January 9, 2013

Tax Season Delayed

by Kenneth Hoffman in Business Counsel, Tax Due Dates, Tax Preparation, Tax Planning

Following the January tax law changes made by the United States Congress within the American Taxpayer Relief Act (ATRA), the Internal Revenue Service (IRS) has announced that it plans to open the 2013 filing season and begin processing individual income tax returns on January 30.

The opening of the filing season follows passage by Congress of an extensive set of tax changes in ATRA on January 1, 2013, with many affecting tax returns for 2012. While the IRS worked to anticipate the late tax law changes as much as possible, the final law required that the IRS update forms and instructions as well as make critical processing system adjustments before it could begin accepting tax returns.

The IRS will therefore begin accepting tax returns on January 30, after updating forms and completing programming and testing of its processing systems, to reflect the bulk of the late tax law changes. The announcement means that the vast majority of tax filers - more than 120m households - should be able to start filing tax returns on that date.

The IRS will be able to accept tax returns affected by the late Alternative Minimum Tax patch as well as the three major "tax extender" provisions for taxpayers claiming the state and local sales tax deduction, higher education tuition and fees deduction and educator expenses deduction.

It is estimated that the remaining households will be able to start filing in late February or early March, because of the need for more extensive form and processing systems changes. This group includes people claiming residential energy credits, depreciation of property or general business credits. Most of those in this group file more complex tax returns and typically file closer to the April 15 deadline, or obtain an extension.

"We have worked hard to open tax season as soon as possible," said IRS Acting Commissioner Steven Miller. "This date ensures we have the time we need to update and test our processing systems."

The IRS has also emphasized that taxpayers will receive their tax refunds much faster by using e-file with direct deposit. The IRS had originally planned to open electronic filing this year on January 22; more than 80% of taxpayers filed electronically last year.

Although tax season has been delayed, there is no automatic extension to file or pay any taxes that may be due by March 15th for corporate filers and April 15th for every one else. If an extension is needed, call us ASAP at 954.591.8290.

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January 9, 2013

More Than Meets the Eye

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

We usually try and keep these dispatches light and entertaining. We know you'd rather read about "Tax Strategies for Somali Pirates" than, say, the latest regulations governing domestic international sales corporations. But every so often it's time to put on our serious face, and this is one of those times.

By now, of course, we all know that Congress spent their New Year's crafting a last-minute deal to avoid a "fiscal cliff" disaster. The "American Taxpayer Relief Act of 2012" extended the Bush tax cuts, permanently, for incomes up to $400,000 for single filers and $450,000 for joint filers. Ordinary income above those thresholds will be taxed at 39.6%; corporate dividends and long-term capital gains will be taxed at 20%. The Alternative Minimum Tax is "patched" for good, and the estate tax is eliminated for estates under $5 million.

If your income isn't quite that high, you may think you've just dodged a bullet. But the sad reality is, you're probably already paying more tax, even if your income is nowhere near $400,000:

The fiscal cliff legislation includes provisions phasing out personalized exemptions and itemized deductions for singles earning over $250,000 and joint filers earning over $300,000. You'll lose 2% of your personal exemptions for every $2,500 over the threshold. And you'll lose $3 of your itemized deductions, up to 80% of the total, for every $100 of income above the thresholds.
The 2% payroll tax "holiday" that we enjoyed in 2011 and 2012 is over, and won't be coming back.
Finally, the new Medicare tax provisions of the Affordable Care Act take effect. Medicare taxes on earned income go from 2.9% to 3.8% on incomes above $200,000 ($250,000 for joint filers). And there's a new "unearned income Medicare contribution" on "Investment income" (interest, dividends, capital gains, rents, royalties, and annuities) above those same thresholds.

Here's the bottom line. If you woke up on January 2, read the headlines, saw "$400,000," and thought you were safe, think again.

On the bright side, fiscal cliff legislation extends all sorts of tax breaks that were in danger of expiring. These include expanded first-year expensing and bonus depreciation deductions for business equipment, tax-free charitable gifts from IRA accounts, expanded student loan interest, and even the above-the-line deduction for educator expenses. The bill even extends a critical break for NASCAR track owners, letting them write off land improvements and support facilities over just seven years instead of fifteen! (If you happen to own a "motorsports entertainment complex," you really need to call us for planning!)

The tax provisions of the fiscal cliff legislation run over 80 pages. Even the Senate explanation takes up 15 pages. So we're still doing our homework and sorting out all the opportunities. But we can promise you that we're here to help make the best of the new law. And remember, we're here for your family, friends, and colleagues, too!

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January 3, 2013

Dying to Save Taxes?

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

2013 is here, and after months of post-election sound and fury, we took a quick "test leap" off the dreaded "fiscal cliff." Look out below!

By this point, we're all familiar with the income tax consequences of the cliff. The Bush tax cuts expired, as scheduled, on December 31, sending everyone's taxes up. The 2% payroll tax holiday expired at the same time, with no hope of resuscitation. The Alternative Minimum Tax (AMT), which up until this week had never been indexed for inflation, still hadn't been "patched" for 2012, meaning it would catch 27 million more Americans in its claws. There are even new Medicare taxes and a 3.8% "unearned income Medicare contribution" on earned income and investment income for individuals earning over $200,000 and joint filers earning over $250,000. (Okay, those new Medicare taxes aren't technically part of the "fiscal cliff" -- but they don't give upper-income earners much reason to cheer 2013, either!)

But the fiscal cliff also threatened some dramatic estate tax changes as well. Taxpayers dying on December 31 could leave a tax-free $5.12 million "unified credit" to their heirs, and pay a 35% rate on any balance above that amount. On January 1, however, that unified credit shrank to just $1 million -- and the tax itself jumped to 55%. Die on December 31 with a $3 million estate and owe Uncle Sam nothing. Die just one day later, and pay a $1.1 million tax. That's one awfully expensive day!

Of course, Washington spent New Year's Day scrambling its way back from the cliff. As we now know, we'll keep the Bush tax rates on incomes up to $400,000 ($450,000 for joint filers) and get a permanent AMT fix. As for estate taxes, the unified credit stays the same and the rate climbs to 40%.

So, here's an awkward question, moot as it now may be. With such large estate taxes at stake, would millionaires choose to die early to spare their heirs the risk of higher taxes?

You probably won't be shocked to learn that determined patients can literally will themselves to delay death past important dates like birthdays, holidays, and anniversaries. Hospitals saw death rates drop significantly in the last week of 1999, only to increase by similar amounts in the first week of 2000. That suggests that patients were determined to catch at least a peek at the new millenium.

A similiar but happier phenomenon can occur when it comes to giving birth. In 2004, the Australian government gave taxpayers a $3,000 new baby bonus, starting on July 1. A 2009 study found that as many as 1,000 births were delayed to take advantage of that windfall.

But dying early to save estate taxes? Really . . . ?

Well, believe it or not, yes. A 2003 study published in the The Review of Economics and Statistics by two economics professors asked if changes in estate tax rates affected mortality rates -- and found that for individuals dying within two weeks of a tax reform, a $10,000 change in estate taxes increased the chance of dying in the low-tax period by 1.6%. This is hardly surprising when living longer let people claim the savings. But the authors even found evidence of people dying sooner to avoid the increases. (That's especially ironic considering that, by definition, nobody gets to enjoy saving tax on their own estate!)

We've said all along that proactive planning is the real key to paying less tax. And smart tax planning lets you pay less and even live to enjoy it! So, we're glad that you're reading these words, and we promise we're here to answer all your questions on the "American Taxpayer Relief Act of 2012"!

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January 1, 2013

Happy New Year and Welcome to 2013

by Kenneth Hoffman in Business Counsel, Tax Preparation, Tax Planning, Church Taxes, Tax Counsel

Welcome to 2013. There is still an air of uncertainty about the nations fiscal health. If you have any questions, please do not hesitate to contact me.

Now is a good time of the year to change the oil in your car. Your mechanic will provide you with a receipt with your cars' current mileage. This can be used as evidence to establish the ending mileage for 2012 and the beginning mileage for 2013.

There is no need to keep track of those pesky, fading receipts. Take a picture with your phone's camera and upload it to your "2013 Business Receipt" folder on your FREE Box.com account.

The IRS requires you to track your mileage and expenses. As our New Year's gift to you, you can download our 2013 Tax Diary. Use it to track your mileage, appointments, and meal expenses.

While you are here, please check out our Tax Preparation services.

If you decide to prepare your own tax return and want a second opinion, then have a look at my Tax Return Review Service. Have a question about preparing your own tax return, I'd be more than happy to answer them. Sign-up for my Tax Question and Answer service.

Lastly, if you receive a Notice from the IRS about your tax return, then take advantage of my IRS Notice Service.

If you found this article helpful, I invite you to leave a commit and please share it on twitter, facebook or your favorite social media site and with your friends, family and colleagues. Thank you.

I truly value your business and I appreciate your referrals. Refer your family, friends, acquaintances, and business colleagues to KR Hoffman & Co., LLC. If your referral retains our services, we will send you a $25 gift card and your referral will receive a $25 discount on their first invoice.

December 31, 2012

Update on the Fiscal Cliff

by Kenneth Hoffman in Business Counsel, Tax Counsel

I am receiving a lot of calls about the fiscal cliff. First, I am sure they will pass something, possibly by even today December 31st extending the Bush-era tax rates for most people (those earning less than $400,000 or $450,000).

There's lots of finger pointing going on over all this, but I don't think either party wants to have to deal with the consequences of letting this thing go 'over the falls'. This is just too big a political risk.

Even if nothing gets done by 12/31, that doesn't mean we 'go over'. When the bill is passed it will most likely be retroactive to January 1, 2013. So, if a deal is cut on January 10th it would still be as if it was passed on January 1st.

I will keep you apprised on what is happening as we get it. Don't let it spoil the New Year's fun.

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.

If you found this article helpful, I invite you to leave a commit and please share it on twitter, facebook or your favorite social media site and with your friends, family and colleagues. Thank you.

I truly value your business and I appreciate your referrals. Refer your family, friends, acquaintances, and business colleagues to KR Hoffman & Co., LLC. If your referral retains our services, we will send you a $25 gift card and your referral will receive a $25 discount on their first invoice.

December 28, 2012

Final Thoughts for 2012

by Kenneth Hoffman in Business Counsel, Tax Counsel

2013 is almost here, and it looks like that old Grinch is leaving a "fiscal cliff" under everyone's tree. Here are a few final thoughts to help usher in the New Year:

"There's no line on the tax return that asks 'what are you not telling us?'"
Robert Goulder (tax attorney)
"The rich, indeed, are different from the rest of us; they have shiftier tax lawyers."
Jim McTeague (columnist, Barron's)
"Dear Tax Commissioner: Three years ago I cheated on my taxes. Since then I have been unable to sleep at night. Enclosed is $5,000. If I still can't sleep, I'll send you the rest."
Anonymous
"If you are truly serious about preparing your child for the future, don't teach him to subtract -- teach him to deduct."
Fran Lebowitz
"The ancient Egyptians built elaborate fortresses and tunnels and even posted guards at tombs to stop grave robbers. In today's America, we call that estate planning."
Rep. William R. Archer (former Chair, House Ways and Means Committee)
"[A] tax lawyer is a person who is good with numbers but does not have enough personality to be an accountant."
James D. Gordon III (BYU Law School)
"Make sure you pay your taxes; otherwise you can get in a lot of trouble."
Richard M. Nixon
"Just because you have a briefcase full of cash doesn't mean you're out to cheat the government."
Pete Rose
"From a tax point of view, you're better off raising horses or cattle than children."
Former U.S. Rep. Patricia Schroeder

We wish we could tell you exactly what's going to happen with the fiscal cliff and taxes. But we can promise we'll be here to help you make the best of it, in 2013 and beyond. And remember, we're here for your family, friends, and colleagues too!

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.

December 20, 2012

Set Minister Housing Allowance Before Year End

by Kenneth Hoffman in Church Counsel

Churches must designate a portion of each minister's compensation as a housing allowance by December 31 in order for ministers who own or rent their homes to receive the full benefit of a housing allowance exclusion for calendar year 2013. The designation should be adopted during a regular or special meeting of the church board, and should be contained in the written minutes of the meeting.

If you found this article helpful, I invite you to leave a commit and please share it on twitter, facebook or your favorite social media site and with your friends, family and colleagues. Thank you.

December 19, 2012

Tax Strategies for Santa Claus

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

As 2012 draws to a close, most of us are preparing to take time off and enjoy friends and family. But there's one famous name who works harder than any one else this time of year -- everyone's favorite fat man in a red suit, Santa Claus.

When you think of Santa, you probably focus on what he gives. But have you ever thought about what he pays? You can be sure the grinches at the IRS do!

Santa is most famous for his holiday gift-giving. His "North Pole Foundation" is set up as a not-for-profit under Internal Revenue Code Section 501(c)(3). But Santa also operates a second, highly profitable business focused on licensing and endorsements. (In that sense, he's like top athletes whose off-the-field income from endorsements far outstrips their on-field earnings.) So how can Santa shelter some of his own presents?

Fortunately, Santa can take advantage of many of the same deductions as any other business owner. Those include:

Mileage. Santa can choose to deduct "actual expenses" (maintenance, upkeep and depreciation on the sleigh, reindeer chow, etc.) or the standard allowance (currently 55.5 cents per mile). In Santa's case, the sheer length of his trip around the globe to deliver toys to all the good little girls and boys makes the allowance his best bet. (His sleigh also qualifies as "energy efficient" -- it's 100% "green," running entirely on reindeer power, and even Rudolph's nose is low-wattage.)
Uniforms and work clothes. Clothing Santa provides for himself and his elves are deductible so long as they're not "suitable for ordinary street wear." This time of year it seems like everyone enjoys a red coat and hat. Still, we feel confident Santa's classic look is distinctive enough to pass the IRS test.
Home office. Home offices are deductible so long as they're used "regularly and exclusively" for work and constitute the "principal place of business." Santa's North Pole workshop certainly qualifies, which means he can write off depreciation, utilities, cleaning and maintenance, and holiday decorations. Code Section 132(j)(4) even lets him deduct an "on-premises employee athletic facilities" for hosting reindeer games.
Retirement. Santa sure seems to love his job now. But how will he feel about his long night's work as he ages? He'll probably want to stuff some cheer in his own stocking. The problem is those naughty nondiscrimination rules that force him to contribute on behalf of his elves, too. We recommend a "safe harbor" 401(k) to maximize his own contributions without letting the plan become as "top-heavy" as his sleigh.
Family employment. It's not clear if Mrs. Claus holds a formal position in Santa's organization. However, putting her "on the books" would let Santa boost the couple's qualified plan contributions. Perhaps he might even establish a Section 105 medical expense reimbursement plan to write off his cholesterol medication as a business expense.

This holiday season, we wish you and your family all the best. And remember, we're here for all your year-end tax questions -- unlike Santa, we don't quit after the holiday!

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December 12, 2012

By Any Other Name

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

In Shakespeare's classic drama Romeo and Juliet, star-crossed protagonists from feuding families meet and fall in love. In Act II, when the impossibility of their courtship has become clear, Juliet leans out her balcony and declares to her lover "What's in a name? That which we call a rose by any other name would smell as sweet." The line, of course, implies that Romeo's last name should mean nothing, and the two should be together.

Shakespeare may or may not have been right about love and roses. But what about taxes? Does that which we call a "tax," by any other name smell as sour? Apparently, Washington thinks not -- if you pay attention to all the new euphemisms, you'd think Washington has given up imposing new "taxes" entirely!

In 1952, the IRS started charging "user fees" when the government provides special benefits to a recipient beyond those given to the general public. Today the government raises over $200 billion per year in fees for services like approving retirement plan applications, driving heavy vehicles, entering national parks, and even walking to the top of the Statue of Liberty. But "user fees" are still "fees," and Americans seem to have figured out that trick. So, what now?

Now we're seeing even more clever names for what most of us would consider plain old taxes. Take, for example, the new "unearned income Medicare contribution" that goes into effect on January 1. This is a 3.8% levy on "investment income" (interest dividends, capital gains, rents, royalties, and annuities) for individuals earning over $200,000 or joint filers earning over $250,000. Washington created it as part of the Obamacare package, along with an increase in the Medicare tax on earned incomes over those same thresholds. But, while they call it a "Medicare contribution," the money doesn't actually go into the Medicare trust fund. It goes straight into the general revenue fund, where Washington can spend it on whatever they want.

The "unearned income Medicare contribution" isn't Obamacare's only euphemism for "tax." Beginning on January 1, 2014, applicable large employers with 50 or more employees have to offer their employees minimum essential coverage or pay a $2,000/employee "assessable payment." That's a nondeductible "assessable payment," by the way, so the actual cost might be even higher. Sure sounds like a tax to us.

Finally, there are taxes in disguise that have the same bottom-line effect as more direct taxes. If you start taking Social Security benefits before your normal retirement age and earn more than the retirement earnings test exempt amount ($14,640 for 2012), you'll pay a Social Security earnings penalty of one dollar for every two dollars you earn above that limit. Doesn't that sound like a 50% tax? (The penalty drops to one dollar for every three dollars in earnings above $33,880 in the year you reach normal retirement age, then disappears after that year.)

The good news here is that we can help. Whether you're looking to pay less "tax", minimize your "unearned income medicare contribution," sidestep the "assessable penalty," or avoid the "Social Security earnings penalty," planning is your plain-English solution. So call me -- and make sure you do it now before Washington comes up with any more new names for taxes! And remember, we're here for your family, friends, and colleagues, too!

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December 10, 2012

Self-Employed Individual's and the Additional Medicare Tax

by Kenneth Hoffman

The Internal Revenue Code (IRC) imposes social security and Medicare taxes on the self-employment income of every individual at the same combined employer and employee rates applicable under the FICA. The Affordable Care Act added Code Sec. 1401(b)(2). Code Sec. 1401(b)(2)(A) increases the Medicare tax on self-employment income for any tax year beginning after December 31, 2012, by an additional 0.9 percent of self-employment income that is in excess of certain threshold amounts previously mentioned.

The proposed regulations describe the extent to which an individual who has self-employment income is liable for the additional Medicare tax. Specifically, the proposed regulations describe how the applicable threshold amounts are reduced (but not below zero) by the amount of FICA wages taken into account in determining the additional Medicare tax liability. Thus, the proposed regulations illustrate the application of the reduced threshold amounts for purposes of determining liability for the additional Medicare tax attributable to the individual's self-employment income.

Example: Carl, a single filer, has $130,000 in wages and $145,000 in self-employment income. Carl's wages are not in excess of the $200,000 threshold for single filers, so Carl is not liable for the additional Medicare tax on these wages. Before calculating the additional Medicare tax on self-employment income, the $200,000 threshold for single filers is reduced by Carl's $130,000 in wages, resulting in a reduced self-employment income threshold of $70,000. Carl is liable to pay the additional Medicare tax on $75,000 of self-employment income ($145,000 in self-employment income minus the reduced threshold of $70,000).

Example: Dave and Emily are married and file jointly. Dave has $150,000 in wages and Emily has $175,000 in self-employment income. Dave's wages are not in excess of the $250,000 threshold for joint filers, so Dave and Emily are not liable for additional Medicare tax on Dave's wages. Before calculating the additional Medicare tax on Emily's self-employment income, the $250,000 threshold for joint filers is reduced by Dave's $150,000 in wages resulting in a reduced self-employment income threshold of $100,000. Dave and Emily are liable to pay the additional Medicare tax on $75,000 of self-employment income ($175,000 in self-employment income minus the reduced threshold of $100,000).

Example: Gina, a head of household filer, has $225,000 in wages and $50,000 in self-employment income. Gina's employer withheld additional Medicare tax on $25,000 ($225,000 minus the $200,000 withholding threshold). Gina is liable to pay the additional Medicare tax on $25,000 of her wages ($225,000 minus the $200,000 threshold for head of household filers). Before calculating the additional Medicare tax on self-employment income, the $200,000 threshold for head of household filers is reduced by Gina's $225,000 in wages to $0 (reduced, but not below zero). Gina is liable to pay the additional Medicare tax on $50,000 of self-employment income ($50,000 in self-employment income minus the reduced threshold of $0). In total, Gina is liable to pay the additional Medicare tax on $75,000 ($25,000 of her wages and $50,000 of her self-employment income). The additional Medicare tax withheld by Gina's employer is applied against all taxes shown on her individual income tax return, including any additional Medicare tax liability.

The Affordable Care Act did not provide for a reduction in the self-employment income threshold amounts by the amount of any RRTA compensation taken into account in determining liability for the additional Medicare tax. Thus, an individual who receives both RRTA compensation and self-employment income does not reduce the self-employment income threshold amounts by the amount of RRTA compensation taken into account in determining the additional Medicare tax liability.

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