by Kenneth Hoffman in Revenue
Attorney Lee Rosen over at Divorce Discourse has a good post on how to overcome the holiday revenue blues.
In my practice, where we charge fixed fees for everything, December can be difficult. Revenues are affected by the holidays. My revenue anxiety often disrupts my holiday sleep. I wake up dreaming of bankruptcy judges and debtor’s prison.
Continue reading here.
by Kenneth Hoffman in Tax Planning
Now may be a good time to evaluate the expenses you incur as an employee in connection with your work. While your employer may be reimbursing you for some of these expenses, there may be others for which you are bearing the cost yet not utilizing the tax benefit. Through proper substantiation, it is possible that you may be able to obtain greater reimbursement from your employer. Alternatively, you may be entitled to deduct such expenses as miscellaneous itemized deductions.
In order to be reimbursed and/or deducted, trade or business expenses must be ordinary, necessary, and reasonable. They also must be properly substantiated. Examples of qualifying expenses include:
You may also benefit from a review of the business expenses related to the use of your home. If you qualify for the home office deduction, you may be able to deduct part of your home’s normal operating expenses, such as utilities and insurance. The tax-savings opportunities available to you are dependent not only on the type of work you do at home, but where in your home you perform it.
The rules for deducting these expenses, as well as substantiating your deduction, vary according to the type of expense involved. It is important to retain all records and receipts that document the time, place, and business purpose of each expense. Please contact our office at your earliest convenience to schedule an appointment.
by Kenneth Hoffman in Tax Planning
An S corporation, such as yours, is a pass-through entity that is treated very much like a partnership for federal income tax purposes. As a result, all income is passed through to your shareholders and taxed at their individual tax rates. However, unlike a C corporation, an S corporation’s income is taxable to the shareholders when it is earned whether or not the corporation distributes the income. Because an S corporation has a unique tax structure that directly impacts shareholders, it is important for you to understand the S corporation distribution and loss limitations, as well as how and when items of income and expense are taxed, before developing your overall tax plan.
In addition, some S corporation income and expense items are subject to special rules and separate identification for tax purposes. Examples of separately stated items that could affect a shareholder’s tax liability include charitable contributions, capital gains, Sec. 179 expense deductions, foreign taxes, and net income or loss related to rental real estate activities.
These items, as well as income and losses, are passed through to the shareholder on a pro rata basis, which means that the amount passed through to each shareholder is dependent upon that shareholder’s stock ownership percentage. However, a shareholder’s portion of the losses and deductions may only be used to offset income from other sources to the extent that the total does not exceed the basis of the shareholder’s stock and the basis of any debt owed to the shareholder by the corporation. The S corporation losses and deductions are also subject to the passive-activity rules.
Other key points to consider when developing your comprehensive tax strategy include:
We can assist you in identifying and maximizing the potential tax savings. Please contact our office at your earliest convenience to arrange an appointment.
by Kenneth Hoffman in Tax Planning
Successful tax planning includes a review of your available deductions and the impact of your filing status on your option to itemize. It is important that all of the technical requirements for your deductions are met. In addition, certain items are deductible only to the extent they exceed a percentage threshold. By reducing your adjusted gross income, you increase the amount of itemized deductions you can claim, because the floor limitation amounts are reduced accordingly.
A strategy commonly used in year-end individual tax planning is to determine the best timing for claiming itemized deductions. Generally, it is beneficial for taxpayers to defer income and accelerate expenses. This strategy may enable you to itemize your deductions if you claimed the standard deduction in the past. This year, some certainty for planning purposes is provided due to the extension of the reduced individual income tax rates through 2012 by the Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act of 2010 (Tax Relief Act of 2010).
In addition to the reduced tax rates, the Tax Relief Act of 2010 also extended numerous other tax benefits, including:
However, the additional standard deductions for state and local real property tax, motor vehicle sales tax, and net disaster losses are no longer available.
Tax planning for higher-income taxpayers is more complicated. Generally, you must reduce your otherwise allowable itemized deductions if your adjusted gross income exceeds a specified threshold amount. However, the phase-out of itemized deductions and personal exemptions for higher-income taxpayers is eliminated through 2012 by the Tax Relief Act of 2010. The failure to take the alternative minimum tax (AMT) into account may also jeopardize your tax planning strategy, as the AMT continues to negate many itemized deductions. The Tax Relief Act of 2010 increased the AMT exemptions amounts for the 2010 and 2011 tax years, which provides some relief from this tax burden.
Although maximizing your itemized deductions is an important aspect of tax planning, there are other issues that you may need to consider in light of your overall tax scenario. We hope to provide you with planning options that enable you to achieve the greatest tax savings possible. Please contact our office at your earliest convenience to make an appointment to discuss your tax planning options.
If you regularly make donations to charity, or plan to make a charitable donation this year, you may be able to take a deduction on your tax return. The Internal Revenue Service has compiled nine tips that you should keep in mind when contributing to charity:
In order to be deductible, charitable contributions must be made to qualified organizations. An online version of IRS Publication 78, which provides a list of organizations eligible to receive tax-deductible charitable contributions, is available at www.irs.gov/charities under the "Search for Charities" tab.
Charitable contributions are deductible only if you itemize deductions using Form 1040, Schedule A.
Generally, you can deduct your cash contributions and the fair market value of most property you donate to a qualified organization. Special rules apply to several types of donated property, including clothing or household items, cars and boats.
If your contribution entitles you to receive merchandise, goods, or services in return - such as admission to a charity banquet or sporting event - you can deduct only the amount that exceeds the fair market value of the benefit received.
Keep good records of any contribution you make, regardless of the amount. For any cash contribution, you must maintain a record, such as a cancelled check, bank or credit card statement, payroll deduction record or a written statement from the charity containing the date and amount of the contribution as well as the name of the organization.
Only contributions actually made during the tax year are deductible. For example, if you pledge $500 in September but only pay the charity $200 by Dec. 31, your deduction for the current year is $200.
Include credit card charges and payments by check in the year you give them to the charity, even though you may not pay the credit card bill or have your bank account debited until the next year.
If your contribution is $250 or more, you must have a written acknowledgment from the organization. The acknowledgment must include the cash amount, and state whether the organization provided any goods or services in exchange for the gift. If you donate property, the acknowledgment must include a description of the items and a good faith estimate of its value. For items valued at $500 or more you must complete Form 8283, Noncash Charitable Contributions, and attach it to your tax return. If you claim a deduction for a contribution of noncash property worth more than $5,000, generally an appraisal must be obtained, and Section B of Form 8283 must be completed and filed with your return.
Approximately 275,000 organizations automatically lost their tax-exempt status recently because they did not file required annual reports for three consecutive years, as required by law. Donations made prior to an organization's automatic revocation remain tax-deductible. Going forward, however, organizations that are on the auto-revocation list that do not receive reinstatement are no longer eligible to receive tax-deductible contributions.
If you are interested in making a charitable donation this year, we would like to help you ensure its deductibility. Please contact our office at your earliest convenience if you would like to discuss this or any other tax issue.
Sometimes, in the midst of all that motion, facts get twisted and misinterpreted. Sometimes a rumor gets launched that takes on a life of its own. Right now, there's an email going around that has most of us tax professionals shaking our heads. It warns that, starting in 2013, the healthcare reform act imposes a 3.8% sales tax on home sales. If you sell your $400,000 home, you'll owe a $15,200 tax!
If you see it in an email, it must be true, right? The truth, as is often the case with taxes, is a little more complicated than that - and a lot less scary. First, let's take a look at how taxes are figured on home sales today:
First, calculate "adjusted sale price." This is the sale price of the house, minus expenses of actually selling it (last-minute fixups, commissions, etc.).
The bottom line here is that few home sales are taxable - especially in today's down market - because of that Section 121 exclusion. So, where does the new healthcare law come in? Well, it does impose a new "unearned income Medicare contribution," beginning in 2013, of 3.8% on capital gains, for individuals earning over $200,000 and families earning over $250,000. (Don't you love how the folks in Washington spin that 3.8% "unearned income Medicare contribution"? Wouldn't it just be easier to call it a "tax"?)
That means any gain on the sale of your home that isn't already sheltered by the $250,000 or $500,000 exclusion might be subject to the new tax if your adjusted gross income is over the $200,000 or $250,000 threshold. That's a pretty far cry from saying there's a new 3.8% sales tax on home sales!
But somewhere along the line, Chicken Little saw the new 3.8% tax, missed the rest of the process, and saw the sky starting to fall. Being a thoroughly modern chicken, she hopped on her computer to fire off an email telling all of us that the sky was falling - and that email spread faster than the latest news about Snooki or the Kardashians. So now here we are, setting the record straight.
The next time you get an email with a rumor that sounds too awful to be true, don't just run around like Chicken Little. Send it to us. We can tell you if it's something you really need to worry about - and if so, we'll help you craft a plan to avoid or minimize the threat!
Myth #1: Tax Refunds Are Great News:
You've probably heard some tax preparation firms brag about how many of their customers receive refunds, or the average size of their customers' refunds.
Isn't this great news? I'm not so sure it is.
A refund can seem like great news, especially if it isn't expected, but it usually indicates a lack of tax planning. With proper planning, that refund can be received a whole lot earlier. While most people don't want to owe tax when they file their return, they also don't like to part with their money any earlier than they have to and that is exactly what a refund reflects.
Myth #2: Filing an Extension is Bad:
Many taxpayers are hesitant to file extensions for their business or personal tax returns for fear that there are hidden disadvantages to doing so. This is not true. In fact, extending your tax return can be a great tool in your tax strategy.
Extensions are helpful to avoid having to file amended returns. Sometimes the forms or information you receive from others to complete your tax return may be amended. If you receive an amended form and you've already filed your return, then you must amend your tax return.
Other times, the information you need from others to complete your tax return may be late. Filing an extension provides you with the time to gather this information and accurately report it on your tax return.
Remember: An extension does not mean you are off the hook when it comes to gathering your tax information timely. It is still important to gather all of your tax information timely so the extension can be prepared with the best information available.
Also, an extension does not extend the due date of any taxes due with the return. Any tax liability due with the return is due on the original due date.
Myth #3: Tax Return Preparation is Expensive:
Tax return preparation fees can vary dramatically. This makes it extremely important to look at the big picture rather than just the cost to prepare the tax return.
Let me give you an example. Suppose you have a choice of paying $500 for your tax return to be prepared or $2,000. All things being equal, anyone would choose to pay the lesser amount.
But, what if all things are not equal? What if the $500 gets you an adequate, accurate return but the $2,000 would get you a return where you legally pay $5,000 less in tax? Which is the better deal? In one, you are out $500. In the other, you are ahead a net of $3,000.
Before you have your next tax return prepared, review your own tax situation and the advice you are receiving from your tax preparer. Are you getting the return on investment you want? Are you getting the planning ideas you need? Are you paying the least amount of taxes?
When is the last time your current accountant, CPA or tax preparer can to you with ideas on how to save money on your taxes. If not you should Contact us. More often than not, we can save our clients hundreds or even thousands of dollars on their taxes.
Myth #4: Accurate Returns Are All The Same:
When I review a tax return, the basic accuracy of the tax return is generally excellent. It's rare that I find a flagrant error on a tax return.
Does that mean that all firms produce the same quality of tax return? The clear answer in my experience is a resounding "NO!"
Accuracy in a tax return simply means that the information provided by the client was reflected on the tax return. It does not mean that the tax return was prepared in the best way it could have been prepared. In fact, I rarely see a tax return from a new client that was prepared the way it would have been prepared at KR Hoffman & co., LLC.
For example, certain deductions can be classified in different ways. While each way is technically accurate, the tax impact of each can vary dramatically.
It's not safe to assume your tax preparer (or tax software) knows the difference.
Never use a tax preparer who isn't also your tax advisor. Otherwise, great advice may never implemented and you will lose out on great tax savings.
I would be happy to review your last three (3) years tax returns for mistakes and missed-opportunities that may be costing you thousands of $'s at no cost to you. Contact us to find out how to securely send us your prior year tax returns.
Myth #5: The Software Does All The Work:
Whether you do your tax return yourself or hire someone to prepare it, most likely there is tax software involved. Many people make the assumption that the tax software does all the work.
While the tax software performs the calculations (usually quite accurately), it's easy to get into trouble if the data input is incorrect. We know what goes on what line and what form.
The true work and expertise - and resulting tax savings - is in the knowledge of the tax preparer.
Contact us TODAY so that you can start saving hundreds or thousands of dollars.
Accounting programs help you compile "the books." But software is just a tool, not a solution. You still have to know how to use it. Sure, you can buy your own scalpel. But does that mean you should take out your own appendix?
K.R. Hoffman & Co., LLC, helps individuals and businesses take control of their taxes and understand their financial affairs using proven methods. Discover how we can help you with your business and tax challenges; call me at (954) 591-8290 or drop me a note.
by Kenneth Hoffman in Tax Planning
Whether you file as an individual, a corporation, a small business owner, or are self-employed, as the end of the year draws near, you're probably thinking ahead to tax season and filing your taxes.
Most tax provisions of course, remain the same (IRA contribution limits for example), but a few such as personal exemptions have been adjusted for inflation and others have been extended due to legislation and are set to expire at the end of 2012.
From tax credits, exemptions and deductions for individuals and Section 179 expensing for small businesses, here's what you need to know about tax changes for 2011.
From personal deductions to tax credits and educational expenses, many of the tax changes relating to individuals remain in effect through 2012 and are the result of tax provisions that were either modified or extended by the Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act of 2010 that became law on December 17, 2010.
Personal Exemptions
The personal and dependent exemption for tax year 2011 is $3,700, up $50 from 2010.
Standard Deductions
In 2011 the standard deduction for married couples filing a joint return is $11,600, up $200 from 2010 and for singles and married individuals filing separately it's $5,800, up $100. For heads of household the deduction is $8,500, also up $100 from 2010.
The additional standard deduction for blind people and senior citizens is $1,150 for married individuals, up $50, and $1,450 for singles and heads of household, also up $50.
Income Tax Rates
Due to inflation, tax-bracket thresholds will increase for every filing status. For example, the taxable-income threshold separating the 15-percent bracket from the 25-percent bracket is $69,000 for a married couple filing a joint return, up from $68,000 in 2010.
Estate and Gift Taxes
The recent overhaul of estate and gift taxes means that there is an exemption of $5 million per individual for estate, gift and generation-skipping taxes, with a top rate of 35%. For married couples the exemption is $10 million.
Alternative Minimum Tax (AMT)
AMT exemption amounts for 2011 are slightly higher than those in 2010 at $48,450 for single and head of household fliers, $74,450 for married people filing jointly and for qualifying widows or widowers, and $37,225 for married people filing separately.
Marriage Penalty Relief
For 2011, the basic standard deduction for a married couple filing jointly is $11,600, up $200 from 2010.
Pease and PEP (Personal Exemption Phaseout)
Pease (limitations on itemized deductions) and PEP (personal exemption phase-out) limitations do not apply for 2011, but these are set to expire at the end of 2012.
Flexible Spending Accounts (FSA)
The Affordable Care Act, enacted in March, established a new uniform standard, effective January 1, 2011, that applies to FSAs and health reimbursement arrangements (HRAs).
Under the new standard, the cost of an over-the-counter medicine or drug cannot be reimbursed from the account unless a prescription is obtained. The change does not affect insulin, even if purchased without a prescription, or other health care expenses such as medical devices, eye glasses, contact lenses, co-pays and deductibles.
The new standard applies only to purchases made on or after Jan. 1, 2011, so claims for medicines or drugs purchased without a prescription in 2010 can still be reimbursed in 2011, if allowed by the employer's plan.
A similar rule went into effect on Jan. 1, 2011 for Health Savings Accounts (HSAs), and Archer Medical Savings Accounts (Archer MSAs).
Long Term Capital Gains
In 2011, long-term gains for assets held at least one year are taxed at a flat rate of 15% for taxpayers above the 25% tax bracket. For taxpayers in lower tax brackets, the long-term capital gains rate is 0%.
Adoption Credit
A refundable credit of up to $13,360 for 2011 is available for qualified adoption expenses for each eligible child.
Child and Dependent Care Credit
If you pay someone to take care of your dependent (defined as being under the age of 13 at the end of the tax year or incapable of self-care) in order to work or look for work, you may qualify for a credit of up to $1,050 or 35 percent of $3,000 of eligible expenses.
For two or more qualifying dependents, you can claim up to 35 percent of $6,000 (or $2,100) of eligible expenses. For higher income earners the credit percentage is reduced, but not below 20 percent, regardless of the amount of adjusted gross income.
Child Tax Credit
The $1,000 child tax credit has been extended through 2012. A portion of the credit may be refundable, which means that you can claim the amount you are owed, even if you have no tax liability for the year. The credit is phased out for those with higher incomes.
Energy Tax Credits for Homeowners
Energy tax credits for homeowners expire at the end of 2011 and are not as generous as in previous years. In addition, a taxpayer who has claimed an amount of $500 in any previous year is not eligible for this tax credit.
Homeowners can claim an Energy Star window tax credit of up to $200 maximum as well as a water heater tax credit, which includes electric, natural gas, propane, or oil, up to a maximum of $300. The same maximum ($300) applies to air conditioners, but insulation, doors, and roof credits are capped at $500. The furnace tax credit (includes natural gas, propane, oil, or hot water) and is capped at $150 maximum and efficiency must be at 95%.
Earned Income Tax Credit (EITC)
The maximum EITC for low and moderate income workers and working families is $5,751, up from $5,666 in 2010. The maximum income limit for the EITC has increased to $49,078, up from $48,362 in 2010. The credit varies by family size, filing status and other factors, with the maximum credit going to joint filers with three or more qualifying children.
Coverdell Education Savings Account
For two more years, you can contribute up to $2,000 a year to Coverdell savings accounts. These accounts can be used to offset the cost of elementary and secondary education, as well as post-secondary education.
American Opportunity Tax Credit (Higher Education)
The expansion of the Hope Scholarship Credit by the American Opportunity Tax Credit has been extended through 2012. For 2011, the maximum Hope Scholarship Credit that can be used to offset certain higher education expenses is $2,500, although it is phased out beginning at $160,000 adjusted gross income for joint filers and $80,000 for other filers.
Employer Provided Educational Assistance
Through 2012, you, as an employee, can exclude up to $5,250 of qualifying post-secondary and graduate education expenses that are reimbursed by your employer.
Lifetime Learning Credit
A credit of up to $2,000 is available for an unlimited number of years for certain costs of post-secondary or graduate courses or courses to acquire or improve your job skills. For 2011, the credit is fully phased out at $122,000 adjusted gross income for joint filers and $61,000 for others.
Student Loan Interest
For 2011 and 2012, the $2,500 maximum student loan interest deduction for interest paid on student loans is not limited to interest paid during the first 60 months of repayment. The deduction begins to phase out for higher-income taxpayers.
Tuition and Related Expenses Deduction
For 2010 and 2011, there is an above-the-line deduction of up to $4,000 for qualified tuition expenses. This means that qualified tuition payments can directly reduce the amount of taxable income, and you don't have to itemize to claim this deduction. However, this option can't be used with other education tax breaks, such as the American Opportunity Tax Credit, and the amount available is phased out for higher-income taxpayers.
Roth IRA Conversions
There is no longer an income limit for taxpayers who want to convert regular IRAs into Roth IRAs. The difference is that taxpayers who convert to Roth IRAs in tax year 2011 must pay taxes on the conversion income now instead of deferring it in later years as was the case in 2010.
Standard Mileage Rates
The standard mileage rate increases to 51 cents per business mile driven (19 cents per mile driven for medical or moving purposes and 14 cents per mile driven in service of charitable organizations) for the first half of 2011. From July 1, 2011 to December 31, 2011 however, the rate increases to 55.5 cents per business mile. This increase is a special adjustment by the IRS and reflects higher gasoline prices.
Health Care Tax Credit for Small Businesses
Small business employers who pay at least half the premiums for single health insurance coverage for their employees may be eligible for the Small Business Health Care Tax Credit as long as they employ fewer than the equivalent of 25 full-time workers and average annual wages do not exceed $50,000. The credit can be claimed in tax years 2010 through 2013 and for any two years after that. The maximum credit that can be claimed is an amount equal to 35% of premiums paid by eligible small businesses.
Section 179 Expensing
In 2011 (as well as 2010), the maximum Section 179 expense deduction for equipment purchases is $500,000 ($535,000 for qualified enterprise zone property) of the first $2 million of certain business property placed in service during the year. The bonus depreciation increases to 100% for qualified property. If the cost of all section 179 property placed in service by the taxpayer during the tax year exceeds $2 million, the $500,000 amount is reduced, but not below zero.
Please contact us if you need help understanding which deductions and tax credits you are entitled to. We are always available to assist you.
Source: Kiplinger Tax Letter, November 10, 2011