Don't be a sheep!

RETIREMENT 

We are consumed with thinking about retirement. Our televisions are loaded with retirement advertising. From simple questions like are you going to outlive your retirement to more complex issues about how sheep in Asia effect rice in China. Really? The retirement industry is huge and employs lots of people that have to be paid some way and advertising that costs and prospectuses and lawyers etc... Where does it end? More importantly who is paying for all that?

All that to my way of thinking pales in comparison the what I call the big lie. "Put money away for retirement" they say. "You will pay less taxes when you pull it out because you will be making less money" Sounds reasonable. In fact that would be great if it worked that way. Talk about shrinking the size of government. Fully 10,000 baby boomers are retiring everyday, paying in less taxes and taking more out of Social Security at the same time. It looks like our elected officials are the poster children for unintended consequences. How could they do that to themselves? How long can that last?

Well guess what. It actually does not work that way. Say it ain't so! Nope, sorry. First I would point you to the Federal Income Tax Brackets for 2014. For married filing joint taxpayers the 25% tax bracket starts at $73,800 and ends at $148,850. Most people work toward a goal of bringing in 70% of what they were making before they retired. If you were at the top of that bracket and took the 30% hit in income you would still be in the 25% bracket. Actual case. I prepared a tax return for a client in 2012 that had all w-2 income and he made $200,000. In 2013 his income was all retirement money. How much did he receive? Of course it was $200,000. Same ol, same ol. Definitely no change in taxes. 

Secondly, tax rates never go down. They are always going up. Our government is addicted to spending more than they bring in. What is the last thing you want to worry about when you retire?  What is always going up? What will be taking out a larger chunk of your retirement every year forcing you to decide to either withdraw less and squeeze the budget or take out more and hope the market continues to go up? Taxes. 

Rumor has it that Pelosi and her ilk want to tax your retirement where it sits. Obama says you only need a certain amount to retire on anyway. Just think about all the risks you will be concerned about when you retire with your 401k plans and your IRAs. Taxes going up, markets going down, your financial institution's solvency or (say it ain't so) another Bernie Madoff. And what about that rice in China? Are you tired of counting sheep yet?

I think there are better ways to retire than doing what everyone else is being told to do. Sheep will always be either slaughtered or sheared. Don't be a sheep.

 

Uniform state nonresident taxation rule reintroduced in Congress

Federal legislation has been reintroduced in Congress that would allow all States to tax the wages earned by nonresident employees who are present and performing employment duties in the State for more than 30 days in a year [H.R. 1864]. Sounds ok so far right? Read on.

Nonresident taxation rules are not currently uniform across states. Some states tax nonresidents if they perform one day of service in the state. Hawaii, on the other hand, doesn't require withholding if services aren't performed in the State for more than 60 days during the year. The new legislation would reduce some of the complexity in these rules. Reducing complexity? Since when has the FEDERAL Government ever been capable of reducing complexity? Here comes the gotcha...

The legislation is called the “Mobile Workforce State Income Tax Simplification Act of 2011.” The bill would allow a nonresident State to tax all of the wages and remuneration earned by the employee in that State from day one once the employee reaches the “more than 30 day threshold.” The employee's earnings would also be subject to taxation in his resident State. The provisions of the bill would not apply to professional athletes and entertainers, and to “certain public figures,” who are defined as “persons of prominence who perform services for wages or other remuneration on a per-event basis, provided that the wages or other remuneration are paid to such person for services provided at a discrete event in the form of a speech, similar presentation or personal appearance.” So if you work in Colorado for 4 months, get laid off, move to Wisconsin and work the last six months of the year you could be taxed for ALL of your income earned that year in BOTH states instead of a prorated amount based only on the time in each state. Sounds simple to me but also very expensive.

Since the mechanics of the bill are identical to a bill issued in 2009 that never came to a vote in the House or Senate it sounds like a good time to call your representatives and let them know you thoughts. The bill would take effect on Jan. 1, 2013, if it is signed into law.

Surprise, surpirise...New tax laws

While you were sleeping... or actually while you were putting together your tax information this past quarter there were over 160 new changes to the tax law. The following is a summary of the most important tax developments that have occurred in the past three months that may affect you, your family, your investments, and your livelihood. Please call us for more information about any of these developments and what steps you should implement to take advantage of favorable developments and to minimize the impact of those that are unfavorable.

Detailed guidance on new law's 100% bonus depreciation allowance. The IRS has issued detailed guidance on the 2010 Tax Relief Act's 100% bonus depreciation rules for qualifying new property generally acquired and placed in service after Sept. 8, 2010 and before Jan. 1, 2012. Overall, the rules are quite generous. For example, they permit 100% bonus depreciation for components where work on a larger self-constructed property began before Sept. 9, 2010, allow a taxpayer to elect to “step down” from 100% to 50% bonus depreciation for property placed in service in a tax year that includes Sept. 9, 2010, permit 100% bonus depreciation for qualified restaurant property or qualified retail improvement property that also meets the definition of qualified leasehold improvement property, and provide an escape hatch for some business car owners who would otherwise be subject to a draconian depreciation result.

New law creates a 100% write-off for heavy SUVs used entirely for business. Under the 2010 Tax Relief Act, a taxpayer that buys and places in service a new heavy SUV after Sept. 8, 2010 and before Jan. 1, 2012, and uses it 100% for business, may write off its entire cost in the placed-in-service year. A heavy SUV is one with a GVW rating of more than 6,000 pounds.

IRS further delays health insurance coverage information reporting for small employers. The new health reform legislation generally requires employers to report the cost of health insurance they provide to employees on their W-2 forms. Last fall, the IRS made this new reporting requirement optional for all employers for the 2011 Forms W-2. More recently, the IRS announced that the reporting requirement will continue to be voluntary for small employers at least through 2012.

New settlement offer for those voluntarily disclosing unreported offshore income. The IRS has announced a second voluntary disclosure initiative designed to bring offshore money back into the U.S. tax system and help people with undisclosed income from hidden offshore accounts get current with their taxes. It will be available through Aug. 31, 2011. The IRS released details of the new voluntary offer, called the 2011 Offshore Voluntary Disclosure Initiative (OVDI), in the form of 53 frequently asked questions (FAQs). As with the first offer, participants have to pay back taxes and penalties but will avoid criminal prosecution. The offshore penalty is different under the new offer. The general rule is that the penalty is 25% based on amounts in foreign bank accounts, but can be as low as 12.5% or 5% for some taxpayers.

IRS eases lien procedures. The IRS has announced new policies and programs to help taxpayers pay back taxes and avoid tax liens. Its goal is to help individuals and small businesses meet their tax obligations, without adding an unnecessary burden to taxpayers. Specifically, the IRS is:
• Significantly increasing the dollar threshold when liens are generally issued, resulting in fewer tax liens.
• Making it easier for taxpayers to obtain lien withdrawals after paying a tax bill.
• Withdrawing liens in most cases where a taxpayer enters into a Direct Debit Installment Agreement.
• Creating easier access to Installment Agreements for more struggling small businesses; and
• Expanding a streamlined Offer in Compromise program to cover more taxpayers.

Lactation expenses now qualify as deductible medical expenses. Reversing its prior position, the IRS has announced that expenses paid for breast pumps and supplies that assist lactation qualify as deductible medical expenses. Amounts reimbursed for these expenses under FSAs (flexible spending accounts), Archer MSAs (medical savings accounts), HRAs (health reimbursement arrangements), or HSAs (health savings accounts) are accordingly not income to the taxpayer.

Tax consequences of governmental homeowner-assistance payments. The IRS has explained the income tax and information return consequences of payments made to or on behalf of homeowners under various government programs designed to prevent avoidable foreclosures of homeowners' homes and stabilize housing markets. In general, homeowners may exclude the payments from income, and may deduct all payments they actually make during 2010–2012 to the mortgage servicer, HUD (the Department of Housing and Urban Development), or the State HFA (housing finance agency) on the home mortgage. The aid payments aren't subject to information reporting, and there are transition rules for payments that are incorrectly reported.

Courts differ over whether basis overstatement can trigger 6-year limitations period under new regulations. Late last year, the IRS issued final regulations under which an understated amount of gross income reported on a return resulting from an overstatement of unrecovered cost or other basis is an omission of gross income for purposes of the 6-year period for assessing tax and the minimum period for assessment of tax attributable to partnership items. The 6-year limitations period applies when a taxpayer omits from gross income an amount that's greater than 25% of the amount of gross income stated in the return. Several courts had held that a basis overstatement is not an omission of gross income for this purpose. In response to these decisions, the IRS issued the new regulations to clarify that an omission can arise in that fashion. Now, some Courts have addressed the regulations. The Court of Appeals for the Fourth Circuit and the Tax Court have rejected the regulations. On the other hand, the Federal Circuit has upheld them and the Seventh Circuit has viewed them favorably. As a result, it looks like the Supreme Court will ultimately have to resolve the issue.

New deadline for electing modified carryover basis rules. Estates of decedents dying in 2010 can choose zero estate tax, but at the price of beneficiaries being limited to the decedents' basis plus certain increases. The IRS has announced that Form 8939, Allocation of Increase in Basis for Property Acquired From a Decedent, is not due Apr. 18, 2011 and should not be filed with the final Form 1040 of persons who died in 2010. The IRS says the due date will be set in forthcoming guidance but does not indicate when that guidance may be issued. The forthcoming guidance will also explain the manner in which an executor of an estate may elect to have the estate tax not apply for a decedent dying in 2010.

Another Appeals Court upholds IRS's time limit on spousal relief requests. Married joint return filers are jointly and severally liable for the tax arising from their returns. Innocent spouses may request relief from this liability in certain circumstances. An IRS regulation states that a request for equitable innocent spouse relief must be no later than two years from the first collection activity against the spouse. The Tax Court had found this regulation invalidly imposed a time limit. However, the Court of Appeals for the Third Circuit has reversed the Tax Court and upheld the regulation (so has the Court of Appeals for the Seventh Circuit).

Business expenses of professional gamblers not limited. Gambling losses may be deducted only to the extent of gambling winnings, even in the case of an individual engaged in the trade or business of gambling. Previously, the Tax Court had held that losses for purposes of the limitation included both the cost of wagers and business expenses. Earlier this year, the Court overruled its prior position and now says that a professional gambler's business expenses are not subject to the loss limitation.

Physician statement alone doesn't establish financial disability to toll limitations period. In general, a taxpayer must file a claim for credit or refund of tax within three years after filing the return or two years after paying the tax, whichever period expires later. (Code Sec. 6511(a)) However, the statute of limitations is suspended for certain taxpayers who are unable to manage their financial affairs because of a medically determinable mental or physical impairment. A physician's statement must be submitted to claim this relief, but a Court has made clear that the statement alone doesn't establish that the taxpayer was financially disabled. Thus, it allowed the IRS to seek additional proof of the taxpayer's condition.

We hope you find this information helpful for 2011 tax year planning.

Audit triggers to watch out for

Running a close second as to the most popular questions I get is " Will this raise a red flag with the IRS?" What most people don't know is that there are many more audits being conducted without you knowing your beng audited. As more regulations hit the books requiring electronic reporting more information is being gathered about you at the IRS. Brokerage firms are reporting your interest, dividends and stock sales, mortgage companies are reporting mortgage interest, real estate taxes, points and mortgage interest premiums. And the IRS is matching these items up.

Additionally, the IRS has compiled information over many years and has developed averages for many deductions based on income levels. If a return includes deductions too far outside the norms it could get a little extra attention. So here are a few items that will trigger red flags at the IRS:

1. Failure to include ALL of your 1099s like interest, dividends and the like. With the matching up of outside data this is a surefire way to get "fan mail" from the IRS.

2. Larger than normal home office deductions. The IRS thinks this is one of THE most abused deductions taken. As more and more people take contract jobs they look for all the deductions they can get. Everyone should take any legitimate deduction but on this one don't go overboard.

3. Too many losses for your side businesses. The IRS expects any business to show a profit at least 2 in every 5 years. If you can't do that then it is possible they will consider that activity a hobby and disallow your losses.

4. Extra large charitable contributions. Make sure you keep your receipts for any cash contributions. For those non-cash donations to your favorite charity keep a list of every item and it's condition at the time of the donation. Better still there are programs available that assign a value to most of the items donated and will keep track of it for you.

5. Too many round numbers. The IRS is somewhat averse to estimates. The term "Ballpark" is not in the code.

6. Rental real estate losses when you do not activly participate in the management of the property.

7. Extra large unreimbursed employee business expenses.

As I have posted on Facebook before the IRS is targeting self-employed individuals these days so for you mavericks out there all the above is in play plus some. When in doubt documentation is paramount. Better to keep up with those mileage logs all along than to try to create one a couple of years later.

Where is my refund???

How many times I get this question is unknown but let's just say it is a bunch. Taxpayers who have filed a federal tax return and are entitled to a refund have several options to check on the status of their refund. I am not one of them. The IRS says the fastest and easiest way to check on the status of a refund is to access “Where's My Refund?” on the agency website. If a taxpayer e-files, refund information becomes available 72 hours after IRS acknowledges receipt of the return. If a paper return is filed, refund information will generally be available three to four weeks after mailing the return. When checking on the status of a refund, you must enter either a Social Security number or an Individual Taxpayer Identification Number, filing status, and the exact whole dollar refund amount shown of the tax return. As described by IRS, once the personal information is entered, several responses are possible, including: acknowledgment that the return was received and is in processing; the mailing date or direct deposit date of the refund; or notice that IRS could not deliver the refund due to an incorrect address or incorrect direct deposit information. If you file a joint return with your spouse you must use a joint bank account for direct deposit.

Also, don't be surprised if you don't find anything referencing your return within the time frame mentioned this year. The IRS is runnung behind on everything this year purportedly due to the late tax changes inacted by Congress in December of last year.

Deductions for kids

Your children may help you qualify for some tax benefits. Here are 10 tax benefits parents should consider when filing their tax returns this year.

1. Dependents In most cases, a child can be claimed as a dependent in the year they were born. For more information see IRS Publication 501, Exemptions, Standard Deduction, and Filing Information.
2. Child Tax Credit You may be able to take this credit on your tax return for each of your children under age 17. If you do not benefit from the full amount of the Child Tax Credit, you may be eligible for the Additional Child Tax Credit.

3. Child and Dependent Care Credit You may be able to claim the credit if you pay someone to care for your child under age 13 so that you can work or look for work.

4. Earned Income Tax Credit The EITC is a benefit for certain people who work and have earned income from wages, self-employment or farming. EITC reduces the amount of tax you owe and may also give you a refund.
5. Adoption Credit You may be able to take a tax credit for qualifying expenses paid to adopt an eligible child. Taxpayers claiming the adoption credit must file a paper tax return because adoption-related documentation must be included.

6. Higher Education Credits Education tax credits can help offset the costs of education. The American Opportunity and the Lifetime Learning Credit are education credits that reduce your federal income tax dollar-for-dollar, unlike a deduction, which reduces your taxable income.

7. Student loan Interest You may be able to deduct interest you pay on a qualified student loan. The deduction is claimed as an adjustment to income so you do not need to itemize your deductions.
8. Self-employed health insurance deduction If you were self-employed and paid for health insurance, you may be able to deduct any premiums you paid for coverage after March 29, 2010, for any child of yours who was under age 27 at the end of 2010, even if the child was not your dependent.

9. Contract labor If you're self-employed it is usually a good tax strategy to pay your kids. This works especially well for those in higher tax brackets where there is no credit or deduction for higher education expenses.

10. Unearned income allocations If you operate out of an LLC, Limited Partnership or S-Corp showing kids as owners / managers may help in diverting income away from self-employment tax.

Itemized deductions - taxes

Moving down the list of itemized deductions our next topic is deductible taxes. Deductible taxes include:

1. State, local or foreign real property taxes,
2. State or local personal property taxes,
3. State, local or foreign income, war profits or excess profits taxes,
4. Generation-skipping transfer tax imposed on income distributions,
5. State and local general sales tax (in liew of state and local income tax),
6. State or local sales taxes on the purchase of new automobiles, boats, aircraft and other special items.

As an individual taxpayer you are considered a cash basis taxpayer and as such these taxes are only deductible in the year you actually pay them. Additionally there are special rules for the deduction for the sales tax imposed on new motor vehicles. Only sales tax on the first $49,500 of the purchase price is allowed and only on vehicles whose gross vehicle weight is less than 8500 pounds. Also the deduction begins to phase out for a taxpayer whose adjusted gross income is over $125,000 ($250,000 for marrieds). When figuring you sales tax deduction using the IRS - provided table remember to add a proporionate share of local sales taxes to the total since the table only uses the state rate in their calculation. Next itemized installment will be on deductible interest.