December 7, 2012

Stephen Baldwin Arrested State Income Tax Evasion

by Kenneth Hoffman in IRS Info, Filing Status, Tax Preparation, Tax Counsel

The NY Daily News is reporting that actor Stephen Baldwin has been arrested and charged with state income tax evasion.

Read about it in the Daily News.

Failing to file your tax return and pay your taxes can and does lead to a criminal conviction. Contact me immediately if you have not filed your federal or state taxes. Don't end up with your mug shot in the local newspaper.

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 between 8:30 a.m. to 1:00 p.m. for a no cost consultation, or drop me a note.

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December 5, 2012

Wave Accounting and FreshBooks Divorce

by Kenneth Hoffman in Business Counsel

You, just like us, may have received an email today letting you know that Waveaccounting and Freshbooks have broken off their relationship. In computer terms Waveaccounting will no longer work with Freshbooks Application Programming Interface (API).

Since we use both applications in our own business and have found the two to be a great combination, we are very sad to see this happen.

Additionally we are a bit upset that we have less than a week to decide how to address the problem. For our clients that use either or both Wave and Freshbooks here is how we see the situation.

You use Wave but not Freshbooks-There is nothing to do as this change will not impact you at all. We have not heard any news that Wave will stop working with any other current API's, but given the short notice we received about the breakup, our firm will be digging to find out if this is a trend, so we can be prepared.
You use Freshbooks but not Waveaccounting-Again nothing really changes for you. If you are integrating your Freshbooks with some other app such as Outright, we have no reason to believe those connections are changing. It appears the disconnect was on the part of Waveaccounting.
You have your Freshbooks feed into your Waveaccounting-Unless something changes, we are told by Wave that on December 10, that connection will no longer work. That means you will have some decisions to make. Wave does do invoicing and receivables itself, and that is an option. Also Freshbooks has been beefing up their financial reporting ability in the past year and it may offer you enough functionality as a stand alone program. There are also other cloud apps which have an active API to Freshbooks, including Outright, Kashoo and Xero. Additionally Freshbooks will export a csv file for Quickbooks.

We will be evaluating alternatives since our own firm fits this third category, so if you need assistance with this transition, feel free to contact us.

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 between 8:30 a.m. to 1:00 p.m. for a no cost consultation, or drop me a note.

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December 5, 2012

Powerball Tax Planning

by Kenneth Hoffman in Tax Planning, Tax Counsel

We all know money can't buy happiness, blah, blah, blah. But money can buy a lot of other good stuff we all want -- like comfort, security, freedom, and independence. So, last week, millions of us across America lined up at gas stations, convenience stores, and bodegas to take a shot at last week's record Powerball jackpot of 588 million bucks.

Admit it -- even if you didn't play, you couldn't help but dream at least a little about what you would do with all that money. That house you've always wanted on the most expensive street in town? The beach house or ski lodge you've always wanted to share with your friends? Lavish gifts for your family, favorite charities, and community? (It's OK to dream just a little bit more before you finish reading.)

But here's an ugly reality you probably don't want to think about. No matter where you choose to spend your windfall, the biggest piece of all will go to your friends at the IRS. (Yes, those nice folks at the Multi-State Lottery Association will send the IRS a Form W-2G alerting them to your good fortune.) With jackpots this big, the tax collectors in Washington will probably put a plaque on the wall with your name on it!

Your first decision involves whether to take your prize in a lump sum this year, or an inflation-adjusted annuity over the next 30 years. And big decisions, as always, mean taking taxes into consideration. Taking your loot all at once means paying the top federal income tax rate of 35%. That may sound like a lot, but at least you'll know exactly how much the tax will cost. Taking the prize in installments means paying whatever tax rate is in effect the year an installment is paid. Next year, for example, the Bush tax cuts are scheduled to expire, pushing the top tax rate to 39.6%. Next year also marks the first appearance of the Unearned Income Medicare Contribution, a 3.8% tax on "investment income" including annuities. And who knows what other new taxes might appear over the next 30 years?

Uncle Sam isn't the only one who's going to want a piece of your action. Forty-three states tax lottery winnings as ordinary income. Some states even tax your winnings if you just buy your ticket there without even living there. Do you live in Pennsylvania and work in New York? Don't buy your ticket around the corner from the office unless you want to cut the Empire State in for 8.82%!

Of course, there are plenty of strategies you can use to offset the income from the prize. Do you own your own business? Consider establishing or beefing up your qualified retirement plan. Maybe a closely-held insurance company (CHIC) makes sense for even bigger savings. Are you charitably-inclined? You can offset up to 30% of your "adjusted gross income" with gifts to a private foundation and 50% for gifts to a "public" charity.

So, if you find yourself with a winning ticket, call us before you host that press conference and cash your ticket!

But if you don't win that Powerball jackpot, good tax planning is even more important. That's because you don't have millions to waste on taxes you don't have to pay! So call us anyway -- and make sure you do it now before the New Year brings new taxes. And remember, we're here for your family, friends, and colleagues, too!

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November 30, 2012

1099-K and Business Income Matching

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

In September, the IRS launched its first information return–matching program for corporate entities filing Forms 1120, 1120S and 1065. This program will match business return incomes to separately reported Form 1099-K receipts, in order for the IRS to see if companies are reporting all of their income correctly.

This year business taxpayers also started receiving Form 1099-K (merchant card and third-party network payments) to report amounts received from payment settlement entities (debit/credit cards and third-party network payers such as PayPal). For 2012 business returns, the expectation should be to separately report Form 1099-K receipts as line items on their returns.

On November 16, the IRS announced that it will start questioning businesses with smaller-than-expected income, based on its analysis of Form 1099-K amounts reported to the business. For 2011, the IRS cannot propose specific adjustments to the returns because it can’t match Forms 1099-K directly to line items on 2011 business returns. However, the IRS is contacting taxpayers when it thinks that there is a discrepancy.

Last week the National Association of Tax Professionals (NATP) reported that the IRS is starting three compliance initiatives with regards to Form 1099-K reporting:

A soft-touch inquiry that asks taxpayers to review their returns more closely
A correspondence audit
An underreported notice and assessment

The NATP reported that the IRS will send out about 20,000 letters to small businesses before year-end. If your company is in receipt of IRS Letters 5035, 5036, 5039 or 5043, Notification of Possible Income Under-reporting, you may have under-reported gross receipts. The IRS is comparing the amount in gross receipts reported on tax returns to the amount in receipts from merchant card payments on Forms 1099-K. Based on the IRS’s analysis of your industry, the IRS calculates whether it thinks you may have more income than what is reported on the filed tax returns.

Depending on the letter you receive, your next steps may vary. Contact me immediately at 954.591.8290 if you receive such a letter.

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November 30, 2012

IRS Hot Topics

by Kenneth Hoffman in Business Counsel, Tax Counsel

The hottest topic now is that the IRS is targeting small and medium-size businesses with substantial cash flow and S-corp filers. A just completed three-year study showed that up to 85% of businesses are noncompliant with many of the issues having to do with the requirement that S-corp officers be on the W-2 payroll if they are active in the business.

Another area of concern is the issue of loans to and from partners in partnerships, members of LLCs or stockholders in corporations. All such loans must be recorded in the company minutes and documented with loan agreements and real interest activity.

Many small business owners have been charging personal items to the company and are unaware that too many of these business deductions are, in fact, not business deductions. Included in this area are vehicles used for personal and business use (business may only deduct business use). The same rules apply for purchasing meals for your employees (personal meals are never deductible).

All businesses should be preparing Form 1099’s for all individuals to whom the business has paid $600.00 or more in the calendar year. Small businesses should start collecting information now on people to whom you have paid at least $600 during the year. You will need to collect the name, address, and tax ID number (which can be social security number or an employer identification number for each of these individuals). Form W-9 should be used to collect that information.

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November 28, 2012

A Different Kind of Black Friday Savings

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

Last week marked the celebration of our most uniquely American holiday. No, silly, we're not talking about Thanksgiving. We're talking about Black Friday, our national homage to consumerism, conspicuous consumption, and all things capitalist. Walmart and other "big box" retailers pounded a final nail in Thanksgiving's coffin, opening at 8PM that night so shoppers could skip out on the pumpkin pie to save a couple hundred bucks on a flat-screen TV.

And this year, Walmart founder Sam Walton's heirs, who still own 48% of the company, have taken a lesson from their own shoppers. Only, the Waltons aren't just saving hundreds. They've found a way to save millions, just by accelerating a regularly-scheduled dividend payment from January 2 to December 27. (Apparently, they think "everyday low prices" applies to their tax bills, too!)

Under current law, tax on dividends is capped at just 15%. The Walmart dividend will be 39.75 cents/share, and the Waltons own approximately 1.6 billion shares. That means the family's payout will be $636 million, and their federal income tax bill on that payout will be a hefty $95.4 million.

If Walmart waits until January 1 to make the payment, though, taxes could go up -- possibly way up. That's because the so-called "Bush tax cuts," in effect since 2003, expire. At that point, dividends lose their special protection, and the top rate jumps to 39.6%. Congress and the White House have both said they want to extend the current rates for most taxpayers. But if they can't come to some agreement to the contrary, the Waltons will pay an extra $156 million in tax on their dividend. (A recent CNN poll shows that two-thirds of Americans expect Washington officials to act like "spoiled children" rather than "responsible adults" during those upcoming negotiations, so the Waltons better cross their fingers!)

Waiting 'til January 1 would also make the Walton heirs subject to the new "Unearned Income Medicare Contribution" of 3.8%. (This is a special tax on investment income for taxpayers making over $200,000, or $250,000 for joint filers.) That would bring the effective tax rate on the January 2nd payment all the way up to 43.4%, and bring the Waltons' final tax bill up to a whopping $276 million. Ouch!

Walmart is hardly the only company accelerating dividends to beat the tax hike. One financial data firm estimates that 109 public companies will issue special dividend payments before January 1, more than three times as many as in recent years. Those special payments will actually be enough to give the IRS a significant spike in 2012 tax revenue. The New York Times reported last week that two recent studies show that companies where board members own a large percentage of company shares are likeliest to make this move. The three Walton family members who serve on the company's board of directors recused themselves from last week's vote, but a company spokesman confirmed the company did make the decision because of uncertainty over taxes.

It may be too late to take advantage of Black Friday shopping specials at Walmart. But it's assuredly not too late to take advantage of Black Friday planning for taxes! Tax planning is the key to paying the legal minimum, especially with the "fiscal cliff" looming on the horizon. And a good tax plan can pay for a holiday season full of gifts and fun. So call us if you don't already have a plan, and let us show you what we can do. We're sure you'll give thanks for the savings!

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November 26, 2012

"Black Friday" Tax Planning Puts Taxes on Sale!

by Kenneth Hoffman in Tax Planning, Tax Counsel

The holidays are here, and millions of Americans kicked off the season with Black Friday shopping. Braving the crowds and the cold, facing scorn from family they've left behind, they line up at obscenely early hours (or duck out of Thanksgiving dinner before the pumpkin pie is even served) to save $20 on a DVD player or $40 on a flat-screen television.

It's sad, but true, that most Americans spend more time planning their Black Friday shopping than they spend planning their taxes. But that can be an expensive mistake!

What if the IRS had a sale? What if the IRS let you discount your taxes by thousands of dollars, this year and every year to come? And what if they let you do it from the comfort of your home or your office, without lining up in the pre-dawn hours of a chilly November morning? Would you give thanks for a sale like that?

You're probably not holding your breath for the scrooges at the IRS to hold a sale. The good news is, you don't have to wait for that to happen. You just need a plan. Tax planning is the key to paying the legal minimum, especially with the fiscal cliff looming on the horizon. And a good tax plan can pay for a holiday season full of gifts and fun.

Call me today at 954-591-8290 for your free Tax Analysis. I'll find the mistakes and missed opportunities that may be costing you thousands today, and show you how Black Friday tax planning can save thousands more tomorrow. We guarantee you'll give thanks for the savings, or I'll donate $50 to your favorite soup kitchen. So call now to schedule your Analysis.

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November 24, 2012

Proof a Minister Opted Out of Self-Employment Tax

by Kenneth Hoffman in Church Counsel, Tax Preparation, Church Issues

Ministers are allowed to opt out of Self Employment tax by filing Form 4361 with the IRS. Some refer to this as Social Security. There are a number hoops and hurdles a minister must jump through in order to opt out. Once the Form 4361 is approved, it is irrevocable unless Congress allows it.

An approved Form 4361 is very difficult to replace. Without the approved form, it is hard to convince the IRS and the Social Security Administration that the minister is exempt from Self Employment tax. The courts have allowed the exemption without an approved form where the minister has retained proof that he filed the form.

When I prepare a ministers tax return, I ask if they have opted-out and for a copy of the approved Form 4361. Occasionally a minister will not have a copy of their approved Forms 4361. To make matters worse, they also do not have any evidence of filing the form with the IRS. In the past, I have had little guidance to give to them regarding how to obtain a duplicate of the approved form. However, the IRS recently published a Minister Audit Techniques Guide reviewing all the rules regarding ministers for its agents.

An IRS agent can confirm the exemption by:

For ministers who filed the Form 4361 after 1988, the agent can order a transcript for the year under audit. Included on this transcript should be an indicator that tells the agent the minister is exempt from Self Employment tax.
If the transcript is not an option, the agent can contact the Taxpayer Relations Branch at the IRS Service Center where the Form 4361 was filed and request a copy of the form.
The last option is to contact the Social Security Administration in Baltimore and ask them to provide confirmation of a minister's exempt status.

If you are a minister and cannot locate your approved Form 4361, please call Kenneth Hoffman at 954-591-8290 or email him for assistance in obtaining a copy of your approved Form 4361. It is better to know for sure you are exempt, then to discover you are not exempt when a large tax bill is sent your way.

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November 24, 2012

Impact of the Affordable Care Act

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

Effective for 2013, taxpayers may be subject to a new 3.8 percent surtax on net investment income. The surtax will apply to those taxpayers whose income is over a “threshold amount” called Modified Adjusted Gross Income (MAGI). For single taxpayers, MAGI is $200,000; for other taxpayers, MAGI is $250,000. Income subject to the surtax includes taxable interest income, dividend income, rental income, royalties, annuities, capital gains from the sale of investment assets, and income from businesses where the taxpayer is not active in the business.

Income not subject to this surtax includes salary and wages, income subject to self-employment income, business income where the taxpayer is active in the business, pensions, social security income, and distributions from IRAs and other qualified plans.

For example:

Elizabeth, a single taxpayer, has $170,000 of investment income and received a $65,000 required minimum distribution (RMD) from his traditional IRA in 2013. The RMD is not “net investment income,” but it is included in MAGI, increasing MAGI to $235,000. The surtax applies to the lesser of: 1) net investment income (i.e., $170,000) or 2) the excess of MAGI over the $200,000 threshold amount for single taxpayers (i.e.,$235,000 minus $200,000 or $35,000). Thus, $35,000 is subject to the surtax and the amount payable is $1,330 (.038 x $35,000).

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November 24, 2012

Year End Planning for 2012

by Kenneth Hoffman in Tax Planning, Tax Counsel

It’s that time of year where we should think about preparing an estimate of your current year tax liability and see if there isn’t some way we can reduce that liability. There are several things to consider when doing year-end tax planning: taking advantage of expiring tax provisions, deferring income into the following year or accelerating income into the current year, and accelerating expenses into the current year or deferring them into the following year. The proper strategy depends on whether or not you anticipate a significant change in income or expenses next year.

We'll also need to consider the impact of possible changes in tax rates/rules in the wake of the presidential and congressional elections.

There are some very favorable tax provisions that are scheduled to expire at the end of 2012 and some potentially unfavorable provisions that become effective in 2013. For example, individual tax rates are scheduled to rise on January 1 to a top rate of 39.6 percent, and the limitations on both itemized deductions and the personal and dependency exemptions are scheduled to return for high-income individuals. Also, the maximum capital gains rate that applies to sales or exchanges for most capital assets is scheduled to increase to 20 percent (10 percent for taxpayers is in the 15 percent income tax bracket). Further, a new .9 percent tax on earned income and a 3.8 percent tax on investment income take effect in 2013 for certain high-income individuals.

Depending on your projected income for 2013, we may need to revise your withholdings or increase your estimated tax payments for 2013 to take these changes into consideration.

While the following are some of the actions we should consider, the focus should not be entirely on tax savings. These strategies should be adopted only if they make sense in the context of your total financial picture.

Accelerating Income into 2012

While we don’t yet know if the tax rate increases scheduled to take effect on January 1, 2013, will actually occur, we need to allow for the possibility that they will. Depending on your projected income, it may make sense to accelerate income into the 2012 tax year to lock into favorable rates. Besides harvesting gains from your investment portfolio, other options for accelerating income include:

if you own a traditional IRA or a SEP IRA, converting it into a Roth IRA and recognizing the conversion income this year;
taking IRA distributions this year rather than next year;
selling stocks or other assets with taxable gains this year;
if you are self employed with receivables on hand, trying to get clients or customers to pay before year end; and
settling lawsuits or insurance claims that will generate income.

Deferring Income into 2013

There are also scenarios (for example, if you think that your income will decrease substantially next year) in which it might make sense to defer income into the 2013 tax year. Some options for deferring income include:

if you are due a year-end bonus, asking your employer to pay the bonus in January 2013;
if you are considering selling assets that will generate a gain, postponing the sale until 2013;
delaying the exercise of any stock options you may have;
if you are selling property, considering an installment sale;
consider parking investments in deferred annuities;
establishing an IRA, if you are within certain income requirements; and
if your employer has a 401(k) plan, consider putting the maximum salary allowed into it before year end.

However, with respect to deferring the sale of stock or other property, the scheduled increase in capital gain rates after December 31, 2012, should be taken into account.

Deferring Deductions into 2013

Once again, if we expect tax rates to increase next year, or if you anticipate a substantial increase in taxable income, we may want to explore deferring deductions into 2013 by looking at the following:

postponing year-end charitable contributions, property tax payments, and medical and dental expense payments until next year; and
postponing the sale of any loss-generating property.

However, with respect to postponing the payment of medical and dental expenses, the scheduled increased in the threshold for deducting such expenses (from 7.5 percent of AGI to 10 percent of AGI for taxpayers under 65) should be considered.

Accelerating Deductions into 2012

If you expect your income to decrease next year, and if we expect tax rates to stay the same for your tax bracket, we should accelerate what deductions we can into the current year. Some options include:

consider prepaying your property taxes in December;
consider making your January mortgage payment in December;
if you are going to owe state income taxes, consider making up any shortfall in December rather than waiting until your return is due;
since medical expenses are deductible only to the extent they exceed 7.5 percent of your adjusted gross income (AGI), if you have large medical bills not covered by insurance, bunching them into one year may help overcome this threshold;
making any large charitable deductions in 2012, rather than 2013;
selling some or all of your loss stocks; and
if you qualify for a health savings account, consider setting one up and making the maximum contribution allowable.

As previously noted, there is a change in the threshold for deducting medical expenses in 2013 for taxpayers under 65. Thus, accelerating medical expenses into 2012 to the extent possible is especially important for individuals under age 65 because the threshold increases from 7.5 percent to 10 percent of AGI in 2013. Also note that after 2012, the amount reimbursable under a health flexible spending arrangement for each 12-month coverage period is limited to $2,500 (subject to indexing for inflation after 2013).

Alternative Minimum Tax

If you are subject to the alternative minimum tax (AMT), your deductions may be limited. While Congress has generally increased the AMT exemption each year, it has not yet done so for 2012. As a result, more individuals may be subject to the AMT than in prior years. Thus, if we anticipate that you will be subject to the AMT, we need to consider the timing of deductible expenses that may be limited under AMT.

Expiring Tax Provisions or Reductions in Credits

Besides the expiration of the reduced capital gains rates, the increase in the top tax rate, the return of the limitations on itemized deductions and personal and dependent exemptions for high income individuals, as mentioned above, the following are some important tax provisions that are scheduled to expire at the end of 2012:

the 10 percent individual income tax rate;
the American Opportunity tax credit;
the increase of the standard deduction for married filers;
the exclusion from income of the discharge of debt on a principal residence;
certain advantageous student loan interest deductions; and
the taxation of qualified dividends at capital gain rates.

Life Events

Certain life events can also affect your tax situation. If you’ve gotten married or divorced, had a birth or death in the family, lost or changed jobs, or retired during the year, we need to discuss the tax implications of these events.

Miscellaneous Items

Some additional miscellaneous items to consider:

If you have a health flexible spending account with a balance, remember to spend it before year end (unless your employer allows you to go until March 15, 2013, in which case you’ll have until then).
If you own a vacation home that you rented out, we need to look at the number of days it was used for business versus pleasure to see if there is anything we can do to maximize tax savings with respect to that property. For example, if you spent less than 14 days at the home, it may make sense to spend a couple more days and have the house qualify as a second residence, with the interest being deductible. As a rental home, rental expenses, including interest, are limited to rental income.
We should also consider if there is any income that could be shifted to a child so that the income is paid at the child’s rate.
If you have any foreign assets, there are reporting requirements and a tax form to fill out. Noncompliance carries stiff penalties.

Please call me, 954-591-8290, at your convenience so we can set up an appointment and estimate your tax liability for the year and discuss any questions you may have.

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