Archive for January 18, 2013

The 10 Commandments of CPAs

The 10 Commandments of CPAs

(As told to the Prophet, the Barefoot Accountant, by the Lords of Public Accounting, after many years of sweat, slavery, and servitude at public accounting firms in the Valley of Tears of Hartford County, Connecticut)

 

I. Thou shalt always hire employees that show well.

Never hire nerdy looking accountants. Always hire attractive personnel, even if they are not the best accountants in the world. People are superficial, including clients, and will judge you more by appearances than a few errors committed by a curvaceous staff member. In addition, good-looking employees are so much more pleasing to gawk at, since you’ll be spending most of your time in the office with them, when they are not out in the field being gawked at by your clients.

II. Thou shalt not pay thy employees by the hour.

Never pay them by the hour:  the over-time will kill you.  Always pay them a salary so you can work them slavishly 80 hours per week during tax season without paying a shekel extra.  Learn from the Pharoahs.  Build your pyramid of success upon the sweat of slave labor.

 

III. Thou shalt always dangle a carrot to staff.

Always promise your employees the opportunity of partnership in order to pay them less and retain them longer.  Of course, as most experienced staff have discovered only after many years of toil and thousands and thousands of hours of overtime without a dime to show for it, you can always find an excuse later not to deliver—or, at least, to delay— on your promises of partnership.  As the most astute partners of public accounting firms have known and practiced for years with the dexterity of a politician promising the world to a gullible constituency, always discuss the far-off distant partnership opportunity in the most general terms, always hiding the sordid details, namely, that the aspiring staff member would be required to buy you out at a ridiculously exorbitant price, necessitating the mortgaging of his home, wife, and first born.  And lest ye forget, promises cost nothing.

IV. Thou shalt always get a retainer.

If possible, try to get full payment up-front.  If your clients are struggling paying taxes to keep their home and stay out of jail, what makes you think they will pay you upon completion of your services?  And even if your clients do pay you, it may be years before you recover all of the monies, well after you have been driven into bankruptcy because of your trickling cash inflow.  Consequently, never do any work on credit.  Why work for the sake of working?  Remember always you’re doing it for the money, not for love.  (If you want love, get a dog.)  It is always better to have no work than a ton of work for which you will receive no payment.  Get the moolah ASAP.

V. Thou shalt not quote a fixed rate.

Never quote a job for a fixed rate.  Avoid committing yourself to a fixed fee—or, for that matter, to anything in life—unless there is absolutely no alternative; however, if you rack your brain or someone else’s long enough, you are bound to find an alternative!  If a client insists on a quotation—and only after you have run out of every known ruse employed by scoundrels since the beginning of time—give an “estimate”, allowing you to squirm out of that amount later and squeeze every remaining drop out of your client.  Always remember that you are a professional, just like lawyers and doctors, who are experts in over-charging and gouging.  Did you ever receive a fixed quotation for a triple by-pass procedure?  Take heed.  Learn from the pros.

VI. Thou shalt not answer thy telephone. 

Clients call you so they won’t be charged for picking your brains.  And no one enjoys being billed for telephone conversations:  that’s why attorneys are despised by everyone, including their wives!  Always have your receptionist screen your calls or hide behind voice mail, and if forced to return calls, pick the time when your clients are least likely to be available, e.g., at 7:00 AM in the morning.  And end your message with the ever-effective deterrents, “I haven’t received your retainer yet” or “when can I expect you to drop off a check for your overdue balance”.  That’ll stop their persistent, annoying, and mooching calls for sure.

VII. Thou shalt charge as much as thou can.

Never compete on price.  If you charge less than your competitors, your clients will think they are getting less.  Clients believe that idiotic saying, “You get what you pay for”.  (I prefer the much wiser saying, “A fool and his money are soon parted”.)  So if you save them a ton of money, they will, of course, think they are getting less.  Furthermore, when you get more money for your services, you will feel better, and your spouse will say nicer things about you and appreciate you much more at the end of the day:  frankly, isn’t this ultimately why we work as slaves all day?

VIII. Thou shalt not jeopardize thy license to practice public accounting.

Never let a client con you into jeopardizing your license.  Be vigilant for fraud when preparing tax returns and audit reports.  Your clients won’t respect nor appreciate what you’ve done for them, even when you are carted off to jail.  If they insist on being crooked, let them go to jail rather than you…unless you secretly desire Buster as a cell-mate.  If you do, seek professional help quickly.  I pity you.

IX. Thou shalt not volunteer thy services.

Never volunteer to be the treasurer of an organization.  Nonprofit organizations often attract board members unable to secure full-time employment and, consequently, have nothing better to do with their time than spout crazy and impractical courses of action for the organization, driving you completely mad with all of their nutty ideas.  If these individuals were practical, they would be gainfully employed and not wasting their time serving on boards of nonprofits.  More importantly, you’ll end up working for free, and you won’t obtain any business from doing so, especially from the organization itself.  Furthermore, if you attempt to straighten out the finances of the organization, you may generate a bad press for yourself from the very members causing the mess from their repeated dippings into its till.  Charity begins at home and at your public accounting firm.  So never volunter.  Read my article, “1,001 Excuses to Give to Nonprofit Organizations Asking You to be their Treasurer” to weazle out of their repeated requests.  And stop feeling like Mother Theresa of the Missionaries of Charity, unless you want to practice public accounting in Calcutta.

X. Thou shalt not pay for promises.

Don’t pay for any marketing services promising you fantastic results.  Marketers (now more commonly referred to as “spammers”) typically promise the world, guaranteeing everything but delivering nothing but a big bill, typically charged to your credit card or withdrawn directly out of your business checking account.  That’s their job!  And that’s why they make so much more money than CPAs!  Marketers are experts at selling, conning you out of every remaining shekel in your pocket.  They promise, even guarantee, to obtain you leads and new clients, only to make 1,001 excuses later, always passing the blame onto you for their failures.  Learn from them!  And do unto others as they do unto you:  turn the con back onto the con artist by promising—better yet, guaranteeing—to pay these marketers a commission on any clients obtained from their efforts, but only after those clients have paid you.  This reverse-con ploy has been found to be the most effective spam killer yet, especially from all of those marketers from India, China, and the Philippines, who yet have been provided a suitable script in English in order to reply persuasively and convincingly to this reverse-con ploy.  Enjoy the moment of frustrating the hell out of them, listening to their rote, repetitive, non sequitur ”pwomises” and “gwuaranteeeeeeeeees”.

This article is provided for informational purposes and is not intended to be construed as legal, accounting, or other professional advice.  For further information, please consult appropriate professional advice from your attorney and certified public accountant.

Have a tax or an accounting question?  Please feel free to submit it under “Comments” at Accounting, QuickBooks, and Taxes by the Barefoot Accountant.  For information and assistance on any tax and accounting issue, please visit our website:  Accountants CPA Hartford, LLC.

If and only to the extent that this publication contains contributions from tax professionals who are subject to the rules of professional conduct set forth in Circular 230, as promulgated by the United States Department of the Treasury, the publisher, on behalf of those contributors, hereby states that any U.S. federal tax advice that is contained in such contributions was not intended or written to be used by any taxpayer for the purpose of avoiding penalties that may be imposed on the taxpayer by the Internal Revenue Service, and it cannot be used by any taxpayer for such purpose. The above tax advice was written to support the promotion or marketing of the accounting practice of the publisher and any transaction described herein. The taxpayer recipients of this offering memorandum should seek tax advice based on their particular circumstances from an independent tax advisor .

Written by | Posted in TaxConnections

Retroactive Procedures Implement Qualified Transportation Fringe Benefits Parity For 2012

Edited and Posted by: Harold Goedde, CPA, CMA, Ph.D.

The IRS has provided procedures for employers to use to handle the retroactive application of the increased amount of the 2012 income exclusion for monthly transit benefits. The American Taxpayer Relief Act of 2012, P.L. 112-240 (the Act), retroactively reinstated parity between the benefits for parking and the benefit for transportation in a commuter highway vehicle or a transit pass for 2012 under Sec. 132.

The parity expired at the end of 2011, so that for all of 2012 the maximum that could be excluded from income for transportation in a commuter highway vehicle or a transit pass was $125 per month, while the amount allowed for parking was $240 per month. As a practical matter, taxpayers received their benefits for 2012 at these rates, and it was unclear what the mechanism would be to refund the income and FICA tax paid on amounts that would have been excluded from income under the higher $240 a month level (referred to as “excess transit benefits”).

On January 16, the IRS released Notice 2013-8 to provide simplified procedures for employers to use in filing Form 941, Employer’s Quarterly Federal Tax Return, for the fourth quarter of 2012  to reflect changes in the excludable amount for transit benefits provided in all quarters of 2012, and in filing Forms W-2, Wage and Tax Statement.

The procedures address only the over-collected FICA taxes resulting from the lower transit benefit amount. In cases of over-collected FICA tax, employers are generally required to repay or reimburse to employees the amount of over-collected  FICA tax. However, employers cannot adjust over payments of income tax after the end of the calendar year (Regs. Sec. 31.6413(a)_1(b)).

Special rules for employers that have not yet filed their final Form 941 for 2012:

To use this special FICA tax on the excess transit benefits for all four quarters of 2012 on or before filing the fourth quarter Form 941. The employer, in reporting amounts on its fourth quarter Form 941, may reduce the fourth quarter “Wages, tips, and compensation” reported on line 2, “Taxable social security wages” reported on line 5a, and “Taxable Medicare wages & tips” reported on line 5c, by the excess transit benefits for all four quarters of 2012. Employers who use this special administrative procedure will avoid having to file Forms 941-X, Adjusted Employer’s Quarterly Federal Tax Return or Claim for Refund, and Forms W-2c, Corrected Wage and Tax Statement.

Employers may correct only the employer share of FICA tax that corresponds to the employees’ share of FICA tax that has been repaid or reimbursed to the employees. Employers using this special procedure do not need to obtain written statements from each employee confirming that the employee did not make a claim (or if the employee did make a claim, the claim was rejected) and will not make a claim for refund of FICA tax over-collected in a prior year, which is usually required when employers refund FICA tax to employees.

Employers that have not repaid or reimbursed some or all employees who received excess transit benefits in 2012 by the time they file their fourth quarter Form 941 must use Form 941-X  to make an adjustment or claim for refund for the excess transit benefits provided to those employees and must follow the normal procedures, which include obtaining a statement from employees.

Rule for employers that already filed final fourth quarter Form 941 for 2012:

Employers that already filed a final fourth quarter Form 941 for 2012 must use Form 941-X to make an adjustment or claim a refund for any quarter in 2012 for the overpayment of tax on the excess transit benefits, after repaying or reimbursing the employees or, for refund claims, securing consents from employees.

Special instructions for Forms W-2:

Those employers that have not yet provided 2012 Forms W-2 to their employees should take into account the increased exclusion for transit benefits in calculating the amount of wages reported in box 1, “Wages, tips, other compensation”; box 3, “Social security wages”; and box 5, “Medicare wages and tips.” Employers that have already repaid or reimbursed their employees for the over-collected FICA taxes before furnishing Form W-2 should reduce the amounts of withheld tax reported in box 4, “Social security tax withheld,” and box 6, “Medicare tax withheld,” by those amounts. Employers, however, must report in box 2, “Federal income tax withheld,” the amount of income tax actually withheld during 2012. The employee will be able to apply this additional income tax withholding against the employee’s taxes on Form 1040, U.S. Individual Income Tax Return, for 2012.

For those employers that repaid or reimbursed their employees for the over-collected FICA taxes after they furnished Forms W-2 to their employees, but before filing Forms W-2 with the Social Security Administration (SSA), the procedures require them to check the Void box at the top of each incorrect Form W-2 (Copy A), prepare new Forms W-2 with the correct information, and send these new Forms W-2 to the SSA. The employers should also provide the employees new copies of Form W-2 marked “CORRECTED.” Employers that have already filed with SSA their 2012 Forms W-2 must file Forms W-2c to reflect the increased exclusion for transit benefits.

[Sally P. Schreiber (sschreiber@aicpa.org), senior editor, Journal of Accountancy, on-line ed. January 16, 2013]

Written by | Posted in Federal • Individual • Tax Policy

“Words Have Meaning — Especially Statutory Words”

By Michael J. Fleming

One of my mentors constantly reminds me that, “We are accountants; words have meaning.” My immediate response is to usually think that, “if we were not accountants would words not have meaning?” However, once I get past my sarcastic thoughts, I realize that he is challenging us to be more precise and succinct in our writing and to not just read surface meanings but to really analyze the words for alternative meanings. Looking for alternative meanings is especially important when it comes to state tax audit defense. Since you can’t change the facts, you sometimes have to change the argument.

This concept was illustrated quite pointedly in the recent decision of Van Horn v. Alabama Department of Revenue, Alabama Department of Revenue, Administrative Law Division, No. S. 12-863, January 3, 2013. In this case, the taxpayer or his employees traveled throughout AL to take photographs which were later developed at the home office and sent to customers by common carrier. The taxpayer also made in-person phone calls. The DOR examiner assessed the taxpayer for the local taxes based on the sales and photographing visits. The administrative law judge agreed that it could be argued that the taxpayer had purposely availed himself of the economic market and met the conditions of Quill. However, Quill did not apply because the DOR had not updated its regulations concerning local nexus. Basically the only activity that mattered was solicitation and the taxpayer actually traveled into four jurisdictions to solicit sales. However the Administrative Law Judge (ALJ) found that this was still not enough to create nexus. His reasoning was that the statute read “salesmen” while in the taxpayer’s case there was only one “salesman”. He clarified that since the state only used the plural form, the regulation anticipated multiple sales people and therefore the taxpayer did not have nexus.

Words have meaning! In this case the state failed to update its language to be more encompassing and capture the implications of Quill as well as using only the plural form of a word. What great illustrations! We don’t suggest taking this approach when doing tax planning but when you find yourself in an audit situation having someone who can think outside the box is invaluable. My mentor constantly forces us to do so.

Written by | Posted in TaxConnections

IRS Announces Simplified Safe Harbor Home-Office Deduction

 

edited and posted by Harold Goedde CPA, CMA, Ph.D.

On January 14, the IRS released Rev. Proc. 2013-13, which gives taxpayers an optional safe-harbor method to calculate the amount of the deduction for expenses for business use of a residence during the tax year under Sec. 280A, beginning with the current tax year.

Individual taxpayers who elect this method can deduct an amount determined by multiplying the allowable square footage by $5. The allowable square footage is the portion of the house used in a qualified business use, but not to exceed 300 square feet. The maximum a taxpayer can deduct annually under the safe harbor is $1,500. The IRS may update the $5 allowance from time to time.

Electing the safe-harbor is done on a timely filed original tax return (instead of on Form 8829, “Expenses for Business Use of Your Home,” which is used for the actual expense method), and taxpayers are allowed to change their treatment from year-to-year. However, the election made for any tax year is irrevocable.

No depreciation is allowed for the years in which the safe harbor is elected, but it is permitted in the years in which the actual expense method is used. The revenue procedure has detailed examples of how depreciation is calculated in a year subsequent to a year the safe-harbor method is used.

To use the sale-harbor method, taxpayers must continue to satisfy all the other requirements for a home-office deduction, including the requirement that the space in the residence used as an office be used exclusively for that purpose and the limitation that an employee qualifies for the home-office deduction only if the office is for the convenience of the taxpayer’s employer.

The deduction under the safe-harbor method cannot exceed the amount of gross income derived from the qualified business use of the home minus business deductions, and a taxpayer cannot carry over any excess to another tax year. If a taxpayer uses the actual expense method for calculating the deduction and has had his or her deduction limited by the gross income limitation in that year, the taxpayer can deduct this amount in the next year he or she uses the actual expense method, but cannot use the disallowed amount in a year he or she elects the safe harbor. This limit on carryovers for the safe-harbor method means taxpayers must be careful before electing it to be sure they will not lose any of their deduction.

Taxpayers sharing a home (for example, roommates or spouses, regardless of filing status), if otherwise eligible, may each use the safe harbor method provided by the revenue procedure, but not for qualified business use of the same portion of the home. The revenue procedure contains detailed rules for use of the home for part of the year. It allows taxpayers who have a qualified business use of more than one home for a tax year to use the safe harbor for only one home, but it permits them to use the actual expense method for the other homes.

[Sally P. Schreiber, J.D., senior editor Journal of Accountancy on-line ed. January 15, 2013],

CIRCULAR 230 DISCLOSURE:  Pursuant to regulations governing practice before the IRS, any tax  advice contained herein is not intended or written to be used and cannot be used by the taxpayer  for the purpose of avoiding tax penalties that may be imposed on the taxpayer.
Written by | Posted in Federal • Individual • North America

What Is the “Digital Goods Tax?”

By Andrew Johnson, CPA

We’ve been getting this question a lot lately. This question or something similar is frequently posed during our webinars, and we see it on a lot of tax sites like TaxConnections, too.

In most states, there is not a so-called “digital goods tax,” per se. But let us back up just a bit before we tackle this question. First, remember that most states impose sales and use tax on tangible personal property (TPP) by default, unless there is a specific exemption provided. Most states also tax at least some services. In contrast, most states do not tax real property sales or sales of intangible property. Those have been the general categories in sales and use tax law for many years. Now, with the emergence of electronic downloads of digital goods like software, apps, music, movies, games, and more, a new category emerges as well. Many state tax professionals refer to this new category as “digital goods” or “digital products.” A new category is necessary because these types of items do not fit nicely as tangible property or services. Of course, state governments have a natural inclination to impose taxes and these new digital goods are no exception. “Digital goods tax” then is more an industry term than a state statutory term. In fact, most states do not necessarily even have a category in their statutes such as digital goods.  But that doesn’t mean states don’t tax them, and it doesn’t mean all states aren’t trying to tax them as we speak.

How Can States Tax These Digital Products or Goods?

Because digital goods as we’ve defined them are just a series of computer instructions, they are intangible in nature. States do not tax intangibles. A good example of intangible assets are shares of stock in a company and computer software. When you buy stock in a company, you are not buying a certificate, the certificate is tangible, but it’s just a piece of paper. The certificate showing how many shares of stock you own is just a representation of your ownership in the company.

The same is true with computer software. Software is a series of computer instructions compiled into a program. The program itself is intangible. But in the past, computer programs have been stored and sold on tangible media such as tapes, diskettes, and CDs. Many states have decided over the years to simply declare that for sales and use tax purposes, canned software sold on tangible media is tangible personal property. States can do that with their own laws. So, in most states, canned software is taxable. The question in those states is: What if that software is sold and delivered electronically? The answer comes down to a state-by-state determination. Some states have specifically stated that electronically delivered software is not taxable, while others have deemed all canned software to be TPP regardless of delivery method. If you’d like a chart on which states exempt electronically delivered software here it is.

Downloaded music, games, and apps are no different (conceptually in a sales tax sense, anyway) from software. But whether they can be taxed right now by states depends on how their tax statutes are constructed. If states have specifically deemed “canned software” to be TPP “if sold on tangible media,” then these states have a problem statutorily taxing all or any of these digital goods. If state statutes say that canned software is TPP and is therefore taxable however it is delivered, then those states are better positioned to tax at least the downloaded software apps. The question remains whether downloaded music and games and other digital goods fall under the definition of “canned software.” States that specifically do not tax electronically delivered software are in a weak statutory position to tax digital goods.

What States Are Doing Now?

States have a number of options. I will point out just two. I won’t address in detail the politics of these options, but I recognize that politics is a huge, and probably deciding, factor because no politician wants to raise taxes or propose a new set of taxes.

The first option is a tweak to their existing statutes — maybe call it a “technical correction.” This seems like a likely approach for states that already deem software to be TPP, however delivered. Those states could simply “clarify” what they meant and add language to the definition of “software” to include all possible digital goods.

Secondly, states could decide to add digital goods or digital products as a new product category to their list of what is taxable. Depending on the state statutes already on the books regarding the taxability of intangibles, they may have to simply declare that digital goods are included in their definition of tangible personal property.

Some states have already taken advantage of these options. Some examples are Washington, Wisconsin, and Wyoming. If you would like a chart of states that currently tax digital goods here it is.

The Good Old Days

History is the best predictor of the future, as they say. History indicates that state governments are always seeking new revenue. In this case, the government could argue that it’s not new sources of revenue they seek, but only to replace the taxes they were collecting when everyone bought software and music on CDs, and actual board games and decks of cards.

Those were the days, right? When all these things were taxable. We’ve enjoyed a period where these types of items have largely escaped the long arm of the tax man. But maybe not for much longer. You can expect states to change their statutes so we can get right back to the good old days of sales taxes on everything.

Written by | Posted in TaxConnections

Penny Taxwise Ponders Incorporation

We meet again, you tax-paying rascals! Penny here, and I’m back atcha with another installment of Penny Taxwise. As you loyal readers out there know, your ol’ pal Penny is rocking the whole work-at-home mom gig like crazy this year. At the end of 2012, my little freelance writing biz exploded and I’ve been struggling to catch up with the success.

To compound things further, I’ve branched out from the freelance writing to a variety of other endeavors – a blog, websites, and an upcoming info product line to be exact. I expect to earn a significant amount of income from these things over the next couple of years, and it dawned on me that I should think about taking the plunge and becoming an actual business.

Naturally, I’ve been researching the heck out of the idea this week. I was spurred by a question that was posted recently right here on TaxConnections:

Oh man. That’s my biggest fear realized. I try to do everything by the book, but I fear the wrath of Uncle Sam when it comes to incorrect self-employment tax records – I think all freelancers feel the same way. Patrick O’Hara, Tax Pro and Owner/Enrolled Agent of CHR Associates in New York, jumped at the chance to respond:

 

Well, wow. His reply was the final push over the edge I needed to finally make a real effort with my business structure search. Off I went to learn about business entities, and boy… did I learn a lot!

Why I’m Thinking LLC

Since Mr. Taxwise and I have our own property to protect, I want to form a legal structure for my business that will shelter us from any potential lawsuits against our personal assets down the road. If you’re wondering why I’m so worried about that with nothing but a teensy Internet biz to show for myself, allow me to enlighten you.

My ultimate goal is to eventually purchase rental properties. It’s something I’ve wanted to do for the better part of ten years, and my online adventures may just allow me to build up enough savings to break into the game. However, if I choose to file as a sole proprietor, my personal assets won’t be protected.

That’s why I decided to go for incorporation. I learned that there are three basic types of legal entities freelancers could form if they choose to incorporate: an S Corporation, a C Corporation, or an LLC (Limited Liability Company). Each comes with its own benefits and drawbacks for freelancers, so picking the right one is vital for protecting your bottom line.

According to an awesome SBA writeup I found, S Corporations, if owned by one single shareholder (the freelancer), allow only the earnings to be subject to employment tax. If the S Corp freelancer makes quite a bit one year, he or she can take a fraction of that year’s earnings as a paycheck and the rest as “profit through distribution to shareholders.”

The S Corp does have a major downside, of course. It demands yearly legal hoop-jumping, including accomplishing compelling tasks throughout the year – requirements such as holding regular shareholder meetings, filing minutes from them, extensive record-keeping, and reporting bylaw updates. Sounds like a blast, right?

On the other hand, a C Corporation is great for people who have small startups that may seek future venture capital to finance expansion. Although there’s flexibility to spread profits around to plan for taxes. However, at the end of the day, a freelancer who chooses this corporate structure will almost always end up with a hefty tax bill due to the whole double taxation thing. Not very fun, either.

That brings us to the newest corporation type around – the Limited Liability Company (LLC). Owners of LLC companies deal with taxes like sole proprietors. They’re taxed on the LLC’s net income, and those taxes are reported on the owner’s personal tax return. The LLC simply acts as a “pass-though entity.”

That was all fine with me since the biggest selling point was the part about an LLC protecting me from legal attacks once I begin dealing with real estate. Plus, if my company doesn’t make much or operates on a loss at first, I can report that on my income taxes. Bonus!

Yup, I’ve definitely made my choice.

Evaluating Your Own Biz

Enough about me… let’s talk about you! If you’re the proud owner of a small biz or a freelancer yourself, it’s important to evaluate your own business needs before choosing a structure. Moreover, you should talk to a tax professional before making any big decisions.

In addition, don’t forget to check with your state for laws concerning your new filing status. Many require different kinds of things from you depending upon the entity you choose.

That’s it for me this week, my taxalicious buddies!

Until next time.

Making Cents Count,

Penny

Written by | Posted in Corporate • Individual • North America • Sales/Use Tax • State And Local Tax (SALT) • Tax Policy • TaxConnections

2012 Top Tax Twitter Awards — TaxConnections.com

TaxConnections.com, a tax professional media site, announces 2012 Top Tax Twitter Awards

TaxConnections.com CEO Kat Jennings and Social Media Analyst Tony Chau recently conducted research on the Top Tax Twitter 2012. The Top Ten Tax Twitter Awards go to: Jeff Haywood (1st); Daniel Stoica (2nd); Jeffrey Rosan (3rd); Kelly Phillips Erb (4th); James McBrearty (5th); Diane Kennedy (6th); Neil Harries (7th); Rick Telberg (8th); Francine McKenna (9th); and Wray Rives (10th).

TaxConnections.com also acknowledges the Top Fifty Twitter Communicators with honors earned this year.  All winners receive a Logo Award and one-year complimentary TaxConnections.com membership.

“The 2012 Tax Twitter Award Winners”

     Name Twitter Handle @ Followers
  1) Jeff Haywood jeffhaywoodcpa 73,711
  2) Daniel Stoica danielstoicatax 58,661
  3) Jeffrey Rosan a_tax_pro 50,595
  4) Kelly Phillips Erb taxgirl 19,776
  5) James McBrearty taxhelpukcom 16,134
  6) Diane Kennedy DianeKennedyCPA 15,105
  7) Neil Harries taxhelpforu 13,848
  8) Rick Telberg CPA_Trendlines 11,302
  9) Francine McKenna retheauditors 10,189
10) Wray Rives RivesCPA 9,648
11) Travis Raml RAMLCPA 7,954
12) Jeff Wagner Vacation Tax 7,342
13) Eric Cohen ECohenCPAs 7,010
14) Don James Growthguy2 6,757
15) Greg Barton taxes007 5,697
16) Benjamin Bankes feedthepig 5,547
17) Kay Bell taxtweet 5,358
18) John Pointon jpointon 4,826
19) Tom Hood tomhood 4,752
20) Danielle Lee Atomorrow 3,966
21) Chad Bordeaux CLT_CPA 3,920
22) John Brian Fast JBF_CPA 3,819
23) Jeff Beckley thetaxxman 3,332
24) Jody Padar JodyPadarCPA 3,272
25) Earla Riopel ERTaxbytes 2,743
26) Frank Woodman Jr. kstaxman 2,614
27) Naden Lean nadenlean 2,505
28) Eva Rosenberg TaxMama 2,411
29) Peter Pappas TaxLawCPA 2,232
30) Gabrielle Luoma GabrielleLuoma 2,187
31) Christina Hansen YourTaxEdge 2,075
32) Monica Lawver TheTaxCPA 2,056
33) Steve Trojan smtcpa 2,048
34) Joe TaxPayer JoeTaxPayerBlog 1,989
35) Geni Whitehouse evenanerd 1,958
36) William Miranda TaxMan45 1,913
37) Greg Kyte gregkyte 1,531
38) Lucia Galeano taxhelprightnow 1,463
39) Sharon Gubinsky GubinskyCPA 1,392
40) Dan Lucas CredoTaxPro 1,306
41) Albert Corey albertcorey 1,284
42) Howard Kaufman SaveMoreTaxes 1,239
43) Dianne Besunder DianneIRS 1,156
44) Jesse M. Herschbein HerschbeinCPA 1,137
45) Bruce McFarland bruce_taxguy 1,119
46) Mike Emeigh NCTaxPro 1,080
47) Joe Kristan joebwan 976
48) Bill Walston TheTaxWiz 898
49) Kevin Jacobs stepbystepbaok 834
50) Bryan Wakefield CorridorTax 740
TaxConnections.com 2012 Top Tax Twitter Awards – is something to Tweet about!
Written by | Posted in TaxConnections

Start Of Tax Season Delayed; January 30 For Some Taxpayers

Edited and posted by Harold Goedde CPA, CMA, Ph.D.

The IRS announced on January 8, that it plans to open the 2013 tax filing season and begin processing most individual income tax returns on January30, after updating forms and completing programming and testing of its processing systems to account for most of the tax law changes enacted by Congress on  January 2. The IRS says that this will allow “the vast majority of tax filers-more than 120 million households”- to start filing tax returns on January 30. The delayed start applies to both electronic and paper returns.

The IRS said that on January 30, it will also accept tax returns affected by the late change in the alternative minimum tax (AMT) exemption amount as well as three other major extended provisions:

(1) the state and local sales tax deduction (Sec. 164(b));

(2) the higher education tuition and fees deduction (Sec. 222);

(3) the deduction for certain expenses of elementary/secondary schoolteachers (up to $250 per teacher). (Sec. 62).

Some Returns Delayed

Due to the need for more extensive form and processing systems changes, many taxpayers will not be able to file returns until February or March. For example, the IRS says taxpayers who claim residential energy credits or general business credits or who depreciate property will not be able to file starting January 30. The IRS downplayed this delay, claiming that most of these taxpayers  “typically file closer to the April 15 deadline or obtain an extension.”

Forms that will require more extensive programming changes include form 5695-“Residential Energy Credits”, form 4562-“Depreciation and Amortization”, and form 3800-“General Business Credit”.  The IRS will announce a specific date in the near future when it will start accepting these forms. They promised to post on its website a full list of the forms that it will not accept until later. The list was not yet available when this article was published.

[Alistair M. Nevius, editor-in-chief, tax, Journal of Accountancy, on-line ed,  January 8, 2013]

CIRCULAR 230 DISCLOSURE:  Pursuant to regulations governing practice before the  IRS, any tax  advice contained herein is not intended or written to be used and cannot be used by the taxpayer  for the purpose of avoiding tax penalties that may be imposed on the taxpayer.
Written by | Posted in Federal • Individual • Tax Policy

The American Tax Relief Act of 2012 (The Fiscal Cliff Compromise)

Details of tentative deal that averts the fiscal crisis

Income tax rates:  Extends decade-old tax cuts on incomes up to $400,000 for individuals, ($450,000  married filing joint). Earnings above those amounts would be taxed at a rate of 39.6% up from the current 35 %.  Extends the Clinton-era caps on itemized deductions and the phase-out of the personal exemption for individuals making more than $250,000 and couples filing joint earning more than $300,000.

The estate and gift tax exclusion amount is retained at $5 million indexed for inflation ($5.12 million in 2012), but the top tax rate increases from 35% to 40%  effective Jan. 1, 2013. The estate tax “portability” election, under which, if an election is made, the surviving spouse’s exemption amount is increased by the deceased spouse’s unused exemption amount, was made permanent by the act.

Capital gains, dividends:  the tax rate on capital gains and dividend income for taxpayers with income exceeding $400,000 ($450,000 for married filing joint) increases from 15 % to 20 %.

Alternative minimum tax: permanently indexes it for inflation to prevent nearly 30 million middle-and upper-middle income taxpayers from being hit with higher tax bills averaging almost $3,000. The tax was originally designed to ensure that the wealthy did not avoid owing taxes by using loopholes.

Extends a tax credit for research and development costs and for renewable energy such as wind-generated electricity.

Unemployment benefits: Extends jobless benefits for the long-term unemployed for one year.

Cuts in Medicare reimbursements to doctors:  Blocks a 27 % cut in Medicare payments to doctors for one year.

Social Security payroll tax cut: Allows a 2 percentage point cut in the FICA tax, first enacted two years ago, to lapse, which restores the FICA tax to 6.2 %.

Across-the-board cuts:  delays for two months $109 billion worth of across-the-board spending cuts that were set to start striking the Pentagon and domestic agencies January 1. Cost of $24 billion is divided between spending cuts and new revenues from rules changes on converting traditional individual retirement accounts into Roth IRAs.  [Fox News, on-line ed.,  January 1, 2013, “Fiscal Cliff  Deal reached between Senate and White House- what’s inside the Senate’s ‘fiscal cliff’ solution?”  Fox News’ Ed Henry, Chad Pergram and Mike Emanuel contributed to this report].

OTHER PROVISIONS

Permanent extensions:

(1) Marriage penalty relief (i.e., the increased size of the 15% rate bracket (Sec. 1(f)(8)) and increased standard deduction for married taxpayers filing jointly (Sec. 63(c)(2))
(2) The child and dependent care credit rules (allowing the credit to be calculated based on up to  $3,000 of expenses for one dependent or up to $6,000 for more than one) (Sec. 21)
(3) The exclusion for National Health Services Corps and Armed Forces Health Professions  Scholarships (Sec. 117(c)(2))
(4) The exclusion for employer-provided educational assistance (Sec. 127)
(5) The enhanced rules for student loan deductions introduced by EGTRRA (Sec. 221)
(6) The higher contribution amount and other EGTRRA changes to Coverdell education savings accounts (Sec. 530)
(7) The employer-provided child care credit (Sec. 45F)
(8) Special treatment of tax-exempt bonds for education facilities (Sec 142(a)(13))
(9) Repeal of the collapsible corporation rules (Sec. 341)
(10) Special rates for accumulated earnings tax and personal holding company tax (Secs. 531 &  541)
(11) Modified tax treatment for electing Alaska Native Settlement Trusts (Sec. 646).

Extension of individual credits that were set to expire at the end of 2012:

(1) American Opportunity Tax Credit. Up to $2,500 tax credit for qualified tuition and other expenses of higher education was extended through 2018.
(2) Other credits and items from the American Recovery and Reinvestment Act of 2009, P.L. 111-5, that were extended for the same five-year period include
(3) enhanced provisions of the child tax credit under Sec. 24(d).
(4) earned income tax credit under Sec. 32(b). In addition, the bill permanently extends a rule excluding from taxable income refunds from certain federal and federally assisted programs (Sec. 6409).

Extension of individual provisions that expired at the end of 2011:

The act also extended through 2013 a number of temporary individual tax provisions, most of which expired at the end of 2011:

(1) $250 deduction for certain expenses of elementary and secondary school teachers (Sec. 62). This is per teacher. On a joint return, if both spouses are teachers, they may deduct only $250 EACH.  If one spouse-teacher does not have $250 in expenses, the other spouse-teacher cannot use the balance from the other spouse-teacher. Amounts in excess of $250 ($500) can be deducted as a employee business expense under miscellaneous itemized deductions-allowable to the extent they exceed 2% of AGI.
(2)  Exclusion from gross income of discharge of qualified principal residence indebtedness (Sec. 108)
(3) Parity for exclusion from income for employer-provided mass transit and parking benefits (Sec. 132(f))
(4) Mortgage insurance premiums treated as qualified residence interest (Sec. 163(h))
(5) Deduction of state and local general sales taxes (Sec. 164(b))
(6) Special rule for contributions of capital gain real property made for conservation purposes (Sec. 170(b))
(7) Above-the-line deduction (deduction for AGI) for qualified tuition and related education expenses for taxpayer and dependents (Sec. 222)
(8) Tax-free distributions from individual retirement plans for charitable purposes for taxpayers age 70½ or older (Sec. 408(d)).

Business tax extenders:

(1) Modified the Sec. 41 credit for increasing research and development activities, which expired  at the end of 2011. The credit is modified to allow partial inclusion in qualified research expenses and gross receipts for those of an acquired trade or business or major portion of one.  Extended  through 2013.
(2) The increased expensing amounts under Sec. 179 are extended through 2013.
(3) The availability of an additional 50% first-year bonus depreciation (Sec. 168(k)) was also  extended for one year by the act. It now generally applies to personal property placed in service  before January 1, 2014 (Jan. 1, 2015, for certain property with longer production periods).
(4)   Temporary minimum low-income tax credit rate for non-federally subsidized  new buildings (Sec. 42);
(5) Housing allowance exclusion for determining area median gross income for qualified residential rental project exempt facility bonds (Section 3005 of the Housing Assistance Tax Act of 2008)
(6) Indian employment tax credit (Sec. 45A)
(7) New markets tax credit (Sec. 45D)
(8) Railroad track maintenance credit (Sec. 45G)
(9)   Mine rescue team training credit (Sec. 45N)
(10)  Employer wage credit for employees who are active duty members of the uniformed services (Sec. 45P)
(11) Work opportunity tax credit (Sec. 51)
(12) Qualified zone academy bonds (Sec. 54E)
(13) Fifteen-year straight-line cost recovery for qualified leasehold improvements, qualified  restaurant buildings and improvements, and qualified retail improvements (Sec. 168(e))
(14) Accelerated depreciation for business property on an Indian reservation (Sec. 168(j))
(15) Enhanced charitable deduction for contributions of food inventory (Sec. 170(e))
(16) Election to expense mine safety equipment (Sec. 179E)
(17) Special expensing rules for certain film and television productions (Sec. 181)
(18) Deduction allowable with respect to income attributable to domestic production activities in Puerto Rico (Sec. 199(d))
(19) Modification of tax treatment of certain payments to controlling exempt organizations (Sec. 512(b))
(20) Treatment of certain dividends of regulated investment companies (Sec. 871(k))
(21) Regulated investment company qualified investment entity treatment under the Foreign Investment in Real Property Act (Sec. 897(h))
(22) Extension of subpart F exception for active financing income (Sec. 953(e))
(23) Look-through treatment of payments between related controlled foreign corporations under foreign personal holding company rules (Sec. 954)
(24) Temporary exclusion of 100% of gain on certain small business stock (Sec. 1202)
(25) Basis adjustment to stock of S corporations making charitable contributions of property (Sec. 1367)
(26) Reduction in S corporation recognition period for built-in gains tax (Sec. 1374(d))
(27) Empowerment Zone tax incentives (Sec. 1391)
(28) Tax-exempt financing for New York Liberty Zone (Sec. 1400L)
(29) Temporary increase in limit on cover-over of rum excise taxes to Puerto Rico and the Virgin Islands (Sec. 7652(f))
(30) American Samoa economic development credit (Section 119 of the Tax Relief and Health Care Act of 2006, P.L. 109-432, as modified).

Energy Tax Extenders:

The act also extends through 2013, and in some cases modifies, a number of energy credits and provisions that expired at the end of 2011:

(1) Credit for energy-efficient existing homes (Sec. 25C)
(2) Credit for alternative fuel vehicle refueling property (Sec. 30C)
(3) Credit for two- or three-wheeled plug-in electric vehicles (Sec. 30D)
(4) Cellulosic biofuel producer credit (Sec. 40(b), as modified)
(5) Incentives for biodiesel and renewable diesel (Sec. 40A)
(6) Production credit for Indian coal facilities placed in service before 2009 (Sec. 45(e)) (extended to an eight-year period)
(7) Credits with respect to facilities producing energy from certain renewable resources
(Sec. 45(d), as modified)
(8) Credit for energy-efficient new homes (Sec. 45L)
(9) Credit for energy-efficient appliances (Sec. 45M)
(10) Special allowance for cellulosic biofuel plant property (Sec. 168(l), as modified)
(11) Special rule for sales or dispositions to implement Federal Energy
Regulatory Commission or state electric restructuring policy for qualified electric utilities (Sec. 451)
(12) Alternative fuels excise tax credits (Sec. 6426).

Foreign Provisions:

The IRS’s authority under Sec. 1445(e)(1) to apply a withholding tax to gains on the disposition of U.S. real property interests by partnerships, trusts, or estates that are passed through to partners or beneficiaries that are foreign persons is made permanent, and the amount is increased to 20%.

New Taxes:

These are effective January 1 as a result of 2010’s health care reform  (“Obama Care”) legislation:

(1) Additional hospital insurance tax on high income taxpayers. The employee portion of the hospital insurance tax part of FICA, normally 1.45% of covered wages, is increased by 0.9% on wages that exceed a threshold amount. The additional tax is imposed on the combined wages of both the taxpayer and the taxpayer’s spouse, in the case of a joint return. The threshold amount is $250,000 in the case of a joint return or surviving spouse, $125,000 in the case of a married individual filing a separate return, and $200,000 in any other case.
(2)  For self-employed taxpayers, the same additional hospital insurance tax applies to the hospital insurance portion of SECA tax on self-employment income in excess of the threshold amount.
(3)  Medicare tax on net-investment income. Starting  January 1, Sec. 1411 imposes a tax on individuals equal to 3.8% of the lesser of the individual’s net investment income for the year or the amount the individual’s modified adjusted gross income (MAGI) that exceeds a threshold amount.  For married individuals filing a joint return and surviving spouses, the threshold amount is $250,000; for married taxpayers filing separately, $125,000; for other individuals $200,000.  For estates and trusts, the tax equals 3.8% of the lesser of undistributed net investment income or AGI over the dollar amount at which the highest trust and estate tax bracket begins.  Net investment income means investment income reduced by deductions properly allocable to that income. Investment income includes income from interest, dividends, annuities, royalties, and rents, and net gain from disposition of property, other than such income derived in the ordinary course of a trade or business. However, income from a trade or business that is a passive activity and from a trade or business of trading in financial instruments or commodities is included in investment income. [Note: I have posted two articles on this topic on TaxConnections.com Tax Blog].
(4)  Medical care itemized deduction threshold. The threshold for the itemized deduction for unreimbursed medical expenses has increased from 7.5% of AGI to 10% of AGI for regular income tax purposes. This is effective for all individuals, except, in the years 2013–2016, if either the taxpayer or the taxpayer’s spouse has turned 65 before the end of the tax year, the increased threshold does not apply and the threshold remains at 7.5% of AGI.
(5) Health flexible spending arrangement. Effective for cafeteria plan years beginning after December  31, 2012, the maximum amount of salary reduction contributions that an employee may elect to have made to a flexible spending arrangement for any plan year is $2,500.

[Paul Bonner and Alistair M. Nevius, Journal of Accountancy, on-line. ed., January 1, 2013]

REACTIONS  AND  COMMENTS

Edward Karl, Vice President–Tax for the AICPA said  “The AICPA is pleased that Congress has reached an agreement. The uncertainty of the tax law has unnecessarily impeded the long-term tax and cash flow planning for businesses and prevented taxpayers from making informed decisions. The agreement should also allow the IRS and commercial software vendors to revise or issue new tax forms and update software, and allow tax season to begin with minimal delay.”  [Paul Bonner and Alistair M. Nevius, Journal of Accountancy, on-line. ed., January 1, 2013]

There have been many critics of the legislation signed by the president, particularly due to its potential effect on the economy and not enough reduction in spending.  It did nothing to patch up the broken Social Security, Medicaid, and Medicare programs. The new congress convened on January 3 and the House reelected  John Boehner as Speaker. John Boehner and Mitch McConnell, Senate minority leader, said the GOP will use this legislation as a bargaining chip for more reductions in government spending (the debt limit has to be raised by February 28) that the Democrats are sure to resist. On March 1, automatic spending cuts, deferred by the act, will take place. Defense and domestic cuts will be hardest hit. In mid-March, congress must vote on a continuing resolution to fund government operations through September 30.

Self-employed and owners of S corporations will be faced with higher taxes since many of them will have income exceeding $400,000 where the tax rate increases from  35%  to 39.6%.  According to Vistage Polling, “29% of the chiefs of small firms planned to hire fewer workers. An additional  32%  expect lower investment spending, or fewer purchases of vehicles, property and equipment.” A small businessman said  “any added tax bill, which will be paid out of cash flow, would prevent him from offering employees raises and profit sharing.” [Emily Maltby and
Angus Loten, “Cliff  Fix Hits Small Business”, The Wall Street Journal, January 3, 2013].

David Limbaugh, a Fox News political analyst, appeared January 2 on Hannity. He was critical of the president saying  “the White House isn’t finished with revenue increases. He [the president] plans to put caps and phase-outs on deductions and go after the so called wealthy. The president refuses to reform entitlements and [wants to] tax and destroy the wealthy.”

Appearing on the same program, Charles Krauthammer, a syndicated columnist and Fox News analyst, said  “Obama only demanded increases in tax rates because it would accentuate the fractures, and that’s what happening on the House vote. If he [the president] can get the House GOP out of the way, he can be dominant in Washington for his entire term.”

Higher income taxes and the payroll tax increase is likely to stunt the growth of the economy. Joel Naroff, president of Naroff  Economic Advisors, said  “It’s [the new tax law] a huge hit.  It hits people whether they’re making $10,000 or they’re making $2 million.  It doesn’t matter who you are . . .the lower  your income, the more of your income you’re spending.  So, if your taxes go up, its going to come out of your spending. And that’s bad news for an economy that is 70 percent consumer spending.”  Mark Zandi, chief economist at Moody’s Analytics, stated  “. . . the higher payroll tax will reduce economic growth by .6 percent in 2013. . . higher taxes on household incomes above $400,000 a year will slice just  0.15 percentage point off economic growth.”  [Associated Press, “Economy likely loser in any deal”, The Albany Times Union, January  2, 2013].

The long drawn out political standoff between the president and the GOP added uncertainty that discouraged consumers from spending and businesses from hiring and investing. Mark Vitner, senior economist at Wells Fargo, predicts the economy will expand only 1.5 percent in 2013, down from a lackluster 2.2 percent in 2012. Unemployment stands at  7.7 percent.  Many economists are disappointed that Congress and the White House couldn’t reach an agreement to significantly reduce the deficit over the next 10 years. That could have increased business and consumer confidence and accelerated growth. Another shortcoming in the legislation is the failure to reform the big entitlement programs, particularly Social Security and Medicare. Joseph Lavorgita, an economist at Deutsche bank, said  “Nothing really has been fixed. There are bigger philosophical issues that we aren’t addressing yet.”  [Associated Press, “Economy likely loser in any deal”, The Albany Times Union, January 2, 2013].

Another prominent businessman, Steve Forbes, chairman and editor-in-chief of Forbes Media, appeared January 3 on The Willis Report, and was very critical of the tax increase. He said the tax increases remove capital from the economy, substantially hurts small businesses, and  middle class taxpayers [due to the payroll tax increase]. The tax increase will hurt wage earners, capital creators, and risk takers. The complexity of the Internal Revenue Code has increased which will harm the economy.  He was also critical of the president’s position on tax increases.  “President Obama doesn’t want tax reform and simplicity in the tax code recommended by Simpson-Bowles. He only wants to raise tax rates, and take away exemptions and deductions.  He doesn’t want to raise revenue; he only wants “justice” and income redistribution. He thinks rich people shouldn’t be allowed to keep as much as they earn today. He doesn’t care if it [tax increases] hurts the economy.”

The Wall Street Journal, in an editorial, was very critical of the bill approved by Congress, due to a tax increase on what they call middle class taxpayers. Their editorial centered around why the new much ballyhooed $450,000 income threshold for the highest tax rate is largely fake and a political fiction.  The editor stated:

Under the new law, some of the steepest tax increases will fall on upper-middle class earners with incomes just above $250,000. During the negotiations, the White House won a concession from the Republicans to allow phaseouts for personal exemptions and limitations on itemized deductions, starting at an income level of $250,000 for individuals and $300,000 for joint filers…. the loss of the personal exemption, currently $3,800 per family member, can mean a 4.4 percent point rise in the marginal tax rate for a married couple with two kids and income above $250,000.  A family in that income range faces about a six percentage point marginal rate hike. The restored limitation on itemized deductions can raise the tax rate by another one percentage point. Add it together [phaseouts on exemptions and caps on deductions] and families in the 33%  tax bracket could see their marginal rate paid on each additional dollar earned rise to above 38%.  Add in the new ObamaCare investment taxes and the tax rare on interest income is close to 45% [Review and Outlook, “The Stealth Tax Hike”, January 5-6, 2013].

Carly Fiorina,, a Republican national strategist and former CEO of Hewlett Packard appeared on NBC’s Meet The Press January 6. Regarding the fiscal cliff compromise she said  “. . . the latest deal complicates the tax code and continues corporate welfare [she did not elaborate on what she meant by this]. We need to broaden and simplify the tax code. close the loopholes, lower the tax rates, deal with health care costs, stabilize Social Security, and get spending under control.”

Eugene Robinson, a nationally syndicated columnist was also very critical of the fiscal cliff deal.  He said:

To say that Congress looked like a clown show last week is an insult to self-respecting clowns. Our august legislature-aided and abetted by President Barak Obama-manufactured a fake crisis. They then proceeded to handle it so incompetently that they turned into a real one…. they could only manage to avoid hurtling to their doom, and ours, by deciding not to decide much of anything. Obama “won” this bloody battle, but what did he really gain, aside from bragging rights for the next few weeks?  More important, what did the nation gain? Practically zilch, except reprieve from hardships that its elected leaders were bizarrely threatening to impose on the citizens who elected them. The bill Congress passed and the President signed contains no significant new stimulus to boost the recovery. And while it raises taxes… the non-partisan Congressional Budget Office estimates the bill actually adds $4 trillion to the debt over the next decade, mostly by keeping the Bush middle class tax cuts in place.  [“Lets hand the clowns the script”, The Albany Times Union, January 6, 2012].

The next big crisis facing Congress is action on raising the national debt limit which we will hit at the end of February. Mr. Boehner and Mr. McConnell both said they will be holding out for spending cuts and will not stand for any tax increases on any agreement raising the debt limit. President Obama said he will not agree to spending cuts and wants more tax increases to raise revenue. If the GOP holds out on their insistence on spending cuts and no tax increases, the Democrats will likely resist spending cuts. This showdown could possibly shut down the government until an agreement is reached. The next big showdown will come in March when the delayed sequester on spending cuts expires.  At that date, unless a compromise is reached between the president and congress, there will be automatic large spending cuts in defense and other domestic programs. Another area that congress must deal with is entitlement cuts and reforms to Social Security Medicaid, and Medicare.

If a deal is not reached on spending cuts and raising the debt limit, Moody’s Investor Services and Standards and Poors said they may lower the U.S. credit rating unless there is more deficit reduction.

I will continue to monitor future tax legislation in Congress, particularly tax reform.  If anything significant takes place, I will post another article to discuss it.

CIRCULAR 230 DISCLOSURE:  Pursuant to regulations governing practice before the IRS, any tax  advice contained herein is not intended or written to be used and cannot be used by the taxpayer  for the purpose of avoiding tax penalties that may be imposed on the taxpayer.

Written by | Posted in Estate Planning Tax • Federal • Individual

Santa May Owe $5,000,000,000 in Sales or Use Taxes

By Andrew Johnson CPA

Some states are just grinchier than others. You try to just give away stuff and the state still wants taxes on the goods given away. Maybe Santa is already aware of these laws and he already has a use tax payment plan in place, but maybe he has no idea of the liabilities he could be incurring. Companies usually know about income tax problems, but often miss the bigger sales and use tax liabilities. Santa is probably no different.

This article in Forbes caught my attention: Why Santa Won’t Owe Any Income Taxes. And he probably has no worries when it comes to state income taxes either. But that doesn’t mean he’s off the tax hook. Talk about keeping a list and checking it twice. He also needs to be an expert on sales and use taxes.

They say Santa makes most of his own toys right there in North Pole, Alaska, but I’m guessing he buys a lot of it online these days also. It’s just so much easier. Maybe his strategy is to buy most gifts online and have it shipped to his shop in Alaska. Alaska does not have a state sales tax. That’s all good, but once he leaves Alaska and starts making deliveries and assembling the toys in homes either by himself or using “agents” he may very well have a use tax problem. Rudolph solved the “storm of the century” problem he had one year, but a big use tax liability could put him right out of business.

In my case, he not only bought a certain bike online but had it drop-shipped to me a week before so that I could help him get it assembled in time for Christmas morning. (Maybe in this case, I’m no different from a school teacher in Tennessee passing out some catalogs for Scholastic Books?) Drop-shipping goods to others and using elves and Moms and Dads and other “helpers” or “agents” creates all sorts of sales/use tax issues for Santa. It’s possible the drop-shipper has nexus themselves in the ship-to state and they themselves have to charge sales tax to Santa. They may even have to tax Santa on the retail value of the goods being shipped. Drop-shipping is a sales tax nightmare, which is probably why our drop-ship tax charts are always popular.

Drop-shipping tax issues aside, Santa may owe use tax on all the giveaways. Many states assess use tax on the value of inventory given away, which we call the Grinchiest States.

If you take Kelly’s figures and say that Santa gives away $142.5BB in gifts each Christmas and say half of that amount is for taxable materials and say that the average use tax rate to apply is 7 percent, you arrive at a $5,000,000,000 potential use tax liability for last year alone.

If he didn’t pay that in past years, then he’d have multiple years of tax liabilities staring at him. But never fear. PJCo could help him too. We just need to help him take advantage of various amnesty and voluntary disclosure remedies that are available. He’d take a little hit financially, but he doesn’t need to go out of business altogether.

Written by | Posted in Indirect Tax • Sales/Use Tax • TaxConnections

I Was A Fiscal Cliff Weakling

“Give that Man Some Fiscal Cliff!”

I worry sometimes. Sometimes a lot. I’ve been living in and outside the States for some years and one time as I was leaving, back in 2010, I knew for sure that upon looking back at my beloved country – our United States of America, within a short period (I don’t know, months?) I’d be witness to the buckling and ultimate collapse of the American behemoth. The leviathan that America had become was groaning under the stress of its own unsupportable fiscal weight and was about to give way. I fully expected to be watching, in awed disbelief, as the United States succumbed to greater financial forces and had to face a fiscal reckoning of its own making. I’ve always been fascinated by finance and economics (for me, it was finance instead of sports) and as the last couple years have unfolded, astonishingly, not only did the United States not collapse, I happened upon a whole new way of looking at economies and how macro-fiscal matters really unfold.

Bright!TaxI used to believe economics was science – borne of great minds, like Keynes, Hayek, von Mises. Through quantification, calculation and forward analysis, though from different economic schools of thought, they predicted probable outcomes based on their own particular certainties. Using historical modeling as reference and for proof to support their forward projections, they captured the imagination of a larger population of thinkers. Given their disparate philosophies of how economies work great debates ensued and they continue to this day. Each side, right vs. left, continually outdoes the other with proofs and ‘precise outcomes’ that favor their worldview as events unfold.

“Show Me the Fiscal Cliff”

I’ve reached a new conclusion though. Economics is more political and social than it is reliant upon numbers and hard math. The math is the final arbiter. It brings us to the end of the story, but the real intrigue, the part that matters, because it is what we live, is the drama that is played out before economies and civilizations rise and fall. It is always a story that is long and deep and nuanced and highly unpredictable.

The math of economics assumes rational, predictive behavior. However, the social aspect of economics mandates that, even if governments act in the greater interest, there are both winners and losers. In the United States, our social construct and our democracy relies upon the consent of the governed. Those who are governed must participate in our democracy, by voting, in order for it to ‘work’. As long as we the governed are in agreement that we are active in a participatory democracy, then we support events and outcomes as they unfold. After all, we have been ‘instrumental’ in bringing these things about.

The answer to the fiscal problems the United States faces, in reality, are insurmountable. They cannot be solved. The math says so. The amount of debt the United States has accrued and the monetary steps necessary to remedy that are impossible to implement to any meaningful degree. It’s a complicated problem of unfathomable proportions that is politically inexpedient and, therefore, virtually impossible to address.  The average American cannot get his head around, much less embrace, the necessary reduction in entitlements and increase in taxes that would be necessary to actually fix our upside down American economy.

“Fiscal Cliff Prevents that Sinking Feeling”

The so called ‘answer’ to this quandary has emerged and has captured the imagination, not just of the U.S., but of the world. It is a manifestation of political and social theater that is brilliant in its inception – and masterful in its execution. The answer is the Fiscal Cliff. The sound of the words themselves are ominous enough to give one pause. ‘Fiscal Cliff’ has the ring of impending doom. They are words that both terrify – and unify those who hear it. Upon hearing such words, most Americans would be ready and willing to marshal whatever resources are necessary to avert this looming catastrophe.

So Americans rallied. They participated in presidential elections and chose a person whom they believed had the right stuff and the wherewithal to master the beast. They chose a man who could reach forward and grasp us just as we were at the precipice and with calm and determination pull us back to safer ground. We are safe now. We did not go over the cliff. Disaster has been averted. We, as Americans, pulled together and by exercising our democratic rights we solved the crisis. We prevailed. Our mood as a society is better now. Now we can move forward with more confidence that we’ve faced the crisis and did what it took to ‘solve it’.

It’s not really solved though. It’s not even close to being solved. All that was gained by the ‘grand bargain’ that was struck between the opposing parties regarding the Fiscal Cliff is a minimal tax increase that makes no appreciable dent in our debt outstanding and a ‘promise’ to address spending cuts a few months hence. My expectation is that these cuts, like most other promised cuts, will never actually materialize. They never seem to. The actual agreement results in deficits that are 4 trillion dollars higher than they are now. Some cut. Some Fiscal Cliff. Did we address the reality of our situation? No. But the theater? Superb.

“More Fiscal Cliff Please”

Our immediate reality is clear then: There is no politically palatable way for the United States to fix what ails us. The fiscal imbroglio that engulfs us is bad – unimaginably bad, but there is no realistic way forward that will actually fix it. Politicians themselves know this and are primarily focused on the next best thing and that is to keep the music playing. Louis XV was attributed with saying, “Après moi, le déluge” (“After me, the deluge”), suggesting his only concern was for his life and his lifetime. Today in the States, the governing class focuses on the present and in the present the participation of the governed is essential lest the music stops. Should the music stop, order breaks down and mayhem ensues (in the case of France, after Louis XV, it was the French Revolution).

It’s not the sort of picture anyone wishes to visualize. And so, looking at our reality through a more tinted lens now, as I ponder our fiscal plight I don’t worry so much anymore. What I once worried about was the end game. What I’ve learned is that the end game, though certain, is impossible to predict. In the meantime, I’ll be enjoying and listening as the music plays – “More fiscal cliff please”.

Written by | Posted in TaxConnections

Penny Taxwise and the Great Student Loan Caper

Talking 'bout student loans, people!

Greetings, fellow taxpayers! At last we meet again. It’s your pal Penny, fresh from the holidays and back in action.

Another day, another tale of IRS adventures in the Taxwise household. This time, ‘ol Penny wrestled the student loan monster into submission with a little help from the pros here at Tax Connections.

To Close or Not to Close, That is the Question

So here’s the skinny. Mr. Taxwise has no student loans to his name. Must be nice. I’m not so lucky: I’ve saddled myself with one mother of a federal consolidation loan. I rolled my undergrad and graduate school debt into one big ball, Uncle Sam tagged it with a 6.1% interest rate, and I’ve been paying on it ever since.

I’m one of the fortunate few that was able to take advantage of the government’s new breed of student loan repayment plans. I am enrolled in an ICR (Income-Contingent Repayment) plan, and it rocks. Here’s some of the perks for those of you who aren’t in the know: qualifying borrowers make manageable monthly payments based on their annual income. The payment changes as income rises or falls, and the maximum loan term is 25 years.

If I manage to stay in the program and I pay as agreed for the life of the loan, any remaining balance will be forgiven when the 25 years are up. Cool, right? But wait – there’s a “little” (and by little I mean huge) caveat: The amount you pay under the ICR plan must be less than the interest your loan accrues. You must make a bulk interest payment once a year or your student loan company will capitalize the unpaid interest.

I learned this the hard way – I have automatic payments set up and my loan’s in pristine standing, but I opened a letter a little late (oops) to discover that my unpaid interest had been tacked to my loan’s principal. Ouch.

I freaked and proceeded to manically review my records. Horrors – they did it last year too. Sneaky, sneaky, sneaky. After almost two years of payments, my loan jumped from $56,000 to almost $59,000. Um, aren’t loan balances supposed to go down?

This leads me to the tax portion of the program. Hubby and I have a rare opportunity to make a one-time payment to kill the loan entirely. However, some family members urged us to consider our tax situation before we made a move.

It’s All About the Taxes

Without going into too much detail and getting Mr. Taxwise all hot and bothered, I’ll just tell you what you need to know for the sake of this little tax talk. In our situation, making the payment would mean turning the money into taxable income for 2013. Currently, the funds are in an account protected from taxation. Therefore, a quandary presents itself quite clearly. If we use the money to pay off the loan, would our increased 2013 tax liability outweigh the student loan interest we’d pay if we kept on paying as agreed?

I spent half a day of frustration looking for an answer to that one. After tears, sweat, and a whole lotta research, I finally came up with some coherent figures. First, I found out that we can deduct up to $2,500 of the student loan interest we pay each year as long as our joint modified adjusted gross income does not exceed $150,000.

That means that we can keep deducting the interest from the loan if our income stays under the limit for the next 20 years. But wait – there’s more! The total interest that we’d pay if the loan continued for the next 25 years would be a whopping $47,311.97. At first glance, you’d think that the tax deduction would offset this amount. $2,500 multiplied by 25 year would come to $62,500, right? We’d be covered.

Not so fast.

The interest is calculated based upon the amount outstanding, which means it starts out high and drops along with the balance. When I checked out the actual amortization schedule for my loan, I found that over its lifetime, we’d only be able to deduct a total of $41,461.32 of interest on our taxes. Since the total interest would be $47,311.97, we would still be $5,850.65 in the red.

Based upon that info alone, it makes sense to pay the thing off now.

However, there’s one final piece to this crazy jigsaw puzzle of mine: what about our increased 2013 tax liability? Even though we’d be $5,850.65 poorer if we chose to keep paying as agreed, wouldn’t next year’s tax hit far outweigh that amount?

That sent me on a quest for info about tax brackets – the new 2013 figures to be exact. I had a hard time finding what I needed online, and I kept getting search results with 2011 and 2012 tax tables. I was about to call it quits, but I had a sudden light bulb moment and headed over to Tax Connections to have a look around.

Before I asked my tax question, I hit the answered questions to see if the info was there. Hallelujah –there it was. The million-dollar question:

 

Debbie Tolbert, Owner/ Manager of Friends Doin Taxes, LLC in Missouri answered with exactly the info I was looking for:

Tax Pro's Answer

So we’re looking at a major discrepancy between the taxes we’d pay without the added income and those we’d cough up with it. Using Debbie’s table, I was able to calculate the exact figures I needed for Mr. Taxwise and I to mull over our options.

The Final Verdict

Ultimately, it remains to be seen what Mr. Taxwise will do. I, however, have made my choice. Our taxes will be higher in 2013 if we do this – that’s a given. However, we’re going to be taxed on the money when it comes out anyway, so we’ll be paying taxes on it regardless of whether we claim it as income in 2013 or use it later on. No matter what, once we use it, it will be taxed. There is something we can avoid, though: paying all that student loan interest we won’t be able to deduct from future taxes.

So there you have it. I’ve made up my mine – now I’m off to convince Mr. Taxwise to see things my way.

Until we meet again, my taxpaying amigos.

Making Cents Count,

Penny

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