

 

TIPS ON WHO SHOULD FILE A 2014 TAX RETURN

 

Most people file their tax return because they have to, but even if you don’t, there are times when you should.  You may be eligible for a tax refund and not know it. This year, there are a few new rules for some who must file. Here are six tax tips to help you find out if you should file a tax return:

 

  1. General Filing Rules. Whether you need to file a tax return depends on a few factors. In most cases, the amount of your income, your filing status and your age determine if you must file a tax return. For example, if you’re single and 28 years old you must file if your income was at least $10,150. Other rules may apply if you’re self-employed or if you’re a dependent of another person. There are also other cases when you must file. Contact us to find out if you need to file.

 

  1. New for 2014: Premium Tax Credit. If you bought health insurance through the Health Insurance Marketplace in 2014, you may be eligible for the new Premium Tax Credit. You will need to file a return to claim the credit. If you purchased coverage from the Marketplace in 2014 and chose to have advance payments of the premium tax credit sent directly to your insurer during the year you must file a federal tax return. You will reconcile any advance payments with the allowable Premium Tax Credit. Your Marketplace will provide Form 1095-A, Health Insurance Marketplace Statement, to you by Jan. 31, 2015, containing information that will help you file your tax return.

 

  1. Tax Withheld or Paid. Did your employer withhold federal income tax from your pay? Did you make estimated tax payments? Did you overpay last year and have it applied to this year’s tax? If you answered “yes” to any of these questions, you could be due a refund. But you have to file a tax return to get it.

 

  1. Earned Income Tax Credit. Did you work and earn less than $52,427 last year? You could receive EITC as a tax refund if you qualify with or without a qualifying child. You may be eligible for up to $6,143. Use the 2014 EITC Assistant tool on IRS.gov to find out if you qualify. If you do, you need to file a tax return to claim it.

 

  1. Additional Child Tax Credit. Do you have at least one child that qualifies for the Child Tax Credit? If you don’t get the full credit amount, you may qualify for the Additional Child Tax Credit.

 

  1. American Opportunity Credit. The AOTC is available for four years of post secondary education and can be up to $2,500 per eligible student. You or your dependent must have been a student enrolled at least half time for at least one academic period. Even if you don’t owe

taxes, you still may qualify. However, you must complete Form 8863, Education Credits, and file a return to claim the credit. Learn more by contacting us.

 

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START PREPARING FOR 2015 NOW

 

The further we go into the future, the less certain we are about IRS rules and regulations.

We know how things are now - and we know something about what is planned - but if the

Affordable Care Act (Obamacare) is any indicator, those plans are subject to change.

Tax year 2015 rules may not be clear yet but here is what we know now along with ways to make your finances more tax efficient.

 

Affordable Care Act. Several parts of the Affordable Care Act, also known as Obamacare, will go into effect and they could impact your tax situation. (See article “Health Care Reform - What You Need to Know”).

 

Investments as Tax Strategy. We may not know precisely what the IRS has in store for 2015, but when it comes to investments, thinking long-term is definitely a tax advantage.

Hold on to investment positions at least one year to avoid short-term capital gains taxes and speak with an investment advisor about making your investment portfolio more tax-efficient.

 

Also, be mindful of the fact that allowable contributions to IRAs, 401(k) s, and other tax advantage accounts are adjusted each year for inflation.

 

Tax Law Changes. Did you know there is a free service you can subscribe to that will provide information about tax law changes, provide helpful tips, and send you IRS announcements as they’re published?

 

Subscribe to IRS Tax Tips at the IRS website or download the IRS2Go mobile app. If you have an Apple mobile device, you can download the app at the iTunes app store. If you have an Android device, visit Google Play.

 

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OFFICE-IN-HOME TAX BREAKS

 

If you operate a business from home, you may qualify for valuable tax-saving home office deductions. But using the computer in your home office for personal reasons could cost tax deductions.

 

Strategy: Buy a separate computer or laptop for personal use. To qualify for home office deductions, a portion of your home must be used “regularly and exclusively” as your principal place of business.

 

If you qualify, you can deduct expenses directly associated with your home office, like painting or repairs, in addition to a proportionate share of the home’s expenses. This includes utilities, insurance, mortgage interest and property taxes as well as a depreciation deduction.

 

If you buy computer equipment for business use in a home office, the cost and related fees are deductible, but there are several special rules to consider.

 

The IRS has developed a new optional safe harbor method for taxpayers claiming office in home expenses. This safe harbor method is an alternative to the calculation, allocation, and substantiation of actual expenses under section 280A. For tax years beginning on or after January 1, 2013, taxpayers have two choices for deducting office-in-home expenses, these are:

 

  • Continue to use the actual expense method, or
  • Use the new optional safe harbor act

 

General rule. Section 280A generally disallows any deduction that is otherwise allowable as a business expense if it is related to a dwelling unit that is used as a residence by the taxpayer during the year. This is true even if the dwelling unit is used in the taxpayer’s trade or business. An exception applies for mortgage interest, property taxes, and casualty losses, which are deductible regardless of whether the residence is used for business purposes.

 

Another exception to the general rule is if the taxpayer uses the residence for business and meets all the following requirements.

 

Exclusive use test. An area of the home is used exclusively for business and not for personal purposes. Exceptions to the exclusive use test include an area used for the storage of inventory or product samples and areas used as a day care facility.

 

Trade or business test. The area used for business must be used in connection with a trade or business. A profit-seeking activity for investment purposes, such as buying and selling stocks or managing a rental unit, that is not conducted as a trade or business does not qualify.

 

Principal place of business test. The trade or business can have more than one location. However, the area in the home used for business must be the principal place of business for that trade or business. For this purpose, space used for administrative or management activities qualifies if there is no other fixed location where substantial administrative or management activities are conducted

 

Employee use. In addition to the above general rules, an employee can deduct office in home expenses if the home office is for the convenience of the employer.

 

Substantiation rules. As with any business expense deduction, the taxpayer must be able to substantiate the cost. For office-in-home deductions, the cost must also be allocated between the amount used for business and the amount used for personal purposes. For example, after adding up all the costs for home utilities, the taxpayer must use a reasonable method to determine how much of that cost is for business. A method comparing the square footage of the business area business area with total livable square footage in the home, and then multiplying total costs by that percentage, is one reasonable method for allocating costs.

 

The IRS recognizes that the calculation, allocation, and substantiation of allowable deductions attributable to an office-in-home can be complex and burdensome for small business owners. Accordingly, the IRS has developed this optional safe harbor method to reduce the administrative, record keeping, and compliance burdens of determining the allowable deduction for business use of the home under section 280A.

 

Optional safe harbor method for calculating office-in-home deduction. To use the optional safe harbor method, the taxpayer must otherwise qualify for deduction of office-in-home expenses under prior rules. (Exclusive use test, regular use test, business use test, etc.)

 

  • Under the new optional method, deductible expenses are calculated by multiplying the allowable square footage of the office in home by the prescribed rate.

 

  • The allowable square footage is the area used for business, but not more than 300 square feet.

 

  • The prescribed rate is $5 per square foot (300 x $5 = $1,500) maximum deduction.

 

Itemized deductions. In addition to the above method for calculating office-in-home expenses, a taxpayer who itemizes deductions can deduct mortgage interest paid, property taxes, and casualty losses without regard to whether there is a qualified business use of the home for the year.

 

Election. If the taxpayer elects to use the above method to calculate deductible costs, then the taxpayer cannot deduct any actual expenses related to the office-in-home. This optional method does not apply to an employee with a home office if the employee receives advances, allowances, or reimbursements for expenses related to the qualified business use of the home.

 

The election to use the optional safe harbor method is made on a year-by-year determination. The election is made by using the optional method on a timely filed, original tax return. Once made, the election is irrevocable. A change from using the optional method one year to actual expenses in another year is not considered to be a change in an accounting method and does not require consent from the IRS.

 

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TAX BREAKS FOR STUDENTS

 

Filing a tax return is important for college students. First, filing a tax return is helpful while filling out the FAFSA form to see what type of grants and student aid you qualify for, including if you qualify for the work study program through your school. Also, you may qualify for a tax deduction or credit that can give you a tax refund. You can put your refund towards next semester’s tuition to avoid further student loans.

 

Claim your tuition deduction. Your 1098-T will tell you how much you paid in tuition expenses and will also report any scholarships or grants you received through your school. This is important information you will need while filling out your taxes and taking the Tuition & Fees Deduction.

 

Qualified expenses are the tuition and any other fees, materials, supplies, or equipment that is paid directly to the school. This can include books needed for the course, supplies, and equipment that were purchases as part of the required tuition along with health and wellness fees.

 

Things that do not qualify as expenses include any late charges, application fees, processing fees, books or materials bought at the bookstore or other places besides directly to the University.

 

So here’s an example of how this works. If you paid $1,000 for a course at your college and that $1,000 included a camera to take pictures and a workbook required for the class, it can count for a qualified expense. However, if you get a syllabus and the syllabus says you are required to buy a book, this book does not count. Even though you need it, if you aren’t purchasing it directly through the school, even the bookstore, it does not count.

 

In addition to reporting what your tuition and qualified expenses are, you will have to write down the amount of any money you received for scholarships and grants.

 

You can fill this out and claim your deduction if your gross income is less than $80,000 or $160,000 if you’re filing a joint return with your spouse. You also must be or have been enrolled in an eligible educational institution.

 

You can’t claim any tuition expense if you or your spouse were a nonresident alien for any part of the year.

 

Filling this out and claiming your deduction can reduce your income subject to tax by up to $4,000.

 

In most cases, your college will mail you a copy of your 1098-T or send you an e-mail containing the official file. This is a great reason to be sure both your current mailing address and e-mail address is up to date. If you haven’t received it, check your official school e-mail address since this is probably where the document was sent. If you still can’t find it, contact your financial aid office, a record office, or any other administrative office that is going to have this on file for you.

 

Get a tax credit. Use Form 8863 to claim your education credits, either the American Opportunity Credit or the Lifetime Learning Credit.

 

The American Opportunity Credit is a refundable credit that can help you receive up to $2,500 per student. You must be enrolled at least halftime for at least one of the academic periods and enrolled in an accredited university where you are trying to earn a degree.

 

The Lifetime Learning Credit is a nonrefundable credit, which means it can reduce your tax, but it will not give you additional money, unlike the American Opportunity Credit. Also unlike the American Opportunity Credit, you do not need to be pursuing a degree for this. So any classes you are taking to enhance your work skills can qualify towards this credit. Keep in mind you cannot claim both of these credits for the same student during the same year. In addition, you must decide between the tuition deduction and the tax credit.

 

Be sure to discuss your dependency status with your parents, as it will impact the tuition tax breaks on both of your tax returns.

 

Write off your student loan interest. If you have been making payments towards your student loans this past year or at least paying the interest on any of your loans, you may be able to deduct any amount of your payment that went towards your loan’s interest.

 

Form 1098 E will give you the information you need to fill it out. Your student loan lender will provide you with this document. They mail a paper document of this, so be sure that your correct information is on file. You may also be able to attain a copy online by logging into your account. If you can’t find the document or have not received it, be sure to contact your lender as soon as possible so they can send out another copy to you as soon as possible.

 

When you are looking at Form 1098-E, box 1 will show how much interest the lender received. This is the amount you report on your taxes.

 

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HEALTH CARE REFORM - WHAT YOU NEED TO KNOW

 

As anyone who watches the news realizes, there are quite a few changes taking place within the next eight years due to the health care reform bill, the Affordable Care Act, also known as Obamacare. It’s important to understand at least the basics of the bill.

 

Cost and requirement to buy health insurance. The health care reform bill will cost approximately $940 billion over ten years, but according to the Congressional Budget Office (CBO) it will not only pay for itself, but it is also expected to reduce the federal deficit by $143 billion over the first ten years. Note: the health care bill also included student loan reforms which ended government subsidies to banks for managing private student loans.

 

The goal of the health care reform bill is to require everyone in the US to have health insurance by 2014 (or face an annual fine of $95). This will be accomplished by several methods. It will require some businesses to provide health insurance to their employees or face large fines per employee, and other individuals will be required to pay for their own insurance.

 

What if I can’t afford health insurance or can’t get approved for health insurance? These are common questions - there are an estimated 32 million Americans without health insurance. These topics are addressed several ways, most notably through health insurance exchanges and subsidies. People who are self-employed or do not currently have health-insurance will be able to purchase health insurance via state health insurance exchanges. There will be subsidies available to those whose income is between 100% and 400% of the Federal Poverty level (Federal Poverty level for family of four is $22,050).

 

Obamacare Penalty to Be Owed by as Many as 6 Million Taxpayers who will have to pay a penalty of as much as 1 percent of income because they went without health insurance in part or all of 2014, the Treasury Department said recently.

 

The penalty, part of the Patient Protection and Affordable Care Act, is designed to encourage people to sign up for health insurance using the expanded options and financial assistance available under the law, known as Obamacare. The penalty would apply to about 2 percent to 4 percent of all taxpayers for 2014.

 

Tax filing for 2014 opened Jan. 20, and the Internal Revenue Service’s Form 1040—for 2014 federal income tax—includes a new Line 61 asking if the taxpayer has health insurance. Three-quarters of taxpayers won’t have to do anything more than check that box, said Mark Mazur, the department’s assistant secretary for tax policy. The remainder will have to take additional steps, though most won’t pay a penalty, he said on a conference call with reporters.

 

The IRS has been preparing for additional strain during the tax season as people adjust to the rule, warning that about half the people who call its toll-free phone lines won’t be able to get through.

 

About 3 percent to 5 percent of taxpayers got tax credits last year to help them absorb the cost of paying premiums on Obamacare insurance plans, Mazur said. Ten percent to 20 percent weren’t insured for all or part of the year but will be able to claim an exemption. People who owe a penalty “will pay a fee because they made a choice not to obtain health insurance that they could have afforded, and they’re not eligible for one of the exemptions,” he said.

 

About 8 million people purchased health-care policies through the insurance exchanges in 2014. About 85 percent of those who initially enrolled received subsidies, which went directly to insurance companies during 2014. The U.S. gets about 150 million income tax returns a year.

 

How health care reform affects taxes. There is no magic bullet here, health care is not cheap and the only way we can pay for this is through taxes. The Congressional Budget Office made the statement that not only will this plan pay for itself, but also work toward reducing the federal deficit. Here are some of the tax changes we will see in the coming years:

 

  • 2010 - 10% federal excise tax for using indoor tanning facility.

 

  • 2013 - Medicare payroll tax increase from 1.45% to 2.35% for couples earning more than $250,000 a year, and individuals earning more than $200,000 a year.

 

  • 2013 - Flexible spending account contributions will be limited to $2,500 for medical expenses.

 

  • 2013 - The threshold for itemized deductions for health care expenses will increase to

10% from 7.5%.

 

  • 2018 - 40% excise tax on the portion of employer-sponsored “Cadillac plans’ that exceeds $10,200 a year for individuals and $27,500 for families.

 

Summary of health care changes in 2010:

 

  • Anyone under the age of 26 will be covered under their parents’ insurance, regardless of their school status.

 

  • Insurance companies must provide coverage for children regardless of pre-existing conditions.

 

  • Adults with pre-existing conditions will be covered in a high risk health insurance pool. They’ll remain in this pool until another plan is in place.

 

  • Annual and lifetime insurance limits will be prohibited.

 

  • New health insurance plans will be required to cover preventative services in full.

 

  • New insurance plans must follow the new regulations appeals process when a claim is denied.

 

  • Companies with less than 50 employees will receive tax credits equal to 35% of their health care premiums.

 

Summary of health care changes in 2011:

 

  • Wellness visits will be offered free for Medicare patients and new Medicare plans will include preventative coverage with no out of pocket expense.

 

  • Those enrolled in the Medicare Advantage or prescription plan will receive a 50% discount for name brand drugs.

 

  • There will be a 10% increase on the penalty tax when Health Savings Accounts are distributed before the age of 65 on non-qualified medical expenses.

 

  • Small businesses will be offered tax free benefits when they use alternatives to cafeteria plans.

 

  • Those who make more than $200,000 will be assessed a Medicare payroll tax increase of 9%.

 

Summary of health care changes in 2013:

 

  • A $2,500 per year cap will be placed on flexible spending accounts.

 

  • Tax deductions for employers who have employees participating in Medicare part D will be eliminated.

 

  • Medical devices will have a 2.9% excise tax added to the cost.

 

  • Those earning more than $200,000 will see a 9/10% increase on hospital insurance tax.

 

  • Uniform standards will be in place for those who need to exchange health care information. This will include electronic communication and other means that will reduce administrative costs.

 

  • The threshold for itemized deductions for health care expenses will increase to

10%.

 

Summary of health care changes in 2014:

 

  • Beginning in 2014, anyone who does not have insurance will be fined.

 

  • Eligibility standards for newly formed health care exchanges will be put into place.

 

  • Businesses with 50 or more employees, who don’t offer insurance, will be fined.

 

  • Pre-existing conditions must be covered and higher health insurance rates will not be allowed for them.

 

  • Medicaid eligibility standards will be increased to provide only for those less than 133% above poverty level.

 

  • Health care providers will see annual fees levied based on their total premiums.

 

Summary of health care changes in 2018:

 

  • Excise taxes will be levied on employers who provide plans that cost more than $27,500 for families and $10,200 for individuals.

 

There are many more changes that will take affect between now and 2018, but these are the major issues. If you’re concerned about the changes, talk to your health care provider about how the health care reform bill will affect your health coverage.

 

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TAX SAVING STRATEGIES CHECKLIST

 

This article provides tax saving strategies for deferring income and maximizing deductions, and includes some strategies for specific categories of individuals, such as those with high income and those who are self-employed. 

 

Before getting into the specifics, however, we would like to stress the importance of proper documentation.  Many taxpayers lose worthwhile tax deductions because they have neglected to keep receipts or records.  Keeping adequate records is required by the IRS for employee business expenses, deductible travel and entertainment expenses, charitable gifts and travel.  But don’t do it just because the IRS says so.  Neglecting to track these deductions can lead to overlooking them.  You also need to maintain records regarding your income.  If you receive a large tax-free amount, such as a gift or inheritance, make certain to document the item so that the IRS does not later claim that you had unreported income.

 

The checklist items listed below are for general information only and should be tailored to your specific situation.  If you think one of them fits your tax situation, we’d be happy to discuss it with you.

 

  • Avoid or Defer Income Recognition. Deferring taxable income makes sense for two reasons.  Most individuals are in a higher tax bracket in their working years than they are during retirement.  Deferring income until retirement may result in paying taxes on that income at a lower rate.  Additionally, through the use of tax-deferred retirement accounts you can actually invest the money you would have otherwise paid in taxes to increase the amount of your retirement fund.  Deferral can also work in the short term if you expect to be in a lower bracket in the following year or if you can take advantage of lower long-term capital gains rates by holding an asset a little longer.

 

Tip: You can achieve the same effect of deferring income by accelerating deductions. For example, by paying a state estimated tax installment in December instead of at the following January due date.

 

  • Max Out Your 401(k) or Similar Employer Plan. Many employers offer plans where you can elect to defer a portion of your salary and contribute it to a tax-deferred retirement account.  For most companies these are referred to as 401(k) plans.  For many other employers, such as universities, a similar plan called a 403(b) is available.  Check with your employer about the availability of such a plan and contribute as much as possible to defer income and accumulate retirement assets.

 

Tip: Some employers match a portion of employee contributions to such plans.  If this is available, you should structure your contributions to receive the maximum employer matching contribution.

 

  • If You Have Your Own Business, Set Up and Contribute to a Retirement Plan.

If you have your own business, consider setting up and contributing as much as possible to a retirement plan.  These are even allowed for sideline or moonlighting businesses.  Several types of plans are available which minimize the paperwork involved in establishing and administering such a plan.

 

 

  • Contribute to an IRA. If you have income from wages or self-employment income, you can build tax-sheltered investments by contributing to a traditional or a Roth IRA.  You may also be able to contribute to a spousal IRA – even where the spouse has little or no earned income.  All IRAs defer the taxation of IRA investment income and in some cases can be deductible or be withdrawn tax free.

 

Tip: To get the most from IRA contributions, fund the IRA as early as possible in the year.  Also, pay the IRA trustee out of separate funds, not out of the amount in the IRA.  Following these two rules will ensure that you get the most possible tax-deferred earnings from your money.

 

  • Defer Bonuses or Other Earned Income. If you are due a bonus at year-end, you may be able to defer receipt of these funds until January.  This can defer the payment of taxes (other than the portion withheld) for another year.  If you’re self-employed, defer sending invoices or bills to clients or customers until after the new year begins.  Here, too, you can defer some of the tax, subject to estimated tax requirements.  This may even save taxes if you are in a lower tax bracket in the following year.  Note, however, that the amount subject to social security or self-employment tax increases each year.

 

  • Accelerate Capital Losses and Defer Capital Gains. If you have investments on which you have an accumulated loss, it may be advantageous to sell it prior to year-end.  Capital losses are deductible up to the amount of your capital gains plus $3,000.  If you are planning on selling an investment on which you have an accumulated gain, it may be best to wait until after the end of the year to defer payment of the taxes for another year (subject to estimated tax requirements).  For most capital assets held more than 12 months (long-term capital gains) the maximum capital gains tax is 20 percent.  However, make sure to consider the investment potential of the asset.  It may be wise to hold or sell the asset to maximize the economic gain or minimize the economic loss.

 

  • Watch Trading Activity in Your Portfolio. When your mutual fund manager sells stock at a gain, these gains pass through to you as realized taxable gains, even though you don’t withdraw them.  So you may prefer a fund with low turnover, assuming satisfactory investment management.  Turnover isn’t a tax consideration in tax-sheltered funds such as IRAs or 401(k) s.  For growth stocks you invest in directly and hold for the long term, you pay no tax on the appreciation until you sell them.  No capital gains tax is imposed on appreciation at your death.

 

  • Use the Gift-Tax Exclusion to Shift Income. You can give away $14,000 ($28,000 if joined by a spouse) per donee in 2015 (same as 2014), per year without paying federal gift tax.  You can give $14,000 to as many donees as you like.  The income earned on these transfers will then be taxed at the donees tax rate, which is in many cases lower.

 

Note: Special rules apply to children under age 18.  Also, if you directly pay the medical or educational expenses of the donee, such gifts will not be subject to gift tax.  The 2015 federal estate tax exemption rises to $5.43 million per person.

 

Invest in Treasury Securities.  For high-income taxpayers, who live in high-income-tax states, investing in Treasury bills, bonds, and notes can pay off in tax savings.  The interest on Treasuries is exempt from state and local income tax.  Also, investing in treasury bills that mature in the next tax year results in a deferral of the tax until the next year.

 

  • Consider Tax-Exempt Municipal Bonds. Interest on state or local municipal bonds is generally exempt from federal income tax and from tax by the issuing state or locality.  For that reason, interest paid on such bonds is somewhat less than that paid on commercial bonds of comparable quality.  However, for individuals in higher brackets, the interest from municipal bonds will often be greater than from higher paying commercial bonds  (after reduction for taxes).  Gain on sale of municipal bonds is taxable and loss is deductible.  Tax-exempt interest is sometimes an element in computation of other tax items.  Interest on loans to buy or carry tax-exempts is non-deductible.

 

  • Give Appreciated Assets to Charity. If you’re planning to make a charitable gift, it generally makes more sense to give appreciated long-term capital assets to the charity, instead of selling the assets and giving the charity the after-tax proceeds.  Donating the assets instead of the cash prevents you from having to pay capital gains tax on the sale, which can result in considerable savings, depending on your tax bracket and the amount of tax that would be due on the sale.  Additionally,  you can obtain a tax deduction for the fair market value of the property.

 

Tip:  Many taxpayers also give depreciated assets to charity.  Deduction is for Fair Market Value (FMV).

 

  • Keep Track of Mileage Driven for Business, Medical or Charitable Purposes. If you drive your car for business, medical or charitable purposes, you may be entitled to a deduction for miles driven.  For 2014, its 56 cents per mile for business, 23.5 cents for medical and moving purposes, and 14 cents for service for charitable organization.  You need to keep detailed daily records (mileage log) of the mileage driven for these purposes to substantiate the deduction.

 

  • Take Advantage of Your Employer’s Benefit Plans to Get an Effective Deduction of Items Such as Medical Expenses. Medical and dental expenses are generally only deductible to the extent they exceed 10 percent of your adjusted gross income (AGI).  For most individuals, particularly those with high income, this eliminates the possibility for a deduction.  You can effectively get a deduction for these items if your employer offers a Flexible Spending Account, sometimes called a cafeteria plan.  These plans permit you to redirect a portion of your salary to pay these types of expenses with pre-tax dollars.  Another such arrangement is a Health Savings Account.  Ask your employer if they provide either of these plans.

 

  • Check Out Separate Filing Status. Certain married couples may benefit from filing separately instead of jointly.  Consider filing separately if you meet the following criteria:

 

  • One spouse has large medical expenses, miscellaneous itemized deductions, or casualty losses.
  • The spouses’ incomes are about equal.

 

Separate filing may benefit such couples because the adjusted gross income “floors” for taking the listed deductions will be computed separately.  On the other hand, some tax benefits are denied to couples filing separately.  In some states, filing separately can also save a significant amount of state income taxes.

 

  • If Self-Employed, Take Advantage of Special Deductions. Self-employed individuals can deduct 100% of their health insurance premiums as business expenses.  You may also be able to establish a Keogh, SEP or SIMPLE PLAN, or a Health Savings Account, as mentioned above.

 

  • If Self-Employed, Hire Your Child in the Business. If your child is under age 18, they are not subject to employment taxes from your unincorporated business (income taxes still apply).  This will reduce your income for both income and employment tax purposes and shift assets to the child at the same time; however, you cannot hire your child if they are under the age of 7 years old.

 

  • Take Out a Home-Equity Loan. Most consumer related interest expense, such as car loans or credit cards, is not deductible.  Interest on a home-equity loan, however, can be deductible.  It may be advisable to take out a home-equity loan to pay off other nondeductible obligations.

 

  • Bunch Your Itemized Deductions. Certain itemized deductions, such as medical or employment related expenses, are only deductible if they exceed a certain amount.  It may be advantageous to delay payments in one year and prepay them in the next year to bunch the expenses in one year.  This way you stand a better chance of getting a deduction.

 

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BUSINESS TAX STRATEGIES

 

Business owners and professionals can minimize taxes by proper planning and execution of simple tax strategies.  Though taxation is different for various types of business entities (sole proprietorship, partnership or corporation), proper expense reporting, amortizing and depreciating company assets can go a long way toward reducing tax liabilities.

 

Record Keeping.  Business owners should keep all tax records and related documents needed for tax preparation and employee logs and receipts for at least seven years in the event there is a tax audit.  These records become your proof of deductions.  Beyond maintaining the records after filing, proper record keeping helps you to maximize deductions that you might otherwise forget.  Use a calendar or diary to keep track of all meetings, trips and costs associated with the meeting.  A ledger or software program can organize mileage, names and expenses.  Another option is to use a receipt storage organizer for all invoices, bills and sales slips.  Keeping a record of canceled checks and bank deposit slips documents the sources of your cash flow.

 

Depreciation.  Equipment assets owned by the business qualify for depreciation of the initial investment over several years.  Vehicles are not the only items you can depreciate.  Computers, software, copiers and office furniture may also be depreciated.  One depreciated value easily overlooked is the amount spent on leasehold improvements such as storefronts and remodeling.

 

Use of Home Facilities.  According to IRS Publication 583, business owners and professionals who have a designated portion of their home devoted to business use can deduct some costs under certain circumstances.  If your home is the exclusive place of business, then you may qualify for a business deduction.  If your home is used for regular administrative activities, you can make partial deductions for mortgage and utilities.  Deductions may also be taken by those who use part of their home for storage of samples or inventory.  Daycare providers may also get a home deduction.

 

Carry-Over Losses.  If your business is able to depreciate and deduct enough to document that it is operating at a loss, the loss can be carried over into the next tax year.  This offsets gross revenues in future years.  This strategy is especially important to young businesses where initial investments are high but revenues streams are still evolving.  Carrying over the Net Operating Loss (NOL) allows the business to reduce the tax liabilities as revenues increase.  Another option is to carry-back the NOL to claim a refund from prior years.

 

Defer Income.  This is an end of the year trick that defers some of your income until the next year.  At the end of the year, wait a few extra days to send out invoices.  This delays money coming in until after the first of the year and thus keeps your income from increasing.  You can also use this in similar fashion with bills and pay them early so that they are included in the closing year’s taxes, particularly business expenses.

 

Accountable Plans.  If you regularly reimburse your employees for using their own vehicles, work with your accountant to set up an accountable plan.  This helps both you and the employee.  You don’t have to pay payroll taxes on the money and the employee doesn’t have to pay income taxes.  You can reimburse business expenses such as vehicle use, mileage, lunches and more.  IRS Publication 463 has more information on what can be covered under this account.

 

Tax strategies are important for keeping taxes as low as possible.  There are many deductions that can be used by a business to offset income.  Purchasing equipment and spreading the deduction over multiple years or ensuring that you purchase any necessary equipment at the end of the year when you see that you need deductions is one method.  You can also use retirement plans and accountable plans to help keep taxes lower.  If you own a business, the best thing you can do is to work with our professional tax advisors who works with business owners and professionals to come up with your best practices.

 

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TAX STRATEGIES - FREQUENTLY ASKED QUESTIONS

 

 

What’s the best way to borrow to make consumer purchases? For homeowners, it’s the home equity loan. Other consumer related interest expense, such as from car loans or credit cards, is not deductible. Interest on a home-equity loan can be deductible. So avoid other nondeductible borrowings and use a home-equity loan if you plan to borrow for consumer purchases.

 

Why should I participate in my employer’s cafeteria plan or FSA? Medical and dental expenses are deductible to the extent they exceed 10% in 2015 (same as 2014) of your adjusted gross income (AGI). As such, many people are not able to take advantage of them. There is, however, a way to get around this if your employer offers a flexible Spending Account (FSA), Health Savings Account or cafeteria plan. These plans permit you to redirect a portion of your salary to pay these types of expenses with pre-tax dollars.

 

What’s the best way to give to charity? If you’re planning to make a charitable gift, it generally makes more sense to give appreciated long-term capital assets to the charity, instead of selling the assets and giving the charity the after-tax proceeds. Donating the assets instead of the cash avoids capital gains tax on the sale, and you can obtain a tax deduction for the full Fair Market Value of the property.

 

I have a large capital gain this year. What should I do? If you also have an investment on which you have an accumulated loss, it may be advantageous to sell it prior to year-end. Capital losses are deductible up to the amount of your capital gains plus $3,000. If you are planning on selling an investment on which you have an accumulated gain, it may be best to wait until after the end of the year to defer payment of the taxes for another year (subject to estimated tax requirements).

 

What other tax-favored investments should I consider? For growth stocks you hold for the long term, you pay no tax on the appreciation until you sell them. No capital gains tax is imposed on appreciation at your death.

 

Interest on state or local bonds (“municipals”) is generally exempt from federal income tax and from tax by the issuing state or locality. For that reason, interest paid on such bonds is somewhat less than that paid on commercial bonds of comparable quality. However, for individuals in higher brackets, the interest from municipals will often be greater than from higher paying commercial bonds after reduction for taxes.

 

For high-income taxpayers, who live in high-income-tax states, investing in Treasury bills, bonds, and notes can pay off in tax savings. The interest on Treasuries is exempt from state and local income tax.

 

What tax-deferred investments are possible if I’m self-employed? Consider setting up and contributing as much as possible to a retirement plan. These are allowed even for sideline or moonlighting businesses. Several types of plans are available: the Keogh plan, the SEP and the SIMPLE.

 

How can I make tax-deferred investments? Through the use of tax-deferred retirement accounts you can invest some of the money you would have otherwise paid in taxes to increase the amount of your retirement fund. Many employers offer plans where you can elect to defer a portion of your salary and contribute it to a tax-deferred retirement account. For most companies these are referred to as 401(k) plans. For many other employers, such as universities, a similar plan called a 403(b) is available.

 

Some employers match a portion of employee contributions to such plans. If this is available, you should structure your contributions to receive the maximum employer matching contribution.

 

Why should I defer income to a later year? Most individuals are in a higher tax bracket in their working years than during retirement. Deferring income until retirement may result in paying taxes on that income at a lower rate. Deferral can also work in the short term. If you expect to be in a lower bracket in the following year or if you can take advantage of lower long-term capital gains rates by holding an asset a little longer. You can achieve the same effect of short-term income deferral by accelerating deductions. For example, paying a state estimated tax installment in December instead of at the following January due date.

 

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Tax Tips Newsline - March 2015

TAX TIPS NEWSLINE  _____________________      

                                                              MARCH 2015

                                                                                     

Produced monthly for clients of the Advisory Group Associates

Our Mission:  Sharing ideas that make a real difference.

 

This “TAX TIPS NEWSLINE” is compiled by its founder, Frank Zerjav CPA and team of Professional Tax Associates, and then it is sent by email each month because you need tax and compliance knowledge.  It’s a big part of your life and the entities that you operate.

 

Do not wait to send us your 2014 data. Often Schedules K-1 from partnerships etc. are not issued until April.  Best practice is to bring us what you have as soon as possible, even if your forms 1099 and brokerage statements have not yet been received.  The goal is to have adequate time to let us process an accurate tax return.  If you have any questions, please do not hesitate to contact us.  Please notify us promptly of any address, e-mail, and telephone contact changes!

 

 

Inside this Month's Issue

 

  • Top Tax Issues Of 2015
  • Recent Tax Developments
  • Help If W-2s Are Missing
  • Parents: Don’t Miss Out on Tax Savers
  • Tax Help for Home Help
  • Tax Help if You Get Tipped
  • Final “Repair Regulations” Issued On Tangible Property Costs
  • Reporting Unrelated Business Taxable Income (UBTI)
  • Revised 2014 and 2015 Auto Depreciation Limits
  • Wide Range of Solutions & Services Offered

 

 

TOP TAX ISSUES OF 2015

 

The new calendar year is upon us, and there are numerous changes and new regulations expected that companies should be closely monitoring. As you look at your tax-planning activities for 2015, keep your eye on the following issues.

 

The Affordable Care Act

 

The Affordable Care Act (ACA) is both a health care law and a tax with far-reaching ramifications. The Obama administration’s release of final guidance on Employer Shared Responsibility and information reporting requirements gave employers little time to ensure their systems are ready to comply. The ACA requires employers to track and report to the IRS a significant amount of employee data.  Employers who took a “wait and see” approach to the law, particularly those with calendar-year benefit plans, might need to start gathering required reporting data immediately. This data often resides in multiple functions within the organization (HR, benefits, payroll, operations, etc.) or with vendors.

 

In addition to system readiness described above, companies must also evaluate excise tax implications that might result from not offering minimum essential coverage to a sufficient percentage of full-time employees on an entity basis. Missing more than 30% of employees that should be covered can result in millions of dollars in excise taxes and penalties. Companies must check and document their internal controls to ensure their systems properly track employee hours and contingent workers.

 

Tangible Property Regulations

 

The final tangible property regulations affect all taxpayers that acquire, produce or improve tangible, real or personal property - and their impact transcends industry, geography and ideology. The vast majority of companies are in industries that do not expect industry-specific guidance in the near term and must comply with all the rules in the regulations in their First taxable year beginning on or after Jan. 1, 2014.

 

The best-prepared companies will begin by determining their objectives (e.g., deduction maximization or reduction of administrative burden) as they begin the journey toward compliance. For many taxpayers, the answer lies somewhere between the most deductions and the least work. Understanding the path to compliance requires a measured approach, including an understanding of current accounting methods and the systems and processes required to capture relevant and necessary information.  Proactive companies have the greatest opportunity to achieve their unique objectives, while demonstrating compliance with the regulations.

 

Tax reform

 

While some think reform is likely, nothing is certain. What’s clear is that tax reform is dependent on complex political dynamics and will produce winners and losers. Whatever the outcome, companies should become familiar with tax reform proposals and how their provisions might affect operations. It will be important to weigh the tax benefits of lower rates against the detriments of the various base-broadening provisions. Communicating with others who are similarly situated and engaging with policymakers will improve the quality of any potential future legislation.

 

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RECENT TAX DEVELOPMENTS

 

The following is a summary of the most important tax developments that have occurred in the past three months that may affect you, your family, your investments, and your livelihood. Please call us for more information about any of these developments and what steps you should implement to take advantage of favorable developments and to minimize the impact of those that are unfavorable.

 

New tax-advantaged ABLE accounts. A new law allows states to establish tax-exempt “Achieving a Better Life Experience” (ABLE) accounts, which are tax-free accounts that can be used to save for disability-related expenses. They can be created by individuals to support themselves or by families to support their dependents. Assets can be accumulated, invested, grown and distributed free from federal taxes. Contributions to the accounts are made on an after-tax basis (i.e., contributions aren’t deductible), but assets in the account grow tax free and are protected from tax as long as they are used to pay qualified expenses. Withdrawals are tax-free if the money is used for disability-related expenses including: education; housing; transportation; employment support; health, prevention, and wellness costs; assistive technology and personal support services. A nonqualified distribution is subject to income tax and a 10% penalty on the part of the distribution attributable to earnings. Each disabled person is limited to one ABLE account, and total annual contributions by all individuals to any one ABLE account can be made up to the inflation-adjusted gift tax exclusion amount ($14,000 for 2015).

 

Health care impacts 2014 income tax returns. The IRS has provided details on how health care reform under the Affordable Care Act (ACA) affects the upcoming income tax return filing season. The most important ACA tax provision for individuals and families is the premium tax credit. Under another key provision, individuals without coverage and those who don’t maintain coverage throughout the year must have an exemption or make an individual shared responsibility payment, as separately detailed in final regulations and a notice issued by the IRS in November. The IRS stresses that most people already have qualifying health care coverage and will only need to check a box to indicate that they satisfy the individual shared responsibility provision when they file their tax returns in early 2015. Individuals and families who get coverage through the Health Insurance Marketplace (Marketplace, also known as an exchange) may be eligible for the premium tax credit. Eligible individuals and families can choose to have advance credit payments paid directly to their insurance company to lower what they pay out-of-pocket for their monthly premiums. Early in 2015, individuals who bought health insurance through the Marketplace will receive Form 1095-A, Health Insurance Marketplace Statement, which includes information about their coverage and any premium assistance received. Form 1095-A will help individuals complete their return. Individuals claiming the premium tax credit, including those who received advance payments of the premium tax credit, must file a federal income tax return for the year and attach Form 8962, Premium Tax Credit.

 

Supreme Court to decide if premium credit is allowed for health insurance purchased on federal exchange. A controversy has erupted concerning the ACA’s premium credit. The statute makes the credit available for insurance purchased on an exchange established by a state. A federal exchange was established for many states that did not establish their own exchanges. The IRS has issued regulations making the credit available for insurance purchased on a federal exchange. The regulations were challenged in court; one Circuit Court upheld them and another said they were invalid. After these conflicting decisions, the Supreme Court agreed to resolve the issue. The Supreme Court will hear the case in 2015. Its decision could affect about 5 million people getting a credit for insurance purchased on the federal exchange and could affect other key ACA provisions that are intertwined with the credit.

 

More guidance on toughened IRA rollover rule. A law limits the number of IRA rollovers that can be made in any 1-year period to one. Earlier, the Tax Court held that the limit applies to all of an individual’s IRAs even though the IRS had stated that the limit applies to each separate IRA an individual owns. Shortly after this decision, the IRS announced that it will adopt the more restrictive view for distributions after 2014. Then, in November, the IRS issued more guidance to clarify the start of the new policy. As clarified, an individual receiving an IRA distribution on or after Jan. 1, 2015 cannot roll over any portion of the distribution into an IRA if the individual has received a distribution from any IRA in the preceding 1-year period that was rolled over into an IRA. However, as a transition rule for distributions in 2015, a distribution occurring in 2014 that was rolled over is disregarded for purposes of determining whether a 2015 distribution can be rolled over, provided that the 2015 distribution is from an IRA that neither made nor received the 2014 distribution.

 

Personal service corporation in group avoids flat tax. Normally, a qualified personal service corporation (e.g., an employee-owned corporation performing legal, health or other professional services) is subject to a flat tax of 35%, unlike other corporations that are subject to graduated rates of 15%, 25% and 34%. In one case, the IRS sought to tax a qualified personal service corporation that was part of an affiliated group of corporations at the flat 35% rate. The Tax Court wouldn’t allow the IRS to do so. Rather, it said that the group’s consolidated income, including the income of the qualified personal service corporation, had to be taxed at the graduated rates.

 

Standard mileage rates up and down for 2015. The optional mileage allowance for owned or leased autos (including vans, pickups or panel trucks) is 57.5c per each business mile traveled after 2014. That’s 1.5c more than the 56c allowance for business mileage during 2014. But the 2015 rate for using a car to get medical care or in connection with a move that qualifies for the moving expense deduction is 23c per mile, 0.5c less per mile than the 23.5c rate for 2014.

 

Non-farmer escapes self-employment tax on conservation payments. A recent case addressed a tax issue concerning payments an individual received under a U.S. Department of Agriculture voluntary conservation reserve program. Specifically, an appellate court held that payments received under the program by the taxpayer (who was not a farmer) were not subject to self-employment tax (i.e., social security taxes imposed on self-employed persons). Rather, they were rentals from real estate excludible from self-employment income.

 

Tenant’s death extinguished tax lien on jointly held property. A district court has held that an IRS lien on a taxpayer’s interest in property was extinguished at his death because the property was owned jointly with a right of survivorship and the other joint tenant survived the taxpayer. Thus, there was no interest left to which the lien could continue to attach.

 

Tax developments involving West African Ebola outbreak. The IRS has designated the Ebola outbreak occurring in the West African countries of Guinea, Liberia, and Sierra Leone as a qualified disaster for purposes of the income tax exclusion for qualified disaster relief payments. The IRS also made clear that employer-sponsored private foundations can provide disaster relief to employee-victims in areas affected by the outbreak without jeopardizing their exempt status. In addition, the IRS announced that employees won’t be taxed when they forgo vacation, sick, or personal leave in exchange for employer contributions of amounts to charitable organizations providing relief to Ebola victims in Guinea, Liberia and Sierra Leone. Employers may deduct the amounts as business expenses.

 

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HELP IF W-2s ARE MISSING

 

In most cases you get your W-2 forms by the end of January. Form W-2, Wage and Tax Statement, shows your income and the taxes withheld from your pay for the year. You need your W-2 form to file an accurate tax return.

 

If you haven’t received your form by mid-February, here’s what you should do:

 

  • Contact your employer. Ask your employer (or former employer) for a copy. Be sure that they have your correct address.

 

  • After Feb. 23. If you can’t get a copy from your employer, call the IRS at 800-829-1040 after Feb. 23. The IRS will send a letter to your employer on your behalf. You’ll need the following when you call:

 

  • Your name, address, Social Security number and phone number;

 

  • Your employer’s name, address and phone number;

 

  • The dates you worked for the employer; and

 

  • An estimate of your wages and federal income tax withheld in 2014. You can use your final pay stub for these amounts.

 

File on time. Your tax return is normally due on or before April 15, 2015. Use Form 4852, Substitute for Form W-2, Wage and Tax Statement, if you don’t get your W-2 in time to file. Estimate your wages and taxes withheld as best as you can. The IRS may need more time to process your return while it verifies your information. If you can’t finish your tax return by the due date, you can ask for more time to file. Get an extra six months by filing Form 4868, Application for Automatic Extension of Time to File U.S. Individual Income Tax Return. You can also e-file a request for more time. You can do this for free with IRS Free File.

 

Correct if necessary. You may need to correct your Tax Return if you get your missing W-2 after you file. If the tax information on the W-2 is different from what you originally reported, you may need to file an amended tax return. Use Form 1040X, Amended U.S. Individual Income Tax Return to make the change.

 

Note: Important New Health Insurance Form. If you bought health insurance through the Health Insurance Marketplace, you should have received a Form 1095-A, Health Insurance Marketplace Statement, by early February. You will need the new form to help you complete an accurate federal tax return. You will use the formation from the Form 1095-A to calculate the amount of your premium tax credit. The form is also used to reconcile advance payments of the premium tax credit made on your behalf with the amount of premium tax credit that you are eligible to claim.

 

If you did not receive your Form 1095-A, you should contact the Marketplace from which you received coverage to get a copy. You are not required to send in of health care coverage, including Form 1095-A, to the IRS when filing your tax return. However, it’s a good idea to keep these records on hand to verify coverage.

 

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PARENTS: DON’T MISS OUT ON THESE TAX SAVERS

 

Children may help reduce the amount of taxes owed for the year. If you’re a parent, here are several tax benefits you should look for when you file your federal tax return:

 

  • Dependents. In most cases, you can claim your child as a dependent. You can deduct $3,950 for each dependent you are entitled to claim. You must reduce this amount if your income is above certain limits. For more on these rules, see Publication 501, Exemptions, Standard Deduction and Filing Information.

 

  • Child Tax Credit. You may be able to claim the Child Tax Credit for each of your qualifying children under the age of 17. The maximum credit is $1,000 per child. If you get less than the full amount of the credit, you may be eligible for the Additional Child Tax Credit. For more, see Schedule 8812 and Publication 972, both titled Child Tax Credit.

 

  • Child and Dependent Care Credit. You may be able to claim this credit if you paid for the care of one or more qualifying persons. Dependent children under age 13 are among those who qualify. You must have paid for care so that you could work or could look for work. See Publication 503, Child and Dependent Care Expenses, for more on this credit.

 

  • Earned Income Tax Credit. You may qualify for EITC if you worked but earned less than $52,427 last year. You can get up to $6,143 in EITC. You may qualify with or without children. Use the 2014 EITC Assistant tool at IRS.gov to find out if you qualify. See Publication 596, Earned Income Tax Credit, to learn more.

 

  • Adoption Credit. You may be able to claim a tax credit for certain costs you paid to adopt a child. For details see Form 8839, Qualified Adoption Expenses.

 

  • Education tax credits. An education credit can help you with the cost of higher education. There are two credits that are available. The American Opportunity Tax Credit and the Lifetime Learning Credit may reduce the amount of tax you owe. If the credit reduces your tax to less than zero, you may get a refund. Even if you don’t owe any taxes, you still may qualify. You must complete Form 8863, Education Credits, and file a return to claim these credits. Use the Interactive Tax Assistant on IRS.gov to see if you can claim them. Visit the IRS’s Education Credits Web page to learn more. Also see Publication 970, Tax Benefits for Education, for more on this topic.

 

  • Student loan interest. You may be able to deduct interest you paid on a qualified student loan. You can claim this benefit even if you do not itemize your deductions. For more information, see Publication 970.

 

  • Self-employed health insurance deduction. If you were self-employed and paid for health insurance, you may be able to deduct premiums you paid during the year. This may include the cost to cover your children under age 27, even if they are not your dependent. See Publication 535, Business Expenses, for details.

 

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TAX HELP FOR HOME HELP

 

Household employment is quite different from commercial employment - different forms, processes, deadlines and labor laws. Families with domestic employees struggle with all the state and federal obligations and, as a result, many make inadvertent mistakes that can become very expensive and frustrating. We want to share these helpful tips:

 

  1. A domestic worker is considered an employee, not an independent contractor. This is easily the most common mistake seen in the household employment industry. IRS Publication 926 clearly states that nannies, senior caregivers, housekeepers and other domestic workers are employees of the family for whom they work. Unfortunately many families are bombarded with misinformation and believe they can simply provide their household employee with a 1099 at tax time and save themselves the burden of handling employment taxes. Worker misclassification is considered tax evasion and punishes the worker in the form of higher taxes. As a result, it’s being aggressively enforced by the IRS and the Department of Labor.

 

  1. During the hiring process, illustrate the difference between gross and net pay. While there is significant momentum building toward household employment tax compliance many domestic workers are still used to being paid under the table in cash. So when they work for a family that wants to pay them legally, it’s important that the worker understands how tax withholdings work - and how much will actually end up in their bank account. It would be wise to run a few payroll scenarios to illustrate the difference between gross wages and net pay - during the compensation discussion at time of hire. This will help prevent any surprises on the first payday.

 

  1. Household employees should be paid an hourly rate and overtime. Household employees are classified in the Fair Labor Standards Act as non-exempt workers. This means their payroll should be set up on an hourly rate for every hour worked.

 

Because household employees are non-exempt workers, they also must be paid overtime if they work more than 40 hours in a seven-day workweek. Overtime should be paid at least 1.5 times the regular hourly rate and should be spelled out in the employment contract. The Domestic Worker Bill of Rights laws passed in California, Hawaii, Massachusetts and New York over the past few years have heightened awareness of overtime rights, making it more important than ever to stay compliant and prevent any potential wage disputes.

 

Note:   Federal law exempts household employers from paying overtime to live-in employees, but they must be paid for every hour they work. Additionally, several states have laws on the books to extend overtime to live-in employees or have daily overtime requirements, so it’s important your clients understand the specific requirements in their state.

 

  1. Think about paid time off, holidays and sick time for the employee. While federal law does not require you to provide paid time off for vacations, holidays or sick time to a household employee, it’s an important benefit to provide if you want to attract and retain a high-quality employee. Additionally, several states and municipalities have paid time off or sick time requirements, so it’s crucial to build these details into their employment contract.

 

  1. Don’t procrastinate! To families, the “nanny tax” obligations seem like “tax stuff’ that can wait until “tax time.” However, most states have wage reporting obligations throughout the year. Additionally, employers must withhold FICA taxes from the employee or they become liable for them. Waiting until tax season to address these issues - as well as all the labor law issues - usually results in mistakes and added expense. It’s much cheaper and easier to handle all this at the time of hire.

 

The Domestic Worker Bill of Rights has brought attention to legal pay among workers across the country. Additionally, many domestic workers qualify for the federal health insurance subsidy, but they must have documented wages in order to realize that benefit.   In addition, many caregivers will be approaching their family about these issues - and families will then turn to their trusted advisors to help them handle things correctly and eliminate risk.

 

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TAX HELP IF YOU GET TIPPED

 

If you get tips on the job, you should know some things about tips and taxes. Here are a few tips from the IRS to help you file and report your tip income correctly:

 

  • Show all tips on your return. You must report all tips you receive on your federal tax return. This includes the value of tips that are not in cash. Examples include items such as tickets, passes or other items.

 

  • All tips are taxable. You must pay tax on all tips you received during the year. This includes tips directly from customers and tips added to credit cards. It also includes your share of tips received under a tip-splitting agreement with other employees.

 

  • Report tips to your employer. If you receive $20 or more in tips in any one month, you must report your tips for that month to your employer. You should only include cash, check and credit card tips you received. Do not report the value of any noncash tips on this report. Your employer must withhold federal income, Social Security and Medicare taxes on the reported tips.

 

  • Keep a daily log of tips. Use Publication 1244, Employee’s Daily Record of Tips and Report to Employer, to record your tips. This will help you report the correct amount of tips on your tax return.

           

For more on this topic, see Publication 531, Reporting Tip Income. You can get it on IRS.gov.

 

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 FINAL “REPAIR REGULATIONS” ISSUED ON

TANGIBLE PROPERTY COSTS

(May Require 2014 Form 3115 Filings)

 

The IRS has issued long-awaited final regulations during mid-January, 2015 on the treatment of costs to acquire, produce or improve tangible property. Taxpayers must apply these Repair Regulations on their 2014 tax return to determine whether they can immediately deduct costs as repairs and maintenance or capitalize and depreciate these costs over a sometimes lengthy depreciation period.  These new regulations cover all tangible property (that which you can see and touch), that is used in or associated with any type of business or rental property.

 

The final Repair Regulations retain the basic requirements and the structure of the temporary and proposed regulations issued in December 2011 (the 2011 regulations).  The Repair Regulations are complex. At the same time, they made changes that can benefit taxpayers.  These new regulations also contain new and revised safe harbors, which if adopted and adhered to will make them safe from Internal Revenue Service audit.  The Safe Harbors cover repairs, routine maintenance, materials and supplies.

 

As expected, the regulations “take effect” January 1, 2014. However, they can be applied to prior years retroactively by adopting the changes which would require filing Form 3115, Application for Change in Accounting Method.

 

For expenditures that were capitalized and depreciated in prior years that could have been expensed under the new Repair Regulations, taxpayers can make an accounting method change and file Form 3115 to stop depreciating the capitalized amounts and claim an immediate deduction on the remaining undepreciated amount. Conversely, amounts expensed in a prior year that should have been capitalized under the new Repair Regulations standards, the expensed amounts (less depreciation that could have been claimed) are reported as income. Depending upon your particular situation, the net effect may generate additional deductions or an additional income for 2014. Often the adjustments are taxpayer favorable.

 

Complying with the final regulations requires significant time and effort, despite several taxpayer-friendly changes. Every business and real property owner, especially those with significant fixed assets, must develop an understanding of the regulations and their requirements.

 

The regulations will provide simplification and reduce controversy to the extent they allow taxpayers to follow their financial accounting (“book”) policies for certain expenditures. For example, de minimis safe harbor rules provide a $500 per item safe harbor deduction for taxpayers that have a policy in effect at the beginning of the tax year to deduct items within the safe harbor deduction limit. The $500 per item limit is increased to $5,000 if you have an Applicable Financial Statement (AFS), which usually means audited financial statements.

 

Other Significant Provisions In The Final Regulations Relate To The Following:

 

Materials and Supplies. The deduction threshold for materials and supplies has increased from $100 to $200. Materials and supplies also include items that are expected to be consumed within 12 months or less, or that have an economically useful life of 12 months or less.  Materials and supplies can be immediately deducted when purchased, or if the taxpayer tracks such items, deducted when used.

 

Unit of Property.  “Unit” of property rules apply the rules for real property to building systems, as well as to the overall structure. 

 

Routine Maintenance. A routine maintenance safe harbor is expanded to include real property.   In the context of buildings, a taxpayer that expects to perform an activity more than once within a 10 year period, such as replacing the handrail to an escalator, may immediately deduct such costs.  There are similar rules for personal property.  The routine maintenance safe harbor ensures the current deductibility of certain recurring maintenance.

 

Capitalization Election. The final regulations allow taxpayers to capitalize repair and maintenance costs if they are capitalized for financial (book) accounting purposes. This is a significant simplification over earlier proposed guidance. It is an annual election and does not require filing Form 3115.

 

DE MINIMIS SAFE HARBOR IN FINAL REPAIR REGULATIONS

 

The goal of the final Repair Regulations is to bring some certainty to the treatment of costs to acquire, produce or improve tangible property. Overall, both the proposed and final regulations generally require a taxpayer to capitalize amounts paid to acquire or produce a unit of real or personal property including the related transaction costs. However, taxpayers can take advantage of a de minimis safe harbor. The safe harbor in the final regulations is much more expansive and generous than in the proposed regulations.

 

A taxpayer with an Applicable Financial Statement (generally, an audited financial statement) may rely on the de minimis safe harbor only if the amount paid for property does not exceed $5,000 per invoice, or per item, as substantiated by the invoice.

 

For taxpayers without an Applicable Financial Statement, under this approach, a taxpayer may rely on the de minimis safe harbor only if the amount paid for property does not exceed $500 per invoice, or per item, as substantiated by the invoice.

 

The final regulations authorize the IRS to increase the $5,000/$500 de minimis amounts in future years. Our firm will keep you posted of developments.

 

The de minimis safe harbor is an election that is made annually on the tax return. An election  statement must be included with the return. Moreover, you must have a “Capitalization Policy” in place at the beginning of the tax year to expense for both tax and financial (book) accounting purposes items costing less than the de minimis limitation ($500 or $5,000, as applicable).

 

As you can see, the new Repair Regulations are extensive and complex. Determining whether particular costs should be deducted or capitalized will be challenging. This firm stands ready to help taxpayers digest and understand the regulations, determine what accounting and record-keeping policies are needed, and make appropriate elections to comply with the regulations. Please contact our firm so that we can help you address these rules.

 

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REPORTING UNRELATED BUSINESS TAXABLE INCOME (UBTI)

 

Even though your Retirement Plan is generally recognized as tax exempt before making distributions, it still may be liable for tax on its Unrelated Business Income, which is income from a trade or business.  If your retirement plan has $1,000.00 or more of Unrelated Business Income, either the Custodian, Trustee or you must file Form 990-T, Exempt Organization Business Income Tax Return.

 

The Form 990-T may need to be filed for an employee’s 401(k) Trustee, an IRA (including SEPs and SIMPLEs), a ROTH IRA, a Coverdell ESA, or an Archer MSA by the 15th day of the 4th month after the end of its tax year.  Failure to file when due (including extensions of time for filing) is subject to a penalty of 5% of the unpaid tax for each month the return is late, up to a maximum of 25% of the unpaid tax.

 

For many years investors with qualified retirement plans have looked to reduce overall portfolio volatility and improve returns on their investments. This has led to an increased interest in the area of “Alternative Investments,” which include Direct Participation Programs (“DPP”) in oil and gas, hedge funds, real estate, private equity and venture capital funds. These investors have embraced the pros and cons of Unrelated Business Taxable Income (“UBTI”) generated by Alternative Investments for more attractive risk adjusted returns.

 

Oil and gas drilling funds structured through a limited partnership that holds working interests in oil and gas properties create UBTI when placed inside an IRA or other qualified retirement plan. So, do oil and gas investments belong in IRAs and qualified plans? This is not a black and white issue and the usual answer is no, but there may be exceptions. The nature of certain types of oil and gas DPP investments may have benefits created by the investment that more than offset the potential negatives, or exposure to UBTI. If the exposure to UBTI is insignificant or inconsequential to the total benefits from the investment’s non-UBTI returns, there may be a level of acceptability.

 

Other energy DPP investments, such as leasebank investments, may be more suitable to an IRA than a drilling fund. Typically, the majority of the returns to a leasebank fund come from capital gains created by the sale of lease assets and passive income from royalty interests. It is our belief that capital gains and passive income are exempt from UBTI, however, we encourage investors to consult their tax advisors for specific advice and guidance.

 

What is UBTI?

Unrelated Business Taxable Income in the U.S. Internal Revenue Code is the income that comes from an activity engaged in by a tax exempt entity or organization that is unrelated to the tax-exempt purpose of that entity or organization.

 

UBTI is a tax imposed by Congress on tax-qualified entities that produce profits through business activity instead of passive investments. Examples of passive investments include interest from loans, dividends and gains from private stock holdings, and returns from the purchase/sale of precious metals.

 

UBTI in an IRA or Qualified Retirement Plan

If an investor holds an Individual Retirement Account (IRA), and the Alternative Investment generates income that qualifies as UBTI, the Plan may be subject to taxation. When it comes to self-directed IRA investing, account holders often find out about prohibited transactions and disqualified persons before making investments; but fewer investors learn about (or even come across) UBTI before acquiring their DPP in a limited partnership or purchasing rental real property in their self-directed IRA or 401(k).

 

There are two scenarios that trigger UBTI for Retirement Plans:

 

  1. Profits generated from a business/trade. When an IRA or 401(k) derives profit from an operating business that has not paid business tax on those profits before distributing them to the retirement account, those profits trigger UBTI and are taxed at trust rates. This includes net taxable income from working interests in oil and gas properties. Taxable deductions from oil and gas properties can be used in computing net taxable income. (Generally Mineral Royalties are excluded from UBIT whether measured by production or by gross or taxable income from the Mineral Property).

 

  1. Leveraged Real Estate Investments. When an IRA purchases real estate using a non-recourse mortgage loan, the Debt-Financed portion of the property’s profits is subject to UBTI. Similarly, if an IRA-owned property is sold while a percentage of ownership is still debt financed, the profit derived from the debt financed percentage is subject to UBTI. (Generally rental income and Capital Gain are excluded in computing UBTI-property that is NOT Debt-Financed).

 

What is the tax rate for UBTI? How is UBTI Calculated?

 

UBTI rates for retirement account investments follow a schedule of “Trust Rates” provided by the IRS on an annual basis. Contact your Professional Tax Advisor about filing form 990-T as soon as you consider investing in an asset that may be subject to UBTI.  Keep in mind that losses in some years may offset profits in subsequent years. Trust rates change from year to year, but slide from 15% to 39.6%.

 

If your IRA generates UBTI, it does not disqualify the IRA (like prohibited transactions would). It does, however, require your IRA to file an income tax return, which is unusual since an IRA is supposed to be tax-exempt. Since UBTI is generated, income tax will be owed on the income if it reaches certain levels.

 

Just like individual tax returns, if the IRA generates gross income of $1,000 or more during the tax year, the Retirement Plan must file Form 990-T. Issues that arise with this filing include:

 

  • The IRA must have a federal tax ID (EIN).

 

  • The custodian is considered responsible for filing Form 990-T, but most self-directed IRA custodians transfer this responsibility to the account owner.

 

  • The IRA custodian may not have all of the information required to file the return, since much of the information in these privately-held investments is given directly to the account owner.

 

  • The account owner ultimately has the final responsibility to file the Form 990-T, and a lack of an understanding of the rules can cause major issues for the account owner.

 

  • The account owner will also be required to file quarterly estimated tax payments as long as the investment is in place. Every three months, a tax payment must be made to the IRS if the total tax for the year is expected to be greater than $500.

 

Note: UBTI may create one of those cases where income within an IRA is actually destined to be double-taxed. Even though you pay tax on the tax as it is earned within the IRA (at trust rates, not individual rates, which are more compressed), when you take the money out of the IRA, you will be taxed again. Paying tax on the UBTI doesn’t create non-taxable basis in the IRA.

 

Depending upon the nature of the IRA or qualified plan investment, UBTI may be:

 

Good - with limited exposure, the overall net investment benefits may be worthwhile using assets from this source.

 

Bad - the tax shelter on some or all investment earnings may be lost and some of the IRA/plan may wind up being double taxed.

 

Ugly - there are tax reporting and tax estimates that may come into play. Failure to take care of all of these duties could lead to adverse consequences.

 

Account Owners should not run away when they hear UBTI, but care and proper evaluation are definitely in order. When debating the pros and cons of UBTI in an IRA, the question shouldn’t be “How do I avoid UBTI?” but rather “What is the resulting net rate of return from the investment within my IRA that will generate UBTI”

 

Dismissing an investment because of the potential payment of taxes should never be a deal killer.

 

PLEASE CONSULT YOUR PROFESSIONAL TAX ADVISOR REGARDING THE POTENTIAL IMPACT OF UBTI ON AN IRA OR OTHER QUALIFIED PLAN.

 

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REVISED 2014 AND 2015 AUTOMOBILE DEPRECIATION LIMITS

 

IRS just recently issued revised numbers for the amount of depreciation taxpayers can take for the first year they use a passenger automobile (including a truck or van) for business in 2014 and the figures for 2015 (Rev. Proc. 2015-19, amplifying and modifying Rev. Proc. 2014-21).

The revised numbers for 2014 were necessary because the Tax Increase Prevention Act of 2014, P.L. 113-295, extended bonus depreciation retroactively to the beginning of 2014, but it did not extend it for 2015.

 

Under the new law, the amount of the first year depreciation limitation for 2014 for passenger automobiles to which bonus depreciation applies is increased by $8,000. For passenger automobiles (other than trucks or vans) placed in service during calendar year 2014 to which 50% first-year bonus depreciation applies, the depreciation limit under Sec. 280F(d)(7) is $11,160 for the first tax year. Trucks and vans to which bonus depreciation applies have a slightly higher limit: $11,460 for the first tax year.

 

For 2015, for passenger automobiles (other than trucks or vans) placed in service during that calendar year, the depreciation limit under Sec. 280F(d)(7) is $3,160 for the first tax year. For trucks and vans, the limit is $3,460 for the first tax year.

 

For passenger automobiles for 2015, the limits are $5,100 for the second tax year; $3,050 for the third tax year; and $1,875 for each successive tax year.

 

For trucks and vans, the limits are $5,600 for the second tax year; $3,350 for the third tax year; and $1,975 for each successive tax year.

 

Sec. 280F(c) limits deductions for the cost of leasing automobiles, expressed as an income inclusion amount according to a formula and tables prescribed under Regs. Sec. I.280F-7. The revenue procedure provides an updated table of the amounts to be included in income by lessees of passenger automobiles and another for trucks and vans, in both cases with lease terms that begin in calendar year 2015.

 

 

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TAX     ACCOUNTING     ADVISORY

_____________________________________________________________________

 

 

Providing a wide array of specialized non-traditional solutions plus offering traditional CPA services including:

 

Real Estate Transactions

 

Entity Structuring

 

Asset Protection Solutions

 

Business & Tax Advisory

 

Strategic Business & Tax Planning

 

Proactive Comprehensive Accounting Solutions including data and payroll processing.

 

Representation for Resolution of Tax Problems involving levy, liens, audit defense, payment plans, un-filed tax returns, penalty abatement and offers in compromise.

 

Tax Return Preparation for Individuals, Professionals, Business Owners, Corporations, Partnerships, Estates, Trusts and Exempt organizations.

 

Our experienced team of dedicated Accounting Professionals are committed to providing personal attention, quality work, reliable and helpful services to make complex accounting and compliance tasks easier, gain greater financial control and increase profitability by providing timely, accurate and complete accounting, payroll and tax preparation services.  This allows you more time to focus on growing your enterprise.

 

Tax Professionals consult on all aspects of tax compliance, advisory and planning, including individual, corporate, partnership, fiduciary, trust, gift and tax exempt organization tax returns.  These tax related services are provided by Zerjav & Associates, Certified Public Accountants, which has an alternative practice structure that is a separate and independent entity which works together with Advisory Group Associates to serve clients’ needs.

 

Our Core values include: Accountability, Accuracy, Collaboration, Commitment, Efficiency, Integrity, Passion, Quality, Respect and Service Excellence offered by our team of Professional Tax & Accounting Associates.

 

Our primary objective is the well-being of clients

as well as their satisfaction in the work we do, while our goal is to be the best, not the biggest firm.

 

 

For More Information, Contact by phone or email

(314) 205-9595 or toll free (888) 809-9595

 

[email protected]

 

 

Our service offerings are tailored to each stage of a client's tax life, from basic compliance and tax return preparation, where our process is imperative to minimizing costs, to many complex circumstances, where both our process and specialized knowledge is the key to successful results.

 

Our complimentary monthly electronic newsletter to subscribers provides comprehensive and timely insight on a wide range of taxation issues including federal and state tax incentives and current issues.

 

We also offer an initial complimentary consultation to better determine that we will make a real difference when using proven strategies based upon the particular facts and circumstances of any taxpayer.

 

 Our Mission:      Sharing ideas that make a real difference.

 

 

Tax Professional Standards Statement. The TAX TIPS NEWSLINE is published monthly to provide general educational tax compliance tips, information, updates and general business or economic data compiled from various sources.  This document supports the marketing of professional services and does not provide substantive determination or advice affecting specific tax liability.  It is not written tax advice directed at the particular facts and circumstances of any taxpayer.  Nothing herein shall be construed as imposing a limitation from disclosing the tax treatment or tax structure of any matter addressed.  To the extent this document may be considered written tax advice, in accordance with applicable requirements imposed under IRS Circular 230, any written advice contained in, forwarded with, or attached to this document is not intended or written to be used, and cannot be used, by any taxpayer for the purpose of avoiding any penalties that may be imposed under the Internal Revenue Code.

 

If you are not the original addressee of this communication you must delete this message from your computer system.  Any disclosure, copying, distribution of this communication or the taking of any action based on it is strictly prohibited.

 

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Tax Tips Newsline - April 2015

TAX TIPS NEWSLINE  _____________________      

                                                              APRIL 2015

 

Produced monthly for clients of the Advisory Group Associates

Our Mission:  Sharing ideas that make a real difference.

 

This “TAX TIPS NEWSLINE” is compiled by its founder, Frank Zerjav CPA and team of Professional Tax Associates, and then it is sent by email each month because you need tax and compliance knowledge.  It’s a big part of your life and the entities that you operate.

 

It is not too late to gather your 2014 records and deliver them so that we can complete preparation of accurate income tax returns.  We will at least need enough data and information to help determine if a payment will be due and payable April 15, 2015, when you file a request for an extension of time.  In addition to amounts due for 2014, the first 2015 estimated tax payment, both federal and state, will also be due April 15, 2015.

 

Someone is available every day, including Saturday and Sunday throughout this very busy tax return preparation period.  Again, if you have any questions or concerns, please do not hesitate to contact this CPA firm by calling 314-205-9595.

 

The Tax Organizers that were sent via email 1/22/15 should be used to help gather the items needed so that we can prepare an accurate return or make estimates of your obligations in the event you will want this CPA firm to file an extension request.  Please update the data on your organizers with your new phone numbers, addresses and emails if they changed.  We look forward to providing tax related, advisory, compliance and preparation services for you, your family and others that you refer.

 

Our firm engages in strategic tax planning for professionals, business owners, investors and individuals.  Our responsibility to our clients is to minimize their tax burden by appropriate proven methods, which helps them to keep more of what they earn.  Our primary objective is the well-being of clients as well as their satisfaction in the work we do.

 

“GO CARDS - 2015”

 

Inside this Month's Issue

 

  • Tax Time Tips from the IRS
  • Tax Savings Strategies Checklist
  • Nontaxable Income
  • Tax Breaks for College Students
  • Tax Strategies – Frequently Asked Questions (FAQ)
  • How to Determine the Obamacare Penalty Tax
  • Wide Range of Solutions & Services Offered

TAX TIME TIPS FROM THE IRS

 

The tax filing season is almost over.  You can make tax time easier if you don’t wait until the last minute.  Here are important tax time tips:

 

Gather your records.  Collect all tax records you need to file your taxes.

This includes receipts, canceled checks and records that support income, deductions or tax credits that you claim on your tax return.

Store them in a safe place.

 

  • Report all your income. You will need to report your income from all of your Forms W-2, Wage and Tax Statements, and Form 1099 income statements when you file your tax return.

 

  • Use direct deposit. Combining e-file with direct deposit is the fastest and safest way to get your tax refund.

 

  • Check out number 17. IRS Publication 17, Your Federal Income Tax, is a complete tax resource.  It contains helpful information such as whether you need to file a tax return and how to choose your filing status.

 

  • Review your return. Mistakes slow down the receipt of your tax refund.  Be sure to check all Social Security numbers and math calculations on your return, as these are the most common errors.  If you run into a problem, remember the IRS is here to help.  Start with IRS.gov.

 

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TAX SAVING STRATEGIES CHECKLIST

 

This article provides tax saving strategies for deferring income and maximizing deductions, and includes some strategies for specific categories of individuals, such as those with high income and those who are self-employed. 

 

Before getting into the specifics, however, we would like to stress the importance of proper documentation.  Many taxpayers lose worthwhile tax deductions because they have neglected to keep receipts or records.  Keeping adequate records is required by the IRS for employee business expenses, deductible meals and entertainment expenses, charitable gifts and travel.  But don’t do it just because the IRS says so.  Neglecting to track these deductions can lead to overlooking them.  You also need to maintain records regarding your income.  If you receive a large tax-free amount, such as a gift or inheritance, make certain to document the item so that the IRS does not later claim that you had unreported income.

 

The checklist items listed below are for general information only and should be tailored to your specific situation.  If you think one of them fits your tax situation, we’d be happy to discuss it with you.

 

  • Max Out Your 401(k) or Similar Employer Plan. Many employers offer plans where you can elect to defer a portion of your salary and contribute it to a tax-deferred retirement account.  For most companies these are referred to as 401(k) plans.  For many other employers, such as universities, a similar plan called a 403(b) is available.  Check with your employer about the availability of such a plan and contribute as much as possible to defer income and accumulate retirement assets.

 

Tip: Some employers match a portion of employee contributions to such plans.  If this is available, you should structure your contributions to receive the maximum employer matching contribution.

 

  • If You Have Your Own Business, Set Up and Contribute to a Retirement Plan.

If you have your own business, consider setting up and contributing as much as possible to a retirement plan.  These are even allowed for sideline or moonlighting businesses.  Several types of plans are available which minimize the paperwork involved in establishing and administering such a plan.

 

  • Contribute to an IRA. If you have income from wages or self-employment income, you can build tax-sheltered investments by contributing to a traditional or a Roth IRA.  You may also be able to contribute to a spousal IRA – even where the spouse has little or no earned income.  All IRAs defer the taxation of IRA investment income and in some cases can be deductible or be withdrawn tax free.

 

Tip: To get the most from IRA contributions, fund the IRA as early as possible in the year.  Also, pay the IRA trustee out of separate funds, not out of the amount in the IRA.  Following these two rules will ensure that you get the most possible tax-deferred earnings from your money.

 

  • Use the Gift-Tax Exclusion to Shift Income. You can give away $14,000 ($28,000 if joined by a spouse) per donee in 2015 (same as 2014), per year without paying federal gift tax.  You can give $14,000 to as many donees as you like.  The income earned on these transfers will then be taxed at the donees tax rate, which is in many cases lower.

 

Note: Special rules apply to children under age 18.  Also, if you directly pay the medical or educational expenses of the donee, such gifts will not be subject to gift tax.

 

  • Invest in Treasury Securities. For high-income taxpayers, who live in high-income-tax states, investing in Treasury bills, bonds, and notes can pay off in tax savings.  The interest on Treasuries is exempt from state and local income tax.  Also, investing in treasury bills that mature in the next tax year results in a deferral of the tax until the next year.

 

  • Consider Tax-Exempt Municipal Bonds. Interest on state or local municipal bonds is generally exempt from federal income tax and from tax by the issuing state or locality.  For that reason, interest paid on such bonds is somewhat less than that paid on commercial bonds of comparable quality.  However, for individuals in higher brackets, the interest from municipal bonds will often be greater than from higher paying commercial bonds  (after reduction for taxes).  Gain on sale of municipal bonds is taxable and loss is deductible.  Tax-exempt interest is sometimes an element in computation of other tax items.  Interest on loans to buy or carry tax-exempts is non-deductible.

 

  • Give Appreciated Assets to Charity. If you’re planning to make a charitable gift, it generally makes more sense to give appreciated long-term capital assets to the charity, instead of selling the assets and giving the charity the after-tax proceeds.  Donating the assets instead of the cash prevents you from having to pay capital gains tax on the sale, which can result in considerable savings, depending on your tax bracket and the amount of tax that would be due on the sale.  Additionally,  you can obtain a tax deduction for the fair market value of the property.

 

Tip:  Many taxpayers also give depreciated assets to charity.  Deduction is for Fair Market Value.

 

  • Keep Track of Mileage Driven for Business, Medical or Charitable Purposes. If you drive your car for business, medical or charitable purposes, you may be entitled to a deduction for miles driven.  For 2015, its 57.5 cents per mile for business, 23.5 cents for medical and moving purposes, and 14 cents for service for charitable organization.  You need to keep detailed daily records (mileage log) of the mileage driven for these purposes to substantiate the deduction.

 

  • Take Advantage of Your Employer’s Benefit Plans to Get an Effective Deduction of Items Such as Medical Expenses. Medical and dental expenses are generally only deductible to the extent they exceed 10 percent of your adjusted gross income (AGI).  For most individuals, particularly those with high income, this eliminates the possibility for a deduction.  You can effectively get a deduction for these items if your employer offers a Flexible Spending Account, sometimes called a cafeteria plan.  These plans permit you to redirect a portion of your salary to pay these types of expenses with pre-tax dollars.  Another such arrangement is a Health Savings Account.  Ask your employer if they provide either of these plans.

 

  • If Self-Employed, Take Advantage of Special Deductions. You may be able to expense up to $25,000 in 2014 for qualified equipment purchases for use in your business immediately instead of writing it off over many years.  Additionally, self-employed individuals can deduct 100% of their health insurance premiums as business expenses.  You may also be able to establish a Keogh, SEP or SIMPLE PLAN, or a Health Savings Account, as mentioned above.

 

  • If Self-Employed, Hire Your Child in the Business. If your child is under age 18, they are not subject to employment taxes from your unincorporated business (income taxes still apply).  This will reduce your income for both income and employment tax purposes and shift assets to the child at the same time; however, you cannot hire your child if they are under the age of 8 years old.

 

  • Take Out a Home-Equity Loan. Most consumer related interest expense, such as from car loans or credit cards, is not deductible.  Interest on a home-equity loan, however, can be deductible.  It may be advisable to take out a home-equity loan to pay off other nondeductible obligations.

 

  • Bunch Your Itemized Deductions. Certain itemized deductions, such as medical or employment related expenses, are only deductible if they exceed a certain amount.  It may be advantageous to delay payments in one year and prepay them in the next year to bunch the expenses in one year.  This way you stand a better chance of getting a deduction.

 

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NONTAXABLE INCOME

 

Most types of income are taxable, but some are not.  Income can include money, property or services that you receive.  Here are some examples of income that are usually not taxable:

 

  • Scholarships
  • Child support payments;
  • Gifts, bequests and inheritances;
  • Welfare benefits;
  • Damage awards for physical injury or sickness;
  • Cash rebates from a dealer or manufacturer for an item you buy;
  • Reimbursements for qualified adoption expenses; and
  • Points earned on credit card purchases.

 

Some income is not taxable, except under certain conditions.  Examples include:

 

  • Life insurance proceeds paid to you because of an insured person’s death are usually not taxable. However, if you redeem a life insurance policy for cash, any amount that is more than the cost of the policy is taxable.

 

  • Income you get from a qualified scholarship is normally not taxable. Amounts you use for certain costs, such as tuition and required course books, are not taxable.  However, amounts used for room and board are taxable.

 

All income, such as wages and tips, is taxable unless the law specifically excludes it.  This includes non-cash income from bartering – the exchange of property or services.  Both parties must include the fair market value of goods or services received as income on their tax return. 

 

If you received a refund, credit or offset of state or local income taxes in 2013, you may be required to report this amount.  If you did not receive a 2013 Form 1099-G, check with the government agency that made the payments to you.  That agency may have made the form available only in an electronic format.  You will need to get instructions from the agency to retrieve this document.  Report any taxable refund you received, even if you did not receive Form 1099-G.

 

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TAX BREAKS FOR COLLEGE STUDENTS

 

As a reminder to parents and students now is a good time to see if they qualify for either of two college education tax credits or any of several other education-related tax benefits.

 

In general, the American opportunity tax credit, lifetime learning credit and tuition and fees deduction are available to taxpayers who pay qualifying expenses for an eligible student.  Eligible students include the primary taxpayer, the taxpayer’s spouse or a dependent of the taxpayer.

 

Though a taxpayer often qualifies for more than one of these benefits, he or she can only claim one of them for a particular student in a particular year.  The benefits are available to all taxpayers – both those who itemize their deductions on Schedule A and those who claim a standard deduction.  The credits are claimed on Form 8863 and the tuition and fees deduction is claimed on Form 8917.

 

The American Taxpayer Relief Act, enacted Jan. 2, 2013, extended the American opportunity tax credit for another four years until the end of 2017.  The new law also retroactively extended the tuition and fees deduction, which had expired at the end of 2011, to be extended because it was already a permanent part of the tax code.

 

For those eligible, including most “undergraduate” students, the American opportunity tax credit will yield the greatest tax savings.  Alternatively, the lifetime learning credit should be considered by part-time students and those attending graduate school.  For others, especially those who don’t qualify for either credit, the tuition and fees deduction may be the right choice.

All three benefits are available for students enrolled in an eligible college, university or vocational school, including both nonprofit and for-profit institutions.  None of them can be claimed by a nonresident alien or married person filing a separate return.  In most cases, dependents cannot claim these education benefits.

 

Normally, a student will receive a Form 1098-T from their institution by the end of January for the following year.  This form will show information about tuition paid or billed along with other information.  However, taxpayers are eligible to claim for these tax benefits.

 

Many of those eligible for the American opportunity tax credit qualify for the maximum annual credit of $2,500 per student.  Here are some key features of the credit:

 

  • The credit targets the first four years of post-secondary education, and a student must be enrolled at least half time. This means that expenses paid for a student who, as of the beginning of the tax year, has already completed the first four years of college do not qualify.  Any student with a felony drug conviction also does not qualify.

 

  • Tuition, required enrollment fees, books and other required course materials generally qualify. Other expenses, such as room and board, do not.

 

  • The credit equals 100 percent of the first $2,000 spent and 25 percent of the next $2,000. That means the full $2,500 credit may be available to a taxpayer who pays $4,000 or more in qualified expenses for an eligible student.

 

  • The full credit can only be claimed by taxpayers whose modified adjusted gross income (MAGI) is $80,000 or less. For married couples filing a joint return, the limit is $160,000.  The credit is phased out for taxpayers with incomes above these levels.  No credit can be claimed by joint filers whose MAGI is $180,000 or more and singles, heads of household and some window and widowers whose MAGI is $90,000 or more.

 

  • Forty percent of the American opportunity tax credit is refundable. This means that even people who owe no tax can get an annual payment of up to $1,000 for each eligible student.  Other education-related credits and deductions do not provide a benefit to people who owe no tax.

 

The lifetime learning credit of up to $2,000 per tax return is available for both graduate and undergraduate students.  Unlike the American opportunity tax credit, the limit on the lifetime learning credit applies to each tax return, rather than to each student.  Though the half-time student requirement does not apply, the course of study must be either part of a post-secondary degree program or taken by the student to maintain or improve job skills.

Other features of the credit include:

 

  • Tuition and fees required for enrollment of attendance qualify as do other fees required for the course. Additional expenses do not.

 

  • The credit equals 20 percent of the amount spent on eligible expenses across all students on the return. That means the full $2,000 credit is only available to a taxpayer who pays $10,000 or more in qualifying tuition and fees and has sufficient tax liability.

 

  • Income limits are lower than under the American opportunity tax credit. For 2013, the full credit can be claimed by taxpayers whose MAGI is $52,000 or less. For married couples filing a joint return, the limit is $104,000.  The credit is phased out for taxpayers with incomes above these levels.  No credit can be claimed by joint filers whose MAGI is $124,000 or more and singles, head of household and some widows and widowers whose MAGI is $62,000 or more.

 

Like the lifetime learning credit, the tuition and fees deduction is available for all levels of post-secondary education, and the cost of one or more courses can qualify.  The annual deduction limit is $4,000 for joint filers whose MAGI is $130,000 or less and other taxpayers whose MAGI is $65,000 or less.  The deduction limit drops to $2,000 for couples whose MAGI exceeds $130,000 but is no more than $160,000, and other taxpayers whose MAGI exceeds $65,000 but is no more than $80,000.

 

There are a variety of other education-related tax benefits that can help many tax payers.  They include:

 

  • Scholarship and fellowship grants-generally tax-free if used to pay for tuition, required enrollment fees, books and other course materials, but taxable if used for room, board, research, travel or other expenses.

 

  • Student loan interest deduction of up to $2,500 per year.

 

  • Savings bonds used to pay for college-though income limits apply; interest is usually tax-free if bonds were purchased after 1989 by a taxpayer who, at time of purchase, was at least 24 years old.

 

  • Qualified tuition programs, also called 529 plans, used by many families to prepay or save for a child’s college education.

 

Taxpayers with qualifying children who are students up to age 24 may be able to claim a dependent exemption and the earned income tax credit.

 

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TAX STRATEGIES – FREQUENTLY ASKED QUESTIONS

 

What’s the best way to borrow to make consumer purchases? For homeowners, it’s the home equity loan.  Other consumer related interest expense, such as from car loans or credit cards, is not deductible.  Interest on a home-equity loan can be deductible.  So avoid other nondeductible borrowings and use a home-equity loan if you plan to borrow for consumer purchases.

 

Why should I participate in my employer’s cafeteria plan or FSA? Medical and dental expenses are deductible to the extent they exceed 10% in 2014 (same as 2013) of your adjusted gross income (AGI).  As such, many people are not able to take advantage of them. There is, however, a way to get around this if your employer offers a flexible Spending Account (FSA), Health Savings Account or cafeteria plan.  These plans permit you to redirect a portion of your salary to pay these types of expenses with pre-tax dollars.

 

What’s the best way to give to charity? If you’re planning to make a charitable gift, it generally makes more sense to give appreciated long-term capital assets to the charity, instead of selling the assets and giving the charity the after-tax proceeds.  Donating the assets instead of the cash avoids capital gains tax on the sale, and you can obtain a tax deduction for the full Fair Market Value of the property.

 

I have a large capital gain this year.  What should I do? If you also have an investment on which you have an accumulated loss, it may be advantageous to sell it prior to year-end.  Capital losses are deductible up to the amount of your capital gains plus $3,000.  If you are planning on selling an investment on which you have an accumulated gain, it may be best to wait until after the end of the year to defer payment of the taxes for another year (subject to estimated tax requirements).

 

What other tax-favored investments should I consider? For growth stocks you hold for the long term, you pay no tax on the appreciation until you sell them.  No capital gains tax is imposed on appreciation at your death.

 

Interest on state or local bonds (“municipals”) is generally exempt from federal income tax and from tax by the issuing state or locality.  For that reason, interest paid on such bonds is somewhat less than that paid on commercial bonds of comparable quality.  However, for individuals in higher brackets, the interest from municipals will often be greater than from higher paying commercial bonds after reduction for taxes.

 

For high-income taxpayers, who live in high-income-tax states, investing in Treasury bills, bonds, and notes can pay off in tax savings.  The interest on Treasuries is exempt from state and local income tax.

 

What tax-deferred investments are possible if I’m self-employed? Consider setting up and contributing as much as possible to a retirement plan.  These are allowed even for sideline or moonlighting businesses.  Several types of plans are available: the Keogh plan, the SEP and the SIMPLE.

 

How can I make tax-deferred investments? Through the use of tax-deferred retirement accounts you can invest some of the money you would have otherwise paid in taxes to increase the amount of your retirement fund.  Many employers offer plans where you can elect to defer a portion of your salary and contribute it to a tax-deferred retirement account.  For most companies these are referred to as 401(k) plans.  For many other employers, such as universities, a similar plan called a 403(b) is available.

 

Some employers match a portion of employee contributions to such plans.  If this is available, you should structure your contributions to receive the maximum employer matching contribution.

 

Why should I defer income to a later year? Most individuals are in a higher tax bracket in their working years than during retirement.  Deferring income until retirement may result in paying taxes on that income at a lower rate.  Deferral can also work in the short term.  If you expect to be in a lower bracket in the following year or if  you can take advantage of lower long-term capital gains rates by holding an asset a little longer. You can achieve the same effect of short-term income deferral by accelerating deductions.  For example, paying a state estimated tax installment in December instead of at the following January due date.

 

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HOW TO DETERMINE IF YOU’LL OWE THE OBAMACARE PENALTY TAX

 

The Affordable Care Act (ACA) was the biggest overhaul in the US healthcare system since the implementation of Medicare in 1965. It is an attempt to expand health care coverage to the entire population, as well as to eliminate traditional barriers, such as pre-existing conditions. These benefits, however, do not come without cost. One of those costs for many without health insurance will be the penalty tax.

 

Since the law attempts to be revenue neutral, there are provisions in place to offset the higher costs being borne in the healthcare system with new sources of revenue. In other words, new taxes. Some of those taxes will fall on individuals who do not have health insurance coverage at all.

 

What is the ACA Penalty Tax

The tax that is being imposed on those who do not have health insurance coverage is frequently referred to as the ACA penalty tax (some refer to this as the Obamacare Penalty Tax). The first year that it applied was 2014, and the size of the tax will get progressively larger through at least 2016.

 

Under the law, if you’re uninsured for even part of the year, then 1/12 of the annual penalty will apply to each month that you do not have health insurance. (We’ll discuss the size of the penalty shortly.)

 

Before you go thinking that the penalty will be assessed for any month in which you do not have coverage, there is a provision that exempts you from having to pay the penalty if you’re uninsured for less than three months out of the year. That will exempt the majority of people who are simply between jobs, and therefore only temporarily without insurance.

 

The penalty is to be paid through the filing of your annual income tax. However, there are no liens, levies, or criminal penalties for failing to pay the tax. Should you fail to pay the penalty, the IRS will deduct it from any future tax refunds.

 

How Likely Are You to Be Affected by the Penalty Tax

Because the penalty is new in 2014, projections as to how many people will ultimately have to pay it are no better than wide range estimates. According to the Treasury Department, it is estimated that three to six million people will have to pay the penalty tax.

 

The breadth of this tax raises the $64,000 question—How much will those subject to the

penalty have to pay?

           

The Penalty for 2014 and 2015

 

Over the next few years, the Obamacare Penalty Tax looks like this:

 

  • For 2014 - The higher of $95 per person (and $47.50 per child under 18), or 1% of Income
  • For 2015 - The higher of $325 per person (and $162.50 per child under the age of 18), or 2% of

                     income

  • For 2016 - The higher of $695 per person (and presumably $347.50 per child under the age of

                    18), or 2.5% of income

  • After 2016 -The tax will be adjusted for inflation each year.

 

Calculating the Penalty

Calculating the ACA penalty depends on several factors, including income and family size. The IRS has several predetermined numbers that are also used to compute the penalty, including the average premium for a bronze plan in any given year.

 

Remember that the penalty is the higher of the minimum dollar amount or the percentage of income for each year. In 2014 and 2015, the percentage of income is the higher of the two, and is therefore the required penalty amount. But in 2016 the dollar amount is the higher of the two, and is the final penalty required.

 

Exceptions to the Penalty

 

The law provides generous exemptions to the ACA penalty tax, including:

 

  1. You’re uninsured for less than 3 consecutive months of the year
  2. Individuals with income below the income tax filing threshold
  3. Individuals for whom the cost of getting health insurance (net of ACA subsidies) would

    exceed 8% of “household income” in 2014 (That percentage would rise in subsequent years if    

    premium growth exceeds Income growth.)

  1. Individuals in states that did not accept the ACA’s Medicaid expansion who would have

    qualified for Medicaid under the expansion

  1. Members of Indian tribes
  2. Members of certain religious faiths
  3. Members of a health care sharing ministry
  4. Individuals not legally in the U.S. (undocumented aliens)
  5. Incarcerated individuals

 

Exemption #3 would effectively remove the ACA penalty tax for anyone who does not have approved health insurance by virtue of their inability to afford it. So for example, a family of four earning $50,000 in 2014 would be exempt from the tax because the average annual cost of the policy under a bronze plan would be $9,792, representing nearly 20% of income.

 

“Household Income” = AGI+Section 104 (disability and sickness payments) + Section 911 (foreign earned income) for every member of the household that you can claim as a dependent and that is required to file his or her own tax return.

 

If that’s not enough exemptions for you, there is also an incredibly long list of hardship exemptions on Healthcare.gov’s Hardship exemptions from the fee for not having health coverage page.

 

You can apply for an exemption by filing IRS Form 8965. The Obamacare penalty tax promises to get even more interesting in a future. And we can probably expect revisions along the way.

 

  • It’s pretty simple. Get health insurance. Then you do not owe the penalty. Insurance is nearly free if you cannot afford it.

 

  • Are US citizens living abroad subject to the individual shared responsibility provision? Yes. However, U.S. citizens who are not physically present in the United States for at least 330 full days within a 12-month period are treated as having minimum essential coverage for that 12-month period. In addition, U.S. citizens who are bona-fide residents of a foreign country (or countries) for an entire taxable year are treated as having minimum essential coverage for that year. In general, these are individuals who quality for a foreign earned income exclusion under Section 911 of the Internal Revenue Code. Individuals may qualify for this rule even if they cannot use the exclusion for all of their foreign earned income because, for example, they are employees of the United States. See Publication 5.4, Tax Guide for U.S. Citizens and Resident Aliens Abroad, for further information on the foreign earned income exclusion. Individuals who qualify for this rule should file Form 8965, Health Coverage Exemptions, with their federal income tax returns.

 

  • S. citizens who meet neither the physical presence nor residency requirements will need to maintain minimum essential coverage, qualify for a coverage exemption or make a shared responsibility payment for each month of the year. For this purpose, minimum essential coverage includes a group health plan provided by an overseas employer. One exemption that may be particularly relevant to U.S. citizens living abroad for a small part of a year is the exemption for a short coverage gap. This exemption provides that no shared responsibility payment will be due for a once-per-year gap in coverage that lasts less than three consecutive months.

 

  • Obamacare is just another tax. The big problem is that they created a big revenue source for healthcare and did not put any cost controls in place. You think healthcare is expensive now, see what it will be in 5 years with no checks on spending.

 

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Tax Tips Newsline - May 2015

                                                            

Produced monthly for Clients & Friends of the Advisory Group Associates

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This “TAX TIPS NEWSLINE” is compiled by its founder, Frank Zerjav CPA and team of Professional Tax Associates, and then it is sent by email each month because you need tax and compliance knowledge.  It’s a big part of your life and the entities that you operate.

 

 

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BECOME A REAL ESTATE PROFESSIONAL

 

The so-called passive activity loss (PAL) rules limit the write-offs that certain real estate investors are able to claim.  Now, the same investors could get socked by the new 3.8% Medicare surtax on their net rental income.

 

Strategy: Be proactive.  A real estate professional isn’t restricted by the PAL rules and their rental income generally isn’t subject to the new surtax.

 

Generally, your annual write-off for passive activities is limited to your income from such passive activities.  In other words, you can’t claim an overall passive loss.  Any excess loss is “suspended” and carried over to the next year.  The PAL rules were enacted to crack down on artificial losses sustained in tax shelter deals.

 

A “passive activity” is one in which you do not “materially participate”.  The IRS has established several tests for establishing material participation.  For example, you’re treated as a material participant if you spend more than 500 hours during the year on the activity.  Unfortunately, however, a rental real estate activity is generally considered a passive activity by definition. 

 

Key exception: An “active participant” who owns at least 10% of the property is allowed to treat up to $25,000 of rental real estate losses as nonpassive, meaning they can be used to offset income from other sources such as wages and investments.  However, this $25,000 exception phases out between modified adjusted gross income (MAGI) of $100,000 and $150,000.

 

To compound matters, the 3.8% Medicare surtax applies to the lesser of your annual net investment income (NII) or the excess above $200,000 of MAGI for single filers and $250,000 for joint filers.  Although income from an active trade or business doesn’t count as NII, income from a passive activity does.  Therefore, a passive rental real estate activity can further increase your tax liability.

 

Tax solution to the problem.  So-called real estate professionals qualify for another exception to the passive loss rules.  Under the exception, a real estate professional can treat rental real estate losses as nonpassive if the professional materially participates in the rental activity (or activities).  But you must meet these two requirements to qualify as a real estate professional: (1) More than half of the personal services you perform in all trades or businesses during the tax year are performed in real property trades or businesses in which you materially participate.  (2) You spend more than 750 hours on your real property trades or businesses. A written time log is required to support the time spent.

 

If you satisfy this two-part test, rental real estate activities in which you materially participate aren’t treated as passive activities.  However, each ownership interest in rental real estate is treated as a separate activity, unless you make a special election to treat all your interests in rental real estate as a single activity.

 

You can make this election in any year in which you qualify as a real estate professional.  And, if you forgo it one year, you can still make it in a later year.

 

Tip: Once you make the election, it is binding for that tax year, plus any following years in which you’re a real estate professional.

 

Time must be on your side.   The Tax Court has consistently said you won’t qualify for the exception as a real estate professional unless you “do the time”.

 

New decision: The taxpayer, a full-time pharmaceutical salesperson owned seven rental properties along with his wife.  He performed most of the management duties for the properties, including collecting rents and performing repairs, and kept a log of these activities.  The logbook showed that the taxpayer spent no more than 800 hours on real estate in 2008 and 715 hours in 2009.  Thus, he didn’t satisfy the 750-hour threshold in 2009.  For 2008, he worked 1,500 hours in sales, so his real estate services were less than half of his personal services.

 

Result: The taxpayer didn’t qualify as a real estate professional in either tax year.  Therefore, his rental real estate losses for both years were passive and limited by the PAL rules unless the taxpayer’s spouse was qualified.

 

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POSTPONE, CUT TAX ON REAL ESTATE SALES

 

If you’re selling a prime piece of real estate, you can probably get top dollar in today’s market. But it may be worthwhile to structure the deal so you receive payments over several years.

 

Strategy: Sell the property on the “installment sale” basis. As long as you receive payments from the buyer in two or more tax years, you don’t owe current tax on all of your gain in the year of sale.

 

Not only does this defer the tax, it may also reduce your overall tax bill on the gain.

 

Recent tax-law changes further encourage real estate sellers to use the installment sale method.

 

Under the installment sale rules, only a portion of the gain is taxable in the year in which you receive a payment. Also, the taxable portion on the sale qualifies for favorable capital gain treatment.

 

The current maximum federal income tax rate on long-term capital gains is 20% for taxpayers in the highest ordinary income tax bracket. However, most taxpayers will owe no more than 15% to the feds on long-term capital gains. For sales of depreciable real estate, a maximum federal rate of 25% applies to the portion of gain attributable to your depreciation deductions.  In addition, a 3.8% Medicare surtax now applies to the lesser of “net investment income,”(NII) which includes most sales of rental real estate properties, or the amount by which your modified adjusted gross income (MAGI) exceeds a threshold of $250,000 for joint filers (or a MAGI of $200,000 for single filers). These figures are not indexed for inflation.

 

Thus, you could pay an effective tax rate of 23.8% (20% + 3.8%) or 28.8% (25% + 3.8%) on the sale of highly appreciated long-term capital gain property in 2015.

 

What is the taxable portion of the payment? It’s based on the “gross profit ratio.” Gross profit ratio is determined by dividing the gross profit from the real estate sale by the contract price.

 

Example:       You acquired a parcel of commercially zoned land several years ago.   It has an adjusted tax basis of $600,000, in 2015, you agree to sell the property for $1.5 million in five annual installments of $300,000 each with the first installment received in 2015. Because your gross profit is $900,000 ($1.5 million - $600,000), the taxable percentage of each installment payment is 60% ($900,000 divided by $1.5 million).

 

When you report the sale on your 2015 tax return, you’re only taxed on $180,000 of gain (60% of $300,000), reducing your exposure to the 20% capital gains rate and the 3.8% net investment income tax.

 

For simplicity, let’s say you save the 5% capital gains differential on $100,000 of income each year. That’s a tax savings of $25,000 (5% of $500,000) - well worth the wait.

 

Finally, watch out for a little known tax trap. If the sales price of your property (other than farm property or personal property) exceeds $150,000, interest must be paid to the government on the deferred tax to the extent that your outstanding installment receivables exceed $5 million.

 

Tip:     Keep an eye on the $5 million limit if you want to preserve tax deferral.

 

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TIPS TO KNOW IF YOU GET A LETTER FROM THE IRS

 

The IRS mails millions of notices and letters to taxpayers each year. There are a variety of reasons why they might send you a notice. Here are the top 10 tips to know in case you get one.

 

  • Don’t panic. You often can take care of a notice simply by responding to it.

 

  • An IRS notice typically will be about your federal tax return or tax account. It will be about a specific issue, such as changes to your account. It may ask you for more information. It could also explain that you owe tax and that you need to pay the amount that is due.

 

  • Each notice has specific instructions, so read it carefully. It will tell you what you need to do.

 

  • You may get a notice that states the IRS has made a change or correction to your tax return. If you do, review the information and compare it with your original return.

 

  • If you agree with the notice, you usually don’t need to reply unless it gives you other instructions or you need to make a payment.

 

  • If you do not agree with the notice, it’s important for you to respond. You should write a letter to explain why you disagree. Include any information and documents you want the IRS to consider. Mail your reply with the bottom tear-off portion of the notice. Send it to the address shown in the upper left-hand corner of the notice. Allow at least 30 days for a response.

 

  • You won’t need to call the IRS or visit an IRS office for most notices. If you do have questions, call the phone number in the upper right-hand corner of the notice. Have a copy of your tax return and the notice with you when you call. This will help the IRS answer your questions.

 

  • Always keep copies of any notices you receive with your other tax records.

 

  • Be alert for tax scams. The IRS sends letters and notices by mail. The IRS does not contact people by either telephone, email or social media to ask for personal or financial information.

 

  • For more on this topic visit IRS.gov. Click on the link ‘Responding to a Notice’ at the bottom left of the home page. Also, see Publication 594, The IRS Collection Process. You can get it on gov/forms at any time.

 

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TRADITIONAL, NON-TRADITIONAL, & SPECIALIZED SERVICES PROVIDED

 

We would be pleased to visit further regarding the nature, scope and array of services that we provide for you, your family and your enterprises.  Our mission is “Sharing Ideas that make a Real Difference.”  We offer Traditional, Non-Traditional, and Specialized services.

 

Traditional services is a total range of tax and compliance services that includes tax return preparation, representation, accounting and financial statements.

 

It never ceases, and we are amazed by the number of  “compliance” issues clients have been confronted with from both federal and state regulators.  Business owners and professionals contend with the IRS, Department of Labor, State Division of Employment Security and Sales/use taxes and are compelled to be in Compliance with seemingly endless and often changing regulations. 

 

As a result, our traditional role has changed from tax return preparation to tax compliance.

 

Non-Traditional services include Tax planning that begins with structuring a “Tax Efficient” entity integrated with asset protection solutions. We help business owners to protect, grow and exit their business or professional practice.  By sharing ideas, business owners are taken through comprehensive tax planning sessions to implement proven strategies and methods that reduce or even eliminate taxes.

 

In addition to Tax and Estate planning, we are always prepared to defend positions taken in event of any examination or other scrutiny through this comprehensive approach.  Business owners and investors are faced with what seems to be an endless array of both federal and state regulatory agencies.  Compliance involves both knowledge and keeping good records with appropriate documentation.  This knowledge is gained from our monthly newsletter – TAX TIPS NEWSLINE provided to all clients by email to share ideas and be informed regarding current topics and planning opportunities.

 

Our practice specialties include our role in tax problem resolution.  As tax professionals for 40 years, our team has helped clients in all areas of tax controversy and dealing with the IRS.  In addition to un-filed tax returns, penalty abatement, lien and levy releases, collection issues and offers in compromise, this often includes representation and defense strategies during IRS or state examinations.

 

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MAKE REASONABLE S CORPORATION SALARY 

 

Why would you pick the S corporation as a form of business entity?  Your likely answer:  to cut self – employment taxes.  How do you do that?  Pay a low salary and take the remaining profits as distributions that are not subject to the self – employment tax.

 

This article will help you establish a salary that’s not too low and not too high.  Thus, if your purpose for the S corporation is to save money on self – employment taxes, this article is for you.

 

Size Matters:  The one-owner personal service S corporation with no employees has no chance claiming:

 

  • A zero salary, and
  • All S corporation profits as corporate distributions.

 

The combination of zero salary and big profit distributions to the S corporation owner/operator rendering personal services simply does not work.

 

Finding and Proving the Reasonable Salary:  There is no one best way to identify and prove the reasonable salary, but you do need proof.  With good proof, you are not only armed should you be attacked by the IRS, but also you may well have bulletproof armor.

 

The Proof:  You want in your files proof that your salary level is indeed reasonable, before the IRS thinks about sending you an audit notice.  You could make this part of your annual stockholder’s meeting and fold it into the corporate minutes.  You don’t need a valuation expert to do this for you, although that certainly would not hurt.

You simply need good evidence of why your salary (low as it might be) is a reasonable salary.  Look to your trade association for evidence.

 

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TAX NEWS

 

IRS still on the job.  Despite predictions early in tax-return season about furloughs and reduced services for taxpayers, IRS Commissioner John Koskinen now says those measures won’t be necessary.  “Even though we’ve had to do less with less, so far  filing season has been running as smoothly as we could hope thanks to the dedicated work of IRS employees,”  Koskinen stated on March 18.

 

Threat to Obamacare.  The U.S. Supreme Court began hearing oral arguments in King V. Burwell in March. (S. Ct. Docket No. 14-114, 3/4/15).  The key issue in this case is whether the federally operated health insurance marketplace can grant premium tax credits under Obamacare, the informal name for the Affordable Care Act (ACA).  Without the credits, millions of taxpayers can’t afford health insurance, making it a major threat to the ACA’s survival.  The nation’s highest court is expected to rule in June.

 

Hurry up and wait. Are you filing your 2014 tax return electronically or on paper? IRS Commissioner John Koskinen warned that paper filers could face delays of a week or more on their refunds. Koskinen attributed the slowdown to budget cuts, which could lead to a longer hiring freeze; fewer resources dedicated to customer services, tax enforcement and overtime; and a possible two-day furlough for IRS employees.

 

IRS raises prices. If you want a private letter ruling from the IRS, the price tag has gone up. (Revenue Procedure 2015-1, 1/2/15) Effective Feb. 1, 2015, the cost for a taxpayer with income under $250,000 is $2,200 (up from $2,000); for a taxpayer with income between $250,000 and $1 million its $6,500 (up from $5,000); and a whopping $28,300 (up from $19,000) for those with income above $1 million.

 

Lowdown on high income. New IRS statistics show the top 1% of all filers paid about 38.1% of all federal income tax in 2012, the last year the agency analyzed it. That’s up 3% from the prior year.  The top 5% paid 58.9% of the total income tax and accounted for 36.8% of adjusted gross income (AGI). Conversely, the bottom 50% of filers paid only 2.8% of the total tax revenue.

 

Up in smoke. The trend toward legalizing marijuana continues.  It was voted in by Oregon, Alaska and the District of Columbia with more states likely to adopt similar measures. What does this mean to consumers for federal income tax purposes? Not much. Even if a doctor prescribes marijuana use for medical reasons, it can’t be deducted as a medical expense because federal law doesn’t sanction the usage.

 

Don’t expect miracles. IRS Commissioner John Koskinen is on record as predicting that the 2015 tax filing season will be “a very complex one.” In an email to IRS employees, Koskinen noted that the 2015 budget is comparable to the 1998 budget after factoring in inflation, but the IRS now receives 27.4 million more individual returns and 3 million more business returns than it did in 1998.

 

More tax mileage. The IRS has announced new standard mileage rates for 2015 (IRS Notice 2014-79, 12/10/14).  In lieu of deducting actual business auto expenses, you can deduct a flat rate of 57.5 cents per business mile, up from 56 cents in 2014, plus parking and tolls. But the standard rate for medical or moving expense driving drops to 23 cents per mile for 2015, down from 23.5 cents per mile in 2014.  The flat rate for charitable driving remains at l4 cents per mile.

 

Review T&E reimbursements.  The tax law limits deductions for T&E expense, including meals. But if an arrangement involves a third party - say a leasing company-who does the limit apply to?  According to the IRS, the parties can determine which one is subject to the limit. Absent such an agreement, the 50% limit applies to the party making the reimbursements.  (T.D. 9625, Reg. 1.274-2, 07/31/2013).

 

Key tax break for iPads.  The IRS has informally indicated that iPads and other tablets will be treated like cellphones when employers provide them to employees.  Thus, employees won’t be taxed on the value of personal use, as long as the devices are provided primarily for business reasons rather than as a form of compensation.  Similarly, reimbursements made by employers to employees for personally owned iPads generally should not be subject to tax when used primarily for business.

 

Find your comfort level.  Are you confident about having saved enough for retirement?  According to the Employee Benefit Research Institute’s 23rd annual Retirement Confidence Survey, more than half of the respondents had some measure of confidence that they would have enough saved to be comfortable in retirement  (13% very confident and 38% somewhat confident), 21% were not too confident and 28% were not all confident.

 

IRS has 2020 vision.  The IRS and the Free File Alliance will be in business together until 2020.  The agency has announced a new five-year agreement providing free federal tax-preparation-software products to 70% of all taxpayers. (IRS Internal News Release 2015-52, 3/17/15).  The agreement paves the way for innovations such as importing the prior year’s information and requests for additional options for free state tax returns. For 2015, taxpayers with income of $60,000 or less were eligible for the free tax software, while those above the $60,000 threshold could use Free File Fillable Forms, the electronic version of IRS paper forms.  Free File also provides free tax filing extensions.   For more information, visit www.irs.gov/FreeFile.

 

Handle this letter with care.  Have you received a 5071C letter from the IRS?  The IRS  generates this letter when its computers stop a suspicious tax return in its racks and the agency needs more information to process it accurately.  Go to IDVerify.irs.gov where you will be asked a series of questions about your identity and tax return history by an independent, secure identity assurance service.  This service uses nongovernmental information to create the questions that only you are likely to know the answers to.  The information provided to the IRS will be checked against your records to protect you from identiy theft.

 

Prepare for stormy tax weather.  National Taxpayer Advocate (NTA) Nina E. Olson delivered her annual report to Congress on Jan. 14, 2015. (IRS Internal Release IR-2015-02, 1/14/15) For the most part, the news wasn’t good.  According to Olson, during the 2015 tax filing season, taxpayers can expect to experience the worst level of service seen in a decade. The NTA, which operates independently within the IRS, is placing most of the blame on recent budget cuts and reduced resources.  Combined with an extra workload for the IRS, due to the health care legislation and other factors, a “perfect storm” of trouble could be brewing for taxpayers. Finally, in addition to addressing a host of other tax issues, Olson strongly urged Congress to codify a principles-based Taxpayer Bill of Rights. Previous versions haven’t been included in the tax law.

 

Get serious about tax reform. This time, the Senate Finance Committee (SFC) appears to mean business. It recently announced that it has launched five separate bipartisan “working groups” that will provide recommendations on comprehensive tax reform.

 

The five groups are as follows: (1) Individual Income Tax, (2) Business Income Tax, (3) Savings & Investment, (4) International Tax and (5) Community Development & Infrastructure. Each group will collaborate with the nonpartisan Joint Committee on Taxation (JCT) to produce an in-depth analysis of options and potential legislative solutions. Then they will submit the results to SFC chairman Orrin Hatch (R-UT) and former chairman Ron Wyden (D-OR), the highest-ranking Democrat, no later than May 30. Stay tuned.

 

To have and to withhold. The 3.8% Medicare surtax on net investment income (see page 1) isn’t the only tax complication triggered by the Patient Protection and Affordable Care Act (PPACA).  Under the PPACA, an additional 0.9% Medicare tax applies to wages received by employees above $200,000 for single filers, heads of households and qualifying Widows and Widowers; $250,000 for joint filers; or $125,000 for married taxpayers filing separately. The additional 0.9% Medicare surtax also hits net self-employment income in excess of the aforementioned thresholds.

 

The IRS recently refreshed the Frequently Asked Questions (FAQs) section for the 0.9% Medicare surtax on its website.  For instance, the FAQs explain that wage withholding of the 0.9% surtax must begin in 2015 when an employee earns more than $200,000 even though a married employee and his or her spouse may not have combined wages above the $250,000 threshold for married joint filers.

 

Tax hikes in ABLE Act. The Achieving a Better Life Experience (ABLE) Act authorizes states to create tax-favored accounts for disabled individuals and allows Section 529 plan holders to change their investment decisions twice a year (SBTS, January 2015). But the new law comes with a price: certain revenue-raisers to offset these tax breaks.  For instance, the new law increases the inland waterways fuel tax by 9 cents per gallon to 29.1 cents a gallon and indexing certain penalties for returns filed after 2014. This includes penalties for failing to file a tax return or to pay tax and for not filing information returns, as well as fines for tax return preparers who don’t sign returns, provide copies to taxpayers or put their tax ID number on returns.

 

Higher grade for earnings test.  If you continue working while you receive Social Security benefits, you might have to forfeit part of your benefits under the so-called “earnings test.” For those who started collecting benefits before the “normal retirement age” (NRA) for full benefits - 66 for most baby boomers - the earnings limit for 2015 is $15,720 (up from $15,480 in 2014). You lose $1 in benefits for every $2 over the limit.  If you attain the NRA in 2015, the limit is $41,880 (up from $41,400 in 2014). You lose $1 in benefits for every $3 over the limit.

 

Crackdown on nest eggs? A new report from the Government Accountability Office (GAO) zeroes in on so-called “mega IRAs.”  This is the name given to IRAs that have grown into seven figures or higher on a tax-deferred basis. Using figures from the 2011 tax year, the GAO says an estimated 600,000 taxpayers had aggregate IRA balances exceeding $1 million. About 6,000 to 10,000 taxpayers had aggregated IRA balances of $5 million to $10 million and 700 to 1,000taxpayers had more than $10 million. Senator Ron Wyden (D-Ore.), chairman of the Senate Finance Committee, has pledged support for legislation that would curtail big IRAs.  However, the new Congress is likely to be cool to the idea. Stay tuned, we will keep you posted on any developments.

 

Beware of phony email from “IRS.” We’ve said it before; we’ll say it again: Never send personal financial data in response to unsolicited email. The IRS says scam artists are sending emails to random people, telling them they’re due a refund or under investigation. The message directs people to a fake IRS website that asks for personal data. In reality, the IRS won’t contact you via email.

 

Need an old tax return Fast? Contact your tax advisor. A special IRS service lets tax practitioners receive transcripts of clients’ tax returns electronically in minutes.

Taxpayers can still receive a free paper transcript of their returns within seven to 10 days by calling the IRS at (800) 829-1040.

 

Know the difference between gifts and compensation. If you give a favorite employee a big check at Christmas, you might consider it a gift, but the IRS will likely consider it income. That could be true even if the employee and owner are family. In one case, the IRS said payments to an owner’s daughter (who was an employee) were for past services, not a gift. Talk with your tax pro if YOU face a similar dilemma.

 

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FORM 1099 COMPLIANCE

 

The IRS has mandated business owners, professionals and landlords to issue forms 1099-MISC when amounts paid to a single contracted provider or vendor exceeds $600 during the calendar year.  This is an important COMPLIANCE matter since the penalties for non-compliance has been increased significantly.  Form W-9 needs to be obtained from providers and retained with the payer’s records.

 

Tip – Carefully check any forms 1099-MISC issued by your customers to determine that the correct taxpayer identification number (TIN) was used as well as the name of the company.  Generally, your SSN should not be given when a company conducts the business.  When errors are found, prompt corrective actions need to be taken since the IRS intends to match amounts reported.

 

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PLAN NOW FOR 2015 TAX RETURN

 

Most people stop thinking about taxes after they file their tax return.  But there’s no better time to start tax planning than right now.  And it’s never too early to set up a smart recordkeeping system.  Here are six IRS tips to help you start to plan for this year’s taxes:

 

  • Take action when life changes occur. Some life events, like a change in marital status, the birth of a child or buying a home, can change the amount of taxes you owe.  When such events occur during the year, you may need to change the amount of tax taken out of your pay.  To do that, you must file a new Form W-4, Employee’s Withholding Allowance Certificate, with your employer.  Use the IRS Withholding Calculator on IRS.gov to help you fill out the form.  If you receive advance payments of the premium tax credit it is important that you report changes in circumstances, such as changes in your income or family size, to your Health Insurance Marketplace.

 

  • Keep records safe. Put your 2014 tax return and supporting records in a safe place.  That way if you ever need to refer to your return, you’ll know where to find it.  For example, you may need a copy of your return if you apply for a home loan or financial aid.  You can also use it as a guide when you do next year’s tax return.

 

  • Stay organized. Make sure your family puts tax records in the same place during the year. This will avoid a search for misplaced records come tax time next year.

 

  • Think about itemizing. If you usually claim a standard deduction on your tax return, you may be able to lower your taxes if you itemize deductions instead.  A donation to charity could mean some tax savings.  See the instructions for Schedule A, Itemized Deductions, for a list of deductions.
  • Keep up with changes. Subscribe to and read this monthly publication “TAX TIPS NEWSLINE”. 

 

Remember, a little planning now can pay off big at tax time next year.

 

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FRAUD RISK QUESTIONNAIRE

This questionnaire is intended for general guidance and information only. The list of risk factors is presented for illustrative purposes only and is not exhaustive. Use of this questionnaire does not guarantee the prevention or detection of fraud and is not intended as a substitute for audit or similar procedures.

 

We invite you to call if you have vital concerns about fraud prevention or suspect that fraud exists.

 

 

Does the organization have an adequate level of fraud awareness, and are   appropriate policies in place to minimize fraud risk, specifically:

 

Generic Risk Factors

 

  • Has the organization assigned each employee a maximum “opportunity level” to commit fraud, that is, has management asked itself the question, “What is the maximum amount this employee could defraud the organization, and does this represent an acceptable risk?

 

  • Has the organization set a catastrophic opportunity level; that is, has management asked itself the question, “Have we ensured that no single employee, or group of employees in collusion, can commit a fraud that would place the organization in imminent risk of survival?

 

  • Does the organization have a policy of immediately dismissing any employee who has committed fraud?

 

  • Does the organization have a policy of reporting all frauds to the authorities and pressing charges?

 

  • For all frauds experienced by the organization in the past, has management evaluated the reasons that led to the fraud and taken corrective action?

 

 

         

 

 Individual Risk Factors

 

  • Does the organization have a written “mission statement”, which includes an objective of good citizenship or the maintenance of good standing in the community?

 

  • Does the organization have a written code of ethics and business conduct?

 

  • Does the organization conduct ethical and security training for new employees and periodic updates for existing employees?

 

  • Does management set the right example that is, does it follow the organization’s mission statement, code of ethics and business conduct, and other policies of the organization and is it clearly seen to be doing so by employees?

 

  • Does the organization’s culture avoid characteristics that promote unethical behavior, for example, high or even hostile competitiveness within the organization that might push employees to the point of burnout; pointless rigid or petty policies, or both; over centralization of authority?

 

  • Do the organization’s hiring policies, to the extent possible, seek out individuals of high moral character and weed out those of low moral character?

 

  • Does the organization use screening and or testing procedures for especially sensitive positions; for example, psychological tests, drug tests, or lie detector tests, or a combination of all three, where permitted by law?

 

  • Does the organization provide or encourage counseling or both for employees with personal problems, for example, alcohol and drug abuse?

 

  • Does the organization have fair policies in the area of employee relations and compensation for example, salaries, fringe benefits, performance appraisal, promotions, severance pay; and do these policies compare favorably with those of competitors and promote an environment that minimizes disenchantment and other similar motives to commit fraud?

 

  • Does the organization have fair mechanisms in place for dealing with employee grievances?

 

  • Does the organization have a feedback mechanism concerning employee relations’ policies and conduct exit interviews with departing employees?

 

 

Overall Risk Factors

 

Does the organization exhibit an awareness of fraud and its possible manifestations, for example, signs of employee problems such as drug addiction, employees who are living beyond their means, etc.

 

Internal Control

 

Has the organization explicitly considered the need for fraud prevention in the design and maintenance of the system of internal controls?

 

Control over Physical and Logical Access

 

  • Does the organization have a policy of locking doors, desks, and cabinets after hours and when, unattended, especially in areas with valuable assets including files and records, for example, personnel and payroll, customer and vendor lists, corporate strategies, marketing plans, research?

 

  • Does the organization use IDs and passwords, for example, for computer files?

 

  • Does the organization state and enforce a policy that restricts access to those requiring it for job performance, including a strict policy against employees allowing access to unauthorized personnel, for example, by loaning keys or sharing passwords?

 

  • Has the organization installed, for especially sensitive areas, the computerized security or electronic surveillance systems, or both?

 

  • Does the workplace appear, to an impartial observer, to have adequate access controls?

 

Job Descriptions

 

  • Does the organization have written specific job descriptions?

 

  • Are job descriptions adhered to?

 

  • Does the organization have an organization chart that reflects and is consistent with the job descriptions of its employees?

 

  • Are incompatible duties segregated, for example, the handling of valuable assets especially cash and related records?

 

  • Does the organization properly segregate the purchasing functions that are ensuring that one single individual cannot requisition goods or services approve and make the related payment, and access accounts payable records?

 

  • Are especially sensitive duties duplicated, for example, the double signing of checks over a specified amount?

 

  • Do job descriptions specify that employees must take annual vacations?

 

  • Is the overall process of formulating job descriptions integrated with adequate consideration the importance of fraud prevention?

 

Regular Accounting Reconciliation and Analysis

 

  • Are all bank accounts reconciled? Monthly?

 

  • Are all accounts receivable reconciled, for example, month-to-month, general ledger to sub ledger?

 

  • Are all accounts payable reconciled, for example, month-to-month, general ledger to sub ledger?

 

  • Has the organization performed a variance analysis of general ledger accounts, for example budget to actual, current year versus prior year?

 

  • Has the organization performed a vertical analysis of profit and loss accounts that is, as a percentage of sales against historical or budget standards, or both?

 

  • Has the organization performed an analysis of detailed sales and major expenses, for example, by product line or geographic territory?

 

Supervision

 

  • Do supervisors and managers have adequate fraud awareness, that is, are they alert to the possibility of fraud whenever an unusual situation occurs, such as supplier or customer complaint about their accounts?

 

  • Do supervisors and managers diligently review their subordinates’ work, for example, accounting reconciliation, and redo the work when appropriate?

 

  • Does close supervision adequately compensate against the increased risk of fraud in smaller businesses or where an inability to divide duties exists.

 

  • Is supervisory or management override prohibited and are others within the firm alert to the fraud risks associated with management override?

Audit

 

  • Is there an internal audit function?

 

  • Does the internal audit function perform regular checks to ensure that fraud prevention mechanisms are in place and operating as intended?

 

  • Are external audits performed on a regular basis, for example, quarterly for larger businesses?

 

  • Are the timing demands of management on external auditors reasonable?

 

  • Do external auditors receive full cooperation from management with respect to their work in general and fraud matters in particular, for example, through the audit committee?

 

Has the organization specifically addressed the following fraud prevention issues?

 

  • Ethical Environment

 

  • Risk Financing

 

  • Computer Security

 

Misappropriation of Assets

 

  • Are there planned layoffs, which have become known by employees throughout the company?

 

  • Are the company’s assets easily convertible and are they physically available to employees?

 

  • Is there insufficient segregation of duties related to check writing, wiring of funds, or cash?

 

  • Are the controls over the accounting system or automated records inadequate?

 

  • Do certain employees exhibit a change in behavior to a disagreeable or discontent state?

 

Does the organization require that a fidelity bond be purchased or have an adequate level of insurance in event fraud has been detected?

 

 

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TAX     ACCOUNTING     ADVISORY

_____________________________________________________________________

 

 

Providing a wide array of specialized non-traditional solutions plus offering traditional CPA services including:

 

Real Estate Transactions

 

Entity Structuring

 

Asset Protection Solutions

 

Business & Tax Advisory

 

Strategic Business & Tax Planning

 

Proactive Comprehensive Accounting Solutions including data and payroll processing.

 

Representation for Resolution of Tax Problems involving levy, liens, audit defense, payment plans, un-filed tax returns, penalty abatement and offers in compromise.

 

Tax Return Preparation for Individuals, Professionals, Business Owners, Corporations, Partnerships, Estates, Trusts and Exempt organizations.

 

Our experienced team of dedicated Accounting Professionals are committed to providing personal attention, quality work, reliable and helpful services to make complex accounting and compliance tasks easier, gain greater financial control and increase profitability by providing timely, accurate and complete accounting, payroll and tax preparation services.  This allows you more time to focus on growing your enterprise.

 

Tax Professionals consult on all aspects of tax compliance, advisory and planning, including individual, corporate, partnership, fiduciary, trust, gift and tax exempt organization tax returns.  These tax related services are provided by Zerjav & Associates, Certified Public Accountants, which has an alternative practice structure that is a separate and independent entity which works together with Advisory Group Associates to serve clients’ needs.

 

Our Core values include: Accountability, Accuracy, Collaboration, Commitment, Efficiency, Integrity, Passion, Quality, Respect and Service Excellence offered by our team of Professional Tax & Accounting Associates.

 

Our primary objective is the well-being of clients

as well as their satisfaction with the work we do, while our goal is to be the best, not the biggest firm.

 

For More Information, Contact by phone or email

(314) 205-9595 or toll free (888) 809-9595

 

[email protected]

 

 

Our service offerings are tailored to each stage of a client's tax life, from basic compliance and tax return preparation, where our process is imperative to minimizing costs, to many complex circumstances, where both our process and specialized knowledge is the key to successful results.

 

Our complimentary monthly electronic newsletter to subscribers provides comprehensive and timely insight on a wide range of taxation issues including federal and state tax incentives and current issues.

 

We also offer an initial complimentary consultation to better determine that we will make a real difference when using proven strategies based upon the particular facts and circumstances of any taxpayer.

 

Our Mission:        Sharing ideas that make a real difference.

 

 

Tax Professional Standards Statement. The TAX TIPS NEWSLINE is published monthly to provide general educational tax compliance tips, information, updates and general business or economic data compiled from various sources.  This document supports the marketing of professional services and does not provide substantive determination or advice affecting specific tax liability.  It is not written tax advice directed at the particular facts and circumstances of any taxpayer.  Nothing herein shall be construed as imposing a limitation from disclosing the tax treatment or tax structure of any matter addressed.  To the extent this document may be considered written tax advice, in accordance with applicable requirements imposed under IRS Circular 230, any written advice contained in, forwarded with, or attached to this document is not intended or written to be used, and cannot be used, by any taxpayer for the purpose of avoiding any penalties that may be imposed under the Internal Revenue Code.

 

If you are not the original addressee of this communication you must delete this message from your computer system.  Any disclosure, copying, distribution of this communication or the taking of any action based on it is strictly prohibited.

 

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Tax Tips Newsline - June 2015

TAX TIPS NEWSLINE                                  

                                                                             JUNE 2015

 

 

Produced monthly for Clients & Friends of the Advisory Group Associates.

Our Mission. Sharing ideas that make a real difference.

 

This “TAX TIPS NEWSLINE” is compiled by its founder, Frank Zerjav CPA and team of Professional Tax Associates, and then it is sent by email each month because you need tax and compliance knowledge.  It’s a big part of your life and the entities that you operate.

 

Our firm engages in strategic tax planning for professionals, business owners, investors and individuals. Our responsibility to our clients is to minimize their tax burden by appropriate proven methods, which helps them to keep more of what they earn. Our primary objective is the well-being of clients, as well as their satisfaction with the work we do.

 

 

Inside this Month’s Issue

 

  • Report of Foreign Bank & Financial Accounts (FBAR)
  • Important Legal Documents For All Couples
  • Your Rights As A Taxpayer
  • More Business Owners Switching to C Corp Status
  • Stretch an IRA over generations
  • Launch a “Solo” Individual 401(k) Plan
  • ROTH IRA Conversion Strategy to Avoid Taxes
  • Business Tax Deductions
  • Wide Range of Services Offered

 

 

REPORT OF FOREIGN BANK & FINANCIAL ACCOUNTS (FBAR)

 

This information report (FBAR) filing deadline is June 30, 2015.

 

IRS had issued, during 2014, its “Reference Guide on the Report of Foreign Bank and Financial Accounts (FBAR),” which summarizes and augments previously published information on that report that must be filed by U.S. persons who have financial interests in or signature authority over financial accounts maintained with financial institutions located outside of the U.S.

 

The FBAR is not filed with a federal tax return. A filing extension, granted by IRS to file an income tax return, does not extend the time to file an FBAR. There is no provision to request an extension of time to file an FBAR.

The Financial Crimes and Enforcement Network (FinCEN) has delegated enforcement authority regarding the FBAR to the IRS.

 

  • Recordkeeping. The Reference Guide provides that, generally, records of accounts required to be reported on the FBAR should be kept for five years from the due date of the report, which is June 30 of the year following the calendar year being reported. The records should contain the following: a) name maintained on each account; b) number or other designation of the account; c) name and address of the foreign bank or other person with whom the account is maintained; d) type of account; and e) maximum value of each account during the reporting period. Retaining a copy of the filed FBAR can help to satisfy the recordkeeping requirements. An officer or employee who files an FBAR to report signature authority over an employer’s foreign financial account is not required to personally retain records regarding these foreign financial accounts.

 

  • If a filer does not have all the available information to file the return by the June 30 filing due date, the Reference Guide provides that the filer should file as complete a return as possible by June 30 and amend the report when additional or new information becomes available.

 

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IMPORTANT LEGAL DOCUMENTS FOR ALL COUPLES

 

According to the US Census Bureau, the number of unmarried adult couples has greatly increased over the past 50 years. Nowadays, it is more socially acceptable to move in together before getting married and more and more people are thinking twice about marriage.

 

Many of the people that are thinking twice about marriage are doing so because they saw what happened to their parents’ marriage - ending in a bitter divorce - and in some cases even seeing what has happened to themselves and/or friends. For this reason, they would rather just live together and make the finances less murky.

 

Legal Documents for Unmarried Couples

 

Unfortunately, while not getting married clears up the murky water for divorce, it muddies up the water when it comes to long-term planning. This is an area where many unmarried couples fail to take the steps needed to ensure they are protected and are able to help and provide for their loved ones. Here are 3 documents all unmarried couples need to have for the long-term:

                

  1. Will. Having a will is a big deal for an unmarried couple. In most states, if you pass away without a will, the court will dictate how your assets will be dispersed. Most likely they will go to your spouse, then to your children. In the event you have neither, they will go to siblings or your parents. The problem is that you could have a loved one – an unmarried partner - who will not get anything from the court because you are not related by birth or marriage.

 

This is why you need to have a will. While your siblings could give physical belongings back to your partner, it will be difficult to give cash or stocks, especially if they are in large amounts. There also could be issues with family members not wanting to give anything to your partner as well. To benefit everyone, it makes sense to have a will set up in place to make sure your assets go where you intend them to go.

 

  1. Power of Attorney. A power of attorney, also called a health care proxy, gives someone the right to make health related decisions on your behalf, should you be in a position to not make the decision yourself. A common example is if you were in a coma, someone else would have the ability to make the decision to keep you on life support.

 

But it doesn’t stop there. It could also mean making decisions for you if you have Alzheimer’s or other diseases as well. The reason you need to have a power of attorney is because without it, your unmarried partner cannot make any decisions for you. The only ones that can are family members, and without being married, your partner is not a family member.

 

  1. Durable Power of Attorney. While a power of attorney helps you in medical situations, a durable power of attorney allows for financial decisions to be made for you should you become incapacitated. Don’t mistake “incapacitated” for dying. It simply means that a person is temporarily or permanently impaired and unable to make rational decisions. This could be any number of accidents or instances not related to passing away.

 

As with the examples above, the courts look at family members to make decisions on your behalf and your partner is not a family member if you are not legally married.

 

An Example of the Need for These Documents

 

Let’s say that you get into an accident and someone else needs to start making decisions on your behalf. Since you and your partner are not married, they have zero say in the matter. The court turns to your parents, who you don’t have the greatest relationship with. Would you rather have them make decisions on your behalf or your partner? Most would answer their partner, but without these documents, your partner can not make the decision, let alone any decision.

 

While this example might sound a little on the extreme side, it happens more often than you would think. And furthermore, even if you think your parents have your best intention in heart, do they have the intentions you truly want, the one you have discussed and know your partner knows?

 

Final Thoughts.  Take the few hours at an attorney’s office and set up these 3 documents if you are living together with your partner and have no plans on getting married. Ideally, you will never need to use two of them, but there is the chance they will need to be used. In that regard, it is better to have your bases covered and know who can make the decisions on your behalf.

 

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YOUR RIGHTS AS A TAXPAYER

 

IRS Publication 1 explains your rights as a taxpayer and the processes for examination, appeal, collection, and refunds.  It is also available in Spanish. Following is a summary:

 

THE TAXPAYER BILL OF RIGHTS

 

  1. The Right to Be Informed

Taxpayers have the right to know what they need to do to comply with the tax laws. They are entitled to clear explanations of the laws and IRS procedures in all tax forms, instructions, publications, notices, and correspondence. They have the right to be informed of IRS decisions about their tax accounts and to receive clear explanations of the outcomes.

 

  1. The Right to Quality Service

Taxpayers have the right to receive prompt, courteous, and professional assistance in their dealings with the IRS, to be spoken to in a way they can easily understand, to receive clear and easily understandable communications from the IRS, and to speak to a supervisor about inadequate service.

 

  1. The Right to Pay No More than the Correct Amount of Tax

Taxpayers have the right to pay only the amount of tax legally due, including interest and penalties, and to have the IRS apply all tax payments properly.

 

  1. The Right to Challenge the IRS’s Position and Be Heard

Taxpayers have the right to raise objections and provide additional documentation in response to formal IRS proposed actions, to expect that the IRS will consider their timely objections and documentation promptly and fairly, and to receive a response if the IRS does not agree with their position.

 

  1. The Right to Appeal an IRS Decision in an Independent Forum

Taxpayers are entitled to a fair and impartial administrative appeal of most IRS decisions, including many penalties, and have the right to receive a written response regarding the Office of Appeals decision. Taxpayers generally have the right to take their cases to court.

 

  1. The Right to Finality

Taxpayers have the right to know the maximum amount of time they have to challenge the   IRS’s position as well as the maximum amount of time the IRS has to audit a particular tax year or collect a tax debt. Taxpayers have the right to know when the IRS has finished an audit.

 

  1. The Right to Privacy

Taxpayers have the right to expect that any IRS inquiry, examination, or enforcement action will comply with the law and be no more intrusive than necessary, and will respect all due process rights, including search and seizure protections and will provide, where applicable, a collection due process hearing.

 

 

  1. The Right to Confidentiality

Taxpayers have the right to expect that any information they provide to the IRS will not be disclosed unless authorized by the taxpayer or by law.  Taxpayers have the right to expect appropriate action will be taken against employees, return preparers, and others who wrongfully use or disclose taxpayer return information.

 

  1. The Right to Retain Representation

Taxpayers have the right to retain an authorized representative of their choice to represent them in their dealings with the IRS. Taxpayers have the right to seek assistance from a Low

Income Taxpayer Clinic if they cannot afford representation.

 

  1. The Right to a Fair and Just Tax System

Taxpayers have the right to expect the tax system to consider facts and circumstances that might affect their underlying liabilities, ability to pay, or ability to provide information timely. Taxpayers have the right to receive assistance from the Taxpayer Advocate Service if they are experiencing financial difficulty or if the IRS has not resolved their tax issues properly and timely through its normal channels.

 

The IRS Mission: Provide America’s taxpayers top-quality service by helping them understand and meet their tax responsibilities and enforce the law with integrity and fairness to all.

 

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MORE BUSINESS-OWNERS SWITCHING TO C-CORP STATUS

                                                                                        

Key factor: For years, most individual share-holders were taxed at a lower federal rate than the maximum corporate rate. But the current top individual federal income tax rate of 39.6% is almost 5% higher than the top average corporate rate of 35%. Plus, tax reform calls to lower the corporate rate, which would create even more separation, are getting louder each year.

 

Finally, consider these potential drawbacks for an S-Corp status:

 

An S corporation can have only one class of stock (although it may have both voting and nonvoting shares).

 

Because amounts distributed to a shareholder can be classified as dividends or salary, the IRS often scrutinizes payments to ensure compensation is reasonable.

 

Due to the one-class-of-stock restriction, an S corporation cannot allocate a disproportionate share of tax losses or taxable income to a particular shareholder or group of shareholders.

 

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STRETCH AN IRA OVER GENERATIONS

 

How would you like to leave tax-sheltered assets to your kids and grandkids that can actually increase in value over time? It’s not a pipe dream.

 

Strategy: Take advantage of the “stretch IRA” concept. As the name implies, this technique enables a family to stretch out the benefits of retirement savings over a longer period than usual. In the interim, the funds continue to grow tax-deferred.

 

Keeping it going requires coordination between the IRA holder and his or her heirs.

 

With a traditional IRA, you can accumulate savings for retirement without any current tax erosion. The IRA may be funded by annual contributions, subject to tax law limits, or a rollover from a qualified retirement plan like a 401(k), or both.

 

You must begin taking annual “required minimum distributions” (RMDs) after reaching age 70½.

 

RMDs are taxable at ordinary income rates. Thus, the tax rate on these mandatory IRA payouts may be as high as 39.6%, plus the extra taxable income from RMDs may trigger phase-out rules for valuable tax breaks.

 

The amount of the RMD for a particular year depends on your combined traditional IRA account balances as of Dec. 31 of the prior year and a life-expectancy divisor from IRS-approved tables. For instance, the RMD for a 75-year-old with IRA balances of $500,000 is $21,834 ($500,000 divided by the applicable life expectancy divisor of 22.9 from the standard IRS life expectancy table).

 

Alternatively, if you’ve designated your spouse as the sole beneficiary of the IRA and he or she is more than 10 years younger than you are, the RMD is calculated using a divisor based on your joint life expectancies. This will result in smaller annual RMDs than the amounts calculated using the divisors from the standard life expectancy table. Going back to our example, if a 75-year-old with $500,000 in IRA assets has a 60-year-old spouse, the joint life expectancy divisor is 26.5, and the RMD is reduced to only $18,868.

 

5 steps to stretch an IRA.  The basic thrust behind the stretch IRA concept is to keep as much in the account for as long as you possibly can: RMDs should be minimized both before and after the IRA owner’s death.

 

  1. Ensure that you have properly established the beneficiaries for all your IRAs. Double-check the paperwork, and then check it again.

 

  1. Name successor beneficiaries. Doing so will ensure that RMDs will be calculated using divisors based on the beneficiary’s life expectancy (found in another IRS-approved table), which will be big numbers if the beneficiary is a generation or more younger than you. If you don’t name any beneficiary, your estate must liquidate your IRAs and pay the resulting income tax hit sooner rather than later.

 

  1. Don’t withdraw a dollar more than the required annual amount. Don’t guess; use an

online calculator. This will allow you to preserve a larger nest egg for your heirs.

 

  1. Upon the death of the IRA owner, beneficiaries can calculate RMDs based on their own life expectancies. Usually, these beneficiaries will be younger than the owner. If so, the life expectancy divisors will be bigger, and the RMDs will be smaller than while the owner was still alive.

 

  1. If there are multiple beneficiaries, establish separate accounts for each one. Reason: After you die, RMDs generally must begin in the year of death or the following year. Unless separate accounts are used, the RMDs must be based on the life expectancy of the oldest beneficiary. Therefore, using separate accounts will reduce the size of RMDs for the younger beneficiaries who have longer life expectancies.

 

To qualify for the benefits of a stretch IRA after the account owner’s death, the beneficiary must establish an account in the deceased IRA owner’s name by no later than Sept. 30 of the year following the year of death. This should give beneficiaries enough time to make decisions regarding inherited IRA funds.

 

Tip: The tax penalty for failing to take an RMD, whether you’re the original IRA owner or a beneficiary of an inherited account, is steep. It’s equal to 50% of the required amount (less any amount withdrawn).

 

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LAUNCH A “SOLO” 401(k) RETIREMENT PLAN

 

Strategy: Set up a “solo 401(k) plan.” If you qualify, you can effectively benefit from both “employee” and “employer” contributions to your account. In many cases, this dual tax winner can’t be beat because it often allows you to sock away more money than any other type of retirement plan.

 

An employee participating in a traditional 401(k) plan can make an elective deferral contribution to the plan within the annual limits and the employer may match part of the contribution, usually up to a single digit percentage of your salary.

 

A solo 401(k) offers even more. You may defer up to $17,500 of compensation to your account, plus an extra catch-up contribution of $5,500 is allowed if you’re age 50 or older - the same as with elective deferrals to a traditional 401(k). Of course, the limits on deductible employer contributions still apply, but here’s the kicker: Elective deferrals to a solo 401(k) don’t count toward the 25% cap. So you can combine an employer contribution with an employee deferral for greater savings.

 

The contributions to a solo 401(k) grow tax-deferred until you’re ready to make withdrawals.

 

If the business isn’t incorporated, the 25%-of-compensation cap on employer contributions is reduced to 20% because of the way contributions are calculated for self-employed individuals. But that still leaves you with plenty of room to maneuver.

 

Note that a solo 401(k) may offer other advantages. For instance, the plan can be set up to allow loans and hardship withdrawals. Also, you might roll over funds tax-free from another qualified plan if you previously worked somewhere else.

 

Tip: Contributions are discretionary. Therefore, you can cut back on your annual contribution - or skip it entirely - if your business is having a bad year.

 

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ROTH IRA CONVERSION STRATEGY TO AVOID TAXES

 

If you have money in a traditional IRA and want to take advantage of a Roth conversion, you need to know about the pro-rata tax treatment of conversions.

 

If you have both tax deferred and after tax money in a traditional IRA, you could face hefty taxes on the deductible IRA money, since you must convert a pro-rata amount of deductible and non-deductible money.

 

If you want to convert just your after tax money, which is common when using a backdoor Roth IRA strategy, you can use this Roth IRA conversion strategy to avoid taxes if your 401k provider allows transfers of IRA money.

 

Roth IRA Conversion Strategy to Avoid Taxes.  When you make a Roth IRA conversion for your IRA you must include a portion of tax-deferred money in the IRA in proportion to the amount held.

 

If your 401k provider allows transfers of IRA money, you can transfer your deductible IRA money to your 401k. When you convert your remaining non-deductible money in your traditional IRA to your Roth IRA, it will be tax free!

 

Tax Free Roth IRA Conversion Steps:

 

  1. Identify how much money in your IRA was (or will be) deducted on your taxes.
  2. Move your deductible IRA money to your 401k.
  3. Make a Roth IRA Conversion with your non-deductible money.
  4. Report your conversion with 100% basis on form 8606.
  5. The conversion will be tax free.

 

Example:

 

Let’s say I have an IRA worth $100,000, with $50,000 (50%) tax deferred and $50,000 after tax. If you complete a conversion of $20,000 to a Roth IRA, you will be responsible for taxes on $10,000, or 50%. You cannot specify to convert only the after-tax money in the account.

 

If you used the strategy above, you would first move $50,000 of tax deferred money to your 401k. Then, when you make your $50,000 Roth IRA conversion, the taxable amount will be $0.

 

More Considerations

 

Which IRAs count? Don’t forget to account for all of your IRA money when you determine how you might make this work. All IRAs including rollover IRAs are considered one IRA for conversion purposes. The traditional IRA also includes your SEP-IRAs and SIMPLE IRAs.

 

Add additional money. Before your conversion, you can also contribute to a non-deductible traditional IRA at your broker of choice up to the IRA Limits.

 

Don’t have a 401k? If you don’t have a 401k, or your current 401k provider doesn’t accept incoming money, you could establish a solo 401k for the purpose of moving your deductible money in your traditional IRA.

 

Keep detailed records. If you do this, you need to keep very detailed records. For more see How to Track Your Roth IRA Contributions... and Why You Need To!

 

Early retirement and Roth IRAs. This strategy sounds like a lot of work to move money into a Roth IRA.... why would you want to hassle? If you are considering an early retirement, the Roth allows much more flexibility in early withdrawals than a traditional IRA. After a conversion, you only need to wait 5 years, then you can withdraw your conversion money tax free. A real benefit for anyone considering early retirement!

 

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BUSINESS TAX DEDUCTIONS

 

Opportunities abound for small businesses to cut their tax bills. The key is understanding what’s deductible for your business.

 

Good record keeping is the key to lower tax preparation fees, painless IRS audits and more deductions.

 

Here’s a rundown of expenses to track:

 

Auto expenses: You may deduct mileage, parking fees and tolls for business use of your car. Most people take the standard mileage rate deduction because the record keeping requirements are less burdensome, but actual expenses often yield a larger deduction.  Keep track of the mileage, odometer start and finish for each trip, destination, the starting point and business purpose.

 

Equipment, furniture and supplies: Look at your purchases and ask your tax preparer to run the calculations to see if you should expense it or depreciate it. Buying equipment just to get a tax deduction is not good business sense.

 

Professional and legal expenses, and association dues:  Professional and legal expenses are deductible, but if the costs are part of startup expenses, you may need to amortize the cost. Association dues may include a portion for political contributions or lobbying, so those can’t be deducted.  The association must disclose this amount or percentage.

 

Expenses to start up or expand your business: The biggest mistake in deducting expenses to start up or expand your business is failing to make an election to amortize or deduct these expenses in the first year. An election is required stating your intention to amortize them.  Otherwise, the expenses become nondeductible until you sell or liquidate the business.

 

Professional publications and software: Here again, the common error is taking the cost as an expense instead of amortizing. Software licensing fees, for example, should be capitalized and amortized unless it has a life of only one year, such as an annual maintenance agreement. Professional publications should be amortized over the subscription period if prepaid.

 

Gifts and advertising: Client gifts are deductible up to only $25 per gift. And if you advertise, deductions taken for costs that cover multiple-year contracts must be spread over all the contract years.

 

Home office: If you have a legitimate home office, don’t be afraid to deduct it. To qualify, the room must be used exclusively for business. It can’t double as a spare bedroom or toy room for your kids. You can deduct a portion of rent, utilities, insurance, taxes, maintenance, professional cleaning, depreciation and interest.

 

Telephone and internet: Any dedicated services for your business are deductible. If you use your home or personal cell phone for business, you may only deduct the portion used for business purposes.

 

Education and training: You may deduct the cost of continuing education or certification for the business you’re already in, but education that qualifies you for a new line of business is not deductible.

 

Interest on loans: You can fully deduct interest on loans and credit cards used for your business. If you have a loan from a relative, make sure it conforms to IRS rules.

 

Entertainment and travel expenses: Keep excellent records here, and keep a log of who you met, why, where, when and for what business purpose. Only 50 percent of meals and entertainment costs is deductible, and none of the costs associated with country club memberships are deductible.

 

Insurance: Insurance premiums for the business for one year or less are deductible currently, while excess prepaid premiums are deductible in subsequent years.

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