What direction is Obama going to take on tax issues?

As the holiday season approaches I am reminded of that sick in the gut feeling I used to get when the credit card bills came in January. Time to pay up for all the holiday gifts and extras that seemed a great idea at the time. What was I thinking? Similarly, I think Obama and Congress are thinking that some bills are coming due. I'm sure Obama thought his recent trip abroad would result in some good news at home in the way of new markets and jobs which was to translate into a positive political muscle at the tax bargaining table. I'm sorry Mr. President, but you obviously misread the situation. It seems that everyone is concerned about the money you and your Democrat controlled Congress has spent and is concerned on how that issue is going to be resolved. I don't think printing new money was what they had in mind. It seems it just devalues what is already out there.

So now the President has a real bona fide issue to resolve. Does he remain true to his campaign promise of raising taxes on people making over $250,000 thereby ensuring the jobless rate stays near ten percent. Or does he crawfish and keep the current tax structure in place for a while longer. Either way, someone else will get the blame, it will be politically costly, the debt does not go away and Bush 43 will still be smiling.

Look out sole proprietors

$8 million. That's what The Inspector General says that the IRS has missed in revenue generation from sole proprietors. “Tests for unreported income during IRS audits of sole proprietors are critical to the process of verifying that the correct amount of tax is reported,” said TIGTA Inspector General J. Russell George in a statement. “Our results indicate that sole proprietors may have avoided tax and interest assessments of over $8 million in fiscal year 2008.” So now the IRS is going to spend some extra effort into looking into the books and lives of these thieves and ne'er do wells called sole proprietors. Never mind that $8 million is only .001% of the stimulus. What will these cats think of next?

Solution? Incorporate. How? The process is simple. The choices are few i.e. LLC, C Corp, S Corp. Limited Partnership or a regular partnership. Pick the one that is right for you and go to the Secretary of State's website for your state and follow the instructions. Or enlist the aid of a QUALIFIED professional. Like me. www.robideaucpa.com

Traditional vs Roth IRA - Part 2

Roth IRA accounts are subject to the same limits as a traditional IRA which we discussed last week. The way a Roth works differently than a traditional IRA is that if you keep your investment in a Roth IRA for at least five years then none of your withdrawals are taxable, even the money you have earned on your investment is tax free.

You could be on the cusp of a great opportunity. With the stock market poised to rocket upward in the next 18 months now might be a great time to convert your Traditional IRA to a Roth IRA. First let's talk a bit about the market. There have been numerous studies done by the large investment houses that indicate huge market gains after midterm elections. It does not matter which political party is in power or who is going to take over. The results are the same. In fact the smallest increase after a midterm election in the last 100 years was 14+%, the average was around 50%.

Now some news about conversions. This year is the first in which taxpayers may convert funds in regular IRAs (as well as qualified plan funds) to Roth IRAs regardless of their income level. What's more, taxpayers have the choice of paying the tax on the conversion when they file their 2010 returns, or deferring the tax hit on the conversion to the 2011 and 2012 tax years.

How do you know if this conversion is right for you?

The consensus view is that the conversion route should be considered by taxpayers who:
... have a number of years to go before retirement (and are therefore able to recoup the dollars that are lost to taxes on account of the conversion);
... anticipate being taxed in a higher bracket in the future than they are now; and
... can pay the tax on the conversion from non-retirement-account assets (otherwise, there will be a smaller buildup of tax-free earnings in the depleted retirement account). This issue is made much more convenient now due to the ability to spread the burden over the next two years.

One thing to be a little careful of your tax brackets. It is considerably more certain as to what your tax bracket will be in 2010 than it will be in 2011 and beyond. Time is running out to figure out what to do so let me know if I can help you. http://www.robideaucpa.com/

Traditional IRA vs Roth IRA

There has been a commercial airing lately touting a particular antacid. A guy goes into a burger joint and orders a meal to which the order taker responds "Do you want that to hurt now or later?". That is in some way the main difference between a traditional IRA and a Roth IRA. With a traditional IRA you exclude your contribution from taxable income now and later, when you withdraw those funds, you include them in your taxable income. The other option is a Roth IRA where your contribution today has no effect on your taxable income today or when you withdraw the funds later.

Of course there are a lot of rules that effect the deductibility of a traditional IRA and you should make sure you qualify before contributing. The first rule is that you receive compensation that is includible in gross income and you were under the age of 70 1/2 the entire year. Also, if you OR your spouse is covered under an employer-maintained retirement plan the amount of your deduction may be reduced or eliminated. The maximum contribution amount for 2010 is $5,000 or if you reach age 50 by the end of the year you can make a "catch up contribution" and increase your maximum to $6,000. Your contributions must be made by the due date of your return regardless of any filing extensions.

**HINT HINT** You can use your refund to fund your IRA. Simply leverage the speed of filing electronically allowing for direct deposit. You can direct deposit the refund into as many as three separate accounts including an IRA

The amount of your income will also effect how much you can deduct. Contribution limits begin phasing out when your income is only $89,000 and is eliminated when you reach $109,000 for married filing joint returns. It is less when you are single or head of household. More about IRAs are coming so stay tuned.

FY 2010 Deficit to Top $1.3 Trillion - CBO

The federal budget deficit was an estimated $1.265 trillion for the first 11 months of fiscal year 2010, the Congressional Budget Office (CBO) reported on Sept. 7. Relative to the size of the economy, the deficit for the entire fiscal year will likely be the second-largest in the past 65 years, coming in at 9.1% of gross domestic product (GDP). Estimated receipts were $17 billion (or 11%) higher in August than they were in August 2009. This was the fourth consecutive month of higher receipts, CBO said. Withholding for income and payroll taxes rose by $9 billion (or 7%) compared to the previous August. However, approximately $2 billion of that increase occurred because this August had one more business day. Receipts of unemployment insurance taxes grew by $3 billion, “resulting primarily from the efforts of states to replenish their unemployment trust funds,” CBO said.

At this point in FY 2010, total receipts from individual income taxes have decline by 2.8% compared to FY 2009 and payroll tax receipts have dropped by 3%.

Receipts of corporate income taxes have jumped by 29.5% and total $142 billion.

To say that Washington is spending money like drunken sailors is an insult to drunken sailors. At least the sailors are spending their own money. - Ronald Reagan

Per Kiplinger don't expect much in the way of a decision on the expiring Bush tax cuts before November elections. The Democrats are wanting to use them as a political tool against the Republicans claiming they want to keep the tax cuts for preferential treatment to the rich as well as showing how the Republicans have opposed other measures that would help lower incomers. The Republicans look forward to the fight claiming that tax hikes on small business would take the wind out of the economy.

Hasn't Washington figured out yet that no one wins when two elephants fight? What kind of political gains can the Dems, who hold majorities in the House and Senate, hope to gain by delaying action? Doesn't that give the opposition even more ammo for the argument "Gov't is too big to do anything"? And so what if the Republicans throw a few rocks back, what in the end is accomplished?

Bottom line for you and me is we are still left out in the dark as to what to do between now and year end regarding certain capital decisions. As always we will keep you informed should anything change.

Small Business Audit - TIGTA

The Treasury Inspector General for Tax Administration (TIGTA) audit looks at the filing characteristics and examination outcomes for small business corporate returns during the period of 2005 through 2009. The number of small business corporate income tax returns processed annually by IRS declined 7%, from some 2.2 million to approximately two million, the Treasury Inspector said in an audit that was recently released. “One factor that may be contributing to the modest decline in corporate return filings is the popularity of organizing a business as a partnership or S corporation, which allows the partners and shareholders of these entities to avoid double taxation on business profits,” TIIGTA said. Citing an IRS estimate, the audit noted that the number of partnerships will increase by 49% and the number of S corporation filings will grow by 39% between 2006 and 2014. The audit found that examiners from the Small Business/Self-Employed Division closed one of every three corporate return examinations in fiscal year 2009 without recommending any adjustments. This suggests that a managerial review might be appropriate, TIGTA observed. “Examinations that result in no change to the tax reported can result in an inefficient use of limited examination resources and place an unnecessary burden on compliant taxpayers,” TIGTA said.

Gift Taxes explained

Seems I'm always being asked about gift taxes. Who pays them? How much, what rate? Is it income to the donee? Let's look at the basics. You can transfer substantial amounts free of gift taxes to children or other donees through the proper use of the annual federal gift tax exclusion. (You're probably aware that the estate tax has been repealed for 2010, but is scheduled to return in 2011. However, the gift tax has not been repealed, but continues to remain in effect in 2010 as well as in later years.)

The statutory exclusion amount ($10,000) is adjusted for inflation annually, using 1997 as the base year. The amount of the exclusion for 2010 is $13,000.

The exclusion covers gifts an individual makes to each donee each year. Thus, a taxpayer with three children can transfer a total of $39,000 to them every year free of federal gift taxes. If the only gifts made during a year are excluded in this fashion, there is no need to file a federal gift tax return. If annual gifts exceed $13,000, the exclusion covers the first $13,000 and only the excess is taxable. Further, even taxable gifts may result in no gift tax liability thanks to the unified credit (discussed below). (Note, this discussion is not relevant to gifts made by a donor to his spouse because these gifts are gift tax-free under separate marital deduction rules.)

Gift-splitting by married taxpayers is when each spouse makes a gift to each person and their respective spouse. If the donor of the gift is married, gifts to donees made during a year can be treated as split between the husband and wife, even if the cash or gift property is actually given to a donee by only one of them. By gift-splitting, therefore, up to $26,000 a year can be transferred to each donee by a married couple because their two annual exclusions are available. Thus, for example, a married couple with three married children can transfer a total of $156,000 each year to their children and the children's spouses ($26,000 for each of six donees).

Staying within these guidlines should not be difficult for most. No gift tax return even need be filed in these scenarios. If, however, you exceed these annual limits and have to file a gift tax return don't panic.

There is the “unified” credit for taxable gifts. Even gifts that are not covered by the exclusion, and that are thus taxable, may not result in a tax liability. This is so because a tax credit wipes out the federal gift tax liability on the first taxable gifts that you make in your lifetime, up to $1 million.

Sales Tax and Garage Sales

Found this interesting tidbit on the Texas Comptroller's site. Seems even garage sales are not totally immune from having to collect sales taxes. A new category of occasional sale, that affects the taxability of used items sold by individuals, became effective July 1, 2007, under House Bill 373.

Garage-type sales frequently fall under this new occasional sale provision. As a result of the enactment of 151.304(b)(5), sales tax is not due on the sale of items at a garage sale if:

1) the items being sold were originally acquired for personal use by the person or a family member of the person selling them; and
2) if the total receipts from sales of the individual's property in the calendar year the garage sale is made do not exceed $3,000.

This exemption applies only to the first $3,000 in total receipts that an individual earns from the sale of items that were originally acquired for personal use by the person, or a family member of the person, selling them. Once the $3,000 threshold is reached, the individual must obtain a sales tax permit and begin collecting state and local sales and use taxes beginning with the first sale after the $3,000 threshold was exceeded, and must continue to collect tax on all sales of taxable items for the remainder of the calendar year.

As with all exemptions, the seller is required to maintain records to document that the exemption applies.

This last sentence should make you stop and think. Who keeps those kinds of records of garage sales for a whole year anyway? My suggestion, don't have a garage sale. Donate instead and keep a receipt. Usually you can end up with a better income tax deduction anyway.

Deductible Job-Search expenses

As the published jobless rate continues to hover near 10% nationwide, many individuals are engaged in a search to find employment. These job-hunters should know whether job-hunting expenses are deductible, and what kinds of expenses qualify.
When are job-hunting expenses are deductible? An individual's expenses in looking for a job in his or her line of work can be claimed as miscellaneous itemized deductions (subject to the 2%-of-AGI floor). However, if an individual is looking for work in a new field (or has not worked before), then there's no deduction for job-hunting expenses.

When determining whether an individual is seeking work in his field, the focus is on the nature of the employment rather than the status of employment. For example, an engineer who worked for an engineering firm could deduct expenses in seeking new employment as an engineer whether or not he eventually found employment as a self-employed engineer or in some other engineering capacity.
Types of job-hunting expenses that are deductible. The following are examples of deductible job-hunting expenses:
• Employment and outplacement agency fees
• Cost of preparing a resume.
• Job counselling and referral services.
• Legal expenses to get reinstated on a civil service list of eligibles.
• “Professional career consultants.”
• Travel expenses if undertaken primarily to look for a new job. If a person travels out of town for a job interview he may deduct the round-trip travel cost, plus lodging and 50% of meals.
• Individuals who use their cars in 2010 to look for a job can deduct 50¢ cents per job-hunting mile if they own their cars and haven't (a) depreciated them in prior years using MACRS, (b) expensed any of the cost of the auto under Code Sec. 179, or (c) or claimed additional first year depreciation for the auto. A taxpayer may use the mileage allowance method for a leased auto only if he uses that method (or a fixed and variable rate (FAVR) allowance method) for the entire lease period (including renewals). They must keep records of the time, place, mileage and purpose of each trip. ( Rev Proc 2009-54, 2009-51 IRB 930 ) Alternatively, individuals who keep records of all expenses in addition to the mileage record can deduct actual expenses plus depreciation (or lease payments), in the ratio of total annual business miles to total miles traveled during the year. Job-hunting mileage qualifies as business mileage. (See, e.g., Campana, TC Memo 1990-35)

Expenses incurred by a taxpayer in seeking employment are deductible regardless of whether he actually obtains a new job. When a job-hunter must travel out of town for a job interview, a prospective employer may reimburse the applicant's out-of-pocket costs (travel, meals and lodging). As long as the reimbursement doesn't exceed actual expenses, the applicant doesn't wind up with compensation income. That's true whether or not the applicant actually gets an offer or if an offer is made, accepts the job.

What's not deductible as job-related expenses? A recently released Information Letter points out that under Code Sec. 262(a), an individual cannot deduct personal, living, or family expenses unless the deduction is specifically provided for by another Code section. Examples of expenses related to looking for a new job that are nondeductible personal or living expenses are: (1) the cost of a new suit, shoes, and a tie for interviewing; (2) the cost of a phone, a fax machine, a computer, and phone and internet service; and (3) the cost of newspapers and magazines.

Estimated Tax Payments

One question many small business owners ask me relates to their estimated tax payments. There are two ways to figure the amount of tax to pay. One type of taxpayer wants to satisfy the tax law to the bare minimum. If this is you simply divide the amount on line 60 of your previous year's tax return by four (four quarterly payments). This way you will not have to pay underpayment penalties if you have underestimated your total tax bill. Payment dates are April 15, June 15, September 15 and January 15.

The other type of taxpayer wants to estimate his tax payments so that he doesn't owe any more by the April 15 filing deadline. If this is you get your pencil sharpener out because this requires a bit more effort. First, your business records should be up to date and reconciled. Once your records are current then create a report that shows your net income to date, annualize the results, and this becomes your estimated income. Flow this through as if you were preparing your tax return to estimate the tax amount. Divide this by four for your first estimate. To do your second, third and fourth estimates calculate the same as above subtracting previous estimates to determine each quarters individual amount.

Regardless which type of taxpayer you are estimated payments are a good idea so you don't get behind with the IRS. Most people become business consultants (owners) without adequate knowledge about tax requirements or the mechanics of estimating tax payments.

Office in the home deduction

Many people have heard about the office in the home tax deduction and have questions about claiming it on their personal tax return. I am always of the mindset that if you have a legitimate claim for any deduction you should claim it unless if by not claiming a deduction you would owe a lesser amount of tax. It can happen.

The IRS has determined that the office in the home deduction abuse is widespread and as such usually raises a red flag. So let’s take a look at a few simple requirements to determine if you have a legitimate claim.

• Is the area you use as an office used EXCLUSIVELY on a regular basis as your principle place of business or to conduct administrative or management activities for your business? The area cannot be a dual purpose room. You can’t use your dining room table as your “desk” and your buffet as a “file cabinet”.
• If not used for administrative or management activities then is the area you use as an office used EXCLUSIVELY on a regular basis for meeting and conducting business with customers or clients?
• Are you providing day care?
• Do you use the space to store inventory or samples used in wholesale or retail trade?

If you can answer yes to one or more of these questions then you may have a legitimate deduction. How much of a deduction you get and the resultant tax savings derived is based on a number of factors.
• The first question is whether you are an employee or self-employed. If you are an employee your office in the home must be for the convenience of your employer. Also, the answer to this question will determine which form the deduction appears. For an employee, the deduction first appears on form 2106 Unreimbursed Employee Business Expenses and then transfers to Schedule A Itemized Deductions under the Miscellaneous section which is subject to the 2% AGI floor.
• Next you need to determine the square footage of the room. This will be used as the numerator to determine your deduction percentage. The denominator is the total square footage of your dwelling.
• Next, get a total of all the expenditures of your dwelling for the calendar year. The items you should include are:
o Rent
o Mortgage interest
o Real estate taxes
o Homeowner’s or renters insurance
o HOA fees
o Monthly condo/co-op fees
o Utilities
Electricity
Water
Sewer
Trash
Gas
Telephone
Cable
Internet
Fuel oil
o Lawncare service
o Maid service
o Repairs / maintenance
o Homeowners’ warranty policy
• The total of all these expenditures are multiplied by the fraction of office square footage over total dwelling square footage to determine your deduction.

If your home office was 125 square feet and your dwelling is 2,500 square feet then the percentage of applicable expenses you're eligible to write off is 5%. If your total expenses are $20,000 then your home office deduction is $1,000. If you are self employed this deduction applies directly against your taxable income. If you are an employee, as stated earlier, this deduction is added to your itemized deduction in the miscellaneous section and is subject to the 2% AGI floor. If your Adjustd Gross Income is more than $50,000 then there is no benefit.

Plan now for the 3.8% medicare tax on Investment income

The recently enacted health care reform legislation includes a 3.8% Medicare contribution tax on net investment income of higher income taxpayers. Even though the tax does not kick in for a couple of years, start planning now on how to minimize the impact.

For tax years beginning after December 31, 2012 the tax will apply to higher income taxpayers. The tax is 3.8% on the lessor of (1) net investment income or (2) the excess of your modified adjusted gross income over the threshold amount ($250,000 for joint filers, $125,000 for married filing separate returns and $200,000 for singles and head of household filers).

What is included in investment income you ask? Investment income includes interest, dividends, annuities, royalties, and rents unless derived in the normal course of a trade or business. It also includes capital gains, possibly even from the sale of your principal residence or second/vacation home.

How does the tax work? Here is an example. If you file a joint return with your spouse and you have less than $250,000 in modified adjusted gross income (usually the last number on the first page of your Form 1040) you will not be subject to the tax, regardless of how much investment income you have. If you income exceeds the threshold you will pay 3.8% tax on the amount of your income that exceeds the threshold to the extent you have investment income. Let's say you have modified adjusted gross income(MAGI) of $300,000 of which $10.000 is in investment income. You then owe Medicare tax on the full $10,000. If your MAGI is $255,000 then you will only owe medicare tax on the first $5,000 of investment income.

To know more about how this could effect your individual situation I would be glad to discuss this with you.

It's that time of the year again!

Ha! Beat you to it this year. So many of you called last year and told me that. Well we are ready for another thrill ride through tax season. Already getting plenty of questions, especially about the first time home buyer's credit. Two things a little different this year on that one. Number 1 is if you want the credit you better be ready to prove that you qualify for it. The IRS wnats a copy of your closing statement. Which brings us to number 2, because of the closing statement requirement you have to file a paper return... no electronic filing. That means it will take an additional 4-6 weeks to process your return. You can blame the scammers from last year on the new rules. More tax items to follow.

This is the first post for Robideau, CPA, a major milestone in and of itself. You don't think of CPA firms doing much marketing/blogging usually. Local firms might have something in the yellow pages (soon to be called dinosaur marketing) but most of the time new clients are a product of word of mouth advertising. This firm however is looking forward to interfacing with you, our audience using this medium and hope you find it informative, helpful and maybe at times entertaining.