CPA 2.0 The Next Generation

Reporting Stock Transactions Becomes More Complicated

Reporting Stock Transactions Becomes More Complicated
Beginning with the 2011 tax return, reporting stock transactions has become significantly more complicated because of the new requirement for brokerage firms to track the purchase price of stocks acquired in 2011 and subsequent years and to include that information on the information-reporting document 1099-B.

For several years now, the IRS has required brokerage firms to report the gross proceeds from the sale of stocks and other securities on the Form 1099-B. But just knowing the proceeds from a security sale does not allow the IRS to verify the profit or loss reported by the taxpayer. So beginning with 2011 purchase transactions, brokers are required to track the price paid for the securities and include that information on the 1099-B when that particular security is subsequently sold.

This new system of reporting is not a solve-all solution for the IRS because it does not have the cost or basis information for securities acquired prior to 2011 or for securities acquired by gift or inheritance. Special adjustments are required for wash sales and when sales can be attributed to a prior purchase of the same security. Some brokers also may report on Form 1099-B the cost information, if known, for stocks purchased prior to 2011.

So that the IRS can use the new data to verify taxpayer profit or loss transactions attributable to purchases where the cost information is included on the 1099-B, the year’s transactions must now be broken down into six categories (the last two categories listed do not apply to stock transactions but may apply to sales of other capital assets):
•    Long-term sales where the broker IS reporting the cost of the security
•    Short-term sales where the broker IS reporting the cost of the security
•    Long-term sales where the broker IS NOT reporting the cost of the security
•    Short-term sales where the broker IS NOT reporting the cost of the security
•    Long-term sales for which no 1099-B is issued
•    Short-term sales for which no 1099-B is issued
To accommodate separating the transaction into the six categories, the IRS has provided a new Form 8949. A separate 8949 must be used for each category. This will allow the IRS to match and verify transactions where the brokerage firm supplied the cost basis.

Now that the IRS has profit or loss matching capabilities, it is important to correctly report the transactions as the IRS expects to see them. Failure to do so could lead to correspondence audits or even face-to-face audits.

Please call our office if you have questions relating to reporting your security sales this year.

Those Gold Sales May Be Taxable

If you took advantage of the escalating gold and silver prices and made any sales of gold, silver, gems, jewelry, or the like during 2011, you are required to report the sales on your tax return. Whether or not the sales are subject to tax, and at what tax rate, depends upon the type of item sold and your tax basis for the item.

Determining Basis - Generally, your tax basis is what you originally paid for the item, assuming that you can recall the amount. It may be difficult to remember how much you paid for an item; however, if the cost was significant, you hopefully have documentation that can verify the price. Without documentation, you are at the mercy of the IRS should you be audited! Even more complicated is determining the value of an item acquired as a gift. Your tax basis for a gift generally is the same basis as it was for the item in the hands of the individual who gave you the gift. Meanwhile, the basis for an item acquired by inheritance is generally the fair market value of the item on the date of the inheritance. As you can see, simply determining the basis for the items that you sold can be complicated.

Types of Items Sold - Not all items are taxed the same. The percentage depends on whether the item was held for personal use or for investment purposes and whether or not the item is classified as a collectible. A higher maximum tax rate applies to collectibles than to other capital assets.

• Jewelry - Generally, jewelry that is held for personal use is excluded from the definition of collectibles and is taxed the same as any other personal use property. Losses are thus not allowed, and gains are taxed as either short-term or long-term capital gains. For the most part, jewelry that an individual may choose to sell will have been owned for over a year, and the gain will be taxed at the long-term rate, which, for 2011, is a maximum of 15% (0% to the extent that the taxpayer is in the 15% regular tax bracket or lower). Beware, however, as some jewelry may include gold or silver coins that are considered collectible items and thus may be taxed at a higher rate, as explained below.
  
  
• Collectibles - Gold and silver coins and bullion are included on the IRS’s list of collectibles. Unlike jewelry, the sale of “collectibles” can result in either a taxable loss or a taxable gain. In addition, collectible gains are taxed at a maximum rate of 28%, as opposed to a maximum of 15% for other capital assets that are held long-term. The maximum rate does not imply that all collectible gains are taxed at 28%. A taxpayer in a lesser tax bracket will be taxed at that lesser rate.

If you have questions related to selling jewelry and collectibles, please give the office a call.

It’s Not Too Late for IRA or SEP

It’s not too late to make an IRA and/or SEP contribution or undo a Roth IRA conversion for 2011.

Generally, after the close of the year you can no longer take steps to alter the outcome of your tax return. However, both IRA contributions and SEP contributions can be made for a year after it has closed, and if you converted a traditional IRA into a Roth IRA, you can undo that conversion after the close of the year. Here are the details:

Traditional IRA Contributions - IRA contributions (tax-deductible and non-deductible) for 2011 can be made up to and including the un-extended filing due date for your 2011 tax return, which is April 17, 2012. The maximum contribution allowed is $5,000 ($6,000 if age 50 or over) for each taxpayer. The annual maximum must be allocated between traditional and Roth IRA contributions.

If you are an active participant in an employer-sponsored plan, the IRA contributions are phased out for higher income taxpayers. The traditional IRA AGI phase-outs for 2011 are: between $90,000 and $110,000 for married individuals filing jointly and individuals qualifying as a surviving spouse, $56,000 and $66,000 for unmarried individuals, and $0 to $10,000 for married individuals filing separately.

Where one spouse participates in an employer plan but the other does not, the non-participating spouse’s phase-out is between $169,000 and $179,000 for 2011.

SEP Plan Contributions – SEP plans are tax-deductible retirement plans for self-employed individuals. Contributions can be made up to and including the extended due date, which for the 2011 tax return is October 15, 2012. The maximum annual contribution to a SEP plan is the lesser of “25% of compensation” (20% of net profit after deducting the SEP contribution for the self-employed proprietor’s contribution) or $49,000. SEP plans have no AGI phase-out limitations and no catch-up contributions for older individuals.

Roth IRA Conversions – If you made a conversion from a traditional to a Roth IRA, there is a good chance the entire conversion is taxable. Generally, people plan those conversions for years with low income or when the stock market is down and the IRA value at the time of the conversion is low. However, if subsequent to the conversion conditions change, and you wish you hadn’t made the conversion, or you simply decide you can’t afford to pay the tax on the conversion, you can undo the conversion up to and including the extended due date of the return (October 15, 2012 for 2011 returns). However, don’t wait until the last minute to make that decision because it will require some paperwork on the part of the trustee (bank, broker, etc.).

Other plans – Other plans such as Simple Plans and Keogh plans also permit contributions in 2012 for 2011.

For additional information related to making retirement plan contributions after the close of the tax year, please give this office a call.

New Reporting Requirement for Individuals with Foreign Financial Assets

New for 2011 is a requirement for any individual who, during the tax year, holds any interest in a “specified foreign financial asset” to complete and attach Form 8938 to his or her income tax return if a reporting threshold is met. The reporting threshold varies depending on whether the individual lives in the U.S. and files a joint return with his or her spouse. For example, someone who is not married and doesn’t live abroad will need to file Form 8938 for 2011 if the total value of his or her specified foreign financial assets was more than $50,000 as of December 31, 2011, or more than $75,000 at any time during 2011. For married taxpayers filing a joint return and living in the U.S., the threshold amounts are doubled. The thresholds also are higher for taxpayers residing abroad.

Specified foreign financial assets include financial accounts maintained by foreign financial institutions and other investment assets not held in accounts maintained by financial institutions, such as stock or securities issued by non-U.S. persons, financial instruments or contracts with issuers or counterparties that are non-U.S. persons, and interests in certain foreign entities. However, no disclosure is required for interests that are held in a custodial account with a U.S. financial institution.

The penalty for failing to report specified foreign financial assets for a tax year is $10,000. However, if this failure continues for more than 90 days after the day on which the IRS mails notice of the failure to the individual, additional penalties of $10,000 for each 30-day period (or fraction of the 30-day period) during which the failure continues after the expiration of the 90-day period, with a maximum penalty of $50,000.

To the extent the IRS determines that the individual has an interest in one or more foreign financial assets but he or she doesn't provide enough information to enable the IRS to determine the aggregate value of those assets, the aggregate value of those assets will be presumed to have exceeded $50,000 (or other applicable reporting threshold amount) for purposes of assessing the penalty.

No penalty will be imposed if the failure to file the 8938 is due to reasonable cause and not due to willful neglect. The fact that a foreign jurisdiction would impose a civil or criminal penalty on the taxpayer (or any other person) for disclosing the required information isn't reasonable cause.

In addition, if it is shown that the individual failed to report the income from the foreign financial account on his or her income tax return, a 40% accuracy-related penalty is imposed for underpayment of tax that is attributable to an undisclosed foreign financial asset.

If you have questions related to this issue or are uncertain if you are required to file Form 8938, please give this office a call to discuss your particular situation.

Don’t be Scammed by Tax Season Cyber Criminals

Now that tax season is upon us, so are the e-mail scammers pretending to be the IRS. Most of these scams fraudulently use the IRS name, logo, and/or website header as a lure to make the communication appear more authentic and enticing. They lead you to believe you had a refund of some sort coming and request personal information. The goal of these scams - known as phishing - is to trick you into revealing your personal and financial information. The scammers can then use your information - like your Social Security number, bank account, or credit card numbers - to commit identity theft or steal your money.

DON’T BE A VICTIM – THE IRS DOES NOT INITIATE E-MAIL CORRESPONDENCE

The Internal Revenue Service receives thousands of reports each year from taxpayers who receive suspicious e-mails, phone calls, faxes, or notices claiming to be from the IRS. If you find something suspicious, you should immediately call this office before responding. In fact, it is a good policy to check with this office before responding to any inquiry from the IRS or state or local tax agencies.

Here are some tips you should know about phishing scams.

1. The IRS never asks for detailed personal and financial information like PIN numbers, passwords, or similar secret access information for credit card, bank, or other financial accounts.

2. The IRS does not initiate contact with taxpayers by e-mail to request personal or financial information. If you receive an e-mail from someone claiming to be a representative of the IRS or directing you to an IRS site:

• Do not reply to the message.
  
  
• Do not open any attachments. Attachments may contain malicious code that will infect your computer.
  
  
• Do not click on any links. If you clicked on links in a suspicious e-mail or phishing website and entered confidential information, you may have compromised your financial information. If you entered your credit card number, contact the credit card company for guidance. If you entered your banking information, contact the bank for the appropriate steps to take. The IRS website provides additional resources that can help. Visit the IRS website  and enter the search term “identity theft” for additional information.

3. The address of the official IRS website is www.irs.gov. Do not be confused or misled by sites claiming to be the IRS but ending in .com, .net, .org or other designations instead of .gov. If you discover a website that claims to be the IRS but you suspect it is bogus, do not provide any personal information on the suspicious site.

4. If you receive a phone call, fax, or letter in the mail from an individual claiming to be from the IRS but you suspect he or she is not an IRS employee, contact the IRS at 1-800-829-1040 to determine if the IRS has a legitimate need to contact you. Report any bogus correspondence. You can forward a suspicious e-mail to phishing@irs.gov.

If you have any questions or doubts related to a letter, phone call, or e-mail from the IRS or other taxing authorities, please call this office before responding or providing any financial or personal information. Better safe than sorry!

QuickBooks Income Tax Reports And Filtering Options: Target The Right Output

April 15 is getting uncomfortably close.

QuickBooks, of course, can't do your taxes for you. But it helps you lay some of the groundwork. Following up on last month's column on customizing reports, we'll look at the program's tax-related reports and its powerful report-filtering options.

But first, you'll need to make sure that this output will be accurate.

Describe your company accurately
Your tax entity setting should have been established when you first set up QuickBooks, but verify that you've specified the correct one. Go to Company | Company Information. Your Report Information is in the lower left corner. Click the arrow next to Income Tax Form Used to see what's active.



Figure 1: Make sure that QuickBooks is set up for the correct tax entity.

QuickBooks automatically assigns some of your accounts to their matching lines on the 1040 and assorted forms and schedules; this is called tax line mapping. So when you create tax reports, related transactions will be grouped by these designations.

This can be a real time-saver – as long as you've specified the correct entity. If:

• was selected
• This setting is incorrect
• You're starting a business and don't know which to choose… … please contact us. If you switch entities, your existing tax line mapping will disappear and will have to be reassigned.

Dedicated tax reports
Many of QuickBooks' general financial reports provide tax-related information. But there are some that specifically relate to the numbers that will go on your return. Go to Reports | Accounting & Taxes | Income Tax Preparation. Here's an excerpt of what you'll see:



Figure 2: QuickBooks automatically assigns many accounts to the appropriate tax form lines, based on your specified tax entity.

Here, QuickBooks shows you which tax lines have been pre-assigned to your accounts. You can specify a tax form line for unassigned accounts, but this is something you should not attempt on your own. This report, though, will give you an idea of how useful your report output will be and where you'll need our assistance.

Other reports provide tax-related data. You can access them by going again to Reports | Accountant & Taxes and clicking:

• Income Tax Summary. This displays totals for each tax line that's relevant to your particular tax entity. Double-click on any number, and the Tax Line By Account report appears, detailing every transaction related to every tax-related account (you could add a column for Tax Line in Display options and make this quite a useful report).
• Income Tax Detail. This lists all individual transactions by tax form/schedule line assignment.

Paring it down
Some tax reports can be very lengthy; you may want to filter them to look at various "slices." Click Customize Report | Filters:



Figure 3: This window displays a powerful set of filtering options.

The options listed under Choose Filter are available on other reports; they help you set up incredibly complex searches using multiple filters.

Let's say you want a report that displays your installation labor costs on new residential construction from the last year (you could also throw other variables in). You'd simply choose the filters from the left pane and then select related options in the next pane (usually a list). You'd want to also click on the Display tab to make sure that the appropriate columns appear.



Figure 4: You can apply multiple filters to your reports.

QuickBooks reports can shave time off of tax preparation, and filtered views help you scrutinize your data in quite creative – and very useful – ways. The program's boilerplate reports have their place in simple examinations of your financial status, but filters are potent tools. They can facilitate the kind of deep analysis that helps you make critical business decisions.

If you have questions on this or any other QuickBooks feature, call or email us. We’re your partner and we’re here to make your business better.

Tax Effects of a Lawsuit

Before negotiating a settlement, it is important to know what effect it will have on your taxes. Depending on the type of damages, your settlement may be tax free. Physical injury awards are tax free; however, the interest, punitive damages and emotional distress from a physical injury are taxable.  When negotiating, keep in mind that only the physical injury and medical expenses are tax free. Severance pay and discrimination settlements are taxable income.

Another important thing to remember is attorney fees are not deducted from the settlement. You must recognize 100% of the award you receive as income and then in most cases, deduct the legal fees as a miscellaneous itemized deduction. This will make your adjusted gross income higher and possibly phase out deductions. In addition, miscellaneous itemized deductions are affected by alternative minimum tax, which may make the deduction have little or no effect on your return.

IRS Smartphone App

The IRS has launched the IRS2Go app for IPhone and Android. This application allows taxpayers to check the status of their refunds and obtain tax information. To check the status of a refund, taxpayers will need to enter their social security number, filing status and the amount of their refund.

If the return was e-filed, the status should be available approximately 72 hours after filing the return. For paper filers, status takes approximately three to four weeks.

Users of the IRS2Go app can enter their email address to receive automatic daily tips.

Modifying QuickBooks Reports Gives You Better Insight Into Past, Future: Part 1

If you make one resolution about improving your accounting procedures in 2012, it should be this: Make extensive use of the tools that QuickBooks offers for report modification. Comprehensive, meticulously-shaped reports that flow out of your carefully-constructed records and transactions are your reward for pounding on the keys every day, conscientiously recording income and expenses.

QuickBooks supplies you with a wide variety of pre-formatted reports whose modification options can help you do focused, critical analysis of your financial data. The right set of numbers will help you understand your history and plan for the future more effectively.

Note: The reports discussed and pictured here shows only one possible set of customization options. There are many variations. We can answer your questions.

Check your preferences
When you created your company file in QuickBooks, you chose between reporting on a cash (income and expenses are recorded when money changes hands) or accrual (recorded when you invoice or receive a bill) basis. This affects summary reports, but not those that break out individual transactions or are simply lists.

If you want to change this, click Edit | Preferences | Reports & Graphs | Company Preferences and click the desired button:



Figure 1: You can establish a preference for your summary reports' basis here.

You can set other preferences in this window that will affect your report output here, too, as you can see.

Altering the display
Open the Income by Customer Summary report (Reports | Company & Financial). Change the dates to reflect a range you'd like to see. Want the data displayed by different time increments – like week or quarter – instead of just the total? Click the arrow next to Columns and select Four week.



Figure 2: You can do some report display alterations from this toolbar; the options it offers vary by report.

By default, your report rows display alphabetically. If you want to view a column by total in ascending or descending order, select the column by hovering over the top number until the magnifying glass appears, and click on it. Click the arrow next to Sort by and choose Total, then click the AZ [down arrow] icon (in some reports, there will be other options here).

Additional options in this toolbar let you:

• Memorize the report
• Print, email or export it to Excel
• Hide or Show the Header
• Collapse or Expand the columns
• Refresh the report if you've made changes that will alter data

More display options
Click Customize Report to open this window:



Figure 3: This window outlines your report's content options.

Some of the options here duplicate what you saw in the toolbar. In addition, you can switch between Accrual and Cash for just this report, and add subcolumns in some. The latter is a complicated operation, one that you must understand well in order to glean any insight from it. We can help you with this.

Sometimes the subcolumns are generic, as shown in the screen above. In other reports, they're very specific to that group of data.

Clicking on Revert takes you back to the default format, and Advanced opens additional options specific to the current report.

More customization = more insightful results = more informed financial choices

Transaction reports have many similarities and two major differences: You can change the column order by hovering your cursor over the column label until a hand appears. Click, hold and drag the column to the desired spot and let go. You can also add or delete columns by clicking Customize Report and checking or unchecking labels.



Figure 4: In transaction – or detail – reports, you can alter the column structure.

Learn the mechanics of report display modification well, and your company's finances will come into much sharper focus, improving the wisdom of future choices. Up next month: filtering your reports for additional clarity.

If you have questions on this or any other QuickBooks feature, call or email us. We’re your partner and we’re here to make your business better.

Are You Liable for a Gift Tax Return?

Frequently, taxpayers think that gifts of cash, securities, or other assets they give to other individuals are tax-deductible and, in turn, the gift recipient sometimes thinks income tax must be paid on the gift received. Nothing is further from the truth. To fully understand the ramifications of gifting, one needs to realize that gift tax laws are related to estate tax laws.

When a taxpayer dies, the value of his or her gross estate (to the extent it exceeds the excludable amount for the year) is subject to estate taxes. Naturally, individuals want to do whatever they can to maximize their beneficiaries’ inheritances and limit the estate’s amount of inheritance tax. Because giving away one’s assets before dying reduces the individual’s gross estate, the government has placed limits on gifts, and if those gifts exceed the limit, they are subject to gift tax that must be paid by the giver.

Gift Tax Exclusions – Certain gifts are excluded from the gift tax.

• Annual Exclusion – This is the annual amount that an individual can give to any number of recipients. This amount is adjusted for inflation, and for 2011, it is $13,000. For example, a taxpayer with five children could have given $13,000 to each child in 2011 without any gift tax consequences. The taxpayer cannot deduct the dollar value of the gifts, and the value of the gifts is not taxable to the recipients. Generally, for a gift to qualify for the annual exclusion, it must be a gift of a “present interest.” That is, the recipient’s enjoyment of the gift can't be postponed into the future. For gifts to minor children, there is an exception to the “present interest” rule where a properly worded trust is established.
  
  
• Lifetime Limit – In addition to the annual amounts, taxpayers can use a portion of the federal estate tax exemption (it is actually in the form of a credit) to offset an additional amount during their lifetime without gift tax consequences. However, to the extent this credit is used against a gift tax liability, it reduces the credit available for use against the federal estate tax at the taxpayer’s death. For 2011, the credit-equivalent lifetime gift tax exemption is $5 million and is the same as for the estate tax exemption.
  
  
• Education & Medical Exclusion – In addition to the amounts listed above, there are two additional types of gifts that can be excluded from the gift tax:

(1) Amounts paid by one individual on behalf of another individual directly to a qualifying educational organization as tuition for that other individual.

(2) Amounts paid by one individual on behalf of another individual directly to a provider of medical care as payment for that medical care. Payments for medical insurance qualify for this exclusion.

If, during the year, your gifts exceed the sum of the annual, education, and medical exclusions, you are required to file a gift tax return (even if you have not exceeded the lifetime limit).

Gifts of Capital Assets – Sometimes a gift might be in the form of securities, real estate, or other items that have appreciated in value. In these situations, the gift value is the item’s fair market value at the time of the gift. However, when the recipient of the gift sells that asset, he or she will measure his or her gain from the giver’s tax basis. For example, a parent gifts 100 shares of XYZ, Inc. worth $9,000 to his or her child. If the parent originally paid $5,000 for the shares and if the child sold the shares for $9,000, the child (the recipient) would be liable for the tax on the $4,000 gain. In effect, the parent (giver) transferred the taxable gain in the stock to the child. This can be beneficial from a tax standpoint if the child is not subject to the “kiddie tax” rules and is in a lower tax bracket than the parent. Caution: Watch out for unintended gifts such as an elderly parent placing a child on the title of the home or other assets.

Gift-Splitting by Married Taxpayers - If the gift-giver is married and both spouses are in agreement, gifts to recipients made during a year can be treated as split between the husband and wife, even if the cash or property gift was made by only one of them. Thus, by using this technique, a married couple can give $26,000 a year to each recipient under the annual limitation discussed previously.

If you have additional questions or would like this office to assist you in planning an appropriate gifting strategy, please give us a call.