CPA 2.0 The Next Generation

NEW YEAR TAX SAVINGS FOR EMPLOYEES

Employees have some special tax-saving considerations to take into account that retirees and other nonworking individuals don't face.  Below are three of those opportunities.  Please contact us if you need additional information on these items.

 

Adjustments to federal withholding

            Consider adjusting your federal withholding if you usually have a balance due when you file your return and face a penalty for underpayment of federal estimated tax.  Perhaps a raise in salary has put you in a higher tax bracket.  You can eliminate the penalty and save the pain of a large payment by having a little more withheld each payday.  Also, consider an adjustment if you have multiple jobs, both you and your spouse work or you can be by another person as his dependent. 

            Payroll departments are usually willing to adjust the withholding at any time during the year.  Just an adjustment of $50 each payday twice a month will give you $1,200 additional in federal income tax payments for the year.

 

401(k) contributions

            If you are not already contributing the maximum to your 401(k), you can reduce your 2012 tax bill by increasing your contribution.  You already know that earnings in a qualified retirement account are not taxed currently, but, don't forget that the amount you contribute this year reduces you taxable income this year, dollar for dollar.  The maximum employee contribution for 2012 is $17,000, with an additional catch-up amount of $5,500 for those age fifty and over.

 

Health flexible spending account

            This is a good time of year to review the amount that you will direct in 2012 to a health flexible spending account (health FSA).  Look at last year's expenditures and consider any anticipated change in circumstances in 2012. 

            You save taxes because you use pre-tax dollars to pay for medical expenses that might not be deductible on your tax return.  They would not be deductible if you do not itemize.  Even if you do itemize, some medical expenses would not be deductible because of the 7.5% adjusted gross income floor.  Also, a health FSA can be used to get tax-free reimbursement for over-the-counter medications and other items even though they would not be deductible as medical expenses if you paid for them outside of a health FSA.

            Mark your calendar to review your balance in December so that you can incur reimbursable expenditures to prevent loss of any unused amount under the use-it-or-lose-it feature of these plans.

 

HIDING INCOME OFFSHORE

There have always been U.S. taxpayers who try to avoid paying U.S. taxes by hiding income in offshore bank and brokerage accounts.  The practice is at the top of the IRS's 2011 "Dirty Dozen" annual list of tax scams.  The IRS is increasing its pursuit of taxpayers and promoters of these scams.

U.S. taxpayers are required to report and pay tax on their "world-wide income."  In February, the IRS announced a second voluntary disclosure initiative available through August 31, 2011 designed to encourage taxpayers to report offshore money previously unreported and to help those who have not been reporting income from offshore accounts to get current.

The first offshore voluntary disclosure program, covering tax years 2003 through 2009, ended October 15, 2009.  This second program covers tax years 2003 through 2010.  Penalty rate has been increased from 20% to 25%.

Form TD F 90-22.1, Report of Foreign Bank and Financial Accounts, is used to report financial interest or signature authority over financial account(s) in foreign country if the aggregate value of all foreign accounts exceeds $10,000.  FBAR is not a tax.  The report is due June 30 with no extension available.

For the tax year beginning 2011 there is a new Form 8938, Statement of Foreign Financial Assets.  This form is for reporting foreign bank accounts and the income associated with the accounts, and for reporting interests in stock or security, in foreign financial instruments and contacts and in foreign entities.  This includes reporting foreign rental property.   

 

 

 

IRS DIRTY DOZEN

The IRS has issued its annual list of "dirty dozen" tax scams, Don't Fall Prey to the 2011 Dirty Dozen Tax Scams.  "The IRS works with the Justice Department to pursue and shut down perpetrators of these and other illegal scams.  Promoters frequently end up facing heavy fines and imprisonment.  Meanwhile, taxpayers who wittingly or unwittingly get involved with these schemes must repay all taxes due plus interest and penalties."

 Beware; the 2011 list goes like this:

    1.      Hiding Income Offshore

Taxpayers try to evade U.S. Income tax by hiding income in foreign banks and brokerage accounts among other means.  The IRS has given these taxpayers a voluntary disclosure initiative available through August 31, 2011.

    2.      Identity Theft and Phishing

Besides the well-known tactics of using stolen credit cards or bank information, your personal information can be used to file a fraudulent tax return and collect a refund.  Criminals posing as IRS agents can obtain personal information.  Spyware can be loaded on your computer without your knowledge to steal personal information. 

    3.      Return Preparer Fraud

There are a few bad apples in the bunch.  "Some make basic errors or engage in fraud and other illegal activities.  These fraudsters derive benefit by skimming a portion of their clients' refunds, charging inflated fees for return preparation services and attracting new clients by making false promises."  The IRS is implementing a number of requirements for paid tax preparers.

    4.      Filing False or Misleading Forms

"IRS personnel are seeing various instances in which scam artists file false or misleading returns to claim refunds to which they are not entitled."  "Don't fall prey to people who encourage you to claim deductions or credits you are not entitled to or willingly allow others to use your information to file false returns."  You could find yourself with penalties to pay and even criminal charges.

    5.      Frivolous Arguments

While you have the right to argue your position in court, there is no defense against arguments that are false, illegal or against IRS guidance.  "The IRS has a list of frivolous legal positions that taxpayers should avoid."  Search for "the Truth About Frivolous Tax Arguments" on www.irs.gov.

    6.      Nontaxable Social Security Benefits with Exaggerated Withholding Credit

"Filings of this type of return may result in a $5,000 penalty."

    7.      Abuse of Charitable Organizations and Deductions

"Abuse includes arrangements to improperly shield income of assets from taxation and attempts by donors to maintain control over donated assets or income from donated property."  Other problems are donor overvaluing assets, organization allowing donor to repurchase asset at a price determined by donor and multiple organizations claiming both receipt and distribution of the same asset.

     8.      Abusive Retirement Plans

"The IRS is looking for transactions that taxpayers use to avoid the limits on contributions to IRAs, as well as transactions that are not properly reported as early distributions."

    9.      Disguised Corporate Ownership

"Such entities can be used to facilitate underreporting of income, fictitious deductions, non-filing of tax returns, participating in listed transactions, money laundering, financial crimes and even terrorist financing."

10.  Zero Wages

To reduce taxable income to zero, persons have been known to file a fictitious Substitute W-2 or a "corrected" Form 1099.  "Filings of this type of return may result in a $5,000 penalty."

11.  Misuse of Trusts

"IRS personnel have recently seen an increase in the improper use of private annuity trusts and foreign trusts to shift income and deduct personal expenses.  As with other arrangements, tax payers should seek the advice of a trusted professional before entering a trust arrangement."

12.  Fuel Tax Credit Scams

There is a legitimate tax credit available for use of fuel for off-highway business purposes, for example use by farmers.  The IRS receives excessive and unreasonable claims.  "Fraud involving the fuel tax credit is considered a frivolous tax claim and can result in a penalty of $5,000."

 

DOCUMENT THOSE CHARITABLE DEDUCTIONS

In recent years, the IRS has become very strict about the documentation of charitable deductions.  A LETTER from the charitable organization must document donations of cash over $250 - email is acceptable.  Even for cash donations under $250, you need documentation - in the form of a cancelled check or receipt.

 "Get the letter.  Get the letter.  Get the letter.," writes Laura Saunders in a recent Wall Street Journal, Tax Report.  "There isn't any room for error here.  If you don't have the correct paperwork, there's no way to fix the problem."

 The letter must be received no later than the filing date of the return and must contain specific wording.  The letter must state the amount of the donation and state that no goods or services were provided, unless you do actually receive something.  If you do receive goods or services, the letter needs to state the value received.  For example, if you pay to attend a charity event that includes dinner, the value of the dinner should be itemized in the letter with your net contribution deduction.  If you buy an item at a charity auction get a letter stating the value of the item and your net contribution deduction.

DISTRIBUTIONS TO BUSINESS OWNER

We have probably already had this discussion, if you are a client of Hodgson CPA who has a wholly-owned corporation.  It is quite common for an owner/shareholder to dip into his/her own pocket to pay business expenses or put cash in the business bank account to cover payroll or other expenses.  These transactions are recorded in the books to give the owner credit for his contributions or loans - there is nothing wrong with that. 

The problem arises when the owner takes cash out of the company - a distribution - considering it a repayment of money he loaned the company earlier or considering it a loan from the company.  Seemingly harmless, it may be as simple as an ATM cash withdrawal or use of the company debit card at a grocery store.  Again, there is nothing wrong with that - as long as the loan has been properly documented.  The IRS has rejected such draws as repayment of loans or new loans because the loans were not properly documented or formalized.  The IRS may call them dividends, taxable as income to the shareholder.  

In one such case the Tax Court ruled that Taxpayers failed to establish a debtor/creditor relationship using the following factors (Welch v. Comm, 85 AFTR 2d 2000-1064 (9th Cir.2000)): 1. a note or other instrument, 2. charging interest, 3. a fixed schedule of repayment, 4. collateral, 5. repayments actually made, 6. a reasonable prospect of repayment and 7. parties conducted themselves as if the transaction was a loan.

The lesson to be learned is to treat your business like a business not a piggy bank.  Start writting notes for all loans between the owner and the corporation.  At Hodgson CPA we would be glad to help you draft those notes.  One simple step to avoid taxes.

CALIFORNIAN FALSIFIED CHARITABLE DEDUCTION

A Santa Monica, California man claimed a contribution of $1 million on his 2006 tax return.  The man, Howard Berger, pleaded not guilty to the change.  According to the indictment Berger filed a partnership return for Lab Holdings LLC and for the year 2006 reported the $1 million contribution.

On his 2006 personal tax return, Berger reported on his itemized deductions schedule, gifts to charity of $991,700.

Under audit by the Internal Revenue Service, Berger produced a false charitable deduction letter to substantiate the deduction for gifts to charity.

If found guilty, Berger could face up to nine years in prison and fines assessed up to $750,000.

 

 

HOW IDENTITY THEFT CAN AFFECT YOUR TAXES

When you think of identity theft, the first thing that may come to mind is someone stealing your credit card number or opening a credit card in your name. Although this crime is a common form of identity theft, thieves may also use your social security number to obtain employment.

If your social security number is given to an employer by someone other than you, their income will be linked to you. It will appear that you did not report all of your income on your tax return. How will you know if someone used your social security number to get a job?

If you receive a letter from the IRS indicating that more than one tax return was filed for you or if the letter states you did not report income from an employer that you did not work for, your identity may have been stolen. In this case, respond to the IRS letter immediately. How can you avoid the hassle of identity theft?

According to the FTC, 9 million Americans are victims of identity theft each year. Unfortunately, not all of these cases could have been avoided, but the best thing you can do to avoid identity theft is to safeguard your personal information. The easiest ways to prevent identity theft are: not carrying your social security card, not giving anyone on the phone or internet your personal information, shredding confidential mail and not providing personal information on unsecured websites. These tips may just help you be one less American whose identity was stolen. What should you do if you think you might be at risk?

If you believe you may be at risk due to questionable activity on your credit report or lost or missing information, you should submit a copy of your valid government issued ID along with a police report and/or Form 14039, Identity Theft Affidavit, to the IRS. The FTC has guidance on how to report identity theft at www.ftc.gov/idtheft.

 

 

 

 

10 WAYS TO GROW YOUR BUSINESS THIS SUMMER

Does your business slow down in the summer months?  In an article at Manta Small Business Tip of the Week Ingrid Cliff offers the following ten suggestions for you to take advantage of the extra time on your hands.  

1.  Take a holiday and get away.  You deserve it.  Your clients will understand and consider it normal this time of year because they are also taking vacations themselves.  Take this time to recharge. 

2.  Get a massage, healing and take care of your health.  Contemplate the thought that your business relies on you being healthy.  Take this time to let go of the stress you have been carrying around and get an annual checkup.  Visualize how energized you will feel when you come back to work.

3.  Take a business-planning day.  The act of taking time to plan and set goals creates a culture among your staff - including the business owner - increases the likelihood of success and motivation.  Bring in a professional or do it yourself.  Reflect on what is good, bad and ugly; reflect on business processes, marketing plans and goals.  Then create an action plan with a timeline. 

4.  Update your website.  Websites can get stale.  This is a good time to review and critique what your website says about you.  Do it yourself or get some help, either way, step back and judge if the site portrays the image and information that you think are important.

5.  Refresh your marketing material.  "In a down economy you need to market more than ever to attract and retain new business."  Review all your materials and get professional help with photos and written profiles.

6.  Clear the clutter.  Have a declutter day (or days).  Clean the office thoroughly, go through file cabinets and stacks of paper, pitching what is no longer needed and scanning and archiving what you want to keep, "delete old emails (it helps to free space on your server in the process)."

7.  Write articles.  "Articles are a great way to help boost your businesses credibility.  Put pen to paper and share your ideas with customers and potential clients.  Create a store of articles you can match to your marketing calendar throughout the year."

8. Computer maintenance.  "All computers need maintenance.  Take the time to defrag your computers," test your back-up system" and generally run a system tune up."

9.  Update your emergency procedures.  Recently there have been devastating tornados, floods and fires.  Here in Houston it is hurricane season.  We do not like to think about it, but it has happened here and it could happen again.  If a fire or other disaster would hit your place of business in the next month, have you done what needs to be done beforehand and do you have a plan to restore and restart your business after an event?  Review your insurance.  Review your data backup system.  Now is the time for disaster recovery planning.

10.  Touch base with your contacts.  "Take time to reconnect over coffee or phone calls" with key clients, colleagues and alliance partners   Working with trusted colleagues is a great way to gain ideas, share resources and grow your business."

Enjoy and recharge this summer!

HOW IDENTITY THEFT CAN AFFECT YOUR TAXES

When you think of identity theft, the first thing that may come to mind is someone stealing your credit card number or opening a credit card in your name. Although this crime is a common form of identity theft, thieves may also use your social security number to obtain employment.

If your social security number is given to an employer by someone other than you, their income will be linked to you. It will appear that you did not report all of your income on your tax return. How will you know if someone used your social security number to get a job?

If you receive a letter from the IRS indicating that more than one tax return was filed for you or if the letter states you did not report income from an employer that you did not work for, your identity may have been stolen. In this case, respond to the IRS letter immediately. How can you avoid the hassle of identity theft?

According to the FTC, 9 million Americans are victims of identity theft each year. Unfortunately, not all of these cases could have been avoided, but the best thing you can do to avoid identity theft is to safeguard your personal information. The easiest ways to prevent identity theft are: not carrying your social security card, not giving anyone on the phone or internet your personal information, shredding confidential mail and not providing personal information on unsecured websites. These tips may just help you be one less American whose identity was stolen. What should you do if you think you might be at risk?

If you believe you may be at risk due to questionable activity on your credit report or lost or missing information, you should submit a copy of your valid government issued ID along with a police report and/or Form 14039, Identity Theft Affidavit, to the IRS. The FTC has guidance on how to report identity theft at www.ftc.gov/idtheft.

MILLION DOLLAR HOME MORTGAGE

You already know that you may deduct the home mortgage interest that you pay each year as an Itemized Deduction on your Form 1040-Schedule A.  But, did you know that the deduction has been limited to the first million dollars of the loan?  So, if your mortgage was over one million dollars, you lost the deduction of the interest paid on the portion above one million. 

There are two types of home mortgage loans, one known as “acquisition indebtedness” which is used to acquire, construct or substantially improve a residence.” And a second type known as “home equity indebtedness” which is any other debt secured by the home.  Both types of loans must be secured by your residence to qualify.  Deduction of home mortgage interest on “acquisition indebtedness” is limited to one million dollars, and the second type, “home equity indebtedness,” is limited to $100,000.

Good news: “The IRS has ruled that indebtedness incurred by a taxpayer to acquire, construct or substantially improve a qualified residence can constitute “home equity indebtedness” to the extent it exceeds $1 million, up to an excess of $100,000 (Revenue Ruling 2010-25).”  “This allows the taxpayer to deduct interest on the first $1.1 million of the loan - $1 million as acquisition indebtedness and $100,000 as home equity indebtedness” (Journal of Accountancy).  This IRS ruling contradicts two earlier Tax Court cases. 

So, if you have a mortgage of more than one million dollars this ruling allows you a larger allowable home mortgage deduction on your tax return.  You may treat the first $100,000 in excess of the $1 million limit as home equity indebtedness.  Interest paid on any amount above $1.1 million is nondeductible personal interest.

To read more about limits on home mortgage interest deduction see IRS Publication 936, Part II.