October 30, 2012

Social Security Taxable Wage Cap Increasing To $113,700 In 2013

by Kenneth Hoffman in Business Counsel, Tax Planning, Tax Counsel

The Social Security Administration has announced an increase in the Social Security taxable wage base in 2013 from $110,100 to $113,700. The $3,600 increase is slightly more than the $3,300 increase from 2011 to 2012. The cap was just $106,800 from 2009 to 2011, as inflation ground to a halt during the economic downturn.

The wage cap is the maximum amount of compensation subject to tax under the Federal Insurance Contributions Act (FICA) for old age, survivors and disability insurance (OASDI) — typically called Social Security tax. FICA imposes both Medicare tax and Social Security tax on compensation received for services at matching employer and employee rates (with self-employed taxpayers effectively paying both shares on self-employment income). Although the Social Security tax is capped, the Medicare portion of FICA tax applies to total earnings, with no limit on the amount.

The Social Security tax rate is generally 6.2% for both employers and employees, but under a special temporary provision it is only 4.2% for individuals in 2012. The rate is scheduled to revert to 6.2% in 2013 without legislative action. The maximum total individual share of Social Security tax is capped at $4,624.20 in 2012 but is scheduled to jump to $7,049.40 in 2013, with a return to the 6.2% rate and the higher wage cap.

S-corporation shareholders should see their tax advisor to understand how this may impact their compensation package.

Kenneth Hoffman counsels Entrepreneurs, Professionals and Select Individuals in taking control of their taxes, and businesses. Discover how I can help you overcome your tax and business challenges. To start the conversation or to become a client, call Kenneth Hoffman at (954) 591-8290 Monday - Friday from 8:30 a.m. to 1:00 p.m. for a no cost consultation, or drop me a note.

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October 30, 2012

Serious Illness Reasonable Cause For Late Filing

by Kenneth Hoffman in Tax Counsel

In Margaret V. Stine (U.S. Court of Federal Claims) the taxpayer failed to timely file gift tax returns. The late-filed returns involved a substantial amount of tax and the penalty was some $450,000.

The Court noted a serious illness can provide reasonable cause for later filing. The Court cited an Appeals Court case which said "We believe the type of illness or debilitation that might create reasonable cause is one that because of severity or timing makes it virtually impossible for the taxpayer to comply--things like emergency hospitalization or other incapacity occurring around tax time."

The Court noted that the taxpayer's knee surgery required only a brief hospitalization. She also suffered a variety of symptoms during the course of a year including respiratory infections, knee pain, medication reactions, heart palpitations and blurred vision, but that did not provide reasonable cause. These did not continuously incapacitate her during the time the return should have been filed. Moreover, the periods of incapacity were vague as to beginning and end dates. The Court found her liable for the penalties.

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October 24, 2012

Barnes & Noble Customer Credit Card Data Stolen

by Kenneth Hoffman in Business Counsel

According to CNNMoney.com. a data breach at various Barnes & Noble stores may have compromised credit card information of customers.

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October 24, 2012

Watching Out for the Cliff

by Kenneth Hoffman in Business Counsel, Tax Planning, Tax Counsel

Ordinarily, we use these posts to discuss fun items related to taxes and finances. We know that you can read the usual boring articles about the usual boring tax topics pretty much anywhere else. And most of you are happy to let us worry about "the details."

Every so often, though, we need to discuss more serious issues, even if it's just to let you know that we're on top of them. That's the case today with the so-called "fiscal cliff" -- Federal Reserve Chairman Ben Bernanke's clever term for what happens on January 1, when a bunch of current tax rules expire, and some new rules take effect. Here's a quick rundown of what to expect:

The Bush tax cuts expire. That means the top rates on ordinary income goes from 35% to 39.6%; the top rate on capital gains goes from 15% to 20%; and the top rate on qualified dividends jumps from 15% to 39.6%. Much of the debate over tax rates focuses on income at the top. But the expiration of the Bush tax cuts affects all of us. The lowest 10% rate will disappear entirely, and everyone who actually pays income tax will pay more.
The 2011-2012 payroll tax cuts expire. That means Social Security and self-employment taxes go up by 2% on all earned income up to $113,700. Two percent may not sound like a lot -- but it means higher taxes for about 163 million working Americans.
New taxes imposed by the 2010 "Obamacare" legislation take effect. The Medicare portion of Social Security and self-employment taxes goes up from 2.9% to 3.8% on earned income topping $200,000 ($250,000 for joint filers). And there's a new 3.8% "Unearned Income Medicare Contribution" (which sounds so much better than "tax') on "net investment income" (interest, dividends, capital gains, rents, royalties, and annuities) over those same amounts.
The Alternative Minimum Tax exemptions revert back to where they stood in 2000. Under current law, those exemptions aren't adjusted for inflation. So, every couple of years, Congress "patches" the system by temporarily raising the exemptions to where they would be if they were indexed for inflation. The AMT currently hits about 4½ million Americans -- but without the "patch," that number explodes to 33 million.
Oh, and don't think dying solves your tax problem. That's because estate taxes, which currently start at 45% on estates over $5 million, will jump to 55% on estates over just $1 million.

So, January 1 is our fiscal cliff, and we're hurtling towards it like Thelma and Louise. What can we do? Well, plenty of legislators have proposed extending part or all of the Bush tax cuts, extending the payroll tax cuts, patching the AMT, and raising the estate tax exemption. But actually passing anything will be a challenge -- Congress has passed just 132 bills this year, and 20% of those were to name post offices!

The partisan gridlock has many observers convinced that we'll actually go over that fiscal cliff. (Maybe it'll be like those old Road Runner cartoons, where the coyote runs off a cliff and keeps right on going, just fine, until he looks down. That's when he realizes he's standing in thin air, then plummets 1,000 feet to the bottom of the canyon.) If that winds up being the case, we may see Washington wait for the election results and pass something noncontroversial like the AMT patch before the end of the year. Then in 2013 they'll pass legislation extending at least part of the Bush tax cuts and make it retroactive to January 1.

We're not writing today to take sides on any of these issues, or tell you where taxes should go. But we want you to know that we're watching everything closely to help you make the most of your opportunities and avoid land mines where possible. And remember, we're here for your family, friend, and colleagues, too!

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October 19, 2012

Intuit Quickbooks Syncing Sensitive Client Data To Their Servers

by Kenneth Hoffman in Business Counsel

I was alerted by Michelle Long, CPA, MBA from Long For Success, LLC, that Intuit Quickbooks may be accessing sensitive client data without first telling the program users. Seems we've seen this before with other companies.

From Michelle's blog:

Intuit Sync Manager may be syncing QuickBooks data (indexing sensitive financial data like Social Security numbers and customer credit card information) to Intuit servers without your knowledge.

This may be a security concern for QuickBooks users who do not want to sync sensitive financial information with Intuit Servers. It should be a bigger concern for CPAs, Chartered Accountants and other accounting professionals. We are usually required to keep client information confidential and secure according to the AlCPA, state laws or other regulations. If client data will be shared with third parties (ie. Intuit's servers), we should have consent from the client in an engagement letter or privacy notice.

I urge you to read the blog post, then check your Quickbook program to ensure that you are not sharing your sensitive client data with Intuit.

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October 17, 2012

Duh!

by Kenneth Hoffman in Business Counsel, Tax Counsel

Today's wired world has most of us drowning in information. Twenty-four-hour cable news networks, instantaneous online updates, Facebook, and Twitter are constantly assaulting our senses. Much of what passes for "news" is really just noise -- the latest statistical fluctuations in the presidential polls, for example, or the comings and goings of your favorite Kardashian sister. But every so often, we learn something so surprising that it rocks us to the core and causes us to re-evaluate everything we thought we knew.

Three professors have just revealed that sort of earth-shattering information in the newest issue of Accounting Review. They analyzed data from 5,000 corporations over 17 years from 1992-2008 to answer an age-old question: "Do IRS Audits Deter Corporate Tax Avoidance?" And here's their startling conclusion -- make sure you're sitting down to read it: when audit rates go up, so do taxes!

"We extend research on the determinants of corporate tax avoidance to include the role of Internal Revenue Service (IRS) monitoring. Our evidence from large samples implies that U.S. public firms undertake less aggressive tax positions when tax enforcement is stricter. Reflecting its first-order economic impact on firms, our coefficient estimates imply that raising the probability of an IRS audit from 19 percent (the 25th percentile in our data) to 37 percent (the 75th percentile) increases their cash effective tax rates, on average, by nearly 2 percentage points, which amounts to a 7 percent increase in cash effective tax rates. These results are robust to controlling for firm size and time, which determine our primary proxy for IRS enforcement, in different ways; specifying several alternative dependent and test variables; and confronting potential endogeneity with instrumental variables and panel data estimations, among other techniques."

Shocking, isn't it? (Just FYI, "endogeneity" is a statistical condition that occurs when there's a correlation between a parameter or variable and an "error term." It can arise as a result of measurement error, or a few other things that require looking up, including autoregression with autocorrelated errors, simultaneity, omitted variables, or sample selection errors.)

Let's give the authors a little credit here -- they do say it's not really surprising that more audits equal more taxes. But they say it was hardly obvious before they started their study. What if they found that corporations were just so confident they could outmaneuver the IRS that audit rates didn't matter?

The professors also argue that shareholders benefit from IRS audits -- especially when corporate governance is weak. Co-author Jeffrey Hoopes of the University of Michigan reports that "strict tax enforcement promotes good financial reporting and tends to check managers' proclivities to divert corporate resources for their personal use under the guise of saving taxes." They cite Tyco as an example, where top executives minimized taxes by relocating profits to low-tax foreign countries, then diverted millions of dollars for their own personal use. (Remember CEO Dennis Kozlowski, who spent $15,000 of shareholder money on an umbrella stand? Yeah, that guy . . . he's in jail now.)

What does all this mean for you? Well, audit rates for personal returns average just over one percent. That's a tiny fraction of the 30% or so that the biggest group of companies in the Accounting Review study faced. But we file every return as if we expect it to be audited. Yes, we work and plan to minimize your taxes. But the strategies we use are all court-tested and IRS-approved. That way, you save money and sleep well at night!

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October 17, 2012

IRS Considering Reporting Tax Debt to Credit Bureaus

by Kenneth Hoffman in IRS Info, Business Counsel, Tax Counsel

Congress is considering allowing the Internal Revenue Service to report on taxpayers’ tax debts to consumer credit bureaus such as Equifax, TransUnion and Experian.

The Government Accountability Office provided a report Wednesday to Senate Finance Committee chairman Max Baucus, D-Mont., and Senate Judiciary Committee ranking member Charles Grassley, R-Iowa., on the factors for considering a congressional proposal to report tax debts to credit bureaus. The report noted that millions of individual and business taxpayers owe billions of dollars in unpaid federal tax debts—$373 billion as of the end of fiscal year 2011, including $258 billion in individual debt and $115 billion in business debt—and the IRS expends substantial resources trying to collect these debts.

Unlike many other debts owed to the federal government, tax debts are not directly reported to the credit bureaus that collect and sell information about the credit history of individuals and businesses. The IRS is not allowed to directly report tax debt information to credit bureaus because long-standing federal law protects the privacy of any personally identifiable information reported to or developed by the IRS. The IRS is, however, allowed to file tax liens on some tax debts. Tax liens become part of the public record, which can be picked up by credit bureaus and included in the credit history information they compile

Among the potential reasons for directly reporting tax debt information to credit bureaus are the possibility that it could increase revenue by encouraging tax debtors to pay off their debts and the possibility that it could give the users of credit bureau information a more complete picture of the indebtedness of tax debtors. A proposal could conceivably encompass all tax debts or specify types of tax debts for such reporting.

How much of this debt would be suitable to report to credit bureaus could depend on the purpose of the reporting proposal, such as to collect more debts or simply to inform other potential creditors of the existence of tax debts, the GAO noted. Most debts are relatively small in size. Well over half of individuals and businesses with tax debts owed less than $5,000.

However, much of the aggregate debt is concentrated among those owing relatively large amounts. Debts over $25,000 add up to a total of $310 billion.

However, the National Taxpayer Advocate cautioned that such reporting could cause some taxpayers to choose not to file or file inaccurately if they know they owe money to the IRS.

Now is the time to contact your congress critters to let them know how you feel.

Do you have unfiled back taxes or owe the IRS money, contact me ASAP to get this resolved.

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October 16, 2012

ObamaCare Individual Overview

by Kenneth Hoffman in Health Care, Tax Planning, Tax Counsel

The Patient Protection and Affordable Care Act (PPACA) is getting a lot of press these days and I thought this would be a good time to review some of the provisions that could affect you. While some of the law's provisions have already taken effect, many of the provisions will begin taking effect in 2013, 2014, and later years. This is a summary of some of the more significant individual provisions that may be of interest to you.

Penalty for Not Maintaining Minimum Essential Coverage

The crux of PPACA is the requirement for almost all individuals to maintain minimum essential healthcare coverage (i.e., the individual mandate). Beginning in January 2014, non-exempt U.S. citizens and legal residents are required to maintain such coverage or be subject to a penalty. Once the penalty is fully phased in, individuals who fail to maintain minimum essential coverage are subject to a penalty equal to the greater of 2.5 percent of household income in excess of the taxpayer's household income for the tax year over the threshold amount of income required for income tax return filing for that taxpayer or $695 per uninsured adult in the household.

The per-adult annual penalty is phased in as follows: $95 for 2014; $325 for 2015; and $695 in 2016. The percentage of income is phased in as follows: 1 percent for 2014; 2 percent in 2015; and 2.5 percent beginning after 2015. If you file a joint return, you and your spouse are jointly liable for any penalty payment.

Premium Assistance Tax Credit

Effective for tax years ending after December 31, 2013, the law creates a refundable tax credit, called the premium assistance credit, for eligible individuals and families who purchase health insurance through an insurance exchange. The premium assistance credit is generally available for individuals (single or joint filers) with household incomes between 100 and 400 percent of the federal poverty level for the family size involved.

Additional Hospital Insurance Tax

Beginning in 2013, the employee portion of the hospital insurance portion of FICA taxes is increased by an additional tax of 0.9 percent on wages received in excess of the threshold amount. This additional tax is on the combined wages of the employee and the employee's spouse, in the case of a joint return. The threshold amount is $250,000 in the case of a joint return or surviving spouse, $125,000 in the case of a married individual filing a separate return, and $200,000 in any other case.

Unearned Income Medicare Contribution Tax

Beginning in 2013, in the case of an individual, estate, or trust, an additional tax is imposed on income over a certain level. This tax is referred to as the "unearned income Medicare contribution tax." Others have referred to it as a tax on investment income, although it can apply to individuals, estates, and trusts that do not have investment income. For an individual, the tax is 3.8 percent of the lesser of net investment income or the excess of modified adjusted gross income over a threshold amount. The threshold amount is $250,000 in the case of taxpayers filing a joint return or a surviving spouse, $125,000 in the case of a married individual filing a separate return, and $200,000 in any other case.

In the case of an estate or trust, the tax is 3.8 percent of the lesser of undistributed net investment income or the excess of adjusted gross income over the dollar amount at which the highest income tax bracket applicable to an estate or trust begins.

The new tax does not apply to items that are excludible from gross income under the tax rules, such as interest on tax-exempt bonds, veterans' benefits, and any gain excludible from income when you sell a principal residence.

Increase in Medical Expense Deduction Threshold

For 2013 and later years, the floor for taking a deduction for medical expenses is increased from 7.5 percent of adjusted gross income (AGI) to 10 percent of AGI. However, for any tax year ending before January 1, 2017, the floor will be 7.5 percent if the taxpayer or the taxpayer's spouse has reached age 65 before the end of that year.

FSA Limitation

Beginning in 2013, for a health flexible spending arrangement (FSA) to be a qualified benefit under a cafeteria plan, the maximum amount available for reimbursement of incurred medical expenses of an employee, the employee's dependents, and any other eligible beneficiaries with respect to the employee, under the health FSA for a plan year (or other 12-month coverage period) must not exceed $2,500.

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October 16, 2012

ObamaCare Business Overview

by Kenneth Hoffman in Business Counsel, Tax Planning, Tax Counsel

The Patient Protection and Affordable Care Act (PPACA) has several provisions that will affect you as an employer. While some of the law's provisions have already taken effect, many of the provisions will begin taking effect in 2013, 2014, and later years. Below is a summary of some of the more significant provisions that may be of interest to you.

FSA Limitation

Beginning in 2013, for a health flexible spending arrangement (FSA) to be a qualified benefit under a cafeteria plan, the maximum amount available for reimbursement of incurred medical expenses of an employee, the employee's dependents, and any other eligible beneficiaries with respect to the employee, for a plan year (or other 12-month coverage period) is $2,500.

Employer Mandate

Under PPACA, an "applicable large employer" is subject to certain "shared responsibility" requirements. Under those requirements, an applicable large employer that (1) does not offer coverage for all its full-time employees, (2) offers minimum essential coverage that is unaffordable, or (3) offers minimum essential coverage that consists of a plan under which the plan's share of the total allowed cost of benefits is less than 60 percent, must pay a penalty if any full-time employee is certified to the employer as having purchased health insurance through a state exchange with respect to which a tax credit or cost-sharing reduction is allowed or paid to the employee.

An employer is an applicable large employer for any calendar year if it employed an average of at least 50 full-time employees during the preceding calendar year. An employer is not treated as employing more than 50 full-time employees if the employer's workforce exceeds 50 full-time employees for 120 days or fewer during the calendar year and the employees that cause the employer's workforce to exceed 50 full-time employees are seasonal workers. A seasonal worker is a worker who performs labor or services on a seasonal basis, including retail workers employed exclusively during the holiday season and workers whose employment is, ordinarily, the kind exclusively performed at certain seasons or periods of the year and which, from its nature, may not be continuous or carried on throughout the year.

The penalty for any month is an excise tax equal to the number of full-time employees over a 30-employee threshold during the applicable month multiplied by one-twelfth of $2,000. In the case of persons treated as a single employer under the provision, the 30-employee reduction in full-time employees is made from the total number of full-time employees (i.e., only one 30-person reduction is permitted per controlled group of employers) and is allocated among such persons in relation to the number of full-time employees employed by each such person.

For example, say that in 2014, you fail to offer minimum essential coverage and have 100 full-time employees, 10 of whom receive a tax credit for the year for enrolling in a state exchange-offered plan. For each employee over the 30-employee threshold, you would owe $2,000, for a total penalty of $140,000 ($2,000 multiplied by 70 ((100-30)). This penalty is assessed on a monthly basis. Thus, the monthly penalty would be one-twelfth of $140,000. For calendar years after 2014, the $2,000 dollar amount is increased by the percentage (if any) by which the average per capita premium for health insurance coverage in the United States for the preceding calendar year exceeds the average per capita premium for 2013.

Small Business Tax Credit

PPACA provides a tax credit for a qualified small employer for nonelective contributions to purchase health insurance for its employees. Although the credit took effect in 2011, the amount of the credit increases from 35 percent (25 percent for tax-exempt organizations) of eligible premium payments to 50 percent (35 percent for tax-exempt organizations) in 2014.

Excise Tax on High-Cost Employer-Sponsored Health Coverage

Beginning after December 31, 2017, PPACA imposes an excise tax on certain health insurance providers for any excess benefit provided by an employer to an employee with respect to employer-sponsored health coverage. The excise tax is imposed pro rata on the issuers of the insurance. In the case of a self-insured group health plan, a health FSA or a health reimbursement arrangement (HRA), the excise tax is paid by the entity that administers benefits under the plan or arrangement. Where the employer acts as plan administrator to a self-insured group health plan, a health FSA or an HRA, the excise tax is paid by the employer. Where an employer contributes to a health savings account (HSA) or an Archer MSA, the employer is responsible for payment of the excise tax, as the insurer.

Please call me at your convenience if you wish to discuss these provisions or any other issue regarding employee health insurance.

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October 16, 2012

ObamaCare Individual Mandate

by Kenneth Hoffman in Tax Planning, Tax Counsel

The cornerstone of the Patient Protection and Affordable Care Act is the individual mandate. There have been a lot of questions and some misinformation about this provision. To help you better understand how this provision may affect you, I'm providing a plain-English explanation of what the individual mandate entails.

Beginning January, 2014, non-exempt U.S. citizens and legal residents are required to have health insurance. Under the law, they must maintain minimum essential coverage. Individuals are exempt from the requirement for months they are incarcerated, not legally present in the United States, or maintain religious exemptions. Those who are exempt from the requirement due to religious reasons must be members of a recognized religious sect exempting them from self employment taxes and adhere to tenets of the sect. Individuals living outside of the United States are deemed to maintain minimum essential coverage. If an individual is a dependent of another taxpayer, the other taxpayer is liable for any penalty payment with respect to the individual.

Minimum essential coverage includes government-sponsored programs, eligible employer-sponsored plans, plans in the individual market, grandfathered group health plans, and other coverage as recognized by the Secretary of HHS in coordination with the Secretary of the Treasury. Government-sponsored programs include Medicare, Medicaid, Children's Health Insurance Program, coverage for members of the U.S. military, veterans health care, and health care for Peace Corps volunteers. Eligible employer-sponsored plans include governmental plans, church plans, grandfathered plans, and other group health plans offered in the small or large group market within a state (e.g., a health insurance exchange).

Minimum essential coverage does not include coverage that consists of certain HIPAA excepted benefits. Thus, if your only coverage is a supplement to liability insurance or is workers' compensation or other similar insurance, you are not considered to have minimum essential coverage. Other HIPAA excepted benefits that do not constitute minimum essential coverage if offered under a separate policy, certificate or contract of insurance include long term care, limited scope dental and vision benefits, coverage for a disease or specified illness, hospital indemnity or other fixed indemnity insurance, or Medicare supplemental health insurance.

If you fail to maintain minimum essential coverage, you are subject to a penalty. The amount of the penalty is phased in from 2014 thru 2016. In 2016, when fully phased in, the penalty is equal to the greater of: (1) 2.5 percent of your household income in excess of an amount equal to your household income for the tax year over the threshold amount of income required for filing an income tax return (for example, in 2011, this amount was $19,000 for under 65 and married filing jointly), or (2) $695 per uninsured adult in the household. The fee for an uninsured individual under age 18 is one-half of the adult fee. The total household penalty may not exceed 300 percent of the per-adult penalty ($2,085). The total annual household payment may not exceed the national average annual premium for a bronze level health plan offered through a health insurance exchange that year for the household size.

As part of the phase in, the per-adult annual penalty is $95 for 2014 and $325 for 2015. The percentage of income is 1 percent for 2014 and 2 percent in 2015. If you file a joint return, you and your spouse are jointly liable for any penalty payment.

The penalty applies to any period minimum essential coverage is not maintained and is determined monthly. The penalty is an excise tax and is assessable and collectible under the Internal Revenue Code and is reported on an individual's income tax return. However, IRS collection procedures (e.g., liens, levies, etc.) do not apply to this excise tax. In addition, there are no criminal penalties for non-compliance with the requirement to maintain minimum essential coverage. However, the authority to offset refunds or credits is not limited by this provision.

Individuals who cannot afford coverage because their required contribution for employer-sponsored coverage or the lowest cost bronze plan in the local health exchange exceeds 8 percent of household income for the year are exempt from the penalty. In years after 2014, the 8 percent exemption is increased by the amount by which premium growth exceeds income growth.

For employees, and individuals who are eligible for minimum essential coverage through an employer by reason of a relationship to an employee, the determination of whether coverage is affordable to the employee and any such individual is made by looking at the required contribution of the employee for self-only coverage. Individuals are liable for penalties imposed with respect to their dependents and their spouse, if filing a joint return.

Taxpayers with income below the income tax filing threshold, as well as members of Indian tribes, are exempt from the penalty for failure to maintain minimum essential coverage.

No penalty is assessed on individuals who do not maintain health insurance for a period of three months or less during the tax year. If an individual exceeds the three-month maximum during the tax year, the penalty for the full duration of the gap during the year is applied. If there are multiple gaps in coverage during a calendar year, the exemption from penalty applies only to the first such gap in coverage. Individuals may also apply for a hardship exemption. Residents of U.S. possessions are treated as being covered by acceptable coverage. Family size is equal to the number of individuals for whom the taxpayer is allowed a personal exemption. Household income is the sum of the modified adjusted gross incomes of the taxpayer and all individuals accounted for in the family size required to file a tax return for that year. Modified adjusted gross income means adjusted gross income increased by all tax-exempt interest and foreign earned income.

I know this is a lot of information to absorb, so if you have any questions please feel free to contact me so we can review your individual situation and how this individual mandate may affect you.

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