Messner & Hadley LLP Blog http://www.messnerandhadley.com/blog/ Read the latest articles from Messner & Hadley LLP en-us IRS Reinterprets the Once-Per-Year IRA Rollover Limitation http://www.messnerandhadley.com/blog/irs-reinterprets-the-once-per-year-ira-rollover-limitation/38816 http://www.messnerandhadley.com/blog/irs-reinterprets-the-once-per-year-ira-rollover-limitation/38816 Messner & Hadley LLP There is a tax rule that allows taxpayers to take money out of their IRA and avoid paying income tax and the 10% early distribution penalty so long as they return that money to their IRA account within 60 days. However, tax law limits the number of rollovers to one per year. In the past, the IRS has taken a liberal view toward the one-per-year limitation by allowing one rollover per IRA account each year. In other words, if you have three separate IRA accounts, you can apply the 60-day rollover rule to each IRA account. However, a recent Tax Court Case ruled that the once-per-year rollover applied to the aggregate of all of the taxpayer's IRA accounts, meaning all of a taxpayer's IRAs are treated as one for the purposes of applying the once-per-year rollover limitation. The IRS has announced it will adopt the Tax Court's ruling, meaning that an individual cannot make an IRA-to-IRA rollover if he or she made such a rollover involving any of individual IRAs in the preceding one-year period. Since both the IRS's proposed regulations and Publication 590 currently permit one rollover per account, the IRS is extending transitional relief and will not apply the Tax Court's interpretation to the rollover rule to any rollover that involves an IRA distribution occurring before January 1, 2015. These actions by the IRS will not affect the ability of an IRA owner to transfer funds from one IRA trustee directly to another because such a transfer is not a rollover and, therefore, is not subject to the one rollover-per-year limitation. Taxpayers considering utilizing the 60-day rollover rule should be cautious about possibly violating the once-per-year rollover rule. Please call this office if you have any concerns. Thu, 17 Apr 2014 19:00:00 GMT Bartering Is Taxable Income http://www.messnerandhadley.com/blog/bartering-is-taxable-income/38803 http://www.messnerandhadley.com/blog/bartering-is-taxable-income/38803 Messner & Hadley LLP Article Highlights: Exchange of goods or services Bartering is taxable income Bartering exchanges Bartering credit units Bartering is the trading of one product or service for another. Often there is no exchange of cash. In addition to individuals, small businesses sometimes barter to get the products or services they need. For example, a plumber might trade plumbing work with a dentist for dental services. Bartering may take place on an informal one-on-one basis between individuals and businesses, or it can take place on a third-party basis through a modern barter exchange company. Some individuals and small businesses believe that bartering avoids taxable income because there is no exchange of money. This is not true, however; barter exchanges are considered taxable income by the IRS. The fair market value of goods and services exchanged must be included in the income of both parties to the exchange. Business Owners - If you are the owner of a business, you may sometimes find it to your advantage to barter for goods and services rather than pay in cash. You should be aware, however, that the fair market value of the goods that you receive through bartering is taxable income, just as if you had received a cash payment. Exchanges of services result in taxable income for both parties. Say, for example, that a computer consultant agrees to an exchange of services with an advertising agency. Both parties to the transaction are taxed on the fair market value of the services received. This is the amount they would normally charge for the same services. If the parties agree to the value of the services in advance, this will be considered the fair market value, unless there is contrary evidence. Income is also realized when services are exchanged for property. For example, if an architectural firm does work for a corporation in exchange for shares of the corporation's stock, it will have income equal to the fair market value of the stock. Barter Exchanges - Individuals and business owners sometimes join barter clubs that facilitate barter exchanges. Some exchanges operate out of an office and others over the Internet. Unlike one-on-one bartering, members of exchanges are not obligated to barter or purchase directly from a seller. Instead, when a barter exchange member sells a product or a service to another member, their barter account is credited for the fair market value of the sale. When a barter exchange member buys, the account is debited for the fair market value of the purchase. These clubs generally use a system of “credit units” that are awarded to members who provide goods and services and can be redeemed for goods and services from other members. If you participate in a barter club, you'll be taxed on the value of credit units at the time they are added to your account, even if you don't redeem the units for actual goods and services until a later year. For example, say that in Year 1, you earn 2,000 credit units and each unit is redeemable for one dollar in goods and services. In Year 1, you'll have $2,000 of income. You won't pay additional tax if you redeem the units in Year 2, since you will already have been taxed once on that income. When you join a barter club, you'll be asked to give the club your social security number or employer identification number and to certify that you aren't subject to backup withholding. Unless you make this certification, the club must withhold tax from your bartering income at a 28% rate. By January 31st of each year, the barter club will send you a Form 1099-B, which shows the value of cash, property, services, and credits that you received from exchanges during the previous year. This information will also be reported to the IRS. If you have questions related to bartering income, please give this office a call. Tue, 15 Apr 2014 19:00:00 GMT Last Minute Payments and Filing Tips http://www.messnerandhadley.com/blog/last-minute-payments-and-filing-tips/36644 http://www.messnerandhadley.com/blog/last-minute-payments-and-filing-tips/36644 Messner & Hadley LLP Article Highlights: Filing an extension Extension is for filing, not paying any tax due Installment Agreements If you are up against the April deadline and still need some information to complete your tax return, you can obtain a six-month automatic time extension to file your 1040. The filing extension will give you extra time to get the paperwork together, but it does not extend the time to pay any tax due. You have to make an accurate estimate of any tax due and pay at least 90% when requesting an extension. Interest will be owed on any amounts not paid by the April deadline. If your return is completed but you are unable to pay the tax due, do not request an extension. File your return on time and pay as much as you can. The IRS will send you a bill or notice for the balance due and will charge interest and penalties only on the unpaid balance. If you cannot pay the full amount due with your return, you can ask to make monthly installment payments for the full or partial amount by requesting an installment agreement. The foregoing is only an overview of the options available to you and discusses the problems that may arise if you don’t file and pay your tax by the April 15 due date. If you are unable to file or pay on time, it is important to contact this office prior to April 15 so you can take the appropriate steps to mitigate penalties and interest. Thu, 10 Apr 2014 19:00:00 GMT Individual Estimated Tax Payments for 2014 Start Soon http://www.messnerandhadley.com/blog/individual-estimated-tax-payments-for-2014-start-soon/38793 http://www.messnerandhadley.com/blog/individual-estimated-tax-payments-for-2014-start-soon/38793 Messner & Hadley LLP Article Highlights: Pay-as-you-go tax system Tax law changes affecting estimates Underpayment penalties Safe harbor estimates Our tax system is a “pay-as-you-go” system, and if your pre-paid amount is not enough, you become liable for non-deductible interest penalties. To facilitate that concept, the government has provided several means of assisting taxpayers in meeting the “pay-as-you-go” requirement. The primary among these include: Payroll withholding for employees; Pension withholding for retirees; and Estimated tax payments for self-employed individuals and those with other sources of income not covered by withholding. Determining how much tax to pre-pay through withholding and estimated tax payments has always been difficult, and thanks to Congress' constant tinkering with the tax laws, ensuring there are no underpayment penalties or tax surprises when the tax return is prepared next year can be challenging. Recently, several new tax laws and changes took effect that add complexity to estimating one's tax liability, including: higher ordinary tax rates, higher capital gains tax rates, the phase out of exemptions and itemized deductions for higher income taxpayers, the 3.8% tax on net investment income, and .9% increase in self-employment tax for upper-income self-employed individuals, not to mention a myriad of sun setting tax provisions. When a taxpayer fails to prepay a safe harbor (minimum) amount, he or she can be subject to the underpayment of estimated tax penalty. This penalty is the short-term federal rate plus 3 percentage points, and the penalty is computed on a quarter-by-quarter basis. So, even if you pre-pay the correct amount for the year, if the amounts are not paid evenly, you could be subject to a penalty. Interestingly enough, withholding amounts are treated as paid ratably throughout the year, so taxpayers who are underpaid in the earlier part of the year can compensate by bumping up their withholding in the later part of the year. Federal tax law does provide ways to avoid the underpayment penalty. If the underpayment is less than $1,000 (referred to as the de minimis amount), no penalty is assessed. In addition, the law provides “safe harbor” prepayments. There are two safe harbors: The first safe harbor is based on the tax owed in the current year. If your payments equal or exceed 90% of what is owed in the current year, you can escape a penalty. The second safe harbor is based on the tax owed in the immediately preceding tax year. This safe harbor is generally 100% of the prior year's tax liability. However, for a higher income taxpayer who has AGI exceeding $150,000 ($75,000 for married taxpayers filing separately), the prior year's safe harbor is 110%. Example: Suppose your tax for the year is $10,000 and your prepayments total $5,600. The result is that you owe an additional $4,400 on your tax return. To find out if you owe a penalty, see if you meet the first safe harbor exception. As 90% of $10,000 is $9,000, your prepayments fell short of the mark. You can't avoid the penalty under this exception. However, in the above example, the safe harbor may still apply. Assume your prior year's tax was $5,000. As you prepaid $5,600, which is greater than 110% of the prior year's tax (110% = $5,500), you qualify for this safe harbor and can escape the penalty. If your state has a state tax, the state's de minimis amount and safe-harbor percentage and amount may be different. This example underscores the importance of making sure your prepayments are adequate, especially if you have a large increase in income. This is common when there is a large gain from the sale of stocks, sale of property, when large bonuses are paid, or when a taxpayer retires. If you have questions regarding your pre-payments or would like to review and adjust your W-4 payroll withholding, W-4P pension withholding, and estimated tax payments to provide the desired tax result for 2014, please give this office a call. Tue, 08 Apr 2014 19:00:00 GMT Not Able to Pay Your Taxes by the April Due Date? http://www.messnerandhadley.com/blog/not-able-to-pay-your-taxes-by-the-april-due-date/36647 http://www.messnerandhadley.com/blog/not-able-to-pay-your-taxes-by-the-april-due-date/36647 Messner & Hadley LLP Article Highlights: Unpaid tax liabilities are subject to substantial interest and penalties. Options for coming up with the money to pay your taxes. Making installment agreements with the IRS. The vast majority of Americans get a tax refund from the IRS each spring, but what if you are one of those who end ends up owing? The IRS encourages you to pay the full amount of your tax liability on time by imposing significant penalties and interest on late payments if you don’t. So, if you are unable to pay the taxes you owe, it is generally in your best interest to make other arrangements to obtain the funds for paying your taxes rather than be subjected to the government’s penalties and interest. Here are a few options to consider. Family Loan - Obtaining a loan from a relative or friend may be your best bet because this type of loan is generally the least costly in terms of interest. Credit Card - Another option is to pay by credit card with one of the service providers that work with the IRS. However, as the IRS will not pay the credit card discount fee, you will have to pay it and pay the higher credit card interest rates. Installment Agreement - If you owe the IRS $50,000 or less, you may qualify for a streamlined installment agreement where you can make monthly payments for up to six years. You will still be subject to the late payment penalty, but it will be reduced by half. Interest will also be charged at the current rate, and there is a user fee to set up the payment plan. In making the agreement, a taxpayer agrees to keep all future years’ tax obligations current. If the taxpayer does not make payments on time or has an outstanding past due amount in a future year, they will be in default of their agreement, and the IRS has the option of taking enforcement actions to collect the entire amount owed. Taxpayers seeking installment agreements exceeding $50,000 will need to validate their financial condition and an installment agreement by providing the IRS with a Collection Information Statement (financial statements). Taxpayers may also pay down their due balance to $50,000 or less to take advantage of the streamlined option. Tap a Retirement Account - This is possibly the worst option for obtaining funds to pay your taxes because you are jeopardizing your retirement and the distributions are generally taxable at your highest bracket, which adds more taxes to your existing problem. In addition, if you are under the age of 59½, the withdrawal is also subject to a 10% early withdrawal penalty that compounds the problem even further. Whatever you decide, don’t just ignore your tax liability, because that is the worst thing you can do. Please call this office for assistance. Thu, 03 Apr 2014 19:00:00 GMT Tax Filing Deadline Rapidly Approaching http://www.messnerandhadley.com/blog/tax-filing-deadline-rapidly-approaching/38777 http://www.messnerandhadley.com/blog/tax-filing-deadline-rapidly-approaching/38777 Messner & Hadley LLP Article Highlights: 2013 balance due payments IRA Contributions for 2013 Estimated tax payments for first quarter 2014 Statute of limitation 2010 refunds Just a reminder that the due date for 2013 tax returns is April 15, 2014! There is no penalty for filing late if you are receiving a refund. However, it is quite a different story if you have a balance due. There are two types of penalties. Late filings and late payments are quite severe. Filing an extension gives you until October 15th to file and avoid the late filing penalties. However, there is no extension for paying your tax liability even if you have a valid extension to file. In addition, the April 15, 2014 deadline also applies to the following: Tax year 2013 balance-due payments - Taxpayers that are filing extensions are cautioned that the filing extension is an extension to file, NOT an extension to pay a balance due. Late payment penalties and interest will be assessed on any balance due, even for returns on extension. Taxpayers anticipating a balance due will need to estimate this amount and include their payment with the extension request. Tax year 2013 contributions to a Roth or traditional IRA - April 15 is the last day that contributions for 2013 can be made to either a Roth or traditional IRA, even if an extension is filed. Individual estimated tax payments for the first quarter of 2014 - Taxpayers, especially those who have filed for an extension, are cautioned that the first installment of the 2014 estimated taxes is due on April 15. If you are on extension and anticipate a refund, all or a portion of the refund can be allocated to this quarter's payment on the final return when it is filed at a later date. Please call this office for any questions. Individual refund claims for tax year 2010 - The regular three-year statute of limitations for refunds expires on April 15 for the 2010 tax return. Thus, no refund will be granted for a 2010 original or amended return that is filed after April 15. Caution: The statute does not apply to balances due for unfiled 2010 returns. If this office is holding up the completion of your returns because of missing information, please forward that information as quickly as possible in order to meet the April 15 deadline. Keep in mind that the last week of tax season is very hectic, and your returns may not be completed if you wait until the last minute. If it is apparent that the information will not be available in time for the April 15 deadline, then let the office know right away so that an extension request and estimate tax vouchers may be prepared if needed. If your returns have not yet been completed, please call right away so that we can schedule an appointment and/or file an extension if necessary. Wed, 02 Apr 2014 19:00:00 GMT Refund Statute Expiring - Don't Miss Out! http://www.messnerandhadley.com/blog/refund-statute-expiring-dont-miss-out/38758 http://www.messnerandhadley.com/blog/refund-statute-expiring-dont-miss-out/38758 Messner & Hadley LLP Article Highlights: The refund statute expires on April 15, 2014 for unfiled 2010 returns. Unfiled returns will lose out on refundable credits. Refunds may be offset by unpaid child support, past due student loans, and back taxes. If you have not yet filed your 2010 tax return and have a refund coming, time is running out! The IRS estimates that there are more than 1 million taxpayers who have not filed their 2010 tax return approximately $1 billion of unclaimed refunds available for those taxpayers. If you fall in this category, you need to act quickly because the return must be filed by April 15, 2014 to claim a refund for 2010. Otherwise, the money becomes the property of the U.S. Treasury. People stand to lose more than a refund of taxes withheld or paid during 2010 by failing to file a return. In addition, many low- and moderate-income workers may not have claimed the Earned Income Tax Credit (EITC). The EITC provides financial assistance to individuals and families with incomes below certain thresholds. In addition, taxpayers may also qualify for the refundable child and education credits. When filing a 2010 return, the law requires that the return be properly addressed, mailed, and postmarked by April 15. There is no penalty for filing a late return that qualifies for a refund. As a reminder, taxpayers seeking a 2010 refund should know that their checks will be held if they have not filed tax returns for 2011 and 2012. In addition, the refund will be applied to any amounts still owed to the IRS and may be used to offset unpaid child support or past due federal debts, such as student loans. Please give this office a call as soon as possible if you have not filed your 2010 return. Sufficient time is needed to prepare and print the return and for you take it to the post office to send with proof of mailing. Thu, 27 Mar 2014 19:00:00 GMT Receiving Tips Can Be Taxing http://www.messnerandhadley.com/blog/receiving-tips-can-be-taxing/30377 http://www.messnerandhadley.com/blog/receiving-tips-can-be-taxing/30377 Messner & Hadley LLP Article Highlights: Tips are taxable and must be included on your tax return Tip splitting and cover charges Tip reporting to employer Employer tip allocation Daily log for tip record keeping If you work in an occupation where tips are part of your total compensation, you need to be aware of several facts relating to your federal income taxes: Tips are taxable - Tips are subject to federal income, social security, and Medicare taxes. The value of non-cash tips, such as tickets, passes, or other items of value, is also income and subject to taxation. Include tips on your tax return - You must include all cash tips received directly from customers, tips added to credit cards, and your share of any tips received under a tip-splitting arrangement with fellow employees in gross income. Tip-splitting and cover charges - Tips given to others under the tip-splitting arrangement are not subject to the reporting requirement by the employee who initially receives them. That employee should only report the net tips received to the employer. Service (cover) charges, which are arbitrarily added by the business establishment, are excluded from the tip reporting requirements. The employer should add each employee’s share of service charges to each employee’s wages. Report tips to your employer - If you receive $20 or more in tips in any month, you should report all of your tips to your employer. Your employer is required to withhold federal income, social security, and Medicare taxes. If the tips received are less than $20 in any month, they do not need to be reported to the employer. However, these tips are still taxable and must be reported on your tax return as they are subject to income and social security taxes. Employer allocation of tips - Tip allocation is applicable to “large food and beverage establishments” (i.e., food service businesses where tipping is customary and that have 10 or more employees). These establishments must allocate a portion of their gross receipts as tip income to those employees who “underreport.” Underreporting occurs if an employee reports tips that are less than 8% of the employee’s applicable share of the employer’s gross sales. The employer must allocate the difference between what the employee reported and the 8% to those underreported employees. The allocation amount is noted on the employee’s W-2, but it does not have to be reported as additional income if the employee has adequate records to show that the amount is incorrect. Note that these allocated tips are not included in the total wages shown on the employee’s W-2. The IRS frequently issues inquiries where the taxpayer’s W-2 shows an allocation of tips and a lesser amount is reported on the tax return. Keep a running daily log of tip income - Tips are a frequently audited item and it is a good practice to keep a daily log of your tips. The IRS provides a log in Publication 1244 that includes an Employee's Daily Record of Tips and a Report to Employer for recording your tip income. If you are receiving tips and have any questions about their tax treatment, please give this office a call. Tue, 25 Mar 2014 19:00:00 GMT April 2014 Individual Due Dates http://www.messnerandhadley.com/blog/april-2014-individual-due-dates/36567 http://www.messnerandhadley.com/blog/april-2014-individual-due-dates/36567 Messner & Hadley LLP April 1 - Last Day to Withdraw Required Minimum DistributionLast day to withdraw 2013’s required minimum distribution from Traditional or SEP IRAs for taxpayers who turned 70½ in 2013. Failing to make a timely withdrawal may result in a penalty equal to 50% of the amount that should have been withdrawn. Taxpayers who became 70½ before 2013 were required to make their 2013 IRA withdrawal by December 31, 2013.April 10 - Report Tips to Employer If you are an employee who works for tips and received more than $20 in tips during March, you are required to report them to your employer on IRS Form 4070 no later than April 10. Your employer is required to withhold FICA taxes and income tax withholding for these tips from your regular wages. If your regular wages are insufficient to cover the FICA and tax withholding, the employer will report the amount of the uncollected withholding in box 12 of your W-2 for the year. You will be required to pay the uncollected withholding when your return for the year is filed.April 15 - Individual Tax Returns Due File a 2013 income tax return (Form 1040, 1040A, or 1040EZ) and pay any tax due. If you want an automatic six-month extension of time to file the return, please call this office. Caution: The extension gives you until October 15, 2014 to file your 2013 1040 return without being liable for the late filing penalty. However, it does not avoid the late payment penalty; thus, if you owe money, the late payment penalty can be severe, so you are encouraged to file as soon as possible to minimize that penalty. Also, you will owe interest, figured from the original due date until the tax is paid. If you have a refund, there is no penalty; however, you are giving the government a free loan, since they will only pay interest starting 45 days after the return is filed. Please call this office to discuss your individual situation if you are unable to file by the April 15 due date.April 15 - Household Employer Return Due If you paid cash wages of $1,800 or more in 2013 to a household employee, you must file Schedule H. If you are required to file a federal income tax return (Form 1040), file Schedule H with the return and report any household employment taxes. Report any federal unemployment (FUTA) tax on Schedule H if you paid total cash wages of $1,000 or more in any calendar quarter of 2012 or 2013 to household employees. Also, report any income tax that was withheld for your household employees. For more information, please call this office.April 15 - Estimated Tax Payment Due (Individuals) It’s time to make your first quarter estimated tax installment payment for the 2014 tax year. Our tax system is a “pay-as-you-go” system. To facilitate that concept, the government has provided several means of assisting taxpayers in meeting the “pay-as-you-go” requirement. These include: Payroll withholding for employees; Pension withholding for retirees; and Estimated tax payments for self-employed individuals and those with other sources of income not covered by withholding. When a taxpayer fails to prepay a safe harbor (minimum) amount, they can be subject to the underpayment penalty. This penalty is equal to the federal short-term rate plus 3 percentage points, and the penalty is computed on a quarter-by-quarter basis. Federal tax law does provide ways to avoid the underpayment penalty. If the underpayment is less than the $1,000 de-minimis amount, no penalty is assessed. In addition, the law provides "safe harbor" prepayments. There are two safe harbors: The first safe harbor is based on the tax owed in the current year. If your payments equal or exceed 90% of what is owed in the current year, you can escape a penalty. The second safe harbor is based on the tax owed in the immediately preceding tax year. This safe harbor is generally 100% of the prior year’s tax liability. However, for higher-income taxpayers whose AGI exceeds $150,000 ($75,000 for married taxpayers filing separately), the prior year’s safe harbor is 110%. Example: Suppose your tax for the year is $10,000 and your prepayments total $5,600. The result is that you owe an additional $4,400 on your tax return. To find out if you owe a penalty, see if you meet the first safe harbor exception. Since 90% of $10,000 is $9,000, your prepayments fell short of the mark. You can't avoid the penalty under this exception. However, in the above example, the safe harbor may still apply. Assume your prior year’s tax was $5,000. Since you prepaid $5,600, which is greater than the 110% of the prior year’s tax (110% = $5,500), you qualify for this safe harbor and can escape the penalty. This example underscores the importance of making sure your prepayments are adequate, especially if you have a large increase in income. This is common when there is a large gain from the sale of stocks, sale of property, when large bonuses are paid, when a taxpayer retires, etc. Timely payment of each required estimated tax installment is also a requirement to meet the safe harbor exception to the penalty. If you have questions regarding your safe harbor estimates, please call this office as soon as possible. CAUTION: Some state de-minimis amounts and safe harbor estimate rules are different than those for the Federal estimates. Please call this office for particular state safe harbor rules.April 15 - Last Day to Make Contributions Last day to make contributions to Traditional and Roth IRAs for tax year 2013. Sun, 23 Mar 2014 19:00:00 GMT April 2014 Business Due Dates http://www.messnerandhadley.com/blog/april-2014-business-due-dates/36568 http://www.messnerandhadley.com/blog/april-2014-business-due-dates/36568 Messner & Hadley LLP April 1 - Electronic Filing of Forms 1098, 1099 and W-2G If you file forms 1098, 1099, or W-2G electronically with the IRS, this is the final due date. This due date applies only if you file electronically (not paper forms). Otherwise, February 28 was the due date. The due date for giving the recipient these forms was January 31. April 15 - Social Security, Medicare and Withheld Income Tax If the monthly deposit rule applies, deposit the tax for payments in March. April 15 - Non-Payroll Withholding If the monthly deposit rule applies, deposit the tax for payments in March. April 15 - Corporations The first installment of 2014 estimated tax of a calendar year corporation is due. April 15 - Partnerships File a 2013-calendar year return (Form 1065). Provide each partner with a copy of Schedule K-1 (Form 1065), Partner’s Share of Income, Deductions, Credits, etc., or a substitute Schedule K-1. If you want an automatic 5-month extension of time to file the return and provide Schedules K-1 or substitute Schedules K-1 to the partners, file Form 7004. Then, file Form 1065 and provide the K-1s to the partners by September 15.April 30 - Social Security, Medicare and Withheld Income Tax File Form 941 for the first quarter of 2014. Deposit or pay any undeposited tax under the accuracy of deposit rules. If your tax liability is less than $2,500, you can pay it in full with a timely filed return. If you deposited the tax for the quarter in full and on time, you have until May 12 to file the return.April 30 - Federal Unemployment Tax Deposit the tax owed through March if it is more than $500. Sun, 23 Mar 2014 19:00:00 GMT Spring-Clean Your QuickBooks Company File http://www.messnerandhadley.com/blog/spring-clean-your-quickbooks-company-file/38739 http://www.messnerandhadley.com/blog/spring-clean-your-quickbooks-company-file/38739 Messner & Hadley LLP There are a lot of clues that indicate trouble with your QuickBooks company file. Is it time for a check-up and tune-up? After this ridiculously long winter, you'll probably hear few complaints about things like puddles in the street, summer heat and spring cleaning. Most people are eager to throw open the doors and windows, and attack the dirt that the season left behind, both inside and outside of the house. It's not hard to see when your home is dirty. QuickBooks company file errors are harder to detect, but they're there, including: Performance problems Inability to execute specific processes, like upgrading Occasional program crashes Missing data (accounts, names, etc.) Refusal to complete transactions, and Mistakes in reports. Figure 1: If some transactions won't go through when you click one of the Save buttons - or worse, QuickBooks shuts down -- you may have a corrupted company file. Call for Help The best thing you can do if you notice problems like this cropping up in QuickBooks - especially if you're experiencing multiple ones - is to contact us. We understand the file structure of QuickBooks company data, and we have access to tools that you don't. We can analyze your file and take steps to correct the problem(s). One of the reasons QuickBooks files get corrupt is simply because they grow too big. That's either a sign of your company's success or of a lack of periodic maintenance that you can do yourself. QuickBooks contains some built-in tools that you can run occasionally to minimize your file size. One thing you can do on your own is to rid QuickBooks of old, unneeded data. The software contains a Condense Data utility that can do this automatically. But just because QuickBooks offers a tool doesn't mean that you should use it on your own.Figure 2: Yes, QuickBooks allows you to use this tool on your own. But if you really want to preserve the integrity of your data, let us help. A Risky Utility The program's documentation for this utility contains a list of warnings and preparation steps a mile long. We recommend that you don't use this tool. Same goes for Verify Data and Rebuild Data in the Utilities menu. If you lose a significant amount of company data, you can also lose your company. It's happened to numerous businesses. Be Proactive Instead, start practicing good preventive medicine to keep your QuickBooks company file healthy. Once a month or so, perhaps at the same time you reconcile your bank accounts, do a manual check of your major Lists. Run the Account Listing report (Lists | Chart of Accounts | Reports | Account Listing). Are all of your bank accounts still active? Do you see accounts that you no longer used or which duplicate each other? Don't try to “fix” the Chart of Accounts on your own. Let us help. Figure 3: You might run this report periodically to see if it can be abbreviated. Be very careful here, but if there are Customers and Vendors that have been off your radar for a long time, consider removing them - once you're sure your interaction with them is history. Same goes for Items and Jobs. Go through the other lists in this menu with a critical but conservative eye. If there's any doubt, leave them there. A Few Alternatives There are other options. Your copy of QuickBooks may be misbehaving because it's unable to handle the depth and complexity of your company. It may be time to upgrade. If you're using QuickBooks Pro, move up to Premier. And if Premier isn't cutting it anymore, consider QuickBooks Enterprise Solutions. There's cost involved, of course, but you may already be losing money by losing time because of your version's limitations. All editions of QuickBooks look and work similarly, so your learning curve will be minimal. Also, try to minimize the number of open windows that are active in QuickBooks. That will improve your performance. And what about your hardware? Is it getting a little long in the tooth? At least consider adding memory, but PCs are cheap these days. If you're having problems with many of your applications, it may be time for an upgrade. A Stitch in Time... We've suggested many times here that you contact us for help with your spring cleanup. While that may seem self-serving, remember that it takes us a lot less time and money to take preventive steps with your QuickBooks company file than to troubleshoot a broken one. Sun, 23 Mar 2014 19:00:00 GMT Haven’t Filed an Income Tax Return? http://www.messnerandhadley.com/blog/haven8217t-filed-an-income-tax-return/38735 http://www.messnerandhadley.com/blog/haven8217t-filed-an-income-tax-return/38735 Messner & Hadley LLP Article Highlights: Late filing penalties Three-year statute of limitations Forfeited refunds Earned income credit Self-employment income If you have been procrastinating on filing your 2013 tax return or have other prior year returns that have not been filed, you should consider the consequences. The April 15 due date for the 2013 returns is just around the corner. That is also the last day to file a 2010 return and be able to claim a refund. Taxpayers should file all tax returns that are due, regardless of whether or not full payment can be made with the return. Depending on an individual’s circumstances, a taxpayer filing late may qualify for a payment plan. All payment plans require continued compliance with all filing and payment responsibilities after the plan is approved. Facts about Filing Tax Returns. These rules apply to federal returns. Your state rules may be different. Failing to file a return or filing late can be costly. If taxes are owed, a delay in filing may result in penalty and interest charges that could substantially increase your tax bill. The late filing and payment penalties are a combined 5% per month (25% maximum) of the balance due. If you are due a refund, there is no penalty for failing to file a tax return. However, you can lose your refund by waiting too long to file. In order to receive a refund, the return must be filed within three years of the due date. If you file a return and later realize you made an error on the return, the deadline for claiming any refund due is three years after the return was filed, or two years after the tax was paid, whichever expires later. Taxpayers who are entitled to the refundable Earned Income Tax Credit must file a return to claim the credit, even if they are not otherwise required to file. The return must be filed within three years of the due date in order to receive the credit. If you are self-employed, you must file returns reporting self-employment income within three years of the due date in order to receive Social Security credits toward your retirement. Taxpayers who continue to not file a required return and fail to respond to IRS requests to do so may be subject to a variety of enforcement actions, all of which can be unpleasant. Thus, if you have returns that need to be filed, please call this office so we can help you bring your tax returns up-to-date, and - if necessary - advise you on a payment plan. Thu, 20 Mar 2014 19:00:00 GMT Don’t Get Scammed, They Are Very Clever http://www.messnerandhadley.com/blog/don8217t-get-scammed-they-are-very-clever/37909 http://www.messnerandhadley.com/blog/don8217t-get-scammed-they-are-very-clever/37909 Messner & Hadley LLP Article Highlights: Scammers disguise e-mails to look legitimate. Legitimate businesses and the IRS never request sensitive personal and financial information by e-mail. Don’t become a victim. Stop - Think - Delete You may think we harp a lot on protecting yourself against identity theft. You are right…because having your identity stolen becomes an absolute financial nightmare, sometimes taking years to straighten out. Identity thieves are clever, relentless, and always coming up with new schemes to trick you. And all you have to do is slip up just once to compromise your identity and your nightmare begins. What they try to do is trick you into divulging your personal information such as bank account numbers, passwords, credit card numbers, or Social Security number. One of the most popular methods these unscrupulous people use is requesting your personal information by e-mail. They are pretty good at making their e-mails look as if they came from a legitimate source such as the IRS, your credit card company, or your bank. You need to be very careful when responding to e-mails asking you to update such things as your account information, pin number, or password. First and foremost, you should be aware that no legitimate company would make such a request by e-mail. If they do, they should be deleted and ignored just like spam e-mails. We have seen bogus e-mails that looked like they were from the IRS, well-known banks, credit card companies, and other pseudo-legitimate enterprises. The intent is to trick you and have you click through to a website that also appears legitimate where they have you enter your secure information. Here are some examples: E-mails that appeared to be from the IRS indicating you have a refund coming and they need information to process the refund. The IRS never initiates communication via e-mail! Right away, you should know that it is bogus. If you are concerned, please free to call this office. E-mails from a bank indicating they are holding a wire transfer and need your bank routing information and account number. Don’t respond; if in doubt, call your bank. E-mails saying you have a foreign inheritance and they need your bank info so they can wire the funds. The funds that will get wired are yours going the other way. Remember, if it seems too good to be true, it generally is. We could go on and on with examples. The key here is for you to be highly suspect of any e-mail requesting personal or financial information. A good rule of thumb is to: STOP - THINK - DELETE. If you receive something from the IRS or your state taxing agency and feel uncomfortable ignoring it, call this office to check so you don’t need to worry. The IRS just published the 2014 “Dirty Dozen Tax Scams” which details current scams. However, the perpetrators of those scams are not the only ones trying to steal your financial information, so always be vigilant. Your life can become a nightmare if your identity is stolen. Identity thieves will even file tax returns under your Social Security number claiming huge refunds and leaving you with a horrendous mess to clean up with the IRS. Don’t be a victim. Please call this office if you believe your tax ID has been compromised. Tue, 18 Mar 2014 19:00:00 GMT Clock is Ticking for Retirement Plan Contributions http://www.messnerandhadley.com/blog/clock-is-ticking-for-retirement-plan-contributions/38731 http://www.messnerandhadley.com/blog/clock-is-ticking-for-retirement-plan-contributions/38731 Messner & Hadley LLP Article Highlights: 2013 IRA contributions can be made through April 15, 2014 2013 SEP IRA contributions can be made through October 15, 2014 2013 Health Savings Account contributions can be made through April 15, 2014 2013 Coverdell Education Account contributions can be made through April 15, 2014 Did you know that you can make tax-deductible retirement savings contributions after the close of the tax year? Well, you can and with April 15th looming, the window of opportunity to maximize retirement and other special-purpose plan contributions for 2013 is closing. Many of those contributions not only build the retirement nest egg, but also deliver tax deductions for the 2013 tax return. Let's take a look at some of the ways a taxpayer can benefit. Traditional IRA – The maximum contribution to an IRA for 2013 is $5,500 ($6,500 if over 49 years old). The 2013 contribution can be made up to April 15th. If the taxpayer is covered by another retirement plan, some or all of the contribution may not be deductible. To be eligible to contribute to an IRA of any type, the taxpayer, or spouse if married filing jointly, must have earned income, such as wages or self-employment income. Roth IRA – This is a nondeductible retirement account, but the earnings are tax-free upon withdrawal, provided that the holding period and age requirements are met. Roth IRAs are a good alternative for many taxpayers who aren’t eligible to deduct contributions to a traditional IRA. The maximum deductible contribution for the 2013 tax year is $5,500 ($6,500 if the taxpayer is over 49 years old). The 2013 contribution can be made up to April 15th. Caution: the combined traditional IRA and Roth IRA contributions are limited to $5,500 ($6,500 if the taxpayer is over 49 years old). Spousal IRA – A non-working spouse can open and contribute to a traditional IRA or Roth IRA based upon the working spouse’s earned income, subject to the same contribution limits as the working spouse, but the combined contributions of both spouses cannot exceed the earned income of the working spouse. SEP-IRA (Simplified Employee Pension) – SEP-IRAs are tax-deferred plans for sole proprietorships and small businesses. They are probably the easiest way to build retirement dollars, requiring virtually no paperwork. Maximum contributions depend on your net earnings from your business. For 2013, contributions are the lesser of 25 percent of compensation or $51,000. This figure increases to $52,000 for 2014. The 2013 contribution can be made up to the due date of the return, including extensions. Thus, unlike a traditional or Roth IRA, funding of a SEP-IRA for 2013 may occur up to October 15, 2014 when an extension has been granted. Solo 401(k) Plans – A growing number of self-employed individuals with no employees are forsaking the SEP-IRA for a newer type of retirement plan called the Solo 401(k), or Self-Employed 401(k), mostly for its higher contribution levels. For 2013, the maximum contribution to a Solo 401(k) is the sum of: (A) up to 25% of compensation, and (B) salary deferral up to $17,500. The total of A and B can't exceed $51,000 or 100% of compensation. The maximum contribution rises to $52,000 for 2014. On a last note, a Solo 401(k) account must have been established by December 31, 2013 to make 2013 contributions. If one was not established, open one now for 2014 contributions. Health Savings Accounts (HSA) – An HSA is a tax-exempt trust or custodial account established exclusively for the purpose of paying qualified medical expenses of the account beneficiary. An HSA is designed to assist individuals who have high-deductible health plans (HDHP). A taxpayer is only eligible to establish an HSA if he or she has an HDHP. For 2013, this means that the plan must have a deductible amount of $1,250 or more for self-only coverage or $2,500 for family coverage. In addition, the annual maximum out-of-pocket costs for covered expenses can’t exceed $6,250 for a self-only plan or $12,500 for a family plan. The maximum 2013 contribution for eligible individuals with self-only coverage under an HDHP is $3,250, while an eligible individual with family coverage under an HDHP can contribute up to $6,450. The contribution limit is increased by $1,000 for an eligible individual who was age 55 or older at the end of 2013; however, no contribution can be made as of the month that an individual is enrolled in Medicare. Amounts contributed to an HSA belong to individuals and are completely portable. Every year, the money not spent on medical expenses stays in the account and gains interest tax-free, just like an IRA. Unused amounts remain available for later years (unlike amounts in Flexible Spending Arrangements that may be forfeited if not used by the end of the year). Contributions to an HSA for 2013 can be made through April 15, 2014. Coverdell Education Savings Account – These plans were originally called Education IRAs, but that moniker created confusion since they were really not retirement accounts. They are now called Coverdell Education Savings Accounts, named after the late Senator from Iowa. Contributions, which can be made for a beneficiary who is under 18 years of age, are not tax-deductible, but the money grows tax-free if the distributions are used to pay qualified education expenses. The maximum annual contribution is $2,000 per beneficiary, but this amount could be reduced partly or totally depending on income. Contributions do not count toward IRA annual contribution limits; they are also due by April 15, 2014 to be considered as having been made for 2013. Please note that information for each plan or account above has been abbreviated. Contact this office for specific details on how they may apply to your situation. Thu, 13 Mar 2014 19:00:00 GMT Tax Breaks for Grandparents http://www.messnerandhadley.com/blog/tax-breaks-for-grandparents/38720 http://www.messnerandhadley.com/blog/tax-breaks-for-grandparents/38720 Messner & Hadley LLP Article Highlights: Head of household filing status Exemption deduction for the grandchild Earned income tax credit Child tax credit Childcare credit for certain working grandparents Grandchild education credits and deductions More and more individuals who thought their child-rearing days were over are now raising their grandchildren. The U.S. Census Bureau has found that there were 7 million grandparents whose grandchildren younger than 18 were living with them in 2010. Another study found that the number of grandchildren living with their grandparents has increased 50% over the past ten years. Grandparents in this challenging situation should be aware that a variety of tax breaks may be available to ease the financial burden of becoming primary caregivers for grandchildren. These include: Head of household filing status - An unmarried grandparent may be eligible to use head of household as his or her filing status. This filing status generally is more favorable than the single filing status. To qualify, the grandparent must maintain a household that is the principal place of abode for the grandchild for more than half the year. Generally the grandchild must not be self-supporting and under the age of 19 (24 if a full time student) at the close of the tax year or permanently and totally disabled. Exemption for the grandchild - If the grandchild qualifies as the grandparent’s dependent, the grandparent is entitled to a deduction equal to the exemption amount, which for 2014 is $3,950 (up from $3,900 in 2013). For a grandchild to qualify as a dependent, the grandchild generally must meet the definition of a “qualifying child,” which includes being under the age of 19 (24 if a full time student) at the close of the tax year or permanently and totally disabled, and a U.S. citizen, U.S. National, or a resident of the U.S., Canada, or Mexico. The grandchild may not have provided more than half of his or her own support. Additional rules apply if the grandchild is married. Earned income credit - A grandparent who is working and has a grandchild who is a qualifying child living with him or her may be able to take the earned income tax credit (EITC), even if the grandparent is 65 years of age or older. Generally, to be a qualified child for EITC purposes, the grandchild must meet the same requirements as to be a dependent but without the requirement that the child didn't provide more than half of his own support. To qualify for EITC for 2013 on account of a grandchild or grandchildren, a taxpayer's adjusted gross income (AGI) must be less than: $46,227 ($51,567 for married filing jointly) if he or she has three or more qualifying children; $43,038 ($48,378 for married filing jointly) if he or she has two qualifying children; and $37,870 ($43,210 for married filing jointly) if he or she has one qualifying child. There's no EITC if the taxpayer files as married filing separately, isn't a U.S. citizen or resident alien all year, files Form 2555 or Form 2555-EZ (relating to foreign earned income), doesn't have earned income, or has more than $3,300 of investment income for 2013 ($3,350 for 2014). Child tax credit - A grandparent who is raising a grandchild may be able to take the $1,000 child tax credit and, under specific circumstances, the credit may be refundable. To qualify, the grandchild must be under the age of 17, a U.S. citizen or resident alien, and the grandchild must be the grandparent’s dependent. The credit is reduced for higher-income taxpayers. Credit for grandchild care expenses - A grandparent may also qualify for the child and dependent care credit if the grandparent pays someone to care for a dependent grandchild under the age of 13 or a grandchild who is physically or mentally not able to care for himself or herself, and the grandparent works or looks for work and has the same principal place of abode as the grandparent for more than half the tax year. The credit is 35% of employment-related expenses for taxpayers with an AGI of $15,000 or less. The percentage decreases by 1% for each $2,000 (or fraction thereof) of AGI over $15,000, but not below 20%. The maximum amount of employment-related expenses that may be used to compute the credit is $3,000 for one qualifying individual or $6,000 for two or more qualifying individuals. These maximums must be reduced, dollar-for-dollar, by the total amount excludable from gross income through an employer’s dependent care assistance program. Grandchild education expenses - There are a number of tax breaks that may be available to a grandparent who pays his or her dependent grandchild's education costs. These include: o Education credits - An individual taxpayer may claim an income tax credit of up to $2,500 for the American Opportunity tax credit (AOTC) and the Lifetime Learning credit (up to $2,000) for higher education expenses of a grandchild at accredited post-secondary educational institutions. The AOTC is available for qualified expenses of the first four years of undergraduate education. The Lifetime Learning credit is available for qualified expenses of any post-high school education at "eligible educational institutions." Both credits can't be claimed in the same tax year for any one student’s expenses, and they phase out for higher-income taxpayers. o Deduction for interest on qualified education loans – Grandparents may qualify to claim an above-the-line deduction for up to $2,500 of interest paid on a qualified higher education loan for any debt incurred by the taxpayer solely to pay qualified higher education expenses for a grandchild, who is at least a half-time student. The deduction phases out for higher-income taxpayers. These education tax benefits only apply to a grandparent who claims the grandchild as a dependent. Many generous grandparents pay these types of expenses for a non-dependent grandchild, but unfortunately, they get no tax breaks for doing so. Medical and dental expenses - A grandparent who itemizes deductions can deduct certain unreimbursed medical and dental expenses paid for a dependent grandchild during the year. The grandchild’s medical expenses are combined with the grandparent’s medical deductions and are allowed to the extent that they exceed 10% of the grandparent’s adjusted gross income for the year. Where a grandparent is age 65 or older, the 10% is reduced to 7.5% through 2016. The foregoing is an overview of the tax benefits available to grandparents. Not all limits and requirements were covered in complete detail. Please contact this office to determine if you qualify for one or more of them. Tue, 11 Mar 2014 19:00:00 GMT Getting Hit With the Alternative Minimum Tax? http://www.messnerandhadley.com/blog/getting-hit-with-the-alternative-minimum-tax/38703 http://www.messnerandhadley.com/blog/getting-hit-with-the-alternative-minimum-tax/38703 Messner & Hadley LLP Article Hightlights: The alternative minimum tax, originally created to curb tax shelters and tax preferences of the wealthy, can now apply to the average taxpayer. Six commonly encountered deductions routinely cause the average taxpayer to be hit by the AMT. Incentive stock options can also have a profound impact on the AMT. There are two ways to determine your tax—the regular way that most everyone understands, and the alternative method. Your tax will be the higher of the two. So what is the alternative tax and why are you getting hit with it? Well, many, many years ago, Congress, in an effort to curb tax shelters and tax preferences of wealthy taxpayers, created an alternative way of computing tax that disallows certain tax deductions and preferences, and called it the alternative minimum tax (AMT). Although originally intended to apply to the wealthy, years of inflation caused more and more taxpayers to be caught up in the tax. It now no longer just affects wealthy taxpayers and can apply to almost any taxpayer if the conditions are correct. Congress has been discussing AMT reform for years but has failed to take any action. The list of tax deductions and preferences not allowed when computing the AMT is substantial and at times complicated. However, the following six items routinely cause the average taxpayer to be hit by the AMT: Medical Deductions - Prior to 2013, medical deductions were allowed to the extent they exceeded 7.5% of a taxpayer's income for regular tax purposes and 10% for the AMT computation. However that difference, except for the elderly, has been eliminated now that the Affordable Care Act raised the 7.5% to 10% for regular tax, making it the same as for the AMT. For taxpayers aged 65 and older, the regular tax adjustment remains at 7.5% through 2016, and that creates a medical AMT adjustment for seniors affected by the AMT. Tax Deductions - When itemizing deductions, a taxpayer is allowed to deduct a variety of taxes, including real property, personal property and state income tax. But for AMT purposes, none of the itemized taxes are deductible. For most taxpayers, this represents one of their largest tax deductions, and frequently triggers the AMT. If you are affected by the AMT, conventional wisdom would dictate deferring tax payments to a subsequent year when the AMT may not apply. When deferring, care should be exercised with regard to late payment penalties and interest on underpayments for certain taxes. In addition, taxpayers can annually elect to capitalize taxes on unimproved and unproductive real estate. This means foregoing the deduction currently and adding the tax paid to the cost basis of the real property. Home Mortgage Interest - For both the regular tax and AMT computations, interest paid on a debt to acquire or substantially improve a main home or second home is deductible as long as the debt limit (generally $1 million) isn't exceeded. This is true of refinanced debt, except that any increase in debt is treated as equity debt. For regular tax purposes, the interest on up to $100,000 of equity debt on the two homes can also be deducted. However, equity debt is not deductible against the AMT; neither is the acquisition or equity debt interest on a motor home or boat that qualifies as a second home. Therefore, taxpayers should exercise caution when incurring home equity debt. Generally, loan brokers are not aware of these limitations, and there are numerous pitfalls. Miscellaneous Itemized Deductions - The category of miscellaneous deductions, which includes employee business expenses and investment expenses, is not deductible for AMT purposes. For certain taxpayers with deductible employee business expenses, this can create a significant AMT. Employees with significant employee business expenses should attempt to negotiate an “accountable” reimbursement plan with their employer. Under this type of plan, the reimbursement for qualified expenses is tax-free. Because the employee has been reimbursed, he or she no longer claims a deduction for the expenses, thus eliminating the miscellaneous deduction. Another strategy would be to defer the expenses to a year not affected by the AMT. Personal Exemptions - Personal exemptions for dependents provide no benefit when taxed by the AMT method. Therefore, divorced or separated parents should carefully consider which party should claim the exemption for a dependent child. Standard Deduction - Since the regular tax standard deduction is not allowed as an AMT deduction, taxpayers affected by the AMT should always itemize. While the benefit of some deductions will be lost, there is still a partial advantage. Even the smallest of charitable deductions will benefit at a minimum of 26% (the lowest bracket for the AMT). Caution: Although not frequently encountered, incentive stock options (ISO) can have a profound impact on the AMT, and clients are strongly encouraged to seek our advice prior to exercising incentive stock options. The AMT is an extremely complicated area of tax law that requires careful planning to minimize its effects. Please contact this office for further assistance. Thu, 06 Mar 2014 19:00:00 GMT Don’t Overlook the Spousal IRA http://www.messnerandhadley.com/blog/don8217t-overlook-the-spousal-ira/38696 http://www.messnerandhadley.com/blog/don8217t-overlook-the-spousal-ira/38696 Messner & Hadley LLP Article Highlights: Non-working spouses can contribute to an IRA based upon the working spouse’s earned income. The combined contributions of both spouses cannot exceed the combined earned income. Each spouse’s contribution is limited to a maximum of $5,500 ($6,500 if over age 49). One frequently overlooked tax benefit is the “spousal IRA.” Generally, IRA contributions are only allowed for taxpayers who have compensation (the term “compensation” includes wages, tips, bonuses, professional fees, commissions, alimony received, and net income from self-employment). Spousal IRAs are the exception to that rule and allow a non-working spouse who files a joint return to contribute to his or her own IRA, otherwise known as a spousal IRA. The maximum annual amount that a non-working spouse can contribute is the same as the limit for a working spouse, which is $5,500 for the years 2013 and 2014. A non-working spouse who is age 50 or older can also make “catch-up” contributions (limited to $1,000 for 2013 and 2014), raising the overall yearly contribution limit to $6,500. These limits apply provided that the couple together has compensation equal to or greater than their combined IRA contributions. Example: Tony is employed and his W-2 for 2013 is $100,000. His wife, Rosa, age 45, has a small income from a part-time job totaling $900. Since her own compensation is less than the contribution limits for the year, she can base her contribution on their combined compensation of $100,900. Thus, Rosa can contribute up to $5,500 to an IRA for 2013. The contributions for both spouses can be made either to a Traditional or Roth IRA or split between them, as long as the combined contributions don’t exceed the annual contribution limit. Caution: The deductibility of the Traditional IRA and the ability to make a Roth IRA contribution are generally based on the taxpayer’s income: Traditional IRAs - There is no income limit restricting contributions to a Traditional IRA. However, if the working spouse is an active participant in any other qualified retirement plan, a tax-deductible contribution can be made to the IRA of the non-participant spouse only if the couple’s adjusted gross income (AGI) doesn’t exceed $178,000 for 2013 and $181,000 for 2014. This limit is phased out for AGI between $178,000 and $188,000 for 2013 and between $181,000 and $191,000 for 2014. Roth IRAs - Roth IRA contributions are never tax deductible. Contributions to Roth IRAs are allowed in full if the couple’s AGI doesn’t exceed $178,000 for 2013 and $181,000 for 2014. The contribution is ratably phased out for AGI between $178,000 and $188,000 for 2013 and between $181,000 and $191,000 for 2014. Example: Rosa, in the previous example, can designate her IRA contribution to be either a deductible Traditional IRA or a nondeductible Roth IRA since the couple’s AGI is under $178,000. Had the couple’s AGI been $183,000, Rosa’s allowable contribution to a deductible Traditional or Roth IRA would have been limited to $2,750 because of the phaseout. The other $2,750 could have been contributed to a nondeductible Traditional IRA. These contributions can be made up to the April due date of your tax return, and even if you have already filed your return, you can still make the contribution and file an amended tax return reporting the contribution and claiming a refund if the contribution is deductible. Please give this office a call if you would like to discuss IRAs or need assistance with your retirement planning. Tue, 04 Mar 2014 19:00:00 GMT Where's My IRS Tax Refund http://www.messnerandhadley.com/blog/wheres-my-irs-tax-refund/38673 http://www.messnerandhadley.com/blog/wheres-my-irs-tax-refund/38673 Messner & Hadley LLP Follow these 3 easy steps to check on your tax refund. Thu, 27 Feb 2014 19:00:00 GMT Retroactive Extension for Portability of Deceased Spouse's Unused Estate Tax Exemption Available http://www.messnerandhadley.com/blog/retroactive-extension-for-portability-of-deceased-spouses-unused-estate-tax-exemption-available/38655 http://www.messnerandhadley.com/blog/retroactive-extension-for-portability-of-deceased-spouses-unused-estate-tax-exemption-available/38655 Messner & Hadley LLP Article Highlights Estates of decedents who died after December 31, 2010 may elect to transfer any unused estate tax exclusion to the surviving spouse. The election must be made on an estate tax return for the decedent. The estate tax return must be timely filed. The IRS recently announced a retroactive automatic extension through December 31, 2014, to file for this election. Estates of decedents who died after December 31, 2010 may elect to transfer any unused estate tax exclusion to the surviving spouse. The amount received by the surviving spouse is called the “deceased spousal unused exclusion” (DSUE) amount. Making this election can have a profound effect on the taxation of the estate of the surviving spouse. Example: Bob and Jane were married when Bob passed away in 2012. Bob's estate was valued at $3,700,000. Since Bob's estate plan passed his entire estate to his wife, Jane, the Federal estate tax would have been zero due to the unlimited marital deduction afforded under the Internal Revenue Code. Since Bob's estate did not utilize any of his federal estate tax exemption ($5,120,000 for individuals who died in 2012), the exemption would have been “wasted.” However, under the portability provisions of the federal estate tax, Bob's estate could have elected to pass that unused exemption to Jane by filing a Federal Form 706 and making the “portability election” on Bob's estate tax return, resulting in Bob's unused estate tax exemption of $5,120,000 being transferred to Jane along with an increase in her future estate tax exemption by this unused amount. The highest marginal estate tax rate is currently 40%; therefore, the unused exemption passed from a decedent to his or her spouse via the “portability election” amount can result in significant estate tax savings. Example: Suppose Jane in our prior example passed away in 2013. Assuming that Jane's estate was valued at $6,000,000, if the “portability election” had not been made on Bob's estate tax return, Jane's taxable estate would be $750,000 ($6,000,000 less the $5,250,000 exemption for someone who dies in 2013). However, if the election had been made on Bob's return, Jane's taxable estate would be zero, as her total exclusion would be $10,370,000 (her $5,250,000 plus the portability from Bob's estate of $5,120,000). Making this election would thus result in a sizable reduction in estate taxes. A surviving spouse can apply the unused exclusion amount received from the estate of his or her last deceased spouse against any tax liability arising from subsequent lifetime gifts and transfers at death. Making the Election - To make the portability election, an estate tax return must be filed, even if the estate would not otherwise be required to file an estate tax return. Failure to file the estate tax return would result in the loss of the portability of the spouse's unused exclusion amount. When a surviving spouse's estate is expected to be valued at less than the estate tax exclusion amount when he or she passes, it may seem to be a waste of time and money to file a 706 Estate Tax Return for the pre-deceased spouse. However, in making that decision, one should consider the possibilities of the surviving spouse receiving inheritances or winning the lottery, or of Congress reducing the estate tax exemption at some time in the future. Any of these potential events could result in substantial estate tax considering the current tax rate on taxable estates is 40%. In January 2014, the IRS announced it was allowing a retroactive extension to make the portability election for estates that were not required to file Form 706. Prior to the IRS announcement, a return had to be filed in a timely manner to make the portability election. Now with the automatic retroactive extension, if the decedent spouse died in 2011, 2012, or 2013, it is possible to make the election by filing the required Form 706 through December 31, 2014. This special extension does not apply to situations in which Form 706 was required to be filed by the size of the estate or in which Form 706 was already filed for the year in question. If you believe that the election to transfer any unused exclusion to a surviving spouse applies to you, family members, or friends and would like additional information, please give this office a call. Tue, 25 Feb 2014 19:00:00 GMT 5 Ways to Accelerate Your Receivables in QuickBooks http://www.messnerandhadley.com/blog/5-ways-to-accelerate-your-receivables-in-quickbooks/38634 http://www.messnerandhadley.com/blog/5-ways-to-accelerate-your-receivables-in-quickbooks/38634 Messner & Hadley LLP Increasing your income is good. But even if you can't, you can still take steps to collect the money you're already owed faster. Here are five. If you asked five small business owners to name the top three roadblocks they face in their quest for ongoing profitability, it's likely that all five would point to slow payments. It's everyone's problem. Accounts receivable requires constant monitoring. As satisfying as it can be to dispatch a group of invoices, you know that it's going to take some work to bring in payment for at least some of them. By using QuickBooks' tools and complying with accounting best practices, you'll be more confident during the invoicing stage that what you're owed will actually be in your bank account in a reasonable amount of time. Here are five things that we suggest. Let customers pay invoices electronically. Figure 1: You're likely to get paid faster if you let customers pay electronically when they receive an invoice. Go to Edit | Preferences | Payments | Company Preferences. A few years ago, this was a good idea. In 2014, when people have stopped carrying checkbooks and are accustomed to using their mobile devices to pay for merchandise, it's become almost required. Whether or not you know it, you're probably losing some business if you don't have a merchant account that supports credit and debit card payments, and possibly e-checks. If you have an online storefront, you've undoubtedly been accepting plastic for a long time now. Not many shoppers want to place an order on a website and hunt for envelopes and stamps and blank checks to complete it. If you invoice customers, it's just as critical that you allow them to remit payment ASAP. Not set up with a merchant account yet? We can help you get started with the Intuit Payment Network. Keep a close watch on your A/R reports. Part of being proactive with your accounts receivable is being vigilant and informed. Create and customize A/R reports regularly. When you customize your A/R Aging Detail report, for example, in addition to the other columns that you include, be sure that Terms, Due Date, Bill Date, Aging and Open Balance are turned on (click Customize Report | Display and click in front of each column label). You should also be looking at Open Invoices and Collections Report frequently, or assigning someone else to monitor them closely. We can help here by creating more complex financial reports periodically, like Statement of Cash Flows. Send statements. Figure 2: In this window, QuickBooks wants you to create filters to identify customers who should receive statements. Here, everyone with transactions that are more than 30 days old will be included. Invoices are generally the preferred way to bill your customers, but you should consider sending statements in addition when customers have outstanding balances past a certain date. QuickBooks sometimes calls these reminder statements. You're not providing the recipients with any new information; you're simply sending a kind of report that lists all invoices sent, credit memos and payment received. To generate statements, click Customers | Create Statements. You'll see the window pictured above. You can send statements to everyone, a defined group or one customer, and you can define the past-due status that you want to target in addition to other options. Send accurate invoices the first time. Few things will slow down your accounts receivable more than incorrect invoices. The customer can wait until payment is almost due to dispute the charges, which means that they'll probably get another 15 or 30 days (or whatever their terms are) to pay the amended bill. So whoever is responsible for creating invoices needs to be checking and re-checking them. If it's logistically possible depending on your workflow, have them verified by a second employee. Offer discounts for early payment and assess finance charges.Offering discounts is a balancing act. You'll be getting less money for your sale - even 5 percent multiplied by many customers can add up - but it may make sense financially for you to take a small hit in return for being able to deposit the payment sooner. We can help you do the math here. To offer this, you'll have to set up your discount scenario as a Term option (Lists | Customer & Vendor Profile Lists | Terms List), as seen here: Figure 3: This Standard discount term gives customers a 5 percent discount if their invoice is paid within 10 days. To make a customer eligible for the discount, open the Customer Center and double-click on a customer, then on Payment Settings | Payment Terms. You might also want to be assessing finance charges. The revenue you bring in from finance charges will probably be negligible. But sometimes, just knowing that a late payment will be more costly may prompt your customers to settle up in a timely fashion. Whatever approaches you choose to accelerate your receivables, be consistent. If any of your customers should compare notes, you want to be regarded as being firm but fair. Sat, 22 Feb 2014 19:00:00 GMT Home Energy Credits http://www.messnerandhadley.com/blog/home-energy-credits/4559 http://www.messnerandhadley.com/blog/home-energy-credits/4559 Messner & Hadley LLP Tax Credit for Residential Energy Improvements - A reduced credit for home energy-savings improvements is available through 2013. The credit generally equals 10% of a homeowner's cost of eligible energy-saving improvements, up to a maximum lifetime tax credit of $500. The cost of certain high-efficiency heating and air conditioning systems, water heaters, and stoves that burn biomass all qualify, along with labor costs for installing these items. In addition, the cost of energy-efficient windows and skylights, energy-efficient doors, qualifying insulation, and certain roofs also qualify for the credit, though the cost of installing these items is not included. Tax Credit for Residential Energy Improvements - Energy property improvements to a principal residence located in the United States and placed in service through 2013 qualify for a credit of 10% of the cost of qualified improvements. The maximum lifetime credit allowed is $500. Thus for 2013, if the total of nonbusiness energy property credits taken since 2006 is more than $500, no credit is allowed in 2013. Some of the energy property categories have lower limits, such as $200 for exterior windows and skylights. No credit is allowed for amounts paid or incurred for onsite preparation, assembly, or original installation of the component. The improvement's original use must commence with the taxpayer, and the improvement must reasonably be expected to remain in use for at least five years. Credit generally applies to the following: Qualified advanced main air circulating fan (used in a natural gas, propane, or oil furnace); Qualified energy-efficient heat pumps; Qualified energy-efficient water heaters; Qualified energy-efficient central air conditioners; Qualifying insulation; Qualified exterior windows, including skylights; Qualified exterior doors; Qualified metal roofs coated with heat-reduction pigments; and Qualified asphalt roofing with appropriate cooling granules. Tax Credit for Residential Energy Efficient Property (REEP credit) - This credit is available for years 2009 through 2016. The installation must be on the taxpayer's main or second home located in the United States. A 30% credit with no maximums (except as noted) applies to the following items: Qualified solar water heaters; Residential solar electric systems; Fuel cell equipment - with a maximum credit of $500 for each half-kilowatt of capacity; Qualified wind energy equipment; and Qualified geothermal energy equipment Labor costs for onsite installation and for piping and wiring connections are qualifying costs for these credits. However, the credits do not apply to equipment used to heat swimming pools or hot tubs. Credit limitations - Although these credits can be used to offset both the regular tax and AMT, they are nonrefundable personal credits that can only reduce a taxpayer's tax to zero; any remaining balance is not refundable. If the amount of the credit for the residential energy efficient property credit (REEP - i.e., the credit for residential solar and fuel cell equipment and wind/geothermal energy equipment) exceeds the taxpayer's tax after subtracting other nonrefundable personal credits, the excess may be carried forward to the next tax year and added to the credit allowable for that year. Thu, 20 Feb 2014 19:00:00 GMT Child Tax Credit http://www.messnerandhadley.com/blog/child-tax-credit/4561 http://www.messnerandhadley.com/blog/child-tax-credit/4561 Messner & Hadley LLP Taxpayers who have a qualified child may qualify for the child tax credit. The maximum credit amount is $1,000. Taxpayers with “earned” (not investment) income whose child credit exceeds their regular and alternative minimum taxes are eligible for a refundable credit. This credit is 15% of the taxpayer's earned income in excess of a threshold amount, which is $3,000 through 2017. A qualifying child for purposes of this credit is a child who (1) is the taxpayer's son, daughter, stepchild, foster child, brother, sister, stepbrother, stepsister, or a descendant of any of them (for example, a grandchild); (2) is the taxpayer's dependent; (3) was under age 17 at the end of the tax year; (4) did not provide over half of his or her own support for the tax year; (5) lived with the taxpayer for more than half of the tax year; and (6) was a U.S. citizen, a U.S. national, or a resident of the United States. As with most tax benefits, the child tax credit begins to phase out when a taxpayer's income reaches a specified threshold amount. The threshold amounts are $110,000 for married taxpayers, $55,000 for married taxpayers filing separately, and $75,000 for all others. The phase-out amount is $50 for each $1,000 (or fraction) of income in excess of the phase-out threshold. In addition to being limited due to the AGI phase out, the child tax credit is also limited for most taxpayers by the taxpayer's total tax liability (both regular and AMT). However, when the credit is limited by the amount of tax liability, a portion of the credit may be refundable for certain taxpayers (see below). The child tax credit can be used to offset AMT. Taxpayers who are unable to claim the full amount of the child tax credit because their income tax liability is less than the credit amount may qualify to take a portion of the tax credit as a refundable credit. This refundable “additional” credit is limited to lower-income taxpayers and involves a rather complicated computation to determine the amount that is refundable. Special Benefit-Military - Excluded combat zone pay of military taxpayers is treated as earned income for purposes of the computation of the refundable portion of the credit. Thu, 20 Feb 2014 19:00:00 GMT Child & Dependent Care Credit http://www.messnerandhadley.com/blog/child--dependent-care-credit/4562 http://www.messnerandhadley.com/blog/child--dependent-care-credit/4562 Messner & Hadley LLP A nonrefundable tax credit is available to some taxpayers for the expenses incurred for the care of a child (generally under 13 years of age), disabled child, spouse, or other dependent while the taxpayer is gainfully employed, (or is job seeking). In addition, employer dependent care assistance programs allow employees to exclude from income certain payments expended for child and dependent care. Generally, the credit is 20% of the cost of the care with a maximum expense limit of $3,000 for one child and $6,000 for two or more. However, for lower-income taxpayers, the credit percentage can be as high as 35%. The expenses that are taken into account for the credit are limited to a taxpayer's earned income (i.e., income from working). The limit must be reduced by the amount a taxpayer excludes from gross income under an employer-provided dependent care assistance plan. For taxpayers who file joint returns, the expense is limited to the earned income of the lower paid spouse. Generally, self-employed taxpayers use the net earnings on Schedule C as earned income. The rules for qualifying for this credit are somewhat complicated and the following are some of more frequently encountered issues: Qualifying Person Test - Your child and dependent care expenses must be for the care of one or more qualifying persons. A qualifying person is: Your qualifying child who is generally your dependent and who was under age 13 when the care was provided, or Your spouse who was physically or mentally not able to care for him or herself and lived with you for more than half the year, or A person who was physically or mentally not able to care for him or herself, lived with you for more than half the year, and either: a. Was your dependent, or b. Would have been your dependent except that: i. he or she received gross income of $3,950 in 2014 or more, ii. he or she filed a joint return, or iii. you, or your spouse if filing jointly, could be claimed as a dependent on someone else's return. Work-Related Expense Test - Child and dependent care expenses must be work-related to qualify for the credit. Expenses are considered work-related only if both of the following are true. They allow you (and your spouse if you are married) to work or look for work. They are for a qualifying person's care. Special Situations Kindergarten - Generally, the cost of school (including private schools) from kindergarten and up are considered schooling, which does not count as a qualified expense. However, after school care generally qualifies if its cost is stated separately. Summer School, Day Camp - Costs of summer school and tutoring programs are not qualifying employment-related expenses because they are educational in nature. A day camp or similar program may constitute a qualifying employment-related expense, even though the camp specializes in a particular activity, such as soccer or computers. The full amount paid for an education day camp that focuses on reading, math, writing, and study skills may be a qualifying expense. No portion of the cost of an overnight camp is an employment-related expense. Absent from Work - A taxpayer must allocate the cost of care on a daily basis if expenses are paid during a period in which a taxpayer is not employed or in active search of employment. However, for short temporary absences (generally two consecutive calendar weeks) where the taxpayer is required to pay for the care, the expenses may be counted. Medical or Maternity Leave - Cost of care while a taxpayer is on short- or long-term disability leave under the Family Medical Leave Act, paid medical leave, or paid maternity leave are not employment-related expenses. Special Rule for Children of Separated or Divorced Parents - In the case of a child of divorced or separated parents, only the custodial parent may claim the credit, even if the non-custodial parent may claim the dependency exemption for that child. A custodial parent is the parent with whom a child shares the same principal place of abode for the greater portion of the calendar year. Disabled or a Full-Time Student Spouse - For taxpayers who file joint returns, the expense is limited to the earned income of the lower paid spouse. If the spouse is disabled or a full-time student, he or she generally will not have earned income. In this circumstance, the spouse's income is imputed for each month he or she is disabled or a full-time student. The imputed amounts are $250 where there is one qualifying person and $500 where there are two. If both spouses were full-time students or disabled (and not working) in any given month, then only one can be considered to have the imputed income for that month. A part of a month is treated as a whole month. Care Provided in Taxpayer's Home - If the care services are provided in the taxpayer's home, the care provider would be considered the taxpayer's household employee and the household employee rules may apply. Provider's Tax ID Information - To claim the credit, a taxpayer must include the care provider's name, address and tax ID number on the return when filing for the credit. It is recommended that IRS Form W-10 is used when obtaining the information. The form includes a place for the provider to sign. This credit can be complicated and not all the details about the credit are included in the article. If you have questions about whether or not you qualify for the credit, please call this office. Thu, 20 Feb 2014 19:00:00 GMT AMT Credit http://www.messnerandhadley.com/blog/amt-credit/4565 http://www.messnerandhadley.com/blog/amt-credit/4565 Messner & Hadley LLP The alternative minimum tax credit (AMT) is a frequently misunderstood and overlooked tax credit. Oversimplified, the AMT credit is the result of incurring an AMT in a prior year, which generates a credit that can be used to offset the excess of the taxpayer's regular tax over the alternative minimum tax in a subsequent year, with unused credit carried forward to future years. It doesn't mean that you will have an AMT credit just because you were affected by the AMT. The credit is the result of having an AMT adjustment known as a “deferral item of preference.” Sound complicated? It can be, but generally the deferral item that affects most taxpayers is the result of exercising a qualified stock option (frequently referred to as an “incentive stock option or ISO) but not selling the shares acquired through the option in the same year the option was exercised. Roughly speaking, the credit amount is the difference between the AMT computed with and without the deferral item of preference. If you were unfortunate enough to have been affected by the alternative minimum tax (AMT) in a prior year, then you may have a carryover of an unused minimum tax credit. Thu, 20 Feb 2014 19:00:00 GMT Saver's Credit http://www.messnerandhadley.com/blog/savers-credit/4567 http://www.messnerandhadley.com/blog/savers-credit/4567 Messner & Hadley LLP The Saver's Credit provides a nonrefundable tax credit for retirement plan contributions made by eligible, low-income taxpayers to IRAs and qualified elective income deferral arrangements. The credit provides incentives for lower income individuals to save for their retirement through available qualified plans. To qualify, the taxpayer must have reached the age of 18 by the close of the year and cannot be a full-time student or a dependent of another. The credit ranges from 10% to 50% of the first $2,000 contributed by each taxpayer to a qualified plan during the year. The credit gradually phases out as a taxpayer's modified AGI increases. This phase out is inflation adjusted from year to year, and the phase-outs for 2014 are illustrated below: Modified AGI - Adjusted gross income is determined without regard to foreign and protectorate income exclusions or foreign housing exclusions.The credit is nonrefundable and offsets alternative minimum tax liability as well as regular tax liability. Example - Eric and Heather are married and file a joint return. Eric contributed $3,000 through his 401(k) plan at work, and Heather contributed $500 to her IRA account. Their modified AGI for the year was $30,000. The credit is computed as follows: Eric's 401(k) contribution was $3,000, but only the first $2,000 can be used.....$2,000 Heather's IRA contribution was $500, so it can all be used....................................500 Total Qualifying contributions..............................................................................$2,500 Credit percentage for a Joint AGI of $30,000 from the table........................... X .50 Saver's credit......................................................................................................$1,250 Eric and Heather file a joint return using the standard deduction for a married couple and their tax for the year is computed as follows: AGI....................................................................................................................$30,000 Standard Deduction......................................................................................... Two Personal Exemptions ($3,950 each)....................................................... Taxable Income................................................................................................. 9,700 Tax rate............................................................................................................x 10% Tax.....................................................................................................................$ 970 Credit ($1,250 but limited to the amount of the tax).................................... Eric and Heather's tax for the year.................................................................. - 0 - Caution - To prevent taxpayers from withdrawing contributions from existing plans, and subsequently recontributing the funds in order to qualify for the credit, Congress built-in a testing period - withdrawals during this period reduce the contributions eligible for the credit. The testing period consists of the year for which the credit is claimed, the period after the end of that year up through the extended due date of the credit-year return, and the two years prior to the credit-year. Thu, 20 Feb 2014 19:00:00 GMT Don't Overlook the Earned Income Tax Credit http://www.messnerandhadley.com/blog/dont-overlook-the-earned-income-tax-credit/22570 http://www.messnerandhadley.com/blog/dont-overlook-the-earned-income-tax-credit/22570 Messner & Hadley LLP The Earned Income Tax Credit (EITC) is a refundable credit primarily for lower-income individuals and couples with qualifying children. The credit first offsets any tax liability of the taxpayer(s), and any credit left over is fully refundable. For 2013, the credit can be as much as $6,044 for a taxpayer with three children. The IRS reports that in the past, 1 in 5 individuals who qualified for the credit failed to claim it. The credit is based on an individual's financial, marital, and parental status for the year. The credit increases with earned income until the maximum credit is reached and phases out for higher-income taxpayers. For 2013, the following is the maximum credit, based on the number of children, and the income level at which the credit is fully phased out. Number of Qualifying Children:        None         One         Two         ThreeMaximum Credit .........                    $487      $3,250      $5,372      $6,044Totally Phased Out when AGI or Earned Income Exceeds:Joint Filers                  $19,680     $43,210    $48,378    $51,567Others                       $14,340     $37,870    $43,038    $46,227The following are the general requirements to claim the credit: A federal income tax return must be filed to claim the credit even if the taxpayer is not otherwise required to file. A qualifying child must live with the taxpayer in the U.S. for more than half the year. Temporary absence from home (such as to attend school) can still qualify as time spent at home. Requirements for a qualifying child:- The child must be under age 19 at the end of the tax year or be a full-time student under age 24 at the end of the tax year. A child who is permanently and totally disabled is a qualified child regardless of age.- The child will not be a qualifying child if he or she files a joint return, unless the return is filed solely to claim a refund.- The child must be younger than the taxpayer who is claiming the EIC. This means, for example, that a taxpayer cannot claim the credit for an older brother or sister. The credit is NOT available to individuals whose filing status is Married Filing Separately. The credit is NOT available to individuals whose “disqualified income” (i.e., investment income) is more than $3,300. The filer, spouse (if filing a joint return), and any qualifying child included in the computation must have a valid SSN issued by the Social Security Administration. The filer or spouse must have earned income. Earned income is income from working, such as wages, profits from self-employment, income from farming, and, in some cases, disability income. If a taxpayer retired on disability, benefits received under an employer's disability retirement plan are considered earned income until the taxpayer reaches minimum retirement age. Special rules apply to members of the U.S. Armed Forces in combat zones. Members of the military can elect to include their nontaxable combat pay in earned income for the EITC. If you make this election, the combat pay remains nontaxable. If you have questions related to the EITC and how it might apply to you, a friend, or a family member, please call. Thu, 20 Feb 2014 19:00:00 GMT First-Time Homebuyer’s Credit Recapture http://www.messnerandhadley.com/blog/first-time-homebuyer8217s-credit-recapture/29251 http://www.messnerandhadley.com/blog/first-time-homebuyer8217s-credit-recapture/29251 Messner & Hadley LLP To stimulate home sales, Congress established the first-time homebuyer credit in 2008, resulting in some complicated recapture rules. Unlike the 2009–2010 credit, which must be recaptured only when the home is not used as a principal residence any time within the 36 months after its purchase, the 2008 credit was actually a form of a no-interest loan that had to be paid back to the federal government in 15 equal annual installments beginning in 2010. The repayment amount is included as a tax on the homebuyer’s annual income tax returns through 2024 unless one of the exceptions noted next applies. Recapture Exceptions - Some exceptions apply to the recapture rules: Government Service Waiver - In the case of a disposition of a principal residence by an individual (or a cessation of use of the residence that otherwise would cause recapture) after Dec. 31, 2008, in connection with government orders received by the individual (or the individual's spouse) for qualified official extended duty service, no recapture applies by reason of the disposition of the residence, and any 15-year recapture with respect to a home acquired before Jan. 1, 2009, ceases to apply in the tax year of the disposition. Taxpayer’s Death - If a taxpayer dies, any remaining annual installments are not due. If a joint return was filed, and the taxpayer passes away, the surviving spouse would be required to repay his or her half of the remaining repayment amount. Ceases Being Main Home - If a taxpayer stops using a home as the main home, all remaining annual installments become due on the return for the year that this occurs. There are special rules for involuntary conversions. Home Sold - If a home is sold, all remaining annual installments become due on the return for the year of the sale. The repayment is limited to the amount of gain on the sale if the home is sold to an unrelated taxpayer. If there is no gain or if there is a loss on the sale, the remaining annual installments may be reduced or even eliminated. For example, in 2008, a home was purchased for $200,000, and the homebuyer was eligible for and claimed a credit of $7,500. Assuming that no improvements are made on the home, and it is sold for $195,000 after repaying $500 of the credit, the gain or loss would be measured for purposes of the accelerated credit recapture from $193,000 (the original cost of $200,000 less the $7,500 credit plus the $500 repayment). In this case, there would be a gain of $2,000 on the sale ($195,000 minus $193,000). Thus, the taxpayer would only be liable for repaying $2,000 of the credit when the home is sold. Had the home sold for $193,000 or less, there would be no repayment required. If the home is sold to a related party, the full recapture amount must be paid regardless of the amount of gain (or loss). Divorce - If a home is transferred to a spouse or to a former spouse (as part of a divorce settlement), that person is responsible for making all subsequent installment payments. Involuntary Conversion - If the home is involuntarily converted (e.g., it is destroyed in a storm), and the taxpayer buys a new principal residence within a two-year period beginning on the date of the disposition or the date the home ceases to be the principal residence, the accelerated recapture rule does not apply. However, the regular recapture rule applies to the replacement principal residence during the recapture period in the same way as if the replacement principal residence were the converted residence. Please call this office if you have questions related to the recapture of the First Time Homebuyer credit. Thu, 20 Feb 2014 19:00:00 GMT March 2014 Individual Due Dates http://www.messnerandhadley.com/blog/march-2014-individual-due-dates/30367 http://www.messnerandhadley.com/blog/march-2014-individual-due-dates/30367 Messner & Hadley LLP March 3 - Farmers and Fishermen File your 2013 income tax return (Form 1040) and pay any tax due. However, you have until April 15 to file if you paid your 2013 estimated tax by January 15, 2014. March 10 - Report Tips to Employer If you are an employee who works for tips and received more than $20 in tips during February, you are required to report them to your employer on IRS Form 4070 no later than March 10. Your employer is required to withhold FICA taxes and income tax withholding for these tips from your regular wages. If your regular wages are insufficient to cover the FICA and tax withholding, the employer will report the amount of the uncollected withholding in box 12 of your W-2 for the year. You will be required to pay the uncollected withholding when your return for the year is filed.March 15 - Time to Call For Your Tax Appointment It is only one month until the April due date for your tax returns. If you have not made an appointment to have your taxes prepared, we encourage you do so before it becomes too late.Do not be concerned about having all your information available before making the appointment. If you do not have all your information, we will simply make a list of the missing items. When you receive those items, just forward them to us. Even if you think you might need to go on extension, it is best to prepare a preliminary return and estimate the result so you can pay the tax and minimize interest and penalties. We can then file the extension for you. We look forward to hearing from you. Thu, 20 Feb 2014 19:00:00 GMT March 2014 Business Due Dates http://www.messnerandhadley.com/blog/march-2014-business-due-dates/30368 http://www.messnerandhadley.com/blog/march-2014-business-due-dates/30368 Messner & Hadley LLP March 17 - S-Corporation Election File Form 2553, Election by a Small Business Corporation, to choose to be treated as an S corporation beginning with calendar year 2013. If Form 2553 is filed late, S treatment will begin with calendar year 2015.March 17 - Electing Large Partnerships Provide each partner with a copy of Schedule K-1 (Form 1065-B), Partner’s Share of Income (Loss) From an Electing Large Partnership, or a substitute Schedule K-1. This due date is effective for the first March 15 following the close of the partnership’s tax year. The due date of March 15 applies even if the partnership requests an extension of time to file the Form 1065-B by filing Form 7004.March 17 - Social Security, Medicare and Withheld Income Tax If the monthly deposit rule applies, deposit the tax for payments in February. March 17 - Non-Payroll Withholding If the monthly deposit rule applies, deposit the tax for payments in February. March 17 - Corporations File a 2013 calendar year income tax return (Form 1120 or 1120-A) and pay any tax due. If you need an automatic 6-month extension of time to file the return, file Form 7004, Application for Automatic Extension of Time To File Certain Business Income Tax, Information and Other Returns, and deposit what you estimate you owe. Filing this extension protects you from late filing penalties but not late payment penalties, so it is important that you estimate your liability and deposit it using the instructions on Form 7004. Thu, 20 Feb 2014 19:00:00 GMT Understanding Your Tax Basics http://www.messnerandhadley.com/blog/understanding-your-tax-basics/433 http://www.messnerandhadley.com/blog/understanding-your-tax-basics/433 Messner & Hadley LLP No matter what the season or your unique circumstances, when it comes to your taxes, planning usually pays off in a lower tax bill. The following is provided so that you may have a basic understanding of taxes before you discuss filing options and strategies. Filing Status - Except for a surviving spouse, or married individuals who have lived apart for the entire year, your filing status depends on your marital status at the end of the tax year. Generally, if you are married at the end of the tax year, you have three possible filing status options: Married Filing Jointly, Married Filing Separate, or if you qualify, Head of Household. If you were unmarried at the end of the year, you would file as Single status, unless you qualify for the more beneficial Head of Household status.Head of Household is the most complicated filing status to qualify for and is frequently overlooked as well as incorrectly claimed. Generally, the taxpayer must be unmarried AND: • Pay more than one half of the cost of maintaining as his or her home a household which is the principal place of abode for more than one half the year of a qualifying child, or an individual (relative) for whom the taxpayer may claim a dependency exemption, or• Pay more than half the cost of maintaining a separate household that was the main home for a dependent parent for the entire year. A married taxpayer may be considered unmarried for the purpose of qualifying for the Head of Household status if the spouses were separated for at least the last six months of the year, provided the taxpayer maintained a home for a dependent child for over half the year.Surviving Spouse (also referred to as Qualifying Widow or Widower) is a rarely used status for a taxpayer whose spouse died in one of the prior two years and who has a dependent child at home. The joint tax rates are used, but no exemption is claimed for the deceased spouse. In the year the spouse passed away, the surviving spouse would file jointly with the deceased spouse if not remarried by the end of the year. Adjusted Gross Income (AGI) - AGI is the acronym for Adjusted Gross Income. AGI is generally the sum of a taxpayer's income less specific subtractions called adjustments (but before the standard or itemized deductions and exemptions). Many tax benefits and allowances, such as credits, certain adjustments and some deductions are limited by a taxpayer's AGI. Taxable Income - Taxable income is your AGI less deductions (either standard or itemized) and your exemptions. Your taxable income is what your regular tax is based upon using either the IRS tax tables or the rate schedule. Marginal Tax Rate - Not all of your income is taxed at the same rate. The amount equal to the sum of your deductions and exemptions is not taxed at all. The next increment is taxed at 10%, then 15%, etc., until you reach the maximum tax rate. When you hear people discussing tax bracket, they are referring to the marginal tax rate. Knowing your marginal rate is important, because any increase or decrease in your taxable income will affect your tax at the marginal rate. For example, suppose your marginal rate is 25% and you are able to reduce your income $1,000 by contributing to a deductible retirement plan. You would save $250 in Federal tax ($1,000 x 25%). Your marginal tax bracket depends upon your filing status and taxable income. Find your marginal tax rate using the table below.When using this table, keep in mind that the marginal rates are step functions and that the taxable incomes shown in the filing status column are the top value for that marginal rate range. 2014 MARGINAL TAX RATES TAXABLE INCOME BY FILING STATUS Marginal Tax Rate Single Head of Household Joint* Married Filing Separately 10.0% 9,075 12,950 18,150 9,075 15.0% 36,900 49,400 73,800 36,900 25.0% 89,350 127,550 148,850 74,425 28.0% 186,350 206,600 226,850 113,425 33.0% 405,100 405,100 405,100 202,550 35.0% 406,750 432,200 457,600 228,800 39.6% Over406,750 Over432,200 Over457,600 Over228,800 * Also used by taxpayers filing as Surviving Spouse Taxpayer & Dependent Exemptions - You are allowed to claim a personal exemption for yourself, your spouse (if filing jointly) and each individual who qualifies as your dependent. The amount you are allowed to deduct is adjusted for inflation annually; the amount for 2014 is 3,950 (up from $3,900 in 2013).Dependents - To qualify as your dependent, an individual must be your qualified child or pass all five dependency qualifications: (1) Member of the Household or Relationship Test, (2) Gross Income Test, (3) Joint Return Test, (4) Citizenship or Residency Test, and (5) Support Test. The gross income test limits the amount of income a dependent can make if he or she is over 18 and does not qualify for an exception for certain full-time students. The support test generally requires that you pay over half of the dependent’s support, although there are special rules for divorced parents and situations where several individuals together provide over half of the support.Qualified Child - A qualified child is one that meets the following tests:(1) Has the same principal place of abode as you for more than half of the tax year except for temporary absences.(2) Is your son, daughter, stepson, stepdaughter, brother, sister, stepbrother, stepsister, or a descendant of any such individual.(3) Is younger than you.(4) Did not provide over half of his or her own support for the tax year.(5) Is under age 19 or under age 24 in the case of a full-time student, or is permanently and totally disabled (any age).(6) Was unmarried (or if married, either did not file a joint return or filed jointly only as a claim for refund). Deductions - Taxpayers can choose between itemizing their deductions or using the standard deduction. The standard deductions, which are inflation adjusted annually, are illustrated below for 2014. Filing Status Standard Deduction Single $6,200 Head of Household $9,100 Married Filing Jointly $12,400 Married Filing Separately $6,200 The standard deduction is increased by multiples of $1,550 for unmarried taxpayers who are over age 64 and/or blind. For married taxpayers, the additional amount is $1,200. Those with large deductible expenses can itemize their deductions in lieu of claiming the standard deduction.Itemized deductions include:(1) Medical expenses (limited to those that exceed 10% of your AGI for the year). Note: the reduction rate is 7½% for seniors age 65 and older through 2016;(2) Taxes consisting primarily of real property taxes, state income (or sales*) tax and personal property taxes;(3) Interest on qualified home debt and investments; the latter is limited to net investment income (i.e. the interest cannot exceed your investment income after deducting investment expenses);(4) Charitable contributions are generally limited to 50% of your AGI, but in certain circumstances the limit can be as little as 20% or 30% of AGI,(5) Miscellaneous employee business expenses and investment expenses, but only to the extent that they exceed 2% of your AGI;(6) Casualty losses in excess of 10% of $100 per occurrence plus your AGI; and(7) Gambling losses to the extent of gambling income, and certain other rarely encountered deductions.*The option to deduct state and local sales tax instead of state and local income tax does not apply for 2014 and subsequent years, but there is a chance Congress may reinstate the provision retroactively. Please check with this office for updates. Alternative Minimum Tax (AMT) - The Alternative Minimum Tax is another way of being taxed that taxpayers frequently overlook. The Alternative Minimum Tax (AMT) is a tax that was originally intended to ensure that wealthier taxpayers with large write-offs and tax-sheltered investments paid at least a minimum tax. However, unlike the regular tax computation, for many years the AMT was not adjusted for inflation, and years of inflation drove most taxpayers’ income up to the point where more and more taxpayers were being affected by the AMT. Congress finally changed the law to allow annual inflation-adjustment of the amount of income exempt from the AMT, and raised the amount of AMT taxable income at which the higher of two AMT tax rates applies. These changes have helped limit the number of additional taxpayers subject to the AMT. A full overhaul of the AMT law is yet to come from Congress. Meanwhile, your tax must be computed by the regular method and by the alternative method. The tax that is higher must be paid. The following are some of the more frequently encountered factors and differences that contribute to making the AMT greater than the regular tax.- Personal and dependent exemptions - are not allowed for the AMT. Therefore, separated or divorced parents should be careful not to claim the exemption if they are subject to the AMT and instead allow the other parent to claim the exemption. This strategy can also be applied to taxpayers who are claiming an exemption under a multiple support agreement.- The standard deduction – is not allowed for the AMT and a person subject to the AMT cannot itemize for AMT purposes unless they also itemize for regular tax purposes. Therefore, it is important to make every effort to itemize if subject to the AMT. - Itemized deductions:Medical deductions – only allowed in excess of 10% of AGI, now the same as for regular tax (except the reduction rate is 7½% for taxpayers age 65 or older). This difference for seniors will end when the AGI threshold percentage increases for them to 10% in 2017.Taxes – are not allowed at all for the AMT.Interest – Home equity debt interest and interest on debt for non-conventional homes such as motor homes and boats are not allowed as AMT deductions.Miscellaneous deductions subject to the 2% of AGI reduction are not allowed against the AMT. - Nontaxable interest from Private Activity Bonds – is tax-free for regular tax purposes but some are taxable for the AMT.- Statutory Stock Options (Incentive Stock Options) when exercised produce no income for regular tax purposes. However, the bargain element (difference between grant price and exercise price) is income for AMT purposes in the year the option is exercised.- Depletion Allowance – in excess of a taxpayer’s basis in the property is not allowed for AMT purposes.The AMT exemptions are phased out for higher-income taxpayers. The amounts shown are for 2014. AMT EXEMPTION PHASE OUT Filing Status Exemption Amount Income Where Exemption Is Totally Phased Out Married Filing Jointly $82,100 $484,900 Married Filing Separate $41,050 $242,450 Unmarried $52,800 $328,500 AMT TAX RATES AMT Taxable Income Tax Rate 0 – $182,500 (1) 26% Over $182,500 (1) 28% (1) $91,250 for married taxpayers filing separatelyYour tax will be the higher of the tax computed the regular way or the Alternative Minimum Tax. Anticipating when the AMT will affect you is difficult, because it is usually the result of a combination of circumstances. In addition to those items listed above, watch out for transactions involving limited partnerships, depreciation and business tax credits only allowed against the regular tax. All of these can strongly impact your bottom line tax and raise a question of possible AMT. Tax Tip: If you were subject to the AMT in the prior year, itemized your deductions on your federal return for the prior year, and had a state tax refund for that year, part or all of your state income tax refund from that year may not be includable in the regular tax computation. To the extent you received no tax benefit from the state tax deduction because of the AMT, that portion of the refund is not includable in the subsequent year’s income. Tax Credits - Once your tax is computed, tax credits can reduce the tax further. Credits are divided into two categories: those that are nonrefundable and can only offset the tax, and those that are refundable. In addition, some credits are not deductible against the AMT, and some credits, when not fully used in a specific tax year, can carry over to the succeeding years. Although most credits are a result of some action taken by the taxpayer, there are two commonly encountered credits that are based simply on the number of your dependents or your income.Child Tax Credit - The child tax credit is $1,000 per child. If the credit is not entirely used to offset tax, the excess portion of the credit, up to the amount that the taxpayer's earned income exceeds a threshold ($3,000 2011 through 2017) is refundable. Taxpayers with three or more qualifying dependent children may use an alternate method for figuring the refundable portion of their credit. The credit is allowed against both the regular tax and the AMT for each dependent under age 17. The credit begins to phase out at incomes (AGI) of $110,000 for married joint filers, $75,000 for single taxpayers and $55,000 for married individuals filing separate returns. The credit is reduced by $50 for each $1,000 (or fraction of $1,000) of modified AGI over the thresholds.Earned Income Credit -This is a refundable credit for low-income taxpayers with income from working, either as an employee or a self-employed individual. The credit is based on earned income, the taxpayer’s AGI and the number of qualifying children. A taxpayer who has investment income such as interest and dividends in excess of $3,350 (up from $3,300 in 2013) is ineligible for this credit. The credit was established as an incentive for individuals to obtain employment. It increases with the amount of earned income until the maximum credit is achieved and then begins to phase out at higher incomes. The table below illustrates the phase-out ranges for the various combinations of filing status and earned income and the maximum credit available. 2014 EIC PHASE-OUT RANGE Number ofChildren Joint Return Others MaximumCredit None $13,540 - $20,020 $8,110 - $14,590 $496 1 $23,260 - $43,941 $17,830 - $38,511 $3,305 23 $23,260 - $49,186$23,260 - $52,427 $17,830 - $43,756 $17,830 - $46,997 $5,460 $6,143 Residential Energy-Efficient Property Credit – This credit is generally for energy-producing systems that harness solar, wind or geothermal energy including solar electric, solar water heating, fuel cell, small wind energy and geothermal heat pump systems. These items qualify for a 30% credit with no annual credit limit. Unused residential energy-efficient property credit is generally carried over through 2016. Withholding and Estimated Taxes - Our “pay-as-you-go” tax system requires that you make payments of your tax liability evenly throughout the year. If you don't, it's possible you could owe an underpayment penalty. Some taxpayers meet the “pay-as-you-go” requirements by making quarterly estimated payments. However, when your income is primarily from wages, you usually meet the requirements through wage withholding and rely on your employer's payroll department to take out the right amount of tax, based on the withholding allowances shown on the Form W-4 you filed with your employer. To avoid potential underpayment penalties, you are required to deposit by payroll withholding or estimated tax payments an amount equal to the lesser of: (1) 90% of the current year’s tax liability; or(2) 100% of the prior year’s tax liability or, if your AGI exceeds $150,000 ($75,000 for taxpayers filing Married Separate), 110% of the prior year’s tax liability. If you had a significant change in income during the year, we can assist you in projecting your tax liability to maximize the tax benefit and delay paying as much tax as possible before the filing due date. Wed, 19 Feb 2014 19:00:00 GMT Cut Taxes On Your Investments http://www.messnerandhadley.com/blog/cut-taxes-on-your-investments/434 http://www.messnerandhadley.com/blog/cut-taxes-on-your-investments/434 Messner & Hadley LLP Long-term capital gains tax rates will produce automatic tax savings by taxing the gain from capital assets at rates lower than the regular tax rate. To take advantage of the long-term rates, you need to hold the asset longer than one year. The long-term rate depends on two things: your marginal tax rate and how long you have held the asset. If your marginal rate is 15% or under - Your long-term capital gains rate will be 0% for property held longer than one year. To the extent your marginal rate is above 15% but below 39.6% - Your long-term capital gains rate will be 15% for property held longer than one year. To the extent your marginal rate is 39.6% - Your long-term capital gains rate will be 20% for property held longer than one year. Taxpayers in the 10% or 15% tax brackets with unrealized long-term capital gains should develop strategies to take advantage of the “zero” tax rate, possibly cashing in on existing gains while avoiding any federal tax on the gains. Also remember the gain itself adds to the taxpayer’s income, impacts income-based limitations, and possibly pushes the taxpayer into a higher regular tax bracket, so it is a balancing act to take advantage of this zero rate.Primarily because of this zero tax rate, Congress raised the age for the “kiddie” tax to include full-time students under the age of 25. Thus, Congress effectively nullified a popular strategy for funding college expenses by gifting appreciated stock to children who could then sell it with no or reduced tax liability.Long-term capital losses offset long-term capital gains before they offset short-term capital gains. Similarly, short-term capital losses offset short-term capital gains before they offset long-term capital gains. Keep in mind that taxpayers may use up to $3,000 ($1,500 for taxpayers filing as married separate) of total capital losses in excess of total capital gains as a deduction against ordinary income in computing adjusted gross income or AGI. Currently, individuals are subject to tax at a rate as high as 39.6% on short-term capital gains and ordinary income. But long-term capital gains are generally taxed at a maximum rate of 20%.All of this means that having long-term capital losses offset long-term capital gains should be avoided, since those losses will be more valuable if they are used to offset short-term capital gains or ordinary income. Avoiding this requires making sure that the long-term capital losses are not taken in the same year as the long-term capital gains. However, this is not just a tax issue; investment factors also need to be considered. It would not be wise to defer recognizing gain until the following year if there is too much risk that the property’s value will decline before it can be sold. Similarly, one wouldn't want to risk increasing a loss on property that is expected to continue declining in value by deferring its sale until the following year.To the extent that taking long-term capital losses in a different year than long-term capital gains is consistent with good investment planning, a taxpayer should take steps to prevent those losses from offsetting those gains.Special Considerations - Some long-term gains are treated differently. Long-term gain attributable to depreciation recaptured on certain depreciable real estate is taxed at a maximum rate of 25%, and long-term gain attributable to collectibles (works of art, coins, stamps, antiques and similar property) is taxed at a maximum of 28%. If a taxpayer owns shares of the same stock purchased at different times and prices and can specifically identify those blocks of stock, it may be to his or her benefit to pick the block of shares to sell based on their cost and holding period. If the taxpayer cannot specifically identify them, then the first-in first-out rule applies. Shareholders of mutual funds may choose to average the cost basis of shares bought at different times; for holding period purposes, the mutual fund shares that are sold are considered to be the ones acquired first.When deciding whether to take gain or hold for long-term rates, compare the savings associated with long-term rates to the financial risk of continuing to hold the investment. Careful handling of capital gains and losses can save substantial amounts of tax. Please contact this office to discuss year-end planning strategies that apply to your particular situation so as to maximize tax savings. Owners of luxury homes with gains exceeding the $250,000/$500,000 exclusion limits, and owners of second homes that do not qualify for the home sale gain exclusion, will especially benefit from the lower capital gain rates.DividendsDividends received by an individual shareholder from domestic corporations (and certain foreign corporations) are treated as net capital gain for purposes of applying the capital gain tax rates. This means dividends are taxed at no more than 20% for taxpayers in the highest marginal rate. Capital losses cannot offset the dividend income. Dividends on stock held in a retirement plan or Traditional IRA do not benefit from the lower rates; distributions from these plans are taxed at ordinary income rates.Deferring or Avoiding Tax When Disposing of AssetsDepending on the type of asset, there are a number of strategies that can be employed to reduce, defer, or even avoid the tax upon the asset’s disposition. Tax-Free Exchange - Commonly referred to as a Sec 1031 exchange in reference to the tax code section covering exchanges, this type of strategy is frequently used to defer taxes in real estate held for business or investment purposes by deferring the gain into a replacement real estate property also held for business or investment purposes. Tax-free exchanges are also available for non-real estate business assets, but must conform to stringent like-for-like requirements. Tax-free exchanges do not apply to personal-use real estate holdings, such as your home or second home, and generally do not apply to publicly-traded stock. If the property is mixed-use property, such as a house that is used partially as a home, the business portion may qualify under the Sec 1031 exchange rules. Please call this office for additional details. Installment Sale - By carrying back the paper (loan) on the sale of an asset, you can spread the gain over a period of years. In these types of arrangements, the gain and nontaxable return of capital are taxed proportionally over the term of the sale agreement, thereby deferring the tax on the gain portion until actually received. Charitable Gift - Consider replacing cash charitable gifts with gifts of appreciated property. By giving the asset to a favorite charity, the taxpayer receives a charitable contribution deduction equal to the fair market value of the gift and at the same time avoids having to report the gain from the asset on his or her return. However, the maximum deduction for gifts of this type can be as low as 20% or 30% of AGI as compared to 50% for cash gifts. Caution: If the value of the stock a taxpayer is considering gifting is less than what was paid for it, he or she should sell it, take the loss on their return and then contribute the cash to the charity. Charitable Remainder Trust - This technique allows a taxpayer to contribute his or her asset(s) to a trust, which in turn pays an income during the remainder of the taxpayer's life and leaves the balance at death to the charity. The assets contributed to the trust can be sold within the trust without any tax consequences to the taxpayer. In addition, when the trust is formed, the taxpayer will receive a charitable deduction for the estimated amount that the trust will leave to charity upon death. The amount of income paid to the taxpayer each year is flexible (within some limitations) and provides annual funds, which can then supplement retirement needs. Gifts to Individuals - Giving a gift of appreciated property to an individual (donee) transfers the gain from that property to the donee. This can work to your advantage by gifting the appreciated asset rather than giving the donee cash. Let’s say that a taxpayer is assisting a low-income parent with living expenses (but doesn't pay over half the parent's support so the taxpayer cannot claim the parent as a dependent). Instead of selling some appreciated stock to pay for the parent's household costs, for example, the stock should be gifted to the parent, who can sell it in a much lower tax bracket and pay for his or her own expenses. The foregoing are abbreviated summaries of tax strategies that may have additional restrictions or other tax ramifications. Please consult with this office before attempting to employ any of these strategies.Take Investment LossesIf a taxpayer has investments that are worth less than what was paid for them, he or she can use the losses to offset other gains and in certain circumstances other types of income. Capital Losses - Tax law allows you as an investor to offset capital gains with capital losses, and if the losses exceed the gains, you can deduct losses up to a maximum of $3,000 ($1,500 if filing married separate) for the tax year. Any additional losses carry over to future years. For this reason, review your securities portfolio at year’s end and search for stocks and other securities whose sales will result in a capital loss. This will help minimize your gains or maximize your losses for the year. When planning this strategy, keep in mind that under the wash sale rules, a loss is disallowed if the security sold at a loss is repurchased within 30 days. A loss will also be disallowed if the investor buys the same security 30 days before the sale.Another planning strategy is to avoid having long-term capital losses offset long-term capital gains, since those losses will be more valuable if they are used to offset short-term capital gains or ordinary income. Avoiding this requires making sure that the long-term capital losses are not taken in the same year as the long-term capital gains. However, this is not just a tax issue; investment factors also need to be considered. Variable Annuity Losses - If a taxpayer has a variable annuity that is worth less than what was paid for it, consider surrendering it before year’s end so that a deductible loss can be realized. Usually, the amount that is deductible will be the surrender value less the tax basis in the annuity. The tax basis is generally the amount originally invested less any amounts previously received from the annuity that were excludable from income. Before making a decision to surrender, consider any possible surrender penalties and the potential for the annuity to recover. Please call this office if we can assist you with your decision. Invest in Tax-Exempt Securities Municipal Bonds - Interest received on obligations of states and their municipalities is exempt from Federal tax and may also be free from state taxation. Although these bonds generally pay a lower interest rate, their “after-tax” return (yield) can be higher than other similar investments such as corporate bonds, CDs, etc. Taxpayers in higher tax brackets and children subject to the “kiddie tax” frequently use this investment. Taxpayers drawing Social Security benefits should be reminded that even though municipal bond income may be tax-free, it is still used as income for purposes of determining the taxable portion of Social Security income. In addition, interest on certain “private activity bonds” is not exempt for AMT purposes. EQUIVALENT TAXABLE YIELD TaxExempt Tax Equivalent Taxable Yield Marginal Tax Rate 10 15 25 28 33 35 39.6 2.0 2.2 2.35 2.67 2.78 2.98 3.08 3.31 2.5 2.75 2.94 3.33 3.47 3.73 3.85 4.14 3.0 3.30 3.53 4.00 4.17 4.48 4.62 4.97 3.5 3.85 4.12 4.67 4.86 5.22 5.38 5.79 4.0 4.40 4.7 5.33 5.56 5.97 6.15 6.62 4.5 4.95 5.29 6.00 6.25 6.72 6.92 7.45 5.0 5.50 5.88 6.67 6.94 7.46 7.69 8.28 5.5 6.05 6.47 7.33 7.64 8.21 8.46 9.10 6.0 6.60 7.06 8.00 8.33 8.96 9.23 9.93 Direct U.S. Government Obligations - Interest from U.S. Savings Bonds, T-Bills, HH Bonds, etc., is taxable only for Federal purposes. Federal law prohibits states from taking a bite out of this income. In addition, interest from U.S. Savings Bonds (series E, EE and I) may be deferred until the year the bond is cashed, providing a vehicle for deferral strategies. Wed, 19 Feb 2014 19:00:00 GMT Plan For Selling Your Home http://www.messnerandhadley.com/blog/plan-for-selling-your-home/436 http://www.messnerandhadley.com/blog/plan-for-selling-your-home/436 Messner & Hadley LLP Each individual taxpayer, regardless of age, is allowed to exclude up to $250,000 of gain from the sale of their main home if certain requirements are met. A married couple that meets the requirements can exclude up to $500,000. To qualify for the exclusion, a taxpayer must own and live in the home as their main home for two of the prior five years immediately before the sale (under certain circumstances the five-year period is extended for military personnel and intelligence community employees). Short temporary absences, such as for vacation or other seasonal absence (even though accompanied with rental of the residence), are counted as periods of use.If the home was originally acquired via a Sec 1031 tax-free exchange, the home must be owned for a minimum of five years before a home-sale gain exclusion can be utilized, provided the taxpayer also meets the two-year use test. Any gain in excess of the excludable amount is taxable. If the home was previously used as a rental, second home, used by a relative, unoccupied, etc., and converted to the taxpayer’s primary residence, the gain must be allocated between gain attributable to non-qualified use after December 31, 2008 and home sale gain. Non-qualified use is any use other than as a home between January 1, 2009 and the time it was converted to the taxpayer’s home. Only home sale portion of the gain qualifies for the $250,000/$500,000 gain exclusion.The exclusion can be used over and over again, as long as two years have elapsed between sales and the taxpayer otherwise meets the ownership and use tests. If there is a loss from the sale of your home, that loss is not deductible. Even if the taxpayer doesn’t qualify for the full exclusion, he or she may still qualify for a partial exclusion if the home is sold due to a job-related move, health reasons, involuntary conversions, death, loss of employment, divorce, or other unforeseen circumstances. Also, in divorce situations where one spouse remains in the home for an extended period after the divorce, the spouse who no longer lives in the home may still qualify for the exclusion based on the other spouse’s use period. If claiming, or have previously claimed, a home office deduction for an office that is an integral part of your home, the IRS has taken a liberal approach and allows the gain from the office portion to also be excluded, except for home office depreciation claimed after May 6, 1997. That depreciation, to the extent of any home sale gain, is taxable at 25%. However, this liberal treatment is not extended to gain derived from a portion of the property that is separate from the dwelling and that was used for business. The exchange of a home can qualify for both the §121 home sale exclusion and §1031 like-kind exchange deferral treatment. This can occur where the property was used as a principal residence and a business consecutively (e.g., use as a principal residence followed by rental of the property) or concurrently (a portion of the home used as a principal residence and a portion used as a home office). A beneficiary who inherits the residence of a decedent generally (except for decedents dying in 2010 where the executor opts to use a carryover basis regime) receives a step-up or step-down in basis based upon the value of the property at the date of death, and since it is inherited property, it is treated as held for long-term. Generally, a beneficiary will sell the residence through a broker and will have substantial sales costs. These sales costs quite often translate into a loss on the sale (sales price – sales costs – inherited basis) if the beneficiary does not use the property for personal uses. Wed, 19 Feb 2014 19:00:00 GMT Save Taxes by Shifting or Deferring Income http://www.messnerandhadley.com/blog/save-taxes-by-shifting-or-deferring-income/437 http://www.messnerandhadley.com/blog/save-taxes-by-shifting-or-deferring-income/437 Messner & Hadley LLP Shifting Income to Your Child - Children under the age of 19 and full-time students under the age of 24 are subject to the so-called kiddie tax. This was enacted by Congress to restrict taxpayers from shifting large amounts of income to their children by taxing the child at the parent’s marginal tax rate. However, for children without earnings from working, there is no kiddie tax on the first $1,000 for 2013 and 2014 of investment income, and the next $1,000 is taxed at 10%. Once the child is beyond the applicable age, all of their income is taxed at their own marginal rate.When the income of a child subject to this tax calculation reaches the point where it would be taxed at the parent’s rate, making investments through tax-deferred investment vehicles becomes a prudent option. Placing or moving a child's funds into tax deferred or tax free investments such as U.S. Savings Bonds, tax-deferred annuities, municipal bonds, growth stocks, etc., that produce little or no current taxable income, can help avoid the Kiddie Tax, at least in the years until the investments need to be sold or redeemed to pay for education expenses. Investing in U.S. Savings Bonds - Interest income from certain types of U.S. Savings Bonds may be deferred until the bonds mature or are cashed in, whichever occurs first. Thus, one can defer income for the life of the bonds. Investing in Deferred Annuities - Because the interest earned on a deferred annuity is tax-deferred, your earnings are not taxed until withdrawn. This also allows the investment to compound faster. Employing Your Child - Payments that you make to your child under the age of 18, who works for you in your trade or business that is a sole proprietorship or partnership in which each partner is a parent of the child, are not subject to Social Security and Medicare taxes. As long as the pay is reasonable for the necessary services to the business provided by the child, you can deduct that pay as a business expense. Assuming the child has no other income, he or she will not have any tax on the first $6,200 of wages from you in 2014. Your child may also make deductible contributions to an IRA of the lesser of earned income or $5,500. These contributions can offset income, so your child could receive $11,700 in gross income by combining the IRA deduction with the standard deduction and pay no tax. IRA Contributions - For 2013 and 2014, an individual may contribute the lesser of his or her compensation or $5,500 to their IRA accounts. The spouse can do the same even if he or she does not work, provided the joint compensation is at least $11,000 for the year. For individuals age 50 and over, the annual limit is increased by $1,000. Contributions to a Traditional IRA cannot be made once the taxpayer reaches age 70-1/2. For purposes of determining IRA deduction limits, individuals who receive taxable alimony and separate maintenance payments may treat the alimony as compensation even if it is the only income they have. This allows alimony recipients to save for their retirement by making either Traditional or Roth IRA contributions. Traditional IRA contributions are deductible if the taxpayer and spouse (if married) do not actively participate in another qualified retirement plan, or if participating in another plan, their AGI is below income phase-out levels. For married taxpayers where one spouse is an active participant in a qualified plan and the other is not, the IRA deduction is phased out when AGI is between $178,000 and $188,000 for the one who is not an active participant in 2013. For 2014 the range is $181,000 to $191,000. 2014 TRADITIONAL IRA PHASE OUT AGI Phase Out Single & Head of Household Joint* &Surviving Spouse MarriedSeparate Threshold $60,000 $96,000 $0 Complete $70,000 $116,000 $10,000 *When both spouses are active participants in qualified plans. If you cannot deduct your IRA contribution or you simply wish to generate tax-free retirement funds, you can contribute to a Roth IRA instead of the Traditional IRA, provided the owner’s AGI is below the phase-out levels shown in the table below. Roth IRA distributions are tax-free after a five-year waiting period and the owner has reached age 59-1/2 or becomes disabled. 2014 ROTH IRA PHASE OUT AGI Phase Out Single & Head of Household Joint &Surviving Spouse MarriedSeparate Threshold $114,000 $181,000 $0 Complete $129,000 $191,000 $10,000 An individual can convert all or any portion of his or her Traditional IRA to a Roth IRA. Since income tax must be paid on the conversion amount, it makes sense to convert if there are many years to go before the individual plans to withdraw the funds. This allows the IRA to accumulate tax-free earnings and appreciation. If an individual has one or more IRA accounts invested in stocks or mutual funds that have declined in value, this might be an opportune time to convert it to a Roth IRA. Another reason to convert to a Roth IRA is to pass on money to your heirs. Unlike a Regular IRA, there are no mandatory withdrawals for the Roth IRA owner, and the heirs will not be liable for income taxes when the Roth IRA is distributed to them. Roth Rollover Strategies - There are some interesting strategies a taxpayer can employ to convert nondeductible traditional IRA contributions to a Roth IRA, thereby funding the more favorable Roth IRA. Taxpayers who have employer plans and are restricted from making deductible traditional IRA contributions because of income level can make nondeductible traditional IRA contributions and then convert those nondeductible traditional IRAs to Roth IRAs with virtually no tax since they were nondeductible. Only the earnings from the time of the original contributions up to the time of conversion would be taxable. Taxpayers who are prohibited from making Roth IRA contributions because their income exceeds the limit may also benefit from this strategy. Using the same strategy, even a taxpayer who can make a deductible contribution to a traditional IRA can elect to make it nondeductible, providing the same result as above. Self-Employed Retirement Plans - The maximum deduction for a self-employed individual’s contribution on their own behalf to a profit-sharing or SEP plan for 2014 is the lesser of 20% of net self-employment earnings (after the deduction for one-half of self-employment taxes) or $52,000 (up from $51,000 in 2013). In addition, a self-employed individual who is age 50 or older can make an additional catch-up contribution of $5,500.Self-employed individuals are also allowed a 401(k)-style elective deferral of the lesser of the annual maximum ($17,500 in 2013 and 2014) or the net profit from the self-employed business less the profit-sharing or SEP contribution. Wed, 19 Feb 2014 19:00:00 GMT Planning Pension Distributions http://www.messnerandhadley.com/blog/planning-pension-distributions/438 http://www.messnerandhadley.com/blog/planning-pension-distributions/438 Messner & Hadley LLP An individual may begin withdrawing, without penalty, from his or her qualified pension plans at the age of 59-1/2. Generally, distributions before age 59-1/2 are subject to a federal penalty equal to 10% of the taxable amount of the distribution, but there are several exceptions that will allow earlier withdrawal without penalty. Upon reaching age 70-1/2, you are required to take distributions from your plans or face a substantial penalty for failing to do so. Impact of Your Marginal Rate - If you are able to plan your withdrawals, you can save considerable tax dollars. This is not always possible, but the basic premise is to take distributions and pay the resulting tax in years when your marginal rate is low. Also watch for years when, for a variety of reasons, your taxable income is negative and some amount of distributions could be taken tax-free if age 59-1/2 and over. The penalty only applies to those under 59-1/2. Impact on Social Security - For retired individuals receiving Social Security benefits, planning IRA distributions can also be beneficial. Social Security itself is only taxable when the total of one-half of the taxpayer’s Social Security benefits plus the taxpayer’s other income exceeds $25,000 ($32,000 for a married couple filing jointly). Once this threshold is reached, every additional dollar of other income will cause 50% to 85% of the Social Security benefits to also become taxable. Therefore, if a taxpayer’s other income is under the threshold, it is generally good practice to withdraw just enough taxable IRA funds to bring the income up to the threshold amount, even if the funds are not needed in that year. They can be set aside for a future year when they might be used for some unplanned need or large purchase. However, this strategy may not work if IRA distributions are required to be made (see next section). Minimum Distribution Requirements - The IRS does not allow taxpayers to keep funds in qualified plans indefinitely. Eventually, assets must be distributed and taxes paid. If there are no distributions, or if the distributions are not large enough, the owner may have to pay a 50% penalty of the amount not distributed as required. Generally, distributions must begin in the year the plan owner reaches the age of 70-1/2. In most cases, the required minimum distribution can be figured using the “life” factor from the following table, which is divided into the value of the account as of the end of the preceding tax year. So, for example, an individual who reaches age 73 in 2014 and whose IRA had a value on December 31, 2013 of $50,000, would be required to withdraw $2,024.29 in 2014 ($50,000/24.7). UNIFORM LIFETIME TABLE Age Life Age Life Age Life Age Life Age Life 70 27.4 80 18.7 90 11.4 100 6.3 110 3.1 71 26.5 81 17.9 91 10.8 101 5.9 111 2.9 72 25.6 82 17.1 92 10.2 102 5.5 112 2.6 73 24.7 83 16.3 93 9.6 103 5.2 113 2.4 74 23.8 84 15.5 94 9.1 104 4.9 114 2.1 75 22.9 85 14.8 95 8.6 105 4.5 115 1.9 76 22.0 86 14.1 96 8.1 106 4.2 77 21.2 87 13.4 97 7.6 107 3.9 78 20.3 88 12.7 98 7.1 108 3.7 79 19.5 89 12.0 99 6.7 109 3.4 Wed, 19 Feb 2014 19:00:00 GMT Explore Education Tax Incentives http://www.messnerandhadley.com/blog/explore-education-tax-incentives/439 http://www.messnerandhadley.com/blog/explore-education-tax-incentives/439 Messner & Hadley LLP Congress, through the years, has provided a variety of tax incentives to help defray the cost of education. Some require long-term planning to become beneficial, while others provide current tax deductions or credits. Section 529 Plans - Section 529 Plans (named after the section of the IRS Code that created them) are plans established to help families save and pay for college in a tax-advantaged way and are available to everyone, regardless of income. These state-sponsored plans allow you to gift large sums of money for a family member’s college education while maintaining control of the funds. The earnings from these accounts grow tax-deferred and are tax-free, if used to pay for qualified higher education expenses. They can be used as an estate-planning tool as well, providing a means to transfer large amounts of money without gift tax. With all these tax benefits, 529 Plans are an excellent vehicle for college funding. Section 529 Plans come in two types, allowing you to either save funds in a tax-free account to be used later for higher education costs, or to prepay tuition for qualified universities. For 2014, you can contribute $14,000 ($28,000 for married couples who agree to split their gift) a year without gift tax implications. The annual amount is subject to inflation-adjustment, so call for the limit for other years. There is also a special gift provision allowing the donor to prepay five years of gifts up front without gift tax. No income tax deduction is allowed for the amount contributed. Coverdell Education Savings Account - These accounts are actually education trusts that allow nondeductible contributions to be invested for a child’s education. Tax on earnings from these accounts is deferred until the funds are withdrawn, and if used for qualified education purposes, the entire withdrawal can be tax-free. Qualified use of these funds includes elementary and secondary education expenses in addition to post-secondary schools (colleges). A total of $2,000 per year can be contributed for each beneficiary under the age of 18. The ability to contribute to these plans phases out when modified adjusted gross income is between $190,000 and $220,000 for married taxpayers filing jointly and between $95,000 and $110,000 for all others. Education Tax Credits - Two tax credits, the American Opportunity Credit (partially refundable) and the Lifetime Learning Credit (nonrefundable), are available for qualified post-secondary education expenses for a taxpayer, spouse and eligible dependents. Both credits will reduce one’s tax liability dollar for dollar until the tax reaches zero. The credit is not allowed for taxpayers who file Married Separate returns. The American Opportunity Credit is a credit of up to $2,500 per student per year, covering the first four years of qualified post-secondary education. The credit is 100% of the first $2,000 of qualifying expenses plus 25% of the next $2,000 for a student attending college on at least a half-time basis. 40% of the American Opportunity credit is refundable (if the tax liability is reduced to zero). The Lifetime Learning Credit is a credit of up to 20% of the first $10,000 of qualifying higher education expenses. Unlike the American Opportunity Credit, which is on a per-student basis, this credit is per taxpayer. In addition to post-secondary education, the Lifetime Credit applies to any course of instruction at an eligible institution taken to acquire or improve job skills. Qualifying expenses for these credits is generally limited to tuition. However, student activity fees and fees for course-related books, supplies and equipment qualify if they must be paid directly to the educational institution for the enrollment or attendance of the student. You may qualify for this credit even if you did not pay the tuition. If a third party (someone other than the taxpayer or a claimed dependent) makes a payment directly to an eligible educational institution for a student’s qualified tuition and related expenses, the student would be treated as receiving the payment from the third party, and, in turn, paying the qualified tuition and related expenses. Furthermore, qualified tuition and related expenses paid by a student would be treated as paid by the taxpayer if the student is a claimed dependent of the taxpayer. Education Loan Interest - You can deduct qualified interest of $2,500 per year in computing AGI. This is not limited to government student loans and could be home equity loans, credit card debt, etc., provided the debt was incurred solely to pay qualified higher education expenses. For 2014, this deduction phases out for married taxpayers with an AGI between $130,000 and $160,000 and for unmarried taxpayers between $65,000 and $80,000. The phase out range is inflation adjusted annually, so please call for limits other than those shown for 2014. This deduction is not allowed for taxpayers who file married separate returns. Wed, 19 Feb 2014 19:00:00 GMT Make the Most of Your Deductions http://www.messnerandhadley.com/blog/make-the-most-of-your-deductions/440 http://www.messnerandhadley.com/blog/make-the-most-of-your-deductions/440 Messner & Hadley LLP As you plan for your tax year, keep in mind that some tax deductions are “above-the-line” and are available whether deductions are itemized or not. In addition to the educational “above-the-line” deductions, the following deductions are noteworthy. Health Savings Accounts - A Health Savings Account is a trust account into which tax-deductible contributions may be made by qualified taxpayers who have high deductible medical insurance plans. Interest earned on the HSA balance is tax-free. The funds from these accounts are then used to pay qualified medical expenses not covered by the medical insurance for an eligible individual. If these funds are not used, they roll over year to year. Once the taxpayer turns 65, the funds can be used as a retirement plan (taxable when withdrawn, but not subject to a withdrawal penalty) or saved for future medical expenses. Since the contribution is an above-the-line deduction, a taxpayer need not itemize deductions to take advantage of this tax break. High deductible plans are defined as those with the following deductible amounts for 2014: Self-only coverage with an annual deductible of $1,250 or more and limits on annual expenses, other than premiums, required to be paid by the plan during the year, up to $6,350; or Family coverage with an annual deductible of $2,500 or more and limits on annual expenses, other than premiums, required to be paid by the plan during the year, up to $12,700. The deductibles and maximum out of pocket limits are inflation adjusted annually, so please call for amounts for years other than 2014. Itemized Deductions - A taxpayer with deductible expenses exceeding the standard deduction amount will want to itemize their deductions. Itemized deductions consist of five basic categories, each with its own limitations and special considerations. If your deductions only marginally exceed the standard deduction, consider “bunching” your deductions in one year. This allows you to produce higher than normal itemized deductions that year and then take the standard deduction the other year. The following is an overview of the itemized deductions o Medical Expenses - Deductible medical expenses are limited to unreimbursed expenses for the taxpayer, his or her spouse and dependents that exceed 10% (7-1/2% if age 65 or older) of the taxpayer's AGI for the year. For AMT purposes, the medical deduction of a taxpayer who is age 65 or more will be less because only the excess of unreimbursed expenses above 10% of AGI is deductible. For younger taxpayers, their regular tax and AMT medical deduction will be the same amount. Expenses most frequently thought of as deductible medical expenses include medical and dental insurance premiums, charges by doctors and dentists and the cost of prescription medication. Medical insurance premiums and other expenses paid with pre-tax dollars (e.g., through an employer's cafeteria plan) cannot be included. Generally, travel costs (not including meals) may be a deductible expense if the trip is primarily for medical purposes. Cosmetic surgeries are generally not deductible. Some less common deductions include the following: - The cost of a weight loss program (not including food) for the treatment of a specific disease or diseases (including obesity) diagnosed by a physician. - Medicare-B premium payments and Medicare-D premiums for drug coverage. - Participation in smoking-cessation programs and for prescribed drugs (but not nonprescription items such as gum or patches) designed to alleviate nicotine withdrawal. - Elder Care, generally including the entire cost of nursing homes, homes for the aged and assisted living facilities. - Medical dependent - For medical purposes, an individual may be a dependent even if his gross income precludes a dependency exemption, thus enabling the taxpayer to deduct the individual’s medical expenses that the taxpayer paid. A child of divorced parents is considered a dependent of both parents for medical expenses purposes (so that each parent may deduct the medical expenses he or she pays for the child.) - Long-term care insurance - Amounts paid for long-term care services and certain premiums paid on long-term care insurance are includible as medical expenses. The maximum amount of long-term care premiums treated as medical expenses depends on the insured’s age and is inflation-indexed annually. For values for years other than 2014 please call this office. Deductio Limi2014 Long-Term Care Insurance Age 40 or less 41 to 50 51 to 60 61 to 70 71 & Older Limit $370 $700 $1,400 $3,720 $4,660 o Taxes - Deductible taxes primarily consist of real property taxes, state and local income taxes and personal property taxes. Planning tip: Since taxes are not deductible for AMT purposes, taxpayers should attempt to minimize the payment of taxes in a year they are subject to the AMT if they can avoid late payment penalties for the tax payments. Where property taxes were paid on unimproved and unproductive real estate, a taxpayer can annually elect to capitalize the taxes in lieu of deducting them. For 2013, taxpayers have the option of deducting on Schedule A as part of their itemized deductions the LARGER of: (1) State and local income tax paid, or (2) State and local sales tax paid during the year. This option has expired for 2014 and subsequent years. However, there is a chance the provision could be retroactively extended by Congress. Please call for possible future developments. o Interest - The only interest that is deductible as an itemized deduction is home mortgage interest and investment interest. Although this category does not have an AGI limitation, each interest type has special limitations. Home mortgage interest is limited to the interest paid on acquisition debt that does not exceed $1 million and home equity debt (not exceeding $100,000) on the taxpayer’s main home and a designated second home. In addition, the interest on most equity debt is not deductible against the AMT. Note: Home acquisition debt is the original debt (current balance) incurred to purchase or substantially improve the home and is not increased by refinanced debt. Taxpayers can elect to treat any debt secured by the home as unsecured. The election is irrevocable without IRS consent. By making the election, the interest on the loan can be allocated to use of the proceeds, except none of the interest can be allocated back to the home itself. This election is for income tax purposes only and does not change how the loan is secured with the lender. If made, the election applies for both regular tax and AMT purposes, and it applies for the year the election is made and all future years. There is no specific IRS form to use to make the election. Instead, the taxpayer should attach a statement to their return (timely filed) for the year the election is to be effective stating the election is to apply. Investment interest is interest on debts incurred to acquire investments such as securities or land. The investment interest deduction is limited to net investment income (investment income less investment expenses), and any excess not deductible in the current year is carried over to future years. Interest on debt to acquire tax-free investment income is not deductible. A taxpayer can elect to treat qualified dividends and long-term capital gains as investment income in order to increase the amount of deductible investment interest. However, the same capital gains and qualified dividends are then not eligible for the lower capital gains/qualified dividends tax rate. o Charitable Contributions - A taxpayer may, within certain limits, deduct charitable contributions of cash and property to qualified organizations to the extent he or she receives no personal benefit from the donations. All cash contributions regardless of the amount must be documented with a written verification from the charity or a bank record. Non-receipted cash contributions are not deductible. Non-cash contributions also require an acknowledgement of the contribution from the qualified charitable organization except for donations of $250 or less left at unmanned drop points. For non-cash contributions of more than $5,000 (except for publicly-traded securities), a taxpayer is generally required to have a qualified appraisal of the property that was donated. Please call this office for further details. Charitable deductions are limited by a percent of income depending upon the type of contribution. Contributions in excess of the AGI limitation may be carried forward for five years. Although there are 20% and 30% of AGI limitations, generally, contributions to qualified organizations are deductible to the extent they don’t exceed 50% of the taxpayer’s Adjusted Gross Income. One notable exception is the 30% limitation for gifts of capital gains property, where the contribution is based on the fair market value of the property. Frequently overlooked contributions include those made to governmental organizations such as schools, police and fire departments, parks and recreation, etc. Uniforms, travel expenses and out-of-pocket expenses for a charity are also deductible, but not the value of your time or the cost of equipment such as computers, phones, etc., if you retain ownership. Congress imposed some tough rules that substantially limit the deduction for the popular charitable car donation. If the claimed value of the vehicle exceeds $500, the deduction will generally be limited to the gross proceeds from the charity’s sale of the vehicle. The IRS provides Form 1098-C that incorporates all of the required acknowledgement elements for the donee (charitable organization) to complete. The donor is required to attach copy B of the 1098-C to his or her federal tax return when claiming a deduction for contribution of a motor vehicle, boat or airplane. There is an exception to the rules for donated vehicles that the charity retains for its own use “to substantially further the organization's regularly conducted activities or provides to a needy family.” Please call this office for more information. For 2013, taxpayers age 70½ and over were allowed to make direct distributions (up to $100,000 per year) from their Traditional or Roth IRA account to a charity. The distribution is tax-free, and counts toward the taxpayer’s required minimum distribution for the year, but there is no charitable deduction. This provision can be very beneficial to taxpayers who have Social Security income and/or do not itemize their deductions. This option has expired for 2014 and subsequent years. However, there is a chance the provision could be retroactively extended by Congress. Please call for possible future developments. o Miscellaneous Deductions - Miscellaneous deductions fall into two basic categories: those that are reduced by 2% of a taxpayer's AGI and those that are not. - Those Subject to the 2% Reduction - This category generally includes your investment expenses, costs of having your tax return prepared, and employee business expenses. - Those NOT Subject to the 2% Reduction - This category includes gambling losses (but cannot exceed the amount reported as gambling income), personal casualty losses (after first reducing each loss by $100 and the total loss for the year by 10% of your AGI), repayments of income (over $3,000) reported in prior years and estate tax deductions. The estate tax deduction is considered by many to be the most overlooked deduction in taxes. It is a deduction based on the additional taxes paid as a result of the same income being taxed to both the estate and to the beneficiaries of the estate. Only certain types of income are doubly taxed. As an example, if the decedent had a Traditional IRA account, the value of the IRA would be included in the decedent’s estate and also would be taxable to the beneficiary. If the estate paid any tax at all (on Form 706), the beneficiary in this example would have an estate tax deduction equal to the portion of the estate tax paid attributable to the IRA. Wed, 19 Feb 2014 19:00:00 GMT Tax Planning For Your Business http://www.messnerandhadley.com/blog/tax-planning-for-your-business/441 http://www.messnerandhadley.com/blog/tax-planning-for-your-business/441 Messner & Hadley LLP • Business Entity Choices - Non-tax considerations generally take precedence in selecting the appropriate structure for your business. However, tax considerations can also play an important role in your decision. Choosing the right business entity at the inception of your business is important, and all aspects should be carefully considered.Your choices of business entities include: Corporation, Sub-S Corporation, Partnership, and Limited Liability Company; if there are no co-owners, one can choose a Sole Proprietorship. HOW BUSINESS ENTITIES ARE TAXED To TheBusiness To TheOwner(s) Sole Proprietorship No Yes Partnership No Yes Corporation Yes Dividends S-Corporation No (2) Yes Limited Liability Co. Depends Upon Structure (2) Exceptions apply • Business Start-Up Costs - A frequent question is how the start-up costs of a business are handled before actually in business. Typical expenses include legal consultation, travel, surveys, establishment of suppliers, employee training, etc. Current law allows a taxpayer to deduct up to $5,000 of start-up costs in the year the business begins; a partnership or corporation may expense up to $5,000 of organizational costs. Each $5,000 amount must be reduced, but not below zero, by the amount of accumulated start-up expenses and organizational costs in excess of $50,000. If not deductible in the year the business begins, these expenses are deducted ratably over 15 years. • Purchasing an Ongoing Business - If you are considering purchasing an ongoing business that is not a stock transaction, it is important that you and the seller agree on how the purchase price is allocated among the various elements of the business. The allocation can have significant tax ramifications for both the buyer and seller, and the IRS requires the treatment between the buyer and seller to be consistent. Some elements can be depreciated or written off quicker than others, while some cannot be written off at all. For the seller, the sales prices of some elements receive capital gains treatment, while others generate ordinary income. When negotiating the sale, be sure it includes the agreed allocation.• Deducting the Cost of Business Assets - Depreciation is a way of recovering the cost of an item purchased for business use over a period of time. Some assets are depreciated over a specified life. For some assets, the depreciation is straight-line, while for others, accelerated methods that front-load the deduction may be used. Following are examples of the depreciable life for some commonly encountered business assets. Assets that are used only partially for business must be prorated for business use. SAMPLE DEPRECIABLE LIVES Asset DepreciableLife Agricultural Equipment 7 Yrs Automobiles (3) 5 Yrs Commercial Real Estate 39 Yrs Land Not Depreciable Land Improvements 15 Yrs Office Equipment 5 Yrs Office Furnishings 7 Yrs Residential Real Estate 27.5 Yrs Trucks (3) 5 Yrs (3) Vehicles under 6,000 lbs. gross unladen weight have additional deduction restrictions. (4) The Sec 179 deduction for SUVs is limited to $25,000 and applies to sport utility vehicles rated at 14,000 pounds gross vehicle weight or less. Expense Deduction - For 2014, you may also elect to expense up to $25,000 ($12,500 if filing married separate), (down from $500,000 on 2013) of the cost of certain assets (generally those with a depreciable life of seven years or less) the first year the asset is placed in business service (Sec 179 deduction). The deduction is limited to the income from all of the taxpayer’s trades and businesses. There are additional restrictions, called the investment limit, if more than $200,000 of assets are placed in service during the tax year. Note: The drastic reduction in the expense limit is the result of sun setting tax laws which Congress allowed to expire. However, there is a chance Congress could retroactively increase the limit. Please call for further updates. Excluded from this limitation is any vehicle that:- is designed for more than nine individuals in seating rearward of the driver's seat;- is equipped with an open cargo area, or a covered box not readily accessible from the passenger compartment, of at least six feet in interior length; or - has an integral enclosure, fully enclosing the driver compartment and load carrying device, does not have seating rearward of the driver’s seat, and has no body section protruding more than 30 inches ahead of the leading edge of the windshield.Bonus Depreciation - Bonus depreciation expired after 2013.• Special Breaks for Incorporated Businesses - If a business is incorporated, there are two special tax provisions that may apply. You may want to qualify the stock as “Small Business Stock.” When stock of this type is sold or exchanged, losses up to $50,000 ($100,000 if married filing jointly) per year may be deducted as an ordinary loss instead of a capital loss, which would be limited to your capital gains plus $3,000 ($1,500 if filing as married separate). If the business is a C-Corporation and you acquired the stock at original issue, you may also qualify for a 50%, 75% or 100% exclusion of gain for certain small business stock held for more than five years (the applicable exclusion percentage depends on when the stock was acquired). Or, you may choose to roll over the gain from qualified small business stock held for more than six months by buying another small business stock within six months.• Business Automobiles - When a vehicle is used for business purposes, the taxpayer can deduct the business portion of the operating expenses on the business. If the car is used for both business and personal purposes, you may deduct only the cost of its business use. One can generally determine the expense for the business use of the car in one of two ways: the standard mileage rate method or the actual expense method.- Standard Mileage Rate Method—The standard mileage rate takes the place of fuel, oil, insurance, repair, maintenance, and depreciation (or lease) expenses. Beginning in January 2014, the standard mileage rate is 56 cents per mile (down from 56.5 cents in 2013). In addition, the cost of business-related parking and tolls is deductible. Note: Because of the volatility of fuel prices, the mileage rates may vary during the year.Caution: If the standard mileage rate is not used in the first year the vehicle is placed in service, it cannot be used in future years. If, in a subsequent year, the taxpayer switches to the actual method, the straight-line method for depreciation must be used. If the car is leased, continue to use the standard mileage rate in future years. The standard mileage rate can be used for up to four vehicles that are being used simultaneously in business.- Actual Expenses Method: To use the actual expense method, determine the entire actual cost of operating the car for the year and then determine the business portion attributable to the business miles driven. Parking fees and tolls attributable to business use are also deductible.Both methods can include interest paid on the car loan when deducted on business returns. However, the interest deduction is not allowed for employees deducting job connected car expenses as part of their itemized deductions. Unfortunately, if you deduct actual expenses for the business use of your car, you will probably find your write-offs for depreciation restricted due to so-called luxury car limitations. And most all cars (including trucks or vans) fit the IRS definition of a “luxury vehicle,” regardless of their cost. If a vehicle is four-wheeled, used mostly on public roads, and has an unloaded gross weight of no more than 6,000 pounds, the car is considered a “luxury vehicle.” The auto depreciation limit for 2013 is $3,160. An additional $200 allowance is added to the above limitations for certain passenger autos built on a truck chassis, including minivans and sport utility vehicles (SUVs). In addition, if bonus depreciation is elected, the maximum will be increased by $8,000. The rates for 2014 will be similar but without the availability of the $8,000 bonus depreciation which expired after 2013. In an effort to rein in the practice of purchasing SUVs as a tax shelter, Congress has placed a limit of $25,000 on the §179 deduction for certain vehicles. The limit applies to sport utility vehicles rated at 14,000 pounds gross vehicle weight or less. Excluded from this limitation is any vehicle that: is designed for more than nine individuals in seating rearward of the driver's seat; is equipped with an open cargo area, or a covered box not readily accessible from the passenger compartment, of at least six feet in interior length; or has an integral enclosure, fully enclosing the driver compartment and load carrying device, does not have seating rearward of the driver’s seat, and has no body section protruding more than 30 inches ahead of the leading edge of the windshield.• Self-Employed Health Insurance Deduction - Self-employed individuals may deduct, as an adjustment to income, 100% of health insurance expenses paid for themselves and their families. Don’t overlook as eligible amounts for this deduction both amounts paid for long-term care insurance premiums, up to the annual age-based limits, and Medicare-B and -D premium payments. In addition, as part of the recently-enacted health care provisions, a child no longer need qualify as your dependent to be included on your self-employed health insurance plan. They need only be your child under the age of 27. This would include children that are self-supporting or married.• Home-Based Businesses Can Deduct Office-In-Home Expenses - Deducting the costs of a home office gives rise to several issues:(1) the qualifications that must be met to take that deduction;(2) expenses that can be deducted; and(3) the tax implications when the home containing the home office is sold. - Qualifications for the Deduction - Generally, a home office that is part of a residence is deductible only if used regularly and exclusively as a principal place of business, or as a place to meet or deal with customers or clients in the ordinary course of business. For home-based businesses, the home office qualifies as a principal place of business if the office is used on an exclusive and regular basis for administrative or management activities of any trade or business of the taxpayer, and there is no other fixed location of the business where the taxpayer conducts substantial administrative or management activities of the business.- Home Office Expenses - Home office expenses are divided into two categories: those that are directly related to the office, such as painting the room, installing a phone, etc., and indirect expenses that relate to both the office and personal portions of the home, such as utilities, insurance, real estate taxes, home mortgage interest, repairs benefiting the entire home and depreciation if the home is owned or rent if the home is rented. There is also a “safe harbor” allowance that can be used in lieu of actual expenses and depreciation (or rent payments) that allows a deduction of $5 per square foot up a maximum of 300 square feet. The expenses for the business use of a home cannot exceed the income from the business requiring the office. • Acquire Equipment - If you wish to reduce your profits, consider purchasing some additional equipment or machinery needed for the business. This will allow you to take advantage of the depreciation and expensing deductions. • Establish A Retirement Plan - If you don’t have a retirement plan established, this might be the time to consider one. There are a variety of plans available, including Keogh Defined Contribution and Profit Sharing Plans, which must be established before the end of the year, or a SEP Plan, which can be established after the end of the year.• Reduce Inventory - The cost of goods is a deduction against business income. However, any inventory remaining at the conclusion of the business year will be used to reduce your cost of goods sold, and thereby increase your profits for the year. You may wish to minimize the inventory before the end of the business year.• Domestic Production Deduction - For 2014 (the same as 2013), the domestic production deduction for both corporations and individual business owners is 9%. The deduction is 9% of the lesser of the individual taxpayer's:(1) Qualified production activities income for the year, or (2) Adjusted gross income* for the year determined without regard to this deduction (but limited for any year to 50% of the W-2 wages paid by the taxpayer as an employer) during the tax year. So, for example, a sole proprietor who has no employees would not be eligible for this deduction. The main beneficiaries of this deduction are businesses that produce goods, develop software or construct property in the U.S.*Substitute "taxable income" in lieu of adjusted gross income for other than individuals.Example - Computing Domestic Production Deduction: Linda actively conducts a business as a sole proprietor manufacturing and selling ceramic dishware, all in the United States. She has two employees. Linda's qualified production activities income (QPAI) for 2014 is $55,000, which is the same amount as her net earnings from self-employment. The W-2s she filed for the employees show qualifying wages of $80,000. Linda's AGI before the domestic production deduction (Sec. 199 of the Tax Code) is $45,000. Her Section 199 deduction will be $4,050. The applicable percentage for 2014 is 9%; the lesser of QPAI or AGI is AGI of $45,000. 9% x $45,000 = $4,050. Since 50% of W-2 wages (50% x $80,000 = $40,000) is greater than $4,050, the deduction is not limited by the W-2 wage element, and the deduction will be $4,050. Wed, 19 Feb 2014 19:00:00 GMT Real Estate Rental Limitations http://www.messnerandhadley.com/blog/real-estate-rental-limitations/442 http://www.messnerandhadley.com/blog/real-estate-rental-limitations/442 Messner & Hadley LLP Real estate rental income is business income but is not subject to Social Security taxes. Real estate rentals are also considered passive activities. Generally, passive activity losses are only deductible to the extent of passive activity income. An exception allows most individuals to annually deduct up to $25,000 ($12,500 for married filing separate taxpayers who live apart the entire tax year) of real estate rental losses. This dollar limit phases out ratably at AGI between $100,000 and $150,000 ($50,000 and $75,000 for married filing separate taxpayers who live apart the entire tax year). Any unallowed passive loss will carry over to future years. If you qualify as a real estate professional, the passive loss limitations will not apply to your real estate rental activities. Wed, 19 Feb 2014 19:00:00 GMT Avoiding Tax Penalities http://www.messnerandhadley.com/blog/avoiding-tax-penalities/3704 http://www.messnerandhadley.com/blog/avoiding-tax-penalities/3704 Messner & Hadley LLP Many tax penalties are substantial and can dramatically increase a tax bill. Penalties can be assessed for a variety of reasons. Some may result from a taxpayer's carelessness or inattention to tax details. Other penalties are incurred due to the overstatement of deductions, the failure to report income, missing documentation, negligence or procrastination. Taxpayers may also be penalized for intentional acts of fraud and/or filing frivolous tax returns. The following is an overview of the federal penalties that can be imposed on a taxpayer. Filing and Paying Late - These penalties will apply when a taxpayer fails to file taxes on time or does not pay the taxes he or she owes. The combined penalty is 5% of the unpaid tax for each month or part of a month that the return is late, but not for more than five months. The late-filing penalty is reduced if combined with the late payment penalty. Thus, the 5% includes a 4½% penalty for filing late and a ½% penalty for paying late. The 25% combined maximum penalty includes 22½% for filing late and 2½% for paying late. The ½% penalty for paying late is not limited to five months. This penalty will continue to increase to a maximum of 25% until the taxpayer pays the tax in full. The maximum 25% penalty for paying late is in addition to the maximum 22½% late-filing penalty, bringing the total penalty to 47½%. If a taxpayer does not file a return within 60 days of the due date, the minimum penalty is $135 or 100% of the balance of the tax due on the return—whichever is smaller. Underpayment of Estimated Tax - Our tax system is a “pay-as-you-go” system. To facilitate that concept, the government has provided several means of assisting taxpayers in meeting the “pay-as-you-go” requirement. These include: • Payroll withholding for employees; • Pension withholding for retirees; and • Estimated tax payments for self-employed individuals and those with other sources of income not covered by withholding. When a taxpayer fails to prepay the required amount, he or she can be subject to the underpayment penalty. This penalty is 3% higher than the federal short-term interest rate, and the penalty is computed on a quarterly basis. Federal tax law provides ways to avoid the underpayment penalty. If the underpayment is less than $1,000, no penalty is assessed. In addition, the law provides “safe harbor” (minimum) prepayments. There are two safe harbors, which are discussed below: 1. The first safe harbor is based on the tax owed in the current year. If a taxpayer's payments equal or exceed 90% of what is owed in the current year, he or she can escape a penalty. 2. The second safe harbor is based on the tax owed in the immediately preceding tax year. This safe harbor is generally 100% of the prior year's tax liability. However, for higher-income taxpayers whose AGI exceeds $150,000 ($75,000 for married taxpayers filing separately), the prior year's safe harbor is 110%. Dishonored Check - A penalty is charged if a taxpayer's check is returned because of insufficient funds. For checks of $1,250 or more, the penalty is 2% of the check amount. For checks of less than $1,250, the penalty is the lesser of $25 or the amount of the check. Paying Late - The penalty is ½% of the unpaid tax for each month or part of a month that the tax is unpaid. If the IRS issues a Notice of Intent to Levy, and the taxpayer does not pay the balance within 10 days, the penalty increases to 1% per month. The penalty cannot be more than 25% of the tax that was paid late. The late payment penalty is reduced to ¼% per month for those paying in installments. Missing ID Number - This penalty is $50 for each missing number. This penalty is charged when a taxpayer does not provide a social security number (SSN) for himself, a dependent, or another person or does not provide his/her SSN to another person when required. Penalty for Unreported Tips - This penalty is charged if a taxpayer does not report tips to his/her employer. It equals 50% of the social security tax on the unreported tips. Negligence - This “accuracy-related” penalty is 20% of the tax underpayment that is due to negligence or tax valuation misstatements. The “accuracy-related” penalty is imposed if any part of an underpayment of tax is due, either to negligence or a taxpayer's disregard for rules or regulations but without intent to defraud. The penalty is 20% of the portion of the underpayment attributable to the negligence. “Negligence” includes any failure to make a reasonable attempt to comply with the law or to exercise ordinary and reasonable care in preparing a tax return, as well as failure to keep adequate books and records or substantiate items properly. “Disregard” includes any careless, reckless or intentional disregard. Fraud - The civil fraud penalty is one of the most powerful tools that the IRS has. This penalty applies if any part of a tax underpayment is due to fraud, and the penalty equals 75% of that portion of the taxpayer's underpayment attributable to fraud. Although the IRS has the burden of proving fraud with clear and convincing evidence, if it shows that any portion of an underpayment is due to fraud, the entire underpayment is treated as attributable to fraud except for any portion that the taxpayer shows (by a preponderance of the evidence) not to be attributable to fraud. No time limit exists on the assessment and collection of tax if a fraudulent return is filed. Likewise, a return subject to the civil fraud penalty is treated as fraudulent for bankruptcy purposes. As a result, taxes shown on such a return are not normally discharged in a bankruptcy proceeding. Although civil fraud is not defined by statute, some courts have defined it as an actual and deliberate, or willful, wrongdoing with specific intent to evade a tax believed to be owed. Fraud-Late Filing Penalty - The law allows the IRS to increase the penalty for filing late if a taxpayer did not file on time due to fraud. The penalty is 15% of the amount of tax that should have been reported on the tax return and an additional 15% for each additional month or part of a month that the taxpayer didn't file a return. The penalty cannot exceed 75% of the unpaid tax. “Excessive” Claim Penalty - Generally, if a claim for a refund or credit for income tax is made for an “excessive amount,” the person making the claim is liable for a penalty equal to 20% of the excessive amount. The “excessive amount” is the amount by which the amount of a person's claim for a refund or credit for any tax year exceeds the amount of the claim allowable under the Internal Revenue Code for that tax year. The penalty does not apply if it is shown by the taxpayer that the claim for the excessive amount has a reasonable basis or if any portion of the excessive amount or credit is subject to an accuracy-related or fraud penalty. Frivolous Return - In addition to any other penalties, the law imposes a penalty of $5,000 for filing a frivolous return. A frivolous return is one that does not contain information needed to figure the correct tax or shows a substantially incorrect tax because the taxpayer takes a frivolous position or desires to delay or interfere with the tax laws. This includes altering or striking out the preprinted language above the space where the taxpayer signs the tax return. It is possible that some of the penalties listed above can be reduced or removed if a taxpayer can show reasonable cause. The IRS Penalty Handbook used by IRS agents defines reasonable cause as those reasons deemed administratively acceptable to the IRS: “Reasonable cause relief is generally granted when the taxpayer exercises ordinary business care and prudence in determining their tax obligations but is unable to comply with those obligations.” The Handbook also says, “Each case must be judged individually based on the facts and circumstances at hand.” Wed, 19 Feb 2014 19:00:00 GMT Bunching Your Deductions Can Provide Big Tax Benefits http://www.messnerandhadley.com/blog/bunching-your-deductions-can-provide-big-tax-benefits/9109 http://www.messnerandhadley.com/blog/bunching-your-deductions-can-provide-big-tax-benefits/9109 Messner & Hadley LLP If your tax deductions normally fall short of itemizing your deductions or even if you are able to itemize, but only marginally, you may benefit from using the “bunching” strategy. The tax code allows most taxpayers to utilize the standard deduction or itemize their deductions if that provides a greater benefit. As a rule, most taxpayers just wait until tax time to add everything up and then use the higher of the standard deduction or their itemized deductions. If you want to be more proactive, you can time the payments of tax-deductible items to maximize your itemized deductions in one year and take the standard deduction in the next. For the most part, itemized deductions include medical expenses, property taxes, state and local income (or sales) taxes, home mortgage and investment interest, charitable deductions, unreimbursed job-related expenses, and casualty losses. The “bunching strategy” is more commonly associated with medical expenses, tax payments and charitable deductions, although there are circumstances in which the other deductions might come into play. There are many opportunities to bunch deductions, and the following are examples of the bunching strategies most commonly used:Medical Expenses – You contract with a dentist for your child’s braces. The dentist may offer you an up-front, lump sum payment or a payment plan. By making the lump sum payment, the entire cost is credited in the year paid, thereby dramatically increasing your medical expenses for that year. If you do not have the cash available for the up-front payment, then you can pay by credit card, which is treated as a lump-sum payment for tax purposes. If you use a credit card, you must realize that the credit card interest is not deductible, and you need to determine if incurring the interest is worth the increased tax deduction. Another important issue with medical deductions is that only the amount of the total medical expenses that exceeds 10% (7.5% if age 65) of your adjusted gross income (AGI) is actually deductible. If you are caught by the Alternative Minimum Tax (AMT), then only the amount that exceeds 10% of your AGI is actually deductible. So, there is no tax benefit in bunching medical deductions if the total is less than your AGI threshold.If the current year is an abnormally high-income year, you may, where possible, wish to put off making medical expense payments until the subsequent year when the 10% (7.5%) threshold is less. Taxes – Property taxes on real estate are generally billed annually at mid-year, and most locales allow the tax bill to be paid in semi-annual or quarterly installments. Thus, you have the option of paying it all at once or paying in installments. This provides the opportunity to bunch the tax payments by paying one semi-annual installment or two quarterly installments and a full year’s tax liability in one year and only paying one semi-annual installment or two quarterly installments in the other year. In doing so, you are able to deduct 1-½ year’s taxes in one year and 50% of a year’s taxes in the other. If you are thinking of making the property tax payments late as a way to accomplish bunching, you should be cautious. The late payment penalty will probably wipe out any potential tax savings. If you reside in a state that has state income tax, the state income tax paid or withheld during the year is deductible as a federal itemized deduction. So, for instance, if you are paying state estimated tax in quarterly installments, the fourth-quarter estimate is generally due in January of the subsequent year. This gives you the opportunity to either make that payment before December 31st, and be able to deduct the payment on the current year’s return, or pay it in January before the January due date and use it as a deduction in the subsequent year. A word of caution about the itemized deduction for taxes! Taxes are only deductible for regular tax purposes. So, to the extent you are taxed by the AMT, you derive no benefits from the itemized deduction for taxes. Charitable Contributions – Charitable contributions are a nice fit for “bunching” because they are entirely payable at the taxpayer’s discretion. For example, if you normally tithe at your church, you could make your normal contributions during the year and then prepay the entire subsequent year’s tithing in a lump sum in December of the current year, thereby doubling up on the church contribution one year and having no deduction for charity in the other year. Normally, charities are very active with their solicitations during the holiday season, giving you the opportunity to make the contributions at the end of the current year or simply wait a short time and make them after the end of the year. If you think a “bunching” strategy might benefit you, please call this office to discuss the issue and set up an appointment for some in-depth strategizing. Wed, 19 Feb 2014 19:00:00 GMT Fine Tuning Capital Gains and Losses http://www.messnerandhadley.com/blog/fine-tuning-capital-gains-and-losses/9110 http://www.messnerandhadley.com/blog/fine-tuning-capital-gains-and-losses/9110 Messner & Hadley LLP Year-end has historically been a good time to plan tax savings by carefully structuring capital gains and losses. Conventional wisdom has always been to minimize gains by selling “losers” to offset the gains from “winners” and where possible, generate the maximum allowable $3,000 capital loss for the year. Long-term capital losses offset long-term capital gains before they offset short-term capital gains. Similarly, short-term capital losses offset short-term capital gains before they offset long-term capital gains (“long-term” means that the stock or property has been held over one year). Keep in mind that taxpayers may use up to $3,000 of total capital losses in excess of total capital gains as a deduction against ordinary income in computing adjusted gross income (AGI). Individuals are subject to federal income tax at a rate as high as 39.6% on short-term capital gains and ordinary income. But long-term capital gains are generally taxed at a maximum rate of 15% or 20%. All of this means that having long-term capital losses offset long-term capital gains should be avoided where possible, since those losses will be more valuable if they are used to offset short-term capital gains or ordinary income. Avoiding this requires ensuring that the long-term capital losses are not taken in the same year as the long-term capital gains. However, this is not just a tax issue; investment factors also need to be considered. It would be unwise to defer recognizing gain until the following year if there is too much risk that the property’s value will decline before it can be sold. Similarly, one wouldn’t want to risk increasing a loss on property that is expected to continue declining in value by deferring its sale until the following year. To the extent that taking long-term capital losses in a different year than long-term capital gains is consistent with good investment planning, a taxpayer should take steps to prevent those losses from offsetting those gains. Long-Term Capital Gains Rates - The capital gains rates are 0% to the extent that your marginal tax rate is 10% or 15%, and 15% to the extent your marginal rate is between 25% and 35%. This means that the 15% capital gains rate will apply for individuals who file the single status with taxable income in 2014 between $36,900 and $406,750. The 15% capital gains rate for married couples filing jointly will be in effect if their 2014 taxable income is between $73,800 and $457,600. For higher income taxpayers – those in the 39.6% tax bracket – the capital gains rate is 20% to the extent in the 39.6% tax bracket. The tax brackets are annually adjusted for inflation, so please call for brackets for years other than 2014. Individuals with large long-term capital gains in their investment portfolios might consider taking a profit up to the amount that would be taxed at 0%. The good news here is that the wash sale rules do not apply to assets sold at a gain. So if you like a stock, you are free to buy it back right away. If your state doesn’t have a lower tax rate on capital gains, then the additional state tax you’d pay from selling profitable capital assets will need to be weighed against the federal tax you’d potentially save when deciding whether to make tax sales before year-end. Example: You are single with an annual taxable income (income minus deductions and exemptions), before including any stock gains, of $30,000. Thus, the first $6,901 ($36,901 - $30,000) of capital gains added to your income will be in the zero capital gains tax bracket (no tax). The next $369,850 ($406,751- $36,901) of capital gains (without considering the 3.8% surtax on net investment income discussed later) would be taxed at 15%. After that, any additional capital gains are taxed at 20%. Thus when you take a gain, it can have a significant impact on the amount of tax you pay and careful planning can minimize the tax. This gives rise to the following strategies: If in any year some portion of your gain will be taxed at the zero capital gain rate, you should probably take that amount of gain since it produces no tax. If you have a substantial gain that when added to your other income will push some portion of the gain into the 20% capital gains bracket, you may be able to spread the gain over two or more years and keep more of the gain in the 15% capital gains bracket. This is done by structuring the sale as an installment sale. Unfortunately, the law doesn’t allow installment sales for publicly traded securities, so this strategy won’t work when you sell most stocks and bonds, but could be used when selling real estate. Increased Marginal Tax Rates – The marginal rates are 10, 15, 25, 28, 33, 35 and 39.6%, the highest rate being a new one. These rates apply to “ordinary” income including short-term capital gains. Conventional wisdom has always been to defer income, but depending upon your tax bracket and future anticipated income, it may be appropriate to consider accelerating your income to take advantage of a lower tax rate. Surtax on Net Investment Income - One should also be aware of the 3.8% Net Investment Income (NII) Tax taking effect in 2013. It will apply to higher-income taxpayers. This new tax, part of the healthcare reform legislation, imposes a 3.8% surtax on the lesser of net investment income (investment income less investment expenses) or the amount that the modified adjusted gross income exceeds a threshold of $200,000 ($250,000 for joint filers and $125,000 for married individuals filing separately). Taking a large gain in one year can increase your income and make you susceptible to the NII tax. However, where possible you might spread that gain over two or more years, and avoid the surtax by using the installment sale method mentioned above. Of course all of these tax-saving suggestions will go out the window if there is an overriding investment strategy or if there are investment risks to consider. It may be in your best interest to review your current year tax strategy with an eye to the future in order to maximize your benefits from gains or losses associated with capital assets. Please call this office for assistance. Wed, 19 Feb 2014 19:00:00 GMT Owner-Only Businesses Should Consider a Solo 401(k) Plan http://www.messnerandhadley.com/blog/owner-only-businesses-should-consider-a-solo-401k-plan/9113 http://www.messnerandhadley.com/blog/owner-only-businesses-should-consider-a-solo-401k-plan/9113 Messner & Hadley LLP It goes by many names - Solo 401(k), Mini 401(k) and single-participant 401(k). We will use Solo 401(k) in this article to describe probably the best type of pension plan for owner-only businesses. It provides for larger contributions, including a Roth option for a portion of the contribution, and the ability to borrow funds from the plan at reasonable rates. As a result, Solo 401(k) plans have become more attractive options than SEP-IRAs, Simple IRAs or profit-sharing or money purchase plans. In addition, if the plan permits and most do, assets for other retirement plans can be rolled over into the Solo 401(k) plan. Generally, Solo 401(k) plans are a natural fit for two categories of businesses. The first includes independent contractors, sole proprietors, and owner-only C or S corporations. The second is those who have dual incomes. They are W-2 wage earners as employees of a company that offers a 401(k) plan who also have consulting income from corporate directorships or freelance work that requires them to file a Schedule C as a sole proprietor. Since the 401(k) contribution limits apply to each individual for the year and not the individual plans, if the taxpayer has multiple 401(k) plans, he or she needs to make sure that not more than the annual limit is contributed to the combination of plans. The rules limit employer contribution (profit-sharing contribution) to 25% of compensation. The employee can also make salary deferral contributions up to $17,500*. Together, these contributions cannot exceed the lesser of $52,000* or 100% of compensation. In addition, if the employee is age 50 or over he or she can make an additional catch-up contribution of $5,500*. Example – Susan Lewis, age 49, is the sole employee of an incorporated business. Her earned income is $100,000 in 2014. Under the law, Susan can contribute $25,000 to a SEP-IRA ($100,000 x .25), $15,000 ( $12,000 plus 3% of $100,000) to a Simple IRA and $25,000 to a profit-sharing or money purchase plan. However, she can contribute $42,500 to a Solo 401(k) plan ($25,000 employer contribution plus $17,500 employee deferral), still under the $52,000 maximum for the year. If Susan were age 50 or over, she could also make a catch-up contribution of $5,500, increasing her 401(k) contribution total to $48,000. In some cases, 401(k) plan contributions for an unincorporated business may be slightly lower than the above amounts. For unincorporated businesses, compensation is net profit minus half of self-employment taxes minus employer contributions. Although single-participant 401(k) plans are limited to the business owner and his or her spouse, business owners should note the added benefits of having his or her spouse as the business’s only other employee. Having the spouse on the payroll gives the business owner the opportunity to shelter some or all of his or her income by having the spouse make an elective deferral to a 401(k) plan in addition to the business making a profit-sharing contribution. Although the spouse and the business would be responsible for their respective share of employment taxes on the salary, combined employer and employee contributions can be up to the lesser of $52,000* or 100% of compensation. This limit applies separately to the business-owner and spouse, thus allowing a combined total of up to $104,000*. In addition, if age 50 or over, each individual could defer an additional $5,500 each year. Potential downside - If a business grows and begins hiring employees, the single-participant 401(k) plan must become a full-blown 401(k) plan subject to other more stringent rules including discrimination testing that can serve to limit contributions by highly-paid executives. Many providers recommend that businesses with immediate expansion plans not set up one of the Solo 401(k) arrangements. Caution: If the business owner has other businesses or is part of a controlled group of corporations, partnerships, proprietorships or affiliated service groups, the employer aggregation rules may apply and the employees of those other businesses may have to be considered for purposes of meeting qualification and minimum coverage requirements for the Solo 401(k). For additional information regarding Solo 401(k) plans and how it might fit into your tax strategy and retirement planning, please give this office a call. If you are considering a Solo 401(k) plan, be aware that the plan must be set up before year’s end. * These values are inflation adjusted and are for 2014. Please call for the amounts for years other than 2014. Wed, 19 Feb 2014 19:00:00 GMT Take Advantage of a Low Income Year http://www.messnerandhadley.com/blog/take-advantage-of-a-low-income-year/9148 http://www.messnerandhadley.com/blog/take-advantage-of-a-low-income-year/9148 Messner & Hadley LLP If your income is abnormally low this year or your investment portfolio has taken a downturn in value, you might consider some of the following actions: Make Gifts - When values are low and expected to rise, the stage is set for making a gift. Under current law, the gift is valued at its fair market value at the date of the gift. If the value of a planned gift is depressed but the value is beginning to recover (rise), this might be the time to make the gift and minimize the gift tax ramifications while reducing your estate for any future estate tax. If you are helping a loved one weather economic hard times, you can give him or her appreciated property, which the recipient can immediately sell for cash. The result is a transfer of the gain to the person you are helping, who probably will be taxed at a lower tax rate than you are, or possibly will pay no tax at all depending on their circumstances for the year. For 2014, you can gift up to $14,000 of value ($28,000 if married and both spouses make a gift) to as many individuals as you would like without affecting your lifetime gift tax exclusion, paying any gift tax, or even having to file a gift tax return. The gift limit is periodically inflation adjusted so call this office for amounts applicable to years other than 2014. Traditional IRA to Roth IRA Conversions – When one converts a conventional IRA to a Roth IRA, the conversion is taxed at the individual’s marginal tax rate, as if the individual withdrew the funds without being subject to any penalties. Thus, if your taxable income is negative, your marginal tax rate is very low or you have tax credits that are not being fully utilized, it might be appropriate to convert some or all of your traditional IRA funds into a Roth IRA at no or a very small cost. The benefit is not immediate, but in the future at retirement time, the Roth IRA withdrawals, unlike traditional IRA withdrawals, will be tax-free. Use Up Capital Loss Carryovers – If you are one of the lucky investors who has benefited from the recent market upswing and would like to reduce your position in a security or realign your portfolio, and you have unused capital loss carryovers, you might consider selling some of your existing holdings with gains. By utilizing the unused capital loss carryovers to offset those gains, you may pay little or no tax on the profits. Relinquish Dependency Rights – If you are the custodial parent of a child, have the right to claim the child as a dependent, but have no need for the tax benefits associated with the dependency this year, you might consider relinquishing the exemption to the child’s other parent. Form 8332 is used for this purpose, but be careful to complete it correctly lest you release the exemption for more tax years than intended. Exercise Options – Employee stock options, when exercised, produce either ordinary income (non-qualified options) or alternative minimum tax preference income (qualified options) equal to the difference between the exercise price and the market value of the shares at the time of exercise (purchase). Employees who have stock options with a non-publicly-traded company, where the stock’s value is low but is expected to climb in the near future, should consider exercising their options while the stock value is low. In doing so, the employees will be able to acquire the stock at a preferential price and hold it for future appreciation with a minimum, or perhaps zero, current tax bite. Deduct IRA Losses – A traditional IRA account often contains only contributions that were previously deducted, so if the account’s value declines, no additional loss deduction can be claimed. However, if you have made nondeductible contributions to a traditional IRA and the value of all of your IRA accounts combined is less than the sum of your nondeductible contributions, you can take a loss — but to do so, you must take withdrawals from (close out) all of your IRA accounts. The result is a miscellaneous itemized deduction equal to the total of the nondeductible contributions less the sum of the withdrawn amounts. However, this loss is beneficial only if your deductions are itemized, and the loss, along with your other miscellaneous deductions, exceeds 2% of your income (AGI) for the year. Cash in Savings Bonds – Two options are available for tax reporting of interest income from certain U.S. savings bonds, such as EE Bonds and I Bonds: include the increase in redemption value each year as interest, or postpone reporting any of the interest until the return for the earlier of the year the bonds mature or are cashed in. Typically, most people choose the latter method. If you are holding savings bonds that are approaching their maturity and your taxable income for the year will be negative or lower than it normally is, and you haven’t previously reported the interest, you may want to cash in some or all of these bonds to take advantage of your lower tax bracket. If you don’t want to cash in the bonds, you can make an election to switch to the annual interest reporting method, but if you do so, on the return for the year of the change, you will have to include all of the interest accrued to date for all Series E, EE or I savings bonds that you hold, and then report the annual interest in each succeeding year for those and any bonds of these series that you may acquire in the future. Variable Annuity Losses – Variable annuities typically invest in a variety of stock funds, money market accounts, etc. Since purchase, the annuity may have declined in value, making it worth less today than its original cost. If the annuity is sold, the loss can be taken as a miscellaneous itemized deduction. The foregoing are examples of some of the many tax strategies that can be employed during depressed economic times or years of low income to provide both current and future tax benefits. Please give this office a call if you would like to review your specific circumstances for any year-end or long-range strategies that might apply to you. Wed, 19 Feb 2014 19:00:00 GMT Are You Supporting Your Parents? http://www.messnerandhadley.com/blog/are-you-supporting-your-parents/9149 http://www.messnerandhadley.com/blog/are-you-supporting-your-parents/9149 Messner & Hadley LLP If you are helping support your parents, you may be having difficulty showing that you provided over half of the support for both, thus failing to qualify for the dependency exemptions (and for the beneficial head of household filing status if you are an unmarried taxpayer). You may overcome this problem by designating the support to only one of the parents. This may allow you to claim at least one of the parents as your dependent and, if you are unmarried, allow you to file as head of household. To qualify for the head of household filing status, a taxpayer must maintain a household that constitutes one or both of his or her parents' principal abode, and at least one of the parents must be the taxpayer's dependent, i.e., must individually have gross taxable income for the year of less than the personal exemption amount ($3,950 for 2014) and receive over half of his or her support from the taxpayer. The taxpayer himself need not reside in the household he or she maintains for the parents. The home could even be a retirement home or facility. To accomplish this, the taxpayer must be able to provide proof that the support is for one of the parents only. Otherwise, the support will be designated as a “fund” equally allocated to both. According to the IRS, written statements contemporaneous with the expenditures of support funds setting forth the amounts and purposes of such expenditures are entitled to great weight in supporting the designation to a specific individual. Thus, a notation on a check may be an acceptable designation procedure as long it designates who it is for and the purpose of the funds. Although having no effect on filing status, when several people together provide over 50% of support, all who provide more than 10% of the support can agree about which of them will claim the dependent. Of course, the agreeing parties must also otherwise qualify to claim the dependent. Each person who is relinquishing the dependent exemption must complete an IRS-required form for attachment to the return claiming the dependent. If you are supporting both parents and would like to discuss how the foregoing might apply to your specific situation, please give this office a call. Wed, 19 Feb 2014 19:00:00 GMT Avail Yourself of Your Employer's Tax-Advantaged Plans http://www.messnerandhadley.com/blog/avail-yourself-of-your-employers-tax-advantaged-plans/435 http://www.messnerandhadley.com/blog/avail-yourself-of-your-employers-tax-advantaged-plans/435 Messner & Hadley LLP • Dependent Care Benefits - A taxpayer who works and incurs child care expenses, should check to see if their employer has a dependent care program. If the employer does provide dependent care benefits under a qualified plan, the taxpayer may be able to exclude up to $5,000 ($2,500 if Married Filing Separately) of child care expenses from his or her wages, which generally provides a greater tax benefit than the child care credit. • 401(k) or Similar Retirement Plans - If an employer has a 401(k) plan, the employee can elect to defer (pre-tax) a maximum of $17,500 for 2014. If age 50 or older, the maximum is increased to $23,000. These plans are especially beneficial when the employer provides a matching contribution. • Flexible Spending Accounts - Some employers provide health flexible spending accounts (FSA), which allow an employee to make contributions on a pre-tax salary reduction basis to provide coverage for medical and dental expenses. The maximum allowed for 2014 is $2,500. The participant generally must use the contributed amounts for the qualified expenses, or else forfeit any amounts remaining in the account at the end of the plan year. However, some plans allow a 2 ½ month grace period, and beginning for 2013 plan years, a plan may allow up to $500 of any year-end health FSA balance to be carried over to pay or reimburse qualified medical expenses incurred in the next year. Medical expenses paid for or reimbursed through pre-tax plans cannot be deducted as part of itemized deductions • Education Assistance Programs - If you are receiving educational assistance benefits through an educational assistance program provided by your employer, up to $5,250 of those benefits can be excluded from income each year. • Stock Purchase and Option Plans - A variety of plans available to employers are designed to allow the employees to invest in the employer’s stock. The most commonly encountered are: (1) Employee stock ownership plan (ESOP); (2) Nonqualified stock option; and (3) Incentive Stock Options (ISOs). Note: Because of the tax ramifications, it may be prudent for you to consult with this office prior to exercising a stock option, especially an ISO. • Tax-Free (Income excludable) Employee Fringe Benefits – Provided the employer provides them, the law allows an exclusion from taxable income for the following benefits: (1) The cost of up to $50,000 of group term life insurance. (2) $250 (in 2014) per month for qualified parking. (3) $130 (in 2014) per month for transit passes, and commuter transportation. (4) $20 per month for bicycle commuting expenses. Tue, 18 Feb 2014 19:00:00 GMT Maximizing Qualified Tuition Program Contributions http://www.messnerandhadley.com/blog/maximizing-qualified-tuition-program-contributions/38627 http://www.messnerandhadley.com/blog/maximizing-qualified-tuition-program-contributions/38627 Messner & Hadley LLP Qualified Tuition Programs, commonly referred to as Section 529 plans (named after the section of the IRS Code that created them), are plans established to help families save and pay for college in a tax-advantaged way and are available to everyone, regardless of income. These state-sponsored plans allow you to gift large sums of money for a family member’s college education, while you maintain control of the funds. The earnings from these accounts grow tax-deferred and are tax-free if used to pay for qualified higher education expenses. 529 plans can be used as an estate-planning tool as well, providing a means to transfer large amounts of money without gift tax. With all these tax benefits, 529 plans are excellent vehicles for college funding. Tax Benefits: There is no federal tax deduction for making a contribution, but taxes on the earnings within a 529 plan are not only tax-deferred while they are held in the account, but are tax-free when withdrawn to pay for qualified education expenses. This allows you to accumulate money for college at a much faster rate than you can with an account where you have to pay tax on the investment gains and earnings. How Much Can Be Contributed? Unlike the Coverdell Education Savings Accounts that limit the annual contribution to $2,000, Section 529 plans allow you to put away larger amounts of money. There are no income or age limitations for the Section 529 plans. The maximum amount that can be contributed per beneficiary is based on the projected cost of a college education and will vary between state plans. Some states base their maximums on an in-state, four-year education, while others base theirs on the costs of the most expensive schools in the U.S., including graduate studies. Most have limits in excess of $200,000. Generally, once an account reaches the plan-imposed cap, additional contributions cannot be made, but that doesn’t prevent the account from continuing to grow through investment earnings and growth. How Much Should You Contribute? Although there is no contribution limit other than the plan’s limit based on the cost of the education, there are some gift tax limitations that may influence the amount of your contribution. Contributions to Section 529 plans are considered completed gifts and are subject to the gift tax rules. Under these rules, individuals can annually give away (gift) money to another individual, only up to an annual limit (double for a married couple), without triggering gift taxes or reducing their lifetime gifts and inheritance exclusions. The gift exclusion amount is inflation adjusted. For 2014, the gift tax exclusion is $14,000 per recipient. Five-Year Option: Where contributions to a qualified tuition program exceed the annual gift exclusion amount, a donor may elect to take certain contributions to a QTP into account ratably over a five-year period in determining the amount of gifts made during the calendar year. The provision applies only for contributions of up to five times the annual exclusion amount available in the calendar year of the contribution. Any excess may not be taken into account ratably and is treated as a taxable gift in the calendar year of the contribution. Thus, for 2014 an individual could contribute up to $70,000 (five times the 2014 annual exclusion amount), while a married couple could contribute twice that amount ($140,000) to the same individual. The gift would reduce the donor’s estate by the full amount of the gift by the end of the five-year period. Should the donor die before the five-year period elapses, any amount in excess of the allowable annual exclusions would revert back to the donor’s estate. Note: A gift tax return must be filed for the year of the contribution if it exceeds the annual gift tax exclusion and to claim this special exemption. Don’t Overlook Additional Contribution Opportunities During The Five-Year Period: If in any year after the first year of the five-year period the annual exclusion amount is increased, the donor may make an additional contribution in any one or more of the four remaining years up to the difference between the exclusion amount as increased and the original exclusion amount for the year or years in which the original contribution was made. If you have previously utilized the five-year option, you may have the opportunity to make additional annual contributions since the annual exemption amount has increased in the past few years (see table below). Year 2009-12 2013-14 Annual Gift Exemption 13,000 14,000 If you need assistance evaluating the benefits of a Section 529 plan and its impact on your estate plan, please give this office a call. Tue, 18 Feb 2014 19:00:00 GMT The Earned Income Credit http://www.messnerandhadley.com/blog/the-earned-income-credit/4560 http://www.messnerandhadley.com/blog/the-earned-income-credit/4560 Messner & Hadley LLP The EITC is for people who work, but have lower incomes. If you qualify, it could be worth up to $6,143 for 2014. So you could pay less federal tax or even get a refund. The credit is a refundable credit, so you can receive the benefits of the credit even if you may not owe any taxes. That's money you can use to make a difference in your life. Over 23 million taxpayers receive in excess of $45 billion dollars in EITC - making the credit a great investment in the lives of those who claim it. However, the IRS estimates that 20 to 25% of people who qualify for the credit do not claim it. At the same time, there are millions of Americans who have claimed the credit in error, many of whom simply don't understand the criteria. The EITC is based on the amount of your earned income and whether or not there are qualifying children in your household. If you have children, they must meet the relationship, age, and residency requirements. Additionally, you must file a tax return to claim the credit. If you were employed for at least part of the year, you may be eligible for the EITC based on these general requirements (the rates shown are for 2014): You earned less than $14,590 ($20,020 if married filing jointly) and did not have any qualifying children. You earned less than $38,511 ($43,941 if married filing jointly) and have one qualifying child. You earned less than $43,756 ($49,186 if married filing jointly) and have two qualifying children. You earned less than $46,997 ($52,427 if married filing jointly) and have more than two qualifying children. In addition, you must meet a few basic rules: You, and any qualifying child you claim for the EITC, must have a valid Social Security Number. You must have earned income from employment or from self-employment. Your filing status cannot be married, filing separately. You must be a U.S. citizen or resident alien all year, or a nonresident alien married to a U.S. citizen or resident alien, and filing a joint return. You cannot be a qualifying child of another person. If you do not have a qualifying child, you must: o be age 25 but under 65 at the end of the year, o live in the United States for more than half the year, and o not be a qualifying child of another person. You cannot file Form 2555 or 2555-EZ (related to foreign earned income). Members of the military can elect to include their nontaxable combat pay in earned income for the earned income credit. If you make the election, you must include in earned income all nontaxable combat pay received. If you are filing a joint return and both you and your spouse received nontaxable combat pay, then each of you can make your own election. The amount of your nontaxable combat pay should be shown on your Form W-2 in box 12 with code Q. If you have any questions, please give this office a call. Fri, 14 Feb 2014 19:00:00 GMT Work Opportunity Tax Credit http://www.messnerandhadley.com/blog/work-opportunity-tax-credit/4564 http://www.messnerandhadley.com/blog/work-opportunity-tax-credit/4564 Messner & Hadley LLP Employers can qualify for a tax credit for qualified wages paid to members of targeted groups and qualified veterans who were hired before January 1, 2014. The credit for targeted-group employees, except for long-term family assistance recipients and summer youth employees, equals 40% (25% for employment of 400 hours or less) of qualified first-year wages ($6,000 cap) for a maximum credit of $2,400 for each eligible employee. The maximum credit available for hiring qualified veterans may be more. The Work Opportunity Tax Credit (WOTC) is available on an elective basis for employers hiring individuals from one or more specified targeted groups or certain veterans. The amount of the credit available to an employer is determined by the amount of qualified wages paid by the employer. Generally, qualified wages consist of wages for services rendered by a qualified veteran or a member of a targeted group during the one-year period beginning with the day the individual begins to work for the employer. Fri, 14 Feb 2014 19:00:00 GMT How Business Website Expenses Are Deducted http://www.messnerandhadley.com/blog/how-business-website-expenses-are-deducted/31670 http://www.messnerandhadley.com/blog/how-business-website-expenses-are-deducted/31670 Messner & Hadley LLP Article Highlights: Purchased websites can be amortized over the course of 3 years or expensed under Sec 179. In-house developed websites can be expensed or amortized over the course of 3 years. Non-software costs, such as graphics, must be amortized during their useful lives. Advertising content can be expensed. Costs incurred prior to business start-up can be expensed up to $5,000, if elected, and any excess must be amortized over the course of 180 months. With the explosion of online businesses, one would think that there would be a standard method of deducting the cost of your business website. But some questions still exist as to what part of a website is considered software, and to date, the IRS has not fully clarified that issue for tax purposes. Purchased Websites - If the website is purchased from a contractor who is at economic risk should the software not perform, the design costs are amortized (ratably deducted) over the 3-year period, beginning with the month in which the website is placed in service. For 2013, non-customized computer software placed in service during the year can be expensed as Sec 179 property up to the $500,000 limit of this special expense deduction. In-House Developed Websites - If, instead of being purchased, the website design is “developed” by the company or designed by an independent contractor who is not at risk should the software not perform, the company launching the website can choose among alternative treatments, one of which is deducting the costs in the year that the costs are paid or accrued, depending on the taxpayer's overall accounting method. Or, as an alternative, the costs may be amortized under the 3-year rule. Non-Software Expenses - Some website design costs, such as graphics, may not be classified as software and must be deducted over the useful life of the element. Non-software portions of the design with a useful life of no more than a year are currently deductible. Advertising Content - Advertising costs are currently generally deductible. Thus, the costs of website content that is advertising are generally deductible in the year paid or accrued, depending on the business’ accounting method. Cost Before Business Starts - Business expenses that are incurred or accrued prior to the actual activation of the business are generally not deductible until the business is terminated or sold. However, a taxpayer can elect to deduct up to $5,000 of the costs in the year that the business starts and amortize the costs in excess of $5,000 over a period of 180 months (15 years), beginning with the month that the business starts. As you can see, deducting the expenses of a website can be complicated. Please call this office if you have questions. Thu, 13 Feb 2014 19:00:00 GMT Saver's Credit Can Help You Save for Retirement http://www.messnerandhadley.com/blog/savers-credit-can-help-you-save-for-retirement/34799 http://www.messnerandhadley.com/blog/savers-credit-can-help-you-save-for-retirement/34799 Messner & Hadley LLP Low- and moderate-income workers can take steps to save for retirement and earn a special tax credit. The saver’s credit helps offset part of the first $2,000 workers voluntarily contribute to traditional or Roth Individual Retirement Arrangements (IRAs), SIMPLE-IRAs, SEPs, 401(k) plans, 403(b) plans for employees of public schools and certain tax-exempt organizations, 457 plans for state or local government employees, and the Thrift Savings Plan for federal employees. Also known as the retirement savings contributions credit, the saver’s credit is available in addition to any other tax savings that apply as a result of contributing to retirement plans. 2013 Credit Still Available for IRA Contributions - Unlike other workplace retirement plans, IRAs can be set up and funded after the end of the year. Thus, eligible workers still have time to make qualifying IRA contributions and get the saver’s credit on their 2013 tax return. People have until April 15, 2014, to set up a new IRA or add money to an existing IRA and still get credit for 2013. Taxpayers with 401(k), 403(b), 457 and Government Thrift plans who were unable to set aside money for 2013 may want to schedule their 2014 contributions soon so their employer can begin withholding them in January. While these contributions won’t be eligible for the saver’s credit for 2013, they will qualify for 2014 for eligible individuals. The saver’s credit can be claimed by: Married couples filing jointly with incomes up to $59,000 in 2013 or $60,000 in 2014; Heads of Household with incomes up to $44,250 in 2013 or $45,000 in 2014; and Married individuals filing separately and singles with incomes up to $29,500 in 2013 or $30,000 in 2014. Like other tax credits, the saver’s credit can increase a taxpayer’s refund or reduce the tax owed. Though the maximum saver’s credit is $1,000 ($2,000 for married couples), taxpayers are cautioned that it is often much less and, due in part to the impact of other deductions and credits, may, in fact, be zero for some taxpayers.A taxpayer’s saver’s credit amount is based on his or her filing status, adjusted gross income, tax liability, and amount contributed to qualifying retirement programs. The saver’s credit supplements other tax benefits available to people who set money aside for retirement. For example, most workers may deduct their contributions to a traditional IRA. Though Roth IRA contributions are not deductible, qualifying withdrawals, usually after retirement, are tax-free. Normally, contributions to 401(k) and similar workplace plans are not taxed until withdrawn. Other special rules that apply to the saver’s credit include the following: Eligible taxpayers must be at least 18 years of age. Anyone claimed as a dependent on someone else’s return cannot take the credit. A student cannot take the credit. A person enrolled as a full-time student during any part of five calendar months during the year is considered a student. Certain retirement plan distributions reduce the contribution amount used to figure the credit. For 2013, this rule applies to distributions received after 2010 and before the due date (including extensions) of the 2013 return. Begun in 2002 as a temporary provision, the saver’s credit has since been made a permanent part of the tax code. If you have questions about how this tax benefit might apply in your situation, please give the office a call. Tue, 11 Feb 2014 19:00:00 GMT Don’t Overlook the Credit for Small Employer Health Insurance Premiums http://www.messnerandhadley.com/blog/don8217t-overlook-the-credit-for-small-employer-health-insurance-premiums/37621 http://www.messnerandhadley.com/blog/don8217t-overlook-the-credit-for-small-employer-health-insurance-premiums/37621 Messner & Hadley LLP Play Video Article Highlights Small employers get a tax credit for providing a health insurance plan. Credit can be as much as 35% of the premiums paid. A small employer is one with no more than 25 full-time equivalent employees (FTE) with average wages less than $50,000. Self-employed individuals, including partners and sole proprietors, 2% shareholders of an S corporation, and 5% owners of the employer are not treated as employees for purposes of the small employer health insurance credit. Seasonal workers of an employer are not taken into account in determining the FTE employees and average annual wages of the employees unless the worker works for the employer more than 120 days during the tax year. The tax law provides a credit for small business employers who pay the health insurance premiums for their workers. This credit can be as much as 35% (25% for tax-exempt organizations) of the insurance premiums paid by the employer in 2013. Beginning in 2014, the credit percentage increases to 50% (35% for tax-exempt organizations), and claiming the credit is limited to two consecutive years, but if the credit was claimed for any of years 2010 through 2013, those years aren’t counted for the two-year limit. In addition, for 2014 and later years, the insurance must be purchased through a state exchange, and the coverage must be uniform and not less than 50% of the premium cost. To qualify for the credit, the employer can’t have more than 25 full-time equivalent employees, and the average wage of the employees cannot exceed $50,000 for the year. The 25 full-time equivalent employee limit is computed by taking into account both full-time and part-time employees for the year using a formula. To see if your firm may qualify for the credit, complete the two worksheets below. The results at lines 6 and 9 will tell you if your firm is under the maximum full-time equivalent employee and average wage limitations. Determine the Number of Full-Time Equivalent Employees: 1. Enter the number of employees who worked 2,080 hours or more during the year:2. Multiply line 1 by 2,080:3. Enter the total hours worked by all employees who worked less than 2,080 hours during the year:4. Enter the total of lines 2 and 3:5. Divide the result on line 4 by 2,080:6. Number of full-time equivalent employees (round line 5 down to the next whole number, unless the number is less than one, in which case enter 1: If line 6 is greater than 25, stop - your firm does not qualify for this credit. Determine the Average Annual Wage: 7. Enter the total of all wages paid to employees during the tax year:8. Divide line 7 by the number of full-time equivalent employees (line 6):9. Average annual wage (round amount from line 8 down to the next whole $1,000): If the amount on line 9 is $50,000 or less, you may qualify for the credit. Besides meeting the limits of lines 6 and 9, to qualify for the credit an employer has to contribute at least 50% of the premiums for the employees’ health insurance coverage on a uniform basis. The amount of the credit gradually phases out if the number of full-time equivalent employees exceeds 10 or if the average annual wage of the employees exceeds $25,000. Under the phase-out, the full amount of the credit is available only to an employer with 10 or fewer full-time equivalent employees and whose employees have average annual wages of less than $25,000. The credit is in lieu of taking a business deduction for the employer-paid premiums used in computing the credit. It is also part of the general business credit, which may exceed the amount of the business’ income tax, and any unused credit in the current year can be carried back one year and then forward until used up but no longer than 20 years. When counting employees and wages, make the following adjustments: Self-employed individuals, including partners and sole proprietors, 2% shareholders of an S corporation, and 5% owners of the employer are not treated as employees for purposes of the small-employer health insurance credit. Thus, the wages and hours of these business owners and partners, and of their family members and dependent members of their household, are disregarded in determining full-time equivalent (FTE) employees and average annual wages, and the premiums paid on their behalf are not counted in determining the amount of the credit. Leased employees are included in employee count, but insurance premiums paid for the benefit of the leased employee by the leasing company are not taken into account in determining the credit. The number of hours of service worked by, and wages paid to, an employer’s seasonal worker are not taken into account in determining the FTE employees and average annual wages of the employer unless the worker works for the employer more than 120 days during the tax year. Premiums paid on behalf of seasonal workers can be counted in determining the amount of the credit. There is no minimum number of hours of service that a worker has to work in a day before that day is taken into account for purposes of the 120-day test. Please give this office a call if you have questions related to this credit, the pros and cons of offering health insurance to employees, and determining how much your firm can benefit from claiming the credit. Thu, 06 Feb 2014 19:00:00 GMT Are You Missing a W-2? http://www.messnerandhadley.com/blog/are-you-missing-a-w-2/38579 http://www.messnerandhadley.com/blog/are-you-missing-a-w-2/38579 Messner & Hadley LLP Article Highlights: Employers have until Jan. 31, 2014, to provide 2013 W-2s to employees. Steps to take when W-2 has not arrived by scheduled tax appointment. Contact employer if W-2 is not received, then IRS if it is still missing after Feb. 15, 2014. How to proceed if W-2 is still missing by the return due date. Have you received all of your W-2s? These documents are essential for completing individual tax returns. You should receive a Form W-2, Wage and Tax Statement, from all of your employers each year. Employers have until January 31 to provide or send you a 2013 W-2 earnings statement, either electronically or in paper form. If you have not received your W-2, follow these steps: 1. Contact This Office - If your appointment is in the near future, you will be advised whether to keep the appointment or change it to another time. Generally, when a W-2 or 1099 are missing, it is best to keep the appointment so that everything else for the return can be completed. You can then mail the missing document to the office or drop it off at a later date. That way, your return can be finished as soon as the W-2 or 1099 is available, which will speed up your refund, if you are receiving one. 2. Contact Your Employer - Contact your employer to inquire if and when the W-2 was mailed. If it was mailed, it may have been returned to the employer due to an incorrect or incomplete address. After contacting the employer, allow a reasonable amount of time for the employer to resend or re-issue the W-2. 3. Contact the IRS - If you still have not received your W-2 by February 15, you can contact the IRS for assistance at 800-829-1040. However, we recommend that you hold off from contacting the IRS until you are certain that you will not be receiving a W-2 from the employer. If you do call the IRS, have the following information on hand: Employer's name, address, city, and state, including zip code; Your name, address, city, state, zip code, and Social Security number; and An estimate of the wages you earned, the federal income tax withheld, and the period in which you worked for that employer. The estimate should be based on year-to-date information from your final pay stub, or your leave-and-earnings statement, if possible. This office can assist you with making the estimate. 4. File Your Return - Even if you don’t receive a W-2, you are still required to file your tax return or to request a filing extension by April 15. If you anticipate that you will ultimately receive the missing W-2, this office can estimate your 2013 tax liability and file extensions for you. If you have a substantial refund coming, you may opt to have this office prepare a substitute W-2, enabling you to file without the W-2. Refunds for returns that include substitute W-2s can be delayed significantly while the IRS verifies the W-2 information. If you don’t anticipate receiving the missing W-2, then this office can prepare a substitute W-2, enabling you to file your 2013 tax return. If a substitute W-2 is used and it is later determined that the information used to prepare the substitute W-2 was in error, an amended return may need to be prepared for you to file with the IRS and state tax agency, if applicable. Please call this office if you have questions or need assistance about missing W-2s, 1099s, or other tax documents. Tue, 04 Feb 2014 19:00:00 GMT It's Tax Time! Are You Ready? http://www.messnerandhadley.com/blog/its-tax-time-are-you-ready/38558 http://www.messnerandhadley.com/blog/its-tax-time-are-you-ready/38558 Messner & Hadley LLP Article Highlights: It is time to gather your information for your tax appointment Choosing your alternatives Tips for pulling your information together If you're like most taxpayers, you find yourself with an ominous stack of “homework” around TAX TIME! Pulling together the records for your tax appointment is never easy, but the effort usually pays off in the extra tax you save! When you arrive at your appointment fully prepared, you'll have more time to: Consider every possible legal deduction; Evaluate which income reporting and deductions are best suited to your situation; Explore current law changes that affect your tax status; Talk about tax-planning alternatives that could reduce your future tax liability. Choosing Your Best Alternatives The tax law allows a variety of methods of handling income and deductions on your return. Choices you make as you prepare your return often affect not only the current year, but future returns as well. Topics these choices relate to include: Sales of property If you're receiving payments on a sales contract over a period of years, you can sometimes choose between reporting the whole gain in the year you sell or over a period of time as you receive payments from the buyer. Depreciation You're able to deduct the cost of your investment in certain business properties. You can either depreciate the costs over a number of years; or, in certain cases, deduct them all in one. Where to Begin? Preparation for your tax appointment should begin in January. Right after the New Year, set up a safe storage location, such as a file drawer, cupboard, or safe. As you receive pertinent records, file them right away, before you forget or lose them. Make this a habit, and you'll find your job a lot easier on your appointment date. Other general suggestions to prepare for your appointment include: Segregate your records according to income and expense categories. File medical expense receipts in one envelope or folder, mortgage interest payment records in another, charitable donations in a third, etc. If you receive an organizer or questionnaire to complete before your appointment, fill out every section that applies to you. (Important: Read all explanations and follow instructions carefully. By design, organizers remind you of transactions you may otherwise miss.) Call attention to any foreign bank account, foreign financial account, or foreign trust in which you have an ownership interest, signature authority, or controlling stake. We also need to know about foreign inheritances and ownership of foreign assets. In short, bring any foreign financial dealings to our attention so we know if you have any special reporting requirements. The penalties for not making and submitting required reports can be severe. Keep your annual income statements separate from your other documents (e.g., W-2s from employers, 1099s from banks, stockbrokers, etc., and K-1s from partnerships). Be sure to take these documents to your appointment, including the instructions for K-1s! Write down questions so you don't forget to ask them at the appointment. Review last year's return. Compare your income on that return to your income in the current year. A dividend from ABC stock on your prior-year return may remind you that you sold ABC this year and need to report the sale, or that you haven't yet received the current year's 1099-DIV form. Make sure you have social security numbers for all your dependents. The IRS checks these carefully and can deny deductions and credits for returns filed without them. Compare deductions from last year with your records for this year. Did you forget anything? Collect any other documents and financial papers that you're puzzled about. Prepare to bring these to your appointment so you can ask about them. Accuracy Even for Details To ensure the greatest accuracy possible in all detail on your return, make sure you review personal data. Check name(s), address(es), social security number(s) and occupation(s) on last year's return. Note any changes for this year. Although your telephone numbers and e-mail address aren't required on your return, they are always helpful should questions occur during return preparation. Marital Status Change If your marital status changed during the year, if you lived apart from your spouse or if your spouse died during the year, list dates and details. Bring copies of prenuptial, legal separation, divorce or property settlement agreements, if any, to your appointment. If your spouse passed away during the year, you should have a copy of his or her trust agreement or will available for review. Dependents If you have qualifying dependents, you will need to provide the following for each (if you previously provided us with items 1 through 3 you will not need to supply them again): First and last name Social security number Birth date Number of months living in your home Their income amount (both taxable and nontaxable).If your dependent is your child over age 18, note how long the child was a full-time student during the year. For anyone other than your child to qualify as your dependent, they must pass five strict dependency tests. If you think another or others qualify as your dependents (but you aren't sure), tally the amounts you provided toward their support vs. the amounts they provided. This will simplify a final decision. Some Transactions Deserve Special Treatment Certain transactions require special treatment on your tax return. It's a good idea to invest a little extra preparation effort when you have had the following transactions: Sales of Stock or Other Property: All sales of stocks, bonds, securities, real estate and any other property need to be reported on your return, even if you had no profit or loss. List each sale, and have purchase and sale documents available for each transaction. Purchase date, sale date, cost and selling price must all be noted on your return. Make sure this information is contained on the documents you bring to your appointment. Gifted or Inherited Property: If you sell property that was given to you, you need to determine when and for how much the original owner purchased it. If you sell property you inherited, you need to know the original owner's death-date and the property's value at that time. You may be able to find this on estate tax returns or in probate documents; otherwise, ask the executor. Reinvested Dividends: You may have sold stock or a mutual fund in which you participated in a dividend reinvestment program. If so, you will need to have records of each stock purchase made with the reinvested dividends. Sale of Home: The tax law provides special breaks for home sale gains, and you may be able to exclude up to $500,000 of the gain from your primary home if you meet certain ownership, occupancy, and holding period requirements. The maximum exclusion is $250,000 for others. The cost of improvements made on your home can also be used reduce any gain, so it is good practice to keep a record of them. The exclusion of gain applies only to a primary residence; so keeping a record of improvement to other property, such as your second home, is important. Be sure to bring a copy of the sale documents (usually the closing escrow statement). Purchase of a Home: Be sure to bring a copy of the final closing escrow statement if you purchased a home. Vehicle Purchase: If you purchased a new plug-in electric car (or cars) this year, you may qualify for a special credit. Please bring the purchase statement to the appointment with you. Home Energy-Related Expenditures: If you installed solar, geothermal or wind-power-generating systems, please bring the details of those purchases and manufacturer's credit qualification certification to your appointment. You may qualify for a substantial energy-related tax credit. Identity Theft: Identity theft is becoming more prevalent and can impact your tax filings. If you have reason to believe that your identity has been stolen, please contact this firm as soon as possible. The IRS provides special procedures for filing if you have had your identity stolen. Car Expenses: Where you have used one or more automobiles for business, list the expenses of each separately. The government requires your total mileage, business miles, and commuting miles for each business use of your car on your return, so be prepared to have them available. If you were reimbursed for mileage through an employer, know the reimbursement amount and whether it is included in your W-2. Charitable Donations: You must substantiate cash contributions (regardless of amount) with a bank record or written communication from the charity showing the name of the charitable organization, date and amount. Unreceipted cash donations put into a “Christmas kettle,” church collection plate, etc., are not deductible. For clothing and household contributions, items donated must generally be in good or better condition, and items such as undergarments and socks are not deductible. You must keep a record of each item contributed that indicates the name and address of the charity, date and location of the contribution, and a reasonable description of the property. Contributions valued under $250 and dropped at an unattended location do not require a receipt. For contributions above $500, the record must also include when and how the property was acquired and your cost basis in the property. For contributions above $5,000 and other types of contributions, please call this office for additional requirements. If you have questions about assembling your tax data prior to your appointment, please give this office a call. Thu, 30 Jan 2014 19:00:00 GMT Family Home Loan Interest May Not Be Deductible http://www.messnerandhadley.com/blog/family-home-loan-interest-may-not-be-deductible/38547 http://www.messnerandhadley.com/blog/family-home-loan-interest-may-not-be-deductible/38547 Messner & Hadley LLP Article Highlights: Qualified residence interest is deductible interest paid or accrued during the tax year on acquisition indebtedness or home equity indebtedness with respect to any qualified residence of the taxpayer. Acquisition indebtedness means any indebtedness that is incurred in acquiring, constructing, or substantially improving any qualified residence of the taxpayer, and is secured by such residence. Interest on unsecured home debt is generally not deductible. It is not uncommon for individuals to loan money to relatives to help them buy a home. In these situations, it is also not uncommon for a loan to be undocumented or documented by an unsecured note, with the unintended result that the home buyer can’t claim a tax deduction for the interest paid to their helpful relative. The tax code describes qualified residence interest as interest paid or accrued during the tax year on acquisition indebtedness or home equity indebtedness with respect to any qualified residence of the taxpayer. It also provides that the term "acquisition indebtedness" means any indebtedness that is incurred in acquiring, constructing, or substantially improving any qualified residence of the taxpayer, and is secured by such residence. There are also limits on the amount of debt and number of qualified residences a taxpayer may have for purposes of claiming a home mortgage interest tax deduction, but those details are not covered in this article, which is focusing on the requirement that the debt be secured. Secured debt means a debt that is on the security of any instrument (such as a mortgage, deed of trust, or land contract): (i) that makes the interest of the debtor in the qualified residence specific security of the payment of the debt, (ii) under which, in the event of default, the residence could be subjected to the satisfaction of the debt with the same priority as a mortgage or deed of trust in the jurisdiction in which the property is situated, and (iii) that is recorded, where permitted, or is otherwise perfected in accordance with applicable state law. In other words, the home is put up as collateral to protect the interest of the lender. Thus interest paid on undocumented loans, or documented but unsecured notes, is not deductible by the borrower but is fully taxable to the lending individual. The IRS is always skeptical of family transactions. Don’t get trapped in this type of situation; take the time to have a note drawn up and recorded or perfected in accordance to state law. If you have questions related to this situation or other issues related to the deductibility of home mortgage interest, please give this office a call. Tue, 28 Jan 2014 19:00:00 GMT Start Planning Now for 2014 Income Taxes http://www.messnerandhadley.com/blog/start-planning-now-for-2014-income-taxes/38538 http://www.messnerandhadley.com/blog/start-planning-now-for-2014-income-taxes/38538 Messner & Hadley LLP Start Planning Now for 2014 Income Taxes You may not have even completed your 2013 taxes yet. But now is an ideal time to start getting ready for your 2014 returns. We know that you're in some stage of preparation for your 2013 income taxes. It may seem odd to start thinking about 2014 taxes just now, but actually, this is the ideal time to start planning and making business decisions with their tax implications always in the back of your mind. As you look at the data that will be entered in your 2013 tax forms, you're likely to come across some expenses that you might have handled differently, or some income that should have been deferred. If you begin your planning process for 2014 while 2013 is still in the works, you can start making smarter, more tax-advantageous business decisions now, instead of late in the year when everyone is rushing to take actions necessary to lower their tax obligation. Here's how QuickBooks can help you with this new approach. Overhaul your Chart of Accounts. The mechanics of doing this in QuickBooks are fairly uncomplicated, but changing this critical list - the backbone of your company file - requires solid knowledge of which accounts should be added, deleted or changed. You also need to know which accounts and subaccounts will have impact on your income taxes. They must be structured accordingly. Figure 1: QuickBooks' default Chart of Accounts can be easily modified to meet your company's unique needs. But let us help you with this task. For these reasons, we ask that you consult with us if you think your Chart of Accounts could use an overhaul. Our early involvement will be much more economical for you than if we have to come in down the road when your accounts have become dangerously tangled. Devise an effective system for estimated taxes. As you well know, there's no magical formula for estimating how much income tax you'll owe when all of your income and expenses have been tallied. We can make this an ongoing task by creating monthly or quarterly financial reports for your business and working from those. If you're self-employed, you might want to open a low-fee checking account that will serve solely as your tax fund. Because you have no employer to pay a portion of your Social Security and Medicare obligations, it's critical that you're putting enough away. Consider putting one-third of your taxable income into that account and see how it goes. You may get a pleasant surprise at tax prep time, or you may have to dip into other savings to be compliant. Figure 2: You may want to set up a separate bank account to park estimated tax funds, so you know they're committed. Ask us about numbering new accounts. You can submit federal payments online on the Electronic Federal Tax Payment System site. Check with us to see if your state has an electronic system. Of course, the IRS will accept a check. Run reports on everything. And keep running them. We already mentioned that we're happy to create and analyze your most critical financial reports on a regular basis. You may have tried to understand the Trial Balance, Statement of Cash Flows, etc. in QuickBooks and been puzzled. Don't feel incompetent because of that: It often takes an accountant-level individual to understand what they mean for your business. You can define and build your own reports using QuickBooks' customization tools. If you have employees who travel, consider bringing in an automated expense report application (we can help you find one and implement it). Stress the importance of adhering to IRS rules about travel. Same goes for your local salesforce, off-site technicians and other service providers, etc. Figure 3: Help your staff help you by involving them in budgeting and expense management. For employees who come into the office every day or are telecommuting, you can give them some ownership of their contribution to expenses by bringing them into the budget process and/or requesting that they submit their own monthly mini-reports on any company funds they spend. The more employees are aware of and accountable for expenses, the easier it will be for you to work toward minimizing your tax obligation. And having some information about the considerable sum you pay in taxes may help staff understand your tightening of the purse strings. Consider retraining accounting staff if necessary. You may be paying a portion of your taxes unnecessarily, simply because your company's bookkeeping is less-than-precise. Nip that in the bud. The more you micro-manage your reporting, stay aware of the consequences of every expenditure and bring employees into the process, the more prepared you'll be for 2014 taxes. Mon, 27 Jan 2014 19:00:00 GMT Did You Get Married in 2013? http://www.messnerandhadley.com/blog/did-you-get-married-in-2013/38516 http://www.messnerandhadley.com/blog/did-you-get-married-in-2013/38516 Messner & Hadley LLP Article Highlights: E-filing is not possible if married name does not match Social Security Administration (SSA) records. Use SSA Form SS-5 to update SSA records. A married status may produce unexpected tax results. If you got married during 2013, don't forget to notify the Social Security Administration (SSA), IRS, and Postal Service of your address and/or name change. If the SSA does not have the same name as used on your tax return, you may not be able to e-file your returns and your refund could be delayed. Here are some actions that you should take as soon as possible: Notify the Social Security Administration − Report any name change to the Social Security Administration so that your name and SSN will match when filing your next tax return. Informing the SSA of a name change is quite simple. File a Form SS-5, Application for a Social Security Card at your local SSA office. You can access the form on SSA's Web site, by calling 800-772-1213, or at local offices. Your income tax refund may be delayed if it is discovered that your name and SSN don't match at the time your return is filed. Notify the IRS -  If you have a new address, you should notify the IRS by sending Form 8822, Change of Address. Notify the U.S. Postal Service - You should also notify the U.S. Postal Service when you move so that any IRS or state tax agency correspondence can be forwarded to your current address. Review Your Withholding and Estimated Tax Payments -  If both you and your new spouse work, your combined income may place you in a higher tax bracket, and you may have an unpleasant surprise when we prepare your return for 2013. On the other hand, if only one of you works, filing jointly with your new spouse can provide a significant tax reduction. The fat is in the fire for 2013; it may be appropriate to review your withholding (W-4 status) and estimated tax payments, if any, for 2014 to make sure you are not going to be under-withheld and set yourself up to receive bad news when the 2014 return is filed. If you have any questions about how your new marital status will affect your tax filing, please call this office. Fri, 24 Jan 2014 19:00:00 GMT February 2014 Business Due Dates http://www.messnerandhadley.com/blog/february-2014-business-due-dates/36129 http://www.messnerandhadley.com/blog/february-2014-business-due-dates/36129 Messner & Hadley LLP February 10 - Non-Payroll Taxes File Form 945 to report income tax withheld for 2013 on all non-payroll items. This due date applies only if you deposited the tax for the year in full and on time. February 10 - Social Security, Medicare and Withheld Income Tax File Form 941 for the fourth quarter of 2013. This due date applies only if you deposited the tax for the quarter in full and on time. February 10 - Certain Small Employers File Form 944 to report Social Security and Medicare taxes and withheld income tax for 2013. This due date applies only if you deposited the tax for the year in full and on time. February 10 - Farm Employers File Form 943 to report Social Security and Medicare taxes and withheld income tax for 2013. This due date applies only if you deposited the tax for the year in full and on time. February 10 - Federal Unemployment Tax File Form 940 for 2013. This due date applies only if you deposited the tax for the year in full and on time. February 17 - Social Security, Medicare and Withheld Income Tax If the monthly deposit rule applies, deposit the tax for payments in January. February 17 - Non-Payroll Withholding If the monthly deposit rule applies, deposit the tax for payments in January.February 17 - All Employers Begin withholding income tax from the pay of any employee who claimed exemption from withholding in 2013, but did not give you a new Form W-4 to continue the exemption this year. February 28 - Payers of Gambling Winnings File Form 1096, Annual Summary and Transmittal of U.S. Information Returns, along with Copy A of all the Forms W-2G you issued for 2013. If you file Forms W-2G electronically, your due date for filing them with the IRS will be extended to March 31. The due date for giving the recipient these forms was January 31.February 28 - Informational Returns Filing Due File information returns (Form 1099) and transmittal Forms 1096 for certain payments you made during 2013. There are different forms for different types of payments. These are government filing copies for the 1099s issued to service providers and others (see January 31). If you file Forms 1098, 1099, or W-2G electronically, your due date for filing them with the IRS will be extended to March 31. The due date for giving the recipient these forms was January 31.February 28 - All Employers File Form W-3, Transmittal of Wage and Tax Statements, along with Copy A of all the Forms W-2 you issued for 2013. If you file Forms W-2 electronically, your due date for filing them with the SSA will be extended to March 31. The due date for giving the recipient these forms was January 31.February 28 - Large Food and Beverage Establishment Employers File Form 8027, Employer’s Annual Information Return of Tip Income and Allocated Tips. Use Form 8027-T, Transmittal of Employer’s Annual Information Return of Tip Income and Allocated Tips, to summarize and transmit Forms 8027 if you have more than one establishment. If you file Forms 8027 electronically, your due date for filing them with the IRS will be extended to March 31. Thu, 23 Jan 2014 19:00:00 GMT February 2014 Individual Due Dates http://www.messnerandhadley.com/blog/february-2014-individual-due-dates/36130 http://www.messnerandhadley.com/blog/february-2014-individual-due-dates/36130 Messner & Hadley LLP February 1 - Tax Appointment If you don’t already have an appointment scheduled with this office, you should call to make an appointment that is convenient for you. February 10 - Report Tips to Employer If you are an employee who works for tips and received more than $20 in tips during January, you are required to report them to your employer on IRS Form 4070 no later than February 10. Your employer is required to withhold FICA taxes and income tax withholding for these tips from your regular wages. If your regular wages are insufficient to cover the FICA and tax withholding, the employer will report the amount of the uncollected withholding in box 12 of your W-2 for the year. You will be required to pay the uncollected withholding when your return for the year is filed. February 17 - Last Date to Claim Exemption from Withholding If you claimed an exemption from income tax withholding last year on the Form W-4 you gave your employer, you must file a new Form W-4 by this date to continue your exemption for another year. Thu, 23 Jan 2014 19:00:00 GMT Understanding the Health Insurance Mandate http://www.messnerandhadley.com/blog/understanding-the-health-insurance-mandate/38511 http://www.messnerandhadley.com/blog/understanding-the-health-insurance-mandate/38511 Messner & Hadley LLP Beginning in 2014, the Affordable Care Act will impose the new requirement that all people in the United States, with certain exceptions, have minimum essential health care insurance or they will be subject to a penalty. How this will affect your family will depend upon a number of issues. Already Insured If you have insurance through Medicare, Medicaid, or the Veterans Administration, then you will not be subject to the penalty. You will also avoid the penalty if you are insured through an employer plan or a private insurance plan that provides minimum essential care. US individuals and those claimed as their dependents who reside outside the US are deemed to have adequate coverage and are not subject to the penalty. Some Are Exempt from the Penalty Certain individuals are exempt from the health insurance mandate and are therefore not subject to the penalty. Included are: Those unlawfully present in the US Those whose income is below the federal tax filing requirement (the sum of the standard deduction and exemption amounts for the filer and spouse, if any) Those who cannot afford coverage based on formulas contained in the law (generally when the cost of the insurance coverage exceeds 8% of the individual's household income) Members of American Indian tribes Incarcerated individuals, certain religious objectors, and those meeting hardship requirements Household Income The term “household income” is used as a measure of who qualifies for a premium assistance subsidy or tax credit and is used extensively in calculations related to the mandatory insurance requirements. Household income includes the modified adjusted gross incomes (MAGIs) of an individual, the individual's joint filing spouse, if any, and all of the individual's dependents that are required to file a tax return(1). MAGI is an individual's regular adjusted gross income plus non-taxable social security and railroad retirement benefits, excluded foreign earned income, and non-taxable interest and dividends. (1) An individual is required to file a tax return if their income exceeds the sum of their standard deduction and allowable exemptions. Thus, for example, a single person who only made $1,000 for the year would not be required to file a return and their income would not be included in the household income even if they did file to claim a refund. Can't Afford Coverage? Families with household incomes below 400% of the federal poverty guideline may receive help to pay all, or a portion of, the cost of the premiums for health insurance. Where the household income is below 100% of the federal poverty level, the family qualifies for Medicaid. There are no premiums for Medicaid. If the household income is between 100% and 400% of the federal poverty level (FPL), the family qualifies for an insurance premium subsidy, also known as a premium assistance credit, provided the insurance is purchased through a government marketplace (exchange). The actual credit is based upon the current year's household income but can be estimated and allowed in advance as a subsidy. When it is used in advance as a subsidy and the subsidy turns out to be greater than the allowable credit, the excess subsidy may have to be paid back. On the other hand, if the subsidy was not used or the subsidy was less than the credit, the difference becomes a refundable credit on the tax return. The maximum credit is available at 100% of the poverty level and becomes less as the percentage increases and is totally phased out at 400% of the poverty level. For family sizes larger than 4, increase the 100% rate by $4,020 for each additional child. Dollar amounts for Alaska and Hawaii are larger. Note that the table is condensed for this brochure and the actual percentage of poverty level will need to be extrapolated for income not shown in the table. For 2014, the FPL amounts are those in effect on October 1, 2013, the opening date for 2014 enrollment in plans offered through a government marketplace. Credit/Subsidy Qualifications To qualify for the credit, an individual must: Have household income for the year of at least 100% but not more than 400% of the federal poverty level Purchase the insurance through a government marketplace (exchange) Not be claimed as a dependent of another Not be eligible for minimum essential care through Medicaid If married, file a joint tax return Not be offered minimum essential insurance under an employer-sponsored plan How Much Will the Subsidy Be? The amount of the subsidy is based on need and therefore those in the lowest percentage of the poverty level will receive the greatest subsidy. The government has predetermined how much each family must pay toward their own insurance in the form of a percentage of the family's household income. To determine how much a family must pay toward their own insurance, first determine where their income falls within the poverty table above and then determine their percentage from the table below. That percentage represents the portion of their household income that they should pay toward their own insurance. Note: the table is condensed for this brochure and the actual percentage of household income that must be paid toward one's own insurance will need to be extrapolated for poverty levels between those shown. Once the percentage in the right-hand column is determined, multiply that by the family's household income to determine what the family's annual responsibility is and divide it by 12 to determine their monthly responsibility. Then, to determine the subsidy, go to the government marketplace and determine the cost of the Silver(2) level of insurance for the family and subtract the amount they are required to pay themselves; the difference, if any, is the subsidy. Example: Family of two with a household income of $31,020. From the Federal Poverty Level Chart it is determined that a family of 2 with that income is at 200% of the federal poverty level. Using the 200% of poverty level it is determined from the second table that their responsibility toward their own insurance should be 6.3% of their household income or $1,954 (.063 x $31,020) or $162.83 per month. If the cost of the Silver level of insurance is $350 per month, then the premium subsidy would be $187.17 ($350 - $162.83). (2) Insurance acquired through the marketplace (exchange) is available in four levels of cost (premium), with varying metal designations. The least expensive is the Bronze coverage, which is also the insurance that provides the “minimum essential coverage” needed to avoid a penalty. Next is the Silver level, which is referred to as the “benchmark premium.” The Silver or benchmark premium is the one used when determining the subsidy. The Gold and Platinum designations complete the four levels of coverage. The Bronze coverage, on an overall average, is supposed to cover 60% of the insured's medical cost. Silver plans cover 70%, the Gold 80%, and the Platinum 90%. Paying Back Excess Subsidies When an insured individual receives a subsidy in excess of the allowable credit based upon the current year's household income, some portion, but not necessarily all, of the excess must be paid back on the tax return for the year. If the household income is above 400% of the poverty level then the entire amount of the excess must be repaid. If the insured's household income is between 100% and 400% of the poverty level, then payback is capped at the following amounts: Penalty for Not Being Insured Beginning in 2014, there is a penalty for not being insured unless one of the exemptions mentioned earlier is met. The penalty is being phased in over three years. The monthly penalty for 2014 is the greater of $7.92 per uninsured adult plus $3.96 for each uninsured child(3), but not to exceed $23.75 per month for a family, OR, 1% of household income in excess of the individual's income tax filing threshold(4) divided by 12. In 2016, when the penalty is fully phased in, the monthly penalty will be $57.92 per uninsured adult and $28.96 per uninsured child(3), not to exceed $173.75 per family OR 2.5% of household income over the income tax filing threshold(4) divided by 12. The penalty can never be greater than the national average premium for a minimum essential coverage plan purchased through a government marketplace (exchange). (3) The child rate will apply to family members under the age of 18. (4) Filing threshold is the sum of the standard deduction and personal exemption amounts for the tax filer and spouse, if any. Example: A married couple without insurance in 2014 has one dependent child and a household income of $50,000. The couple's standard deduction is $12,400 and with two exemptions at $3,950 each, their filing threshold for 2014 is $20,300. Their monthly penalty is the greater of $19.80 (2 x $7.92 plus $3.96) or $24.75 (.01 x ($50,000 - $20,300)/12). Thus their monthly penalty would be $24.75. There is no penalty when the first lapse in coverage during a year is less than three months. Insurance Marketplaces Residents of states that did not set up their own exchanges must use the federal marketplace. All policies sold through a marketplace have standardized applications, no pre-existing exclusions, and pre-set copays and deductibles. Where an insured family's household income is between 100% and 200% of the federal poverty level, copays and deductibles are reduced by two-thirds. They are reduced by 1/2 where the insured's income is between 200% and 300% , and 1/3 for those between 300% and 400%. Individuals who need to purchase health insurance are not required to use the government marketplaces - they can purchase plans privately. However, privately purchased plans will not be eligible for the premium assistance credit or subsidy, but if they meet the minimum essential coverage requirements, they will qualify the individual to avoid the mandatory coverage penalty. Those shopping for health insurance should check both the private and government marketplaces to compare their net out-of-pocket premium costs. Dependents The filer, or filers if filing jointly, is subject to the penalty for every dependent who can be claimed on their tax return. That includes children, parents, and other related individuals. This is true even if they do not claim the dependent, but were qualified to do so. Thu, 23 Jan 2014 19:00:00 GMT Are You Required To File A Gift Tax Return? http://www.messnerandhadley.com/blog/are-you-required-to-file-a-gift-tax-return/38483 http://www.messnerandhadley.com/blog/are-you-required-to-file-a-gift-tax-return/38483 Messner & Hadley LLP Article Highlights: A gift tax return must be filed if you give gifts in excess of $14,000 per recipient during the year. Directly paid medical and educational gifts are excluded Married individuals can increase the annual $14,000 exclusion to $28,000 by splitting gifts. The estate tax exemption can be used to offset gifts in excess of the annual exclusion. Frequently, taxpayers think that gifts of cash, securities, or other assets that they give to other individuals are tax-deductible and, in turn, the gift recipient sometimes thinks that income tax must be paid on the gift received. Nothing is further from the truth. To fully understand the ramifications of gifting, one needs to realize that gift tax laws are related to estate tax laws. When a taxpayer dies, the value of his or her gross estate (to the extent that it exceeds the excludable amount for the year) is subject to estate taxes. Naturally, individuals want to do whatever they can to maximize their beneficiaries’ inheritances, and limit the amount of tax the estate may owe. Because giving away one’s assets before death reduces the individual’s gross estate, the government has placed limits on gifts, and if those gifts exceed the limit, they are subject to a gift tax that must be paid by the giver. Gift Tax Exclusions – Certain gifts are excluded from the gift tax. Annual Exclusion – This is the annual amount that an individual can give to any number of recipients. This amount is adjusted for inflation, and for 2013, it is $14,000, and can be in the form of cash, property, or a combination thereof. For example, a taxpayer with five children can give $14,000 to each child in 2013 without any gift tax consequences. The taxpayer cannot deduct the gifts, and the gifts are not taxable to the recipients. Generally, for a gift to qualify for the annual exclusion, it must be a gift of a “present interest.” That is, the recipient’s enjoyment of the gift can’t be postponed to the future. For gifts to minor children, there is an exception to the “present interest” rule, where a properly worded trust is established. If the total of all of your gifts to each individual is not over $14,000, then there is no gift tax return filing requirement. Lifetime Limit – In addition to the annual amounts, taxpayers can use a portion of the federal estate tax exemption (it is actually in the form of a credit) to offset an additional amount during their lifetime without gift tax consequences. However, to the extent that this credit is used against a gift tax liability, it reduces the credit available for use against the federal estate tax at the time of the taxpayer’s death. For 2013, the credit-equivalent lifetime gift tax exemption is $5.25 million. If you made a gift to any individual in excess of $14,000 during the year, a gift tax return filing for the year is required even if there is no tax due. The filing allows the IRS to track your federal estate tax exemption reduction as a result of gifts, and includes the tax if you exceed the current lifetime limit. Education and Medical Exclusion – In addition to the amounts listed above, there are two additional types of gifts that can be excluded from the gift tax: (1) Amounts paid by one individual, and on behalf of another individual, directly to a qualifying educational organization as tuition for that other individual. (2) Amounts paid by one individual, and on behalf of another individual, directly to a provider of medical care as payment for that medical care. Payments for medical insurance qualify for this exclusion. Caution: Watch out for unintended gifts such as when an elderly parent places a child on title of the home or other assets. Gift-Splitting by Married Taxpayers – If the gift-giver is married and both spouses are in agreement, gifts to recipients made during a year can be treated as split between the husband and wife, even if the cash or property gift was made by only one of them. Thus, by using this technique, a married couple can only give $28,000 a year to each recipient under the annual limitation previously discussed. If you believe that you have a gift tax filing requirement, have additional questions, or would like this office to assist you in planning an appropriate gifting strategy, please call. Tue, 21 Jan 2014 19:00:00 GMT Revising Your W-4? Seek Professional Advice. http://www.messnerandhadley.com/blog/revising-your-w-4-seek-professional-advice/36044 http://www.messnerandhadley.com/blog/revising-your-w-4-seek-professional-advice/36044 Messner & Hadley LLP Article Highlights: Form W-4 is used to establish payroll-withholding amounts. Incorrectly completed W-4s can result in under-withholding and unexpected year-end tax liability. The IRS’s W-4 calculator is only suitable for simple returns. Commonly encountered problems in getting the W-4 completed to establish the proper amount of withholding. This time of year, many employers will request updated W-4 forms from their employees (and the equivalent state form for those who live in a state with income tax). The W-4 form allows you to specify your filing status and the number of dependent exemptions to be used for determining the amount of income tax to be withheld from your payroll. Although the IRS provides an online W-4 calculator, it is generally suitable only for more simple returns, and may not be appropriate in all cases, since it does not take into account all income adjustments, credits, and deductions available. Be careful when completing the W-4 form, because errors can create some significant financial problems. Let’s say that you are married and have two dependents. On your tax return, you claim four exemptions. The natural thing for you to do would be to claim “married” and four exemptions on the W-4. However, for W-4 purposes, the exemption for the taxpayer and spouse are automatically built into the married rates, and only two exemptions need to be claimed. The result, of course, is that the taxpayer ends up claiming more exemptions than he or she actually is entitled to, which can result in under-withholding, if the standard deduction is used. It is common practice and acceptable for taxpayers to claim additional exemptions when they would otherwise have excessive withholding. Over-withholding may occur because the withholding tables do not account for large itemized deductions or other situations that might reduce the worker’s taxable income. It’s also quite common for taxpayers to increase their exemptions to provide more take-home pay from their payroll checks. In doing so, they are essentially borrowing tax money from the government, which they will have to repay - along with possible penalties and interest - when they file their return the following year. That might seem like a good idea now, but it could lead to an unexpected tax liability at tax time. This is where a professional tax projection can more accurately establish appropriate withholding amounts. Determining the appropriate number of exemptions to claim on the W-4 can be tricky if you have other substantial income on which no tax is withheld or when both spouses of a married couple are employed. The guidance of a tax professional may be beneficial in these and other cases, to help determine the W-4 withholding allowances and to analyze how the withholding amount may affect the need for estimated tax installment payments. If you feel you need assistance in determining your withholding amount and completing the W-4 to produce the correct withholding, please give this office a call. Thu, 16 Jan 2014 19:00:00 GMT Are You Required to File 1099s? http://www.messnerandhadley.com/blog/are-you-required-to-file-1099s/38424 http://www.messnerandhadley.com/blog/are-you-required-to-file-1099s/38424 Messner & Hadley LLP Article Highlights: A business that pays an independent contractor $600 or more in a year must file Form 1099-MISC. Form W-9 is used to collect the independent contractor's data. Deadlines for issuing 2013 1099-MISCs are January 31, 2014 (to independent contractors) and February 28, 2014 (to the IRS). If you use independent contractors to perform services for your business and you pay them $600 or more for the year, you are required to issue them a Form 1099-MISC after the end of the year to avoid facing the loss of the deduction for their labor and expenses. The 1099s for 2013 must be provided to the independent contractor no later than January 31, 2014. It is not uncommon to have a repairman out early in the year, pay him less than $600, and then use his services again later, and have the total for the year exceed the $600 limit. As a result, you may overlook getting the information needed to file the 1099s for the year. Therefore, it is good practice to have individuals who are not incorporated complete and sign the IRS Form W-9 the first time that you use their services. Having properly completed, and signed, Form W-9s for all independent contractors and service providers eliminates any oversights, and protects you against IRS penalties and conflicts. IRS Form W-9, Request for Taxpayer Identification Number and Certification, is provided by the government as a means for you to obtain the data required to file the 1099s from your vendors. It also provides you with verification that you complied with the law should the vendor provide you with incorrect information. We highly recommend that you have a potential vendor complete the Form W-9 prior to engaging in business with them. The form can either be printed out, or filled out onscreen and then printed out. The W-9 is for your use only and is not submitted to the IRS. If you don't have a W-9 for a vendor you used in 2013 and paid $600 or more, you should make every attempt to obtain one. In order to avoid a penalty, copies of the 1099s need to be sent to the IRS by February 28, 2014. They must be submitted on magnetic media, or on optically scannable forms (OCR forms). This firm prepares 1099s in OCR format for submission to the IRS with the 1096 submittal form. This service provides recipient and file copies for your records. Use the worksheet to provide us with the information that we need to prepare your 1099s. Please attempt to have the information to this office by January 20, 2014, in order that the 1099s can be provided to the service providers by the January 31st due date. If you need assistance or have questions, please give this office a call. Tue, 14 Jan 2014 19:00:00 GMT What Happens When Social Security Funds Run Out? http://www.messnerandhadley.com/blog/what-happens-when-social-security-funds-run-out/38396 http://www.messnerandhadley.com/blog/what-happens-when-social-security-funds-run-out/38396 Messner & Hadley LLP Article Highlights:  Without Congressional action, Social Security will become insolvent in 2033. Benefits could shrink to 77% of the current levels and/or payments could be delayed. Individuals need to take proactive steps to supplement Social Security. This subject comes up over and over again and Congress keeps kicking it down the road, not wanting to deal with the political fallout that will result if taxes are increased or benefits are reduced to fund future Social Security benefits. The last change Congress made was to gradually extend the full retirement age from the age of 65 to the age of 67 between 2002 and 2025. Our Social Security system not only provides retirement benefits, but also provides disability and survivor benefits to covered workers and their families. The Social Security system receives funding from numerous sources, including the Social Security payroll tax (FICA) on wages, self-employment tax on the income of self-employed individuals, income tax on the taxable part of Social Security benefits, and interest on current trust fund assets. In the Social Security Administration's 2013 Annual Report, the Board of Trustees projected trust fund exhaustion by the year 2033. It also projected that in 2033, the first year of projected insolvency, the program would only have enough tax revenues to pay about 77% of scheduled benefits. That percentage would decline to 72% in 2087. If that happens, the monthly payment of benefits could be delayed, disrupting the predictability of the current payment schedule. A recent study by the Congressional Research Service (CRS) concluded that the sooner Congress acts, the smaller the changes to Social Security need to be. Making changes now would spread the costs over a larger number of workers, and over a longer period of time. Changes could be slowly phased in, rather than making abrupt cuts in benefits and/or increases in taxes, thus allowing workers to plan in advance for their retirements. Relying solely on government benefits for retirement is risky. Proactive retirement plans may be a better option for your golden years. The current tax code provides for numerous retirement incentives including Traditional IRAs, Roth IRAs, 401(k) plans, self-employed retirement plans, and a Saver's Tax credit for lower income individuals. A little saved each year can become a significant retirement income source in the future. If we can help you plan for your retirement, or explain the various tax-favored retirement plans available, please give this office a call. Thu, 09 Jan 2014 19:00:00 GMT You May Need to File Nominee http://www.messnerandhadley.com/blog/you-may-need-to-file-nominee/38377 http://www.messnerandhadley.com/blog/you-may-need-to-file-nominee/38377 Messner & Hadley LLP If you receive income in your name that actually belongs to someone else, aside from your spouse if married filing jointly, you are a nominee. This means you must file a 1099 form with the IRS appropriate to the type of income you received and give a copy of it to the income’s actual owner. One of the most common nominee situations is a joint bank account or brokerage account with all of its income reported under your Social Security (SS) number. You will need to provide the IRS and your account co-owner with a 1099 reporting the co-owner’s share of the income under his or her SS number. Then, when you file your return, you need to show all the income but back out the co-owner’s share as a “nominee amount.” The type of 1099 to file depends upon the type of income: 1099-INT for interest, 1099-DIV for dividends, and 1099-B for the proceeds from selling stocks and bonds. If the joint account is a brokerage account that has produced interest and dividend income, along with stock or bond sales, the nominee will need to prepare one of each type of 1099 for each co-owner. You should provide Forms 1099-INT and 1099-DIV as a nominee to the recipients by January 31, while the deadline for Form 1099-B is February 15. To avoid penalties, you need to send copies of the 1099s to the IRS by February 28, on magnetic media or optically scannable paper forms (OCR forms). This firm prepares 1099s in OCR format for submission to the IRS along with the required 1096 transmittal form. This service provides recipient and file copies for your records. If you have questions about filing 1099s as a nominee, please call this office. Tue, 07 Jan 2014 19:00:00 GMT Home Mortgage Interest and Unmarried Couples http://www.messnerandhadley.com/blog/home-mortgage-interest-and-unmarried-couples/38329 http://www.messnerandhadley.com/blog/home-mortgage-interest-and-unmarried-couples/38329 Messner & Hadley LLP Article Highlights: Home mortgage interest can generally be deducted only by a person who is legally obligated to pay the mortgage. An exception to the preceding general rule applies for interest paid on a real estate mortgage when a person is a legal or equitable owner of the real estate, but is not directly liable for the debt. If the person making the mortgage payment is not liable, or is not an equitable owner, then that individual is not allowed the interest deduction, nor is the individual who is liable on the debt. It is becoming increasingly common for couples to live together and remain unmarried, which can lead to potential tax problems when they share the expenses of a home, but only one of them is liable for the debt on that home. Home mortgage interest can generally be deducted only by a person who is legally obligated to pay the mortgage (in other words, a person who is named as an obligor on the mortgage document). However, there is an exception to the preceding general rule for interest paid on a real estate mortgage when a person is a legal or equitable owner of the real estate, but is not directly liable for the debt. For example, if the one who is not liable on the mortgage makes the payment, that individual is not allowed to deduct the interest portion of the payment, nor is the other person, because he or she did not pay it. This can lead to some complications where one of the couple earns significantly more income and would benefit tax-wise from an interest deduction, but the other person is the liable party on the loan. It is not uncommon for couples who both work to share the mortgage payments in the mistaken belief that they can each deduct their share of the mortgage interest on their individual tax returns. Although state law governs what constitutes equitable ownership, equitable ownership can generally be established if both parties are on title to the property, even if only one is liable on the loan. The premise behind equitable ownership is that an individual is protecting his or her ownership in the home by making some or all of the mortgage payments. This position was upheld in a 2011 Tax Court decision where the court denied a taxpayer's home mortgage interest deduction that she paid until she became co-owner of the property with her boyfriend and was legally obligated to make the mortgage payments. If you are in a similar situation and have questions related to sharing potentially tax-deductible expenses, please give this office a call. Tue, 31 Dec 2013 19:00:00 GMT Only 5 Days Left For 2013 Tax Deductions http://www.messnerandhadley.com/blog/only-5-days-left-for-2013-tax-deductions/38303 http://www.messnerandhadley.com/blog/only-5-days-left-for-2013-tax-deductions/38303 Messner & Hadley LLP Article Highlights: Actions you can still take to reduce your 2013 tax bite Actions must be completed before the end of 2013 Deductible expenses paid by credit card are deductible in the year charged We would like to remind you that the last day you may make a tax deductible purchase, pay a tax deductible expense, or make tax deductible charitable contributions for 2013, is Tuesday, Dec. 31. That is only 5 days away. However, you still have time to make charitable contributions, to pay deductible taxes, and to make business acquisitions before year-end. If you are making last minute purchases of business equipment, you also must place that equipment into service before year's end. Thus do not expect a deduction on your 2013 return if you take delivery after the end of the year, even if you paid for it in 2013. A charitable contribution to a qualified organization is considered made at the time of its unconditional delivery, which, for donations made by check, is the date you mail it. If you use a pay-by-phone account, the date the financial institution pays the amount is considered the date you made the contribution. If you are short of cash, keep in mind that purchases or contributions charged to your credit card are deemed purchased when the charge is made. Wishing you a happy New Year and looking forward to assisting you with your tax preparation needs during the coming tax season. Thu, 26 Dec 2013 19:00:00 GMT Make QuickBooks Yours in 2014: Customize http://www.messnerandhadley.com/blog/make-quickbooks-yours-in-2014-customize/38295 http://www.messnerandhadley.com/blog/make-quickbooks-yours-in-2014-customize/38295 Messner & Hadley LLP QuickBooks can be used as is (with some exceptions), but you can customize many elements to improve your workflow, your form output and your business insight. While many of the things you purchase and use in your daily work and professional lives don’t come with options, many do. Think about the last time you bought a car, for example. Did you request additional features for safety or convenience or aesthetic value? You can’t buy “extras” with your copy of QuickBooks. You can select from the different versions (Pro, Premier, etc.) and extend the software’s functionality by installing integrated add-ons from the Intuit App Center. But if you install QuickBooks on two machines from the same DVD or download, they’ll look and work the same. Figure 1: Need more functionality in areas like CRM or receivables? Talk to us about adding an integrated app. That is, until you start customizing the product, which you should do. The customization options in QuickBooks let you: Change the appearance of your desktop Modify forms to include only needed content and to make them look professional and uniform, and Drill down deeply on your company data to isolate only the information that you want. The benefits of customization are obvious. You’ll accelerate your workflow, polish your image and get insight that helps you make critical business decisions. Your Desktop View QuickBooks has always made your most commonly-used tools available on the home page. Intuit revamped this screen very skillfully starting with the 2013 versions, so it’s much cleaner and less cramped. But if you don’t use all of the functions represented by icons, you don’t have to even see them. Figure 2: You can remove icons from the home page, but not if related features are enabled. You can remove icons like Estimates and Time Tracking if you’re not planning to use those functions, but some icons must remain if specific features are active. For example, if sales orders and estimates are enabled, invoices are automatically turned on. Likewise, if you’re enabled Inventory, Enter Bills and Pay Bills are locked in, too. There’s an option to either limit the QuickBooks display to one window or let multiple windows open simultaneously. When you open QuickBooks, you can choose to have a specific set of windows open, the window or windows that were open when you shut down, or no windows. Your Forms QuickBooks comes with pre-defined forms for transactions like purchase orders, invoices and sales receipts. If you don’t like the look of one of these default templates, you can download one from the dozens of alternatives that QuickBooks supplies. You can alter these to better meet your needs – even creating multiple versions of the same type of form to use in different situations. Columns and fields can be added, deleted, renamed and repositioned so that your forms contain only the information that your business requires. You can add your logo and change fonts and colors. Once you’ve settled on a design, you can apply it to multiple forms to present a unified image to your customers and vendors. Figure 3: You can specify which fields will appear – both onscreen and in print -- in your templates’ headers, footers and columns. QuickBooks provides the tools to do all of this, but let us help you if you plan to do much modification. It can be challenging, especially if you have to use the Layout Designer. Your Reports You already know that you can do simple modification of your reports, like changing the date range. You may even have clicked on Customize Report and altered the column structure of a report and its sort order. But do you regularly click on the Filters tab in the Modify Report dialog box? If you’re often frustrated because your reports cover too much ground or an inadequate, unfocused level of detail, you should be exploring the options offered here regularly. Filters restrict the data in a given report to a smaller, more targeted group of records or transactions, based on your needs. For example, you might want to find out which customers in your New Construction class have outstanding balances (based on invoices) of more than $500 that are more than 60 days old. You’d set up Filters to create this screen: Figure 4: You’ll learn far more about your company’s financial status if you use Filters in reports. We can help you set up the most effective ones for your business. Why not resolve to make your copy of QuickBooks your copy of QuickBooks in 2014? Some customization processes will require some upfront time, but once you get going, you’ll wish you’d done this sooner. Tue, 24 Dec 2013 19:00:00 GMT Did You Take Your Required Minimum Distribution for 2013? http://www.messnerandhadley.com/blog/did-you-take-your-required-minimum-distribution-for-2013/38297 http://www.messnerandhadley.com/blog/did-you-take-your-required-minimum-distribution-for-2013/38297 Messner & Hadley LLP Article Highlights In the year you reach 70½, you become subject to the required minimum IRA distribution rules. Failure to take the required minimum distribution can result in a 50% penalty. The penalty can be waived under certain circumstances. IRA-to-charity transfers are possible in 2013. The IRS does not allow IRA owners to indefinitely keep funds in a Traditional IRA. Eventually, assets must be distributed and taxes must be paid. If there are no distributions, or if the distributions are not large enough, the IRA owner may have to pay a 50% penalty on the amount that was not distributed as required. Generally, required distributions begin in the year when the IRA owner reaches the age of 70½. IRA owners must take at least a required minimum distribution (RMD) amount from their IRA each year, which starts with the year they reach age 70½. A taxpayer who fails to take a RMD in the year when age 70½ is reached can avoid a penalty by taking that distribution no later than April 1st of the following year. However, that means the IRA owner must take two distributions in the following year, one for the year in which age 70½ is reached and one for the current year. For purposes of determining the RMD, all Traditional IRA accounts—including SEP-IRAs— owned by an individual must be taken into consideration. The minimum amount that must be withdrawn in a particular year is the value of the IRA account at the end of the business day on December 31st of the prior year, divided by the number of years the IRA owner is expected to live based on the IRS life expectancy tables and using the taxpayer's oldest age for the year. The RMD can be taken all at once, sporadically, or in a series of installments (monthly, quarterly, etc.) as long as the total distributions for the year are at least the minimum required amount. Distributions that are less than the RMD for the year are subject to a 50% excise tax penalty. The IRS may waive the penalty if the failure to withdraw the minimum amount or part of the minimum amount was due to reasonable error, and the owner has taken, or is taking, steps to remedy the insufficient distribution. For 2013, you can also directly transfer up to $100,000 from your IRA to a charity, thereby avoiding the income on your tax return. Such a transfer can count toward your RMD requirement. Although you get no charitable deduction as the contribution is excluded from income, it essentially allows taxpayers to deduct the charitable contribution without itemizing. Also, a charitable transfer effectively reduces your income, which in turn can reduce your taxable Social Security and other tax limitations based on income. If you have questions regarding your RMD for 2013 or how an IRA-to-charity transfer can benefit you, please give this office a call. Tue, 24 Dec 2013 19:00:00 GMT January 2014 Individual Due Dates http://www.messnerandhadley.com/blog/january-2014-individual-due-dates/35713 http://www.messnerandhadley.com/blog/january-2014-individual-due-dates/35713 Messner & Hadley LLP January 2 - Time to Call For Your Tax Appointment January is the beginning of tax season. If you have not made an appointment to have your taxes prepared, we encourage you do so before the calendar becomes too crowded. January 10 - Report Tips to Employer If you are an employee who works for tips and received more than $20 in tips during December, you are required to report them to your employer on IRS Form 4070 no later than January 10.January 15 - Individual Estimated Tax Payment Due It’s time to make your fourth quarter estimated tax installment payment for the 2013 tax year.January 15 - Farmers & Fishermen Estimated Tax Payment Due If you are a farmer or fisherman whose gross income for 2012 or 2013 is two-thirds from farming or fishing, it is time to pay your estimated tax for 2013 using Form 1040-ES. You have until April 15, 2014 to file your 2013 income tax return (Form 1040). If you do not pay your estimated tax by January 15, you must file your 2013 return and pay any tax due by March 3, 2014 to avoid an estimated tax penalty. Januar 31 - File 2013 Return to Avoid Penalty for Not Making 4th Quarter Estimated Payment If you file your prior year’s return and pay any tax due by this date, you need not make the 4th Quarter Estimated Tax Payment (January calendar). Mon, 23 Dec 2013 19:00:00 GMT January 2014 Business Due Dates http://www.messnerandhadley.com/blog/january-2014-business-due-dates/35714 http://www.messnerandhadley.com/blog/january-2014-business-due-dates/35714 Messner & Hadley LLP January 15 - Employer’s Monthly Deposit DueIf you are an employer and the monthly deposit rules apply, January 15 is the due date for you to make your deposit of Social Security, Medicare and withheld income tax for December 2013. This is also the due date for the nonpayroll withholding deposit for December 2013 if the monthly deposit rule applies. Employment tax deposits must be made electronically (no more paper coupons), except employers with a deposit liability under $2,500 for a return period may remit payments quarterly or annually with the return.January 31 - 1099s Due To Service Providers If you are a business or rental property owner and paid $600 or more for the services of individuals (other than employees) during a tax year, you are required to provide Form 1099 to those workers by January 31st. "Services" can mean everything from labor, professional fees and materials, to rents on property. In order to avoid a penalty, copies of the 1099s need to be sent to the IRS by February 28, 2014 (March 31, 2014 if filed electronically). They must be submitted on optically scannable (OCR) forms. This firm prepares 1099s in OCR format for submission to the IRS with the 1096 submittal form. This service provides both recipient and file copies for your records. Please call this office for preparation assistance. Payments that may be covered include the following:• Cash payments for fish (or other aquatic life) purchased from anyone engaged in the trade or business of catching fish• Compensation for workers who are not considered employees (including fishing boat proceeds to crew members)• Dividends and other corporate distributions • Interest • Amounts paid in real estate transactions• Rent• Royalties• Amounts paid in broker and barter exchange transactions• Payments to attorneys• Payments of Indian gaming profits to tribal members• Profit-sharing distributions• Retirement plan distributions• Original issue discount• Prizes and awards• Medical and health care payments• Debt cancellation (treated as payment to debtor)January 31 - W-2 Due to All Employees All employers need to give copies of the W-2 form for 2013 to their employees. If an employee agreed to receive their W-2 form electronically, post it on a website and notify the employee of the posting.January 31 - File Form 941 and Deposit Any Undeposited Tax File Form 941 for the fourth quarter of 2013. Deposit any undeposited Social Security, Medicare and withheld income tax. (If your tax liability is less than $2,500, you can pay it in full with a timely filed return.) If you deposited the tax for the quarter in full and on time, you have until February 10 to file the return.January 31 - Certain Small EmployersFile Form 944 to report Social Security and Medicare taxes and withheld income tax for 2013. Deposit or pay any undeposited tax under the accuracy of deposit rules. If your tax liability is $2,500 or more for 2013 but less than $2,500 for the fourth quarter, deposit any undeposited tax or pay it in full with a timely filed return.January 31 - File Form 943 All farm employers should file Form 943 to report Social Security, Medicare taxes and withheld income tax for 2013. Deposit any undeposited tax. (If your tax liability is less than $2,500, you can pay it in full with a timely filed return.) If you deposited the tax for the year in full and on time, you have until February 10 to file the return. January 31 - File Form 940 - Federal Unemployment Tax File Form 940 (or 940-EZ) for 2013. If your undeposited tax is $500 or less, you can either pay it with your return or deposit it. If it is more than $500, you must deposit it. However, if you deposited the tax for the year in full and on time, you have until February 10 to file the return.January 31 - File Form 945 File Form 945 to report income tax withheld for 2013 on all non-payroll items, including back-up withholding and withholding on pensions, annuities, IRAs, gambling winnings, and payments of Indian gaming profits to tribal members. Deposit any undeposited tax. (If your tax liability is less than $2,500, you can pay it in full with a timely filed return.) If you deposited the tax for the year in full and on time, you have until February 10 to file the return.January 31- W-2G Due from Payers of GamblingIf you paid either reportable gambling winnings or withheld income tax from gambling winnings, give the winners their copies of the W-2G form for 2013. Mon, 23 Dec 2013 19:00:00 GMT Did You Collect the Needed W-9s? http://www.messnerandhadley.com/blog/did-you-collect-the-needed-w-9s/38282 http://www.messnerandhadley.com/blog/did-you-collect-the-needed-w-9s/38282 Messner & Hadley LLP Article Highlights: The IRS Form W-9 is used to obtain independent contractors’ tax ID numbers. Tax ID numbers are required when filing 1099s. 1099-MISCs must be issued to independent contractors that are paid $600 or more during the year for performing services for a trade or business. If you used independent contractors to perform services for your business or trade, and you paid them $600 or more for the year, you must issue them a Form 1099-MISC to get the deduction for their labor and expenses and avoid potential penalties. (This requirement generally does not apply to payments made to a corporation. However, the corporation exception does not apply to payments made for attorney fees and for certain payments for medical or health care services.) It is not uncommon to have a repairman out early in the year, pay him less than $600, then use his services again later and have the total paid him for the year exceed the $600 limit. If this happens, you may overlook the information needed to file 1099s for the year. Therefore, it is good practice always to have individuals complete and sign the IRS Form W-9 the first time you use them. This eliminates oversights and protects you against IRS penalties and conflicts. Many small business owners and landlords overlook this requirement during the year, and only realize in January that they have not collected the required documentation to issue 1099s. If you have not collected W-9s throughout the year, do so as soon as possible, so you will have them available when it comes time to prepare 1099s for the year. It is sometimes difficult to acquire contractor information after the fact, especially from those contractors with no intention of reporting the income, so it’s always better to get it up front. Form W-9 provides entries for the contractor’s name, contact information and tax ID number. It also includes a signature block for the contractor, certifying the information and insulating you against penalties if he or she provides an incorrect or phony ID number. Click here to download the Form W-9. If you have questions or need copies of the Form W-9, please call this office. This office can also assist you with your 1099 filing requirements next January. Thu, 19 Dec 2013 19:00:00 GMT Maximize Your Medical Deductions http://www.messnerandhadley.com/blog/maximize-your-medical-deductions/38280 http://www.messnerandhadley.com/blog/maximize-your-medical-deductions/38280 Messner & Hadley LLP Article Highlights The medical deduction AGI floor has increased to 10%, up from 7.5%. For taxpayers age 65 or older and their joint-filing spouses, the AGI floor remains at 7.5% until 2017. For all taxpayers subject to the alternative minimum tax (AMT), the AGI floor is 10%. Beginning this tax year, the only medical expenses that you can deduct are those in excess of 10% of your adjusted gross income (AGI), up from the previous 7.5% AGI limitation. The limitation remains at 7.5% for taxpayers age 65 and over through 2016, unless they are subject to the alternative minimum tax, in which case it is 10% for them as well. For joint return filers not subject to the AMT, if either spouse is age 65 or older, the 7.5% of AGI limitation applies to their joint medical expenses. If you don't itemize your deductions or are nowhere near exceeding the AGI limitation, you need not concern yourself with this deduction. On the other hand, if you do itemize and think you might meet the AGI limitation, then it may be worth your time to summarize your medical expenses for the year.Use the following checklist to help you accumulate your deductible medical expenses. The list is by no means all-inclusive, and some of the deductions listed may have additional restrictions not included here. Ambulance Artificial Limb Artificial Teeth Birth Control Pills Braille Books and Magazines Abortion, Legal Acupuncture Alcoholism Treatment Chiropractor Christian Science Practitioner Contact Lenses Crutches Dental Treatment Drug Addiction Treatment Drugs (Prescription) Eyeglasses Fertility Enhancement Guide Dog Hearing Aids Hospital Services Impairment-Related Expenses Insurance Premiums Laboratory Fees Laser Eye Surgery Lead-based Paint Removal Learning Disability Treatment Medicare B & D Premiums Medical Services Medicines, Prescribed Mentally Retarded, Special Home for Nursing Home Nursing Services Operations Optometrist Organ Donors Osteopath Oxygen Prosthesis Psychiatric Care Psychoanalysis Psychologist Special Schools and Education Sterilization Stop Smoking Programs Surgery Therapy Vasectomy Weight-loss Program Wig (Cancer Patient) If you have questions related to your medical tax deductions please give this office a call. Tue, 17 Dec 2013 19:00:00 GMT Last Minute Tax Moves http://www.messnerandhadley.com/blog/last-minute-tax-moves/38259 http://www.messnerandhadley.com/blog/last-minute-tax-moves/38259 Messner & Hadley LLP Article Highlights: Year-end Tax Strategies Prepay Taxes if Not Subject to the AMT Pay Off Medical Installment Payments Advance Charitable Deductions Be Cautious of Overall Itemized Deductions Phase Out Prepay Tuition Expenses Fast Write-Offs For Business Purchases Year's end is rapidly approaching, but there are still some tax-advantaged moves you can make before the New Year. If you itemize deductions, you might prepay the next installment of your property taxes, pay off medical bills, and pay the fourth quarter state-estimated tax payment in advance. You might prepay college tuition to maximize education credits, and purchase business equipment to take advantage of the more beneficial write-offs available in 2013. Prepay Next Installment of Property Taxes - Usually, property taxes are billed in a fiscal year and can be paid all at once or in multiple installments. If you have been paying the current tax bill in installments and one of those installments is due in 2014, you can pay it before year's end and take the deduction on your 2013 return instead of on 2014's return. Pay State-Estimated Taxes in Advance - If your state has a state income tax, the state income tax paid during the year is deductible as an itemized deduction on your federal tax return. The fourth quarter estimated installment for 2013 is due on January 15, 2014 for most states. If additional state income tax payments in 2013 can benefit you as an itemized deduction, paying that January installment before year's end would allow it to be deducted in 2013. Caution: Taxes are not deductible if you are subject to the alternative minimum tax, and prepaying state income and property taxes might not provide any benefit. Pay Off Medical Bills - If you are paying medical expenses on an installment plan, you itemize your deductions, and your medical expenses for 2013 will exceed 10% of your adjusted gross income (AGI), or 7.5% for tax filers aged 65 and over, it could be beneficial to pay off the balance you owe. You can pay off those medical expenses, even with borrowed funds, before year's end and increase your deductions for 2013. Make Charitable Contributions - The holiday season is historically a time for making charitable contributions to qualified organizations, and if you are itemizing your deductions, the donations you make before the end of 2013 can help to reduce your 2013 tax bite. If you regularly tithe to a house of worship, you might even prepay part of your 2014 commitment and deduct it in 2013. This can be beneficial for those who only marginally itemize their deductions. Caution: Beginning in 2013, higher income taxpayers will have their itemized deductions phased out, so if you are subject to the phase-out, these planning suggestions may not provide the benefits expected. The income threshold for the phase-out is $300,000 for joint filers, $250,000 for singles, $275,000 for heads of household, and $150,000 for married individuals filing separately. Prepay College Tuition - If qualified tuition is paid during 2013 for an academic period that begins during the first three months of 2014, the education credit is allowed for those expenses in 2013. Thus, if your higher-education tuition expenses for yourself, your spouse, or your dependents to date for 2013 have not been enough to maximize your education credit for 2013, you might consider prepaying the tuition for the first quarter of 2014. Purchase Business Equipment - If you have a business, and you anticipate purchasing additional equipment for the business, it may be appropriate to make the purchase(s) before the end of the year to take advantage of the bonus depreciation deduction and/or the Sec 179 expensing deduction. Equipment includes machinery, computer systems, communication systems, office furnishings, etc. Unless extended by Congress, the bonus depreciation will end after 2013, and the maximum Sec 179 deduction will decrease to $25,000 from the current $500,000. If you have questions related to any of the suggested strategies, please give the office a call. Thu, 12 Dec 2013 19:00:00 GMT 16 Tax Issues Facing Small Business Owners in 2014 http://www.messnerandhadley.com/blog/16-tax-issues-facing-small-business-owners-in-2014/38260 http://www.messnerandhadley.com/blog/16-tax-issues-facing-small-business-owners-in-2014/38260 Messner & Hadley LLP 2014 will be a challenging tax year for businesses and higher-income taxpayers. The following issues are concerns that may impact you and your company’s tax liability in the new year. Small Business Health Insurance Credit – The tax credit to small employers (25 or fewer equivalent full-time employees) that provide an affordable health insurance plan for their employees and supplement at least half the premiums, will increase to 50% of the employer’s contribution in 2014, up from 35% in 2013. For non-profit employers, the credit will be 35% in 2014. Net Investment Income Tax – As part of the Patient Protection & Affordable Care Act (the new health care legislation sometimes referred to as “Obamacare”), a new tax kicked in for 2013 and will continue in 2014 and beyond. It is a surtax levied on the net investment income of taxpayers in the higher-income brackets. And although it is perceived as an additional tax on higher-income taxpayers, it can affect even those who normally don’t have higher income if they have a large income from the sale of real estate, certain business assets, stocks, or other investments. This is on top of the 20% long-term capital gain tax rate now in effect for higher-income taxpayers. Higher Tax Rates – Prior to the increase in 2013, there were six tax brackets: 10, 15, 25, 28, 33, and 35%. Beginning in 2013 and continuing for future years, a new top rate of 39.6% has been added for higher-income taxpayers. Higher Capital Gains Rates – Beginning in 2013 and continuing for future years, the tax rate for long-term capital gains and qualified dividends has been increased to 20% (up from 15%) for taxpayers with incomes exceeding the threshold for their filing status. Medical AGI Phase-out – Beginning in 2013 and continuing for future years, a taxpayer’s medical deductions will be reduced by 10% of their adjusted gross income, up from the previous 7.5% (but the 7.5% continues to apply to seniors through 2016). Possibility of Lower Expensing Deductions – The Sec 179 business expensing allowance for business equipment drops from $500,000 per year to $25,000 in 2014 unless Congress extends the more liberal amount.(1) Bonus Depreciation Expires – Beginning in 2014, the 50% bonus depreciation for tangible business assets will expire unless Congress extends it.(1) This also reduces the first-year maximum depreciation deduction for business autos and small trucks. Individual Insurance Mandate – Beginning in 2014, the Patient Protection & Affordable Care Act will impose the new requirement that U.S. persons, with certain exceptions, have minimum essential health care insurance, or face a penalty. Large Employer Mandatory Insurance Requirement – Originally scheduled to begin in 2014 but delayed until 2015 because the government did not have the reporting mechanisms in place, large employers, generally those with 50 or more full-time equivalent employees in the prior calendar year, that: o Do not offer health coverage for all its full-time employees, o Offer minimum essential coverage that is unaffordable (employee contribution being more than 9.5% of the employee’s household income), or o Offer minimum essential coverage where the plan’s share of the total allowed cost of benefits is less than 60% (i.e., less than the bronze plan coverage), will be required to pay a penalty if any of its full-time employees were certified to the employer as having purchased health insurance through a state or federal exchange and qualified for either tax credits or a cost-sharing subsidy. Simplified Home Office Deduction – Effective for tax years beginning in 2013 and continuing for 2014 and beyond, taxpayers can elect a simplified deduction for the business use of the taxpayer’s home. The deduction is $5 per square foot with a maximum square footage of 300. Thus, the maximum deduction is $1,500 per year. Eligibility qualifications are the same whether the simplified or regular deduction is claimed. Increased Payroll and Self-Employment Tax – As part of the new health care legislation, higher-income taxpayers are faced with an additional 0.9% health insurance (HI) tax. Starting in 2013, and continuing for future years, this surtax is imposed upon wage earners and self-employed taxpayers whose wage and self-employment income exceeds $250,000 for married taxpayers filing jointly ($125,000 if filing separately) and $200,000 for all others. Pease Limitations – The Pease limitation on itemized deductions that was reinstated in 2013 will continue for 2014. The Pease limitation phases out certain itemized deductions for higher-income taxpayers. Phase-out of Exemptions - The phase-out of exemptions for higher-income taxpayers that was reinstated in 2013 continues for 2014. Longer Depreciation Life for Leasehold and Restaurant Property – The current 15-year depreciable life will increase to 39 years in 2014.(1) Qualified Small Business Stock Gain Exclusion – Beginning for qualified small business stock issued in 2014, the gain exclusion drops from 100% to 50%. Qualified Real Property Expensing – Congress temporarily permitted the use of the Sec 179 expensing deduction to write off certain leasehold improvements, and restaurant and retail property improvements. Without Congressional intervention, this provision will no longer be available in 2014. (1) Congress, a few years back, engaged in brinkmanship with last-minute tax changes. Normally, they have managed to finalize tax law by year’s end. However, for 2013, they adjourned without addressing the issue of extending many tax breaks that were set to expire at the end of 2013. It is not known if these tax provisions will be extended or not. Thu, 12 Dec 2013 19:00:00 GMT Small Firm Health Insurance Marketplace Postponed http://www.messnerandhadley.com/blog/small-firm-health-insurance-marketplace-postponed/38246 http://www.messnerandhadley.com/blog/small-firm-health-insurance-marketplace-postponed/38246 Messner & Hadley LLP Article Highlights: Small Employer Health Insurance Credit Credit Qualifications Administration Delays Availability from Government Marketplace until 2015 Beginning in 2010, the federal government offered small employers a tax credit as an incentive to provide health insurance to their employees. This credit was up to 35% of the employer's contribution toward the cost of the employees' health insurance for 2010 through 2013, with an increase to 50% starting in 2014, and then available only for two consecutive years after 2013. For non-profit employers, the credit percentages are 25% and 35%, respectively. A small employer is one that employs 25 or fewer equivalent full-time employees with average full-time wages of $50,000 or less. That definition is misleading, since the maximum credit is only available to employers with 10 or fewer employees with average full-time wages of $25,000 or less; the credit begins to phase out as the number of employees and average full-time wages increase. Prior to the startup of health insurance marketplaces, a small employer would qualify for the credit by purchasing group insurance on the open market and paying at least 50% of the employees' premiums. Beginning in 2014, the credit was only supposed to be available if the insurance was purchased through the federal or state government-run marketplaces. However, because of the problems with making the federal marketplace website functional, the Administration has announced a one-year delay to 2015 for the requirement that the insurance be acquired through a government-run insurance marketplace. This will allow small businesses to continue with their existing plans for another year, and still qualify for the credit if the insurance otherwise meets the required criteria. If you have questions related to the small employer health insurance credit or any of the tax provisions of the Affordable Care Act being implemented in 2013 and 2014, please give this office a call. Tue, 10 Dec 2013 19:00:00 GMT 2013 TAX DEDUCTION FINDER & PROBLEM SOLVER http://www.messnerandhadley.com/blog/2013-tax-deduction-finder--problem-solver/18218 http://www.messnerandhadley.com/blog/2013-tax-deduction-finder--problem-solver/18218 Messner & Hadley LLP Our Tax Organizer is designed to help you maximize your deductions and minimize your problems in preparing and filing your tax return. The organizer is revised annually to be compatible with the ever-changing tax laws. The organizer currently posted below is primarily for the 2013 tax year, although it can be used for other years. The 2013 organizer is provided in three configurations to assist you in collecting relevant tax information needed to properly prepare your tax return. Access any of the three versions by double clicking on the underlined part version description. The organizers can be downloaded to your computer where you can fill and save the information until you have completed collecting all of your information. After you have completed it, please forward the organizer (printed or digitally) to our office for immediate service. If you have an office appointment, you can print it out and bring it with you to the meeting. A word of caution: you can fill the organizers online and print them out. However, if you close the file, your data will not be saved unless the form is saved to your computer.Once the completed organizer has been received, you will be contacted by phone, fax or e-mail with any questions, comments, or suggestions. If you e-mail our office advising us that you have sent your tax materials, we will notify you of their receipt.Basic Organizer – This organizer is suitable for clients that are not itemizing their deductions and DO NOT have rental property or self-employment expenses.Basic Organizer plus Itemized Deductions – This organizer is suitable for clients that are itemizing their deductions and DO NOT have rental property or self-employment expenses.Full Organizer – This organizer includes the information included in the basic organizer, plus entries for itemized deductions, rental properties and self-employment expenses.Business Organizer – Use this organizer for partnerships and incorporated business entities.Prior Year Individual Organizer – If you are filing your 2012 return late, please use this organizer. Thu, 05 Dec 2013 19:00:00 GMT Maximize Your American Opportunity for Education Tax Benefits http://www.messnerandhadley.com/blog/maximize-your-american-opportunity-for-education-tax-benefits/38212 http://www.messnerandhadley.com/blog/maximize-your-american-opportunity-for-education-tax-benefits/38212 Messner & Hadley LLP Article Highlights: American Opportunity Credit provides up to $2,500 of tax credit for the cost of post-secondary tuition in each of the first four years of attendance. The credit may be partially refundable. Credit is claimed on the tax return of the individual claiming the student’s tax exemption. The $2,500 credit is a per-student limitation, so the credit can be higher for multiple students in a family. Credit phases out for higher-income taxpayers. The tax code provides tax credits for post-secondary (college) education tuition paid during the year for a taxpayer, spouse, or dependents. Taxpayers should make every attempt to take advantage of these benefits. The most lucrative of the credits is the American Opportunity Credit (AOTC) that provides a partially refundable tax credit for the first four years of post-secondary education. The credit is 100% of the first $2,000 spent on post-secondary education, not including room and board, during the year and 25% of the next $2,000 for a maximum credit of $2,500. The credit does phase-out for joint filers with incomes between $160,000 and $180,000. For single taxpayers, the phase-out is between $80,000 and $90,000. There are some interesting quirks to this credit that give rise to some tax planning options. For starters, the credit is claimed on the tax return where the student’s exemption is claimed. For example, suppose parents are divorced, the mother claims the child as a dependent on her return, and the father pays the child’s college tuition. The mother would actually be the one who gets the credit. However, don’t forget the credit phases out at higher incomes, and should the higher-income parent be claiming the student’s dependency exemption, there may not be any credit at all. Any planning strategy must take into consideration the income of the one who is qualified to claim the exemption. Another example is grandparents paying the tuition for a grandchild. They would have no gift tax issues if the tuition is paid directly to the school, since educational gifts are exempt from the gift tax. In addition, the one who claims the child, generally the grandchild’s parents, gets the credit also free of any gift tax liability. If you have multiple students in the family, the AOTC is a per-student credit so you can claim up to $2,500 for each student who meets the requirements, including the half-time enrollment requirement. Up to 40% of the credit may be refundable, but the balance can only be used to offset the current year’s tax and any excess is lost. There is also another less beneficial credit - the Lifetime Learning credit - that can be claimed when the AOTC no longer applies; rather than a per-student limitation, it has a per-family limitation and lower income levels at which phase-out of the credit starts. If you would like to learn more about the American Opportunity Credit and other education tax benefits that can help you defray the cost of post-secondary education for yourself or your family, please give this office a call. Education tax planning is also available. Thu, 05 Dec 2013 19:00:00 GMT Mandatory Health Insurance Starts Next Month—Are You Ready? http://www.messnerandhadley.com/blog/mandatory-health-insurance-starts-next-monthare-you-ready/38204 http://www.messnerandhadley.com/blog/mandatory-health-insurance-starts-next-monthare-you-ready/38204 Messner & Hadley LLP Beginning in January, everyone, with certain exceptions, is required to have minimum, essential health care insurance. This issue has received a significant amount of press coverage recently, both negative and positive. Regardless of your opinion related to the issue, the mandatory insurance requirement, together with the accompanying penalties for not being insured, premium assistance credits, and insurance subsidies, all begin in 2014. The new marketplace, also called exchanges, where insurance policies can be purchased, have debuted already, but with mixed success. These new provisions are all part of the Affordable Care Act (sometimes referred to as Obamacare) that are being phased in over a number of years. How this will affect you and your family will depend upon a number of issues: Already insured - If you are already be insured through an employer plan, Medicare, Medicaid, the Veterans Administration, or a private plan that provides minimal, essential health care, then you will not be subject to any penalties under this new law. Those exempt from the mandatory insurance requirement - The following individuals are exempt from the insurance mandate, and will not be subject to a penalty for being uninsured: Individuals who have a religious exemption Those not lawfully present in the United States Incarcerated individuals Those who cannot afford coverage based on formulas contained in the law Those who have an income below the federal income tax filing threshold Those who are members  of Indian tribes Those who were uninsured for short coverage gaps of less than three months Those who have received a hardship waiver from the Secretary of Health and Human Services, who are residing outside of the United States, or who are bona fide residents of any possession of the United States. Help for those who can't afford coverage - Individuals and families whose household income is between 100% and 400% of the federal poverty level will qualify for a varying amount of subsidies to help pay for the insurance in the form of a Premium Assistance Credit. The lower the income, the more substantial the credit, which slowly phases out as the income increases, and is totally eliminated when the income reaches 400% of the poverty level. For those in the lower income levels, the subsidy will usually cover the bulk of the insurance costs. To qualify for that credit, the insurance must be acquired from an insurance exchange operated by the individual's or family's resident state, or by the federal government when the state does not have an exchange. These exchanges have been up and running (more or less) since October 1, 2013, allowing individuals and families to apply for coverage which will become effective as of January 1, 2014. There has been considerable negative press related to the federal exchange. The federal Internet site has not been functioning efficiently, but the administration says the problems will be corrected so everyone who needs to, can apply. Individuals who reside in states with their own exchange will use their state's exchange and should not be concerned with the federal exchange. In general, the state-run exchanges seem to be operating smoother than the federal exchange, but some of the state exchanges have also had their problems. Some insurance companies offering insurance through an exchange also offer assistance in signing up through the exchange without going through the website. But be cautious - to be eligible for a subsidy, the insurance must be purchased through an exchange. If you purchase a policy directly from an insurance company without going through an exchange, you won't be qualified for a subsidy, regardless of your income level. It is important to note that the subsidy is really a tax credit based upon family income. It can be estimated in advance, and used to reduce the monthly insurance premiums; it can be claimed as a refundable credit on the tax return for the year; or it can be some combination of both. However, it is based upon the current year's income and must be reconciled on the tax return for the year. If too much was used as a premium subsidy, some portion may need to be repaid. If there is an excess, it is refundable. If household income is below 100% of the poverty level, the individual or family qualifies for Medicaid. Penalty for noncompliance - The penalty for noncompliance will be the greater of either a flat dollar amount or a percentage of income: For 2014, $95 per uninsured adult ($47.50 for a child), or 1 percent of household income over the income tax filing threshold For 2015, $325 per uninsured adult ($162.50 for a child), or 2 percent of household income over the income tax filing threshold For 2016 and beyond, $695 per uninsured adult ($347.50 for a child), or 2.5 percent of household income over the income tax filing threshold Flat dollar amounts - The flat dollar amount for a family will be capped at 300% of the adult amount. For example, in 2014, the first year for the penalty, the maximum penalty for a family will be $285 (300% of $95). But for 2016, the maximum penalty jumps to $2,085 (300% of $695). The child rate will apply to family members under the age of 18. Overall penalty cap - The overall penalty will be capped at the national average premium for a minimal, essential coverage plan purchased through an exchange. This amount won't be known until a later date. If you have any questions as to how this new insurance requirement will affect you, please call. Tue, 03 Dec 2013 19:00:00 GMT Should You Be Converting Your Traditional IRA Into a Roth IRA before Year’s End? http://www.messnerandhadley.com/blog/should-you-be-converting-your-traditional-ira-into-a-roth-ira-before-year8217s-end/38175 http://www.messnerandhadley.com/blog/should-you-be-converting-your-traditional-ira-into-a-roth-ira-before-year8217s-end/38175 Messner & Hadley LLP Article Highlights: Roth IRAs provide tax-free earnings’ accumulation Traditional IRA to Roth IRA conversions can be made If this year is a low or negative income year, you will pay little or no conversion tax There are two types of IRA accounts, traditional and Roth. With traditional IRAs, your contributions are generally tax-deductible when you make the contribution, and tax is not paid on earnings as they accumulate. When it is time to start withdrawing the funds, however, the subsequent distributions, including earnings, are taxable. On the other hand, while contributions to Roth IRAs are not tax deductible, earnings accumulate tax-free, and when the time comes to take distributions, all amounts distributed, including the earnings, are 100% free of tax. The biggest advantage to Roth IRAs is the tax-free accumulation of earnings. Funds in IRA accounts can have significant earnings over the life of the account. And if those earnings end up being tax-free, as they do in a Roth IRA account, that is a huge tax advantage at retirement. If you have a traditional IRA, you are allowed to convert all, or a portion, of the traditional IRA to a Roth IRA at any time, provided you are willing to pay taxes on the amount converted. If your income for 2013 is low or negative, you may be able to convert some portion of your traditional IRA to a Roth IRA with little or no resulting tax. One of the best times to project your income for the year is close to year’s end. At the same time, any IRA conversion must be completed by year’s end. So, if you anticipate a low or negative income this year, and have a traditional IRA, don’t miss this unique tax-saving opportunity. Please call this office for assistance with projecting your 2013 income and determining what amount you might convert to minimize the tax, if any. Remember, the conversion must be made before year’s end, so call early. Tue, 26 Nov 2013 19:00:00 GMT December 2013 Individual Due Dates http://www.messnerandhadley.com/blog/december-2013-individual-due-dates/35301 http://www.messnerandhadley.com/blog/december-2013-individual-due-dates/35301 Messner & Hadley LLP December 1 - Time for Year-End Tax Planning December is the month to take final actions that can affect your tax result for 2013. Taxpayers with substantial increases or decreases in income, changes in marital status or dependent status, and those who sold property during 2013 should call for a tax planning consultation appointment. December 10 - Report Tips to Employer If you are an employee who works for tips and received more than $20 in tips during November, you are required to report them to your employer on IRS Form 4070 no later than December 10. Your employer is required to withhold FICA taxes and income tax withholding for these tips from your regular wages. If your regular wages are insufficient to cover the FICA and tax withholding, the employer will report the amount of the uncollected withholding in box 12 of your W-2 for the year. You will be required to pay the uncollected withholding when your return for the year is filed.December 31 - Last Day to Make Mandatory IRA Withdrawals Last day to withdraw funds from a Traditional IRA Account and avoid a penalty if you turned age 70½ before 2013. If the institution holding your IRA will not be open on December 31, you will need to arrange for withdrawal before that date.December 31 - Last Day to Pay Deductible Expenses for 2013 Last day to pay deductible expenses for the 2013 return (doesn’t apply to IRA, SEP or Keogh contributions, all of which can be made after December 31, 2013). Taxpayers who are making state estimated payments may find it advantageous to prepay the January state estimated tax payment in December (Please call the office for more information). December 31 - Caution! Last Day of the Year If the actions you wish to take cannot be completed on the 31st or a single day, you should consider taking action earlier than December 31st. Thu, 21 Nov 2013 19:00:00 GMT December 2013 Business Due Dates http://www.messnerandhadley.com/blog/december-2013-business-due-dates/35302 http://www.messnerandhadley.com/blog/december-2013-business-due-dates/35302 Messner & Hadley LLP December 16 - Social Security, Medicare and Withheld Income Tax If the monthly deposit rule applies, deposit the tax for payments in November. December 16 - Nonpayroll Withholding If the monthly deposit rule applies, deposit the tax for payments in November. December 16 - Corporations The fourth installment of estimated tax for 2013 calendar year corporations is due. December 31 - Last Day to Set Up a Keogh Account for 2013 If you are self-employed, December 31 is the last day to set up a Keogh Retirement Account if you plan to make a 2013 Contribution. If the institution where you plan to set up the account will not be open for business on the 31st, you will need to establish the plan before the 31st. Note: there are other options such as SEP plans that can be set up after the close of the year. Please call the office to discuss your options.December 31 - Caution! Last Day of the Year If the actions you wish to take cannot be completed on the 31st or a single day, you should consider taking action earlier than December 31st. Thu, 21 Nov 2013 19:00:00 GMT You and the New Medicare Tax http://www.messnerandhadley.com/blog/you-and-the-new-medicare-tax/38129 http://www.messnerandhadley.com/blog/you-and-the-new-medicare-tax/38129 Messner & Hadley LLP Article Highlights: New additional 0.9% Medicare tax for higher-income taxpayers. Threshold for paying the tax is combined wages and net self-employment income of over $250,000 for married individuals and $200,000 for others. Certain combinations of income and marital status could result in unexpected tax liabilities and penalties. There is a new additional Medicare tax in effect for 2013 that may require year-end actions. The new tax, which is part of the Affordable Care Act, imposes an additional 0.9% Medicare (HI) tax on some higher-income taxpayers. The threshold for paying the tax is combined wages and net self-employment income of over $250,000 for married individuals and $200,000 for others. (Taxpayers who do not have wage or self-employment income - for example, retirees or those with only investment income - are not subject to this new tax, regardless of the amount of their income.) Employers are required to begin withholding the additional tax from an employee's wages when the employee's wage income exceeds $200,000. There are situations in which this will generate an additional refund and situations in which the withholding will be insufficient, creating an unexpected year-end tax liability and possibly penalties. Here are some situations that may need your attention: A married couple, both working for wages, and neither has wages in excess of $200,000, but the combination of wages exceeds $250,000. They will be liable for the full additional 0.9% tax on their combined wages that exceed $250,000 because neither of their employers withheld any of the additional Medicare tax. A single individual has two separate jobs, neither producing wages in excess of $200,000, but the combination of wages exceeds $200,000. The individual will be liable for the full additional 0.9% tax on his or her combined wages that exceed $200,000 because neither of the employers will have withheld any of the additional Medicare tax. A single individual has both wages and self-employment income, and the combination exceeds the $200,000 threshold. The individual will need to pay the extra Medicare tax on the combination of the wages and net self-employment income in excess of $200,000. These and similar situations can lead to unexpected tax liability and can cause an underpayment penalty to be assessed. Also, in determining whether taxpayers may need to make adjustments to avoid a penalty for underpayment of the estimated tax, individuals should also be mindful that the additional Medicare tax might be over-withheld. This could occur, for example, in a situation in which only one spouse of a married couple works and reaches the threshold for the employer to withhold, but the couple's income won't exceed the $250,000 threshold to actually cause the tax to be owed. In all of these (and other) situations, a new form in the taxpayers' 2013 returns will be used to reconcile the Medicare tax that was withheld, if any, and the actual additional Medicare tax liability. If you think you might be subject to this new tax and have questions or need assistance projecting your 1040 results and potential for unexpected tax liabilities and penalties, please give this office a call. Thu, 21 Nov 2013 19:00:00 GMT Receiving Payments from Customers in QuickBooks http://www.messnerandhadley.com/blog/receiving-payments-from-customers-in-quickbooks/38130 http://www.messnerandhadley.com/blog/receiving-payments-from-customers-in-quickbooks/38130 Messner & Hadley LLP Depending on the situation, there's more than one way to record a payment in QuickBooks. Here are your options. There are undoubtedly some QuickBooks tasks that are more enjoyable than others. It's no fun paying bills, for example, and making collection calls on unpaid invoices can be downright unpleasant. But you probably don't mind recording payments after all of your hard work creating products or providing services, sending invoices or statements, and generating reports to make sure you're on top of it all. QuickBooks offers more than one way to document customer remittances, and it's important that you use the right one for the right situation. Defining the destination Figure 1: Uncheck the box on the farthest right if you think you may want to direct payments to other accounts sometimes. Before you begin receiving payments, you need to make sure they'll end up in the correct account. The default is an account called Undeposited Funds. To make sure that this setting is correct, open the Edit menu and select Preferences, and click the Company Preferences tab. Use Undeposited Funds as a default deposit to account should have a check mark in the box next to it. If you think you'll sometimes want to deposit to a different account, leave the box unchecked. Then every time you record a payment, there'll be a Deposit to field on the form. Talk to us if you're planning to use any account other than Undeposited Funds, as you can run into serious problems down the road if payments are earmarked for the wrong account. The right tool for the job Probably the most common type of payment that you'll process will come in to pay all or part of an invoice or statement that you sent previously. Figure 2: You'll record payments on invoices you've sent in this window. To do this, open the Customers menu and select Receive Payments. In the window that opens, click on the arrow in the field next to RECEIVED FROM to display the drop-down list, and choose the correct customer. You'll see the outstanding balance. Enter the amount of the payment you received in the AMOUNT field and change the date if necessary. Click the arrow in the field next to PMT. METHOD, and then select the type of payment. If you established a credit card as the default payment method in the customer record, the card number and expiration date will be filled in. If not, or if a check was submitted, enter the information requested. Any outstanding invoices will appear in a table. Make sure that there's a check mark in front of the correct one(s). If the customer only made a partial payment, you'll have to indicate how you want to handle the underpayment. Here are your options: Figure 3: You can select how to handle partially-paid invoices here. When you're done, save the payment. Instant income There may be times when you receive payment immediately, at the time your products or services change hands. In these cases, you'll want to use a sales receipt. Open the Customers menu again and click Enter Sales Receipts. Select a customer from the drop-down list or add a new one, then fill out the rest of the form like you would an invoice, selecting the items and quantities sold, and indicating the type of payment made (cash, check, credit). Figure 4: Fill out a sales receipt when payment is received simultaneously with the sale. Other scenarios These are the most common methods of receiving payments from customers, and you may never have to do anything other than simple payment-recording and sales receipts. But unusual situations may arise that leave you stumped. For example, a customer may want to make a partial, advance payment before you've created an invoice or at the same time you're entering it. In a case like this, you'll have to create a payment item so that the money you've just received is reflected on the invoice. Or you may get a down payment on a product or service, or even an overpayment. Let us help you when such situations occur. It's much easier -and more economical for you - to spend some time with us before you record a puzzling payment than to have us track it down later on. We'll help ensure that your money makes it to the right destination. Thu, 21 Nov 2013 19:00:00 GMT Your 2013 Tax Bill May Give You A Shocker http://www.messnerandhadley.com/blog/your-2013-tax-bill-may-give-you-a-shocker/38124 http://www.messnerandhadley.com/blog/your-2013-tax-bill-may-give-you-a-shocker/38124 Messner & Hadley LLP Article Highlights Regular and capital gains tax rates increase for higher income taxpayers New 3.8% net investment income tax Additional 0.9% health insurance payroll and self-employment tax Phase-out of exemption deduction Phase-out of itemized deductions Many higher-income taxpayers are in for a shock when their 2013 income tax returns are prepared. In 2013, a significant number of tax increases, and new limitations on deductions, will impact higher income taxpayers. Before you decide that you are not a higher income taxpayer, keep in mind that your income does not just include your earnings from work—it also includes gains from the sale of property, investments, business assets, and other capital items. So if you have a significant gain from a sale, even though the gain can be attributed to many years of appreciation, it is all taxable in the year of sale, and could place you in the higher income category. It is important that you are aware of these changes, plan for them in advance, are prepared for the higher taxes, avoid underpayment penalties, and when appropriate, do some tax planning in advance to mitigate the bite of these new taxes. This article highlights many of the tax changes that take effect in 2013. Higher individual income tax rates for some. Generally, the regular income tax rates remain the same at 10%, 15%, 25%, 28%, 33%, and 35%. But to the extent a single individual’s income exceeds $400,000 it will be subject to a new, 39.6% tax rate. The 39.6% threshold for joint filers and surviving spouses will be $450,000, and $425,000 for those filing as the head of household. New Hospital Insurance tax. For higher income workers and self-employed individuals, an additional 0.9% hospital insurance (Medicare) tax is added to the FICA payroll tax (for employees), and self-employment tax (for self-employed individuals). This additional tax applies to wages and net self-employment income in excess of $250,000 for joint filers, $125,000 for married filing separately, and $200,000 for all others. For employees, this tax is automatically withheld from their payroll checks. Surtax on unearned income. As part of the Affordable Care Act, a new tax is imposed upon the net investment income of individuals, estates, and trusts. For single individuals, the tax is 3.8% of the lesser of: (1) net investment income; or (2) the excess of modified adjusted gross income over the threshold amount of $200,000. For joint filers and surviving spouses, the threshold is $250,000, and for married taxpayers filing separately, the threshold is $125,000. Net investment income is investment income less investment expenses. Investment income includes income from interest, dividends, non-qualified annuities, royalties, rents (other than derived from a trade or business), capital gains (other than derived from a trade or business), trade or business income that is a passive activity with respect to the taxpayer, and trade or business income with respect to trading financial instruments or commodities. Increased Capital Gains. Generally the long-term capital gains and qualified dividends tax rates remain at 0% and 15%, except for the fact that a 20% rate has been added for single taxpayers with incomes exceeding $400,000. For joint filers, the threshold for the 20% rate is $450,000, and $225,000 for married individuals filing separately. Personal exemption phase-out. The personal exemption allowance for the taxpayer, a spouse, and each claimed dependent for 2013 is $3,900. For example a married couple claiming their two children as dependents would be able to deduct $15,600 (4 x $3,900) in personal exemptions when determining their taxable income. However, beginning in 2013, the exemption allowance begins to phase out for single taxpayers when their adjusted gross income exceeds the threshold amount of $250,000. The starting threshold of joint filers and surviving spouses is $300,000, $275,000 for heads of household, and $150,000 for married taxpayers filing separately. The exemption allowances are reduced by 2% for each $2,500 (or a portion thereof), by which the taxpayer’s adjusted gross income exceeds the thresholds. Itemized deductions limitations. As with the exemption phase-out explained above, the itemized deductions are also phased out for 2013. The phase-out thresholds are the same as those for exemptions, and the itemized deductions are reduced by 3% of the amount by which the taxpayer’s adjusted gross income exceeds the threshold amount, with the reduction not to exceed 80% of the otherwise allowable itemized deductions. The reduction does not apply to the following deductions: medical and dental expenses, investment interest expense, casualty losses, and gambling losses. As you can see, for some taxpayers the impact can be quite significant. However, it may not be too late to improve your situation with some year-end planning, and the sooner the better. Options include taking advantage of unrealized losses, business expensing, tax credits, delaying certain deductions and tax prepayments, income deferral, and other techniques. Please call this office for assistance. Tue, 19 Nov 2013 19:00:00 GMT Underpayment Penalties Going to Get You? http://www.messnerandhadley.com/blog/underpayment-penalties-going-to-get-you/38112 http://www.messnerandhadley.com/blog/underpayment-penalties-going-to-get-you/38112 Messner & Hadley LLP Article Highlights Taxpayers can be hit with underpayment penalties if their withholding and estimated payments are too low. Underpayment penalties can be avoided by prepaying a safe-harbor amount of 90% of the current tax liability or 100% of the prior year’s tax liability. The safe harbor for taxpayers with an AGI greater than $150,000 in the prior year is 90% of the current tax liability or 110% of the prior year’s tax liability. Prepayment adjustments can still be made to minimize the underpayment penalty. Prepayments must generally be made evenly during the year to avoid the penalty. Withholding is treated as paid evenly throughout the year and can be used as a tool to avoid underpayment penalties. Our “pay-as-you-go” tax system requires that you make payments of your tax liability evenly throughout the year. If you don’t, it’s possible that you owe an underpayment penalty. Some taxpayers meet the “pay-as-you-go” requirements by making quarterly estimated payments. Typically this is how self-employed individuals and those with other non-tax-withheld sources of income satisfy their prepayment obligation. When your income is primarily from wages, however, you meet the requirements through wage withholding and likely rely on your employer’s payroll department to take out the right amount of tax, assuming that you have given them accurate Form W-4 data and that this information has not changed through marital changes, a second job, or your spouse working. Unfortunately, what payroll withholds may not be enough! You may also be underpaid if you: Have a gain from the sale of property, e.g., stocks, bonds, or real estate; Have other income from which there is no withholding (for example, a pension, alimony, IRA, interest, or dividends); Are subject to the new surtax on net investment income for higher-income taxpayers; and/or Are married or self-employed and subject to the new additional Medicare (hospital insurance) taxes. To avoid underpayment penalties, you generally must prepay more than 90% of your current year tax liability or 100% of your prior year tax liability. For taxpayers with incomes in excess of $150,000 in the prior year, pre-paying either 90% of the current year tax liability or 110% of the prior year tax liability will generally avoid underpayment penalties. In addition, the penalties are quarterly-based, so the withholding and estimated taxes need to be paid evenly throughout the year. Please note that state prepayment rules may be different from the federal rules explained in this article. Even though it is late in the year, withholding is treated as paid evenly throughout the year, so you may still have time to adjust your withholding to make up for underpayments in prior quarters. In addition, underpayments are based on when the income was received during the year, and late-year increased estimated tax payments can help offset underpayment penalties for income received later in the year. Think you may have underpaid? Why not give this office a call to be on the safe side? If you have questions related to the underpayment penalty or need assistance in determining if there are any late-year moves you can make to avoid the penalty, please give this office a call. Thu, 14 Nov 2013 19:00:00 GMT Basis Is An Important Tax Term! http://www.messnerandhadley.com/blog/basis-is-an-important-tax-term/38108 http://www.messnerandhadley.com/blog/basis-is-an-important-tax-term/38108 Messner & Hadley LLP Article Highlights: Basis is the point from which taxable gain or loss is measured Good basis records are required to minimize taxable gains Improvements, casualty losses, business depreciation, legal expenses, title costs, etc., can all affect basis. An important tax term that everyone should know is “basis.” The odds are very high that you will encounter the term sometime during your lifetime, and it can have a profound impact on your tax liability. Simply stated, “basis” is the monetary value from which a taxable gain or loss is calculated when an asset is sold. For example, you purchase 100 shares of ABC stock for $10 a share. Your basis for those shares of stock is $1,000 (100 x $10). Then, if the stock were sold for $1,500, you'd have a gain of $500, which is determined by subtracting your basis from the sale price. However this is a very simplistic example of basis. Determining basis, as you will see from the following explanation, can be complicated. Cost Basis - This is the simplest form of basis and is what you originally pay when you purchase stock, other financial securities, a house, rental property, cars, business assets, land, and other assets. However, even cost can be a little tricky as it includes the asset acquisition costs such as: brokerage costs, escrow closing costs, acquisition travel, legal services, title charges, sales tax, etc. So in our earlier example, let's say you paid a broker $50 to purchase the ABC stock; then your cost basis would have been $1,550. Adjusted Basis - After purchasing an asset your basis will change, either up or down, if you make improvements to the asset, suffer damage due to casualty losses, or claim business depreciation or amortization. One example of how your basis increases would be purchasing your home and then adding a pool, family room or other improvements; the cost of the improvements would increase your basis. Keep in mind that routine maintenance is not considered an improvement and does not increase your basis in an asset. Depreciated Basis - An example of when your basis decreases would be a business asset that you are depreciating (deducting as a business expense the cost of the asset over its useful life). In this case, the basis is reduced by the amount of the depreciation you have deducted against your rental or business income. Examples of assets where basis is typically adjusted downward due to depreciation include rental property, business vehicles, tools, business machinery, etc. In some cases, business assets can actually be 100% deducted (expensed) in the year they are acquired, in which case the asset's basis is reduced to zero. Inherited Basis - When you inherit an asset, you inherit it at its fair market value (FMV) at the decedent's date of death. This is because the FMV is included in the value of the estate of the decedent and taxed if the estate's value exceeds the exemption credit. This is not necessarily the basis for a future sale because there may be subsequent improvements, casualty losses, and perhaps depreciation taken after the inheritance. If the inherited asset was used in business before the inheritance, all prior depreciation is disregarded in the hands of the beneficiary. Gift Basis - If someone gifts an asset to you, your gift basis generally is the same as the giver's basis; however, the gift comes with some potential tax strings attached since you'll also be receiving the giver's built-in gains at the time of the gift. Thus, unlike inherited basis, you assume the tax liability for built-in gains. For example, say your aunt gave you 100 shares of stock for which her basis was $1,000. Thus, your basis is $1,000. At the date of the gift, the stock was worth $2,500. You sell the stock for $5,000 a couple of years after receiving it. Your tax gain is $4,000 ($5,000 - $1,000), which includes the $1,500 ($2,500 - $1,000) gain your aunt would have had if she had sold the stock on the date she gave it to you, plus the $2,500 ($5,000 - $2,500) gain from the date you received the stock. The rules are a bit more complex, and not covered in this article, if the asset's value at the date of the gift is less than the giver's adjusted basis. Determining your basis and the resulting gain or loss when an asset is sold can be complicated, and of course, good records are needed to verify the basis, including improvements and other adjustments in case of an audit or the sale of that asset. You are encouraged to consult with this office with any questions relating to basis and the potential gain from the sale of a personal or business asset. Tue, 12 Nov 2013 19:00:00 GMT Take Advantage of the IRA-to-Charity Transfer http://www.messnerandhadley.com/blog/take-advantage-of-the-ira-to-charity-transfer/38081 http://www.messnerandhadley.com/blog/take-advantage-of-the-ira-to-charity-transfer/38081 Messner & Hadley LLP Article Highlights Direct IRA-to-charity transfers are allowed in 2013 for taxpayers age 70½ and over. Maximum transfer allowed is $100,000. Transfer counts towards the required minimum distribution. Beneficial for taxpayers with Social Security income and those who do not itemize their deductions. For 2013, if you are age 70½ and over, you are allowed to make direct distributions (up to $100,000) from your Traditional or Roth IRA account to a charity. The distribution is tax free, but there is no charitable deduction, and the distribution can count toward your required minimum distribution (RMD). This provision can be very beneficial for a taxpayer who is inclined to make substantial charitable contributions for the year and: Receives Social Security (SS) benefits, and the taxpayer’s required minimum distribution for the year causes an increase in the tax on the SS benefits; or Is unable or is marginally able to itemize deductions for the year. Example: A 75-year-old married taxpayer’s adjusted gross income (AGI) before taking his RMD is $28,000. His RMD for the year is $10,000, and he wishes to contribute $8,000 to the building fund for his house of worship. If he takes his RMD and then contributes the $8,000 to the building fund, his AGI will be $38,000; it will be more, if his income includes SS benefits. On the other hand, if he makes a direct transfer of the $8,000 to his house of worship, his AGI would only be $30,000; some or all of his SS benefits would be tax free, depending how much he receives in SS benefits. Arranging a direct transfer may require some extra time, so if you want to donate some of your IRA to a charity, don’t wait until the last minute to make arrangements with your IRA trustee to do so. The higher a taxpayer’s income tax bracket, the greater the tax benefits when making a direct IRA-to-charity distribution. Please contact this office if you have questions related to the tax benefits derived from this strategy. Thu, 07 Nov 2013 19:00:00 GMT Avoid Home Cancellation of Debt Income http://www.messnerandhadley.com/blog/avoid-home-cancellation-of-debt-income/38036 http://www.messnerandhadley.com/blog/avoid-home-cancellation-of-debt-income/38036 Messner & Hadley LLP Article Highlights Forgiven debt is taxable. Forgiven home mortgage acquisition debt is excludable. Without a last-minute congressional extension, the home mortgage acquisition debt exclusion expires at the end of 2013. When a taxpayer settles a debt for less than its full amount, the forgiven amount of the debt is taxable, unless the taxpayer qualifies for one of two currently available exclusions. With the downturn in the economy and the accompanying drop in home prices that occurred in recent years, many taxpayers are unable to keep up the mortgage payments on their home, and unable to sell their homes because they owe more than the market price. As a result, a large number of homeowners have let their homes go back to the lender. Congress offered help for those in this situation by providing an exclusion from income of the forgiven acquisition debt from a taxpayer’s principal residence. If a taxpayer’s home is upside down, and they are considering letting it go back to the lender, they should be aware that unless Congress provides a last-minute extension, this Principal Residence Acquisition Debt Relief Exclusion will expire at the end of 2013. The only other exclusion available is the insolvent taxpayer exclusion, which limits the amount that can be excluded to the excess of the taxpayer’s total debts over the taxpayer’s total assets. An individual not able to exclude the forgiven debt on their home using the insolvent taxpayer exclusion may wish to act before year’s end. The tax implications of forgiven debt are very complicated and not all the details are covered in this article. You are strongly urged to contact this office if you are contemplating letting your home go back to the bank. Tue, 05 Nov 2013 19:00:00 GMT 2013 May Be Your Last Chance to Deduct Sales and Use Tax http://www.messnerandhadley.com/blog/2013-may-be-your-last-chance-to-deduct-sales-and-use-tax/37984 http://www.messnerandhadley.com/blog/2013-may-be-your-last-chance-to-deduct-sales-and-use-tax/37984 Messner & Hadley LLP Article Highlights Taxpayers can choose to deduct sales tax or state income tax. Sales tax deduction includes IRS table amount plus big-ticket items, or actual sales tax paid. Primarily benefits taxpayers in states with no income tax. Can also benefit taxpayers with low state income tax. Generally will not benefit taxpayers subject to the alternative minimum tax. Without congressional extension, the sales tax deduction expires after 2013. Purchasing big-ticket items before year-end could increase tax deductions. The 2013 tax year may be the last chance for taxpayers who itemize deductions to deduct state and local sales taxes. That is because the option to deduct state and local sales taxes in lieu of state and local income taxes expires after the year's end unless Congress extends it. If you are considering the purchase of a big-ticket item on which you'll pay sales tax, you may want to make that purchase this year in order to achieve a higher itemized deduction for sales taxes. Here is how it works: If you itemize your deductions you can choose to deduct state and local: General sales and use taxes, or Income taxes. You will obviously want to deduct the higher of the two options. When determining the deduction for sales tax you may either: Deduct the actual amount of sales and use taxes you paid during the year, or Use the amount from the IRS-published tables based on your income, family size, and the sales and use tax rates in your locale. To the table amount you may add the actual amount of sales to the table amount and use tax for certain "big-ticket" items purchased during the year, such as motor vehicles, boats, aircraft, homes (including mobile and prefabricated homes), and home-building materials. This provision primarily benefits taxpayers who live in states without an income tax where they have no state income tax to deduct. These states include Alaska, Florida, Nevada, South Dakota, Texas, Washington, and Wyoming. However, you may still be able to benefit, even if you reside in a state that has an income tax. This is especially true if your state tax is low, or if you are benefiting from state tax credits that reduce your tax state tax and the sales tax option produces a larger deduction. Taxes - either sales or state income tax - are not deductible at all when computing the alter-native minimum tax (AMT). So if you are subject to the AMT, the sales and use tax deduction strategy may be of no benefit to you. As you can see, whether you will benefit from accelerating any big-ticket purchases before the end of the year will depend upon a number of circumstances. If you are unsure on the appropriate course of action, please call this office for assistance. Tue, 29 Oct 2013 19:00:00 GMT November 2013 Individual Due Dates http://www.messnerandhadley.com/blog/november-2013-individual-due-dates/34877 http://www.messnerandhadley.com/blog/november-2013-individual-due-dates/34877 Messner & Hadley LLP November 12 - Report Tips to Employer If you are an employee who works for tips and received more than $20 in tips during October, you are required to report them to your employer on IRS Form 4070 no later than November 12. Your employer is required to withhold FICA taxes and income tax withholding for these tips from your regular wages. If your regular wages are insufficient to cover the FICA and tax withholding, the employer will report the amount of the uncollected withholding in box 12 of your W-2 for the year. You will be required to pay the uncollected withholding when your return for the year is filed. Thu, 24 Oct 2013 19:00:00 GMT November 2013 Business Due Dates http://www.messnerandhadley.com/blog/november-2013-business-due-dates/34878 http://www.messnerandhadley.com/blog/november-2013-business-due-dates/34878 Messner & Hadley LLP November 12 - Social Security, Medicare and Withheld Income Tax File Form 941 for the third quarter of 2013. This due date applies only if you deposited the tax for the quarter in full and on time. November 15 - Social Security, Medicare and Withheld Income Tax If the monthly deposit rule applies, deposit the tax for payments in October. November 15 - Nonpayroll Withholding If the monthly deposit rule applies, deposit the tax for payments in October. Thu, 24 Oct 2013 19:00:00 GMT Planning Pension Distributions http://www.messnerandhadley.com/blog/planning-pension-distributions/37923 http://www.messnerandhadley.com/blog/planning-pension-distributions/37923 Messner & Hadley LLP Article Highlights Except for distributions from Roth IRAs, pension distributions are generally taxable. Pension distributions can increase the tax on your Social Security benefits. Pension distributions can increase your marginal tax rate. IRA-to-charity transfers are allowable in 2013. An individual may begin withdrawing, without penalty, from his or her qualified pension plans and Traditional IRAs at the age of 59½. There are several exceptions that will allow earlier withdrawal without penalty. Upon reaching age 70½, you are required to take distributions from your plans or face a substantial penalty for failing to do so. An exception applies for Roth IRAs: no distributions are required while the account owner is alive (Roth distributions are generally tax-free anyway). Impact of Your Marginal Rate: If you are able to plan your withdrawals, you can save considerable tax dollars. This is not always possible, but the basic premise is to take distributions and pay the resulting tax in years when your marginal rate is low. Also watch for years when, for a variety of reasons, your taxable income is negative and some amount of distributions can be taken tax-free at ages 59½ and over. The early withdrawal penalty applies only to those under 59½. Impact on Social Security: For retired individuals receiving Social Security benefits, planning IRA distributions can also be beneficial. Social Security itself is taxable only when the total of one-half of the taxpayer’s Social Security benefits plus the taxpayer’s other income exceeds $25,000 ($32,000 for a married couple filing jointly). Once this threshold is reached, every additional dollar of other income will cause 50% to 85% of the Social Security benefits to become taxable as well. Therefore, if a taxpayer’s other income is below the threshold, it is generally good practice to withdraw just enough taxable IRA funds to bring the income up to the threshold amount, even if the funds are not needed in that year. They can be set aside for a future year when they might be used for some unplanned need or large purchase. This strategy may not work, however, if IRA distributions are required to be made (see next section). Minimum Distribution Requirements: The IRS does not allow taxpayers to keep funds in qualified plans and IRAs indefinitely. Eventually, assets must be distributed and taxes paid. If there are no distributions, or if the distributions are not large enough, the owner may have to pay a 50% penalty of the amount not distributed as required. Generally, distributions must begin in the year in which the plan owner reaches the age of 70½. In most cases, the required minimum distribution can be figured with the “life” factor from the following table, which is divided into the value of the account as of the end of the preceding tax year. So, for example, an individual who reaches age 73 in 2013 and whose IRA had a value of $50,000 on December 31, 2012, would be required to withdraw $2,024.29 in 2013 ($50,000/24.7). IRA-to-Charity Contributions: If you are at least 70.5 years old and are thinking of making a donation to a charity, you may wish to consider making the contribution from your IRA account. For 2013 (this is the last year without an extension by Congress), you can donate up to $100,000 to your favorite charity—provided it is an eligible charitable organization—tax-free from your Traditional IRA, Roth IRA, SEP, or SIMPLE IRA. To be considered valid, the distribution from the IRA to the charity must be made directly. It cannot pass through your hands or through other accounts. Note: These distributions are not permitted from ongoing SEP or SIMPLE plans—that is, plans to which a contribution has been made for the year. Here are the pertinent facts about making a donation using this provision of the law: The distribution is not taxable and does not add to your income for the year. The advantage is that it keeps your income low and helps minimize your taxable Social Security income and tax disadvantages associated with higher income. There is no charitable donation, since the distribution was tax-free. This can be a considerable benefit, however, to taxpayers who take the standard deduction and do not itemize anyway. If you have not already taken your required minimum distribution (RMD) for the year, the charitable distribution can count toward this year’s RMD. If you need assistance planning your pension distributions, please give this office a call. Thu, 24 Oct 2013 19:00:00 GMT QuickBooks 2014 Simplifies, Accelerates Common Tasks http://www.messnerandhadley.com/blog/quickbooks-2014-simplifies-accelerates-common-tasks/37933 http://www.messnerandhadley.com/blog/quickbooks-2014-simplifies-accelerates-common-tasks/37933 Messner & Hadley LLP New version of desktop QuickBooks accomplishes goal of speeding up, refining your workflow. If Intuit named its desktop versions of QuickBooks by the version number rather than the year, we'd be in version 20-something by now. QuickBooks, still the preferred software for small businesses, keeps getting smarter in its annual upgrades. Rather than pile on tons of new features in its upgrades, Intuit - for many years - has concentrated on making it easier for you to access the tools and data that are already there. QuickBooks 2014 is no exception. Its combination of small-but-effective changes makes it easier to get in and do what needs to be done quickly, and then get out and move on to activities that will help build your business. A Superior View If you do upgrade to QuickBooks 2014, head first to the new Income Tracker (Customers | Income Tracker). QuickBooks offers numerous reports and other tools for following the progress of your incoming revenue, but this new feature provides the best we've seen in the software. Figure 1: QuickBooks 2014's new Income Tracker gives you real-time access to the status of your receivables. You may find yourself spending a lot of time on this screen because it gives you a birds-eye view of your receivables that isn't available anywhere else in the program. You can click on any of the four colored bars that run across the top of the screen - Estimates, Open Invoices, Overdue and Paid Last 30 Days -- to change the data that appears below. Within each bar is the number of related transactions and their total dollar amount. You'll use the drop-down lists directly below these navigational bars to set filters that define a subset of transactions. These are CUSTOMER:JOB, TYPE, STATUS and DATE. The last column in the table is labeled ACTION. Once you've earmarked a transaction or transactions that you want to work with by checking the box in front of each name, you can select an action you want to take. If OPEN INVOICES is active, for example, you can receive payment for the transaction(s), print or email them. Where applicable, you can open a drop-down menu in the lower left of the screen and batch-produce invoices, sales receipts and credit memos/refunds. More Descriptive Email If you regularly send invoices through email, you may have wondered how many of them actually get opened by your customers in a timely fashion. QuickBooks 2014 contains a new tool that makes the details of each invoice available within the body of the email itself. Figure 2: You can modify this template or leave it as is: QuickBooks 2014 will fill in the relevant details for each customer. To access this template, open the Edit menu and select Preferences. Click on the Send Forms tab, then Company Preferences. Open the drop-down list to select the type of form you want to view or modify (pay stub, sales receipt, credit memo, etc.). Click the Edit button to see the actual template, and open the Insert Field drop-down menu to see your options. When you email a form, QuickBooks will replace the text and numbers in brackets with the correct details for each recipient. This is what's called a mail merge. They're fairly simple to use, but one error will throw your message off. We can help you get set up with these. Smaller Changes Intuit has made many small-but-useful features to QuickBooks 2014, all designed to help you work faster and smarter, and simply to support more convenient operations. For example, the Ribbon toolbars on transactions now include a tab or menu that lets you open related reports. Figure 3: You can now access reports directly from the Ribbon toolbar on transaction screens. In addition: QuickBooks' color scheme has been changed. The program runs faster. You can now copy and paste lines within forms. We can communicate with you (and vice versa) via an email window that's been embedded into the software. This tool even auto-pastes the transaction in question into the email window. There's been some retooling of online banking (now called “Bank Feeds”), making it more accessible and understandable. Upgrading to a new version of QuickBooks can be challenging, so we encourage you to let us know if you'd like to explore the process. New functionality and usability that improves your workflow and your understanding of your finances can be worth the time and trouble. Thu, 24 Oct 2013 19:00:00 GMT What's Best, Tax-Free or Taxable Interest Income? http://www.messnerandhadley.com/blog/whats-best-tax-free-or-taxable-interest-income/33734 http://www.messnerandhadley.com/blog/whats-best-tax-free-or-taxable-interest-income/33734 Messner & Hadley LLP Article Highlights Interest earned from states’ and local governments’ general purpose obligations that are generally tax-exempt for federal purposes. Earning tax-exempt interest may not put the most after-tax dollars into your pocket. Tax-exempt interest is not subject to the new 3.8% surtax on net investment income. Tax-exempt interest is still treated as income for the purposes of taxing Social Security benefits or the Earned Income Tax Credit. Some certain kinds of exempt interest are taxable for alternative minimum tax (AMT) purposes. A frequent tax strategy question is whether investing for tax-free or taxable interest is better. Generally, taxable interest will provide the greater return, but this may not hold true after taking into account taxes on the income. This is especially true for higher-income individuals now that we have the healthcare legislation’s new 3.8% surtax on the net investment income of higher- income taxpayers, which is discussed below. Therefore, the question is really: Which provides the greater "after-tax" return? Generally, interest derived from “municipal bonds” is tax-free for federal purposes and also is tax-free for a particular state if that state or its local governments issue the bonds. In addition, no state can tax interest from United States (U.S.) Government bonds. The following are issues related to making a decision about taxable or tax-free income: Municipal Bond Interest – Interest earned from states’ and local governments’ general purpose obligations, which are issued to finance their operations, are generally tax-exempt for federal purposes. However, the various states usually only exempt interest from bonds issued from the state itself and from local governments within the state. Hence, two categories of municipal bonds exist, namely the tax-free federal and state ones and the tax-free federal-only ones. Individuals can invest in municipal bonds by directly purchasing bonds or through funds that invest in municipal bonds. Some funds invest in bonds issued in a particular state only, providing residents of that state with income that is excludible on their state returns. In general, tax-free bonds are likely to be more attractive to taxpayers in higher brackets, as they receive a greater benefit from excluding interest from income. For lower-bracket taxpayers, on the other hand, the tax benefit of excluding interest from income may not be enough to make up for the lower interest rate generally paid on this type of bond. Even though municipal bond interest isn't taxable, it must be shown on the return. This is because tax-exempt interest is taken into account when determining the amount of Social Security benefits that is taxable, and it may affect the alternative minimum tax computation as well as the earned income credit, investment interest deduction and sales tax deduction. Tax-Deferred Retirement Accounts – It generally doesn't make sense to buy and to hold municipal bonds in your regular individual retirement account (IRA), Keogh or 401(k) plan account. The income in these accounts is not taxed currently, but once you start making withdrawals, the entire amount withdrawn is likely to be taxed even though it includes income from tax-free sources. Thus, if you want to invest your retirement funds in fixed-income obligations, it generally is advisable to invest in higher-yielding taxable securities. Alternative Minimum Tax (AMT) Consequences – Even though interest on municipal bonds is generally excluded from income for purposes of the regular federal income tax, interest on certain “private activity bonds” is included in income for purposes of the alternative minimum tax. Your broker can tell you whether the particular bond you are considering is a private activity bond subject to this rule. The alternative minimum tax is a separate tax system that applies if the tax determined under that system exceeds your regular income tax. Whether or not the alternative minimum tax applies will depend on your overall tax picture; however, in general, the alternative minimum tax’s effect would be to prevent you from achieving too low of an effective tax rate by means of tax-favored techniques, such as investing in municipal bonds. This office can help you to determine how the alternative minimum tax would apply to your situation and how it would affect the after-tax yield if you were to invest in municipal bonds. Effect of Exempt Interest on Taxation of Social Security Benefits – In general, a portion of Social Security benefits is taxable if your adjusted gross income, subject to certain modifications, exceeds specified amounts. For this purpose, the modifications to adjusted gross income include adding in tax-exempt interest. The effect of this rule is that if you receive Social Security benefits, investing in municipal bonds could increase the amount of tax you have to pay with respect to the Social Security benefit. While the municipal bond interest technically remains exempt from tax, the effect is the same as if a portion of that interest were taxable. One technique to solve this problem is to invest in tax-deferred, rather than tax-free, investments. For instance, income earned via an annuity is not taxable until the annuity is cashed in and thus would not impact the Social Security taxation except in the year cashed in. This office can assist you in determining the impact of tax-free income on the taxability of your Social Security benefits. Effect of Exempt Interest on Earned Income Credit – If you are otherwise eligible to take an earned income credit, you will lose the credit completely for 2013 if you have more than $3,300 of “disqualified income,” generally, interest, dividend, non-business rental, passive, and capital gain net income. Disqualified income includes tax-exempt income. Thus, municipal bond income could cause the loss of the credit. However, in most cases, an individual who is eligible for the earned income credit will be in a low tax bracket, thus making municipal bonds an unattractive investment in view of their lower yields. Disqualifying income can be avoided by using tax-deferred investments, as discussed under Effect of Exempt Interest on Taxation of Social Security Benefits above. Effect of the Net Investment Income Tax – Beginning in 2013, high-income taxpayers will be subject to a 3.8% surtax on net investment income. Tax-exempt interest is not subject to that tax, which is a significant issue for higher income taxpayers. For individuals, the tax is 3.8% of the lesser of: 1. The taxpayer’s net investment income or 2. The excess of modified adjusted gross income over the threshold amount ($250,000 for a joint return or surviving spouse, $125,000 for a married individual filing a separate return, and $200,000 for all others). No Deduction for Interest on Obligations Incurred in Connection with Tax-exempt Investments – If you borrow money for the purpose of investing in municipal bonds, you can't deduct the interest expense with respect to that borrowing. Moreover, even if the proceeds of borrowing are not directly traceable to tax-exempt investments, interest deductions could be disallowed if the Internal Revenue Service (IRS) could establish that you continued the borrowing in effect (that is, you didn't pay it off) for the purpose of acquiring or carrying the municipal bonds. If you have otherwise deductible interest and invest in municipal bonds, the result of this rule, by denying a deduction for interest paid, could be effectively to tax the municipal bond interest. • No Deduction for Investment Expenses Related to Tax-exempt Investments – If you itemize your deductions, you may deduct the costs of investment advisory, custodial or agency fees if your total miscellaneous deductions exceed 2% of your income. However, if the investment management services for which you paid are connected to the account from which you receive tax-exempt income from municipal bonds or bond funds, the related expenses are not deductible. Sale, Call or Redemption of Bond – Normally, the sale, call before maturity or redemption of a municipal bond is treated in the same way that a taxable bond is. If you held the bond long enough, any gain is taxed at favorable rates. Capital losses can be used to offset other capital gains. Up to $3,000 of any remaining losses can generally be applied against other income, with a carryover of any excess to later years. U.S. Government Bond Interest – By federal law, the states cannot tax the interest income of direct obligations of the U.S. Government (but it is federally taxed). This includes interest from U.S. Savings Bonds, U.S. Treasury bills, notes, bonds or other U.S. obligations. Interest earned from the Federal National Mortgage Association (Fannie Mae), Government National Mortgage Association (Ginnie Mae) and the Federal Home Loan Mortgage (FHLMC) Corporations are not direct obligations of the U.S. Government and therefore are not excludable from state taxation unless specifically allowed by state law (generally not the case). If you reside in a state with no state income tax, U.S. Government Bond Interest provides no tax benefit. Itemized Deductions – If you do have a state tax and the investment is tax-free in your state, then whether or not you itemize your deductions on your federal return also makes a difference. When you do itemize deductions, the state income tax you pay is included as a deduction on your federal return. Because having state tax-free income reduces your state tax, the reduced state tax lowers your itemized deductions and increases your federal tax. (If, instead of deducting state income tax, you deduct state sales tax because the sales tax amount is more, then whether or not you itemize deductions should not affect your decision to purchase a taxable or non-taxable investment). Municipal Bond Funds – If you are looking for diversity and professional management for your municipal bond holdings, you may want to consider buying shares of a fund that invests in tax-exempt municipal bonds. These funds may be broadly based or targeted to a particular state’s bonds. Dividend municipal bond funds are essentially treated in the same way as municipal bond interest is. To preclude a potential tax loophole, if an investor buys fund shares, receives an exempt-interest dividend and sells the shares at a loss within six months after the purchase, the loss is disallowed to the extent of the exempt-interest dividend. Use the worksheet below to determine the tax-exempt interest equivalents for your particular tax bracket, state tax (if applicable) and type of tax-exempt in investment. Enter all rates in decimal format, and carry all calculated values to at least four places after the decimal. For example, 5.75% would be entered as .0575. CAUTION, because the 3.8% surtax on net investment is only based on investment income or AGI in excess of certain levels, it is not accounted for separately in the worksheet below. Taxpayers below the high-income thresholds would not add the 3.8% to their marginal tax brackets when entering their federal tax brackets on line two of the form, while those who have incomes that are substantially greater than the thresholds would. Please call this office if you would like assistance with deciding whether to make a taxable or tax-free investment. Making the right decision for your particular circumstances can have a significant effect over long periods of time. Thu, 17 Oct 2013 19:00:00 GMT Tax Credits for Small Employers Offering Health Coverage http://www.messnerandhadley.com/blog/tax-credits-for-small-employers-offering-health-coverage/15085 http://www.messnerandhadley.com/blog/tax-credits-for-small-employers-offering-health-coverage/15085 Messner & Hadley LLP The Patient Protection and Affordable Care Act provides a tax credit for an eligible small employer (ESE) for nonelective contributions to purchase health insurance for its employees. The term "nonelective contribution" means an employer contribution other than an employer contribution pursuant to a salary reduction arrangement.o 2010 through 2013 – For tax years 2010 through 2013, qualified small employers, generally those with no more than 25 full-time employees with an average annual full-time equivalent wage of no more than $50,000 will be eligible for a tax credit of up to 35% of the cost of nonelective contributions to purchase health insurance for its employees. (Note, however, that the phase-out of the credit operates in such a way that an employer with exactly 25 full-time equivalent employees or with average annual wages exactly equal to $50,000 is not eligible for the credit. The maximum credit is available to employers with no more than 10 full-time equivalent employees with annual full-time equivalent wages from the employer of less than $25,000.o 2014 and Later - In 2014 and later, eligible small employers who purchase coverage through the Insurance Exchange would be eligible for a tax credit for two years of up to 50% of their contribution.An eligible small employer generally is an employer with no more than 25 full-time equivalent employees employed during its tax year, and whose employees have annual full-time equivalent wages that average no more than $50,000.The credit percentage that can be claimed varies with the number of employees and average wages. The full amount of the credit is available only to an employer with 10 or fewer full-time equivalent employees and whose employees have average annual full-time equivalent wages (AAEW) from the employer of less than $25,000.Calculating the credit amount - The credit is equal to the lesser of the following two amounts multiplied by an applicable tax credit percentage (shown in the table below) and subject to the phase-outs discussed later:(1) The amount of contributions the eligible small employer made on behalf of the employees during the tax year for the qualifying health coverage.(2) The amount of contributions that the employer would have made during the tax year if each employee had enrolled in coverage with a small business benchmark premium. Contributions under this method are determined by multiplying the benchmark premium by the number of employees enrolled in coverage and then multiplied by the uniform percentage that applies for calculating the level of coverage selected by the employer. (See table below) *For years after 2013, only available for a maximum coverage period of two consecutive tax years Computing the Credit Phase-Out – The full credit is only available to eligible small employers with 10 or less full-time equivalent employees with an average annual full-time equivalent wage (AAEW) of $25,000 or less. If either or both of these thresholds are exceeded, then the credit is reduced. There is no credit reduction if there are 10 or less full-time equivalent employees FTEs with an AAEW of $25,000 or less. There is no credit if the full-time equivalent employees exceed 25 or the AAEW exceeds $50,000. To figure the reduction of credit when the limits are exceeded, the number of the employer’s full-time equivalent employees and average annual full-time equivalent wages (AAEW) for the year must be determined.Figuring the number of full-time equivalent employees - An employer's full-time equivalent employees (FTEs) is determined by dividing the total hours the employer pays wages during the year (but not more than 2,080 hours per employee) by 2,080. The result, if not a whole number, is then rounded down to the next lowest whole number if any.Calculating average annual wages (AAEW) - Average annual equivalent wages is determined by dividing the employer’s total FICA wages (without regard to the wage base limitation) for the tax year by the number of the employer's full-time equivalent employees for the year (rounded down to the nearest $1,000 if need be). Credit reduction - If the number of full-time equivalent employees exceeds 10 or if AAEW exceed $25,000, the amount of the credit is reduced (but not below zero). Both reductions can apply at the same time!Example – Joe owns a small California wood working business and has 12 employees, not counting himself or family members. The total FICA wages (without regard for wage base limitations) for the year were $297,500 and total hours worked by his employees during the year were 24,400. None of his employees worked more than 2,080 hours during the year. Joe made nonelective contributions to purchase health insurance for his employees in the amount of $49,800 for the year. Joe’s credit is determined as follows:• Small Business Benchmark Premium (from Table Below) = 12 x 4,628 = $55,536• Smaller of actual premium paid or Benchmark premium = $49,800• Tentative credit = $49,800 x 0.35 = $17,430• Full-time equivalent employees (FTEs) = 24,400/2080= 11.7 rounded down = 11• Average annual full-time equivalent wages (AAEW) = $297,500/11 = $27,045 rounded down = $27,000 • FTE Reduction = ((11-10)/15) x $17,430 = $1,162• AAEW Reduction = ((27,000-25,000)/25,000) x $17,430 = $1,394• Joe’s health insurance tax credit = $17,430 - $1,162- $1,394 = $14,874 Small Business Benchmark Premium 2012* Taxable year State Empl Only Family Coverage State Empl Only Family Coverage AlaskaArkansasCaliforniaConnecticutDelawareGeorgiaIowaIllinoisKansasLouisianaMarylandMichiganMissouriMontanaN DakotaNew HampshireNew MexicoNew YorkOklahomaPennsylvaniaS CarolinaTennesseeUtahVermontWisconsinWyoming 7,3214,4604,9995,9556,2725,4814,8185,7604,9595,3005,2895,3345,0895,1484,8066,0305,5275,8495,0425,4005,2445,1134,7445,6785,5755,657 15,77410,24412,16115,27314,35412,20611,53114,12512,16312,44613,18812,93611,97511,19711,93915,02612,90914,68811,83613,35712,24311,52012,07213,09914,38713,688 AlabamaArizonaColorado DCFloridaHawaiiIdahoIndianaKentuckyMassMaineMinnesotaMississippiN CarolinaNebraskaNew JerseyNevadaOhioOregonRhode IslandS DakotaTexasVirginiaWashingtonW. Virginia- 5,0844,8645,3086,0175,4624,9384,6905,4144,6606,1105,4135,3604,9975,3525,3256,0635,0284,9875,1306,1515,0375,2225,2634,9045,679- 12,72711,86413,01415,14013,01312,27010,42712,38611,38716,26912,83713,58911,66712,25112,51114,47011,79312,14312,19714,95912,13612,80312,88411,70313,112- * The values for 2013 were not available at press time but they will be included in the 2013 Form 8941 instructions when they are released. Other Issues:o The credit reduces the employer's deduction for employee health insurance. o Aggregation rules apply in determining the employer. o Self-employed individuals, including partners and sole proprietors, 2% shareholders of an S Corporation, and 5% owners of the employer are not treated as employees for purposes of this credit. o The credit is not available for a domestic employee of a sole proprietor of a business, and there's a special rule to prevent sole proprietorships from receiving the credit for the owner and their family members. o The credit is a general business credit and can be carried back one year and forward for 20 years. However, because an unused credit amount cannot be carried back to a year before the effective date of the credit, any unused credit amounts for taxable years beginning in 2010 can only be carried forward. o The credit is available for tax liability under the alternative minimum tax. o The credit is initially available for any tax year beginning in 2010, 2011, 2012 or 2013. Qualifying health insurance for claiming the credit for this first phase of the credit is generally health insurance coverage purchased from an insurance company licensed under State law. o For tax years beginning in years after 2013, the credit is only available to an eligible small employer that purchases health insurance coverage for its employees through a State exchange and is only available for a maximum coverage period of two consecutive tax years beginning with the first year in which the employer or any predecessor first offers one or more qualified plans to its employees through an exchange.Please call this office if you have questions related to Tax Credits for Small Employers Offering Health Coverage. Tue, 15 Oct 2013 19:00:00 GMT Penalty for Not Being Insured http://www.messnerandhadley.com/blog/penalty-for-not-being-insured/15116 http://www.messnerandhadley.com/blog/penalty-for-not-being-insured/15116 Messner & Hadley LLP Non-exempt U.S. citizens and legal resident taxpayers will be penalized for failing to maintain at the least the minimum essential health coverage, which includes: Government-sponsored programs (e.g., Medicare, Medicaid, Children's Health Insurance Program), Eligible employer-sponsored plans, Plans in the individual market, and Certain grandfathered group health plans and other coverage as recognized by Health and Human Services (HHS) in coordination with IRS. The penalty will be phased in beginning in 2014 and fully implemented in 2016.Penalty - The penalty for noncompliance is the greater of:(A) The sum of the monthly penalty amounts for months in the taxable year during which 1 or more such failures occurred, or (B)  An amount equal to the national average premium for qualified health plans which have a bronze level of coverage, provide coverage for the applicable family size involved, and are offered through Exchanges for plan years beginning in the calendar year with or within which the taxable year ends.Monthly Penalty Amounts - The monthly penalty amount is an amount equal to 1/12 of the greater of the following amounts:(A) Flat dollar amount - (See computation of the flat dollar amount below)(B) Percentage of income - An amount equal to the applicable percentage for the year (see table below) multiplied by the amount the taxpayer's household income for the year exceeds the taxpayer's income tax filing threshold. Year    2014 2015 2016 Flat Dollar Amounts (Annual)   Adult $95.00 $325.00 $695.00   Individual Under 18 $47.50 $162.50 $347.50 Percentage of Income Rates: 1.0% 2.0% 2.5% After 2016 the values will be inflation adjusted Flat Dollar Amount - The flat dollar amount is the lesser of:1. The sum of the applicable dollar amounts (see table below) for all individuals who were not covered for the month or2. 300% of the per adult penalty (maximum $2,085 in 2016).Example - Unmarried taxpayer without minimum essential coverage - In 2016, Gil is an unmarried individual with no dependents who doesn't have minimum essential coverage for any month in 2016. Gil's household income is $120,000 and his applicable filing threshold is $12,000*. The annual national average bronze plan premium for Gil is $5,000*. For each month in 2016, from the table, Gil's applicable dollar amount is $695. Gil's flat dollar amount is $695 (the lesser of $695 and $2,085 ($695 x 3)). Gil's percentage of excess household income amount is $2,700 (($120,000-$12,000) x 0.025). The monthly penalty is 1/12 of the greater of foregoing amounts.  Therefore, the monthly penalty amount is $225 ($2,700/12)).  Of course the sum of the monthly penalty amounts is $2,700, unless Gil qualifies for the short coverage gap grace period (explained later in this chapter). The penalty is the lesser of the sum of the monthly penalty amounts ($2,700) and the cost of the bronze coverage ($5,000).  Thus the penalty is $2,700. *These amounts are estimates for purposes of the example. Why Are Monthly Amounts & Annual Amounts Determined?As you went through the example above you probably asked yourself, why do I compute an annual amount and then divide it by 12 and then turn around and multiply it by 12 again to get the annual amount?  There is a logical reason.  Even though the percentage of income calculation is based upon annual household income less the filing threshold amount times a fixed percentage, the flat dollar amount could change during the year due to marriage, death, children, etc.  Thus if the dollar amount turns out to be the greater amount, the sum of those dollar amounts will be used and each month may be different. If an applicable individual has not attained the age of 18 as of the beginning of a month, the “applicable dollar amount” for the month will be equal to one-half of the amount shown in the table.Definition of a Month for Coverage - For any calendar month, an individual is treated as having minimum essential coverage if the individual is enrolled in and entitled to receive benefits under a qualifying program or plan for at least one day. (Reg. § 1.5000A-1(b))Liability for Dependent Coverage - Under Code Sec 5000A, nonexempt individuals are subject to the penalty for any dependent that may be claimed on their tax return not just those that they actually claim. The penalty applies regardless if they claim them (Reg Sec 1.5000A-1(c)).   This will prove to be a problem in divorce situations where one parent has custody of a child and claims the child as a dependent, but the noncustodial parent is required by the divorce decree to pay for medical insurance, and has not done so or has purchased coverage that does not meet the minimum essential coverage requirement. The final IRS regulations make no exception for these circumstances and the custodial parent is liable for the penalty. However, Health and Human Services (HHS) has addressed this situation in guidance that permits Exchanges to grant a hardship exemption under 45 CFR 155.605(g)(1) to the custodial parent for a child in this situation if the child is ineligible for coverage under Medicaid or the Children's Health Insurance Program (CHIP). See HHS Center for Consumer Information & Insurance Oversight, Guidance on Hardship Exemption Criteria and Special Enrollment Periods (June 26, 2013). (T.D. 9632, Summary of Comments and Explanation of Revisions)If an individual may be claimed as a dependent by more than one taxpayer in the same year, the taxpayer who properly claims the individual as a dependent is liable for the shared responsibility payment attributable to the individual. If more than one taxpayer may claim an individual as a dependent in the same year but no one claims the individual as a dependent, the taxpayer with priority under the dependency tie-breaker rules to claim the individual as a dependent is liable for the individual's shared responsibility payment. (Reg 1.5000A-1(c)(2))Family Size - For computing a taxpayer's shared responsibility payment with respect to any nonexempt individual included in the taxpayer's shared responsibility family, the final regs clarify that the applicable family size involved for purposes of identifying the appropriate bronze level plan includes only the nonexempt members of the taxpayer's shared responsibility family who do not have minimum essential coverage. (Reg. § 1.5000A-4)Household Income - Household income is the sum of the modified adjusted gross incomes (MAGIs) of the taxpayer and all individuals accounted for in the family size required to file a tax return for that year. Modified AGI means AGI increased by all tax-exempt interest and foreign earned income.Penalty Enforcement - For a joint return, the individual and spouse are jointly liable for any penalty payment.  The penalty is not subject to the enforcement provisions of subtitle F of the Code and the use of liens and seizures otherwise authorized for collection of taxes does not apply to the collection of this penalty. Noncompliance with the personal responsibility requirement to have health coverage is not subject to criminal or civil penalties under the Code and interest does not accrue for failure to pay such assessments in a timely manner. Therefore, enforcement is generally limited to seizing a refund.Three-Month Grace Period - No penalty is assessed for individuals who do not maintain health insurance for a period of three months or less during the tax year. If an individual exceeds the three-month maximum during the taxable year, the penalty for the full duration of the gap during the year is applied. If there are multiple gaps in coverage during a calendar year, the exemption from penalty applies only to the first such gap in coverage. IRS is to provide rules when a coverage gap includes months in multiple calendar years.Taxpayers Exempt from the Penalty -The coverage requirement does not apply to: Individuals who cannot afford coverage because their required contribution for employer-sponsored coverage or the lowest cost “bronze plan” in the local Insurance Exchange exceeds 8% of household income for the year. After 2014, the 8% exemption is increased by the amount by which premium growth exceeds income growth. If self-only coverage is affordable to an employee, but family coverage is unaffordable, the employee is subject to the penalty if he does not maintain minimum essential coverage. However, any individual eligible for employer coverage due to a relationship with an employee (e.g. spouse or child of employee) is exempt from the penalty if that individual does not maintain minimum essential coverage because family coverage is not affordable (i.e., exceeds 8% of household income). Taxpayers with income below the income tax filing threshold (which for 2013 generally is $10,000 for a single person or a married person filing separately and is $20,000 for married filing jointly). Those exempted for religious reasons (who must be members of a recognized religious sect exempting them from self-employment taxes). Individuals residing outside of the U.S. (who are deemed to maintain minimum essential coverage). Individuals who are incarcerated or are not legally present in the U.S. All members of Indian tribes. Tue, 15 Oct 2013 19:00:00 GMT Avail Yourself of Your Employer's Tax-Advantaged Benefits http://www.messnerandhadley.com/blog/avail-yourself-of-your-employers-tax-advantaged-benefits/37882 http://www.messnerandhadley.com/blog/avail-yourself-of-your-employers-tax-advantaged-benefits/37882 Messner & Hadley LLP Article Highlights Employer dependent care benefits allow you to exclude up to $5,000 in childcare expenses from your wages. Employer health care plans allow you to exclude the cost of insurance for you and your family from your wages. Employer 401(k) plans allow you to set aside $17,500 ($23,000 if you are 50 years or over) per year, tax deferred for your retirement. Employer flexible spending arrangements allow you to pay up to $2,500 of medical and dental expenses with pre-tax dollars. Employer's education assistance plans allow the employer to reimburse you by up to $5,250 tax-free for education expenses. Employer stock purchase or option plans allow you to acquire the employer's stock at favorable prices. Employers can provide certain transportation, commuting, and parking costs free of tax. Employers have the option of providing a number of tax-advantaged benefits to their employees. The following is a rundown of those benefits. You may wish to check with your employer to see if the company provides any that interest you. Generally, larger employers provide these benefits. Dependent Care Benefits - If you incur childcare expenses so that you can work, you should check to see if your employer has a dependent care program. If dependent care benefits are provided by your employer under a qualified plan, you may be able to exclude up to $5,000 ($2,500 if Married Filing Separately) of child care expenses from your wages, which generally provides a greater tax benefit than the child care credit. Health Care Insurance - Many employers offer income-excludable group medical and even dental plans. Generally, everyone, under the Patient Protection Act, will be required to have basic affordable health insurance in 2014 or face penalties on their tax return. If you are currently uninsured, utilizing your employer's plan may be your best option to avoid a penalty. Adult Children's Health Care Insurance - Employers are allowed, but not required, to provide insurance coverage for your children under the age of 27. If allowed under your employer's plan, enrolling your young adult children in your employer's medical insurance is an option to get them covered, and at the same time, avoid their penalties for being uninsured in 2014. 401(k) or Similar Retirement Plans - If your employer has a 401(k) plan, you can elect to defer (pre-tax) a maximum of $17,500 for 2013. If you are 50 years or older, the maximum is increased to $23,000. These plans are especially beneficial when the employer provides a matching contribution. Flexible Spending Accounts - Some employers provide flexible spending accounts, which allow an employee to make contributions on a pre-tax salary reduction basis to provide coverage for up to $2,500 of medical and dental expenses. However, the participant must use the contributed amounts for qualified expenses, or else forfeit any amounts remaining in the account at the end of the plan year. Medical expenses paid for or reimbursed through pre-tax plans cannot be deducted as part of itemized deductions on your tax return. Educational Assistance Programs - An educational assistance program provided by your employer can provide up to $5,250 per year of educational assistance benefits that can be excluded from your income. If you have been thinking about continuing your education and your employer offers an educational assistance program, taking advantage of it is a great way to make going back to school more affordable. Stock Purchase and Option Plans - A variety of plans available to employers are designed to allow the employees to invest in the employer's stock at favorable prices. The most commonly encountered are: (1) Employee stock ownership plan (ESOP); (2) Nonqualified stock option; and (3) Incentive Stock Options (ISOs). Note: Because of the tax ramifications, it may be prudent for you to consult with this office prior to exercising a stock option, especially an ISO. Tax-Free (income excludable) Employee Fringe Benefits - If the employer provides them, the law allows an exclusion from the employee's taxable income for the following benefits: (1) The cost of up to $50,000 of group-term life insurance. (2) $245 (in 2013) per month for qualified parking. (3) $245 (in 2013) per month for transit passes and commuter transportation. (4) $20 per month for bicycle commuting expenses. If you have any questions related to these employer-provided benefits, please give this office a call. Tue, 15 Oct 2013 19:00:00 GMT Fee on self-insured health plans -Patient-centered Outcomes Research Fee http://www.messnerandhadley.com/blog/fee-on-self-insured-health-plans-patient-centered-outcomes-research-fee/37883 http://www.messnerandhadley.com/blog/fee-on-self-insured-health-plans-patient-centered-outcomes-research-fee/37883 Messner & Hadley LLP Section 4376 imposes a fee equal to $2 ($1 for plan years ending during physical year 2013) multiplied by the average number of lives covered under the plan. The plan sponsor is liable for the fee. The fees qre required to be reported annually on the 2nd quarter. Use Form 720 (IRS #133) and pay by its due date, July 31st. Fees are based on the average number of lives covered under the policy or plan. Generally, plan sponsors of applicable self-insured health plans must use one of the following three alternative methods to determine the average number of lives covered under a plan for the plan year. Actual count method. Snapshot method. Form 5500 method. However, for plan years beginning before July 11, 2012, and ending on or after October 1, 2012, plan sponsors may determine the average number of lives covered under the plan for the plan year using any reasonable method. This excise tax (fee) is due 2013 through 2019. Tue, 15 Oct 2013 19:00:00 GMT Employee Notices http://www.messnerandhadley.com/blog/employee-notices/37884 http://www.messnerandhadley.com/blog/employee-notices/37884 Messner & Hadley LLP Beginning January 1, 2014 (October 1, 2013 for existing employees), certain employers must provide written notice to employees about health insurance coverage options available through the Marketplace (insurance exchanges). Notices must be provided by employers to whom the Fair Labor Standards Act applies. Generally, means an employer that employs one or more employees who are engaged in, or produce goods for, interstate commerce. For most firms, this rule doesn't apply if they have less than $500,000 in annual dollar volume of business. Employers must provide a notice to each employee, regardless of plan enrollment status (if applicable), or of part-time or full-time status. Employers do not have to provide a separate notice to dependents or other individuals who are, or may become, eligible for coverage under any available plan, but who are not employees. The notice must be provided in writing in a manner calculated to be understood by the average employee. The notice must include information regarding the existence of a new Marketplace, inform the employee that the employee may be eligible for a premium tax credit if the employee purchases a qualified health plan (QHP) through the Marketplace, and (2) include a statement informing the employee that if the employee purchases a QHP, the employee may lose the employer contribution (if any) to any health benefits plan offered by the employer, and that all or a portion of such contribution may be excludable from income for federal income tax purposes. Model language notices are available on the Department of labor's EBSA's website. There is one model for employers who do not offer a health plan, and another model for employers who offer a health plan to some or all employees. Timing and delivery of notice. Employers must provide the notice to each new employee at the time of hiring beginning Oct. 1, 2013. For 2014, a notice is considered to be provided at the time of hiring if it is provided within 14 days of an employee's start date. For employees who are current employees before Oct. 1, 2013, employers must provide the notice no later than Oct 1, 2013. Tue, 15 Oct 2013 19:00:00 GMT Understanding Tax Terminology http://www.messnerandhadley.com/blog/understanding-tax-terminology/37873 http://www.messnerandhadley.com/blog/understanding-tax-terminology/37873 Messner & Hadley LLP Article Highlights Filing status can be single, married filing jointly, married filing separately, head of household, or surviving spouse with dependent child. Adjusted gross income (AGI) is the sum of a taxpayer’s income minus specific subtractions called adjustments. Modified AGI is the regular AGI with certain adjustments and exclusions added back. Taxable income is AGI less deductions and exemption. Marginal tax rate is the tax percentage at which the top dollar of your income is taxed. Also referred to as your tax bracket. Alternative minimum tax (AMT) is a tax that you pay if it is higher than tax computed the regular way. Certain deductions, credits and tax benefits are not allowed when computing the AMT. Credits reduce your tax dollar-for-dollar and some are refundable. Failing to prepay enough tax through withholding or estimated payments can result in an underpayment of estimated tax penalty. No matter what the season or your unique circumstances, when it comes to your taxes, planning usually pays off in a lower tax bill. It can be difficult to understand tax strategies if you are not familiar with the terminologies used in taxation. The following provides you with the basic details associated with the most frequently encountered tax terms. Filing Status - Generally, if you are married at the end of the tax year, you have three possible filing status options: married filing jointly, married filing separately, or, if you qualify, head of household. If you were unmarried at the end of the year, you would file as single, unless you qualify for the more beneficial head-of-household status. A special status applies for some widows and widowers. Head of household is the most complicated filing status to qualify for and is frequently overlooked as well as incorrectly claimed. Generally, the taxpayer must be unmarried AND: o pay more than one half of the cost of maintaining his or her home, a household that was the principal place of abode for more than one half of the year of a qualifying child or an individual for whom the taxpayer may claim a dependency exemption, or o pay more than half the cost of maintaining a separate household that was the main home for a dependent parent for the entire year. A married taxpayer may be considered unmarried for the purpose of qualifying for head-of-household status if the spouses were separated for at least the last six months of the year, provided the taxpayer maintained a home for a dependent child for over half the year. Surviving spouse (also referred to as qualifying widow or widower) is a rarely used status for a taxpayer whose spouse died in one of the prior two years and who has a dependent child at home. Joint rates are used, but no exemption is claimed for the deceased spouse. In the year the spouse passed away, the surviving spouse may file jointly with the deceased spouse if not remarried by the end of the year. In rare circumstances, for the year of a spouse’s death, the executor of the decedent’s estate may determine that it is better to use the married separate status on the decedent’s final return, which would then also require the surviving spouse to use the married separate status for that year. Adjusted Gross Income (AGI) - AGI is the acronym for adjusted gross income. AGI is generally the sum of a taxpayer’s income less specific subtractions called adjustments (but before the standard or itemized deductions and exemptions). The most common adjustments are job-related moving expenses, penalties paid for early withdrawal from a savings account, and deductions for contributing to an IRA or self-employment retirement plan. Many tax benefits and allowances, such as credits, certain adjustments, and some deductions are limited by a taxpayer’s AGI. Modified AGI (MAGI) - Modified AGI is AGI (described above) adjusted (generally up) by tax-exempt and tax-excludable income. MAGI is a significant term when income thresholds apply to limit various deductions, adjustments, and credits. The definition of MAGI will vary depending on the item that is being limited. Taxable Income - Taxable income is AGI less deductions (either standard or itemized) and exemptions. Your taxable income is what your regular tax is based upon using the tax rate schedule. The IRS publishes tax tables that are based on the tax rate schedules and that simplify tax calculation, but the tables can only be used to look up the tax on taxable income up to $99,999. Marginal Tax Rate (Tax Bracket) - Not all of your income is taxed at the same rate. The amount equal to the sum of your deductions and exemptions is not taxed at all. The next increment is taxed at 10%, then 15%, etc., until you reach the maximum tax rate. When you hear people discussing tax brackets, they are referring to the marginal tax rate. Knowing your marginal rate is important because any increase or decrease in your taxable income will affect your tax at the marginal rate. For example, suppose your marginal rate is 25% and you are able to reduce your income $1,000 by contributing to a deductible retirement plan. You would save $250 in federal tax ($1,000 x 25%). Your marginal tax bracket depends upon your filing status and taxable income. You can find your marginal tax rate using the table below. Keep in mind when using this table that the marginal rates are step functions and that the taxable incomes shown in the filing-status column are the top value for that marginal rate range. 2013 MARGINAL TAX RATES TAXABLE INCOME BY FILING STATUS Marginal Tax Rate Single Head of Household Joint* Married Filed Separately 10.0% 8,925 12,750 17,850 8,925 15.0% 36,250 48,600 72,500 36,250 25.0% 87,850 125,450 146,400 73,200 28.0% 183,250 203,150 223,050 111,525 33.0% 398,350 398,350 398,350 199,175 35.0% 400,000 425,000 450,000 225,000 39.6% Over 400,000 Over 425,000 Over 450,000 Over 225,000 * Also used by taxpayers filing as surviving spouse Taxpayer & Dependent Exemptions - You are allowed to claim a personal exemption for yourself, your spouse (if filing jointly), and each individual who qualifies as your dependent. The amount you are allowed to deduct is adjusted for inflation annually; the amount for 2013 is $3,900. Dependents - To qualify as a dependent, an individual must be the taxpayer’s qualified child or pass all five dependency qualifications: the (1) member of the household or relationship test, (2) gross income test, (3) joint return test, (4) citizenship or residency test, and (5) support test. The gross income test limits the amount a dependent can make if he or she is over 18 and does not qualify for an exception for certain full-time students. The support test generally requires that you pay over half of the dependent’s support, although there are special rules for divorced parents and situations where several individuals together provide over half of the support. Qualified Child - A qualified child is one who meets the following tests: (1) has the same principal place of abode as the taxpayer for more than half of the tax year except for temporary absences (2) is the taxpayer’s son, daughter, stepson, stepdaughter, brother, sister, stepbrother, stepsister, or a descendant of any such individual (3) is younger than the taxpayer (4) did not provide over half of his or her own support for the tax year (5) is under age 19, or under age 24 in the case of a full-time student, or is permanently and totally disabled (at any age) (6) was unmarried (or if married, either did not file a joint return or filed jointly only as a claim for refund) Deductions - Taxpayers can choose to itemize deductions or use the standard deductions. The standard deductions, which are adjusted for inflation annually, are illustrated below for 2013. Filing Status Standard Deduction Single $6,100 Head of Household $8,950 Married Filing Jointly $12,200 Married Filing Separately $6,100 The standard deduction is increased by multiples of $1,500 for unmarried taxpayers who are over age 64 and/or blind. For married taxpayers, the additional amount is $1,200. The extra standard deduction amount is not allowed for elderly or blind dependents. Those with large deductible expenses can itemize their deductions in lieu of claiming the standard deduction. Itemized deductions include: (1) Medical expenses, limited to those that exceed 10% of your AGI for the year (Note: The limitation is 7.5% of AGI for seniors age 65 and older through 2016.) (2) Taxes consisting primarily of real property taxes, state income (or sales) tax, and personal property taxes (3) Interest on qualified home debt and investments; the latter is limited to net investment income (i.e., the deductible interest cannot exceed your investment income after deducting investment expenses) (4) Charitable contributions, generally limited to 50% of your AGI, but in certain circumstances the limit can be as little as 20% or 30% of AGI (5) Miscellaneous employee business expenses and investment expenses, but only to the extent that they exceed 2% of your AGI (6) Casualty losses in excess of 10% of your AGI plus $100 per occurrence (7) Gambling losses to the extent of gambling income, and certain other rarely encountered deductions Alternative Minimum Tax (AMT) - The Alternative Minimum Tax is another way of being taxed that taxpayers frequently overlook. An increasing number of taxpayers are being hit with AMT. The Alternative Minimum Tax (AMT) is a tax that was originally intended to ensure that wealthier taxpayers with large write-offs and tax-sheltered investments pay at least a minimum tax. However, even taxpayers whose only “tax shelter” is having a large number of dependents or paying high state income or property taxes may be affected by the AMT. Your tax must be computed by the regular method and also by the alternative method. The tax that is higher must be paid. The following are some of the more frequently encountered factors and differences that contribute to making the AMT greater than the regular tax. o Personal and dependent exemptions are not allowed for the AMT. Therefore, separated or divorced parents should be careful not to claim the exemption if they are subject to the AMT and instead allow the other parent to claim the exemption. This strategy can also be applied to taxpayers who are claiming an exemption under a multiple support agreement. o The standard deduction is not allowed for the AMT, and a person subject to the AMT cannot itemize for AMT purposes unless he or she also itemizes for regular tax purposes. Therefore, it is important to make every effort to itemize if subject to the AMT. o Itemized deductions: - Medical deductions are allowed in excess of 10% of AGI from 2013 through 2016. The amount of deductible medical expenses for regular tax and AMT will be different for seniors, who are allowed to claim medical deductions in excess of 7.5% of AGI for regular tax during this period. For other taxpayers, the medical deductions allowed for regular tax and AMT will be the same. - Taxes are not allowed at all for the AMT. - Interest in the form of home equity debt interest and interest on debt for non-conventional homes such as motor homes and boats are not allowed as AMT deductions. - Miscellaneous deductions subject to the 2% of AGI reduction are not allowed against the AMT. o Nontaxable interest from private activity bonds is tax free for regular tax purposes, but some is taxable for the AMT. o Statutory stock options (incentive stock options) when exercised produce no income for regular tax purposes. However, the bargain element (difference between grant price and exercise price) is income for AMT purposes in the year the option is exercised. o Depletion allowance in excess of a taxpayer’s basis in the property is not allowed for AMT purposes.A certain amount of income is exempt from the AMT, but the AMT exemptions are phased out for higher-income taxpayers. The amounts shown are for 2013. AMT EXEMPTIONS & PHASE OUT Filing Status Exemption Amount Income Where Exemption Is Totally Phased Out Married Filing Jointly $80,800 $477,100 Married Filing Separate $40,400 $238,550 Unmarried $51,900 $323,000 AMT TAX RATES - 2013 AMT Taxable Income Tax Rate 0 – $179,500 (1) 26% Over $179,500 (1) 28% (1) $89,750 for married taxpayers filing separately Your tax will be whichever is higher of the tax computed the regular way and the Alternative Minimum Tax. Anticipating when the AMT will affect you is difficult, because it is usually the result of a combination of circumstances. In addition to those items listed above, watch out for transactions involving limited partnerships, depreciation, and business tax credits only allowed against the regular tax. All of these can strongly impact your bottom-line tax and raise a question of possible AMT. Tax Tip: If you were subject to the AMT in the prior year, itemized your deductions on your federal return for the prior year, and had a state tax refund for that year, part or all of your state income tax refund from that year may not be eligible for inclusion in the regular tax computation. To the extent that you received no tax benefit from the state tax deduction because of the AMT, that portion of the refund is not eligible for inclusion in the subsequent year’s income. Tax Credits - Once your tax is computed, tax credits can reduce the tax further. Credits reduce your tax dollar for dollar and are divided into two categories: those that are nonrefundable and can only offset the tax, and those that are refundable. In addition, some credits are not deductible against the AMT, and some credits, when not fully used in a specific tax year, can carry over to succeeding years. Although most credits are a result of some action taken by the taxpayer, there are two commonly encountered credits that are based simply on the number of your dependents or your income. These and a third popular credit are outlined below. o Child Tax Credit - The child tax credit is $1,000 per child. If the credit is not entirely used to offset tax, the excess portion of the credit, up to the amount that the taxpayer’s earned income exceeds a threshold ($3,000 for 2011–2017) is refundable. Taxpayers with three or more qualifying dependent children may use an alternate method for figuring the refundable portion of their credit. The credit is allowed against both the regular tax and the AMT for each dependent under age 17. The credit begins to phase out at incomes (MAGI) of $110,000 for married joint filers, $75,000 for single taxpayers, and $55,000 for married individuals filing separate returns. The credit is reduced by $50 for each $1,000 (or fraction of $1,000) of modified AGI over the threshold. o Earned Income Credit - This is a refundable credit for a low-income taxpayer with income from working either as an employee or a self-employed individual. The credit is based on earned income, the taxpayer’s AGI, and the number of qualifying children. A taxpayer who has investment income such as interest and dividends in excess of $3,300 (for 2013) is ineligible for this credit. The credit was established as an incentive for individuals to obtain employment. It increases with the amount of earned income until the maximum credit is achieved and then begins to phase out at higher incomes. The table below illustrates the phase-out ranges for the various combinations of filing status and earned income and the maximum credit available. 2013 EIC PHASE-OUT RANGE Number of Children Joint Return Others Maximum Credit None $13,310 – $19,680 $7,970 – $14,340 $487 1 $22,870 – $43,210 $17,530 – $37,870 $3,250 2 $22,870 – $48,378 $17,530 – $43,038 $5,372 3 $22,870 – $51,567 $17,530 – $46,227 $6,044 o Residential Energy-Efficient Property Credit - This credit is generally for energy-producing systems that harness solar, wind, or geothermal energy, including solar-electric, solar water-heating, fuel-cell, small wind-energy, and geothermal heat-pump systems. These items qualify for a 30% credit with no annual credit limit. Unused residential energy-efficient property credit is generally carried over through 2016. Withholding and Estimated Taxes - Our “pay-as-you-go” tax system requires that you make payments of your tax liability evenly throughout the year. If you don’t, it’s possible that you could owe an underpayment penalty. Some taxpayers meet the “pay-as-you-go” requirements by making quarterly estimated payments. However, when your income is primarily from wages, you usually meet the requirements through wage withholding and rely on your employer’s payroll department to take out the right amount of tax, based on the withholding allowances shown on the Form W-4 that you filed with your employer. To avoid potential underpayment penalties, you are required to deposit by payroll withholding or estimated tax payments an amount equal to the lesser of: 1) 90% of the current year’s tax liability; or 2) 100% of the prior year’s tax liability or, if your AGI exceeds $150,000 ($75,000 for taxpayers filing as married separate), 110% of the prior year’s tax liability. If you had a significant change in income during the year, we can assist you in projecting your tax liability to maximize the tax benefit and delay paying as much tax as possible before the filing due date. Please call if this office can be of assistance with your tax planning needs. Thu, 10 Oct 2013 19:00:00 GMT Medical Itemized Deductions Limited http://www.messnerandhadley.com/blog/medical-itemized-deductions-limited/15111 http://www.messnerandhadley.com/blog/medical-itemized-deductions-limited/15111 Messner & Hadley LLP The itemized deduction for medical expenses will be limited in the following manner:AGI Threshold - The AGI threshold percentage for claiming medical expenses on a taxpayer’s Schedule A is increased from 7.5% to 10%, which is the same as the current threshold percentage for alternative minimum tax (AMT) purposes. Delayed Implementation for Seniors - Individuals (and their spouses) age 65 (before close of year) and older will continue to use the 7.5% rate though 2016. AMT & Regular Tax AGI Limit Become the Same The Medical AGI Threshold for AMT is also 10%. Thus, with the implementation of the 10% threshold for regular tax, there will no longer be a medical adjustment for AMT. Tue, 08 Oct 2013 19:00:00 GMT Premium Assistance Credit http://www.messnerandhadley.com/blog/premium-assistance-credit/15117 http://www.messnerandhadley.com/blog/premium-assistance-credit/15117 Messner & Hadley LLP Tax credits will be available for low-income individuals who obtain health insurance coverage with a qualified health plan (QHP) through an “Exchange”. "Exchange" The Health Care Act requires each state to establish an “American Health Benefit Exchange” (“Exchange”) by Jan. 1, 2014, and requires insurers to provide QHPs to be sold on these Exchanges. The Premium Assistance Credit applies to QHPs purchased on an Exchange. The Federal Exchange will be used by individuals who reside in states that have not set up exchanges. Applicable Taxpayers – Generally, these are individuals whose household income is at least 100%, but not more than 400% of the federal poverty line and who don't receive health insurance under an employer plan, Medicaid or other acceptable coverage. Based upon the current poverty levels, the credit would phase-out at $45,960 for individuals and $94,200 for a family of four.Enrollment - Eligible individuals will enroll in a plan offered through an Exchange and report his or her income to the Exchange. Based on the information provided to the Exchange, the individual will receive a premium assistance credit based on income.Premium Subsidy or 1040 Credit – The credit can be used to: Reduce the monthly insurance premiums, Claim a credit on the 1040 tax return, or Some combination of both. The credit is based upon income and family size. Thus changes in those two items can increase or lower the amount of the credit. Immediately reporting changes ensures the correct credit being used as a subsidy for the insurance premiums. Failure to notify, as no doubt will happen frequently, could cause too large of a subsidy to be applied, with the result being the taxpayer will have to repay a portion of credit when they file their tax return. Either way, the credit for the year must be reconciled on the tax return for the year. Failure to Pay the Difference - Individuals who fail to pay all or part of the remaining premium amount will be given a mandatory three-month grace period before an involuntary termination of their participation in the plan.Eligibility - Eligibility for the premium assistance credit will be based on the individual's income for the tax year ending two years before the enrollment period. (Committee Report) The Secretary of Health and Human Services (HHS Secretary) must establish procedures for determining whether an individual who is applying for coverage in the individual market by a QHP offered through an Exchange, or who is claiming a premium assistance credit or reduced cost-sharing, meets the necessary eligibility requirements.Amount of Premium Assistance Credit - The credit is based on the taxpayer's household income level relative to the federal poverty line. The calculation is computed on a sliding scale starting at 2.0% of income for taxpayers at or above 100% of the poverty line and phasing out to 9.5% of income for those at 400% of the poverty line. The reference premium will be the second lowest cost silver plan available in the individual market in the rating area in which the taxpayer resides.Deductibles & Co-payments - The standard out-of-pocket maximum limits will be reduced by: Two-thirds for individuals with household incomes of more than 100% but not more than 200% of the poverty line, One-half for individuals between 201% and 300% of the poverty line, and One-third for individuals between 301% and 400% of the poverty line. The cost-sharing subsidy is available only for those months in which an individual receives the Premium Assistance Credit. Tue, 08 Oct 2013 19:00:00 GMT Make the Most of Your Deductions http://www.messnerandhadley.com/blog/make-the-most-of-your-deductions/37855 http://www.messnerandhadley.com/blog/make-the-most-of-your-deductions/37855 Messner & Hadley LLP Article Highlights Bunching allows you to maximize your itemized deductions in one year and take the standard deduction in the next. The medical expense threshold for deductibility has been increased to 10% of AGI for individuals under the age 65. You have the option of deducting the larger of: (1) State and local income tax paid, or (2) state and local sales tax paid during the year. Charitable contributions generally require substantiation (no more deduction for unsubstantiated cash in the kettle or the collection plate). Documented gambling losses are deductible to the extent of gambling winnings. Home (and second home) mortgage interest is deductible up to the acquisition debt and equity debt limits. Overall itemized deduction limitation applies in 2013 and later years for higher-income filers. As you plan for your tax year, keep in mind that you benefit from itemizing your tax deductions if they exceed the standard deduction, and sometimes when you are subject to the alternative minimum tax (AMT), it is beneficial to itemize even if the result is less than the standard deduction. The following is a run-down on itemizing your deductions. Bunching Deductions - If your itemized deductions exceed the standard deduction, you will want to itemize tem. Itemized deductions consist of five basic categories, each with its own limitations and special considerations. If your deductions only marginally exceed the standard deduction, consider “bunching” your deductions in one year. You can bunch your deductions by pre-paying some of your expenses in one year, such as your church contribution. This allows you to produce higher than normal itemized deductions that year and then take the standard deduction the other year. Also consider pre-paying your state’s January estimated tax payment in December, or paying your property tax in full rather than in installments carrying over to the next year. Medical Expenses - Deductible medical expenses are limited to unreimbursed expenses for you, your spouse if married, and dependents that exceed 10% (7½% if age 65 or older) of your adjusted gross income (AGI) for the year. If you are 65 or older, for AMT purposes, your medical deduction will be less because only the excess of unreimbursed expenses above 10% of your AGI is deductible. Expenses most frequently thought of as deductible medical expenses include medical and dental insurance premiums, charges by doctors and dentists, and the cost of prescription medication. Medical insurance premiums and other expenses paid with pre-tax dollars (e.g., through an employer's cafeteria plan) cannot be included. Some less common deductions include the following: - The cost of a weight-loss program (not including food) for the treatment of a specific disease or diseases (including obesity) diagnosed by a physician. - Medicare-B premium payments and Medicare-D premiums for drug coverage. - Participation in smoking-cessation programs and for prescribed drugs (but not non-prescription items such as gum or patches) designed to alleviate nicotine withdrawal. - Elder Care, generally including the entire cost of nursing homes, homes for the aged and assisted living facilities. Long-term care insurance premiums are deductible, but with an additional limitation on the allowed amount based on the insured’s age. See the table below for the annual limit per insured individual. 2013 Long - Term Care Insurance Age 40 or Less 41 to 50 51 to 60 61 to 70 71 & Older Limit $360 $680 $1,360 $3,640 $4,550 DLimi2013 Long-Term Care Insurance Age 40 or less 41 to 50 51 to 60 61 to 70 71 & Older Limit $360 $680 $1,360 $3,640 $4,550 - Medical dependent: For medical purposes, an individual may be a dependent even if his gross income precludes a dependency exemption, thus enabling you to deduct the individual’s medical expenses that you paid. - A child of divorced parents is considered a dependent of both parents for medical expenses purposes (so that each parent may deduct the medical expenses he or she pays for the child.) Generally, travel costs (not including meals) may be a deductible expense if the trip is primarily for medical purposes. Cosmetic surgeries are generally not deductible. Taxes - Deductible taxes primarily consist of real property taxes, state and local income taxes, and personal property taxes. Planning tip: Since taxes are not deductible for AMT purposes, you should attempt to minimize the payment of taxes in a year you are subject to the AMT if you can avoid late payment penalties for the tax payments. Where property taxes were paid on unimproved and unproductive real estate, you can annually elect to capitalize the taxes in lieu of deducting them (add the amount paid to your cost basis for the property). For 2013, you have the option of deducting on Schedule A as part of your itemized deductions the LARGER of: (1) State and local income tax paid, or (2) State and local sales tax you paid during the year. Interest - The only interest that is deductible as an itemized deduction is home mortgage interest and investment interest. Although this category does not have an AGI limitation, each interest type has special limitations. Home mortgage interest is limited to the interest paid on acquisition debt that does not exceed $1 million and home equity debt (not exceeding $100,000) on your main home and a designated second home. In addition, the interest on most equity debt is not deductible against the AMT. Note: Home acquisition debt is the original debt (current balance) incurred to purchase or substantially improve the home and is not increased by refinanced debt. Taxpayers can elect to treat any debt secured by the home as unsecured. The election is irrevocable without IRS consent. By making the election, the interest on the loan can be allocated to use of the proceeds, except none of the interest can be allocated back to the home itself. This election is for income tax purposes only and does not change how the loan is secured with the lender. If made, the election applies for both regular tax and AMT purposes, and it applies for the year the election is made and all future years. There is no specific IRS form to use to make the election. Instead, attach a statement to your return (timely filed) for the year the election is to be effective, stating the election is to apply. Investment interest is interest on debts incurred to acquire investments such as securities or land. The investment interest deduction is limited to net investment income (investment income less investment expenses), and any excess not deductible in the current year is carried over to future years. Interest on debt to acquire tax-free investment income is not deductible. You can elect to treat capital gains as investment income in order to increase the amount of deductible investment interest. However, the same capital gains are then not eligible for the lower capital gains tax rate. Qualified dividends taxed at the reduced capital gains tax rates are not treated as investment income for the investment interest deduction calculation. Charitable Contributions - You may, within certain limits, deduct charitable contributions of cash and property to qualified organizations to the extent you receive no personal benefit from the donations. All cash contributions regardless of the amount must be documented with a written verification from the charity or a bank record. Non-receipted cash contributions are not deductible. Non-cash contributions also require an acknowledgement of the contribution from the qualified charitable organization except for donations of $250 or less left at unmanned drop points. For non-cash contributions of more than $5,000 (except for publicly-traded securities), you are generally required to have a qualified appraisal of the property donated. Please call this office for further details. Charitable deductions are limited by a percent of income depending upon the type of contribution. Contributions in excess of the AGI limitation may be carried forward for five years. Although there are 20% and 30% of AGI limitations, generally, contributions to qualified organizations are deductible to the extent they don’t exceed 50% of your AGI. One notable exception is the 30% limitation for gifts of capital gains property, where the contribution is based on the fair market value of the property. Frequently overlooked contributions include those made to governmental organizations such as schools, police and fire departments, parks and recreation, etc. Uniforms, travel expenses, and out-of-pocket expenses for a charity are also deductible, but not the value of your time or the cost of equipment such as computers, phones, etc., if you retain ownership. Congress imposed some tough rules that substantially limit the deduction for the popular charitable car donation. If the claimed value of the vehicle exceeds $500, the deduction will generally be limited to the gross proceeds from the charity’s sale of the vehicle. The IRS provides Form 1098-C that incorporates all of the required acknowledgement elements for the donee (charitable organization) to complete. The donor is required to attach copy B of the 1098-C to his or her federal tax return when claiming a deduction for contribution of a motor vehicle, boat, or airplane. There is an exception to the rules for donated vehicles that the charity retains for its own use “to substantially further the organization's regularly conducted activities or provides to a needy family.” Please call this office for more information. For 2013, if you are age 70½ and over you are allowed to make direct distributions (up to $100,000 per year) from your Traditional or Roth IRA account to a charity. The distribution is tax-free, but there is no charitable deduction. The distribution counts toward your required minimum distribution. This provision can be very beneficial if you have Social Security income and/or do not itemize your deductions. Miscellaneous Deductions - Miscellaneous deductions fall into two basic categories: those that are reduced by 2% of your AGI and those that are not. - Those Subject to the 2% Reduction - This category generally includes your investment expenses, costs of having your tax return prepared, and employee business expenses. - Those NOT Subject to the 2% Reduction - This category includes gambling losses (but cannot exceed the amount reported as gambling income), personal casualty losses (after first reducing each loss by $100 and the total loss for the year by 10% of your AGI), repayments of income (over $3,000) reported in prior years, and estate tax deductions. The estate tax deduction is considered by many to be the most overlooked deduction in taxes. It is a deduction based on the additional taxes paid as a result of the same income being taxed to both the estate and to the beneficiaries of the estate. Only certain types of income are doubly taxed. As an example, if the decedent had a Traditional IRA account, the value of the IRA would be included in the decedent’s estate and also would be taxable to the beneficiary. If the estate paid any tax at all (on Form 706), the beneficiary in this example would have an estate tax deduction equal to the portion of the estate tax paid attributable to the IRA. Overall Itemized Deduction Limitation - If your 2013 adjusted gross income exceeds $300,000 for joint filers and a surviving spouse, $275,000 for heads of household, $250,000 for single filers, and $150,000 for married taxpayers filing separately, your total itemized deductions will be limited, adding another factor to consider for planning purposes. This overall limitation had been reduced or suspended for the last few years. If the limitation applies to you, the total amount of your itemized deductions is reduced by 3% of the amount by which your AGI exceeds the threshold amounts listed above, with the reduction not to exceed 80% of your otherwise allowable itemized deductions. The threshold amounts are inflation-adjusted for tax years after 2013. If you have questions related to maximizing your itemized deductions, please give this office a call. Tue, 08 Oct 2013 19:00:00 GMT Don't Overlook the Portability of a Deceased Spouse's Unused Estate Tax Exemption http://www.messnerandhadley.com/blog/dont-overlook-the-portability-of-a-deceased-spouses-unused-estate-tax-exemption/37835 http://www.messnerandhadley.com/blog/dont-overlook-the-portability-of-a-deceased-spouses-unused-estate-tax-exemption/37835 Messner & Hadley LLP Article Highlights Estates may elect to transfer the unused estate tax exclusion to the surviving spouse. Election must be made on an estate tax return for the decedent. The estate tax return must be timely filed. Estates of decedents who die after December 31, 2010 may elect to transfer any unused exclusion to the surviving spouse. The amount received by the surviving spouse is called the deceased spousal unused exclusion (DSUE) amount. Making this election can have a profound effect on the taxation of the estate of the surviving spouse. Example: Bob and Jane are married and Bob passes away in 2012. Bob's estate is valued at $3,700,000. Since Bob's estate plan passed his entire estate to his wife Jane, the Federal estate tax would be zero due to the unlimited marital deduction afforded under the Internal Revenue Code. Since Bob's estate did not utilize any of his federal estate tax exemption ($5,120,000 for individuals who died in 2012), the exemption is “wasted.” However, under the portability provisions of the federal estate tax, Bob's estate can elect to pass that unused exemption to Jane by filing a Federal Form 706 and making the “Portability Election” on Bob's estate tax return. If this “Portability Election” is made on Bob's estate tax return, Bob's unused estate tax exemption of $5,120,000 is transferred to Jane and increases her future estate tax exemption by this unused amount. The highest marginal estate tax rate is currently 40%; therefore, the unused exemption passed from a decedent to his or her spouse via the “Portability Election” amount can result in significant estate tax savings. Example: Suppose Jane in our prior example passes away in 2013. Assuming that Jane's estate is valued at $6,000,000, if the “Portability Election” had not been made on Bob's estate tax return, Jane's taxable estate would be $750,000 ($6,000,000 less the $5,250,000 exemption for someone who dies in 2013). However, if the election had been made on Bob's return, Jane's taxable estate would be zero, as her total exclusion would be $10,370,000 (her $5,250,000 plus the portability from Bob's estate of $5,120,000). Making this election would thus result in a sizable reduction in estate taxes. A surviving spouse can apply the unused exclusion amount received from the estate of his or her last deceased spouse against any tax liability arising from subsequent lifetime gifts and transfers at death. Making the Election - To make the portability election, an estate tax return must be filed on time, even if the estate would not otherwise be required to file an estate tax return. Failure to file the estate tax return will result in the loss of the portability of the spouse's unused exclusion amount. A timely filed return is one that is filed on or before the due date of the return, including extensions. When a surviving spouse's estate is expected to be valued at less than the estate tax exclusion amount when he or she passes, it may seem to be a waste of time and money to file a 706 Estate Tax Return for the pre-deceased spouse. However, in making that decision, one should consider the possibilities of the surviving spouse receiving inheritances or winning the lottery, or of Congress reducing the estate tax exemption at some time in the future. Any of these potential events could result in substantial estate tax considering the current tax rate on taxable estates is 40%. If you believe that the election to transfer any unused exclusion to a surviving spouse applies to you, family members, or friends and would like additional information, please give this office a call. Thu, 03 Oct 2013 19:00:00 GMT How Will the Health Care Legislation Affect You and Your Taxes? http://www.messnerandhadley.com/blog/how-will-the-health-care-legislation-affect-you-and-your-taxes/15045 http://www.messnerandhadley.com/blog/how-will-the-health-care-legislation-affect-you-and-your-taxes/15045 Messner & Hadley LLP In late March 2010, President Obama signed into law the new health care legislation. The legislation will affect virtually every individual in one way or another and will significantly impact the preparation of tax returns in the future. The provisions take effect over a period of years and are categorized by the year they become effective. Some of the provisions include additional taxes to offset the cost of the health care benefits included in the legislation for lower-income individuals. The following is an overview of the provisions that apply to individual taxpayers and small businesses. 2009 Student Loan Forgiveness for Health Professionals - Excludes student loan debt forgiveness from income for certain medical professionals who work in health professional shortage areas. 2010 Tanning Services Excise Tax - A new 10% excise tax is imposed on the amount paid for any indoor tanning service. Excludable Medical Reimbursements for Older Children - An income exclusion for reimbursements of medical care expenses by an employer-provided accident or health plan is extended to any child of an employee who hasn't attained age 27. Self-Employed Health Insurance Deduction - Self-employed individuals may include in their tax-deductible health insurance children who have not attained age 27. Tax Credits for Small Employers Offering Health Coverage - Provides a tax credit for an eligible small employer for non-elective contributions to purchase health insurance for its employees. 2011 Employer W-2 Reporting Responsibilities - Employers will be required to disclose the aggregate cost of employer-sponsored health coverage to their employees on Form W-2. Increased Tax on Nonqualifying HSA or Archer MSA Distributions - The additional tax for making non-medical withdrawals from Health Savings Plans and Archer MSA plans is increased to 20%. Over-the-Counter Medication Restriction for Employer Plans - Over-the-counter medications will no longer qualify for reimbursement. Small Employer Simple Cafeteria Plans - Small employers may provide employees with a "simple cafeteria plan." 2012 Employer W-2 Reporting Responsibilities - Employers will be required to disclose the aggregate cost of employer-sponsored health coverage to their employees on Form W-2. 2013 Additional Hospital Insurance Tax for High-Income Taxpayers - The Hospital Insurance (HI) tax rate (currently at 1.45%) would be increased by 0.9 percentage points on incomes over a threshold. Surtax on Unearned Income for High-Income Taxpayers - A 3.8% surtax is imposed on net investment income of high-income individuals, estates, and trusts. Employer Health FLEX-Spending Plan Contributions Limited - Medical reimbursements from flexible spending plans is limited to $2,500. Medical Itemized Deductions Limited - The AGI threshold percentage for claiming itemized medical expenses is increased from 7.5% to 10%. Compensation Deduction Limit for Health Insurance Issuers - Limits companies' deduction for certain employees' compensation. Fee On Self-Insured Health Plans (Patient-Centered Outcomes Research Fee) - a fee equal to $2 ($1 for plan years ending during physical year 2013) multiplied by the average number of lives covered under the plan. Employee Notices - Beginning January 1, 2014 (October 1, 2013 for existing employees), certain employers must provide written notice to employees about health insurance coverage options available through the Marketplace (insurance exchanges). 2014 Mandatory Heath Insurance Overview - Many of the provisions of the Health Care Legislation are linked to the mandate that everyone becomes insured. The chart provides an overview of how these provisions interact to achieve that goal. American Health Benefit Exchanges - By 2014, each state must establish an exchange to help individuals and small employers obtain coverage. Penalty For Not Being Insured - Non-exempt U.S. citizens and legal resident taxpayers will be penalized for failing to maintain at the least the minimum essential health coverage. Premium Assistance Credit - Tax credits will be available for low-income individuals who obtain health insurance coverage with a qualified health plan (QHP) through an “Exchange”. 2015 Large Employer Health Coverage Excise Tax - This penalty was originally scheduled to become effective in 2014 but was delayed until 2015 Large employers would be required to pay a penalty if any of its full-time employees were certified to the employer as having purchased health insurance through a state exchange and qualified for either tax credits or a cost-sharing subsidy. 2018 Excise Tax on High-Cost Employer-Sponsored Health Coverage - There will be a 40% nondeductible excise tax on insurance companies and plan administrators for any health coverage plan where the premiums exceed certain limits. Wed, 02 Oct 2013 19:00:00 GMT Student Loan Forgiveness for Health Professionals http://www.messnerandhadley.com/blog/student-loan-forgiveness-for-health-professionals/15047 http://www.messnerandhadley.com/blog/student-loan-forgiveness-for-health-professionals/15047 Messner & Hadley LLP Previously, an individual's gross income didn't include cancellation of debt income that was attributable to the discharge of all or part of any student loan if the discharge was made under a provision of the loan - that all or part of the indebtedness would be discharged if the individual worked for a certain period of time in certain professions for any of a broad class of employers.New Law: The law has been amended to include amounts received by an individual in tax years beginning after Dec. 31, 2008; the gross income exclusion for amounts received under the National Health Service Corps loan repayment program or certain State loan repayment programs is modified to include any amount received by an individual under any State loan repayment or loan forgiveness program that is intended to provide for the increased availability of health care services in underserved or health professional shortage areas as determined by the State. Wed, 02 Oct 2013 19:00:00 GMT Selling Your Home http://www.messnerandhadley.com/blog/selling-your-home/37818 http://www.messnerandhadley.com/blog/selling-your-home/37818 Messner & Hadley LLP Article Highlights Individuals can exclude up to $250,000 ($500,000 for a married couple filing jointly) of gain from the sale of their primary residence. Generally, to qualify for the exclusion, the home must have been owned and used as a primary residence for two of the prior five years. Reduced exclusions apply in certain circumstances where the home was owned and used less than the required two years. Special rules apply to a home acquired via a tax-deferred exchange that was formerly used as a rental or when a portion of the home was used for business. Un-excluded gain is subject to more favorable capital gains tax rates. During the summer months, many people sell their homes and move to a new location. Many of those individuals will make a profit on the sale and still will not have to pay a single dime of additional income tax to the IRS. If you are in this position, you may find the following information useful. Generally, a profit is made if the selling price of a home is greater than the price that was paid to purchase the home. That profit, considered a capital gain, is usually subject to income tax. If there is loss, the loss is generally not deductible since the home is personal use property. However, under certain circumstances, the law allows you to exclude all or part of that gain from your income - that is, tax may not have to be paid on the profit. Individuals may be able to exclude up to $250,000 of home sale capital gain, and married taxpayers filing joint returns may be able to exclude up to $500,000. The exclusion may be claimed each time the main home is sold, but generally not more than once every two years. An unmarried surviving spouse may be able exclude $500,000 if the sale occurs no later than two years after the date of the other spouse's death. To qualify, you must meet both the ownership and use tests. Ownership Test: During the five-year period ending on the date of the sale, you must have owned the home for at least two years. Use Test: During the five-year period ending on the date of the sale, you must have lived in the home as your main home for at least two years. If you file a joint return with your spouse and both of you meet the use test, you normally will be able to claim the exclusion for married couples even if only one of you meets the ownership test. If these tests are not met, a reduced amount of the home sale gain may still be excluded. But the home must have been sold for other specific reasons, such as serious health issues, a change in the place of employment, or certain unforeseen circumstances (such as a divorce or legal separation), natural or man-made disasters resulting in a casualty to the home, or an involuntary conversion of the home. For individuals on qualified official extended duty in the U.S. Armed Services, the Foreign Service, or the intelligence community, the five-year test period may be suspended for up to ten years. Military service is considered qualified extended duty when, for more than 90 days or for an indefinite period, that individual is: At a duty station that is at least 50 miles from his or her main home, or Residing under government orders in government housing. If you have more than one home, you can exclude a gain only from the sale of your main home. You must pay tax on the gain from selling any other home. If you have two homes and live in both of them, your main home is ordinarily the one you live in most of the time. Additional complications may apply if the home was acquired via a tax-deferred exchange, was previously a rental, or was used partially for business. If you have a gain after applying the allowable exclusion, that gain will be reported on Form 8949 and the gain taxed similar to gain from selling stocks and bonds. If held a year or less, it will be a short-term capital gain taxed at ordinary income tax rates. If held for more than a year, it will be taxed at the more favorable long-term capital gain rate, which varies from zero to 20% (the higher your income for the year, the higher the capital gain rate). If you have capital losses from sales of other property during the year or capital loss carryovers from prior years, they can be used to offset the home gain that exceeds the exclusion amount. If your modified adjusted gross income for the year exceeds $200,000 ($250,000 for joint filers and $125,000 married individuals filing separately), some portion of the gain will also be subject to the new 3.8% surtax on net investment income that is imposed as part of the Affordable Care Act (the new health care reform law). Finally, if you purchased your home in 2008, claimed the first-time homebuyer's credit, and have a gain from selling the home, you may be required to recapture the balance of the un-repaid credit. Issues connected to selling a home can be complicated. If you have questions related to your specific circumstances, please give this office a call. Tue, 01 Oct 2013 19:00:00 GMT October Extension Due Date Rapidly Approaching http://www.messnerandhadley.com/blog/october-extension-due-date-rapidly-approaching/37797 http://www.messnerandhadley.com/blog/october-extension-due-date-rapidly-approaching/37797 Messner & Hadley LLP Article Highlights October 15 is the extended due date for filing 2012 federal individual tax returns. Late-filing penalty for individual federal returns is 5% of the tax due for each month, or part of a month, for which a return is not filed, up to a maximum of 25% of the tax due. A separate penalty applies for filing a state return late. If you could not complete your 2012 tax return by the normal April filing due date, and are now on extension, that extension expires on October 15, 2013, and there are no additional extensions. Failure to file before the extension period runs out can subject you to late-filing penalties. There are no additional extensions, so if you still do not or will not have all of the information needed to complete your return by the extended due date, please call the office so that we can explore your options for meeting your October 15 filing deadline. If you are waiting for a K-1 from a partnership, S-corporation, or fiduciary return, the extended deadline for those returns was September 16. So, if you have not received that information yet, you should probably make inquiries. Late-filed individual federal returns are subject to a penalty of 5% of the tax due for each month, or part of a month, for which a return is not filed, up to a maximum of 25% of the tax due. If you are required to file a state return, and do not do so, the state will also charge a late-file penalty. If this office is waiting for some missing information to complete your return, we will need that information at least a week before the October 15 due date. Please call this office immediately if you anticipate complications related to providing the needed information, so that a course of action may be determined for avoiding the potential penalties. Thu, 26 Sep 2013 19:00:00 GMT Owner-Only Businesses Should Consider a Solo 401(k) Plan http://www.messnerandhadley.com/blog/owner-only-businesses-should-consider-a-solo-401k-plan/37779 http://www.messnerandhadley.com/blog/owner-only-businesses-should-consider-a-solo-401k-plan/37779 Messner & Hadley LLP Article Highlights Solo 401(k) plans allow greater income deferral than most other retirement plans. A Solo 401(k) plan suits self-employed and owner-only corporations. The plan needs to be established prior to year's end. The plan is generally not beneficial if company has employees other than a spouse. It goes by many names: Solo 401(k), Mini 401(k), and single-participant 401(k). We will use Solo 401(k) in this article to describe probably the best type of pension plan for owner-only businesses. It provides for larger contributions, including a Roth option for a portion of the contribution, and the ability to borrow funds from the plan at reasonable rates. Consequently, Solo 401(k) plans have become more attractive options than SEP-IRAs, SIMPLE IRAs, or profit-sharing or money purchase plans. In addition, if the plan permits-and most do-assets from other retirement plans can be rolled over into the Solo 401(k) plan. Generally, Solo 401(k) plans are a natural fit for two categories of people. The first are those who operate a business as an independent contractor, sole proprietor, or owner-only C or S corporation. The second are those who have dual incomes: they are W-2 wage earners as employees of a company that offers a 401(k) plan, but also have consulting income from corporate directorships or freelance work that requires them to file a Schedule C as a sole proprietor. Since the 401(k) contribution limits apply to each individual for the year and not to the individual plans, the taxpayer who has multiple 401(k) plans needs to make sure that no more than the annual limit is contributed to the total combination of plans. For 2013, the rules limit employer contribution (profit-sharing contribution) to 25% of compensation. The employee can also make salary deferral contributions up to $17,500. Together, these contributions cannot exceed the lesser of $51,000 or 100% of compensation. In addition, if the employee is aged 50 or over, he or she can make an additional catch-up contribution of $5,500. The business owner in these arrangements is considered to be both an employee and an employer. Example: Susan Lewis, 49, is the sole employee of an incorporated business. Her earned income is $100,000 in 2013. Under the law, Susan can contribute $25,000 to a SEP-IRA ($100,000 × .25), $14,500 ($11,500 plus 3% of $100,000) to a Simple IRA, or $25,000 to a profit-sharing or money purchase plan. On the other hand, she can contribute $42,500 to a Solo 401(k) plan ($25,000 employer contribution plus $17,500 employee deferral), which is still under the $51,000 maximum for the year. If Susan is 50 or over, she can also make a catch-up contribution of $5,500, increasing her 401(k) contribution total to $48,000. In some cases, 401(k) plan contributions for an unincorporated business may be slightly lower than the above amounts. For unincorporated businesses, compensation is net profit minus half of self-employment taxes minus employer contributions. Although single-participant 401(k) plans are limited to the business owner and his or her spouse, business owners should note the added benefits of having his or her spouse as the business's only other employee. Having the spouse on the payroll allows the business owner to shelter some or all of his or her income by having his or her spouse make an elective deferral to a 401(k) plan in addition to the business making a profit-sharing contribution. Although the spouse and the business would be responsible for their respective shares of employment taxes on the salary, combined employer and employee contributions could be up to the lesser of $51,000 (for 2013) or 100% of compensation. This limit applies separately to the business-owner and the spouse, thus allowing a combined total of up to $102,000 (for 2013). In addition, if aged 50 or over, each individual could defer an additional $5,500 each year. Potential downside: If a business grows and begins to hire employees, the single-participant 401(k) plan must become a full-blown 401(k) plan subject to other, more stringent rules, including discrimination testing, that can serve to limit contributions by highly paid executives. Many providers recommend that businesses with immediate expansion plans not set up one of the Solo 401(k) arrangements. Caution: If the business owner has other businesses or is part of a controlled group of corporations, partnerships, proprietorships, or affiliated service groups, the employer aggregation rules may apply and the employees of those other businesses may have to be considered for purposes of meeting qualification and minimum coverage requirements for the Solo 401(k). For additional information about Solo 401(k) plans and how they might fit into your tax strategy and retirement-planning, please give this office a call. If you are considering a Solo 401(k) plan, be aware that the plan must be set up before year's end. Tue, 24 Sep 2013 19:00:00 GMT October 2013 Individual Due Dates http://www.messnerandhadley.com/blog/october-2013-individual-due-dates/34391 http://www.messnerandhadley.com/blog/october-2013-individual-due-dates/34391 Messner & Hadley LLP October 10 - Report Tips to Employer If you are an employee who works for tips and received more than $20 in tips during September, you are required to report them to your employer on IRS Form 4070 no later than October 10. Your employer is required to withhold FICA taxes and income tax withholding for these tips from your regular wages. If your regular wages are insufficient to cover the FICA and tax withholding, the employer will report the amount of the uncollected withholding in box 12 of your W-2 for the year. You will be required to pay the uncollected withholding when your return for the year is filed.October 15 - Individuals If you have an automatic 6-month extension to file your income tax return for 2012, file Form 1040, 1040A, or 1040EZ and pay any tax, interest, and penalties due.October 15 -  SEP IRA & Keogh Contributions Last day to contribute to SEP or Keogh retirement plan for calendar year 2012 if tax return is on extension through October 15. Mon, 23 Sep 2013 19:00:00 GMT October 2013 Business Due Dates http://www.messnerandhadley.com/blog/october-2013-business-due-dates/34392 http://www.messnerandhadley.com/blog/october-2013-business-due-dates/34392 Messner & Hadley LLP October 15 -  Electing Large Partnerships File a 2012 calendar year return (Form 1065-B). This due date applies only if you were given an additional 6-month extension. March 15 was the due date for furnishing Schedules K-1 or substitute Schedule K-1 to the partners.October 15 - Social Security, Medicare and withheld income tax If the monthly deposit rule applies, deposit the tax for payments in September. October 15 - Nonpayroll Withholding If the monthly deposit rule applies, deposit the tax for payments in September. October 31 - Social Security, Medicare and Withheld Income Tax File Form 941 for the third quarter of 2013. Deposit or pay any undeposited tax under the accuracy of deposit rules. If your tax liability is less than $2,500, you can pay it in full with a timely filed return. If you deposited the tax for the quarter in full and on time, you have until November 12 to file the return.October 31 - Certain Small Employers Deposit any undeposited tax if your tax liability is $2,500 or more for 2013 but less than $2,500 for the third quarter.October 31 - Federal Unemployment Tax Deposit the tax owed through September if more than $500. Mon, 23 Sep 2013 19:00:00 GMT Do You Need a More Robust Version of QuickBooks? http://www.messnerandhadley.com/blog/do-you-need-a-more-robust-version-of-quickbooks/37767 http://www.messnerandhadley.com/blog/do-you-need-a-more-robust-version-of-quickbooks/37767 Messner & Hadley LLP Do You Need a More Robust Version of QuickBooks? Maybe you just need to study your current version thoroughly. But it might be time to move up. If QuickBooks were just one product, its appeal would be more limited than it is. Because there's an entire family of Windows desktop software applications (as well as five online versions and a Mac edition), the QuickBooks family has found a home in millions of small businesses, and it remains the market leader. Though QuickBooks versions themselves are not scalable (able to expand as your business grows), you can move up to a more sophisticated edition when you outgrow your current version. But how do you know whether it's time to upgrade or whether you're just not stretching your current version to its fullest capabilities? We can help you determine that, and we'll help you move into a more appropriate edition when/if that occurs. Desktop Differences There are three Windows-based versions of QuickBooks: Pro, Premier and Enterprise Solutions. They all let you: Import and export data  Figure 1: All desktop versions of QuickBooks let you import and export data. Track income and expenses Build and maintain records for customers, vendors, employees and items Create and send transaction forms like invoices, estimates and purchase orders Download bank and credit card transactions, and pay bills online Customize and run dozens of reports Keep track of your inventory of items, and Add a payroll-processing service. All three versions share a similar user interface and navigational scheme, so when you move up to the next level, you only need to learn the new features. The 2013 offerings make it even easier to learn and use QuickBooks, since Intuit completely revamped the look and feel for those most current editions. QuickBooks Pro is the base desktop product, offering everything in the above list and more. But would you rather have access to 150+ reports instead of 100, including some that are industry-specific? QuickBooks Premier can provide that, in addition to charts of accounts, sample files and menus tailored to your company's industry. It also offers a business plan builder and the ability to forecast sales and expenses. Figure 2: QuickBooks Premier helps you create a business plan. The biggest jump in functionality, though, occurs when you move up to QuickBooks Enterprise Solutions. You may want to consider this upgrade when you find that, for example: Your system keeps slowing down and experiencing errors because your customer, vendor, item and employee databases have grown too large You need to have more than five people accessing QuickBooks simultaneously You've launched a second company, and/or Your item catalog has grown to the point where you're having trouble managing your multi-location inventory. Robust Accounting QuickBooks Enterprise Solutions is well-suited to complex small businesses, and sometimes even larger companies, depending on their structure and needs. It solves the data management problems that Pro and Premier users can experience, thanks to its 100,000+ record and account capacity. Up to 30 individuals can use the software at the same time, and they have more flexibility than is offered in Pro and Premier. Multiple users can be on the system and still complete tasks like adjusting inventory and changing sales tax rates. You can manage more than one business using QuickBooks Enterprise Solutions, even working in two company files at the same time and combining reports. Reporting capabilities themselves are much more sophisticated: The Intuit Statement Writer helps you create professional financial statements, and you have much more control over customization of your output. Figure 3: QuickBooks Enterprise Solutions offers more sophisticated inventory management tools than Pro or Premier. Inventory management goes many steps further in this sophisticated software. It supports management of multiple warehouse and trucks, and allows transfers among them. Finding specific items is much easier because you can track down to the bin level. FIFO costing is offered as an alternative to average costing, and you can scan items and serial numbers directly into QuickBooks Enterprise Solutions, which tracks both serial and lot numbers. More Power, More Support There are many smaller features that make this application far more powerful than QuickBooks Pro and Premier - and also a little more difficult to master. When you think the time is right, we can help you move your current data file into QuickBooks Enterprise Solutions and provide training. It's important that you have the right fit when it comes to your accounting software. So consider your current setup carefully before you decide to move up. Mon, 23 Sep 2013 19:00:00 GMT Premium Assistance Credit - The Health Insurance Subsidy For Lower Income Individuals and Families http://www.messnerandhadley.com/blog/premium-assistance-credit-the-health-insurance-subsidy-for-lower-income-individuals-and-families/37272 http://www.messnerandhadley.com/blog/premium-assistance-credit-the-health-insurance-subsidy-for-lower-income-individuals-and-families/37272 Messner & Hadley LLP Beginning in 2014, as part of the Patient Protection and Affordable Health Care Acts, all U.S. persons, with certain exceptions, must have minimal essential health care coverage or face a tax penalty.Recognizing this requirement could present a serious financial problem for lower-income individuals and families who do not have employer-provided coverage or other forms of insurance, Congress included a tax credit in the law to help them pay for their insurance. The amount of the tax credit, known as the Premium Assistance Credit, is based on the individual or family's income as it compares to the Federal poverty guidelines. Those with household income at 100% of the poverty level get the largest credit, and the credit is reduced for higher incomes and completely phased out when the income reaches 400% of the poverty level. You might be wondering why those with income under 100% of the poverty level do not qualify for the credit; they qualify for Medicaid. The credit is refundable and computed on the tax return for the year. However, that means the credit will not be available until the tax return is filed in the following year. Understanding this problem, Congress allows an advanced insurance premium subsidy to reduce the insurance premiums. Then, the advanced subsidy and premium assistance credit are reconciled on the tax return and any excess credit is refunded (if other taxes aren't owed), or some portion of the subsidy in excess of the credit is repaid. To qualify for the premium assistance credit, the insurance must be purchased through the state's American Health Benefit Exchange or, if the state does not have an insurance exchange, the federal exchange. In addition, to qualify for the credit the taxpayer: Cannot be claimed as a dependent by another person; Cannot be eligible for Medicaid, Medicare, employer-sponsored insurance, or other acceptable types of coverage; If married, must file a joint tax return; and Cannot be offered minimum essential coverage under an employer-sponsored plan. An individual is eligible for employer-sponsored minimum essential coverage only if the employee's share of premiums is “affordable” and the coverage provides “minimum value.” When determining family size for computing this credit, the family size is the same as the number of individuals for whom the taxpayer is allowed an exemption deduction for the tax year. The term household income includes the modified adjusted gross income (MAGI) of the taxpayer plus the sum of MAGIs of all individuals who were taken into account when determining the taxpayer's family size and who were required to file a tax return. The term MAGI for purposes of this credit means adjusted gross income increased by any foreign earned income exclusion, the excluded portion of Social Security and Railroad Retirement benefits, and tax-exempt interest income. Insurance through the exchanges will be effective January 1, 2014. Exchanges will be accepting applications in the fall in preparation for the January 2014 effective date. It is not too early to begin planning for 2014 and these new requirements. Please call this office with questions. Fri, 20 Sep 2013 19:00:00 GMT Give Withholding and Payments a Check-up to Avoid a Tax Surprise http://www.messnerandhadley.com/blog/give-withholding-and-payments-a-check-up-to-avoid-a-tax-surprise/37736 http://www.messnerandhadley.com/blog/give-withholding-and-payments-a-check-up-to-avoid-a-tax-surprise/37736 Messner & Hadley LLP Article Highlights 2013 could hold some unpleasant tax surprises because of : o Increased long-term capital gains rates. o Increased ordinary tax rates.o A new 3.8% tax on net investment income.o The new additional 0.9% HI (Medicare) payroll and self-employment tax.o Life-changing events such as marriage, birth of a child, or new job.o One-time increase in income from sales of stock or real estate. Under-withholding and underpaid estimates could cause penalties, but corrective actions before year-end may mitigate the penalties. 2013 will hold some unpleasant tax surprises for many taxpayers simply because of the increased long-term capital gains tax rates, the ordinary income tax rates, and the imposition of two new taxes as part of the Affordable Care Act, including a new 3.8% surtax on net investment income and an additional 0.9% payroll and self-employed health insurance tax. Other factors can also have an impact on the results of your tax return. These include life events such as marriage, birth, or adoption of a child; divorce or separation; the death of a spouse; a new job; a bonus; or a spouse going to work. You may have sold a business, real estate, stocks, or other assets that will produce a one-time increase in income. So, if you have a substantial increase in tax as the result of any of the above or other events, it may be wise to review your withholding and/or estimated tax payments to ensure you have set aside funds for the increase in taxes and have paid in enough in advance to avoid or minimize an underpayment penalty. Generally if you have not paid evenly throughout the year withholding and estimated taxes, so that they will equal 90% of your tax liability for the year or 100% of the prior year’s liability (110% if your income is over $150,000), you may be subject to an underpayment penalty for the year. This office can project your 2013 tax liability to prepare you for your tax liability and so you can either adjust your withholding or make estimated tax payments to minimize penalties. If you are already set up to pay estimated tax, revising the remaining payment vouchers may be appropriate. If a potential large tax liability is discovered early enough, your withholding for the rest of the year can be adjusted. Withholding is treated as deposited ratably over the course of the year even if paid towards the end of the year, which helps mitigate underpayment penalties where you are underpaid in the earlier quarters. If this office can be of assistance with tax planning, tax projections, or in modifying your withholding and estimated payments, please call for an appointment. Thu, 19 Sep 2013 19:00:00 GMT Affordable Care Act Employer Letter Requirement http://www.messnerandhadley.com/blog/affordable-care-act-employer-letter-requirement/37730 http://www.messnerandhadley.com/blog/affordable-care-act-employer-letter-requirement/37730 Messner & Hadley LLP Article Highlights Employers must give employees health care notification. Affects employers with one or more employees and a gross income of $500,000 or more. Notices due October 1, 2013. New Employees must be notified within 14 days. Beginning Oct. 1, any business with at least one employee and $500,000 in annual revenue must notify all employees by letter about the Affordable Care Act’s health care exchanges. The requirement applies to any business regulated under the Fair Labor Standards Act (FLSA), regardless of size. Going forward, letters are to be distributed to any new hires within 14 days of their starting date, according to the Department of Labor. The Patient Protection and Affordable Care Act has a general $100-per-day penalty for non-compliance. Since this requirement is in the FLSA, concerns were raised in the business community that the $100-per-day penalty would apply to businesses that did not comply with the notification requirements. On September 12, 2013, the Small Business Administration (sba.gov) posted a blog called “Myth #3: Business Owners Will Be Fined if They Don’t Notify Their Employees about the New Health Insurance Marketplace.” The article clarifies the policy, stating: “If your company is covered by the FLSA, you must provide a written notice to your employees about the Health Insurance Marketplace by October 1, 2013. However, there is no fine or penalty under the law for failing to provide the notice.” The Department of Labor provides model notices for employers: Employers with plans: http://www.dol.gov/ebsa/pdf/FLSAwithplans.pdf Employers without plans: http://www.dol.gov/ebsa/pdf/FLSAwithoutplans.pdf If you have questions, please give this office a call. Tue, 17 Sep 2013 19:00:00 GMT Back-to-School Tax Tips for Students and Parents http://www.messnerandhadley.com/blog/back-to-school-tax-tips-for-students-and-parents/37713 http://www.messnerandhadley.com/blog/back-to-school-tax-tips-for-students-and-parents/37713 Messner & Hadley LLP Article Highlights Sec. 529 plans allow very large sums of money to be put away for a child's college education with the earnings accumulating as tax-deferred and tax-free, if used for qualified college education expenses. Coverdell Education Savings Accounts allow $2,000 a year to be set aside for a child's education. Earnings are tax-deferred and tax-free if used for qualified education expenses. Coverdell funds can be used for kindergarten through college education Expenses. The American Opportunity education credit provides a credit of up to $2,500 per student per year, covering the first four years of qualified post-secondary education. The Lifetime Learning credit provides up to 20% of the first $10,000 of qualifying higher education expenses per family per year. A deduction from gross income of up to $2,000 or $4,000, depending on income, for qualifying tuition and fees may be claimed for 2013, but the same expenses cannot be used for this deduction and education credits. Up to $2,500 can be deducted per year for qualified education loan interest.  Going to college can be a stressful time for students and parents. In recent years, Congress has provided a variety of tax incentives to help defray the cost of education. Some require long-term planning to become beneficial, while others provide current tax deductions or credits. The benefits may even cover vocational schools. If your child is below college age, there are tax-advantaged plans that allow you to save for the cost of college. Although providing no tax benefit for contributions to the plans, they do provide tax-free accumulation; so the earlier they are established, the more you benefit from them. Section 529 Plans - Section 529 Plans (named after the section of the IRS Code that created them) are plans established to help families save and pay for college in a tax-advantaged way and are available to everyone, regardless of income. These state-sponsored plans allow you to gift large sums of money for a family member's college education while maintaining control of the funds. The earnings from these accounts grow tax-deferred and are tax-free, if used to pay for qualified higher education expenses. They can be used as an estate-planning tool as well, providing a means to transfer large amounts of money without gift tax. With all these tax benefits, 529 Plans are an excellent vehicle for college funding. Section 529 Plans come in two types, allowing you to either save funds in a tax-free account to be used later for higher education costs, or to prepay tuition for qualified universities. For 2013, you can contribute $14,000 without gift tax implications (or $28,000 for married couples who agree to split their gift). The annual amount is subject to inflation-adjustment. There is also a special gift provision allowing the donor to prepay five years of gifts up front without gift tax. Coverdell Education Savings Account - These accounts are actually education trusts that allow nondeductible contributions to be invested for a child's education. Tax on earnings from these accounts is deferred until the funds are withdrawn, and if used for qualified education purposes, the entire withdrawal can be tax-free. Qualified use of these funds includes elementary and secondary education expenses in addition to post-secondary schools (colleges). This is the only one of the educational tax benefits that allows tax-free use of the funds for below college-level expenses. A total of $2,000 per year can be contributed for each beneficiary under the age of 18. The ability to contribute to these plans phases out when the modified adjusted gross income is between $190,000 and $220,000 for married taxpayers filing jointly, and between $95,000 and $110,000 for all others. Education Tax Credits - Two tax credits, the American Opportunity Credit (partially refundable) and the Lifetime Learning Credit (nonrefundable), are available for qualified post-secondary education expenses for a taxpayer, spouse, and eligible dependents. Both credits will reduce one's tax liability dollar for dollar until the tax reaches zero. The credit is not allowed for taxpayers who file Married Separate returns. o The American Opportunity Credit - is a credit of up to $2,500 per student per year, covering the first four years of qualified post-secondary education. The credit is 100% of the first $2,000 of qualifying expenses plus 25% of the next $2,000 for a student attending college on at least a half-time basis. Forty percent of the American Opportunity credit is refundable (if the tax liability is reduced to zero.) This credit phases out for joint filing taxpayers with modified adjusted gross income between $160,000 and $180,000, and between $80,000 and $90,000 for others. o The Lifetime Learning Credit - is a credit of up to 20% of the first $10,000 of qualifying higher education expenses. Unlike the American Opportunity Credit, which is on a per-student basis, this credit is per taxpayer. In addition to post-secondary education, the Lifetime Credit applies to any course of instruction at an eligible institution taken to acquire or improve job skills. This credit phases out for joint filing taxpayers with modified adjusted gross income between $107,000 and $127,000, and between $53,000 and $63,000 for others. The credit is not allowed for taxpayers who file Married Separate returns. Qualifying expenses for these credits are generally limited to tuition. However, student activity fees and fees for course-related books, supplies, and equipment qualify if they must be paid directly to the educational institution for the enrollment or attendance of the student. You may qualify for this credit even if you did not pay the tuition. If a third party (someone other than the taxpayer or a claimed dependent) makes a payment directly to an eligible educational institution for a student's qualified tuition and related expenses, the student would be treated as having received the payment from the third party, and, in turn, pay the qualified tuition and related expenses. Furthermore, qualified tuition and related expenses paid by a student would be treated as paid by the taxpayer if the student is a claimed dependent of the taxpayer. Tuition and Fees Deduction - Up to $4,000 of qualified tuition and related expenses for higher education may be deducted as a direct reduction of income without having to itemize deductions. If your modified adjusted gross income (MAGI) is $65,000 or less ($130,000 or less if filing a joint return), the deduction is capped at $4,000, but if MAGI exceeds these amounts and is no more than $80,000 ($160,000 joint), the deduction is limited to a maximum of $2,000. If your MAGI is above $80,000 ($160,000 joint), or you file as Married Separate, no deduction is allowed. The same expenses cannot be used to qualify for one of the education credits and the tuition and fees deduction, and no deduction is allowed if the tuition and related expenses were paid with tax-free distributions of earnings from a Sec. 529 plan or a Coverdell education savings account. Unless extended by Congress, 2013 will be the last year that this deduction may be claimed. Education Loan Interest - You can deduct qualified interest of $2,500 per year in computing AGI. This is not limited to government student loans and this could include home equity loans, credit card debt, etc., if the debt was incurred solely to pay for qualified higher education expenses. For 2013, this deduction phases out for married taxpayers with an AGI between $125,000 and $155,000 and for unmarried taxpayers between $60,000 and $75,000. This deduction is not allowed for taxpayers who file married separate returns. We all know that a child's success in life has a great deal to do with the education they receive. You cannot start the planning process too early. Please call this office if you would like assistance in planning for your children's future education. Thu, 12 Sep 2013 19:00:00 GMT Preparing for the New Surtax http://www.messnerandhadley.com/blog/preparing-for-the-new-surtax/37696 http://www.messnerandhadley.com/blog/preparing-for-the-new-surtax/37696 Messner & Hadley LLP As part of the Affordable Care Act (the new health care legislation), a new tax kicks in this year. The official name of this tax is the Unearned Income Medicare Contribution Tax, and even though the name implies it is a contribution, don’t get the idea that it is voluntary or that you can deduct it as a charitable contribution. It is actually a surtax levied on the net investment income of taxpayers in the higher income brackets. And although it is perceived as an additional tax on higher-income taxpayers, it can affect even those who normally don’t have higher income if they have a large income from the sale of real estate, stocks, or other investments. The surtax is 3.8% on whichever is less: your net investment income or the excess of your modified adjusted gross income (MAGI) over a threshold based on your filing status. Net investment income is your investment income reduced by investment expenses; MAGI is your regular AGI increased by income excluded for working out of the country. The filing status threshold amounts are: $250,000 for married taxpayers filing jointly and surviving spouses. $125,000 for married taxpayers filing separately. $200,000 for single and head-of-household filers. Example: A single taxpayer has net investment income of $100,000 and MAGI of $220,000. The taxpayer would pay a Medicare contribution tax only on the $20,000 amount by which his MAGI exceeds his threshold amount of $200,000, because that is less than his net investment income of $100,000. Thus, the taxpayer’s Medicare contribution tax would be $760 ($20,000 × 3.8%). Investment income includes: Interest, dividends, annuities (but not distributions from IRAs or qualified retirement plans), and royalties, Rents (other than derived from a trade or business), Capital gains (other than derived from a trade or business), Home-sale gain in excess of the allowable home-gain exclusion, A child’s investment income in excess of the excludable threshold if, when eligible, the parent elects to include the child’s investment income on the parent’s return, Trade or business income that is a passive activity with respect to the taxpayer, and Trade or business income with respect to trading financial instruments or commodities. Planning Note: For surtax purposes, gross income doesn’t include interest on tax-exempt bonds. Thus, one can avoid or reduce the net investment income surtax by investing in tax-exempt bonds. Investment expenses include: Investment interest expense, Investment advisory and brokerage fees, Expenses related to rental and royalty income, and State and local income taxes properly allocable to items included in Net Investment Income. Do you think you will never get hit with this tax because your income is way under the threshold amounts? Don’t be so sure. When you sell your home, the gain is a capital gain, and to the extent that the gain is not excludable using the home-gain exclusion, it will add to your income and possibly push you above the taxation thresholds. And, since capital gains are investment income, you might be in for a surprise. The same holds true for gains from selling stock, a second home, or a rental. So when planning to sell a capital asset, be sure to consider the impact of this new surtax. The surtax also applies to the undistributed net investment income of trusts and estates, and there are special rules applying to the sale of partnership and Sub-S Corporation interests. Example: A taxpayer has owned a residential rental property for a number of years, planning to use the rental’s increased value to help fund his retirement. The taxpayer normally has income well below the threshold for this new tax. The taxpayer sells the rental and has a substantial gain. The gain from the rental sale gives the taxpayer a one-time windfall that pushes his income above the threshold for the new tax, and he ends up having to pay the regular capital gains tax plus an additional 3.8% tax on the appreciation that is attributable to the increase in value that occurred over several years. If this surtax will apply to you in 2013, you may need to increase your income tax withholding or estimated tax payments to cover the additional tax so you can avoid or minimize an underpayment of estimated tax penalty when you file your 2013 return. Example: A taxpayer has owned a residential rental property for a number of years, planning to use the rental’s increased value to help fund his retirement. The taxpayer normally has income well below the threshold for this new tax. The taxpayer sells the rental and has a substantial gain. The gain from the rental sale gives the taxpayer a one-time windfall that pushes his income above the threshold for the new tax, and he ends up having to pay the regular capital gains tax plus an additional 3.8% tax on the appreciation that is attributable to the increase in value that occurred over several years. If your income normally exceeds the threshold for this new tax, or you have or are contemplating a large capital gain and would like to explore options to mitigate the impact of the tax, please give this office a call. Tue, 10 Sep 2013 19:00:00 GMT So You Want To Deduct Your Gambling Losses? http://www.messnerandhadley.com/blog/so-you-want-to-deduct-your-gambling-losses/37648 http://www.messnerandhadley.com/blog/so-you-want-to-deduct-your-gambling-losses/37648 Messner & Hadley LLP Article Highlights Gambling winnings must be reported as taxable income. Gambling losses may be deducted as an itemized deduction. Losses cannot exceed winnings. Losses must be documented. Winnings must include all winnings not just those shown on a W-2G. Good news...You can! However, the bad news is that gambling losses are only deductible up to the amount of your winnings. This means that you can use your losses to offset your winnings, but you can never show a net gambling loss on your tax return. Gambling losses are only deductible as a miscellaneous itemized deduction, so you must itemize your deductions in order to claim the deduction. Even better news is that gambling losses are not subject to either the 2% of AGI reduction of miscellaneous deductions or the phase out of itemized deductions for high-income taxpayers. Form W-2G is issued by a casino or other payer to some lucky winners with a copy going to the IRS. Generally, only winners of the following types of gambling activities will be issued a W-2G: bingo or slot machine players who win $1,200 or more, keno winners of $1,500 or more, gamblers in other activities who win $600 or more when the payout is 300 times or more of the wager amount, and poker tournament players winning $5,000 or more. Sometimes federal income tax is withheld on the winnings; in that case a W-2G is issued regardless of the type of gambling activity. Many casual gamblers have the belief that they need only count as winnings those reported on a Form W-2G. Unfortunately that is not true; tax law requires all winnings to be reported whether or not included in a W-2G. This is a frequent issue when the IRS chooses to audit a return where the losses offset the winnings but only winnings included in the W-2G are being reported. The next logical question is how are gambling losses documented? Don’t rush down to the track and start collecting discarded tickets, since they generally aren’t acceptable documentation because of their ready availability. The IRS has published guidelines on what is acceptable documentation to verify losses. They indicate that an accurate diary or similar record regularly maintained by the taxpayer, supplemented by verifiable documentation, will usually be acceptable evidence for substantiation of wagering winnings and losses. In general, that diary should contain at least the following information: Date and type of specific wager or wagering activity, Name of gambling establishment, Address or location of gambling establishment, Names of other persons (if any) present with taxpayer at the gambling establishment, and Amounts won or lost. Save all available documentation including such items as losing tickets, canceled checks, and casino credit slips. You should also save any related documentation such as hotel bills, plane tickets, entry tickets and other items that would document your presence at a gambling location. (Sorry, but the costs for lodging and meals while gambling, even for winners, aren’t deductible.) If you are a member of a slot club, the casino may be able to provide a record of your play. You might also obtain affidavits from responsible gambling officials at the gambling facility. If you are a meticulous record keeper, the IRS recognizes the concept of gambling sessions that allows you to net the gains and losses during a particular gambling session. However, a gambling session is very limited in scope. It must be the same type of uninterrupted wagering during a specific uninterrupted period of time at a specific location. Thus if a taxpayer entered a casino and played slots for an hour and then switched to craps for the next hour, that would be two separate gambling sessions. If a taxpayer entered Casino #1 and played slots for an hour and then went to Casino #2 and continued to play slots, that would be two separate gambling activities since two locations were involved. The following are two examples using the gambling sessions concept: Example - A casual gambler who enters a casino with $100 and redeems his or her tokens for $300 after playing the slot machines has a wagering gain of $200 ($300 - $100). This is true even though the taxpayer may have had $1,000 in winning spins and $700 in losing spins during the course of play. Example - A casual gambler who enters a casino with $100 and loses the entire amount after playing the slot machines has a wagering loss of $100, even though he may have had winning spins of $1,000 and losing spins of $1,100 during the course of play. With regard to specific wagering transactions, winnings and losses might be further supported by: Keno - Copies of keno tickets purchased by the taxpayer and validated by the gambling establishment. Slot Machines - A record of all winnings by date and time that the machine was played. Table Games -The number of the table at which the taxpayer was playing. Casino credit card data indicating whether credit was issued in the pit or at the cashier's cage. Bingo - A record of the number of games played, cost of tickets purchased and amounts collected on winning tickets. Racing - A record of the races, entries, amounts of wagers, and amounts collected on winning tickets and lost on losing tickets. Supplemental records include unredeemed tickets and payment records from the racetrack. Lotteries - A record of ticket purchase dates, winnings and losses. Supplemental records include unredeemed tickets, payment slips and winning statements. One final tip: the deductions you claim for gambling losses do not have to be for the same type of wagering activity for which you have gambling winnings. For example, say for the year you won $800, all from a slot machine jackpot, and you have documentation to support $300 of slot machine losses. You also spent $50 per month buying lottery tickets, but had no winners, and have the records to substantiate your lottery ticket purchases. You would be able to deduct $800 of gambling losses, which includes $300 of slot losses plus $500 of the $600 of lottery losses. Your total gambling deduction is limited to $800, the amount of your winnings. If you had a big win, are concerned about your tax liability, or have any questions related to gambling winnings or losses, please give this office a call. Thu, 05 Sep 2013 19:00:00 GMT September 2013 Individual Due Dates http://www.messnerandhadley.com/blog/september-2013-individual-due-dates/33942 http://www.messnerandhadley.com/blog/september-2013-individual-due-dates/33942 Messner & Hadley LLP September 1 - 2013 Fall and 2014 Tax Planning Contact this office to schedule a consultation appointment. September 10 - Report Tips to Employer If you are an employee who works for tips and received more than $20 in tips during August, you are required to report them to your employer on IRS Form 4070 no later than September 10. Your employer is required to withhold FICA taxes and income tax withholding for these tips from your regular wages. If your regular wages are insufficient to cover the FICA and tax withholding, the employer will report the amount of the uncollected withholding in box 12 of your W-2 for the year. You will be required to pay the uncollected withholding when your return for the year is filed.September 16 - Estimated Tax Payment Due The third installment of 2013 individual estimated taxes is due. Our tax system is a “pay-as-you-go” system. To facilitate that concept, the government has provided several means of assisting taxpayers in meeting the “pay-as-you-go” requirement. These include: Payroll withholding for employees; Pension withholding for retirees; and Estimated tax payments for self-employed individuals and those with other sources of income not covered by withholding. When a taxpayer fails to prepay a safe harbor (minimum) amount, they can be subject to the underpayment penalty. This penalty is equal to the federal short-term rate plus 3 percentage points, and the penalty is computed on a quarter-by-quarter basis. Federal tax law does provide ways to avoid the underpayment penalty. If the underpayment is less than the $1,000 de-minimis amount, no penalty is assessed. In addition, the law provides "safe harbor" prepayments. There are two safe harbors: The first safe harbor is based on the tax owed in the current year. If your payments equal or exceed 90% of what is owed in the current year, you can escape a penalty. The second safe harbor is based on the tax owed in the immediately preceding tax year. This safe harbor is generally 100% of the prior year's tax liability. However, for higher-income taxpayers whose AGI exceeds $150,000 ($75,000 for married taxpayers filing separately), the prior year's safe harbor is 110%. Example: Suppose your tax for the year is $10,000 and your prepayments total $5,600. The result is that you owe an additional $4,400 on your tax return. To find out if you owe a penalty, see if you meet the first safe harbor exception. Since 90% of $10,000 is $9,000, your prepayments fell short of the mark. You can't avoid the penalty under this exception. However, in the above example, the safe harbor may still apply. Assume your prior year's tax was $5,000. Since you prepaid $5,600, which is greater than the 110% of the prior year's tax (110% = $5,500), you qualify for this safe harbor and can escape the penalty. This example underscores the importance of making sure your prepayments are adequate, especially if you have a large increase in income. This is common when there is a large gain from the sale of stocks, sale of property, when large bonuses are paid, when a taxpayer retires, etc. Timely payment of each required estimated tax installment is also a requirement to meet the safe harbor exception to the penalty. If you have questions regarding your safe harbor estimates, please call this office as soon as possible. CAUTION: Some state de-minimis amounts and safe harbor estimate rules are different than those for the Federal estimates. Please call this office for particular state safe harbor rules. Fri, 23 Aug 2013 19:00:00 GMT September 2013 Business Due Dates http://www.messnerandhadley.com/blog/september-2013-business-due-dates/33943 http://www.messnerandhadley.com/blog/september-2013-business-due-dates/33943 Messner & Hadley LLP September 16 - Corporations File a 2012 calendar year income tax return (Form 1120 or 1120-A) and pay any tax, interest, and penalties due. This due date applies only if you timely requested an automatic 6-month extension. September 16 - S Corporations File a 2012 calendar year income tax return (Form 1120S) and pay any tax due. This due date applies only if you requested an automatic 6-month extension. September 16 - Corporations Deposit the third installment of estimated income tax for 2013 for calendar year corporations. September 16 - Social Security, Medicare and withheld income tax If the monthly deposit rule applies, deposit the tax for payments in August. September 16 - Nonpayroll Withholding If the monthly deposit rule applies, deposit the tax for payments in August. September 16 - Partnerships File a 2012 calendar year return (Form 1065). This due date applies only if you were given an additional 5-month extension. Provide each partner with a copy of K-1 (Form 1065) or a substitute Schedule K-1.September 16 - Fiduciaries of Estates and Trusts File a 2012 calendar year return (Form 1041). This due date applies only if you were given an additional 5-month extension. If applicable, provide each beneficiary with a copy of K-1 (Form 1041) or a substitute Schedule K-1. Fri, 23 Aug 2013 19:00:00 GMT Who Gets Your IRA http://www.messnerandhadley.com/blog/who-gets-your-ira/37563 http://www.messnerandhadley.com/blog/who-gets-your-ira/37563 Messner & Hadley LLP The designated beneficiary listed on your IRA account beneficiary form determines who gets your IRA. This is true even if your will or trust names different beneficiaries. You may have filled out that beneficiary form long ago and no longer remember who you designated as your beneficiary. Perhaps your family circumstances or marital status have changed. Whenever your family circumstances change, you need to review your beneficiary designations. You may have named an ex-spouse as your beneficiary and now may not want him or her to receive your IRA. If you are recently remarried and want your IRA account to go to your children, your new spouse may have to sign a waiver of rights to your retirement benefits. Otherwise, the IRA might go automatically to your new spouse. This is also generally true for employer plan benefits. If you have a trust and want the IRA proceeds to go to the trust, then you need to name the trust as the beneficiary. There is no tax advantage to naming a trust as the beneficiary of an IRA. Of course, there may be a non-tax-related reason, such as controlling a beneficiary’s access to the money; thus, naming a trust rather than one or more individuals to inherit the IRA could achieve that goal. However, that is not typically the case. Naming a trust as the beneficiary of an IRA eliminates the ability for multiple beneficiaries to maximize the opportunity to stretch the required minimum distributions (RMDs) over their individual life expectancies. Worse yet is if your IRA does not have a designated beneficiary. When there is no beneficiary form on file, you are really rolling the dice. Your retirement assets will go to whomever the IRA trustee has named for you in the default language in the documents for the account. When you fill out the beneficiary designation form, you have the opportunity to also designate one or more contingent beneficiaries who will inherit the IRA if the primary beneficiary has passed away before you do. For example, you could name your spouse as the primary beneficiary and your child and brother as next in line if your spouse pre-deceases you. This is a safety net of sorts in case you don’t get around to changing the primary beneficiary after that person passes away. Don’t take chances; make sure your IRA beneficiary designations are up to date and correctly specify who you want to get your IRA in the event of your death. Call this office if you have any questions. Fri, 23 Aug 2013 19:00:00 GMT Partnership, S-Corp and Trust Extensions End September 16 http://www.messnerandhadley.com/blog/partnership-s-corp-and-trust-extensions-end-september-16/37564 http://www.messnerandhadley.com/blog/partnership-s-corp-and-trust-extensions-end-september-16/37564 Messner & Hadley LLP Article Highlights September 16 is the extended due date for partnership, S-corporation, and trust tax returns. Late-filing penalty for partnerships and S-corporations is $195 times the number of partners or shareholders during any part of the taxable year, for each month or fraction of a month. Late-filing penalty for trust returns is 5% of the tax due for each month, or part of a month, for which a return is not filed up to a maximum of 25% of the tax due. If you have a calendar year 2012 partnership, S-corporation, or trust return on extension, don't forget the extension for filing those returns ends on September 16, 2013. Pass-through entities such as Partnerships, S-corporations, and fiduciaries (trusts, estates) pass their income, deductions, credits, etc., through to their investors, partners, or beneficiaries, who in turn report the various items on their individual tax returns. Partnerships file Form 1065, S-corps file Form 1120-S, and Fiduciaries file Form 1041, with each partner, shareholder, or beneficiary receiving a Schedule K-1 from the entity that shows their share of the reportable items. If all of the aforementioned entities could obtain an automatic extension to file their returns on the same extended date as allowed to individuals, it would be difficult for individuals to meet the filing deadline without estimating the pass-through information and then later filing an amended return when the actual data was received. To overcome this problem, the automatic extension period for partnerships and trusts is set at 5 months, thus providing individual taxpayers with a month's grace period to complete their individual 1040 returns. The original due date for calendar year S-corporation returns was March 15, and they are allowed a 6-month extension period, making the due date for these returns also September 16. Thus, individual S-corp shareholders also have a month to finish up their individual returns. An S-corporation or partnership which fails to file on time is liable for a monthly penalty equal to $195 times the number of persons who were partners, or shareholders for S corps, during any part of the taxable year, for each month or fraction of a month for which the failure continues. These penalties can be substantial. Trusts are subject to a penalty of 5% of the tax due for each month, or part of a month, for which a return is not filed up to a maximum of 25% of the tax due. If this office is waiting for some missing information to complete your pass-through return, we will need that information at least a week before the September 16 due date. The late-filing penalties are substantial, so please call this office immediately if there are anticipated complications related to providing the needed information so a course of action can be determined to avoid the potential penalties. Fri, 23 Aug 2013 19:00:00 GMT 25 Accounting Terms You Should Know http://www.messnerandhadley.com/blog/25-accounting-terms-you-should-know/37565 http://www.messnerandhadley.com/blog/25-accounting-terms-you-should-know/37565 Messner & Hadley LLP It's back-to-school time. Why not take a page from the kids' books and do some learning of your own? QuickBooks is easy to use, intuitive and flexible. But it is not an accounting manual or class or tutorial. If your business is exceptionally uncomplicated, you might get by without knowing a lot about the principles of bookkeeping. Still, it helps to understand the basics. Here's a look at some terms and phrases you should understand. Account. You'll set up financial accounts like checking and savings in QuickBooks, but in accounting terms, this refers to the accounts in your Chart of Accounts: asset, liability, owners' equity, income and expense. Figure 1: A QuickBooks Chart of Accounts Accounts Payable (A/P). Everything that you owe to vendors, contractors, consultants, etc. is tracked in this account. Accounts Receivable (A/R). This account tracks income that hasn't been realized yet, like outstanding invoices. Accrual Basis. This is one of two basic accounting methods. Using it, you record income as it is invoiced, not when it's actually received, and you records expenses like bills when you receive them. Using the other method, Cash Basis, you would report income when you receive it and expenses when you pay the bills. Asset. What physical items do you own that have value? This could be cash, office equipment and real estate. In QuickBooks you'll be managing two types. Current Assets are generally used within 12 months (or you could convert them to cash in that length of time). Fixed Assets refers to belongings like vehicles, furniture and land, property that you probably won't use up in a year and which usually depreciates in value. Depreciation is very complex; you may need our help with that. Average Cost. This is the inventory costing method that programs like QuickBooks Pro and Premier use to calculate the value of your stock. Figure 2: QuickBooks provides a Statement of Cash Flows report. Cash Flow. This refers to the relationship between incoming and outgoing funds during a specific time period. Double-Entry Accounting. This is the system that QuickBooks uses - that all legitimate small business accounting software uses. Every transaction must show where the funds came from and where they went. Each has a Credit (decreases asset and expense accounts) and Debit (decreases liability and income accounts) which must balance out (other types of accounts can be affected).Equity. This refers to your company's net worth. It's the difference between your assets and liabilities. General Journal. QuickBooks handles this in the background, so it's unlikely you'll ever be exposed to it. We sometimes have to create General Journal Entries, transactions required for various reasons (errors, depreciation, etc.) that contain debits and credits. Please leave that to us. Item Receipt. You'll create these when you receive inventory from a vendor without a bill. Job. QuickBooks often associates customers with multi-part projects that you've taken on, like a kitchen remodel. Net income. This is your revenue minus expenses. Non-Inventory Part. When you purchase an item but don't sell it or you buy something and resell it immediately to a customer, this is what it's called. It's merchandise that isn't stored by you for future sales. Payroll Liabilities Account. QuickBooks tracks federal, state and local withholding taxes, as well as Social Security and Medicare obligations, that you've deducted from employees' paychecks and will remit to the appropriate agencies. Figure 3: QuickBooks helps you track and remit Payroll Liabilities. Post. You won't run into this term in QuickBooks. It simply refers to recording a transaction within one of your accounts. Reconcile. QuickBooks helps you with this. It's the process of making sure your records and those of your financial institutions agree. Sales Receipt. This is how you record a sale when payment is made in full during the transaction. Statement. You'll generally use invoices to bill customers in QuickBooks, but you can also send statements, which contain transaction information for a given date range. Trial Balance. This standard financial report tells you whether your debits and credits are in balance. Should you run this report and find a problem, let us know right away. Vendor. With the exception of employees, QuickBooks uses this term to refer to anyone who you pay as a part of your business operations. These are just a few of the terms you should recognize and understand. We hope you'll contact us when you need help understanding how the accounting process fits into your workflow. Fri, 23 Aug 2013 19:00:00 GMT Tips for Employers Who Outsource Payroll Duties http://www.messnerandhadley.com/blog/tips-for-employers-who-outsource-payroll-duties/37547 http://www.messnerandhadley.com/blog/tips-for-employers-who-outsource-payroll-duties/37547 Messner & Hadley LLP Many employers outsource their payroll and related tax duties to third-party payers such as payroll service providers and reporting agents. Reputable third-party payers can help employers streamline their business operations by collecting and timely depositing payroll taxes on the employer's behalf and filing required payroll tax returns with state and federal authorities. Though most of these businesses provide very good service, there are, unfortunately, some who do not have their clients' best interests at heart. Over the past few months, a number of these individuals and companies around the country have been prosecuted for stealing funds intended for the payment of payroll taxes. Examples of these successful prosecutions can be found on IRS.gov. Like employers who handle their own payroll duties, employers who outsource this function are still legally responsible for any and all payroll taxes due. This includes any federal income taxes withheld as well as both the employer and employee's share of social security and Medicare taxes. This is true even if the employer forwards tax amounts to a PSP or RA to make the required deposits or payments. For an overview of how the duties and obligations of agents, reporting agents and payroll service providers differ from one another, see the Third Party Arrangement Chart on IRS.gov. Here are some steps employers can take to protect themselves from unscrupulous third-party payers. Enroll in the Electronic Federal Tax Payment System and make sure the PSP or RA uses EFTPS to make tax deposits. Available free from the Treasury Department, EFTPS gives employers safe and easy online access to their payment history when deposits are made under their Employer Identification Number, enabling them to monitor whether their third-party payer is properly carrying out their tax deposit responsibilities. It also gives them the option of making any missed deposits themselves, as well as paying other individual and business taxes electronically, either online or by phone. To enroll or for more information, call toll-free 800-555-4477or visit www.eftps.gov. Refrain from substituting the third-party's address for the employer's address. Though employers are allowed to and have the option of making or agreeing to such a change, the IRS recommends that employer's continue to use their own address as the address on record with the tax agency. Doing so ensures that the employer will continue to receive bills, notices and other account-related correspondence from the IRS. It also gives employers a way to monitor the third-party payer and easily spot any improper diversion of funds. Contact the IRS about any bills or notices and do so as soon as possible. This is especially important if it involves a payment that the employer believes was made or should have been made by a third-party payer. Call the number on the bill, write to the IRS office that sent the bill, contact the IRS business tax hotline at 800-829-4933 or visit a local IRS office. See Receiving a Bill from the IRS on IRS.gov for more information. For employers who choose to use a reporting agent, be aware of the special rules that apply to RAs. Among other things, reporting agents are generally required to use EFTPS and file payroll tax returns electronically. They are also required to provide employers with a written statement detailing the employer's responsibilities including a reminder that the employer, not the reporting agent, is still legally required to timely file returns and pay any tax due. This statement must be provided upon entering into a contract with the employer and at least quarterly after that. See Reporting Agents File on IRS.gov for more information. Become familiar with the tax due dates that apply to employers, and use the Small Business Tax Calendar to keep track of these key dates. The key issue here is that you, the employer, are ultimately responsible for the payments even if the third party agent misappropriates the funds. Please call this office if you have any questions. Thu, 22 Aug 2013 19:00:00 GMT Tax Benefits for Military Personnel http://www.messnerandhadley.com/blog/tax-benefits-for-military-personnel/37523 http://www.messnerandhadley.com/blog/tax-benefits-for-military-personnel/37523 Messner & Hadley LLP If you're a member of the U.S. Armed Forces, there are many tax benefits that may apply to you. Special tax rules apply to military members on active duty, including those serving in combat zones. These rules can help lower your federal taxes and make it easier to file your tax return. Here are some of the more prominent of those benefits: Combat Pay Exclusion - If you are an enlisted member of the military serving in a combat zone you can exclude from taxation your pay for any month (one day of a month counts as a full month) you serve in a combat zone. An officer's exclusion is limited to the highest rate for enlisted personnel. This exclusion is automatically computed by the military and the excludable amounts will not appear on your W-2 form. If you qualify for an Earned Income Tax Credit (EITC) you may elect to include or not include the excluded combat pay in the EITC computation, thus allowing you the benefit of maximizing the credit with or without the exclusion while the excluded income remains tax free. Moving Expenses - To deduct moving expenses, a military taxpayer usually must meet the general time and distance tests that apply to all taxpayers. However, if you are on active duty and move because of a permanent change of station, you do not need to meet those tests. A permanent change of station includes: a move from the military member's home to his or her first post of active duty, a move from one permanent post of duty to another, and a move from the last post of duty to the member's home or to a nearer point in the United States. The move must generally occur within one year of ending active duty service.Reservists' Travel Deduction - If you are an Armed Forces reservist who travels more than 100 miles away from home and stays overnight in connection with service as a member of a reserve component, you can deduct travel expenses as an adjustment to gross income. This is in lieu of deducting those expenses as a miscellaneous itemized deduction (subject to the 2% of AGI limitation). Thus, you can take this deduction even if you do not itemize your deductions. The deduction includes unreimbursed expenses for transportation, meals (subject to the 50% limit), and lodging, but the deduction is limited to the amount the federal government pays its employees for travel expenses. Combat Zone and Qualified Hazardous Duty Area Extensions - For military taxpayers in a combat zone or qualified hazardous duty area, the deadlines for taking actions with the IRS are extended. The extension is for 180 consecutive days after the last day the military taxpayer was in a combat zone or qualified hazardous duty area or the last day of any continuous qualified hospitalization for injury from service in the combat zone or qualified hazardous duty area. In addition, the 180 days is also extended by the number of days that were left for the individual to take an action with the IRS when they entered a combat zone or qualified hazardous duty area. Extension To Pay Tax When Not In a Combat Zone - A member of the Armed Forces may delay payment of income tax (but not the employee's share of Social Security and Medicare taxes) that becomes due before or during military service. To qualify, the service member must be performing “military service” AND notify the IRS in writing that his or her ability to pay the income tax is materially affected by the military service. If the IRS approves the request, the service member will be allowed up to 180 days after termination or release from military service to pay the tax. If the tax is paid in full by the end of the deferral period, no interest or penalty will be charged for that period. Home Mortgage Interest & Taxes - You can deduct qualified mortgage interest and real estate taxes as an itemized deduction, even if they are paid with nontaxable military housing allowance pay. The home mortgage interest is, however, still subject to the general rules for deducting home mortgage interest. Home Sale Gain Exclusion - Taxpayers are allowed to exclude $250,000 ($500,000 if filing a joint return with a spouse and both qualify) of gain from a home sale if it was owned and used as a principal residence for two of the five years prior to the sale. The following special rules apply to military personnel: Reduced exclusion - If you sell your primary residence and do not meet the two-out-of-five-years ownership and use tests due to a move to a new permanent duty station, you may qualify for a reduced maximum exclusion amount. Extended test period - You may choose to suspend the 5-year test period for ownership and use during any period you serve on qualified official extended duty. The period of suspension cannot last more than 10 years and cannot be suspended for more than one property at a time. Uniform Deduction - If you itemize your deductions you can deduct the costs and upkeep of certain uniforms that regulations prohibit you from wearing while off duty. However, you must reduce your deduction by any reimbursement you receive for these costs. Signing Joint Returns - Both spouses normally must sign joint income tax returns. However, when one spouse is unavailable due to certain military duties or conditions, the other may, in some cases, sign for both spouses, or will need a power of attorney to file a joint return. If you have questions related to these and other benefits provided to members of the military, please give this office a call. Tue, 20 Aug 2013 19:00:00 GMT Claiming the Child and Dependent Care Tax Credit http://www.messnerandhadley.com/blog/claiming-the-child-and-dependent-care-tax-credit/37494 http://www.messnerandhadley.com/blog/claiming-the-child-and-dependent-care-tax-credit/37494 Messner & Hadley LLP The Child and Dependent Care Credit can help offset some of the costs you pay for the care of your child, a dependent, or disabled spouse. Here are some facts you may need to know about this tax credit. If you pay someone to care for one or more “qualifying individuals,” you may qualify for the Child and Dependent Care Credit. A qualifying individual includes your child under age 13. It also includes your spouse or a dependent who lived with you for more than half the year and was physically or mentally incapable of self-care. The care must be provided so that you can work or look for work. If you are married and filing jointly, the care must be provided so that both of you can work or look for work. In addition, you must have both earned income (both must have earned income if married and filing jointly, but see the exception below), such as income from a job or profits from self-employment. An exception applies if a spouse is a student or is unable to care for him- or herself. In that case a monthly imputed amount is used for earned income. That amount is $250 for one qualifying person and $500 for two or more. Example: Bob and Jerry, who are married and filing jointly, have two children under the age of 13. Jerry worked all year while Bob attended school all year finishing up his college education. For purposes of computing the credit, Bob would use $6,000 as his income. The payments for care cannot go to your spouse, the parent of your qualifying person, or to someone you can claim as a dependent on your return. Payments also cannot go to your child who is under age 19, even if the child is not your dependent. This credit is a percentage, ranging from 20% to 35%, of your qualifying costs for care, depending upon your income. When figuring the amount of your credit, you can claim up to $3,000 of your total costs if you have one qualifying individual. If you have two or more qualifying individuals, you can claim up to $6,000 of your costs. Taxpayers with an AGI of $15,000 or less use the 35% credit rate, while those with an AGI over $43,000 use the 20% rate. The credit rate declines between AGIs of $15,000 and $43,000. If your employer provides dependent care benefits, those benefits are pre-tax and will reduce the $3,000 and $6,000 cap on expenses for computing the credit. If you and your spouse have dependent care benefits at work and your employer contributes more than the $3,000 expense limit for one qualifying individual or $6,000 for two, then the amounts contributed in excess of the $3,000/$6,000 limits will be taxable on your return. You must include the name, address, and Social Security number (individuals) or Employer Identification Number (businesses) of your care providers on your tax return. Where the care is provided in your home, the caregiver will generally be considered your employee. Unless you are using a caregiver service that handles the employee's payroll, you may need to pay unemployment tax, your share of the employee's FICA, and file state payroll returns, depending on the amount you paid the caregiver(s). The IRS will usually check on this if auditing the credit. Of course, the payroll taxes you pay will count as childcare expenses. The credit is a non-refundable credit that can be used to offset both your regular tax and your alternative minimum tax; but if the amount of the credit is greater than your tax, you cannot get a refund of the difference.  If you have questions related to how this credit applies to your specific situation, please give this office a call. Thu, 15 Aug 2013 19:00:00 GMT Who Claims The Child? http://www.messnerandhadley.com/blog/who-claims-the-child/37461 http://www.messnerandhadley.com/blog/who-claims-the-child/37461 Messner & Hadley LLP Claiming a child can provide significant tax benefits. When couples divorce or separate, or even if the parents were never married, the question arises: who gets to claim the kids? This sometimes presents a nightmare for tax preparers. This is because often both parents will claim the same child, and in this modern era of e-filing, the first one to file and claim the child will be accepted for e-file and the second to file will be rejected regardless of who is rightfully entitled to claim the child. If the second parent to file is legally eligible to claim the child, then that parent must file a paper return and provide proof of eligibility to claim the child's exemption. This sometimes requires an elaborate array of documentation and can be quite a pain. Another leading cause of problems are family court judges who will award the child's tax exemption to the parent who is not qualified to claim the child under federal tax law. Rulings by family court judges cannot trump federal tax laws. So, who legally, according to federal tax law, is entitled to claim the child? Well, the Internal Revenue Code says the parent with whom the child resided for the longer period of time during the tax year gets to claim the child's exemption. This seems simple enough, but some parents have joint custody and they begin counting time by the hour and minute. However, when it comes to determining with whom the child resided the longest, the IRS looks at the number of nights the child sleeps in each parent's home. If that turns out to be an equal number of nights, the tax rules include a tiebreaker that gives the child's exemption to the parent with the higher adjusted gross income (AGI). However, a child is treated as the qualifying child of the noncustodial parent if the custodial parent releases a claim to the exemption to the non-custodial parent. The custodial parent can do this on an annual basis or for multiple years. However, the custodial parent should be cautious about releasing the exemption for multiple years. The release can be revoked but the revocation does not become effective until the tax year following the year the non-custodial parent was provided a copy of the revocation. The IRS provides Form 8332, Release/Revocation of Release of Claim to Exemption for Child by Custodial Parent, for this purpose. A number of tax benefits are at stake by claiming the child, including: The child's exemption that produces a $3,900 tax deduction in 2013. A potential $1,000 child credit for children under the age of 17. For children attending college, the education credit (up to as much as $2,500) goes to the parent who claims the child's exemption regardless of who pays the tuition. For children under age 13 the parent that claims the child's exemption is the one that gets to claim a tax credit for childcare expenses while working. Claiming a child under the age of 19 can substantially increase the earned income tax credit if the taxpayer otherwise qualifies. Claiming a child can also help a single individual qualify for the more beneficial head of household filing status. Caution: Some of the benefits phase out for higher income taxpayers. Where possible, parents should seek professional assistance to determine what makes sense financially for both parents. Please contact this office for additional information. Tue, 13 Aug 2013 19:00:00 GMT Tax Tips for Newlyweds http://www.messnerandhadley.com/blog/tax-tips-for-newlyweds/37394 http://www.messnerandhadley.com/blog/tax-tips-for-newlyweds/37394 Messner & Hadley LLP This time year is popular for weddings. So if you are a newlywed there are some important issues that need be taken care of - after the honeymoon. Now that you are married, your tax filing status has changed, and there are a number of steps you’ll need to take, to make a smooth transition into married life, such as… Notify the Social Security Administration - It’s important that your name and Social Security number match on your next tax return, so if you’ve taken on a new name, report the change to the Social Security Administration. File Form SS-5 is the Application for a Social Security Card. This form is available on SSA’s website at www.ssa.gov, by calling 800-772-1213, or by visiting a local SSA office. Failure to complete this simple step could lead to delays in processing your tax return for 2013 and, assuming you have a refund coming, delay the refund. Notify the IRS if you move - It is important for the IRS to have your current address since they may send you some correspondence, and if the correspondence is not dealt with promptly, it can make it significantly more difficult to deal with the matter. Plus, the IRS will meet its legal responsibilities of notifying you by sending the correspondence to your last known address. That’s why it is so important to keep your address current with the agency. Use IRS Form 8822, the Change of Address form, to update the IRS of your address change. Notify your employer of any change of address - If one or both of you are using a new address, it is important that your employer have the updated address information. This will help to ensure that you receive your Form W-2, the Wage and Tax Statement, after the end of the year. It also ensures that you receive important pension plan and health care notices from your employer which will affect your benefits. Both working? If you and your spouse both work, you should check the amount of federal income tax withheld from your pay, and revise one or both of your Forms W-4, Employees Withholding Allowance Certificate, if necessary. Your combined incomes may move you into a higher tax bracket and your expected refund could be substantially reduced; or even worse, you could end up owing tax when you were expecting a refund. Adjusting your withholding now could prevent an unwanted surprise when you file your 2013 tax return next year. Filing status has changed - Even if you were married on the last day of the year, you must either file a joint return or file as married separately for the entire year. There are many situations in taxes where the benefits afforded to joint filers are less than those of two single filers, and that could increase your tax liability. It may be appropriate, especially for higher income individuals, to project their taxes for 2013 so withholding adjustments can be made and there are not any shocks at tax time. Please call if you need assistance. Itemized or Standard Deductions - If you didn’t qualify to itemize deductions before you were married, that may have changed. You and your spouse may save money by itemizing rather than taking the standard deduction on your tax return. The standard deduction for a married couple filing jointly in 2013 is $12,200. So if you anticipate your deductions will exceed that amount you should begin keeping receipts for items such as medical expenses, charitable contributions, and job-related expenses. If you need assistance in determining your projected tax liability for 2013 and your refund or tax due, please give this office a call. Also, call if you need assistance preparing new W-4s for your employer(s). Incorrectly prepared W-4s can lead to problems down the road. Thu, 08 Aug 2013 19:00:00 GMT Renting Your Home or Vacation Home http://www.messnerandhadley.com/blog/renting-your-home-or-vacation-home/37374 http://www.messnerandhadley.com/blog/renting-your-home-or-vacation-home/37374 Messner & Hadley LLP If you own a home in a vacation locale – whether it is your primary residence or a vacation home – and are considering renting it out to others, there are complicated tax rules referred to as the “vacation home rental rules” that you need to be aware of. Generally, the tax code breaks a “vacation rental” into three categories, each with a different treatment for income and expenses: Rented Fewer than 15 Days – If you rent your home for fewer than 15 days during the tax year, the tax code says that you do not need to report the income and that you can still deduct 100% of the property taxes and qualified mortgage interest as an itemized deduction. Yes, you heard me correctly: the government is actually allowing you to ignore the income, regardless of the amount, if you rent the home for fewer than 15 days during the year. This rule offers some opportunities for substantial tax-free income, especially for more expensive homes. Here are some examples: o Rental as a film location - Typically, film production companies will pay substantial amounts (thousands per day) for the short-term use of homes as movie sets. Individuals with unique properties can register with a local film location company. o Home in a vacation locale - Individuals with homes in popular tourist or vacation locales can rent their homes out to vacationers in their area while they are on vacation themselves. o Home in the area of a special event - When a one-time or special event such as a major sports event (think the Super Bowl) or convention comes to town, hotel rooms may be scarce or even fill up. Homeowners in these locations may want to rent their homes short-term during the activity while getting out of town to avoid the crowds. However, be careful - if the rental goes over 14 days, the income is no longer tax-free. When calculating the number of days, the definition of a day is generally “the 24-hour period” for which a day’s rental would be paid. Thus, a person using a dwelling unit from Saturday afternoon through the following Saturday morning would generally be treated as having used the unit for seven days even though the person was on the premises on eight calendar days. Even though the income is tax-free, the property tax and interest for the period is still deductible, directly related rental expenses such as agent fees, utilities, post-rental cleaning, etc. are not deductible. Rented 15 Days or More - When the home is rented 15 days or more, the income must be reported. However, the tax treatment depends upon how many days you used the home personally: o Personal Use More Than 10% of the Rental Days - In this scenario, no rental tax loss is allowed. Let’s assume that the personal use of the home is 20%. As for the remaining 80%, it is used as a rental. The rental income is first reduced by 80% of the taxes and interest; if, after deducting the interest and taxes, there is still a profit, the direct rental expenses (such as the rental portion of the utilities, insurance and any other direct rental expenses) are deducted, but not more than will offset the remaining income. If there is still a profit, you can take depreciation, but it is again limited to the remaining profit. End result: No loss is allowed, but any remaining profit is taxable. The other personal 20% of the interest and taxes is deducted as an itemized deduction subject to mortgage interest and Alternative Minimum Tax (AMT) limitations. Take note that if the rental income becomes less than the business portion of the interest and taxes, the balance of the interest and taxes is still deductible as home mortgage interest and taxes. o Personal Use 10% or Fewer of the Rental Days - In this scenario, the home’s use would be allocated into two separate activities, a rental and a second home. Let’s say that the home is used 5% for personal use: 5% of the interest and taxes are treated as home interest and taxes that can be deducted as an itemized deduction. The other 95% of the interest and taxes are rental expenses, combined with 95% of the insurance, utilities, and allowable depreciation and 100% of the direct rental expenses. The result is a deductible tax loss, which is combined with all other rental activities and limited to a $25,000 loss per year for taxpayers with adjusted gross incomes (AGI) of $100,000 or less. This loss allowance is ratably phased out between $100,000 and $150,000 of AGI. Thus, if your income exceeds $150,000, the loss cannot be deducted; it is carried forward until the home is sold or there are gains from other activities that can be used to offset the loss. When figuring the personal use days, include days used by an owner, co-owner, or family member of the owner/co-owner as well as days used under a reciprocal arrangement. However, you can exclude “fix-up” days, which are days spent repairing and maintaining the property. Word of Caution - Beginning in 2013, passive rental income is subject to the new 3.8% tax on net investment income that is part of the Affordable Care Act (“Obamacare”). So if the net result from renting the home is a profit, in addition to being subject to regular tax, the profit will also be subject to the net investment income tax. The gain from the sale of your primary home (in excess of the allowable home gain exclusion) and the gain from the sale of your second home (even if you never had rental income from it) are also subject to the 3.8% tax on net investment income in addition to the capital gains tax. A number of other rules apply to special situations not covered here. If you have questions about how the vacation rental rules will apply to your unique circumstances, please give this office a call. Tue, 06 Aug 2013 19:00:00 GMT Caring for an Elderly or Incapacitated Individual http://www.messnerandhadley.com/blog/caring-for-an-elderly-or-incapacitated-individual/37347 http://www.messnerandhadley.com/blog/caring-for-an-elderly-or-incapacitated-individual/37347 Messner & Hadley LLP With individuals living longer, we frequently find ourselves in the position of caregiver for elderly or incapacitated individuals. Whether you’re caring for an incapacitated or elderly spouse, an elderly parent, or even a child, understanding potential tax advantages can relieve some of the financial burden associated with being a caregiver. The following are some tax aspects of taking on the care of an elderly or incapacitated individual. Dependency exemption - You may be able to claim the cared-for individual as your dependent, thus qualifying for an exemption deduction. To qualify: You(1) must provide more than 50% of the individual's support costs, The individual must either live with you or be related, The individual must not have gross income in excess of the exemption amount ($3,900 for 2013), The individual must not file a joint return for the year (unless neither spouse would have a tax liability if separate returns were filed and the joint return is filed only to claim a refund), and The individual must be a U.S. citizen or a resident of the U.S., Canada, or Mexico. (1) If the support test can only be met by a group (several children, for example, combining to support a parent), a “multiple support agreement” form can be filed to grant one of the group members the exemption, subject to certain conditions. Medical expenses - If the cared-for individual qualifies as your dependent or medical dependent (2), you can include any medical expenses you incur for the individual along with your own when determining your medical deduction. Amounts paid to a nursing home are fully deductible as a medical expense if the principal reason that a person stays at the nursing home is medical in nature, as opposed to custodial or other care. If a person is not in the nursing home principally to receive medical care, only the portion of the fee that is allocable to actual medical care qualifies as a deductible medical expense. However, if the individual is chronically ill(3), all of the individual’s qualified long-term care services, including maintenance or personal care services, are deductible. (2) A medical dependent is an individual who doesn't qualify as your dependent only because of the gross income or joint return test; you can still include these medical costs with your own. (3) A chronically ill individual is one certified by a physician or other licensed healthcare practitioner (e.g., nurse or social worker) as unable to perform, without substantial assistance, at least two activities of daily living for at least 90 days due to a loss of functional capacity, or as requiring substantial supervision for protection due to severe cognitive impairment (e.g., memory loss or disorientation). Of course, a person with Alzheimer's disease qualifies. Filing status - If you aren't married, you may qualify for “head of household” status by virtue of the cared-for individual. If the cared-for individual: (a) lives in your household, (b) you pay more than half of the household costs, (c) the individual qualifies as your dependent, and (d) the individual is a relative, you can claim head of household filing status. If the person you’re caring for is your parent, he or she does not need to live with you as long as you provide more than half of your parent’s household costs and he or she qualifies as your dependent. For example, if a parent is confined to a nursing home and you pay more than half of the cost, you are considered as maintaining the principal home for your parent. Household employee issues - If you hire individuals to help you care for an elderly or incapacitated individual in your home, you must treat them as employees, issue them a W-2 form, and withhold and remit certain payroll taxes to the IRS and your state. If you use a service company that sends its employees to provide care services, the service company will handle the payroll issue for these employees, relieving you of that responsibility. If you plan to hire help, please call this office to discuss your options in more detail. Dependent care credit - If the cared-for individual qualifies as your dependent, lives with you, and physically or mentally cannot take care of him or herself, you may qualify for the dependent care credit for costs you incur for this individual’s care to enable you and your spouse to go to work. However, the same expense cannot be used as both a medical expense deduction and for the dependent care credit. If you experience financial difficulties in funding the care, the tax code provides some specialized relief as described below. Generally, these forms of relief should be considered only when no other reasonable alternatives exist. Reverse mortgage as alternative to nursing home - It is often desirable for an elderly person to remain in his or her own home with proper in-home care rather than entering a nursing home. A reverse mortgage loan may make this a feasible alternative to a nursing home. If this approach is taken, don’t forget that household help is deductible in the same manner as nursing home expenses. In addition, household employees must be paid by payroll. Exclusion for payments under life insurance contracts - Any lifetime payments received under a life insurance contract on the life of a person who is either terminally or chronically ill are excluded from gross income. A similar exclusion applies to the sale or assignment of a life insurance contract to a person who regularly buys or takes assignments of such contracts and meets other qualifying standards. The tax benefits and regulations related to caring for someone are complicated. If you are a caregiver and would like to discuss your situation and options further, please call our office. Thu, 01 Aug 2013 19:00:00 GMT August 2013 Individual Due Dates http://www.messnerandhadley.com/blog/august-2013-individual-due-dates/33379 http://www.messnerandhadley.com/blog/august-2013-individual-due-dates/33379 Messner & Hadley LLP August 12 - Report Tips to Employer If you are an employee who works for tips and received more than $20 in tips during July, you are required to report them to your employer on IRS Form 4070 no later than August 12. Your employer is required to withhold FICA taxes and income tax withholding for these tips from your regular wages. If your regular wages are insufficient to cover the FICA and tax withholding, the employer will report the amount of the uncollected withholding in box 12 of your W-2 for the year. You will be required to pay the uncollected withholding when your return for the year is filed. Wed, 24 Jul 2013 19:00:00 GMT August 2013 Business Due Dates http://www.messnerandhadley.com/blog/august-2013-business-due-dates/33380 http://www.messnerandhadley.com/blog/august-2013-business-due-dates/33380 Messner & Hadley LLP August 12 - Social Security, Medicare and Withheld Income Tax File Form 941 for the second quarter of 2013. This due date applies only if you deposited the tax for the quarter in full and on time. August 15 - Social Security, Medicare and Withheld Income Tax If the monthly deposit rule applies, deposit the tax for payments in July. August 15 - Non-Payroll Withholding If the monthly deposit rule applies, deposit the tax for payments in July. Wed, 24 Jul 2013 19:00:00 GMT Mandatory Health Insurance Will Begin in 2014 http://www.messnerandhadley.com/blog/mandatory-health-insurance-will-begin-in-2014/37271 http://www.messnerandhadley.com/blog/mandatory-health-insurance-will-begin-in-2014/37271 Messner & Hadley LLP Beginning in 2014 the Patient Protection & Affordable Care Act (the health care legislation sometimes known as Obama Care) will impose the new requirement that U.S. persons, with certain exceptions, have minimal, essential health care insurance. A minimum essential health care policy is one in which the insurer pays 60% of the average medical expenses incurred by an average person over the course of one year. How this will affect your family will depend upon a number of issues: Already insured - If you will already be insured through an employer plan, Medicare, Medicaid, the Veterans Administration, or a private plan that provides minimal, essential care, then you will not be subject to any penalties under this new law. Exempt from the mandatory insurance requirement - The following individuals will be exempt from the insurance mandate and will not be subject to a penalty for being uninsured: Individuals who have a religious exemption Those not lawfully present in the United States Incarcerated individuals Those who cannot afford coverage based on formulas contained in the law Those who have income below the federal income tax filing threshold Those who are members of Indian tribes Those who were uninsured for short coverage gaps of less than three months Those who have received a hardship waiver from the Secretary of Health and Human Services, who are residing outside of the United States, or who are bona fide residents of any possession of the United States. Cannot afford coverage - Individuals and families whose household income is between 100% and 400% of the federal poverty level will qualify for a varying amount of subsidy to help pay for the insurance in the form of a Premium Assistance Credit. To qualify for that credit, the insurance must be acquired from an American Health Benefit Exchange operated by the individual or family’s state, or by the Federal Government. These exchanges are scheduled to be up and running as of October 1, 2013, and the policies purchased through them will be effective as of January 1, 2014. It is important to note that the subsidy is really just a tax credit based upon family income. It can be estimated in advance and used to reduce the monthly insurance premiums; it can be claimed as a refundable credit on the tax return for the year; or it can be some combination of both. However, it is based upon the current year’s income and must be reconciled on the tax return for the year. If too much was used as a premium subsidy, it must be repaid. If there is excess, it is refundable. If household income is below 100% of the poverty level, the individual or family qualifies for Medicaid. Penalty for noncompliance - The penalty for noncompliance will be the greater of either a flat dollar amount or a percentage of income: For 2014, $95 per uninsured adult ($47.50 for a child) or 1 percent of household income over the income tax filing threshold For 2015, $325 per uninsured adult ($162.50 for a child) or 2 percent of household income over the income tax filing threshold For 2016 and beyond, $695 per uninsured adult ($347.50 for a child) or 2.5 percent of household income over the income tax filing threshold. Flat dollar amounts - The flat dollar amount for a family will be capped at 300% of the adult amount. For example, the maximum in 2016 for a family will be $2,085 (300% of $695). The child rate will apply to family members under the age of 18. Overall penalty cap - The overall penalty will be capped at the national average premium for a minimal, essential coverage plan purchased through an exchange. This amount won’t be known until a later date. If you have any questions as to how this new insurance requirement will affect you, please call. Wed, 24 Jul 2013 19:00:00 GMT QuickBooks' Custom Fields: An Overview http://www.messnerandhadley.com/blog/quickbooks-custom-fields-an-overview/37273 http://www.messnerandhadley.com/blog/quickbooks-custom-fields-an-overview/37273 Messner & Hadley LLP Part of QuickBooks' popularity comes from its flexibility. Here's a look at how custom fields contribute to that element. The beauty of QuickBooks is that it can be used for so many different kinds of businesses. Its smart design lets realtors and retail shops, plumbers and plastic surgeons use it to track income and expenses, pay bills and invoice customers, and to run those all-important reports. But Intuit knows that QuickBooks can't - and shouldn't - tailor itself to individual business types (except in the industry-specific versions). So its structure and tools are somewhat generic and as universal as possible. That's where custom fields come in. You can simply use them for your own informational purposes, but QuickBooks also lets you create and add fields to your existing customer, vendor, employee and item records and forms, and use them as filters in reports. A Common Application Let's say you want to search for your best customers to create a targeted marketing mailing. Start by opening the Customer Center and opening any customer's record there. Click on the Additional Info tab. In the lower right corner of this dialog box, click on Define Fields. This box (with some fields already defined in this example) opens: Figure 1: You can create custom fields for your lists of names in this dialog box. You want to send mailings to customers who order frequently, or who regularly purchase big-ticket items. You can call them your “High-Value Customers.” Click in the first field that's available in the Label column and type that phrase, then tab over to the Cust column and click in it to enter a checkmark. Click OK. The Edit Customer dialog box opens with the new custom field included. This field will now appear in all of your existing customer records as well as any new ones you create. You'll need to open the record for each High-Value Customer, click on the Additional Info tab and enter “Yes” on the corresponding line. Figure 2: Custom fields appear in this box in your customer records. Using Custom Fields in Items If you sell physical inventory, custom fields will probably be needed in your item records. You might want to use them for t-shirt colors or sizes, for example, or to store serial or model numbers. They can be employed for all items types except subtotals, sales tax items and sales tax group items. The process is similar to the one you used to define custom fields in your contact records. Open the Lists menu and select Item List (or Fixed Asset Item List where appropriate). Click Custom Fields in the dialog box that opens. Tip: The Custom Fields tool is also available in the New Item dialog box. So you can move directly to that step as you create an item record if you'd like. Click Define Fields and add your field(s). Be sure to put a checkmark in the Use column, and click OK. Figure 3: QuickBooks also lets you define and use custom fields in your item records. Reports and Forms Custom fields can be invaluable when it comes to using them in forms and reports. Your fields will automatically appear at the bottom of the Filter list within your reports' customization tools, but you'll have to add them manually to any forms where they should appear. Warning: You should probably enlist our help before you customize forms. QuickBooks provides tools to help you through this process, but you will encounter some potentially confusing messages as you add fields to forms, and you may have to use the Layout Designer, which can present quite a challenge. Let's say you wanted to find out how many blue coffee mugs Suzanne Jenkins sold in November. You'd proceed like you normally do when you're customizing a report, but you'd have to scroll down to the end of the Filter list to find the Color custom field that you created. You'd enter the word “Blue” in the field supplied. Your Sales by Item Summary report setup would look something like this: Figure 4: Filtering a report using a custom field. This report will only run properly if you've added your Color field to your sales forms. Again, we'd be happy to help you with this, and to explore other uses for QuickBooks custom fields. Wed, 24 Jul 2013 19:00:00 GMT Eight Tips to Help You Determine if Your Gift Is Taxable http://www.messnerandhadley.com/blog/eight-tips-to-help-you-determine-if-your-gift-is-taxable/37263 http://www.messnerandhadley.com/blog/eight-tips-to-help-you-determine-if-your-gift-is-taxable/37263 Messner & Hadley LLP If you give someone money or property during your lifetime, you may be subject to the federal gift tax. The following tips will help you determine if your gift is taxable or if you are required to file a gift tax return. Most gifts are not subject to the gift tax. For example, there is usually no tax if you give a gift to your spouse or to a charity. If you give a gift to someone else, the gift tax usually does not apply until the value of the gifts you give to that person during the year exceeds the annual exclusion for the year. For 2013, the annual exclusion is $14,000. Gift tax returns do not need to be filed unless you give someone other than your spouse money or property worth more than the annual exclusion for that year. Generally, the person who receives your gift will not have to pay any federal gift tax. Also, that person will not have to pay income tax on the value of the gift received. Giving a gift does not ordinarily affect your federal income tax. You cannot deduct the value of gifts you give (other than gifts that are considered deductible charitable contributions). The general rule is that any gift is a taxable gift. However, there are many exceptions to this rule. The following gifts are not taxable gifts: • Gifts that are not more than the annual exclusion for the calendar year; • Tuition or medical expenses that you pay directly to a medical or educational institution for someone (this person does not have to be your dependent); • Gifts to your spouse; • Gifts to a political organization for its use; and • Gifts to charities. Gift splitting - you and your spouse can give a gift valued up to $28,000 to a third party without it being a taxable gift. The gift is considered as two halves: one half from you and one half from your spouse. If you split a gift that you give, you and your spouse must each file a gift tax return to show that you both agree to split the gift. You must file a Form 709, United States Gift (and Generation-Skipping Transfer) Tax Return, even if half of the split gift is less than the annual exclusion. Gift Tax Returns - you must file a gift tax return (Form 709) if any of the following apply: • You gave gifts to at least one person (other than your spouse) that were more than the annual exclusion for the year; • You and your spouse are splitting a gift. In this case, each spouse files a gift tax return—joint gift tax returns are not allowed; • You gave someone (other than your spouse) a gift of a future interest that he or she cannot actually possess, enjoy, or receive income from until sometime in the future; or • You gave your spouse an interest in property that will terminate due to a future event. You do not have to file a gift tax return to report gifts given to political organizations, most gifts to qualified charitable organizations, and gifts through which you pay someone's tuition or medical expenses. If you have questions related to gifts and the gift tax, please give this office a call. Tue, 23 Jul 2013 19:00:00 GMT Congress Puts Lid On Health Flexible Spending Arrangements http://www.messnerandhadley.com/blog/congress-puts-lid-on-health-flexible-spending-arrangements/37229 http://www.messnerandhadley.com/blog/congress-puts-lid-on-health-flexible-spending-arrangements/37229 Messner & Hadley LLP As part of the Patient Protection and Affordable Care Act (new health care law), employee contributions to health flexible spending arrangements (health FSA) are now being limited to a maximum pre-tax contribution of $2,500. Employers are able to establish what is referred to as cafeteria plans for their employees. These arrangements allow employees to allocate a portion of their otherwise taxable compensation to nontaxable benefits. Thus, the amounts paid by both the employer and employee to fund the cafeteria plan are excluded from the employee's gross income. Cafeteria plans are used to pay a variety of employee expenses, including group-term life insurance on an employee's life (up to the excludable $50,000 amount), employer-provided accident and health plans, accidental death and dismemberment policies, dependent care assistance program, adoption assistance program, contributions to a 401(k) plan, health savings account (HSA) contributions, long- and short-term disability coverage and health flexible spending arrangements (FSAs). Health FSAs are benefit plans established by employers to reimburse employees for health care expenses, such as deductibles and co-payments. They are usually funded by employees through salary reduction agreements (and termed “pre-tax contributions”), although employers may contribute as well. Qualifying contributions to and withdrawals from FSAs are tax-exempt. Prior to 2013, an employer could establish its own FSA plan's contribution limits. That continued to be true until the beginning of 2013, when Congress, as a way to partially pay for provisions in the new health care law, put a cap of $2,500 on FSA contributions. The $2,500 cap is inflation adjusted for future years. This new $2,500 FSA limitation does not impact dependent care FSAs, health savings accounts, Archer medical savings accounts, or employee contributions toward health insurance premiums. The limitation is on an employee-by-employee basis. That is, $2,500 is the maximum amount that an employee may contribute in 2013, regardless of the number of individuals (e.g., spouse or dependents) whose medical expenses may be reimbursed under the plan. However, if two people are married, and each has the opportunity to participate in a health FSA, whether through the same employer or through different employers, each may contribute up to $2,500. The new health care law has many complicated elements. If you have questions regarding FSAs or other tax provisions in this law, please give this office a call. Thu, 18 Jul 2013 19:00:00 GMT Patient Protection and Affordable Care Act - Large Employer Mandatory Health Coverage http://www.messnerandhadley.com/blog/patient-protection-and-affordable-care-act-large-employer-mandatory-health-coverage/37223 http://www.messnerandhadley.com/blog/patient-protection-and-affordable-care-act-large-employer-mandatory-health-coverage/37223 Messner & Hadley LLP Beginning in 2015, large employers, generally those with 50 full-time employees in the prior calendar year, that Do not offer coverage for all their full-time employees, Offer minimum essential coverage that is unaffordable (employee contribution being more than 9.5% of the employee’s household income), or Offer minimum essential coverage where the plan’s share of the total allowed cost of benefits is less than 60% (i.e. less than the bronze coverage), will be required to pay a penalty if any of its full-time employees were certified to the employer as having purchased health insurance through a state or federal exchange and qualified for either tax credits or a cost-sharing subsidy previously discussed. Implementation Delayed: This provision of the new health care legislation was meant to have taken effect by 2014. Intense lobbying from the business community, however, which cited lack of time to prepare for the new requirement, has prompted the Obama Administration to delay implementation by one year, to 2015. Interaction with Premium Credit: Generally, if an employee is offered affordable minimum essential coverage under an employer-sponsored plan, he is ineligible for a premium tax credit and for cost-sharing reductions for health insurance purchased through a state or federal exchange. If the coverage is unaffordable (see above), however, or the plan’s share of benefits is less than 60%, then he is eligible, but only if he declines to enroll in the coverage and purchases coverage through the exchange instead. Penalty for Employer Not Offering a Health Care Plan: An applicable large employer would be liable for the penalty (figured monthly) if: (1) The employer has failed to offer to its full-time employees (and their dependents) the opportunity to enroll for that month in “minimum essential coverage” under an “eligible employer-sponsored plan”; and (2) At least one full-time employee has been certified to the employer as having enrolled for that month in a qualified health plan for which a premium tax credit or cost-sharing reduction is allowed or paid with respect to the employee. The excise tax penalty for any month would be $167 ($2,000/12) times the number of full-time employees in excess of 30. Example: No Health Care Plan. In January of 2015, an applicable large employer with 120 employees does not offer a health care plan to its employees. The penalty is $167 times the number of full-time employees in excess of 30. Thus, the penalty for the month of January is $15,030 ((120-30) x $167.00). Penalty - Employees Qualify for Premium Tax Credits or Cost-Sharing Assistance – An applicable large employer would be liable for the penalty (figured monthly) if: (1) The employer offers to its full-time employees (and their dependents) the opportunity to enroll for that month in “minimum essential coverage” under an “eligible employer-sponsored plan”; and (2) At least one full-time employee has been certified to the employer as having enrolled for that month in a qualified health plan for which a premium tax credit or cost-sharing reduction is allowed or paid with respect to the employee. The excise tax penalty for any month would be $250 ($3,000/12) times the number of full-time employees that received premium tax credit or cost-sharing reductions through an exchange, but would not exceed the penalty imposed had the employer not offered health care insurance. Example: Health Care Plan, but with Employees Qualifying for Premium Tax Credit or Cost Sharing Reductions. In January of 2015, an applicable large employer with 120 employees offers its employees a health care plan, but the plan’s cost does not meet the affordable criteria—that employee contribution be more than 9.5% of the employee’s household income, or that the plan’s share of the total allowed cost of benefits be less than 60%—and 20 of the employees sign up for the insurance through an exchange and receive premium tax credit or cost-sharing reductions. The employer’s excise tax penalty is $250 times 20. Thus, the penalty for the month of January is $5,000. Penalty Decision Tree The flow chart below provides an overview of the large employer health care excise tax. Large Employer Health Coverage Excise Tax Decision Tree Applicable Large Employer An “applicable large employer” is one that employed an average of at least 50 full-time employees on business days during the preceding calendar year (for an employer that was not in existence throughout the preceding calendar year, the determination is based on the average number of employees reasonably expected to be employed on business days in the current calendar year). Seasonal Workers But, under an exemption, an employer will not be considered to employ more than 50 full-time employees if: (a) the employer’s workforce exceeds 50 full-time employees for 120 days or fewer during the calendar year; and (b) the employees in excess of 50 employed during that 120-day (or fewer) period are seasonal workers, e.g., retail workers employed exclusively during the holiday season. Special rules apply to construction industry employers. Full-time-employee: For purpose of complying with the 50 full-time-employee requirement, count those working 30 hours or more per week. Part-Time Employees Solely for determining whether an employer is an applicable large employer, an employer will also have to include for that month the number of full-time employees determined by dividing (a) the aggregate number of hours of service of employees who are not full-time employees for the month by (b) 120. Example – Equivalent Full-Time Employees. John has, for his business, 45 full-time employees plus 20 part-time employees. His part-time employees for the month of January have worked 960 hours. This is equivalent to 8 (960/120) full-time employees. Thus, the number of John’s full-time employees for the month of January is 53 (45 + 8). Penalty Deductibility This excise tax penalty is nondeductible under the general rules for excise taxes. Tue, 16 Jul 2013 19:00:00 GMT Supreme Court Strikes Down DOMA http://www.messnerandhadley.com/blog/supreme-court-strikes-down-doma/37200 http://www.messnerandhadley.com/blog/supreme-court-strikes-down-doma/37200 Messner & Hadley LLP The Supreme Court recently struck down Section 3 of the Defense of Marriage Act (DOMA), making it clear that same-sex married couples who reside in a state where same-sex marriages are legal, and in the state in which they were married, can be treated as married for federal tax purposes. This ruling was the result of a situation faced by a same-sex married couple who originally registered as domestic partners in 1993 and then married in Canada in 2007. One of the partners passed away in 2009, leaving her estate to her spouse. For married couples there is an unlimited estate tax deduction, and, therefore, no estate tax on the passing of the first spouse. However, because of DOMA, the federal government did not recognize the couple as married and denied the unlimited marital deduction. As a result, the estate ended up paying $363,053 in federal estate taxes. The survivor sued and prevailed in Federal District Court and in the Second Circuit Court of Appeals. The government appealed the decision to the Supreme Court, which found in the taxpayer’s favor, so the federal government must refund the estate tax. (Windsor, (Sup Ct 6/2013)) But how does this case impact the tax filings of other same-sex couples that were married in states that permit such unions? It seems pretty clear that same-sex married couples who reside in a state where same-sex marriages are legal, and in the state in which they were married, can file a joint return for federal purposes. (Prior to this ruling, these couples had to file their federal returns as if they were not married, generally with each spouse using the “single” filing status.) What is unclear is the Supreme Court’s wording in the ruling: “those persons joined in same-sex marriages made lawful by the state.” This leaves the waters muddy for same-sex married couples who were wed in one state and then relocated to another, particularly a state that does not currently recognize same-sex marriages. Those couples will have to wait for further clarification. Also still up in the air is whether registered domestic partners who are not married will fall under the Supreme Court’s ruling. Whether same-sex married couples can or must file amended returns for prior years is also unknown at this time. The Supreme Court ruling was retroactive in the Windsor case, so one would assume prior returns can be amended, but we must wait to see if they must be amended, which is very doubtful. Also at issue are a host of other governmental and legal rights afforded to married couples. The IRS is expected to provide guidance on the tax-related issues in the near future. This office will continue to monitor these issues and provide updates as further information becomes available. Thu, 11 Jul 2013 19:00:00 GMT Get Credit for Generating Your Own Home Power http://www.messnerandhadley.com/blog/get-credit-for-generating-your-own-home-power/37190 http://www.messnerandhadley.com/blog/get-credit-for-generating-your-own-home-power/37190 Messner & Hadley LLP Through 2016, taxpayers can get a 30% tax credit on their federal tax returns for installing certain power-generating systems in their homes. The credit is non-refundable, which means it can only be used to offset a taxpayer's current tax liability, but any excess can be carried forward to offset tax through 2016. Systems that qualify for the credit include: Solar water-heating system - Qualifies if used in a dwelling unit used by the taxpayer as a main or second residence where at least half of the energy used by the property for such purposes is derived from the sun. Heating water for swimming pools or hot tubs does not qualify for the credit. The property must be certified for performance by the Solar Rating Certification Corporation or a comparable entity endorsed by the state government where the property is installed. Solar electric system - Qualified system that uses solar energy to generate electricity for use in a dwelling unit located in the U.S. and used as a main or second residence by the taxpayer. Fuel cell plant - This is a fuel cell power plant installed in the taxpayer's principal residence that converts a fuel into electricity using electrochemical means. It must have an electricity-only generation efficiency of greater than 30% and generate at least 0.5 kilowatt of electricity. The credit is 30% of qualified fuel cell expenditures but limited to $500 for each 0.5 kilowatt of the fuel cell property's capacity to produce electricity. Qualified small wind energy - A wind turbine used to generate electricity for use in connection with a dwelling unit used as a main or second residence by the taxpayer. Qualified geothermal heat pump - Must use the ground or ground water as a thermal energy source to heat the dwelling unit or as a thermal energy sink to cool the dwelling unit, and must meet the Energy Star program requirements in effect when the expenditure is made. The dwelling unit must be used as a main or second residence by the taxpayer. Other aspects of the credit: Limited carryover - The credit is a non-refundable personal credit, which limits the credit to the taxpayer's tax liability for the year. However, the portion of the credit that is not allowed because of this limitation may be carried to the next tax year and added to the credit allowable for that year. Thus, the credit carryover is available through 2016 (the final year for the credit). Installation costs - Expenditures for labor costs allocable to onsite preparation, assembly, or original installation of property eligible for the credit, as well as for piping or wiring connecting the property to the residence, are expenditures that qualify for the credit. Swimming pool - Expenditures that are for heating a swimming pool or hot tub are not taken into account for purposes of the credit. Newly constructed homes - The credit can be taken for newly constructed homes if the costs of the residential energy-efficient property can be separated from the home construction and the required certification documents are available. Certification - A taxpayer may rely on a manufacturer's certification that a product is a Qualified Energy Property. A taxpayer is not required to attach the certification statement to the return on which the credit is claimed. However, taxpayers are required to retain the certification statement as part of their records. The certification statement provided by the manufacturer may be a written copy of the statement that is posted on the manufacturer's website with the product packaging details in printable form or in any other manner that will permit the taxpayer to retain the certification statement for tax recordkeeping purposes. Installation costs - Costs for labor allocable to onsite preparation, assembly, or original installation of the residential energy-efficient property are includible. If you have questions about how you can benefit from this credit, please give this office a call. Tue, 09 Jul 2013 19:00:00 GMT Did Your 2012 Roth-Converted Account Decline in 2013? http://www.messnerandhadley.com/blog/did-your-2012-roth-converted-account-decline-in-2013/37137 http://www.messnerandhadley.com/blog/did-your-2012-roth-converted-account-decline-in-2013/37137 Messner & Hadley LLP If you converted your traditional IRA to a Roth IRA during 2012 and paid (or will pay) the tax on the conversion and then watched the value of the account decrease in 2013, you still have an opportunity to do something about it. If you filed your return on time or are on extension, you automatically receive a 6-month extension from the return's original due date to recharacterize the Roth account back to a Traditional account, thereby avoiding paying taxes on IRA values that have evaporated. Once you make the recharacterization, you must wait 30 days before reconverting the IRA back to a Roth. However, the deadline for both completing your recharacterization and filing or amending your 2012 return is October 15. So if you have questions or wish to implement this strategy, you will need to call this office right away. Thu, 27 Jun 2013 19:00:00 GMT July 2013 Individual Due Date Reminders http://www.messnerandhadley.com/blog/july-2013-individual-due-date-reminders/32760 http://www.messnerandhadley.com/blog/july-2013-individual-due-date-reminders/32760 Messner & Hadley LLP July 1 - Time for a Mid-Year Tax Check Up Time to review your 2013 year-to-date income and expenses to ensure estimated tax payments and withholding are adequate to avoid underpayment penalties.July 10 - Report Tips to Employer If you are an employee who works for tips and received more than $20 in tips during June, you are required to report them to your employer on IRS Form 4070 no later than July 10. Your employer is required to withhold FICA taxes and income tax withholding for these tips from your regular wages. If your regular wages are insufficient to cover the FICA and tax withholding, the employer will report the amount of the uncollected withholding in box 12 of your W-2 for the year. You will be required to pay the uncollected withholding when your return for the year is filed.July 15 - Social Security, Medicare and Withheld Income TaxIf the monthly deposit rule applies, deposit the tax for payments in June. Mon, 24 Jun 2013 19:00:00 GMT July 2013 Business Due Date Reminders http://www.messnerandhadley.com/blog/july-2013-business-due-date-reminders/32762 http://www.messnerandhadley.com/blog/july-2013-business-due-date-reminders/32762 Messner & Hadley LLP July 1 - Self-Employed Individuals with Pension Plans If you have a pension or profit-sharing plan, you may need to file a Form 5500 or 5500-EZ for calendar year 2012. Even though the forms do not need to be filed until July 31, you should contact this office now to see if you have a filing requirement, and if you do, allow time to prepare the return. July 15 - Non-Payroll Withholding If the monthly deposit rule applies, deposit the tax for payments in June. July 31 - Self-Employed Individuals with Pension Plans If you have a pension or profit-sharing plan, this is the final due date for filing Form 5500 or 5500-EZ for calendar year 2012. July 31 - Social Security, Medicare and Withheld Income Tax File Form 941 for the second quarter of 2013. Deposit or pay any undeposited tax under the accuracy of deposit rules. If your tax liability is less than $2,500, you can pay it in full with a timely filed return. If you deposited the tax for the quarter in full and on time, you have until August 12 to file the return.July 31 - Certain Small Employers Deposit any undeposited tax if your tax liability is $2,500 or more for 2013 but less than $2,500 for the second quarter. July 31 - Federal Unemployment Tax Deposit the tax owed through June if more than $500. July 31 - All Employers If you maintain an employee benefit plan, such as a pension, profit-sharing, or stock bonus plan, file Form 5500 or 5500-EZ for calendar year 2012. If you use a fiscal year as your plan year, file the form by the last day of the seventh month after the plan year ends. Mon, 24 Jun 2013 19:00:00 GMT Mid-Year Tax Planning Checklist http://www.messnerandhadley.com/blog/mid-year-tax-planning-checklist/37103 http://www.messnerandhadley.com/blog/mid-year-tax-planning-checklist/37103 Messner & Hadley LLP All too often, taxpayers wait until after the close of the tax year to worry about their taxes, missing opportunities that could reduce their tax liability or help them financially. Fall is the perfect time for tax planning. The following are some events that can affect your tax return; you may need to take steps to mitigate their impact and thus avoid unpleasant surprises after it is too late to address them. Did you get married, divorced, or become widowed? Did you change jobs or has your spouse started working? Did you have a substantial increase or decrease in income? Did you have a substantial gain from the sale of stocks or bonds? Did you buy or sell a rental? Did you start, acquire, or sell a business? Did you buy or sell a home? Did you retire this year? Are you on track to withdraw the required amount from your IRA (age 70.5 or older)? Did you refinance your home or take out a second home mortgage this year? Were you the beneficiary of an inheritance this year? Did you have a child? Time to start a tax-advantaged savings plan! Are you taking advantage of tax-advantaged retirement savings? Have you made any significant equipment purchases for your business? Are your cash and non-cash charitable contributions adequately documented? Are you keeping up with your estimated tax payments or do they need adjusting? Are you aware of and prepared for the new 3.8% surtax on net investment income? Did you make any unplanned withdrawals from an IRA or pension plan? Have you stayed abreast of every new tax law change? If you anticipate or have already encountered any of the above events, it may be appropriate to consult with this office, preferably before the event, and definitely before the end of the year. Mon, 24 Jun 2013 19:00:00 GMT Turning 70 1/2 This Year? http://www.messnerandhadley.com/blog/turning-70-12-this-year/37106 http://www.messnerandhadley.com/blog/turning-70-12-this-year/37106 Messner & Hadley LLP If you are turning 70 1/2 this year, you may face a number of special tax issues. Not addressing these issues properly could result in significant penalties and filing hassles. Traditional IRA Contributions - You cannot make a traditional IRA contribution in the year you reach the age of 70 1/2 Contributions made in the year you turn 70 1/2 (and later years) are treated as excess contributions and are subject to a nondeductible 6% excise tax penalty for every year in which the excess contribution remains in the account. The penalty, which cannot exceed the value of the IRA account, is calculated on the excess contributed and on any interest it may have earned. You can avoid the penalty by removing the excess and the interest earned on the excess from the IRA prior to April 15 of the subsequent year and including the interest earned on the excess in your taxable income. Even though you can no longer make contributions to a traditional IRA in the year you reach age 70 1/2 you can continue to make contributions to a Roth IRA, not to exceed the annual IRA contribution limits, provided you still have earned income, such as wages or self-employment income, at least equal to the amount of the contribution. Required Minimum Distributions (RMD) - You must begin taking required minimum distributions from your qualified retirement plans and IRA accounts in the year you turn 70 1/2 The distribution for the year in which you turned 70 1/2 can be delayed to the subsequent year without penalty, if the distribution is made before April 1 of the subsequent year. That means in the subsequent year two distributions must be made, the delayed distribution and the distribution for that year. Still Working Exception - If you participate in a qualified employer plan, generally you need to start taking required minimum distributions (RMDs) by April 1 of the year following the year you turn 70½. This is your required beginning date (RBD) for retirement distributions. However, if your plan includes the "still working exception," your RBD is postponed to April 1 of the year following the year you retire. Example: You reached age 70 1/2 in 2011, but chose to continue working and did not retire until June of 2013. Provided your employer’s plan includes the option, you can make the “still working election” and delay your RBD until no later than April 1, 2014. Caution: This exception does not apply to an employee who owns more than 5% of the company. There is no "still working exception" for IRAs, Simple IRAs, or SEP IRAs. Excess Accumulation Penalty - When you fail to take a RMD, you are subject to a draconian penalty called the excess accumulation penalty. This penalty is a 50% excise tax of the amount (RMD) that should have been distributed for the year. Example: Your RMD for the year is $35,000 but you only take $10,000. Your excess accumulation penalty for failing to take the full amount of the distribution for the year would be $12,500 (50% of $25,000). The IRS will generally wave the penalty for non-willful failures to take your RMD, provided you have a valid excuse and the under-distribution is corrected. As you can see, turning 70 1/2 can complicate your tax situation. If you need assistance with any of the issues discussed here, or need assistance computing your RMD for the year, please give this office a call. Mon, 24 Jun 2013 19:00:00 GMT Documenting Charitable Contributions http://www.messnerandhadley.com/blog/documenting-charitable-contributions/37107 http://www.messnerandhadley.com/blog/documenting-charitable-contributions/37107 Messner & Hadley LLP A frequently asked question is, “What records are required for charitable contributions?” In recent years, Congress has passed stringent recordkeeping rules for charitable contributions as well as harsh penalties for understating taxable income. The following is a summary of the recordkeeping rules currently in effect for a variety of contribution types. This list is not all-inclusive, so if you don’t see rules that apply to your particular situation, please give our office a call. Cash Contributions - Cash contributions include those paid by cash, check, electronic funds transfer, or credit card (see special requirements for payroll cash contributions). You cannot deduct a cash contribution, regardless of the amount, unless you can document the contribution in one of the following ways. 1. A bank record that shows the name of the qualified organization, the date of the contribution, and the amount of the contribution. Bank records may include: a. A canceled check, b. A bank or credit union statement, or c. A credit card statement. 2. A receipt (or a letter or other written communication) from the qualified organization showing the name of the organization, the date of the contribution, and the amount of the contribution. As a result, if you drop cash into a church collection plate each week at a worship service, you cannot legally deduct that donation on your tax return. The same goes for dropping a cash donation into the Christmas kettle. Instead, you should write a check to the charitable organization of your choice and put the check into the collection plate, or make other arrangements with the organization for giving your tax-deductible contribution to ensure that a bank record, receipt, or letter is provided. Payroll Contributions - For contributions made by payroll deduction, you must keep: 1. A pay stub, W-2 form, or other document provided by your employer that shows the date and amount of the contribution, and 2. A pledge card or other document prepared by or for the organization to which you are donating that shows the name of this organization. If the employer withheld $250 or more from a single paycheck, the pledge card or other document must state that the organization does not provide goods or services in return for any contribution made to it by payroll deduction. A single pledge card may be kept for all contributions made by payroll deduction, regardless of the amount, as long as it contains all of the required information. If the pay stub, W-2 form, pledge card, or other document does not show the date of the contribution, you must also have another document that does show the date of the contribution. If the pay stub, W-2 form, pledge card, or other document does show the date of the contribution, you need not keep any other records except those described in (A) and (B). Non-Cash Contributions - Non-cash contributions include the donation of property, such as used clothing or furniture, to a qualified charitable organization. Deductions of Less than $250 - If you claim a non-cash contribution of less than $250, you must get and keep a receipt from the charitable organization showing: 1. The name of the charitable organization, 2. The date and location of the charitable contribution, and 3. A reasonably detailed description of the property that was donated.You are not required to have a receipt if it is impractical to get one (for example, if the property was left at a charity’s unattended drop site). However, you still must document the contribution as described above. Deductions of at Least $250 but Not More than $500 - If you claim a deduction of at least $250 but not more than $500 for a non-cash charitable contribution, you must have and keep an acknowledgment of the contribution from the qualified organization. If the contributions were made in more than one donation of $250 or more, you must have either a separate acknowledgment for each or one acknowledgment that shows the total contribution. The acknowledgment(s) must be written and should include the following: 1. The name of the charitable organization, 2. The date and location of the charitable contribution, 3. A reasonably detailed description (but not necessarily the value) of any property contributed, 4. Whether or not the qualified organization gave you any goods or services as a result of the contribution (other than certain token items and membership benefits), and 5. If goods and/or services were provided to you, the acknowledgement must include a description and good faith estimate of the value of those goods or services. If the only benefit received was an intangible religious benefit (such as admission to a religious ceremony) that generally is not sold in a commercial transaction outside the donative context, the acknowledgment must say so and does not need to describe or estimate the value of the benefit. Deductions of over $500 but Not over $5,000 - If you claim a deduction of over $500 but not over $5,000 for a non-cash charitable contribution, you must get and keep the same acknowledgement and written records as for contributions of at least $250 but not more than $500 (as described above). In addition, the records must also include: 1. How the property was obtained (for example, by purchase, gift, bequest, inheritance, or exchange). 2. The approximate date the property was obtained or, if you created, produced, or manufactured the item, the approximate date the property was substantially completed. 3. The cost or other basis, and any adjustments to the basis, of property held for less than 12 months and, if available, the cost or other basis of property held for 12 months or more. This requirement, however, does not apply to publicly-traded securities. If you are not able to provide information on either the date the property was obtained or the cost basis of the property, and there is reasonable cause for not being able to provide this information, a statement of explanation must be attached to the return. Deductions over $5,000 - Because of special rules related to contributions over $5,000, please call this office for documentation requirements of the particular contribution before making the contribution. Out-of-Pocket Expenses - If you render services to a qualified organization and have unreimbursed out-of-pocket expenses related to those services, the following three rules apply. 1. You must have adequate records to prove the amount of the expenses. 2. You must get an acknowledgment from the qualified organization that contains: a. A description of the services provided, b. A statement of whether or not the organization provided you with any goods or services to reimburse you for the expenses incurred, c. A description and good faith estimate of the value of any goods or services (other than intangible religious benefits) provided as reimbursement, and d. A statement that the only benefit received was an intangible religious benefit, if that was the case. The acknowledgment does not need to describe or estimate the value of an intangible religious benefit. 3. The acknowledgement must be obtained before the earlier of the following: a. The date of filing the return for the year in which the contribution was made, or b. The due date, including extensions, for the return. Car Expenses - When you claim expenses directly related to the use of your car to provide services to a qualified organization, you must keep reliable written records. Whether the records are considered reliable depends on the facts and circumstances. Generally, your records will likely be considered reliable if made regularly and/or near the time the expense was incurred. The records must show the name of the organization being served and the date each time the car was used for a charitable purpose. If the standard mileage rate of 14 cents per mile is used, the records must show the miles driven for the charitable purpose. If you deduct actual expenses, the records must show the costs of operating the car that are directly related to a charitable purpose. General repairs and maintenance expenses, depreciation, registration fees, or the costs of tires or insurance cannot be deducted. Vehicle Donations - When the deduction claimed for a donated vehicle exceeds $500, IRS Form 1098-C (or another statement containing the same information as Form 1098-C) furnished by the charitable organization must be attached to your filed tax return. Without the 1098-C or other statement, no deduction is allowed. When the charity sells the vehicle, Form 1098-C (or other statement) must be obtained within 30 days of the sale of the vehicle. CAUTION: With the exception of vehicle contributions, charitable gift acknowledgements must be obtained before the earlier of the following: 1. The date on which your return was filed for the year in which you made the contribution, or 2. The due date, including extensions, for filing the return. If you have questions regarding charitable recordkeeping or what is deductible as a charitable contribution, please give our office a call. Mon, 24 Jun 2013 19:00:00 GMT Installment Sale - a Useful Tool to Minimize Taxes http://www.messnerandhadley.com/blog/installment-sale-a-useful-tool-to-minimize-taxes/37108 http://www.messnerandhadley.com/blog/installment-sale-a-useful-tool-to-minimize-taxes/37108 Messner & Hadley LLP Two new laws that take effect in 2013 can significantly impact the taxes owed from the sale of property that results in capital gains. They include: Higher Capital Gains Rates - Starting in 2013, capital gains can be taxed at 0%, 15%, or 20% depending upon the taxpayer’s regular tax bracket for the year. Therefore, if your regular tax bracket is 15% or less, the capital gains rate is zero. If your regular tax bracket is 25% to 35%, then the top capital gains rate is 15%. However, if your regular tax bracket is 39.6%, the capital gains rate is 20%. Unearned Income Medicare Contribution Tax - This new tax is sometimes referred to as the “surtax on net investment income,” which more aptly describes this 3.8% tax on net investment income. Capital gains (other than those derived from a trade or business) are considered investment income for purposes of this tax. For individuals, the surtax is 3.8% of the lesser of (1) the taxpayer’s net investment income, or (2) the excess of the taxpayer’s modified adjusted gross income (MAGI) over the threshold amount for his or her filing status. The threshold amounts are: $125,000 for married taxpayers filing separately. $200,000 for taxpayers filing as single or head of household. $250,000 for married taxpayers filing jointly or as a surviving spouse. Selling a property one has owned for a long period of time will frequently result in a large capital gain, and reporting all of the gain in one year will generally push the taxpayer’s income within the reach of these two new taxes. This is where an installment sale could fend off these additional taxes by spreading the income over multiple years. Here is how it works. If you sell your property for a reasonable down payment and carry the note on the property yourself, you only pay income taxes on the portion of the down payment (and any other principal payments received in the year of sale) that represents taxable gain. You can then collect interest on the note balance at rates near what a bank charges. To qualify as an installment sale, at least one payment must be received after the year in which the sale occurs. Example: You own a lot for which you originally paid $10,000. You paid it off some time ago, leaving you with no outstanding mortgage on the lot. You sell the property for $300,000 with 20% down and carry a $240,000 first trust deed at 3% interest using the installment sale method. No additional payment is received in the year of sale. The sales costs are $9,000. Computation of Gain Sale Price $300,000 Cost Sales costs Net Profit $281,000 Profit % = $281,000/$300,000 = 93.67% Of your $60,000 down payment, $9,000 went to pay the selling costs, leaving you with $51,000 cash. The 20% down payment is 93.67% taxable, making $56,202 ($60,000 x .9367) taxable the first year. The amount of principal received and reported each subsequent year will be based upon the terms of the installment agreement. In addition, the interest payments on the note are taxable and also subject to the investment surtax. Here are some additional considerations when contemplating an installment sale. Existing mortgages - If the property you are considering selling is currently mortgaged, that mortgage would need to be paid off during the sale. Even if you do not have the financial resources available to pay off the existing loan, there might be ways to work out an installment sale by taking a secondary lending position or wrapping the existing loan into the new loan. Tying up your funds - Tying up your funds into a mortgage may not fit your long-term financial plans, even though you might receive a higher return on your investment and potentially avoid a higher tax rate and the net investment income surtax. Shorter periods can be obtained by establishing a note due date that is shorter than the amortization period. For example, the note may be amortized over 30 years, which produces a lower payment for the buyer but becomes due and payable in five years. However, a large lump sum payment at the end of the 5 years could cause the higher tax rate and surtax to apply to the seller in that year – so close attention to the tax consequences needs to be considered in structuring the installment agreement. Early payoff of the note - The buyer of your property may decide to pay off the installment note early, or sell the property, in which case your installment plan would be defeated and the balance of the taxable portion would be taxable in the year the note is paid off early or the property is sold, unless the new buyer assumes the note. Tax law changes - Income from an installment sale is taxable under the laws in effect when the installment payments are received. If the tax laws are changed, the tax on the installment income could increase or decrease. Based on recent history, it would probably increase. Installment sales do not always work in all situations. To determine if an installment sale will fit your particular needs and set of circumstances, please contact this office for assistance. Mon, 24 Jun 2013 19:00:00 GMT Receiving Inventory With or Without Bills in QuickBooks http://www.messnerandhadley.com/blog/receiving-inventory-with-or-without-bills-in-quickbooks/37109 http://www.messnerandhadley.com/blog/receiving-inventory-with-or-without-bills-in-quickbooks/37109 Messner & Hadley LLP When your goods come rolling in, be sure to document them correctly. You’re probably happy to see couriers delivering inventory items you’ve ordered since it means you can ship to customers, but recording the new stock means yet another repetitive task. QuickBooks’ tools can help with this, but you need to be sure you’re using the right forms. There are two different ones that you’ll use, depending on whether or not you’ve received a bill. Bill in Hand Either way, you’ll get started by opening the Vendors menu (or clicking the arrow next to Receive Inventory on the home page). If you do have a bill, select Receive Items and Enter Bill (Receive Inventory with Bill on the home page). The Enter Bills screen opens; select your vendor from the drop-down list. If you had entered a purchase order, you’ll see something like this: Figure 1: If any purchase orders exist for that vendor in QuickBooks, you’ll see this message. Click Yes. The Open Purchase Orders window will open displaying a list. Select the PO(s) for the items received by placing a checkmark in front of it/them and click OK. Tip: If you accidentally click No, the vendor’s information will be filled in on the Enter Bills screen, and you can click the Select PO icon in the toolbar. Now the PO item information has been entered in the window. Check the form for accuracy, then save it. Of course, if there was no purchase order, you’ll enter the information about the items you received (descriptions, prices, etc.) in the Enter Bills screen. Delayed Billing If you receive items without a bill, you still need to document the shipment. Open the Vendors menu and select Receive Items (or click the arrow next to the Receive Inventory icon on the home page and select Receive Inventory without Bill). The Create Item Receipts window opens. Select the vendor by clicking the down arrow next to that field. If a message about existing purchase orders for that vendor appears, click Yes or No, and either select the appropriate POs or enter the information about what you received. If the items were already earmarked for a specific customer on the purchase order, the Customer column will have an entry in it, and there will be a check mark in the Billable column. If there was no purchase order and you’re entering the information, you can complete those two fields manually. Figure 2: If a purchase order was already assigned to a customer and is billable, that information should appear in this window. Enter a reference number if you’d like. The Memo field should already be filled in with Received items (bill to follow), and the Bill Received box should not be checked. Warning: Be sure that the Items tab is highlighted when you’re recording physical inventory. If there are related costs like freight charges or sales tax, click the Expenses tab and enter them there. Paying Up When the bill comes in for merchandise that you’ve already recorded on an Item Receipt, you’ll use this procedure to pay it: Click Vendors | Enter Bill for Received Items, which opens the Select Item Receipt window. Select the vendor, then the correct Item Receipt. Note: If the bill corresponds to more than one Item Receipt, you’ll need to convert each into a bill separately. You can create a new bill if some items received were not accounted for on Item Receipts. Click the box next to Use the item receipt date for the bill date if you want to match it to the inventory availability date. Figure 3: You’ll select purchase orders that you want to create bills for in this window. Click OK. The Enter Bills screen opens, which can be processed like you’d handle any bill. Though it may seem like extra work, this last procedure is important, since it prevents you from recording the same inventory items twice. It’s easy to get tangled up on these procedures. We hope you’ll consult us when you begin implementing inventory management in QuickBooks, or when you’re taking on a new task there. It’s a lot easier to prevent errors than to go back and fix them. Mon, 24 Jun 2013 19:00:00 GMT Fast Write Off of Business Assets http://www.messnerandhadley.com/blog/fast-write-off-of-business-assets/37072 http://www.messnerandhadley.com/blog/fast-write-off-of-business-assets/37072 Messner & Hadley LLP Normally, when a business acquires an asset, it must be capitalized and depreciated over its useful life. However, tax law includes some provisions that allow the entire asset or some portion of it to be written in the first year it is placed in service, providing the opportunity for very large first-year write-offs. The following is a summary of those provisions. Section 179 Expensing - Code Section 179 allows taxpayers to elect to treat the cost of Section 179 property as an expense deduction for the tax year in which the Section 179 property is placed in service, instead of having to capitalize the expense and recover the cost over several years. Generally, Section 179 property is acquired by purchase for use in the active conduct of a trade or business, and is generally tangible property to which accelerated cost recovery applies. The property must be used more than 50% for business. The Sec 179 expense deduction was increased for tax years 2010 through 2013 so that a taxpayer can expense up to $500,000 of qualifying property, which includes machinery and equipment. For 2010 through 2013, the annual expensing limit is reduced by the cost of qualifying property that is placed into service during the year that exceeds a $2 million investment limit. The maximum Sec 179 deduction is scheduled to revert to $25,000 for qualifying property placed in service after 2013, and the investment limit cap will be $200,000. Off-the-Shelf Computer Software - Off-the-shelf computer software placed in service 2003 through 2013 is property eligible for Sec 179 expensing. Certain Real Property Can Also Be Expensed - Certain real property is also eligible for Sec 179 expensing. For property placed in service in any tax year beginning in 2010 through 2013, the up-to-$500,000 deduction of property expensed can include up to $250,000 of qualified real property (qualified leasehold improvement property, qualified restaurant property, and qualified retail improvement property). Bonus Depreciation - For qualifying assets purchased and placed in service in 2012 and 2013, trades or businesses are allowed to depreciate an additional 50% of the cost of the assets. Please call if you would like to discuss how these tax benefits apply to your business situation. Thu, 20 Jun 2013 19:00:00 GMT Flipping Homes - A Reviving Trend in Real Estate http://www.messnerandhadley.com/blog/flipping-homes-a-reviving-trend-in-real-estate/37065 http://www.messnerandhadley.com/blog/flipping-homes-a-reviving-trend-in-real-estate/37065 Messner & Hadley LLP Prior to the recent economic downturn, flipping real estate was popular. With mortgage interest rates low and home prices at historical lows, flipping appears to be on the rise again. House flipping is, essentially, purchasing a house or property, improving it, and then selling it (presumably for a profit) in a short period of time. The key is to find a suitable fixer-upper that is priced under market for its location, fix it up, and resell it for more than it cost to buy, hold, fix up and resell it. If you are contemplating trying your hand at flipping, keep in mind that you will have a silent partner, Uncle Sam, who will be waiting to take his share of any profits in taxes. (And most likely, Sam's cousin in your state capitol will also expect a share, too.) Taxes play a significant role in the overall transaction, and tax treatment can be quite different depending upon whether you are a dealer, an investor or a homeowner. The following is the tax treatment for each in years after 2012. Dealer in Real Estate - Gains received by a non-corporate taxpayer from business operations as a real estate dealer are taxed as ordinary income (10% to 39.6% ), and in addition, individual sole proprietors are subject to self-employment tax of 15.3% of their net profit (the equivalent of the FICA taxes for a self-employed person). Higher-income sole proprietors are also subject to an additional 0.9% Medicare surtax on their earnings. Thus, a dealer will generally pay significantly more tax on the profit than an investor. On the other hand, if the flip results in a loss, the dealer would be able to deduct the entire loss in the year of sale, which would generally reduce his tax at the same rates. Investor - Gains as an investor are subject to capital gains rates (maximum of 20%) if the property is held for more than a year (long-term). If held short-term, ordinary income rates (10% to 39.6%) will apply. An investor is not subject to the self-employment tax, but could be subject to the 3.8% surtax on net investment income for higher income taxpayers. A downside for the investor who has a loss from the transaction is that, after combining all long- and short-term capital gains and losses for the year, his deductible loss is limited to $3,000, with carryover to the next year of any excess capital loss. The rules get a bit more complicated if the investor rents out the property while trying to sell it, and are beyond the scope of this article. Homeowner - If the individual occupies the property as his primary residence while it is being fixed up, he would be treated as an investor with three major differences: (1) if he owns and occupies the property for two years and has not used a homeowner gain exclusion in the two years prior to closing the sale, he can exclude gain of up to $250,000 ($500,000 for a married couple), (2) if the transaction results in a loss, he will not be able to deduct the loss or even use it to offset gains from other sales, and (3) some fix-up costs may be deemed to be repairs rather than improvements, and repairs on one's primary residence are not deductible nor includible as part of the cost basis of the home. Being a homeowner is easily identifiable, but distinguishing between a dealer and an investor is not clearly defined by the tax code. A real estate dealer is a person who buys and sells real property with a view to the trading profits to be derived and whose operations are so extensive as to constitute a separate business. A person acquiring property strictly for investment, though disposing of investment assets at intermittent intervals, is generally not regularly engaged in dealing in real estate. This issue has been debated in the tax courts frequently, and both the IRS and the courts have taken the following into consideration: whether the individual is already a dealer in real estate, such as a real estate sales person or broker; the number and frequency of sales (flips); whether the individual is more committed to another profession as opposed to fixing and selling real estate; and how much personal time is spent making improvements to the 'flips' as opposed to another profession or employment. The distinction between a dealer and an investor is truly based on the facts and circumstances of each case. Clearly, an individual who is not already in the real estate profession and flips one house is not a dealer. But one who flips five or more houses and/or property and has substantial profits would probably be considered a dealer. Everything in between becomes various shades of grey and the facts and circumstances of each case must be considered. If you have additional questions or need assistance with your specific situation, please give this office a call. Tue, 18 Jun 2013 19:00:00 GMT Employing a Family Member http://www.messnerandhadley.com/blog/employing-a-family-member/37056 http://www.messnerandhadley.com/blog/employing-a-family-member/37056 Messner & Hadley LLP A way to reduce the overall family tax bill is by employing family members through your business, which allows you to shift income to them and provide them with employment benefits. Employing your Spouse. Reasonable wages paid to your spouse entitle you to a business deduction. Although the wages are subject to income and FICA taxes, your spouse may qualify for Social Security benefits to which he or she might not otherwise be entitled. In addition, your spouse may also be entitled to receive coverage under the qualified retirement and health plans of your business, allowing you to obtain business deductions for contributions to your spouse's retirement nest egg and health insurance premium payments made on behalf of your employed spouse. While maintaining the same family medical care coverage, you increase your business deductions by providing your spouse with family health insurance coverage as an employee. Employing your child. By employing your child, the income tax advantages include obtaining a business deduction for a reasonable salary paid to that child, thus reducing your self-employment income and tax by shifting income to the child. Since the salary paid to your child is considered earned income, it is not subject to the “Kiddie Tax” rules that apply to children under the age of 19, as well as some older children. The maximum standard deduction available to your child in 2013 is $6,100 (up from $5,950 in 2012) if he or she has at least that amount of earned income. Therefore, the standard deduction eliminates all tax on this income if you pay your child $6,100 (2013) in compensation. If your business is unincorporated, wages paid to your child under age 18 are not subject to social security taxes. Not only are there significant income tax advantages to employing your child, you may also provide him or her with fringe benefits such as group-term life insurance and qualified pension plan contributions. Your child may also make deductible contributions to an IRA of the lesser of earned income or the annual limitation. These contributions can offset earned and unearned income. As example, in 2013 your child could receive $11,600 gross income ($6,100 earned and $5,500 unearned) by combining the IRA deduction ($5,500) with the standard deduction ($6,100) and pay no tax. You should consider giving him or her part or all of the money needed to fund the IRA (as part of your $14,000/$28,000 annual exclusion for gifts) if your child does not want to use his or her earned income to fund an IRA contribution. Please keep in mind that, when you employ a family member through your business, the wages should be reasonable for the work performed and that the services performed are necessary to the business. Please call this office for additional information. Thu, 13 Jun 2013 19:00:00 GMT Higher Income Taxpayers Hit with Exemption & Itemized Deductions Phase-out http://www.messnerandhadley.com/blog/higher-income-taxpayers-hit-with-exemption--itemized-deductions-phase-out/37025 http://www.messnerandhadley.com/blog/higher-income-taxpayers-hit-with-exemption--itemized-deductions-phase-out/37025 Messner & Hadley LLP Generally, taxpayers are allowed to deduct personal exemptions of $3,900 for themselves, their spouses and their dependents. In addition, taxpayers are allowed a standard deduction or, if their deductions are large, they can itemize their deductions. The American Taxpayer Relief Act of 2012 included a provision to phase out, beginning in 2013, both the personal exemptions and itemized deductions for higher income taxpayers. The phase-out will begin when a taxpayer’s adjusted gross income (AGI) reaches a phase-out threshold amount. The threshold amounts are based on the taxpayers’ filing statuses and are: $250,000 for single filers, $275,000 for individuals filing as heads of households, $300,000 for married couples filing jointly and $150,000 for married individuals filing separately. Here is how the phase-out will work: Personal Exemption - The otherwise allowable exemption amounts are reduced by 2% for each $2,500 or part of $2,500 ($1,250 for a married taxpayer filing separately) that the taxpayer’s AGI exceeds the threshold amount for the taxpayer’s filing status. Example: Ralph and Louise have an AGI of $412,500 for 2013 and two children for a total of four exemptions totaling $15,600 (4 × $3,900). The threshold for a married couple is $300,000; thus, their income exceeds the threshold by $112,500. Dividing $112,500 by $2,500 equals 45. So 90% (45 × 2%) of their $15,600 exemption allowance is phased out, leaving them with a reduced exemption deduction of $1,560 ((100–90) × $15,600). Assuming Ralph and Louise are in the 33% federal tax bracket, the phase-out costs them an additional $4,633 ($15,600 × 90% × 33%). Divorced or separated parents subject to the phase-out should consider relinquishing the exemption of a dependent child to the other parent. Where a taxpayer is a party to a multiple support agreement, the taxpayer may want to allow another contributing member of the agreement who is not hit by the phase-out to claim the dependent’s exemption. Itemized Deductions - The total amount of itemized deductions is reduced by 3% of the amount by which the taxpayer’s AGI exceeds the threshold amount, with the reduction not to exceed 80% of the otherwise allowable itemized deductions. Not all itemized deductions are subject to phase-out. The following deductions are not subject to the phase-out: o Medical and dental expenses o Investment interest expenses o Casualty and theft losses from personal-use property o Casualty and theft losses from income-producing property o Gambling losses Thus, a taxpayer who is subject to the full phase-out still gets to deduct 20% of the deductions subject to the phase-out and 100% of the deductions listed above. Example: Ralph and Louise from the previous example, who had an AGI of $412,500 for 2013, exceed the threshold for a married couple by $112,500. Thus, they must reduce their itemized deductions subject to the phase-out by $3,375 (3% of $112,500), but the reduction must not exceed 80% of the deductions subject to the phase-out. For 2013, Ralph and Louise had the following itemized deductions: Subject to Phase-out Not Subject to Phase-out Home mortgage interest $10,000 Taxes $8,000 Charitable contributions $6,000 Casualty Loss $12,000 Total $24,000 $12,000 Subject to Phase-out Not Subject to Phase-out Home mortgage interest: $10,000 Taxes: $8,000 Charitable contributions: $6,000 Casualty loss: $12,000 Total: $24,000 $12,000 The phase-out is the lesser of $3,375 or 80% of $24,000. Thus Ralph and Louise’s itemized deductions for 2013 will be $32,625 ($24,000 - $3,375 + $12,000). Assuming Ralph and Louise are in the 33% federal tax bracket, the phase-out will cost them an additional $1,114 ($3,375 × 33%). Conventional thinking is to maximize deductions. However, where taxpayers normally are not subject to a phase-out and have a high-income year because of unusual income, it may be appropriate, where possible, to defer paying deductible expenses to the year following the high-income year or perhaps pay and deduct the expenses in the preceding year. If you have questions about how these phase-outs will impact your specific situation, you want to adjust your withholding or estimated taxes, or you want to make a tax planning appointment, please give this office a call. Tue, 11 Jun 2013 19:00:00 GMT Tax Tips for the Well-traveled Businessperson http://www.messnerandhadley.com/blog/tax-tips-for-the-well-traveled-businessperson/36939 http://www.messnerandhadley.com/blog/tax-tips-for-the-well-traveled-businessperson/36939 Messner & Hadley LLP As you probably already know, food and lodging expenses can be deducted when you are away from home for business purposes. This may be particularly beneficial to self-employed individuals who travel extensively. Like everything in the tax law, there are certain rules to follow. Travel, meal, and entertainment expenses must be “ordinary” and “necessary” in carrying on your trade or business and must be “directly related to” or “associated with” the active conduct of that business. Lodging - Travel expenses are deductible only if the individuals are away from their "tax home" for more than one business day. That usually means their regular place of business. The IRS requires that lodging expenses be substantiated by records or other evidence. Some travel expenses of less than $75 can be documented by records including diaries, logs, and expense reports, but lodging documentation generally needs to be verified with actual receipts. The lodging records must include the amount, date, and place. In addition, the reason for the trip must also be included somewhere in the documentation for the trip expenses. If meal expenses are included in the hotel bill, they must be separated out and included with meal expenses, which have limitations. Meal Expenses - Meal expenses are deductible only if the trip is overnight or long enough that there is a need to stop for sleep or rest to properly perform one’s duties. The amount of the meal expenses must be substantiated by receipts unless the expense is less than $75, in which case it can be documented by records including diaries, logs, and expense reports. Meal expenses are deductible up to an amount not considered “lavish” (i.e., reasonable under the circumstances). When traveling, it is not uncommon to share a meal with others and pick up the tab. Your meal is always deductible, but the cost of the other individuals sharing the meal are only deducible if actual business discussions were conducted during the meal and you can show that there was anticipation of a specific business benefit from the meal (even if the benefit does not materialize). Goodwill-generating quiet business meals “in an atmosphere conducive to business” are not deductible. Example - Away-From-Home Meals - Margaret’s employer sent her on a five-day business trip to Minneapolis to make a sales presentation to MM&M, Inc. Margaret received no reimbursement for her meals during the trip. Margaret ate alone on the first three days away, at a total cost of $180. On the fourth night, she met a friend for dinner and paid the tab of $120. The next day, she invited Marty, a purchase representative for MM&M, Inc., to dinner. Their dinner followed a full day of discussion about MM&M’s latest order from Margaret. Margaret paid for dinner that night too, for a total of $150. Margaret’s deductible meal expense is $180 for the trip (50% x ($180 [meals alone] + $60 [her portion of dinner with her friend] + $120 [meal with Marty]). Meal expense substantiation includes the following: the cost of the meal; date, time, and place; business purpose; and names of guests and business relationship. Instead of keeping records of the actual cost of meal expenses, a "standard meal allowance" ranging from $46 to $71 can generally be used. The standard meal allowance depends on the locality and is set by the U.S. General Services Agency (www.gsa.gov). It is also known as the federal M&IE (meals and incidental expenses) rate. The deduction for unreimbursed business meals, regardless of the record-keeping method, is limited to 50% of the cost that would otherwise be deductible. Traveling Companion - Sometimes a business traveler will take a companion, such as a spouse or friend, on a business trip for company. When it comes to deducting a companion’s travel costs for business, the rules are very restrictive. Generally, you cannot deduct the companion’s travel costs unless the companion is a bona fide employee of the business. This requirement prevents deductibility in most cases. Even if your companion is an employee, his or her presence must be for a bona fide business purpose. Generally, a companion’s presence must be “necessary” to meet the bona fide purpose test, and just being “helpful” does not meet the requirement. Being there for goodwill purposes such as serving as a hostess is generally insufficient to satisfy a business purpose. An exception to that rule would be if your companion's presence is necessary to care for a serious medical condition that you have. If your companion’s presence does meet the bona fide business purpose rule, then the normal deductions for business travel away from home can be claimed. These include the costs of transportation, meals, and lodging, and incidental costs such as dry cleaning, phone calls, etc. But all is not lost if your companion does not meet the qualifications. You may still be able to deduct a substantial portion of the trip's costs. This is because the rules don't require you to allocate 50% of your travel costs to your companion. You need only allocate to him or her any additional costs that are incurred. For example, the single rate for a room is not so different than the cost for double occupancy. If you were driving, no allocation would be required because the cost would be fully deductible even if your companion did not accompany you. If you used public transportation, only your cost would be deductible. Any meals and separate costs incurred by your companion would not be deductible. Travel expenses and documentation can be tricky. If you have any questions that may apply to your specific circumstances, please give this office a call. Tue, 28 May 2013 19:00:00 GMT June 2013 Individual Due Date Reminders http://www.messnerandhadley.com/blog/june-2013-individual-due-date-reminders/32072 http://www.messnerandhadley.com/blog/june-2013-individual-due-date-reminders/32072 Messner & Hadley LLP June 10 - Report Tips to Employer If you are an employee who works for tips and received more than $20 in tips during May, you are required to report them to your employer on IRS Form 4070 no later than June 10. Your employer is required to withhold FICA taxes and income tax withholding for these tips from your regular wages. If your regular wages are insufficient to cover the FICA and tax withholding, the employer will report the amount of the uncollected withholding in box 12 of your W-2 for the year. You will be required to pay the uncollected withholding when your return for the year is filed.June 17 - Estimated Tax Payment Due It's time to make your second quarter estimated tax installment payment for the 2013 tax year. Our tax system is a “pay-as-you-go” system. To facilitate that concept, the government has provided several means of assisting taxpayers in meeting the “pay-as-you-go” requirement. These include: Payroll withholding for employers; Pension withholding for retirees; and Estimated tax payments for self-employed individuals and those with other sources of income not covered by withholding. When a taxpayer fails to prepay a safe harbor (minimum) amount, they can be subject to the underpayment penalty. This penalty is equal to the federal short-term rate plus 3 percentage points, and the penalty is computed on a quarter-by-quarter basis. Federal tax law does provide ways to avoid the underpayment penalty. If the underpayment is less than the $1,000 de-minimis amount, no penalty is assessed. In addition, the law provides "safe harbor" prepayments. There are two safe harbors: The first safe harbor is based on the tax owed in the current year. If your payments equal or exceed 90% of what is owed in the current year, you can escape a penalty. The second safe harbor is based on the tax owed in the immediately preceding tax year. This safe harbor is generally 100% of the prior year's tax liability. However, for higher-income taxpayers whose AGI exceeds $150,000 ($75,000 for married taxpayers filing separately), the prior year's safe harbor is 110%. Example: Suppose your tax for the year is $10,000 and your prepayments total $5,600. The result is that you owe an additional $4,400 on your tax return. To find out if you owe a penalty, see if you meet the first safe harbor exception. Since 90% of $10,000 is $9,000, your prepayments fell short of the mark. You can't avoid the penalty under this exception.However, in the above example, the safe harbor may still apply. Assume your prior year's tax was $5,000. Since you prepaid $5,600, which is greater than the 110% of the prior year's tax (110% = $5,500), you qualify for this safe harbor and can escape the penalty.  This example underscores the importance of making sure your prepayments are adequate, especially if you have a large increase in income. This is common when there is a large gain from the sale of stocks, sale of property, when large bonuses are paid, when a taxpayer retires, etc. Timely payment of each required estimated tax installment is also a requirement to meet the safe harbor exception to the penalty. If you have questions regarding your safe harbor estimates, please call this office as soon as possible.CAUTION: Some state de-minimis amounts and safe harbor estimate rules are different than those for the Federal estimates. Please call this office for particular state safe harbor rules. June 17 - Taxpayers Living Abroad If you are a U.S. citizen or resident alien living and working (or on military duty) outside the United States and Puerto Rico, June 17 is the filing due date for your 2012 income tax return and to pay any tax due. If your return has not been completed and you need additional time to file your return, file Form 4868 to obtain 4 additional months to file. Then, file Form 1040 by October 15. However, if you are a participant in a combat zone, you may be able to further extend the filing deadline (see below).Caution: This is not an extension of time to pay your tax liability, only an extension to file the return. If you expect to owe, estimate how much and include your payment with the extension. If you owe taxes when you do file your extended tax return, you will be liable for both the late payment penalty and interest from the due date. Combat Zone - For military taxpayers in a combat zone/qualified hazardous duty area, the deadlines for taking actions with the IRS are extended. This also applies to service members involved in contingency operations, such as Operation Iraqi Freedom or Enduring Freedom. The extension is for 180 consecutive days after the later of: The last day a military taxpayer was in a combat zone/qualified hazardous duty area or served in a qualifying contingency operation, or have qualifying service outside of the combat zone/qualified hazardous duty area (or the last day the area qualifies as a combat zone or qualified hazardous duty area), or The last day of any continuous qualified hospitalization for injury from service in the combat zone/qualified hazardous duty area or contingency operation, or while performing qualifying service outside of the combat zone/qualified hazardous duty area. In addition to the 180 days, the deadline is also extended by the number of days that were left for the individual to take an action with the IRS when they entered a combat zone/qualified hazardous duty area or began serving in a contingency operation. It is not a good idea to delay filing your return because you owe taxes. The late filing penalty is 5% per month (maximum 25%) and can be a substantial penalty. It is generally better practice to file the return without payment and avoid the late filing penalty. We can also establish an installment agreement which allows you to pay your taxes over a period of up to 72 months. Please contact this office for assistance with an extension request or an installment agreement. June 30 - Taxpayers with Foreign Financial InterestsA U.S. citizen or resident, or a person doing business in the United States, who has a financial interest in or signature or other authority over any foreign financial accounts (bank, securities or other types of financial accounts), in a foreign country, is required to file Form TD F 90-22.1 with the Department of the Treasury.  The form must be received by the Treasury Department by June 30, 2013 for 2012 (Caution: Unlike other forms that must be postmarked by the filing due date, this form must actually be in the Treasury Department's offices by the due date.) This filing requirement applies only if the aggregate value of these financial accounts exceeds $10,000 at any time during 2012. Contact our office for additional information and assistance preparing the form. Fri, 24 May 2013 19:00:00 GMT June 2013 Business Due Date Reminders http://www.messnerandhadley.com/blog/june-2013-business-due-date-reminders/32073 http://www.messnerandhadley.com/blog/june-2013-business-due-date-reminders/32073 Messner & Hadley LLP June 17 - Employer's Monthly Deposit Due If you are an employer and the monthly deposit rules apply, June 17 is the due date for you to make your deposit of Social Security, Medicare and withheld income tax for May 2013. This is also the due date for the non-payroll withholding deposit for May 2013 if the monthly deposit rule applies. June 17 - Corporations Deposit the second installment of estimated income tax for 2013 for calendar year corporations. June 30 - Taxpayers with Foreign Financial Interests A U.S. citizen or resident, or a person doing business in the United States, who has a financial interest in or signature or other authority over any foreign financial accounts (bank, securities or other types of financial accounts), in a foreign country, is required to file Form TD F 90-22.1 with the Department of the Treasury.  The form must be received by the Treasury Department by June 30, 2013 for 2012 (Caution: Unlike other forms that must be postmarked by the filing due date, this form must actually be in the Treasury Department's offices by the due date.) This filing requirement applies only if the aggregate value of these financial accounts exceeds $10,000 at any time during 2012. Contact our office for additional information and assistance preparing the form. Fri, 24 May 2013 19:00:00 GMT Have a Financial Interest in or Signature Authority over a Foreign Financial Account? Better Read This! http://www.messnerandhadley.com/blog/have-a-financial-interest-in-or-signature-authority-over-a-foreign-financial-account-better-read-this/36914 http://www.messnerandhadley.com/blog/have-a-financial-interest-in-or-signature-authority-over-a-foreign-financial-account-better-read-this/36914 Messner & Hadley LLP Each U.S. person who has a financial interest in or signature or other authority over any foreign financial accounts (including bank, securities, or other types of financial accounts in a foreign country) must report that relationship to the U.S. government each calendar year if the aggregate value of these financial accounts exceeds $10,000 at any time during the calendar year. The government uses this reporting mechanism as a means of uncovering hidden foreign accounts and ensuring that investment income earned in foreign countries by U.S. taxpayers is included on their U.S. tax returns. The Treasury Department has placed a new emphasis on foreign accounts, and taxpayers with a financial connection to a foreign country should determine whether or not they have a reporting requirement. Reporting is accomplished by filing a “Report of Foreign Bank and Financial Accounts,” more commonly referred to as FBAR, which is due on or before June 30 of the succeeding year. No extensions are available for filing this form. In addition, taxpayers are generally required to answer “yes” or “no” to questions related to the foreign bank and financial accounts on their tax returns. Penalties for failing to comply can be draconian. For non-willful violations, civil penalties up to $10,000 may be imposed. The penalty for willful violations is the greater of $100,000 or 50% of the account's balance at the time of the violation. A reasonable cause exception to the penalty is available for non-willful violations but not for willful violations. Overlooked Accounts - Many taxpayers overlook the fact that they have a reporting requirement in such situations as: Family Accounts - Recent immigrants to the U.S. may still have parents or other family members residing in the “old” country, and those relatives may have included them on an account in a foreign country. This practice is common for some ethnic groups. The taxpayer may not really consider the account to be his or hers; nevertheless, it falls under the reporting requirement if he or she has signature or other authority over the account and its value exceeds $10,000. Inherited Accounts - Accounts in a foreign country and inherited accounts fall under the FBAR reporting requirement, even if the funds are subsequently transferred to the U.S. The FBAR rules state that reporting is required if at any time during the year the foreign account exceeds $10,000. Business Accounts - A corporate officer or Board member may have signature authority over a business account in a foreign country and may overlook the need to meet the FBAR reporting requirements. Foreign Financial Accounts - These financial accounts are maintained by foreign financial institutions and include other investment assets not held in accounts maintained by financial institutions. However, no reporting is required for interests that are held in a custodial account with a U.S. financial institution. In addition to including any reportable foreign income on a tax return, the taxpayer must ensure that the foreign account questions are completed correctly on the tax return and that the FBAR form is filed, if required. If you have questions regarding this reporting requirement, please contact this office. Fri, 24 May 2013 19:00:00 GMT Tax Tips for Students with a Summer Job http://www.messnerandhadley.com/blog/tax-tips-for-students-with-a-summer-job/36915 http://www.messnerandhadley.com/blog/tax-tips-for-students-with-a-summer-job/36915 Messner & Hadley LLP Many students hold a summer job during their time off from school. Here are some tax issues that should be considered when working a summer job. Completing Form W-4 When Starting a New Job - This form is used by employers to determine the taxes that will be withheld from your paycheck. Taxpayers with multiple summer jobs will want to make sure all of their employers are withholding an adequate amount of taxes to cover their total income tax liability. Generally, a student who is claimed as a dependent of another with income only from summer and part-time employment can earn as much as $6,100 (the standard deduction amount) without being liable for income tax. However, if the student is a dependent and has other investment income, the tax determination becomes more complicated and subject to special rules. Tips - If the student works as a waiter, camp counselor, or some other common summer jobs, the student may receive tips as part of the summer income. All tip income received is taxable income and is therefore subject to federal income tax. Employees are required to report tips of $20 or more received while working with any one employer in any given month. The reporting should be made in writing to the employer by the tenth day of the month following the receipt of tips. The IRS provides publication 1244 [http://www.irs.gov/pub/irs-pdf/p1244.pdf] that can be used to record tips for a month on a daily basis. The employer withholds FICA (Social Security and health insurance) and income taxes on these reported tips and then includes the tips and wages on the employee's W-2. Cash Jobs - Many students do odd jobs over the summer and are paid in cash. Just because the job is paid in cash does not mean that it is tax-free. Unfortunately, the income is taxable and may be subject to self-employment taxes (see below). These earnings include income from odd jobs like babysitting and lawn mowing. Self-Employment Tax - When an individual works for an employer, the employer withholds FICA (Social Security taxes) and Medicare taxes from the employee's pay, matches the amount dollar for dollar, and remits the combined amount to the government. Self-employed workers are required to pay the combined employee and employer amounts themselves (referred to as self-employment tax) if their net earnings are $400 or more. This tax pays for their benefits under the Social Security system. Even if a worker is not liable for income tax, this 15.3% tax may apply. ROTC Students - Subsistence allowances paid to ROTC students participating in advanced training are not taxable. However, active duty pay—such as pay received during summer advanced camp—is taxable. Newspaper Carrier or Distributor - Special rules apply to services performed as a newspaper carrier or distributor. An individual is a direct seller and treated as self-employed for federal tax purposes under the following conditions: The person is in the business of delivering newspapers; All of the pay for these services directly relates to sales rather than to the number of hours worked; and A written contract controls the delivery services and states that the distributor will not be treated as an employee for federal tax purposes. Newspaper Carriers or Distributors Under Age 18 - Generally, newspaper carriers or distributors under age 18 are not subject to self-employment tax. Please call this office if you have additional questions. Fri, 24 May 2013 19:00:00 GMT Tips for Students and Parents Paying College Expenses http://www.messnerandhadley.com/blog/tips-for-students-and-parents-paying-college-expenses/36916 http://www.messnerandhadley.com/blog/tips-for-students-and-parents-paying-college-expenses/36916 Messner & Hadley LLP Whether you're a recent high school graduate going to college for the first time or a returning student, paying for college can be a daunting financial task. The following are some tips about education tax benefits that can help offset some college costs for students and parents. American Opportunity Credit - In many cases, this credit offers greater tax savings than other existing education tax breaks. Here are some key features of the credit: Tuition, related fees, books, and other required course materials generally qualify. The credit is equal to 100 percent of the first $2,000 spent and 25 percent of the next $2,000, which means that the full $2,500 credit may be available to a taxpayer who pays $4,000 or more in qualified expenses for an eligible student. You may qualify for this credit even if you have previously taken the Hope or Lifetime Learning credit. The full credit is available for taxpayers whose modified adjusted gross income (MAGI) is $80,000 or less (for married couples filing a joint return, the limit is $160,000). The credit is phased out for taxpayers with incomes above these levels. These income limits are higher than those under the Lifetime Learning credit. Forty percent of the American Opportunity Credit is refundable, which means that even people who owe no tax can receive an annual payment of up to $1,000 for each eligible student. Other existing education-related credits and deductions do not provide a benefit to people who owe no tax. The refundable portion of the credit is not available to any student whose investment income is taxed at the parents' rate, which is commonly referred to as the kiddie tax. Although most taxpayers who pay for post-secondary education qualify for the American Opportunity Credit, some do not. Limitations include a married person filing a separate return, regardless of income; joint filers whose MAGI is $180,000 or more; and, finally, single taxpayers, heads of household, and certain widows and widowers whose MAGI is $90,000 or more. Some post-secondary education expenses do not qualify for the American Opportunity Credit. These include the expenses of a student who, as of the beginning of the tax year, has already completed the first four years of college, as this credit is only granted for the first four years of post-secondary education. Lifetime Learning Credit - If a student does not qualify for the American Opportunity Credit, he or she may still qualify for the Lifetime Learning Credit. Key features of the credit include the following: The credit is available for all years of post-secondary education and for courses taken to acquire or improve job skills. There is no limit on the number of years that the Lifetime Learning Credit can be claimed for an eligible student. The credit amounts to $2,000 maximum per eligible student. The credit is non-refundable; thus, the maximum amount credited is limited to the amount of tax that must be paid on your return. The student does not need to be pursuing a degree or other recognized education credential to qualify for this credit. Qualified expenses include tuition and fees, course-related books, supplies, and equipment. The full credit is generally available to eligible taxpayers, in 2013, whose MAGI is less than $53,000, or $107,000 for married couples filing a joint return. Above these amounts, the credit quickly begins to phase out. Only one type of education credit can be claimed per student in the same tax year. However, if you're the parent of two children attending college, you can claim the American Opportunity Credit for one student and the Lifetime Learning Credit for the other. Note, however, that the Lifetime Learning Credit's $2,000 cap applies on a per tax return basis. The credit is claimed on the return of the individual who claims the student's exemption. For example, if a student's parents are divorced and the father pays the tuition but the mother claims the student's exemption, the mother would receive the credit, even though the father made the payments. Student loan interest deduction - Other than certain home mortgage interest, personal interest that you pay is generally not deductible. However, you may be able to deduct interest paid on a qualified student loan during the year. It can reduce the amount of your income subject to tax by up to $2,500, even without itemizing deductions. However, if your MAGI exceeds $75,000 ($155,000 if married filing a joint return), the student loan interest deduction is not allowed. If you're married and filing separately, the deduction is not permitted, regardless of income level. Determining the most beneficial education tax credit and applying other education expense strategies can be complicated and requires planning in advance. For assistance with these and other tax planning issues, please give this office a call. Fri, 24 May 2013 19:00:00 GMT How to Create a Progress Invoice from an Estimate http://www.messnerandhadley.com/blog/how-to-create-a-progress-invoice-from-an-estimate/36918 http://www.messnerandhadley.com/blog/how-to-create-a-progress-invoice-from-an-estimate/36918 Messner & Hadley LLP Not using progress invoices? Maybe you should be. The U.S. economy may be picking up, but your customers are probably still being very careful with expenditures. If your company’s finances will allow it, you can help them out on sizable jobs by using progress invoicing, also known as partial billing or progress billing. You could, of course, simply create invoices for smaller chunks of the job as they come. A smarter way is to build estimates for the entire job or sequential phases so your customer can see the big picture. You can still use progress invoicing to start collecting funds one segment at a time. How to ProceedFirst, be sure you have progress invoicing turned on. Go to Edit | Preferences | Jobs & Estimates | Company Preferences and make sure the Yes button is filled in next to the questions about estimates and progress invoicing. Now create your estimate (these instructions are for QuickBooks Premier 2013; your steps may vary slightly). Go to Customers | Create Estimates. When you’ve entered all of the items you want to include in this phase of your project, click the Create Invoice button. This window will open: Figure 1: You can decide how many of your estimate items will be included on your progress invoice. By clicking one of these buttons, you can bill the customer 100 percent of what’s due on the invoice or just a percentage. But let’s say you and your customer have agreed that payment will be due in pre-defined stages, so click the third button and select one or more of the line items. Click OK. QuickBooks will display a new window that lets you select items and/or percentages of amounts due. In our example here, we’re going to invoice the customer for two items, the blueprints and floor plans. So we selected the button next to Show Quantity and Rate and entered the full estimated quantity for each item in the QTY columns (if you chose Show Percentage, new columns would appear). It would look like this: Figure 2: You can select specific items or percentages for your progress invoice. Click OK. QuickBooks will return to your progress invoice, which you can save and print or email to your customer. Your original estimate will remain unchanged. Tip: If you don’t want any of the zero amounts to appear on the progress invoice, go to Edit | Preferences | Jobs & Estimates | Company Preferences and make sure there’s a check mark in the box next to Don’t print items that have zero amount. Following Up When you want to bill for another set of items on this estimate, simply repeat these steps. Here’s an easy way to determine how much (if any) of the estimate has been invoiced. Go to the Customer Center and select the customer. Click the arrow next to the Show field and select Estimates. Any estimate that has a zero in the OPEN BALANCE column has been completely billed. QuickBooks provides a report that tells you where you are with all of your progress invoices. Go to Reports | Jobs, Time & Mileage | Job Progress Invoices vs. Estimates. Your report will include the progress invoice you just created: Figure 3: You can see what percentage of each estimate has been included on a progress invoice in this report. More Options What if you determine that you won’t have one or more of the items on the estimate? QuickBooks lets you quickly generate a purchase order. With your estimate open, click Create Purchase Order to select the item(s) needed and generate the form. You can also click Create Sales Order if one is necessary. Estimates provide a useful way to fine-tune your bookkeeping and inform your customers about impending costs. They can also be confusing if you don’t keep up with them. We can help you determine when they’re a good idea and how to keep them organized. QuickBooks provides good tools here, but they require some administrative control. Fri, 24 May 2013 19:00:00 GMT Behind on Your Taxes - Want a Fresh Start? http://www.messnerandhadley.com/blog/behind-on-your-taxes-want-a-fresh-start/36908 http://www.messnerandhadley.com/blog/behind-on-your-taxes-want-a-fresh-start/36908 Messner & Hadley LLP If you are unfortunate enough to have an unpaid tax liability and wish to put end the constant stream of correspondence from the IRS, there are several possible solutions to help you deal with the circumstances and take advantage of the IRS’s Fresh Start initiative. Establish An Installment Agreement - If you are unable to pay your tax liability immediately, a payment plan can be arranged, allowing you to pay the liability over a number of years. Under the new “Fresh Start” program, the IRS recently expanded access to streamlined installment agreements. Now, individual taxpayers who owe up to $50,000 can pay via monthly direct debit payments for up to 72 months (six years). While the IRS generally will not need a financial statement, they may request certain financial information from the taxpayer. Conditions that must be met in order to qualify for an installment agreement include the following: Installment payments must be made in full and on time. All future tax returns must be filed on time. Enough withholding or estimated tax payments must be made so that no tax is due with timely filed future returns. Owe more than $50,000 - If the amount you owe is in excess of $50,000 or it is impossible for you to pay off the debt within six years, you can still apply for an installment agreement, but you will be required to supply the IRS with a financial statement. User Fees - The IRS charges a user fee of $105 ($52 if the taxpayer makes the payment by electronic payment withdrawal) for setting up the installment agreement. A reduced fee of $43 applies to lower income taxpayers. Interest & Penalties - Taxpayers will also be charged interest at the current rate (which recently has been 3% annually), compounded daily, and a late payment penalty, usually 0.5% of the balance due per month. However, the penalty is reduced to 0.25% when the IRS approves the agreement for an individual taxpayer who timely filed the return and did not receive a levy notice. Offers in Compromise - If it is reasonably clear that you are unable to pay the entire liability, you can apply for an Offer in Compromise. An Offer in Compromise is an agreement that allows taxpayers to settle their tax debt for less than the full amount. The IRS Fresh Start program expanded and streamlined the OIC program. The IRS now has greater flexibility when analyzing a taxpayer’s ability to pay, making the offer program available to a larger group of taxpayers. Generally, the IRS will accept an offer if it represents the most that the agency can expect to collect within a reasonable period of time. The IRS will not accept an offer if it believes that the taxpayer can pay the amount owed in full as a lump sum or through a payment agreement. The IRS considers several factors, including the taxpayer’s income and assets, when making a decision regarding the taxpayer’s ability to pay. Tax Liens - The IRS Fresh Start program increased the amount that taxpayers can owe before the IRS generally will file a Notice of Federal Tax Lien. That amount is now $10,000. However, in certain cases, the IRS may still file a lien notice on amounts less than $10,000. When a taxpayer meets certain requirements and pays off his or her tax debt, the IRS may withdraw a filed Notice of Federal Tax Lien. Taxpayers must request that this withdrawal in writing using the appropriate IRS form. Some taxpayers may qualify to have their lien notice withdrawn if they are paying their tax debt through a Direct Debit installment agreement. Taxpayers need to request the withdrawal in writing using the appropriate IRS form. If a taxpayer defaults on the Direct Debit Installment Agreement, the IRS may file a new Notice of Federal Tax Lien and resume collection actions. If you would like assistance with getting your IRS back tax liabilities in order, please call this office for an appointment so that we can explore options for which you may qualify based on your situation. Thu, 23 May 2013 19:00:00 GMT Tax Breaks for Charity Volunteers http://www.messnerandhadley.com/blog/tax-breaks-for-charity-volunteers/36904 http://www.messnerandhadley.com/blog/tax-breaks-for-charity-volunteers/36904 Messner & Hadley LLP If you volunteer your time for a charity, you may qualify for tax breaks. Although no tax deduction is allowed for the value of services performed for a charity, some deductions are permitted for out-of-pocket costs incurred while performing the services. The normal deduction limits and substantiation rules also apply. The following are some examples: Away-from-home travel expenses while performing services for a charity, including out-of-pocket roundtrip travel cost, taxi fares, and other costs of transportation between the airport or station and hotel, plus lodging and meals are allowed at 100%. Unlike other areas of taxes, meals are not subject to the 50% limitation. These expenses are only deductible if there is no significant element of personal pleasure associated with the travel, or if your services for a charity do not involve lobbying activities. Any "significant element of personal pleasure" negates a deduction (i.e., not even partial deduction is allowed). Significant personal pleasure is assumed if the taxpayer has only minor duties and is not required to perform any duties for the charity for major portions of the away-from-home stay. The cost of entertaining others on behalf of a charity, such as wining and dining a potential large contributor are allowed at 100 % (but the cost of your own entertainment or meal is not deductible). If you use your car while performing services for a charitable organization, you may deduct your actual unreimbursed expenses directly attributable to the services, such as gas and oil costs, or you may deduct a flat 14 cents per mile for the charitable use of your car. You may also deduct parking fees and tolls. You can deduct the cost of the uniform you wear when doing volunteer work for the charity, as long as the uniform has no general utility. The cost of cleaning the uniform can also be deducted. No charitable deduction is allowed for a contribution of $250 or more unless the contribution is substantiated with a written acknowledgment from the charitable organization. To verify your contribution: Get written documentation from the charity about the nature of your volunteering activity and the need to pay for related expenses. For example, if you travel out-of-town as a volunteer, request a letter from the charity explaining why you're needed at the out-of-town location. Submit a statement of expenses if you are out-of-pocket for substantial amounts, and preferably, a copy of the receipts to the charity. Also, arrange for the charity to acknowledge the amount of the contribution in writing. Maintain detailed records of your out-of-pocket expenses, including receipts and a written record of the time, place, amount and charitable purpose of the expense. Please call this office if you have questions related to your volunteer expenses or any other charitable contributions. Tue, 21 May 2013 19:00:00 GMT Tax Rates Increase in 2013 http://www.messnerandhadley.com/blog/tax-rates-increase-in-2013/36866 http://www.messnerandhadley.com/blog/tax-rates-increase-in-2013/36866 Messner & Hadley LLP As part of the 2012 American Taxpayer Relief Act (ATRA), tax rates, both ordinary and capital gains, increased in 2013 for higher income taxpayers whose taxable income exceeds the income threshold for their filing status. The thresholds at which taxpayers are subject to the top ordinary and long-term capital gains tax rates are $450,000 for joint filers and surviving spouses, $425,000 for heads of household, $400,000 for single filers, and $225,000 for married couples filing separately. These increases will have the following impact on ordinary income and long-term capital gains rates: Ordinary Income Rates - Prior to the law change, there were six tax brackets: 10, 15, 25, 28, 33 and 35%. The ATRA added a new top rate of 39.6%. Thus, higher-income taxpayers, to the extent their taxable income exceeds the income threshold for their filing status, will be subject to the new 39.6% rate (up 4.6% from previous 35% top rate). Example: Jack and Sally, who are filing jointly, have an ordinary taxable income of $600,000. Their income above $450,000 will be subject to the 39.6% tax rate. Thus, they will see a tax increase of $6,900 (($600,000  $450,000) x 4.6%) as a result of the new tax bracket. Capital Gains and Dividends - Prior to the law change, the long-term capital gain was zero for taxpayers in the 10 and 15% ordinary income tax bracket and 15% for taxpayers with taxable income above the 15% bracket. The ATRA increased the top rate for long-term capital gains and qualified dividends to 20% (up from 15%) for taxpayers with incomes exceeding the threshold for their filing status. Thus, for years beginning in 2013, there will be three long-term capital gains rates: 0, 15, and 20%, with the 20% applying to higher-income taxpayers. Example: Howard, a single individual, retired this year and sold his rental property, which he had owned for a long time, for a profit of $700,000. Even though his income is generally in a lower-income tax bracket, the profit from the sale itself pushed his income above the $400,000 threshold for single taxpayers, and to the extent his income exceeds the $400,000 threshold, he will be subject to the increased capital gains rate. Had Howard's other taxable income been $50,000, he would have had a total income of $750,000, of which $350,000 exceeds the 20% long-term CG rate threshold. As a result, Howard pays the 20% rate on $350,000, resulting in an increase of $17,500 ($350,000 x 5%) over what he would have paid in 2012. Generally, sales that are subject to long-term capital gains rates are also investment income subject to the 3.8% unearned income Medicare contribution tax that is part of the Affordable Care Act, which is discussed later in this article. If Howard had utilized an installment sale, he could have spread the gain over multiple years and possibly avoided the higher CG rate. He might have also utilized a tax-deferred exchange to defer the gain into another real estate property. If you have any questions about how these new tax rates will impact you, please give this office a call. Thu, 16 May 2013 19:00:00 GMT Convert Unused Property Into a Tax Deduction http://www.messnerandhadley.com/blog/convert-unused-property-into-a-tax-deduction/36850 http://www.messnerandhadley.com/blog/convert-unused-property-into-a-tax-deduction/36850 Messner & Hadley LLP When you give away items like clothing, appliances, vehicles, and other goods to a qualified charity, your generosity can add up to a tax write-off if you itemize your deductions. The amount of your deduction is generally the donated property's “fair market value.” The IRS definition of fair market value (FMV) is “the price a willing buyer would pay and a willing seller would accept for an item, when neither party is compelled to buy or sell and both parties have reasonable knowledge of the relevant facts.” Below are guidelines to help determine FMV for the most common types of noncash donations (miscellaneous personal items) that have decreased in value since they were acquired: Used Clothing: The IRS provides no set formula for valuing clothing items. However, keep in mind that the FMV of used clothing and other personal items is usually much less than what you paid for them. Household Goods: The value of used household goods (e.g., furniture and appliances) is also much less than their original cost. If the property is worn, inoperable, or out of style, it may have little or no market value. However, photographs, purchase receipts, and newspaper ads describing similar property should help support a valuation. Cars and Other Vehicles: The deduction is limited for motor vehicles (as well as for boats and airplanes) contributed to a charity for which the claimed value exceeds $500 by making it dependent upon the charity's use of the vehicle and imposing higher substantiation requirements. If the charity sells the vehicle without any “significant intervening use” (actual, significant use of the vehicle to substantially further the organization's regularly conducted activities) or “material improvement” (e.g., major repairs), the donor's charitable deduction cannot exceed the gross proceeds from the charity's sale. The charity will issue form 1098-C which includes details of the sale. Where significant intervening use occurs, the deductible amount is the FMV of the vehicle. The “Blue Book” value is a good place to start in determining the vehicle's FMV. However, Blue Book values generally assume the car to be in good condition and allowances must be made for the actual condition of the vehicle. Noncash contributions must be properly documented with a contemporaneous written acknowledgment from the charity if the total deduction claimed for a donation is valued at $250 or more. The acknowledgment must be obtained on or before the earlier of the date the tax return is filed, or the extended due date for the return. It must include the name of the charity, a description (but not value) of the donation, and one of the following: A statement that no goods or services were provided by the charity in return for the contribution, if that is the case; A description and good faith estimate of the value of goods or services, if any, that the charity provided in return for the contribution; or A statement that goods or services that the charity provided in return for the contribution consisted entirely of intangible religious benefits, if that is the case. If the FMV of the donation claimed is greater than $5,000, a written appraisal must be made by a qualified appraiser no more than 60 days before a vehicle or other similar property is contributed. The appraisal must be received before the extended due date of the return on which the deduction is claimed. In addition, Section B of IRS Form 8283 must be completed, including the signature of an authorized official of the charity. If you have questions about how this tax provision might apply to your specific tax situation, please give this office a call. Tue, 14 May 2013 19:00:00 GMT Did You Overlook Something on a Prior Tax Return? http://www.messnerandhadley.com/blog/did-you-overlook-something-on-a-prior-tax-return/36812 http://www.messnerandhadley.com/blog/did-you-overlook-something-on-a-prior-tax-return/36812 Messner & Hadley LLP Occasionally, clients will realize that an item of income was overlooked, a deduction was not claimed, or that an amended tax document was received after the tax return was already filed. Regardless of whether the oversight will result in more tax due or a refund, it should not be dismissed. Failing to report an item of income will most certainly generate an IRS inquiry, which typically happens a year after the original return was filed and after the interest and penalties have built up. On the other hand, if you have a refund coming, you certainly don't want that to go by the wayside. The solution is to file an amended return as soon as the error or omission is discovered. Amended returns can also be used to claim an overlooked credit, correct the filing status or the number of dependents, report an omitted investment transaction, submit delayed K-1s, or anything else that should have been reported on the original return. If the overlooked item will result in a tax increase, penalties and interest can be mitigated by filing an amended return as soon as possible. Procrastination leads to further complication once the IRS determines something is missing, so it is best to take care of the issues right away. Generally, to claim a refund, an amended return must be filed within three years from the date the original return was filed or within two years from the date the tax was paid, whichever is later. If any of the above applies to your situation, please give this office a call so we can prepare an amended tax return for you. Thu, 09 May 2013 19:00:00 GMT Are You Collecting the Needed W-9s? http://www.messnerandhadley.com/blog/are-you-collecting-the-needed-w-9s/36797 http://www.messnerandhadley.com/blog/are-you-collecting-the-needed-w-9s/36797 Messner & Hadley LLP If you use independent contractors to perform services for your business or rental that is a trade or business, and you pay them $600 or more for the year, you are required to issue them a Form 1099 after the end of the year to avoid facing the loss of the deduction for their labor and expenses. (This requirement generally does not apply for payments made to a corporation. However, the exception does not apply to payments made for attorney fees and for certain payments for medical or health care services.) It is not uncommon to have a repairman out early in the year, pay him less than $600, then use his services again later and have the total for the year exceed the $600 limit. As a result, you overlook getting the information needed to file the 1099s for the year. Therefore, it is good practice to always have individuals who are not incorporated complete and sign the IRS Form W-9 the first time you use their services. Having a properly completed and signed Form W-9 for all independent contractors and service providers eliminates any oversights and protects you against IRS penalties and conflicts. Many small business owners and landlords overlook this requirement during the year, and when the end of the year arrives and it is time to issue 1099s to contractors, they realize they have not collected the required documentation. Often it is difficult to acquire the contractor's information after the fact, especially from those contractors with no intention of reporting the income. IRS Form W-9, “Request for Taxpayer Identification Number and Certification” is provided by the government as a means for you to obtain the data required from your vendors in order to file the 1099s. It also provides you with verification that you complied with the law should the vendor provide you with incorrect information. We highly recommend that you have a potential vendor or independent contractor complete the Form W-9 prior to engaging in business with him or her. If you have questions or need copies of the Form W-9, please call this office. This office can also assist you with your 1099 filing requirements next January. Tue, 07 May 2013 19:00:00 GMT Miss the April 15 Deadline? http://www.messnerandhadley.com/blog/miss-the-april-15-deadline/36772 http://www.messnerandhadley.com/blog/miss-the-april-15-deadline/36772 Messner & Hadley LLP Did you miss filing your 1040 tax return by the April 15 due date? If you did, you may be accruing late filing penalties, late payment penalties, and interest. Late filers can mitigate those penalties by filing as soon as possible. There are no late filing penalties or late payment penalties if you had no tax liability (i.e., did not owe or would have gotten a refund) on April 15. The combined penalty is 5% of the unpaid tax for each month or part of the month that the return is late, but not for more than 5 months. The late filing penalty is reduced by the late payment penalty. Thus, the 5% includes a 4.5% penalty for filing late and a 0.5% penalty for paying late. The 25% combined maximum penalty includes 22.5% for filing late and 2.5% for paying late. The 0.5% penalty for paying late is not limited to 5 months. This penalty will continue until you pay the tax in full or until it reaches a maximum of 25%, whichever occurs first. The maximum 25% penalty for paying late is in addition to the maximum 22.5% late filing penalty for a potential total penalty of 47.5%. If a taxpayer doesn't file a return within 60 days of the due date, there is a minimum penalty of $135 or 100% of the balance of the tax due on the return, whichever is smaller. Of course, if you filed an extension, you are only subject to the late payment penalty, and even that won't apply if you had pre-paid at least 90% of your tax liability through withholding, making estimated tax payments, or making a payment that was included with the extension. The extension gives you until October 15, 2013 to file your 2012 return. If you were living abroad on April 15, your filing due date is June 15, 2013, and late filing and late payment penalties do not begin to accrue until after that date. The law allows the IRS to remove, reduce, or not assess penalties for late filing and/or late payment if the taxpayer is able to show “reasonable” cause for not filing and paying on time. However, the IRS determines the merits of each case based on the events or parties involved, as well as whether or not the taxpayer exercised ordinary business care and prudence, but due to circumstances or events beyond the taxpayer's control, he/she was unable to meet the tax requirement. Because the failure-to-file penalty is generally more than the failure-to-pay penalty, you should file your tax return on time each year, even if you're not able to pay all of the taxes that you owe by the due date. You can reduce additional interest and penalties by paying as much as you can with your tax return. Special penalty relief is available to some victims of the recent severe storms in parts of the South and Midwest, as well as for those affected by the Boston explosions tragedy. If you didn't timely file your return or pay the tax that was due by the April 15 deadline, you are encouraged to contact one of our professionals as soon as possible in order to review your options to minimize your penalties and interest. Together, we can explore other payment options, such as loans and installment agreements, or even offers in compromise, if you are unable to pay the tax. Thu, 02 May 2013 19:00:00 GMT Don't Panic If You Receive an IRS Notice http://www.messnerandhadley.com/blog/dont-panic-if-you-receive-an-irs-notice/36756 http://www.messnerandhadley.com/blog/dont-panic-if-you-receive-an-irs-notice/36756 Messner & Hadley LLP A letter from the IRS will probably increase your heart rate a little. Don't panic; many of these letters can be dealt with simply and painlessly. Each year, the IRS sends millions of letters and notices to taxpayers to request payment of taxes, notify them of a change to their account, or to request additional information. The notice you receive normally covers a very specific issue about your account or tax return. Each letter and notice offers specific instructions on what needs to be done to satisfy the inquiry. However, the letters also have to advise you of your rights and other information required by law. Thus, these letters can become overly lengthy and sometimes difficult to understand. That is why it is important to either call this office immediately or forward a copy of the letter or notice so we can review and handle it accordingly. Do not procrastinate or throw the letter in a drawer, hoping the issue will go away. Most of these letters are computer generated and, after a certain period of time, another letter will automatically be generated. And, as you might expect, each succeeding letter will become more aggressive and less easily dealt with. Most importantly, don't automatically pay an amount the IRS is requesting unless you are positive you owe it. Quite often, you will not owe what is requested and it will be difficult to get your payment back. It is good practice to have this office review the notice prior to making any payment.Please call this office right away if you receive any correspondence from the IRS or state tax authorities so it can be dealt with promptly. Tue, 30 Apr 2013 19:00:00 GMT Leave Your Business to Your Family - Not the Government http://www.messnerandhadley.com/blog/leave-your-business-to-your-family-not-the-government/36730 http://www.messnerandhadley.com/blog/leave-your-business-to-your-family-not-the-government/36730 Messner & Hadley LLP Successfully passing a family business to the family upon death of the owner is not an easy task. Most business owners fail to realize the importance of a sound business succession plan. As a result, only about half of all family businesses are transferred to the next generation. A significant number are forced to look elsewhere for capital and management expertise. Without the benefits of a succession plan, grieving loved ones are forced into a business they know little about, which can adversely affect the financial stability of the business and the financial security of your family. Not only should management succession be addressed in the business succession plan, but transfer of ownership and estate planning issues should also be taken care of as well. Choosing the successor is one of the biggest challenges in business succession planning. Appraise the individual's strengths and weaknesses and ensure that the individual has the leadership skills and drive to meet the goals of the business. The needs of the business - not the desires of family members - should be your foremost consideration. It is imperative that a plan is developed in the early stages so that whomever you choose can benefit from your experience and knowledge. Other crucial elements of a sound business succession plan include transfer of ownership and estate planning. Buy-sell agreements, stock gifting, trusts and wills are some of the ways to transfer ownership. Each of these means of transfer has specific legal and tax ramifications and should be considered in conjunction with proper estate planning. If this office can provide assistance with your business succession plan, please call. Thu, 25 Apr 2013 19:00:00 GMT May 2013 Individual Due Date Reminders http://www.messnerandhadley.com/blog/may-2013-individual-due-date-reminders/31256 http://www.messnerandhadley.com/blog/may-2013-individual-due-date-reminders/31256 Messner & Hadley LLP May 10 - Report Tips to Employer If you are an employee who works for tips and received more than $20 in tips during April, you are required to report them to your employer on IRS Form 4070 no later than May 10. Your employer is required to withhold FICA taxes and income tax withholding for these tips from your regular wages. If your regular wages are insufficient to cover the FICA and tax withholding, the employer will report the amount of the uncollected withholding in box 12 of your W-2 for the year. You will be required to pay the uncollected withholding when your return for the year is filed.May 31 - Final Due Date for IRA Trustees to Issue Form 5498 Final due date for IRA trustees to issue Form 5498, providing IRA owners with the fair market value (FMV) of their IRA accounts as of December 31, 2012. The FMV of an IRA on the last day of the prior year (Dec 31, 2012) is used to determine the required minimum distribution (RMD) that must be taken from the IRA if you are age 70½ or older during 2013. If you are age 70½ or older during 2013 and need assistance determining your RMD for the year, please give this office a call. Otherwise, no other action is required and the Form 5498 can be filed away with your other tax documents for the year. Tue, 23 Apr 2013 19:00:00 GMT May 2013 Business Due Date Reminders http://www.messnerandhadley.com/blog/may-2013-business-due-date-reminders/31257 http://www.messnerandhadley.com/blog/may-2013-business-due-date-reminders/31257 Messner & Hadley LLP May 10 - Social Security, Medicare and Withheld Income Tax File Form 941 for the first quarter of 2013. This due date applies only if you deposited the tax for the quarter in full and on time.May 15 - Employer's Monthly Deposit Due If you are an employer and the monthly deposit rules apply, May 15 is the due date for you to make your deposit of Social Security, Medicare and withheld income tax for April 2013. This is also the due date for the non-payroll withholding deposit for April 2013 if the monthly deposit rule applies. Tue, 23 Apr 2013 19:00:00 GMT Read This Before Tossing Old Tax Records http://www.messnerandhadley.com/blog/read-this-before-tossing-old-tax-records/36706 http://www.messnerandhadley.com/blog/read-this-before-tossing-old-tax-records/36706 Messner & Hadley LLP Now that your taxes have been completed for 2012, you are probably wondering what old records can be discarded. If you are like most taxpayers, you have records from years ago that you are afraid to throw away. It would be helpful to understand why the records must be kept in the first place. Generally, we keep tax records for two basic reasons: (1) in case the IRS or a state agency decides to question the information reported on our tax returns, and (2) to keep track of the tax basis of our capital assets so that the tax liability can be minimized when we dispose of them. With certain exceptions, the statute for assessing additional taxes is three years from the return due date or the date the return was filed, whichever is later. However, the statute of limitations for many states is one year longer than the federal law. In addition to lengthened state statutes clouding the recordkeeping issue, the federal three-year assessment period is extended to six years if a taxpayer omits from gross income an amount that is more than 25 percent of the income reported on a tax return. And, of course, the statutes don't begin running until a return has been filed. There is no limit where a taxpayer files a false or fraudulent return to evade taxes. If an exception does not apply to you, for federal purposes, most of your tax records that are more than three years old can probably be discarded; add a year or so to that if you live in a state with a longer statute. Example - Sue filed her 2009 tax return before the due date of April 15, 2010. She will be able to dispose of most of the 2009 records safely after April 15, 2013. On the other hand, Don files his 2009 return on June 2, 2010. He needs to keep his records at least until June 2, 2013. In both cases, the taxpayers may opt to keep their records a year or two longer if their states have a statute of limitations longer than three years. Note: If a due date falls on a Saturday, Sunday or holiday, the due date becomes the next business day. The big problem! The problem with the carte blanche discarding records for a particular year because the statute of limitations has expired is that many taxpayers combine their normal tax records and the records needed to substantiate the basis of capital assets. These need to be separated and the basis records should not be discarded before the statute expires for the year in which the asset is disposed. Thus, it makes more sense to keep those records separated by asset. The following are examples of records that fall into that category: Stock acquisition data - If you own stock in a corporation, keep the purchase records for at least four years after the year the stock is sold. This data will be needed to prove the amount of profit (or loss) you had on the sale. Stock and mutual fund statements (If you reinvest dividends) - Many taxpayers use the dividends they receive from stocks or mutual funds to buy more shares of the same stock or fund. The reinvested amounts add to the basis in the property and reduce gain when it is finally sold. Keep statements at least four years after the final sale. Tangible property purchase and improvement records - Keep records of home, investment, rental property, or business property acquisitions AND related capital improvements for at least four years after the underlying property is sold. For example, when the large $250,000 and $500,000 home exclusion was passed into law several years back, homeowners became lax in maintaining home improvement records, thinking the large exclusions would cover any potential appreciation in the home's value. Now that the exclusion may not always be enough, records of home improvements are vital. Records can be important, so please use caution when discarding them. If you have questions about whether or not to retain certain records? Give this office a call first; it is better to make sure, before discarding something that might be needed down the road. Tue, 23 Apr 2013 19:00:00 GMT Did You Overlook Something on a Prior Tax Return? http://www.messnerandhadley.com/blog/did-you-overlook-something-on-a-prior-tax-return/36707 http://www.messnerandhadley.com/blog/did-you-overlook-something-on-a-prior-tax-return/36707 Messner & Hadley LLP Occasionally, clients will realize that an item of income was overlooked, a deduction was not claimed, or that an amended tax document was received after the tax return was already filed. Regardless of whether the oversight will result in more tax due or a refund, it should not be dismissed. Failing to report an item of income will most certainly generate an IRS inquiry, which typically happens a year after the original return was filed and after the interest and penalties have built up. On the other hand, if you have a refund coming, you certainly don't want that to go by the wayside. The solution is to file an amended return as soon as the error or omission is discovered. Amended returns can also be used to claim an overlooked credit, correct the filing status or the number of dependents, report an omitted investment transaction, submit delayed K-1s, or anything else that should have been reported on the original return. If the overlooked item will result in a tax increase, penalties and interest can be mitigated by filing an amended return as soon as possible. Procrastination leads to further complication once the IRS determines something is missing, so it is best to take care of the issues right away. Generally, to claim a refund, an amended return must be filed within three years from the date the original return was filed or within two years from the date the tax was paid, whichever is later. If any of the above applies to your situation, please give this office a call so we can prepare an amended tax return for you.     Tue, 23 Apr 2013 19:00:00 GMT Tax Facts about Summertime Child Care Expenses http://www.messnerandhadley.com/blog/tax-facts-about-summertime-child-care-expenses/36710 http://www.messnerandhadley.com/blog/tax-facts-about-summertime-child-care-expenses/36710 Messner & Hadley LLP Many parents who work or are looking for work must arrange for care of their children during the school vacation. If you are one of those, and your children requiring care are under 13 years of age, you may qualify for a child care tax credit. The credit ranges from 20% to 35% (the IRS provides a table) of non-reimbursed expenses based upon your income, with the higher percentages applying to lower income taxpayers and the lower percentages applying to higher income taxpayers. As an example, if your income (AGI) is below $15,000, the credit percentage is 35% and gradually reduces as your income increases, until it caps out at 20% for incomes above $43,000. The maximum expense amount allowed is $3,000 for one child and $6,000 for two or more. The credit is non-refundable, which means it can only reduce your tax to zero and the excess is lost. The Child and Dependent Care Credit is available for expenses incurred during the lazy hazy days of summer and throughout the rest of the year. You must claim the qualifying child for whom you pay care expenses as your dependent to qualify to claim the credit (but there’s an exception for divorced or separated parents). Here are some additional details: Day Camps - The costs of day camp generally count as expenses towards the child and dependent care credit. A day camp or similar program may qualify, even though the camp specializes in a particular activity, such as soccer or computers. Overnight Camp or Tutoring - No portion of the cost of an overnight camp or a tutoring program is a qualified expense. School Expenses - Only school expenses for a child below the level of kindergarten will qualify for the credit. Day Care Facility - The expenses paid the day care center qualify. If the day care center cares for more than six persons, it must comply with applicable state and local laws. In Home Care - If your childcare provider is a “sitter” at your home, the sitter is considered your employee, and you may need to pay payroll taxes and file payroll returns. Maximum Qualifying Expenses - You may use up to $3,000 of the unreimbursed expenses paid in a year for one qualifying individual or $6,000 for two or more qualifying individuals to figure the credit. This will provide a tax credit of between $600 and $1,050 for one child and $1,200 and $2,100 for two or more depending upon your income. If the expenses exceed your work earnings, use the earnings to figure the credit. Dependent care benefits received through your employer will also affect the computation of the credit, and could result in no credit being allowed. Records Required - To claim the credit on your tax return, you will need to provide the care provider’s name, address and tax ID number. No credit is allowed without that information. Where you have more than one child you must also show the expenses paid for each child, up to the $3,000 maximum per child. If your state allows a child care credit, additional information, such as the care provider’s phone number, may be required. For more information about how this credit will affect your particular circumstances, or for information about claiming this credit for your spouse or a dependent age 13 or over who is not able to care for himself or herself, please call this office. Tue, 23 Apr 2013 19:00:00 GMT Energy Costs Rise as Tax Incentives Fade http://www.messnerandhadley.com/blog/energy-costs-rise-as-tax-incentives-fade/36711 http://www.messnerandhadley.com/blog/energy-costs-rise-as-tax-incentives-fade/36711 Messner & Hadley LLP With energy costs skyrocketing, you would think that the federal government would come up with some tax incentives aimed at curbing the consumption of energy. However, on the consumer end of taxes, the incentives are actually fading away. Apparently, federal lawmakers and administrators believe the high cost of energy itself is incentive enough to reduce consumption. The following are the only energy-related tax incentives remaining for individual taxpayers: Credit for Energy-Efficient Home Modifications - Through 2013, a taxpayer can still claim a credit for making qualifying energy-saving improvements to his existing home. But after 2013, this credit will not be available. The credit is 10% of the cost of making the improvement but is limited to $500 and is reduced by any credit claimed under this provision in any prior year. Qualified energy-efficiency improvements are the following building-envelope components installed on or in a taxpayer's main home in the United States that the taxpayer owned during 2012, provided that the original use of the component (1) began with the taxpayer and the component can be expected to remain in use at least 5 years and (2) the component meets certain energy standards. These credits are nonrefundable and can offset both income tax and alternative minimum tax (AMT) for the year. Any insulation material or system that is specifically and primarily designed to reduce heat loss or gain of a home when installed in or on the home(1).o Exterior windows and skylights. The credit for these items is limited to $200(1)(2). Exterior doors(1)(2). Any metal roof with appropriate pigmented coatings or an asphalt roof with appropriate cooling granules that are specifically and primarily designed to reduce the heat gain of the home(1)(2). Certain electric heat pump water heaters; electric heat pumps; central air conditioners; natural gas, propane, or oil water heaters; and stoves that use biomass fuel. No more than $300 if the cost is credit-eligible. Qualified natural gas, propane, or oil furnaces and qualified natural gas, propane, or oil hot water boilers. No more than $150 of the cost is credit-eligible. Certain advanced main air circulating fans used in natural gas, propane, or oil furnaces. No more than $50 of the cost is credit-eligible. (1) To figure the credit, do not include the amounts paid for the onsite preparation, assembly, or original installation. (2) Must meet or exceed the Energy Star program requirements. Energy Generation Credits - Through 2016, a taxpayer can claim a credit for installing systems that generate energy. The expenses used to determine the credit include installation costs; but generally no portion of the cost allocated to heating a swimming pool or hot tub can be used toward the credit. Solar electric systems - A credit equal to 30% of the cost for the installation of a qualified solar electric system (50% of the energy is generated from the sun) in the taxpayer's primary or secondary home in the United States. Solar water heating systems - A credit equal to 30% of the cost for the installation of a qualified solar water heating system in the taxpayer's primary or secondary home in the United States. Fuel cell power plant - A credit of $500 per 0.5 kilowatts of electricity generated by electrochemical means from a qualified fuel cell plant installed in the taxpayer's primary home in the United States. These credits are nonrefundable and can offset both income tax and AMT for the year. However, any unused credit can be carried forward. Plug-in Electric Vehicles Credit - The American Taxpayer Relief Act (ATRA) of 2012 modified and extended for two years, through 2013, the individual income tax credit for highway-capable plug-in motorcycles and 3-wheeled vehicles, replacing the 10% tax credit that expired at the end of 2011 for plug-in electric motorcycles, 3-wheeled vehicles, and low-speed vehicles. Through revised definitions, ATRA repeals the ability of golf carts and other low-speed vehicles to qualify for the credit. The credit continues to be the lesser of 10% of the purchase cost or $2,500 per qualified vehicle. The revised rules require that the vehicle must have been manufactured primarily for use on public streets, roads, and highways; be capable of a speed of at least 45 miles per hour; and be acquired in 2012 or 2013. Other requirements are the same as under the old credit: The vehicle must have 2 or 3 wheels, have a gross vehicle weight rating of fewer than 14,000 pounds, and have been acquired for use or lease by the taxpayer and not for resale. The original use must be with the taxpayer and the vehicle must have been made by a manufacturer and be propelled to a significant extent by an electric motor that draws electricity from a battery with a capacity of no less than 2.5 kilowatt hours. The personal use portion of this credit is nonrefundable and may offset both the current year's income tax and AMT. However, if the vehicle is used for business, the unused business portion of the credit can be carried back one year and then carried forward up to 20 years. This credit (other than any business portion being carried over) will no longer be available after 2013. If you have a question related to any of these credits, you may wish to contact this office in advance to verify how the tax benefits will apply to your specific tax situation. Tue, 23 Apr 2013 19:00:00 GMT 10 Tips to Perfect Check-Printing in QuickBooks http://www.messnerandhadley.com/blog/10-tips-to-perfect-check-printing-in-quickbooks/36713 http://www.messnerandhadley.com/blog/10-tips-to-perfect-check-printing-in-quickbooks/36713 Messner & Hadley LLP But be sure that you’ve established all the right settings and understand the process. If you used small business accounting products in the early days, you know how frustrating it was to print checks correctly from your software. Pre-printed checks weren’t cheap, and you probably printed at least a few that didn’t line up right or were otherwise unusable. Figure 1: The Write Checks window in QuickBooks 2013. Printing checks from QuickBooks has gotten easier, and online banking has made this task less of a necessity for many businesses. But when you do print checks, precision is still required. So to minimize frustration, save time and money, and ensure that everything will be copacetic when your checks are processed at the bank, it’s important that you use the tools that QuickBooks offers appropriately. If you’ve been having trouble with check-printing or you’re considering attempting it, keep these tips in mind: First, be sure you are creating standard checks, not paychecks. Go to Banking | Write Checks or click the Write Checks icon on the home page. QuickBooks offers a few options for check creation. Click Edit | Preferences | Checking | My Preferences. Here, you can specify a default account for the Write Checks function. Click Company Preferences for additional options. Figure 2: Check the boxes here to activate options. You can customize the appearance of your checks. Click File | Printer Setup | Check/PayCheck. Specify printer options and check style, change the fonts in some fields, designate a partial page printing style (using the envelope feed) and add your company’s name and address, logo and a signature image. Figure 3: The Printer Setup window provides access to your output options. Be sure that your printer has enough ink or toner before you begin a job. If you print a lot of checks, consider dedicating one printer to that task. But secure your blank checks. Don’t leave them in the printer. Does your printer process pages in reverse order, last page first? This can cause problems when you’re printing multiple checks. You have several options here. You can: o Modify your printer’s property settings in Windows and/or consult your printer documentation o Load the paper to accommodate reverse printing or o Alter the check numbers in QuickBooks. Go to Lists | Chart of Accounts and open the correct checkbook register to change them. (This option is the least elegant and most risky, and not something you want to do on a regular basis. Let us help you with your printer setup if you can’t resolve the problem.) QuickBooks supports batch printing. If you’re writing multiple checks that you’ll want to print later, click the Print Later or To be printed link (depending on your version of QuickBooks). When you’re ready, you can either select File | Print Forms | Checks or click the Print Checks link on the home page. Both will open this window: Figure 4: Uncheck any items you don’t want printed to remove them from the batch job. Printing a batch of checks and realize that you’ve set something up wrong? Hit the Esc key to halt it. Double-check to make sure that your numbers match before you launch a print job. Compare the number in the First Check Number field to the number of the first check queued up in the printer. Ruin a check or an entire page of them? If your accounting protocol allows you to skip check numbers, just start over by changing the First Check Number so that it corresponds with the starting number on a fresh batch of check blanks. If not, you’ll have to create a check for each one that was ruined, choosing a name and account and an amount of $0.00. Then void the check(s). (Click Banking | Use Register and select the account. Highlight the transaction(s), select the edit option and void. Do not delete them. Check-printing can be tricky, but it must absolutely follow the rules. Let us know if you get stuck or want some guidance upfront – or if you want to switch to online banking and bill-pay. Tue, 23 Apr 2013 19:00:00 GMT Chances for Being Audited http://www.messnerandhadley.com/blog/chances-for-being-audited/322 http://www.messnerandhadley.com/blog/chances-for-being-audited/322 Messner & Hadley LLP During Fiscal Year (FY) 2010, the IRS processed 230 million Federal tax returns and supplemental documents and collected $2.3 trillion in gross taxes. After accounting for 122.2 million refunds, totaling $467.3 billion, collections (net of refunds) totaled $1.8 trillion. During FY 2010, there were more than 141.1 million individual income tax returns filed, accounting for 61.3 percent of all returns filed. Individual income tax withheld and tax payments, combined, totaled almost $1.2 trillion before refunds. Individual taxpayers received $358 billion in refunds. The IRS also processed almost 2.4 million returns and collected almost $278 billion in taxes, before refunds, from corporations in FY 2010. Partnerships and S-Corporations filed an additional 8 million returns. More than 116 million returns, including almost 70 percent of individual income tax returns, were filed electronically in FY 2010. More than 64 million returns were submitted to the IRS through paid preparers, while 2.9 million taxpayers whose adjusted gross income was $58,000 or less filed using the IRS Free File program. The following table shows the percentage of returns By AGI and the audit percentage for that income category. Certain income levels are audited more frequently than others. AGI % Of all returns filed   % Audited   All Returns 100.00 1.11 No adjusted gross income 2.11 3.19 $1 under $25,000   39.62 1.18 $25,000 under $50,000 23.96 0.73 $50,000 under $75,000 13.41 0.78 $75,000 under $100,000 8.21 0.64 $100,000 under $200,000 9.64 0.71 $200,000 under $500,000 2.41 1.92 $500,000 under $1,000,000 0.41 3.37 $1,000,000 under $5,000,000 0.20 6.67 $5,000,000 under $10,000,000 0.01 11.56 $10,000,000 or more 0.01 18.38 Fri, 19 Apr 2013 19:00:00 GMT When to Throw Out Tax Records http://www.messnerandhadley.com/blog/when-to-throw-out-tax-records/325 http://www.messnerandhadley.com/blog/when-to-throw-out-tax-records/325 Messner & Hadley LLP Are you doing your spring cleaning and wondering if you can throw out some of those old tax records? If you are like most taxpayers, you have records from years ago that you are afraid to throw away. It would be helpful to understand why you keep the records in the first place. Generally, we keep “tax” records for two basic reasons: (1) we need to keep the records in case the IRS or a state agency decides to question the information reported on our tax returns, and (2) we need to keep track of the tax basis of our capital assets so when we actually dispose of them we can minimize the tax liability. With certain exceptions, the statute for assessing additional tax is three years from the return due date or the date the return was filed, whichever is later. However, the statute of limitations for many states is one year longer than the federal. In addition to lengthened state statutes clouding the recordkeeping issue, the federal three-year assessment period is extended to six years if a taxpayer omits from gross income an amount that is more than 25 percent of the income reported on a tax return. And of course, the statutes don't begin running until a return has been filed. There is no limit where a taxpayer files a false or fraudulent return in order to evade tax. If an exception does not apply to you, for federal purposes, you can probably discard most of your tax records that are more than three years old; add a year or so to that if you live in a state with a longer statute. Examples - Sue filed her  2010 tax return before the due date of April 15,  2011. She will be able to dispose of most of her records safely after April 15,  2014. On the other hand, Don filed his  2010 return on June 2,  2011. He needs to keep his records at least until June 2, 2014. In both cases, the taxpayers may opt to keep their records a year or two longer if their states have a statute of limitations longer than three years. Note: If a due date falls on a Saturday, Sunday or holiday, the due date becomes the next business day. The big problem! The problem with the carte blanche discarding of records for a particular year because the statute of limitations has expired is that many taxpayers combine their normal tax records and the records needed to substantiate the basis of capital assets. They need to be separated and the basis records should not be discarded before the statute expires for the year in which the asset is disposed. Thus, it makes more sense to keep those records separated by asset. The following are examples of records that fall into that category: Stock acquisition data - If you own stock in a corporation, keep the purchase records for at least four years after the year the stock is sold. This data will be needed in order to prove the amount of profit (or loss) you had on the sale. Stock and mutual fund statements - Where you reinvest dividends. Many taxpayers use the dividends they receive from a stock or mutual fund to buy more shares of the same stock or fund. The reinvested amounts add to the basis in the property and reduce gain when it is finally sold. Keep statements at least four years after final sale. Tangible property purchase and improvement records - Keep records of home, investment, rental property, or business property acquisitions AND related capital improvements for at least four years after the underlying property is sold. Fri, 19 Apr 2013 19:00:00 GMT Avoiding Tax Audits http://www.messnerandhadley.com/blog/avoiding-tax-audits/328 http://www.messnerandhadley.com/blog/avoiding-tax-audits/328 Messner & Hadley LLP An IRS tax audit can come in a number of forms. The most demanding are the face-to-face audits, which require sitting down with an auditor and reconciling income and deductions. Others are the less demanding correspondence audits where the IRS has reason to believe that the taxpayer failed to include reported income or has overstated deductions. Correspondence Audits- Employers, banks, lending institutions, schools, brokerage firms, escrow companies and others all feed data to the IRS, which the IRS, in turn, matches by computer the information reported on your tax return. If there is a significant discrepancy, the IRS will correspond with the taxpayer. Sometimes these discrepancies will result in additional tax liability, while other times a simple explanation will satisfy the IRS and make the problem go away. Here are some examples of typically-encountered discrepancies: Unreported Pension Income - Whenever a taxpayer takes money out of one IRA account and rolls it over within the 60-day statutory limit into another IRA or qualified plan, the income is not taxable. However, the financial institution from which the funds were withdrawn will issue a 1099-R and report to the IRS that you made a withdrawal. To show the rollover, a taxpayer must report on their tax return that the distribution was in fact rolled over. All too frequently, taxpayers will fail to bring the distribution to their return preparer's attention thinking that they have met the 60-day rollover requirement. Because the rollover is unreported, it will result in a correspondence audit. Generally, when moving an IRA from one institution to another, making arrangements for a direct transfer will avoid these types of audits. However, that is not universally true, because some institutions will still issue a 1099-R, which must be reported on the tax return. Gross Proceeds of Sale - When real estate, stock or other securities is sold, the IRS computer knows what it sold for since the gross proceeds of sale for real estate, securities stock are included on the form 1099-B that is filed with the IRS.  Even if there is no gain or loss, it still needs to be reported on the tax return. Otherwise, the IRS will assume the entire sales price (gross proceeds of sale) is taxable profit. By reporting the sale on the return, the taxpayer is able to show what he or she paid for the sold investment, thus minimizing or even reporting a deductible loss. Security Basis - Beginning in 2011, the 1099-B was revised to include the basis and profit or loss information required by the new broker reporting rules. The official format is shown below. Substitutes from brokers that incorporate the same information as required on the official form are permitted. Unfortunately, based on the variety of layouts brokers used for 2011 reporting, it seems no two were alike, making interpreting the information and entering it correctly into software a challenge to the return preparer. Broker statements that weren't categorized in such a fashion that permitted copies of the statements to be submitted, and allowed the practitioner to say “see attached” on the Form 8949, meant that each transaction had to be separately listed - This creates a real nightmare for clients who have a significant number of transactions for the year. IRS instructions clearly state that it is not permissible to enter summary totals on the tax return in lieu of reporting the details for each transaction. Alimony Paid or Received - A taxpayer who pays alimony is able to deduct the amount he or she paid. On the other hand, the recipient of that alimony must report that amount as taxable income. The IRS computer checks to make sure the amounts match; otherwise, a correspondence audit will be initiated by the IRS. This is an area of frequent mismatch because there is a lot of confusion with what constitutes alimony, child support and property settlements. Home Mortgage Interest - Each of your mortgage lenders will report to the IRS the interest paid on your mortgage for the year and issue you a 1098 for the same amount. If these amounts don't reconcile, expect a correspondence audit. Where this frequently becomes an issue is when the loan is from a private party and the paying taxpayer must report on his or her tax return the name and social security number of the individual to which the interest was paid, thus allowing the IRS to make sure the private lender is reporting the income. Another frequently encountered area of mismatch is when two or more individuals are on the same loan, but lenders report the interest paid only under one of the borrower's social security numbers. Here again, a notation must be made on the return showing the individual who actually received the income, so the IRS can make sure they are not claiming 100% of that interest and that the total reported paid by all parties does not exceed the total reported paid on the loan. Tuition Paid - Because of the American Opportunity, Hope and Lifetime education tax credits that can be claimed for paying tuition to a qualified education institution, the IRS requires those institutions to report the tuition received to the IRS and issue the 1098-T to the taxpayers. Thus, the IRS has the ability to verify the tuition paid during the year, and any mismatch could result in a correspondence audit. Interest and Dividends - The IRS allows many financial institutions to issue substitute 1099s, i.e. forms that are not in the traditional standard 1099 format. These substitute forms can often be misinterpreted by an untrained eye with various types of interest and dividends reported separately and spread throughout lengthy annual account statements. To make matters worse, many brokerage firms have been issuing amended 1099 statements late in the tax filing season due to their errors in determining the allocation of a taxpayer's earnings between dividends, qualified dividends, capital gains dividends, and original issue discount interest. Thus, if the taxpayer has already filed, the changes are significant, and if the taxpayer does file an amended return, they will probably receive a correspondence audit. Non-Taxable Interest - Interest from municipal obligations are tax-free for purposes of computing federal tax. However, tax-free municipal interest income is added to income for purposes of computing taxable social security income. It is also counts as income for purposes of determining whether a taxpayer qualifies for earned income credit (EIC). Thus, payers of tax-free municipal interest must report the interest paid to the IRS and issue a 1099 to the taxpayer so that the IRS can match the tax-free income to the computation of taxable social security and EIC disallowance. Taxpayers should pay particular attention to this new matching program. Cash Contributions - Regardless of the amount of cash contributed, the contribution must be backed up with either a bank record or written communication from the donee organization showing the: (1) name of the donee organization, (2) date of the contribution, and (3) amount of the contribution. The recordkeeping requirements may not be satisfied by maintaining other written records. What this means is that unless the charitable organization provides a written communication, cash donations put into a “Christmas kettle,” church collection plate, and pass-the-hat collections at youth sporting events will not be deductible. Donations by debit or credit card can be substantiated by bank records. These new rules will give the IRS the ability to audit taxpayer's charitable contributions via correspondence audits since all contributions must be backed by written receipt or bank record.Don't assume that just because you received a notice that the IRS is correct. They are frequently wrong. Please call this office before responding to any IRS notice. Tax laws are complicated, and the notices are not always easily understood. Face-to-Face Audits - The more demanding face-to-face audit is rarely encountered by wage-earning taxpayers who report all their income and have deductions that are within the general norms. Self-employed, high-income taxpayers, those who have omitted substantial income, or those who repeatedly fail to show income to support their lifestyle are more likely to be subject to these types of audits. You can appear for the audit yourself, but that is probably a bad idea since you are not trained in the rules and regulations regarding audit procedures and what limits the IRS's incursion into your private life. You can authorize your tax professional to handle it without you. Often, this is the best way to prevent the audit from escalating beyond the original areas that attracted the IRS's interest in the first place. Practitioners experienced with IRS audits are less likely to become emotional or to make statements that would lead to additional IRS questioning.Caution: It is strongly recommended that you contact this office immediately upon receipt of any inquiry from the IRS. Don't procrastinate, because that only leads to further action on the part of the IRS. Fri, 19 Apr 2013 19:00:00 GMT IRS Has Your Numbers! http://www.messnerandhadley.com/blog/irs-has-your-numbers/329 http://www.messnerandhadley.com/blog/irs-has-your-numbers/329 Messner & Hadley LLP Correspondence from the IRS has a tendency to escalate a taxpayer's pulse rate. However, most of the communication received is not the feared “come on down” letter that requests an appearance for a face-to-face audit, but instead may only require a written explanation. Generally, all types of income (wages, interest, dividends, etc.) are reported by the payer to the IRS, who in turn, matches the reported income to the recipient's tax return based on Social Security number (SSN). Over the past few years, the IRS has become very proficient in using their computer matching programs to pick up unreported income and other discrepancies on tax returns. Discrepancies will generate an IRS inquiry, so take note of the following items which are frequently monitored by the computer matching programs: Dependent SSN - The IRS allows only one taxpayer to claim the exemption for a dependent. Frequently, a dependent will claim the exemption themselves, or in other cases, separated or divorced individuals will both attempt to claim the dependent. Expect correspondence when the exemption for any SSN has been claimed twice. Gross Proceeds of Sale - All brokerage firms are required to report security sales to the IRS as “gross proceeds of sale” on Form 1099-B. The 1099-B copy provided to the account owner is generally combined with interest and dividend reporting requirements and included in a consolidated 1099 statement. These statements can be confusing, and the “gross proceeds of sale” is frequently buried in the multi-page statements. If a taxpayer fails to report these security sales, the IRS will treat the gross proceeds as all profit, recompute the tax owed and send a bill. In addition, the IRS is now requiring brokers to match up and report the cost of securities giving the IRS the ability to compute the gain or loss from individual security sales. Pension and IRA Rollovers - Unless it is direct (trustee-to-trustee) rollover, the plan administrator is required to issue a Form 1099-R whenever a taxpayer withdraws funds from an IRA or other type of qualified plan. If the 1099-R income is not properly accounted for on the tax return, the IRS may treat it as unreported pension income and issue a revised tax bill. Even if it is directly rolled over, ALWAYS bring rollovers to our attention. Alimony - The person paying alimony must include the recipient's name, address and SSN with the deduction claimed for alimony payments. The IRS will match the payments to income reported by the recipient. If the two amounts are not the same, the IRS will initiate correspondence to both parties. Home Sales - Technically, escrow companies are not required to issue 1099-S forms to taxpayers who sell their primary residence for less than the home sale gain exclusion amount and certify that they meet the exclusion qualifications ($250,000 for a single taxpayer and $500,000 for married taxpayers). Despite this, many escrow companies choose to issue them, making it necessary to report the home sale and avoid IRS correspondence. Home Mortgage Interest - Since all lenders who are in the business of lending money are required to report home mortgage interest, the IRS can verify the amount claimed as deductible mortgage interest on the Schedule A of a tax return, and any significant discrepancy can lead to IRS correspondence. If a private party holds the loan (not the course of business), Form 1098 is not required to be filed, but the taxpayer claiming the mortgage interest as a deduction is required to include that party's name, contact information and SSN on Schedule A. The IRS can then match the claimed interest deduction to the amount reported by the private party as interest income. Education Benefits - Schools are now required to report the tuition payments qualifying for the Hope or Lifetime Learning tax credit or the tuition and fees deduction that were made during the year on Form 1098-T. Educational lenders report the amount of student loan interest paid on Form 1098-E. Both are used to match against claimed deductions and credits on the tax return. Should you receive a notice, it is generally best to contact this office. Don't just pay the revised tax the IRS proposes. Frequently, the IRS notice is in error and attempting to respond to the notice without professional advice may create additional problems. Fri, 19 Apr 2013 19:00:00 GMT Innocent Spouse Relief http://www.messnerandhadley.com/blog/innocent-spouse-relief/333 http://www.messnerandhadley.com/blog/innocent-spouse-relief/333 Messner & Hadley LLP When married taxpayers file jointly, they become “jointly and individually” responsible (often referred to as “jointly and severally liable”) for the tax and interest or penalty due on their returns. This is true even if they later separate or divorce. Joint filers remain “jointly and severally liable” even if a divorce decree states that a former spouse is responsible for any amounts due on previously filed joint returns. The IRS will use all means to collect the tax from either or both of the spouses. One spouse may be held responsible for all the tax due, even if all the income was earned by the other spouse. However, a spouse may in certain cases be relieved of responsibility for tax, interest, and penalties on a joint return under special relief rules. There are three types of relief available: 1. Innocent spouse relief 2. Separation of liability 3. Equitable relief INNOCENT SPOUSE RELIEF - To qualify for innocent spouse relief, a taxpayer:1. Must have filed a joint return with an “understatement of tax” (i.e., the difference between the amount of tax that should have been shown on a return vs. the tax actually shown) that was due to “erroneous items” of his/her spouse;2. Must establish that at the time he/she signed the joint return, he/she didn't know (and had no reason to know) that there was an understatement; and3. Accounting for all the facts and circumstances, it would be unfair (i.e., inequitable) to hold the taxpayer liable for the understatement of tax. Erroneous Items are either: Unreported income that was received by the non-innocent spouse and isn't reported on the return, or Incorrect deductions, credits, or basis claimed by the non-innocent spouse which are improper or for which there is no basis in fact or law. Indicators of Unfairness are determined based on the facts and circumstances of each individual case. To decide unfairness, the IRS will check several factors, which include: Whether the “innocent spouse” received significant direct or indirect benefit from the understatement of tax. A significant benefit is one which is excessive in terms of normal support. Example: In March 2012, Jenna received $20,000 from Terence, her spouse of 10 years. The funds were traced to Terence's lottery winnings in 2010. No winnings were reported on the couple's joint federal return in 2010. The couple's normal monthly household operating budget was around $4,000. More than likely, the IRS would rule that Jenna had received a significant benefit due to the $20,000 gift, even though it was received in a year other than the one in which the unreported income occurred. Desertion of the innocent spouse by the non-innocent spouse. Divorce or separation of the spouses. Innocent spouse received a benefit on the return from the understatement. RELIEF BY SEPARATION OF LIABILITY - To file a claim for this type of relief, the understatement of a joint tax liability (including interest and penalty) must be allocated (separated) between spouses (or former spouses). Since this form of relief is for unpaid liabilities resulting from understatements of tax, the relief doesn't generate refunds. To request relief by separation, a taxpayer must have filed a joint return and meet either of the following when the application is filed: Be divorced or legally separated from the spouse with whom the joint return was filed (widowed counts the same as divorced or legally separated), OR Not be a member of the same household as the spouse with whom the joint return was filed during the 12-month period ending on the date Form 8857 is filed. Note: The reason for living apart must be due to estrangement, not temporary absence.Limitations - Innocent spouse relief by separation won't be granted in these situations:1. IRS proves that the spouses transferred assets to each other fraudulently.2. IRS shows that the “innocent spouse” had actual knowledge of erroneous items at the time of signing the joint return. NOTE: A victim of domestic abuse who had actual knowledge of errors may still qualify for relief if the abuse happened before signing the joint return and fear prevented the abused spouse from challenging treatment of return items.3. The “non-innocent” spouse transfers property to the “innocent” spouse to avoid taxes. A transfer to avoid tax is presumed if made within one year before the date on which the IRS sent its first letter of proposed deficiency. However, this presumption doesn't apply if the transfer is made under a divorce decree or separate maintenance agreement, nor does it apply where a taxpayer can establish that the main purpose of the transfer was not tax avoidance. EQUITABLE RELIEF - If a taxpayer doesn't qualify for the two other forms of innocent spouse relief, the IRS will automatically consider whether equitable relief is suitable to the situation. A taxpayer may qualify for equitable relief if all of the following are met:1. The taxpayer doesn't qualify under one of the other forms of relief (e.g., separation of liability);2. The spouses didn't transfer assets to each other fraudulently or for the purpose of avoiding tax payment;3. The taxpayers' return wasn't fraudulently filed;4. The taxpayer did not pay the tax owed (although a refund may be available for certain installment payments made after Form 8857 is filed);5. The taxpayer can establish that it would be unfair (inequitable) to hold him/her responsible for the tax liability;6. The income tax from which the taxpayer seeks relief is attributable to the “non-innocent” spouse, unless one of the following exceptions apply:a. The item is partly or totally attributable to the taxpayer under community law.b. An item titled in the taxpayer's name is attributable to the taxpayer unless rebutted by facts and circumstances.c. The taxpayer had no knowledge, or reason to know, that the “non-innocent” spouse misappropriated the funds that were intended to pay the tax.d. The taxpayer establishes being an abuse victim before signing the return, and because of prior abuse, didn't challenge the treatment of items on the return for fear of retaliation by the spouse. INDICATORS OF UNFAIRNESS - The IRS considers all facts and circumstances to determine if it is unfair to hold the innocent spouse responsible for an underpayment or understatement of tax. The following factors are examples of items weighed by the Service in equitable relief cases: Favorable Factors: Separation or divorce of the involved spouses Economic hardship Abuse Lack of knowledge of the innocent spouse Non-innocent spouse's obligation under a divorce decree to pay the tax The tax owed is attributed to the non-innocent spouse. Unfavorable Factors: No economic hardship if relief is not granted. Innocent spouse had knowledge of the understated items. Innocent spouse received significant benefit from the unpaid tax. Lack of good faith effort to comply with the tax law by the innocent spouse. Innocent spouse has an obligation to pay the tax under a divorce decree. Tax for which relief request is made is attributable to the innocent spouse. Spousal Notification - Be aware that the law requires the IRS to inform your spouse or former spouse of the request for relief from liability. The IRS is also required to allow your spouse or former spouse to provide information that may assist in determining the amount of relief from liability. The IRS will not provide information to your spouse or former spouse that could infringe on your privacy. The IRS will not provide your current name, address, information about your employer, phone number or any other information that does not relate to making a determination about your request for relief from liability. If you believe you qualify for relief under innocent spouse, separation of liability or equitable relief, you will need to complete IRS Form 8857 and include a written statement explaining why you would qualify for relief. You should also complete and attach IRS Form 12510 (Questionnaire for Requesting Spouse), which may help speeding up the processing. Generally, you can expect the IRS to request additional information before making their final determination. Fri, 19 Apr 2013 19:00:00 GMT Installment Agreement http://www.messnerandhadley.com/blog/installment-agreement/8765 http://www.messnerandhadley.com/blog/installment-agreement/8765 Messner & Hadley LLP So what happens if you can't pay your tax liability?   For taxpayers who cannot pay all their taxes at once, there is the installment agreement option. IRS Form 9465 is used to request a monthly installment plan. Generally, you can have up to 72 months to pay off the liability. Depending upon how much you owe, the IRS may investigate your ability to pay before granting an installment agreement. To be eligible for an installment agreement, you must first file all returns that are required and be current with estimated tax payments. If you owe $50,000 or less in combined tax, penalties and interest, you can request an installment agreement using the web-based application called Online Payment Agreement found at IRS.gov. You can also complete and mail an IRS Form 9465, Installment Agreement Request, along with your bill in the envelope that you have received from the IRS.  The IRS will inform you usually within 30 days whether your request is approved, denied, or if additional information is needed.  If the amount you owe is $50,000 or less, provide the monthly amount you wish to pay with your request.  At a minimum, the monthly amount you will be allowed to pay without completing a Collection Information Statement, Form 433, is an amount that will full pay the total balance owed within 72 months. You may still qualify for an installment agreement if you owe more than $50,000, but a Form 433F, Collection Information Statement, is required to be completed before an installment agreement can be considered. If your balance is over $50,000, consider your financial situation and propose the highest amount possible, as that is how the IRS will arrive at your payment amount based upon your financial information. If an agreement is approved, a one-time user fee will be charged.  The user fee for a new agreement is $105 or $52 for agreements where payments are deducted directly from your bank account.  For eligible individuals with incomes at or below certain levels, a reduced fee of $43 will be charged, and is automatically figured based on your income. But before requesting an installment agreement, you should consider other less costly alternatives, such as a bank loan, home equity loan or other sources of funds. The IRS will charge a $43 fee and you will continue to pay interest on the balance, which is generally higher than bank rates. Fri, 19 Apr 2013 19:00:00 GMT President's Proposed Tax Changes for 2014 http://www.messnerandhadley.com/blog/presidents-proposed-tax-changes-for-2014/36689 http://www.messnerandhadley.com/blog/presidents-proposed-tax-changes-for-2014/36689 Messner & Hadley LLP The budget proposal released by President Obama on April 10 includes a substantial number of proposed tax changes impacting individuals, businesses, estate taxation, energy incentives, and international issues. Although these are only proposals, they provide an insight into the administration's thinking on tax reform. An overview of the most prominent issues related to individuals and small business is provided below. Individual Proposals Reduce the value of itemized deductions and other tax preferences to 28% for families with income in the three highest tax brackets. This limit would apply to all itemized deductions; foreign excluded income; tax-exempt interest; employer-sponsored health insurance; retirement contributions; and selected above-the-line deductions. Observe the “Buffett rule” by requiring millionaires to pay no less than 30% of income (after charitable contributions) in taxes. This would be referred to as the “fair share tax.” For tax years beginning after Dec. 31, 2017, permanently extend the American Opportunity Tax Credit (AOTC), a partially refundable tax credit worth up to $10,000 per student over the course of four years of college. For tax years beginning after Dec. 31, 2017, permanently extend the increased refundability of the child tax credit (CTC) by permanently reducing the earned income threshold to $3,000. Extend the exclusion from income for the cancellation of certain home mortgage debts to amounts that are discharged before Jan. 1, 2016 and amounts that are discharged pursuant to an agreement entered into before that date. For tax years beginning after Dec. 31, 2017, make permanent the expansion of the EITC for workers with three or more qualifying children by maintaining (i) at 45%, the phase-in rate of the EITC for workers with three or more qualifying children, and (ii) the phase-out range for married couples at $5,000 higher than those for unmarried filers (indexed after 2009). Increase the child and dependent care credit available to working families with incomes between $15,000 and $103,000. Extend the exclusion for income from the discharge of qualified principal residence indebtedness (QRPI) to amounts that are discharged before Jan. 1, 2015, and to amounts that are discharged pursuant to an agreement entered into before that date. Prohibit individuals from accumulating over $3 million in tax-preferred retirement accounts. Business Proposals Make permanent the $500,000 Sec. 179 deduction with a $2million phase-out threshold. Enhance and make permanent the research credit and increase the simplified credit percentage to 14%. Permanently extend the work opportunity tax credit (WOTC) to wages paid to qualified individuals who begin work after Dec. 31, 2013. Offer a one-time, temporary, 10% tax credit for increases in company wage payments over wages paid in 2012, whether driven by new hires, increased wages or salaries, or both. Require employers who have over 10 employees and do not currently offer a retirement plan to enroll their employees in a direct-deposit Individual Retirement Account (IRA) that is compatible with existing direct-deposit payroll systems. (Employees can opt out if they choose.) Employers would be entitled to a tax credit of $25 per participating employee, up to $250 per year, for six years. Deny deductions for punitive damages. Make the 100% exclusion permanent for qualified small business stock (QSBS) acquired after Dec. 31, 2013. Permanently double the maximum amount of start-up expenditures that a taxpayer may deduct (in addition to amortized amounts) in the tax year in which a trade or business begins from $5,000 to $10,000 for tax years ending on or after the date of enactment. Reduce this maximum amount of start-up expenditures (but not to below zero) by the amount that start-up expenditures with respect to the active trade or business exceed $60,000. For tax years beginning after Dec. 31, 2012, expand the group of employers who are eligible for the tax credit available to small employers providing health insurance to employees so as to include employers with up to 50 full-time (or the equivalent) employees, and begin the phase-out at of the restriction to no more than 20 full-time equivalent employees.  Create a new general business credit against income tax equal to 20% of the eligible expenses paid or incurred in connection with insourcing a U.S. trade or business. Disallow deductions for expenses paid or incurred in connection with outsourcing a U.S. trade or business. Estate and Gift Tax Proposals Beginning in 2018, return to 2009 levels the estate, generation-skipping transfer (GST), and gift tax exemptions and rates. Thus, the highest tax rate would be 45%, and the exclusion amount would be $3.5 million for estate and GST taxes and $1 million for gift taxes. Require that the basis of property in the hands of the recipient be no greater than the value of that property as determined for estate or gift tax purposes (subject to subsequent adjustments). These rules would apply to transfers on or after the enactment date. Keep in mind that these are only proposed changes, and they must be passed by both houses of Congress in order to become law. Thu, 18 Apr 2013 19:00:00 GMT Checking the Status of Your Federal Tax Refund is Easy http://www.messnerandhadley.com/blog/checking-the-status-of-your-federal-tax-refund-is-easy/36664 http://www.messnerandhadley.com/blog/checking-the-status-of-your-federal-tax-refund-is-easy/36664 Messner & Hadley LLP If you already filed your federal tax return and are due a refund, you can check the status of your refund online. Where's My Refund? is an interactive tool on the IRS web site. Whether you split your refund among several accounts, opted for direct deposit into one account, or asked the IRS to mail you a check, Where's My Refund? will give you online access to your refund information nearly 24 hours a day, 7 days a week. If you e-file, you can get refund information 72 hours after the IRS acknowledges receipt of your return. Nine out of 10 taxpayers typically receive refunds in less than 21 days when they use e-file with direct deposit. If you file a paper return, refund information will be available within three to four weeks. When checking the status of your refund, have a copy of your federal tax return handy. To access your personalized refund information, you must enter: Your Social Security Number (or Individual Taxpayer Identification Number); Your Filing Status (Single, Married Filing Joint Return, Married Filing Separate Return, Head of Household, or Qualifying Widow(er)); and The exact refund amount shown on your tax return. Once your personal information has been entered, one of several responses may come up, including the following: Acknowledgement that your return was received and is in processing. The mailing date or direct deposit date of your refund. Notice that the IRS could not deliver your refund due to an incorrect address. You can update your address online using the Where's My Refund? feature. Where's My Refund? also includes links to customized information based on your specific situation. The links guide you through the steps to resolve any issues affecting your refund. For example, if you do not get the refund within 28 days from the original IRS mailing date shown on Where's My Refund?, you can start a refund trace online. Where's My Refund? is also accessible to visually impaired taxpayers who use the Job Access with Speech screen reader used with a Braille display and is compatible with different JAWS modes. If you do not have Internet access, you can check the status of your refund by calling the IRS TeleTax System at 800-829-4477 or the IRS Refund Hotline at 800-829-1954. When calling, you must provide your Social Security Number (or your spouse's), your filing status and the exact refund amount shown on your return. IRS2Go is the IRS' first smartphone application that let's taxpayers check on the status of their tax refund. Apple users can download the free IRS2Go application by visiting the Apple App Store. Android users can visit the Android Marketplace to download the free IRS2Go app. Where's My Refund? provides the most up-to-date information the IRS has. There's no need to call the IRS unless Where's My Refund? tells you to do so. Where's My Refund? is updated every 24 hours - usually overnight -- so you only need to check once a day. Please call this office if you encounter problems. Tue, 16 Apr 2013 19:00:00 GMT TRACK YOUR REFUND http://www.messnerandhadley.com/blog/track-your-refund/3194 http://www.messnerandhadley.com/blog/track-your-refund/3194 Messner & Hadley LLP When will you receive your refund? The answer depends on how you filed your return. The IRS should issue your refund check within six to eight weeks of filing a paper return. If you chose to receive your refund through direct deposit, you should receive it within a week. If you use e-file, your refund should be issued between two and three weeks. You can check on the status of your refund by clicking on the links below. Check your Federal Refund... click here Check your Federal Amended Return Refund... click here Check your State Refund... AlabamaArkansasArizonaCaliforniaColoradoConnecticutDelawareGeorgiaHawaiiIdahoIllinoisIndianaIowaKansasLouisianaMaineMarylandMassachusettsMichigan MinnesotaMissouriMississippiNebraskaNew JerseyNew YorkNorth CarolinaNorth DakotaOhioOklahomaOregonPennsylvaniaRhode IslandSouth CarolinaUtahVirginiaWest VirginiaWisconsin Fri, 29 Mar 2013 19:00:00 GMT Plan to Benefit from the Saver's Credit http://www.messnerandhadley.com/blog/plan-to-benefit-from-the-savers-credit/36602 http://www.messnerandhadley.com/blog/plan-to-benefit-from-the-savers-credit/36602 Messner & Hadley LLP The Saver's Credit helps low- and moderate-income workers save for retirement. The Saver's Credit helps offset part of the first $2,000 that workers voluntarily contribute to IRAs and 401(k) plans, in addition to similar workplace retirement programs. Also known as the Retirement Savings Contributions Credit, the Saver's Credit is available in addition to any other tax savings that apply.Although most employer retirement programs require contributions to be made by the end of the year, eligible workers can still open and contribute to IRAs up to the April 15, 2013 due date for 2012 tax returns to qualify for the credit in 2012. To receive the credit, the taxpayer must have reached the age of 18 by the close of the year and cannot be a dependent or a full-time student.The credit ranges from 10% to 50% of the first $2,000 contributed by each taxpayer to a qualified plan during the year. The credit gradually phases out as a taxpayer's modified AGI increases. The tables below are for 2012 and 2013. The phase-outs are inflation adjusted from year to year; please call for the phase-outs for any years other than those shown below. Modified AGI- Adjusted gross income is determined without regard to foreign and protectorate income exclusions or foreign housing exclusions. Example - Eric and Heather, both age 28, are married and file a joint return for 2013. Eric contributed $3,000 through his 401(k) plan at work, and Heather contributed $500 to her IRA account. Their modified AGI for the year was $30,000. The credit is computed as follows:  Example - Eric and Heather file a return using the standard deduction for a married couple and their tax for the year is computed as follows: The credit is nonrefundable and offsets the alternative minimum tax liability, as well as the regular tax liability.  Caution - To prevent taxpayers from withdrawing contributions from existing plans and, subsequently, re-contributing the funds in order to qualify for the credit, Congress built in a two-year look-back period that generally reduces a taxpayer's current year contribution by withdrawals during the look-back period.Affluent taxpayers might consider gifting lower-income family members the needed funds to contribute to an IRA, while simultaneously reducing their tax liability for 2012.If you have questions about how this credit can benefit you or your family members, please give this office a call.    Thu, 28 Mar 2013 19:00:00 GMT Refund Statute Expiring http://www.messnerandhadley.com/blog/refund-statute-expiring/36573 http://www.messnerandhadley.com/blog/refund-statute-expiring/36573 Messner & Hadley LLP If you have not yet filed your 2009 tax return and have a refund coming, time is running out! The IRS estimates that there are more than 1 million taxpayers who have not filed their 2009 tax return and that there are approximately $1 billion of unclaimed refunds available for those taxpayers. If you fall in this category, you need to act quickly because the return must be filed by April 15, 2013 to claim a refund for 2009. Otherwise, the money becomes the property of the U.S. Treasury. By failing to file a return, people stand to lose more than a refund of taxes withheld or paid during 2009. In addition, many low- and moderate-income workers may not have claimed the Earned Income Tax Credit (EITC). The EITC helps individuals and families with incomes below certain thresholds, which in 2009 were $43,279 ($48,279 married joint) for people with 3 or more children, $40,295 (45,295 married joint) for those with two or more children, $35,463 ($40,463 married joint) for people with one child, and $13,440 ($18,440 married joint) for those with no children. When filing a 2009 return, the law requires that the return be properly addressed, mailed, and postmarked by April 15. There is no penalty for filing a late return that qualifies for a refund. As a reminder, taxpayers seeking a 2009 refund should know that their checks will be held if they have not filed tax returns for 2010 and 2011. In addition, the refund will be applied to any amounts still owed to the IRS and may be used to offset unpaid child support or past due federal debts, such as student loans. Please give this office a call as soon as possible if you have not filed your 2009 return. Sufficient time is needed to prepare and print the return and for you take it to the post office for proof of mailing. Tue, 26 Mar 2013 19:00:00 GMT IRS LINKS http://www.messnerandhadley.com/blog/irs-links/729 http://www.messnerandhadley.com/blog/irs-links/729 Messner & Hadley LLP FORMS & PUBLICATIONS Forms and Instructions Publications and Notices Prior Year Forms, Instructions and Publications State Tax Forms INDIVIDUAL TAX LINKS Where's My Refund? Economic Stimulus Payments Information Center Extension of Time to File Your Tax Return Name Changes & Social Security Number Matching Issues Payment Options Filing Late and/or Paying Late Setting Up an Installment Agreement Taxpayer Rights BUSINESS TAX LINKS Agriculture/Farmers Small Business and Self-Employed One-Stop Resource Tax Information For Partnerships Tax Information For Corporations Employer ID Numbers (EINs) IDENTITY THEFT Identity Theft and Your Tax Records Suspicious e-Mails and Identity Theft ESTATE & GIFT TAX Estate and Gift Taxes Gift Tax NEWS & OTHER INFORMATION Highlights of Recent Tax Changes Hybrid Cars and Alternative Fuel Vehicles Fact Sheets 2011 Around the Nation Tax Relief in Disaster Situations What Will Happen If You Don't File Your Past Due Return or Contact the IRS Tax Information for Members of the Military OTHER GOVERNMENT LINKS Social Security Administration Find Your Senator Find Your Representative Mon, 25 Mar 2013 19:00:00 GMT Tax Breaks for Charity Volunteers http://www.messnerandhadley.com/blog/tax-breaks-for-charity-volunteers/36557 http://www.messnerandhadley.com/blog/tax-breaks-for-charity-volunteers/36557 Messner & Hadley LLP If you volunteer your time for a charity, you may qualify for tax breaks. Although no tax deduction is allowed for the value of services performed for a charity, some deductions are permitted for out-of-pocket costs incurred while performing the services. The normal deduction limits and substantiation rules also apply. The following are some examples: Away-from-home travel expenses while performing services for a charity, including out-of-pocket roundtrip travel cost, taxi fares, and other costs of transportation between the airport or station and hotel, plus lodging and meals are allowed at 100%. Unlike other areas of taxes, meals are not subject to the 50% limitation. These expenses are only deductible if there is no significant element of personal pleasure associated with the travel, or if your services for a charity do not involve lobbying activities. Any "significant element of personal pleasure" negates a deduction (i.e., not even partial deduction is allowed). Significant personal pleasure is assumed if the taxpayer has only minor duties and is not required to perform any duties for the charity for major portions of the away-from-home stay. The cost of entertaining others on behalf of a charity, such as wining and dining a potential large contributor are allowed at 100 % (but the cost of your own entertainment or meal is not deductible). If you use your car while performing services for a charitable organization, you may deduct your actual unreimbursed expenses directly attributable to the services, such as gas and oil costs, or you may deduct a flat 14 cents per mile for the charitable use of your car. You may also deduct parking fees and tolls. You can deduct the cost of the uniform you wear when doing volunteer work for the charity, as long as the uniform has no general utility. The cost of cleaning the uniform can also be deducted. No charitable deduction is allowed for a contribution of $250 or more unless the contribution is substantiated with a written acknowledgment from the charitable organization. To verify your contribution: Get written documentation from the charity about the nature of your volunteering activity and the need to pay for related expenses. For example, if you travel out-of-town as a volunteer, request a letter from the charity explaining why you're needed at the out-of-town location. Submit a statement of expenses if you are out-of-pocket for substantial amounts, and preferably, a copy of the receipts to the charity. Also, arrange for the charity to acknowledge the amount of the contribution in writing. Maintain detailed records of your out-of-pocket expenses, including receipts and a written record of the time, place, amount and charitable purpose of the expense. Please call this office if you have questions related to your volunteer expenses or any other charitable contributions. Mon, 25 Mar 2013 19:00:00 GMT Individual Estimated Tax Payments for 2013 Start Soon http://www.messnerandhadley.com/blog/individual-estimated-tax-payments-for-2013-start-soon/36560 http://www.messnerandhadley.com/blog/individual-estimated-tax-payments-for-2013-start-soon/36560 Messner & Hadley LLP Our tax system is a “pay-as-you-go” system, and if your pre-paid amount is not enough, you become liable for non-deductible interest penalties. To facilitate that concept, the government has provided several means of assisting taxpayers in meeting the “pay-as-you-go” requirement. The primary among these include: Payroll withholding for employees; Pension withholding for retirees; and Estimated tax payments for self-employed individuals and those with other sources of income not covered by withholding. Determining how much tax to pre-pay through withholding and estimated tax payments has always been difficult, but thanks to Congress' constant tinkering with the tax laws, ensuring there are no underpayment penalties or tax surprises when the tax return is prepared next year can be challenging. There are several new tax laws and changes taking effect in 2013 that add complexity to estimating one's tax liability including: higher ordinary tax rates, higher capital gains tax rates, the phase out of exemptions and itemized deductions for higher income taxpayers, the new 3.8% tax on net investment income and .9% increase in self-employment tax for upper-income self-employed individuals, not to mention myriad of extended and sun setting tax provisions. When a taxpayer fails to prepay a safe harbor (minimum) amount, he or she can be subject to the underpayment penalty. This penalty is the short-term federal rate plus 3 percentage points and the penalty is computed on a quarter-by-quarter basis. So, even if you pre-pay the correct amount for the year, if the amounts are not paid evenly you could be subject to a penalty. Interestingly enough, withholding amounts are treated as paid ratably throughout the year, so taxpayers who are underpaid in the earlier part of the year can compensate by bumping up their withholding in the later part of the year. Federal tax law does provide ways to avoid the underpayment penalty. If the underpayment is less than $1,000 (referred to as the de minimis amount), no penalty is assessed. In addition, the law provides “safe harbor” prepayments. There are two safe harbors: The first safe harbor is based on the tax owed in the current year. If your payments equal or exceed 90% of what is owed in the current year, you can escape a penalty. The second safe harbor is based on the tax owed in the immediately preceding tax year. This safe harbor is generally 100% of the prior year's tax liability. However, for a higher income taxpayer whose AGI exceeds $150,000 ($75,000 for married taxpayers filing separately), the prior year's safe harbor is 110%. Example: Suppose your tax for the year is $10,000 and your prepayments total $5,600. The result is that you owe an additional $4,400 on your tax return. To find out if you owe a penalty, see if you meet the first safe harbor exception. Since 90% of $10,000 is $9,000, your prepayments fell short of the mark. You can't avoid the penalty under this exception. However, in the above example, the safe harbor may still apply. Assume your prior year's tax was $5,000. Since you prepaid $5,600, which is greater than 110% of the prior year's tax (110% = $5,500), you qualify for this safe harbor and can escape the penalty. If your state has a state tax, the state's de minimis amount and safe-harbor percentage and amount may be different. This example underscores the importance of making sure your prepayments are adequate, especially if you have a large increase in income. This is common when there is a large gain from the sale of stocks, sale of property, when large bonuses are paid, when a taxpayer retires, etc. If you have questions regarding your pre-payments or would like to review and adjust your W-4 payroll withholding, W-4P pension withholding, and estimated tax payments to provide the desired tax result for 2013, please give this office a call. Mon, 25 Mar 2013 19:00:00 GMT Checking the Status of Your Federal Tax Refund is Easy http://www.messnerandhadley.com/blog/checking-the-status-of-your-federal-tax-refund-is-easy/36562 http://www.messnerandhadley.com/blog/checking-the-status-of-your-federal-tax-refund-is-easy/36562 Messner & Hadley LLP If you already filed your federal tax return and are due a refund, you can check the status of your refund online. Where's My Refund? is an interactive tool on the IRS web site. Whether you split your refund among several accounts, opted for direct deposit into one account, or asked the IRS to mail you a check, Where's My Refund? will give you online access to your refund information nearly 24 hours a day, 7 days a week. If you e-file, you can get refund information 72 hours after the IRS acknowledges receipt of your return. Nine out of 10 taxpayers typically receive refunds in less than 21 days when they use e-file with direct deposit. If you file a paper return, refund information will be available within three to four weeks. When checking the status of your refund, have a copy of your federal tax return handy. To access your personalized refund information, you must enter: Your Social Security Number (or Individual Taxpayer Identification Number); Your Filing Status (Single, Married Filing Joint Return, Married Filing Separate Return, Head of Household, or Qualifying Widow(er)); and The exact refund amount shown on your tax return. Once your personal information has been entered, one of several responses may come up, including the following: Acknowledgement that your return was received and is in processing. The mailing date or direct deposit date of your refund. Notice that the IRS could not deliver your refund due to an incorrect address. You can update your address online using the Where's My Refund? feature. Where's My Refund? also includes links to customized information based on your specific situation. The links guide you through the steps to resolve any issues affecting your refund. For example, if you do not get the refund within 28 days from the original IRS mailing date shown on Where's My Refund?, you can start a refund trace online. Where's My Refund? is also accessible to visually impaired taxpayers who use the Job Access with Speech screen reader used with a Braille display and is compatible with different JAWS modes. If you do not have Internet access, you can check the status of your refund by calling the IRS TeleTax System at 800-829-4477 or the IRS Refund Hotline at 800-829-1954. When calling, you must provide your Social Security Number (or your spouse's), your filing status and the exact refund amount shown on your return. IRS2Go is the IRS' first smartphone application that let's taxpayers check on the status of their tax refund. Apple users can download the free IRS2Go application by visiting the Apple App Store. Android users can visit the Android Marketplace to download the free IRS2Go app. Where's My Refund? provides the most up-to-date information the IRS has. There's no need to call the IRS unless Where's My Refund? tells you to do so. Where's My Refund? is updated every 24 hours - usually overnight - so you only need to check once a day. Please call this office if you encounter problems. Mon, 25 Mar 2013 19:00:00 GMT Preparing Purchase Orders Precisely http://www.messnerandhadley.com/blog/preparing-purchase-orders-precisely/36564 http://www.messnerandhadley.com/blog/preparing-purchase-orders-precisely/36564 Messner & Hadley LLP Modifying the default template makes tracking easier, more accurate.Part of the reason for QuickBooks' success is its exceptional flexibility. By allowing users to turn features and preferences on and off, the same software can be used by a wide variety of business types and sizes. In some cases, the default settings that QuickBooks supplies will work fine for your company. This is not necessarily true in the case of purchase orders, since the whole inventory procurement process is so complex, and users can have such a diverse range of needs. Figure 1: QuickBooks 2013's default Create Purchase Orders screen. You can see that formatting options are available when you click the Formatting tab. So before you order your first widget, make sure that your purchase order form is designed to accommodate all of the information you want to record and track, with no unnecessary data fields to confuse staff. Working With Templates There aren't many program preferences to check. If you can open a purchase order, you're set. If not, go to Edit | Preferences | Items & Inventory and be sure that the box next to Inventory and purchase orders are active is checked. What you want to find first is the Additional Customization screen for the Custom Purchase Order Template. This is easily accessed from the Create Purchase Order screen itself in QuickBooks 2013, but if you're using an earlier edition, go to Lists | Templates | Custom Purchase Order Template. Double-click on it to open the Basic Customization page. Here, you can add a logo, change fonts and colors, etc. But go ahead and click on the Additional Customization button at the bottom of the screen. This window opens: Figure 2: The left pane of the Additional Customization window contains additional fields that you might want on your purchase orders, like Ship Via and Terms. (Tip: If you want to design multiple purchase order templates, click Manage Templates on the Basic Customization screen, then Copy on the Manage Templates page. Rename the form and make your modifications. This version will always be available as an option when you create purchase orders.) Making It Yours Each of this window's four tabs opens a new screen that gives you customization control over a different element of the purchase order form: the top, bottom and midsection, and printing options. You simply check the boxes next to the fields that you want to add to the current form (be sure to check both columns if you want the fields to appear both onscreen and in your printed versions; sometimes, one is not an option) and uncheck any you want to delete. In the right pane of this window, a dynamic preview changes to reflect each addition or deletion. And when you've finished altering the set of fields, you can see an actual print preview. Close that and keep clicking OK until you get back to the Templates window. This simplicity and ease carries over into the more cosmetic elements of your purchase order. Make sure the template you want to redesign is highlighted and click Templates | Create Form Design. QuickBooks walks you through the process of adding a logo and background, colors and fonts, and a grid style, and it lets you apply this same theme automatically to all of your forms. (You can modify your design similarly on the Basic Customization page, minus the wizard-like approach and the background options.) Simple But Complicated One more comment about the QuickBooks 2013 purchase order screen. Beyond making your formatting options available in the “ribbon,” it also moves you through purchasing to the receiving process. With the appropriate purchase order open, click Create Item Receipts in the ribbon. This window opens, with the correct vendor name selected. When you click in the Item field, this small window appears: Figure 3: Click Yes here and select the correct PO, and QuickBooks fills in the data. If you check the Bill Received box, the Enter Bills window opens. QuickBooks' purchasing and receiving tools makes your inventory-tracking job easier, but you still need to understand the workflow. We encourage you to let us work with you as you begin managing inventory - or to contact us if you're tangled up in what can be a very challenging element of QuickBooks. Mon, 25 Mar 2013 19:00:00 GMT Eldercare Can Be a Medical Deduction http://www.messnerandhadley.com/blog/eldercare-can-be-a-medical-deduction/36545 http://www.messnerandhadley.com/blog/eldercare-can-be-a-medical-deduction/36545 Messner & Hadley LLP With people living longer, many find themselves becoming the care provider for elderly parents, spouses and others who can no longer live independently. When this happens, questions always come up regarding the tax ramifications associated with the cost of nursing homes or in-home care. Generally, the entire cost of nursing homes, homes for the aged, and assisted living facilities are deductible as a medical expense, if the primary reason for the individual being there is for medical care or the individual is incapable of self-care. This would include the entire cost of meals and lodging at the facility. On the other hand, if the individual is in the facility primarily for personal reasons, then only the expenses directly related to medical care would be deductible and the meals and lodging would not be a deductible medical expense. As an alternative to nursing homes, many care providers are hiring day help or live-in employees to provide the needed care at home. When this is the case, the services provided by the employees must be allocated between household chores and deductible nursing services. To be deductible, the nursing services need not be provided by a nurse so long as the services are the same services that would normally be provided by a nurse such as administering medication, bathing, feeding, dressing etc. If the employee also provides general housekeeping services, then the portion of employee's pay attributable to household chores would not be a deductible medical expense. Household employees, like other employees, are subject to Social Security and Medicare taxes, and it is the responsibility of the employer to withhold the employee's share of these taxes and to pay the employer's payroll taxes. Special rules for household employees greatly simplify these payroll withholding and reporting requirements and allow the federal payroll taxes to be paid annually in conjunction with the employer's individual 1040 tax return. Federal income tax withholding is not required unless both the employer and the employee agree to withhold income tax. However, the employer is still required to issue a W-2 to the employee and file the form with the federal government. A federal employer ID number (FEIN) and a state ID number must be obtained for reporting purposes. Most states have special provisions for reporting and paying state payroll taxes on an annual basis that are similar to the federal reporting requirements. If you need assistance in setting up a household payroll, please contact this office for additional details and filing requirements. Thu, 21 Mar 2013 19:00:00 GMT Do Not Overlook Form 8594 When Buying or Selling a Business http://www.messnerandhadley.com/blog/do-not-overlook-form-8594-when-buying-or-selling-a-business/36541 http://www.messnerandhadley.com/blog/do-not-overlook-form-8594-when-buying-or-selling-a-business/36541 Messner & Hadley LLP Most businesses are made up of different types of assets, and those assets get different treatment for tax purposes. How those items are identified at the time of the sale/purchase can have a significant tax impact on both the buyer and the seller. A seller will, of course, want to designate items into classes that will yield a long-term capital gain on sale and thus provide the best tax result from the sale, whereas the buyer will generally want to designate the purchased items into classes that provide the biggest up-front write-offs. The IRS generally does not care how the class allocations are made so long as both the buyer and the seller use consistent treatment. That is where IRS Form 8594 comes in. The form allocates the entire purchase/sale price of the business into the various classes of assets; both the buyer and the seller are required to file the form with their tax returns. It is also very important that allocations be spelled out in the sale/purchase agreement and that the treatment between the buyer and seller is consistent. Generally, assets are divided into the seven categories very briefly described below: Class I – Cash and Bank Deposits Class II – Actively Traded Personal Property & Certificates of Deposit Class III – Debt Instruments Class IV – Stock in Trade (Inventory) Class V – Furniture, Fixtures, Vehicles, etc. Class VI – Intangibles (Including Covenant Not to Compete) Class VII – Goodwill of a Going Concern A seller would prefer to designate the major portion of the sales price to goodwill and minimize any allocation to furnishings and equipment. Why, you ask? Because goodwill is a capital asset, the sale of which for federal purposes will be taxed at a maximum rate of 20% in 2013, while furnishings and equipment can be taxed as high as 39.6 percent. On the other hand, the buyer would prefer to have as much as possible designated as furnishings and equipment, since they can be expensed or written off over a short period of time (usually 5 or 7 years) as opposed to a 15-year amortized write-off of the goodwill. Whether you are the buyer or the seller, don't leave the asset allocations to chance. Negotiate the allocation as part of the sales agreement. If you don't, you could easily end up with inconsistent treatment and potential adjustments by the IRS. If you are anticipating a sale or purchase, please call this office so the transaction can be structured to your best benefit. Tue, 19 Mar 2013 19:00:00 GMT Beware of Bogus IRS Emails http://www.messnerandhadley.com/blog/beware-of-bogus-irs-emails/36518 http://www.messnerandhadley.com/blog/beware-of-bogus-irs-emails/36518 Messner & Hadley LLP Every tax-filing season, the scammers and ID thieves try to sucker people into providing personal and financial information through the use of phony e-mails. The IRS receives thousands of reports every year from taxpayers who received emails out of the blue claiming to be from the IRS. Scammers use the IRS name or logo to make the message appear authentic in an effort to get you to respond and then to trick you into revealing your personal and financial information. The criminals use this information to commit identity theft or steal your money. It is a scam known as “phishing” and we do not want you to become a victim. You should know that the IRS does not initiate contact with any taxpayer via e-mail or social media to request personal or financial information. If you should receive an e-mail claiming to be from the IRS or directing you to an IRS site, the first thing you should do is contact this office. But above all, DO NOT Reply to the message Open any attachments (attachments may contain malicious code that will infect your computer) Click on any links in a suspicious email or phishing website and enter your confidential information Here are additional key points you to know about phishing scams: The IRS never asks for detailed personal and financial information like PINs, passwords, or similar secret access information for credit cards, banks, or other financial accounts. The address of the official IRS website is www.irs.gov. Do not be misled by sites claiming to be the IRS but ending in .com, .net, .org or anything other than .gov. If you discover a website that claims to be the IRS but you suspect it is bogus, do not provide any personal information on the site. If you receive a phone call, fax, or letter in the mail from an individual claiming to be from the IRS, you should immediately contact this office before providing any information. You should do this whether you suspect the contact is legitimate or not. You can also contact the IRS at 1-800-829-1040 to determine if the IRS has a legitimate need to contact you. You can help the IRS and other law enforcement agencies shut down these schemes. Visit the IRS.gov website for Reporting Phishing: to get details on how to report scams and helpful resources if you are the victim of a scam. You can report any bogus e-mails by forwarding a suspicious email to phishing@irs.gov. Identity Theft is a Growing Problem - When a taxpayer’s ID has been stolen, the IRS will issue the individual a special number with which to file a return. The victim gets a new one each year for three years to provide time for the taxpayer to correct the ID theft damage. In 2012, the IRS issued 250,000 of these special numbers and for the 2013 filing season it issued 770,000—an increase of more than 300%. That is why it is so important for you to protect yourself from the nightmare of ID theft. To learn more about how to protect yourself from ID theft, visit the following IRS webpages: Identity Protection Tips and Identity Protection Home Page. Please call this office immediately if you received any communications from either the IRS or state tax authorities or have any questions related to phishing or ID theft. Thu, 14 Mar 2013 19:00:00 GMT Change of Address Notifications http://www.messnerandhadley.com/blog/change-of-address-notifications/283 http://www.messnerandhadley.com/blog/change-of-address-notifications/283 Messner & Hadley LLP If your entire family is moving to the same address and each member has the same last name, you need to fill out only one Change of Address Order form. For all other cases, each individual moving must fill out a separate form. Click here to enter the USPS Website online Change of Address Order Form where you can fill-in and submit your change of address through the Internet.When To Submit Change of Address Form - Submit the change of address at least 15 days before you move, or as soon as you know your new address and the date of your move. The post office will forward your mail to the new address beginning on the "Start Date" you specified on the Change of Address Order form. Once the Change of Address is submitted, the Postal Service will send a confirmation letter to your old address, regardless of the date of your move.If you file your change of address form timely, you should begin receiving forwarded mail at your new address within three to five days from the indicated "Start Date".Duration of Forwarding Order - All mail including First-Class, Priority, and Express Mail will be forwarded for 12 months at no charge, except for mail marked "Do Not Forward." Periodicals (second-class) will be forwarded for 60 days at no charge. This includes newspapers and magazines. Generally third-class mail such as circulars, books, catalogs, and advertising mail will not be forwarded. Parcel Post Packages will be forwarded locally for 12 months at no charge. Forwarding charges will be assessed if forwarded outside the local area. This includes packages weighing 16 ounces or more not mailed as Priority Mail.Magazine & Publisher Notification - You should let all publishers and other business mailers know at least four to six weeks before you move. Follow the publisher's change of address instructions and those noted on billing statements you receive.Notification Postcards - At least 30 days before you move, notify everyone of your new address and the date of your move. Many bills and statements have an area for making an address change notification. You can obtain free Notification Postcards (Form 3576) from your post office.Mail with an Endorsement "Do Not Forward" - For permanent moves, mail marked "Do Not Forward" is returned to the sender along with your new address information. However, if your move is only "temporary" (you'll be returning home in less than 12 months), this mail is returned to the sender without your new address information. Therefore, temporary movers need to notify their mailers directly to inform them of their new address. Wed, 13 Mar 2013 19:00:00 GMT Excluding the Gain from a Home Sale http://www.messnerandhadley.com/blog/excluding-the-gain-from-a-home-sale/284 http://www.messnerandhadley.com/blog/excluding-the-gain-from-a-home-sale/284 Messner & Hadley LLP You may qualify to exclude from your income all or part of any gain from the sale of your main home if you meet certain qualifications. The following are highlights of tax rules pertaining to the sale of a home (primary personal residence). These rules are complex and anyone contemplating selling a home or residential rental property should consult with this office in advance of initiating the transaction. This is one area of the tax law where preplanning can save literally thousands of dollars in taxes.Maximum Amount of Exclusion - You can exclude the entire gain on the sale of your main home up to: 1) $250,000, or 2) $500,000 if ALL of the following are true.   a) You are married and file a joint return for the year. b) Either you or your spouse meets the ownership test. c) Both you and your spouse meet the use test. d) During the 2-year period ending on the date of the sale, neither you nor your spouse excluded gain from the sale of another home.   Reduced Maximum Exclusion - You can claim exclusion, but the maximum amount of gain you can exclude will be reduced, if either of the following is true. 1) You did not meet the ownership and use tests for a home you sold due to a change in health or place of employment. 2) Your exclusion would have been disallowed because of the rule described in More Than One Home Sold During 2-Year Period, except that you sold the home due to a change in health or place of employment. More Than One Home Sold During 2-Year Period - You cannot exclude gain on the sale of your home if, during the 2-year period ending on the date of the sale, you sold another home at a gain and excluded all or part of that gain. Exception: if you sold the home due to a change in health or place of employment, you can still claim exclusion, but the maximum amount you can exclude may be reduced.  Ownership and Use Tests - To claim the exclusion, you must meet the ownership and use tests. This means that during the 5-year period ending on the date of the sale, you must have: 1) Ownership Test: Owned the home for at least 2 years, and 2) Use Test: Lived in the home as your main home for at least 2 years. Period of Ownership and Use - The required 2 years of ownership and use (during the 5-year period ending on the date of the sale) do not have to be continuous. You meet the tests if you can show that you owned and lived in the property as your main home for either 24 full months or 730 days (365 × 2) during the 5-year period. Short temporary absences for vacations or other seasonal absences, even if you rent out the property during the absences, are counted as periods of use.  Married Persons - If you and your spouse file a joint return for the year of sale, you can exclude gain if either spouse meets the ownership and use tests. Death of Spouse Before Sale - If your spouse died before the date of sale, you are considered to have owned and lived in the property as your main home during any period of time when your spouse owned and lived in it as a main home. Home Transferred from Spouse - If your home was transferred to you by your spouse (or former spouse if the transfer was incident to divorce), you are considered to have owned it during any period of time when your spouse owned it. Use of Home after Divorce - You are considered to have used property as your main home during any period when: 1) You owned it, and 2) Your spouse or former spouse is allowed to live in it under a divorce or separation instrument. Business Use or Rental of Home - You may be able to exclude your gain from the sale of a home that you have used for business or to produce rental income. However, you must meet the ownership and use tests. Depreciation for Business Use - If you were entitled to take depreciation deductions because you used your home for business purposes or as rental property, you cannot exclude the part of your gain equal to any depreciation allowed or allowable as a deduction for periods after May 6, 1997. If you can show by adequate records or other evidence that the depreciation deduction allowed was less than the amount allowable, the amount you cannot exclude is the smaller figure. Property Used Partly as Your Home and Partly for Business or Rental During the Year of Sale - In the year of sale you may have used part of your property as your home and part of it for business or to produce income. Examples are: A working farm on which your house was located, An apartment building in which you lived in one unit and rented out the others, A store building with an upstairs apartment in which you lived, or A home with a separate structure used for business or to produce income.  Homes where the business use was an integral part of the same structure, such as the use of a room in your home, do not fall under this rule. If you sell the entire property, you should consider the transaction as the sale of two properties. The sale of the part of your property used for business or rental is reported as the sale of business property and is generally a taxable event (but see next paragraph). The sale of the part used as a home is treated as the sale of your home subject the exclusion of gain provisions, if otherwise qualified. Note: The IRS has made it quite clear that for the business portion the exchange of a home can qualify for both the §121 home sale exclusion and §1031 like-kind exchange deferral treatment. This can occur where the property was used as a principal residence and a business consecutively (e.g., use as a principal residence followed by rental of the property) or concurrently (a portion of the home used as a principal residence and a portion used as a home office). Please call this office for addition information regarding how to qualify for the tax deferral of the business portion gain. Wed, 13 Mar 2013 19:00:00 GMT Moving Deductions http://www.messnerandhadley.com/blog/moving-deductions/286 http://www.messnerandhadley.com/blog/moving-deductions/286 Messner & Hadley LLP In general, moving deductions are deductible if you meet certain qualifying tests. However, like other parts of the tax law, there are exceptions and special cases. The following is an abbreviated overview of the qualifications for domestic moves. Foreign and military moves require certain special qualifications. Click here for a worksheet to record your Moving Deductions. Qualifications 1. Distance Test - A move will meet the distance test if the new main job location is at least 50 miles farther from your former home than your old main job location was from your former home. For example, if your old main job was 3 miles from your former home, your new main job must be at least 53 miles from that former home. The distance between a job location and your home is the shortest of the more commonly traveled routes between them. The distance test considers only the location of your former home. It does not take into account the location of your new home. 2. Related to Start of Work Test - Your move must be closely related, both in time and in place, to the start of work at your new job location. You can generally consider moving expenses incurred within one year from the date you first reported to work at the new location as closely related in time to the start of work. It is not necessary that you arrange to work before moving to a new location, as long as you actually do go to work. 3. Time Test - To deduct your moving expenses, you also must meet one of the following time tests. Time test for employees - If you are an employee, you must work full-time for at least 39 weeks during the first 12 months after you arrive in the general area of your new job location. For this time test, count only your full-time work as an employee; do not count any work you do as a self-employed person. You do not have to work for the same employer for the 39 weeks. You do not have to work 39 weeks in a row. However, you must work full-time within the same general commuting area. Time test for self-employed persons - If you are self-employed, you must work full time for at least 39 weeks during the first 12 months AND for a total of at least 78 weeks during the first 24 months after you arrive in your new job location. For this time test, count any full-time work you do as an employee or as a self-employed person. You do not have to work for the same employer or be self-employed in the same trade or business for the 78 weeks. Deductible Moving Expenses - You can deduct only those expenses that are reasonable for the circumstances of your move. For example, the cost of traveling from your former home to your new one should be by the shortest, most direct route available by conventional transportation. If during your trip to your new home, you make side trips for sightseeing, the additional expenses for your side trips are not deductible as moving expenses. 1) Household goods and personal effects - You can deduct the cost of packing, crating, and transporting your household goods and personal effects and those of the members of your household from your former home to your new home. 2) Storing and Insuring Household Goods - You can include the cost of storing and insuring household goods and personal effects within any period of 30 consecutive days after the day your things are moved from your former home and before they are delivered to your new home. 3) Connecting & Disconnecting Utilities - You can deduct any costs of connecting or disconnecting utilities required because you are moving your household goods, appliances, or personal effects. You can deduct the cost of shipping your car and your household pets to your new home. 4) Travel expenses - You can deduct the cost of transportation and lodging for yourself and members of your household while traveling from your former home to your new home. This includes expenses for the day you arrive. You can include any lodging expenses you had in the area of your former home within one day after you could not live in your former home because your furniture had been moved. You can deduct expenses for only one trip to your new home for yourself and members of your household. However, all of you do not have to travel together. 5) Meals - Meals are NOT a deductible moving expense! 6) Travel by car - If you use your car to take yourself, members of your household, or your personal effects to your new home, you can figure your expenses by deducting either: Your actual expenses, such as gas and oil for your car, if you keep an accurate record of each expense (Do not include general maintenance, repairs. Insurance, etc., are not allowed), or The allowable cents per mile for the year. The allowable cents per mile is adjusted each year.  For 2013 the rate is 24 cents per mile.  Call for the mileage rate for other years.    7) Parking Fees & Tolls - You can deduct parking fees and tolls you pay in moving. Special Rules for Military Personnel To deduct moving expenses, the military taxpayer usually must meet general time and distance tests. However, if the member of the Armed Forces is on active duty and moves because of a permanent change of station, they do not need to meet those tests. Permanent change of station - A permanent change of station includes: A move from the military member's home to his or her first post of active duty, A move from one permanent post of duty to another, and A move from the last post of duty to the member's home or to a nearer point in the United States. The move must occur within one year of ending active duty service or within the period allowed under the Joint Travel Regulations. Wed, 13 Mar 2013 19:00:00 GMT Non-Cash Contributions http://www.messnerandhadley.com/blog/non-cash-contributions/287 http://www.messnerandhadley.com/blog/non-cash-contributions/287 Messner & Hadley LLP When you give away household items like clothing, appliances and other goods to a qualified charity, your generosity can add up to a tax write-off if you itemize your deductions. The amount of your deduction is generally the donated property's "fair market value" (i.e., the price similar property would sell for in the open market).Unfortunately, one of the most difficult problems connected with noncash donations is determining their FMV. In fact, when you give away property of high value, the job of determining worth is best left in the hands of a professional appraiser. Or, when you donate property that has increased in value, special tax rules apply and you should consult with this office before you make your donation. The guidelines offered below are provided as aids for setting value on the most common type of noncash donations (miscellaneous personal items) that have decreased in value since the time they were first acquired: Used Clothing: The IRS provides no set formula for valuing clothing items. However, keep in mind that the fair market value of used clothing and other personal items is usually much less than what you paid for them. A visit to a local thrift shop may help give you an idea of current selling prices for items like yours. Household Goods: The value of used household goods (e.g., furniture and appliances) is also much less than their original cost. If the property is worn, inoperable or out of style, it may have little or no market value. However, photographs, purchase receipts, and newspaper ads describing similar property should help support a valuation. Cars and Other Vehicles: Congress imposed some tough rules that substantially limit the deduction for this popular charitable donation. RECORDKEEPING AND REPORTING OF NONCASH DONATIONS: Your recordkeeping of noncash donations depends on the dollar amount of your gift. That value also determines the manner in which donations get reported on your tax return. Gifts valued at less than $250: You will need a receipt from the charity showing the date of your contribution, the organization's address, and a reasonably detailed description of the property. The receipt doesn't have to state the value of the property you gave away. Keep in mind that you aren't required to have a receipt when it's impractical to get one, for example, if you deposit your donation at an unattended bin site. But whether or not a receipt is required, you still need to keep a written record of each item you give away. Gifts of $250 but not over $500: For goods valued in this category, you must obtain a timely written acknowledgment of your gift from the charity. Without the written acknowledgment, you get no charitable deduction. The acknowledgment needs to contain the following information: (a) a description of the property you gave away, and (b) whether you received any goods or services from the charity in return for your gift (if so, the value of the goods or services needs to be stated). Gifts over $500 but not over $5,000: For donations of this amount, you must have a receipt from the charitable organization in the same format described under "Gifts of $250 but not over $500"; otherwise, you'll get no deduction. However, the information required to be included in the written record must also include details about your acquisition of the property donated. In addition, deductions for these larger gifts require attaching a special IRS form to your tax return for the year of your contribution. Gifts over $5,000: You are required to obtain a qualified appraisal and attach an "appraisal summary" to your tax return. The values of all items donated during the year that are similar in nature are added together to determine whether this rule applies. Since many complicated rules can apply to contributions in this category, it's best to contact this office before you make your contribution. Recordkeeping for gifts valued over $5,000 are the same as those listed previously for "Gifts over $500 but not more than $5,000." In addition, you are required to get an authorized signature from an official of the charitable organization. Page 2 of IRS Form 8283 accommodates the required information and provides the required signature areas to meet the above requirements. Use Section B; Part I to describe the gift, Part III for the appraiser and part IV for the Donee acknowledgement. Noncash Contribution Record: A useful Noncash Charitable Recordkeeping Form can be downloaded for your personal use. Use the form to record property given, condition, cost, your estimate of fair market value, etc. CAUTION: This is a brief summary of the regulations for valuing and keeping records for property donations. For additional specific details, please consult with our office. Wed, 13 Mar 2013 19:00:00 GMT Importance of Notifying the IRS of Your Address Change http://www.messnerandhadley.com/blog/importance-of-notifying-the-irs-of-your-address-change/288 http://www.messnerandhadley.com/blog/importance-of-notifying-the-irs-of-your-address-change/288 Messner & Hadley LLP You might say to yourself, "Why would I want to inform the IRS of my change of address, since they will find out when I file my next year's income tax?" The following are important reasons for promptly notifying the IRS of your address change. You may have a refund coming and failure to file the change of address could delay that refund from reaching you. The IRS may send you correspondence which requires a timely response. By mailing that correspondence to your last known address, the IRS fulfills their legal notification requirements and any repercussions as a result of your lack of response becomes your responsibility, even if you never received the notice. Therefore, it is always good practice to promptly notify the IRS of an address change by filing Form 8822. Click here to access an online form fill and print version of IRS Form 8822. If this change also affects the mailing address for your children who filed income tax returns, complete and file a separate Form 8822 for each child. Prior Name(s) - If you or your spouse changed your name because of marriage, divorce, etc., complete line 5. Also, be sure to notify the Social Security Administration of your new name, so that it has the same name in its records as what you have on your tax return. This prevents delays in processing your return and issuing refunds. It also safeguards your future social security benefits. P.O. Box - If your post office does not deliver mail to your street address, show your P.O. box number instead of your street address. Foreign Address - If your address is outside the United States or its possessions/territories, enter the information in the following order: city, province or state, and country. Follow the country's practice for entering the postal code. Please do not abbreviate the country name. This office can prepare the IRS Form 8822 for you, or if you complete and file it yourself, please forward a copy to our office so that we may update our records and put the copy of the 8822 in your tax file. Wed, 13 Mar 2013 19:00:00 GMT Employee Use of a Home Computer http://www.messnerandhadley.com/blog/employee-use-of-a-home-computer/311 http://www.messnerandhadley.com/blog/employee-use-of-a-home-computer/311 Messner & Hadley LLP If a taxpayer purchases a home computer for use in their work as an employee, they can claim a depreciation deduction if:1. Use of the home computer is for the convenience of the employer (that is, the taxpayer is required to use a computer on the job and the taxpayer's employer does not provide the employee with a computer), and2. Use of the home computer is required as a condition of the taxpayer's employment. To satisfy this requirement, there must be a clear showing that the employee cannot perform properly the duties of employment without it.50% Rule - If the taxpayer meets the two tests above and also use their home computer more than 50% in their work, they can claim an accelerated depreciation deduction and can utilize the Section 179 deduction to write off the computer in the year of purchase. On the other hand, if they do not use the home computer more than 50% in their work, they must depreciate the computer using the straight-line method and cannot take a Section 179 expense deduction.Computer used in home office - The 50% rule does not apply to the taxpayer's computer if part of the taxpayer's home is treated as a regular business establishment and the taxpayer uses the computer exclusively in that part.Nonemployee use of a home computer - A taxpayer can deduct depreciation on the home computer to the extent it is used to produce income (for example, managing investments that produce taxable income). However, the time the computer is used to manage investments does not count as business-use time for purposes of the 50% rule and the determination of the depreciation method.Reporting and Recordkeeping - The IRS requires that you maintain records to prove your percentage of business use. The actual deduction is claimed on Schedule A under Deductions Subject to the 2% Limit. Tue, 12 Mar 2013 19:00:00 GMT Deducting Sales Tax On Business Purchases http://www.messnerandhadley.com/blog/deducting-sales-tax-on-business-purchases/312 http://www.messnerandhadley.com/blog/deducting-sales-tax-on-business-purchases/312 Messner & Hadley LLP When taxpayers buy new equipment for businesses purposes, the following question arises: "Can they separate the sales tax from the purchase price and deduct that separately as a currently deductible tax expense?" Unfortunately, you are required to include all the costs of acquiring the equipment into the depreciable basis, including the sales tax. Whenever property is purchased for business use in a business and that property has a useful life of more than one year, its cost must be deducted over its useful life. This accounting procedure is referred to as depreciation. The number of years the property must be depreciated is largely dependent upon the type of property it is. However, there are exceptions to the depreciation requirement: Tax regulations include a rule allowing you to disregard the depreciation requirements for property for which the cost is less than $100. This may seem very low, but while many other tax values are periodically adjusted for inflation, this value has not changed for well over 20 years. The tax code contains a special provision that allows certain types of property to be expensed (deducted in year of purchase) rather than being depreciated. This provision is commonly referred to as Section 179 expensing and is limited to a maximum annual amount is inflation adjusted annually.  The Section 179 deduction only applies to tangible personal property such as tools, office equipment, machinery, etc. and does not apply to real estate. There are some other restrictions as well, so be sure to contact this office for additional details. Sometimes, even repairs may have to be depreciated. If a repair or replacement increases the value of the property, makes it more useful, or lengthens its life, then it must depreciated. If not, it can be deducted like any other business expense. Tue, 12 Mar 2013 19:00:00 GMT Is Your Withholding Enough? http://www.messnerandhadley.com/blog/is-your-withholding-enough/36477 http://www.messnerandhadley.com/blog/is-your-withholding-enough/36477 Messner & Hadley LLP Our "pay-as-you-go" tax system requires that you make payments of your tax liability evenly throughout the year. If you don't, it's possible you could owe an underpayment penalty. Some taxpayers meet the "pay-as-you-go" requirements by making quarterly estimated payments. However, when your income is primarily from wages, you meet the requirements through wage withholding and you rely on your employer's payroll department to take out the right amount of tax. Unfortunately, what payroll withholds may not be enough! For instance, your employer may be using information about your income that is no longer current. Employers compute withholding for their employees using IRS Form W-4, Withholding Allowance Certificate. To make sure W-4 data is accurate, you need to fill it out based on the latest data available about your income and deductions. Mid-year is a good time to review the withholding situation and forecast your tax liability because there's still time to make adjustments if you're under-withheld. It's especially vital to plan ahead if you've had any of the following: A gain from the sale of property, e.g., stocks, bonds, or real property; Income from a second job; Other income from which there is no withholding (for example, a pension, alimony, IRA, interest or dividends); A change in marital status. Other situations that may impact higher-income taxpayers starting in 2013 are the additional Medicare (hospital insurance) taxes on compensation and a surtax on net investment income. All of the above can cause problems as far as your withholding is concerned and the only way to know for sure is to compute a projection. To be on the safe side, why not give us a call? This office will be happy to assist you in determining safe withholding or estimated tax levels or to help you with long-range tax planning. If you have questions related to delayed income reporting from a 2010 conversion, please give this office a call. Fri, 08 Mar 2013 19:00:00 GMT Plan Your Taxable IRA Withdrawals http://www.messnerandhadley.com/blog/plan-your-taxable-ira-withdrawals/36473 http://www.messnerandhadley.com/blog/plan-your-taxable-ira-withdrawals/36473 Messner & Hadley LLP Your age at the time that you make a taxable withdrawal from your Traditional IRA account can make a big difference in the amount of tax that you will pay. Generally, there are three periods within your lifetime where different tax rules apply: Under Age 59 ½—If you withdraw IRA funds before you reach age 59 ½, you will pay tax and a 10% early withdrawal penalty unless you can avoid the penalty through one of the several exceptions provided in the tax law. Note: Some states also have small early withdrawal penalties. Age 59 ½ to Age 70 ½—During this period, you can make withdrawals of any amount without penalty. You are only subject to income tax. Above Age 70 ½—After reaching age 70 ½, you must begin taking at least the required minimum distributions or face the 50% excess accumulation penalty. The key to minimizing taxes on IRA distributions is to match withdrawals to tax years, in which case you are in a low-tax bracket or even have a negative taxable income. Take, for example, a year when your income—because of illness, disability, unemployment, or large business losses—is less than your deductions and personal exemptions, which leaves you with a negative taxable income for the year. To the extent that your taxable income is negative, you could make a taxable IRA withdrawal and avoid any tax on the amount withdrawn. In this case, even if you were under age 59 ½, you would only pay the small early withdrawal penalty. Generally, except as mentioned above, if you are under 59 ½, your IRA funds are not a good source of cash, except in cases of extreme need, simply because of the tax liability and penalties that come from withdrawing these funds early. However, if you have no alternatives, it may be possible to avoid part or all of the penalties by carefully planning the withdrawals so that they qualify for one or more of the early withdrawal penalty exceptions: (1) amounts withdrawn to pay un-reimbursed medical expenses; (2) amounts withdrawn while qualifying as disabled; (3) amounts withdrawn and used to pay for medical insurance while unemployed; (4) amounts used to pay higher education expenses; (5) amounts up to $10,000 for the purchase of a first home; and (6) early retirement amount withdrawn as an retirement annuity. Taxpayers must meet certain criteria to qualify for these exceptions, so be sure to contact this office to make sure that you meet those qualifications before proceeding. For retired individuals who are receiving Social Security benefits, planning IRA distributions can also be beneficial. Social Security itself is only taxable when half of the taxpayer's Social Security benefits added to the taxpayer's other income exceeds $25,000 (or $32,000 for a married couple filing jointly). Once this threshold is reached, every additional dollar of other income will cause 50 to 85 cents of the individual's Social Security benefits to also become taxable. Therefore, if a taxpayer's other income is under the threshold, it is generally a good practice to withdraw just enough taxable IRA funds to bring the income up to the threshold amount, even if the funds are not needed in that year. They can be set aside for a future year when they might be used for some unplanned need or large purchase. Retirees with income that already puts them over the Social Security taxable threshold should avoid large, uneven withdrawals that might push them into a larger tax bracket one year and way below that tax bracket change in other years. Remember: Once a taxpayer reaches age 70 ½, he or she must begin taking distributions equal to or greater than the Required Minimum Distribution, which somewhat limits planning options. If you wish to explore any of these or other tax saving techniques, please contact this office. Thu, 07 Mar 2013 19:00:00 GMT Planning Your IRA Strategy http://www.messnerandhadley.com/blog/planning-your-ira-strategy/413 http://www.messnerandhadley.com/blog/planning-your-ira-strategy/413 Messner & Hadley LLP Your IRA Contribution OptionsFor over 35 years, individuals have been able to set up personal retirement plans called individual retirement accounts (IRAs). Nearly everyone who receives “compensation,” either as an employee or as a self-employed individual, can contribute to an IRA. You can choose from a variety of different types; some give you a tax deduction,while others don’t. This brochure highlights in general terms the IRA options available under current law and points out some of the advantages of each. For more details about which IRAs fit best with your specific situation, please call this office.Setting up an IRA: To select the best type of IRA to meet your current income level and your long-term investment goals generally requires the advice of a professional. You are strongly advised to seek the advice of this office before selecting a specific type of IRA and the investment vehicle for your IRA. Although others, not fully cognizant of your current tax planning objectives or your long-range financial and estate planning needs, will be eager to assist you, prudent planning may be more appropriate. Types of Investments: Examples of typical IRA investment vehicles include insurance annuities, stocks, bonds, mutual funds and cash (in savings institutions). Definition of Compensation: You can open an IRA only if you receive “compensation.” Compensation includes wages, salaries, tips, professional fees, commissions, self-employment income and alimony. Compensation does not include rental income, interest or dividend income, pensions or annuities, deferred compensation, or amounts you exclude from income. IRA PenaltiesRemember that various penalties can apply to most IRAs. When you contribute more than the IRA limits allow, withdraw from the account too early, or don’t take sufficient distributions when required, penalties can apply. Under certain circumstances, penalties can be avoided for premature IRA withdrawals. Exceptions apply, for example, when withdrawal is due to disability, for paying certain first-time home purchase expenses, and for paying educational costs. Be sure to check with this office concerning the exact rules on penalties to ensure against receiving unwelcome “ surprises” when you file your tax return. Traditional IRAsWith a Traditional IRA , if you’re under age 70-1/2, you can contribute up to the annual limit to your IRA account. However, if your taxable compensation is less than the annual limit in a given year, your contribution will be limited to the amount of your compensation. Traditional IRA contributions are generally deductible on your tax return. However, one can designate that they be nondeductible. If this choice is made, you build up a basis in your IRA so that when you begin to withdraw from the account, part of each withdrawal is nontaxable. However, the choice not to deduct an IRA contribution should be made with caution in light of your particular tax situation. If you’re married, file jointly, and your spouse has little or no compensation, a Traditional IRA may be set up as a spousal IRA, allowing your spouse to make IRA contributions based upon your compensation. However, neither spouse can deposit more than the annual limit to his/her individual account. Participation in Other Plans: One complication of Traditional IRAs affects taxpayers who actively participate in other pension plans - e.g., an employer plan, a Keogh or SEP, etc. When you are covered by another pension plan, your IRA deduction “phases out” (i.e., gradually reduces to zero) depending on your filing status and your income level. Phase out begins at income levels according to the following schedule: Threshold Level Tax Year 20132014 &Subsequent Years Single*59,000InflationAdjusted Joint95,000InflationAdjusted Call for amounts applicable to other years. *The Single threshold applies to taxpayers other than those filing joint, except Married Separate taxpayers who have a threshold of $ -0- . If a taxpayer's income exceeds the above thresholds by less than $10,000 ($20,000 for joint filers), his or her IRA deduction will be limited; if it exceeds the threshold by $10,000 ($20,000 for joint filers), there is no IRA deduction. Break for Spouse of an Active Participant: The limits on deductible IRA contributions do not apply to the spouse of an active participant. Instead, the maximum deductible IRA contributions for an individual who is not an active participant but whose spouse is an active participant, is phased out for the nonactive individual if the couple’s combined AGI is within the phase-out range for the year. Nonactive Participant Spouse Year Phase-Out Range 2013 178,000 - 188,000 2014 and later years Inflation adjusted Call for amounts applicable to other years.Example: In 2013, the wife is an active participant in a retirement plan, but her husband is not. The couple’s combined AGI is $200,000. Neither spouse can take an IRA deduction, because their AGI is over $188,000. But assume the couple’s combined AGI was only $125,000. Since the husband isn’t an active participant in another plan, he can make a deductible IRA contribution. However, his wife can’t make one, because their combined AGI is over the threshold for joint filers (see chart for annual threshold amount). Due Date for Making Traditional IRA Contributions: Traditional IRA contributions (whether deductible or nondeductible) must be made by the due date (without extensions) of the return for the year to which they apply.Roth IRAs You may be able to open a Roth IRA, a type of IRA that allows only nondeductible contributions. Distributions from these IRAs, including earnings on them, are tax-free if a holding period and other requirements are met. Like the Traditional IRA, annual contributions are limited to the smaller of your compensation or the annual limit. However, if you have other IRAs - for example, a Traditional IRA - your combined annual contributions to all of them (including the Roth IRAs) can’t be more than the annual contribution limit. Roth IRAs allow contributions even after you turn age 70-1/2, and spousal Roth IRAs are also allowed. The due date for making your contributions to a Roth IRA is the same as for Traditional IRAs. Contributions to Roth IRAs phase out if income is within the phase-out range for the year (may differ from the traditional IRA phase-out range). The phase out applies regardless of whether the taxpayer (or spouse, if married) is an active participant in another plan. AGI Phase-Out Range - Roth IRA Year Joint MS(Living with Spouse) All Others 2013 178,000 - 188,000 0 - 9999 112,000 - 127,000 2014 and future years - Inflation adjusted Rollovers: Beginning in 2010, there is no AGI limitation for making Traditional IRA to Roth IRA conversions, and married separate taxpayers are also allowed to make conversions. When you roll over or convert to a Roth IRA, you must pay tax on the income from the Traditional IRA that would have been taxed if you had not converted it to a Roth IRA. Comparing Results of Traditional and Roth IRAs: Determining whether a Traditional IRA or a Roth IRA best suits you depends upon your unique circumstances, both now and in the future. You are encouraged to seek assistance from your tax or financial advisor to assist you with this decision. Qualified Roth Contribution Plans Some employer-qualified retirement plans offer employees the option of contributing their elective 401(k) or 403(b) plan contributions to a separate designated Roth account. These are commonly referred to as Roth 401(k) or Roth 403(b) plans. Do not confuse these accounts with a Roth IRA. These accounts are governed by the qualified pension plan rules and allow contributions up to the “elective deferral” limit for the year (the employer’s matching contribution cannot be made to the designated Roth portion of the account). For 2013, the “elective deferral” limit is $17,500 ($23,000 if age 50 or over). The limit is adjusted periodically for inflation. Do not confuse these limits with Traditional and Roth IRA contributions limits which are determined separately. Unlike IRAs, distributions from a Qualified Roth Contribution Plan is generally only permitted when the participant terminates employment, dies, becomes disabled or reaches age 591/2. These accounts are subject to a separate 5-yearaging rule and can be rolled over into a Roth IRA. They are also subject to required minimum distributions at age 701/2 unless rolled into a Roth IRA prior to reaching age 701/2.Annual Contribution LimitsThe IRA contribution annual limit slowly rose over the years as a result of specified increases in the law, but has leveled off recently because of low inflation rates. In addition to normal contributions, taxpayers age 50 and older are allowed to make "catch-up" contributions allowing them larger contributions in their later years to fund their approaching retirement needs. The table below illustrates the annual contribution limit applicable to each year by age. Contribution Limits Year2013 2014 and after Under Age 505,500Inflation Adjusted Age 50 and Over6,500Inflation Adjusted Call for amounts applicable to other years.Saver’s Credit: The Retirement Savings Contribution Credit, frequently referred to as the Saver’s Credit,was established to encourage low to moderate income taxpayers to put funds away for their retirement. Up to $2,000 per taxpayer of contributions to an IRA (Traditional or Roth) or other retirement plans, such as a 401(k), may be eligible for a nonrefundable tax credit that ranges from 10% to 50% of the contribution, depending on the taxpayer’s income. The maximum credit per person is $1,000. The contribution amount on which the credit is based is reduced if the taxpayer (or spouse if filing jointly) received a taxable retirement plan distribution for the year for which the credit is claimed (including up to the return due date in the following year) or in the prior two years. If modified AGI exceeds $29,500(1) (single and married separate), $59,000(1) (married joint) or $44,250(1) (head of household), no credit is allowed. An individual who is under age 18, a full-time student, or a dependent of someone else is ineligible. The credit is in addition to any deduction allowed for traditional IRA contributions.(1) These rates are inflation adjusted annually and the rates shown are for 2013. "Coverdell Education Savings Accounts": Originally referred to as Education IRAs, a Coverdell Education Savings Account (CESA) are actually nondeductible education savings accounts, not IRAs. The investment earnings from these accounts accrue and are withdrawn tax-free, provided the proceeds are used to pay qualified education expenses of the beneficiary. Contributions are only allowed for designated beneficiaries under the age of 18. These accounts first became available in 1998, and nondeductible contributions of up to $500 were permitted per year for the benefit of the designated beneficiary. Beginning in 2002, the allowable nondeductible contribution increased to $2,000 per year per beneficiary. The annual contribution limit is gradually reduced if the contributing taxpayer’s “modified AGI ” is within the phase-out range and eliminated for taxpayers above the range. The phase-out limits for married taxpayers are $190,000 - $220,000 and at $95,000 - $110,000 for single taxpayers. If the AGI limits the contribution, the funds can be gifted to someone else whose contribution would not be AGI limited, even the beneficiary. Tue, 05 Mar 2013 19:00:00 GMT Charitable Away-From-Home Travel http://www.messnerandhadley.com/blog/charitable-away-from-home-travel/36459 http://www.messnerandhadley.com/blog/charitable-away-from-home-travel/36459 Messner & Hadley LLP Charitable deductions are allowed only for travel expenses (including meals and lodging) by volunteers who do charitable work for their organization while they are away from home on the charity's behalf. Unlike other areas of taxes, meals are not subject to the 50% limitation. Any “significant element of personal pleasure” negates a complete deduction (i.e., not even a partial deduction is allowed). Significant personal pleasure is assumed if the taxpayer has only minor duties and is not required to perform any duties for the charity for major portions of the away-from-home stay. If the taxpayer's personal vehicle is used for the charitable travel, then the taxpayer may deduct the cost of gas and oil, but not depreciation, insurance, or repairs. As an alternative to deducting the cost of gas and oil, the taxpayer can use the current standard mileage rate of 14 cents per mile for charitable travel. The taxpayer can also deduct parking fees and tolls, whether actual expenses or the standard mileage rate is used. The 14 cents per mile is not adjusted for inflation, so the current high cost of gasoline may well make it appropriate to document the cost of gas and oil for charitable trips. For example, when this article was prepared, gasoline prices were in the range of $4.50 per gallon in many parts of the country. Assuming that a vehicle gets 20 miles to the gallon, this turns out to be 22.5 cents per mile just for the cost of gasoline. Where there is significant charitable usage, it may be worth the time to document the gasoline usage for the year. Car expenses record requirements - If you claim expenses claimed directly relate to the use of the taxpayers car in giving services to a qualified organization, reliable written records must be kept of the expenses. Whether the records are considered reliable depends on all of the facts and circumstances. Generally, they may be considered reliable if the taxpayer made them regularly and at or near the time in which the expenses were incurred. For example, the records might show the name of the organization the taxpayer was serving, as well as the dates the car was used for a charitable purpose. If the standard mileage rate of 14 cents per mile was used, the records must show the number of miles that the taxpayer drove the car specifically for the charitable purpose. If actual expenses are deducted, the records must show the costs of operating the car that are directly related to a charitable purpose. If you have questions related to the deductibility of your charity volunteer expenses, please give this office a call. Tue, 05 Mar 2013 19:00:00 GMT Home Ownership - Your Best Tax Shelter http://www.messnerandhadley.com/blog/home-ownership-your-best-tax-shelter/407 http://www.messnerandhadley.com/blog/home-ownership-your-best-tax-shelter/407 Messner & Hadley LLP Homeowners Receive Big Tax BreaksHome ownership can provide you with several important tax benefits... Deductions for real estate taxes and home mortgage interest, and Gain exclusion if you meet certain occupancy and holding period requirements. In fact, tax breaks are probably one of the biggest reasons you decided to buy your home in the first place. Unfortunately, some homeowners lose getting the most from their home's tax advantages because they aren't aware that certain limits apply. The purpose of this brochure is to highlight how you as a homeowner can best keep your home's favorable tax edge. Your Home's BasisThe amount of the gain exclusion permitted under current tax law tends to make most taxpayers forget about keeping track of their home improvements. Don't forget, inflation will take its toll, and in a few years the exclusion limits may not be as significant as they are today or the law may change again. In either case, it may be appropriate to keep a record of the improvements on your home. Once you buy a home, you need to begin keeping records related to your home's “ basis,” i.e., the amount you have spent on the property. If you acquired your home through purchase, your basis is what you paid for it originally, including purchase expenses PLUS improvement costs you incur while you own it. Keeping track of basis is extremely important in order to accurately compute gain or loss if you decide to sell. For the purpose of computing basis, it's important to distinguish between “improvements” and repairs; only improvement costs add to your basis. Minor repairs like replacing faucet washers, painting a bedroom or patching a hole in the roof don't need to be tracked. In general, improvements are of a more permanent nature than repairs. They enhance the value of your home and are likely to last more than one year. If you make the same improvement more than once, only the most recent improvement adds to your basis. You should log costs of items like the following in a home improvement record (be sure you keep your backup receipts and canceled checks): Room additionsNew drivewayFence Sprinkler systemExterior lightingIntercomStorm windows/doorsCentral vacuumCentral air Filtration systemWiring upgradeSoft water system Built-in appliancesBathroom upgrade Wall-to-wall carpet LandscapingWalkwaysRetaining wallSwimming poolSatellite dishSecurity systemRoofHeating systemFurnaceLight fixturesWater heaterInsulation Kitchen upgradeFlooring Whenever there's doubt about whether an expenditure qualifies as an improvement, make a note of it in your record anyway. That way, the ultimate decision of qualification can be made later when (and if) you decide to sell. Deductions Related to Your Home Certainly not all costs related to your home are deductible. For example, unless you use your home for business (e.g., you have an office in your home), costs for insurance, repairs, utility costs, condo fees, etc., aren't deductible. However, you generally will be able to deduct: Real Estate Taxes Home Mortgage Interest Keep in mind, however, that home mortgage interest deductions can be limited. Generally, you can deduct the interest from mortgages up to $1 million dollars on a combination of your first and second homes, provided they were the original loans. As the principal on these loans is paid down, the reduced loan amount becomes the new limitation. If you were to later refinance the home for more than the remaining balance on the original loan, the excess would have be used for home improvements or qualify under the provisions that allow a taxpayer to borrow up to $100,000 in home equity. If not, a portion of the interest would not be deductible. The additional $100,000 of home equity can be borrowed from the primary residence and a second home. When used wisely, the $100,000 equity loan can be used to finance other purchases where the interest expense would normally not be deductible. An example of this would be a personal vehicle. Equity debt interest is not deductible for Alternative Minimum Tax (AMT) purposes, so taxpayers who are taxed by the Alternative Minimum Tax (AMT) should consider carefully whether or not to incur home equity debt. Because of the current strict home mortgage deduction limits and the complicated tax rules associated with this tax deduction, be sure to review any home financing plans with your tax advisor before finalizing loan deals.Loan Points: A question often comes up about the deduction for points on a home loan. Points are another name for prepaid interest - they may be called loan origination fees or some similar term. One point equals 1% of the loan amount. When points are paid for services a lender provides to set up a loan, the points aren't deductible. However, when the points are paid as a charge for the use of money, the following rules apply: As a general rule, points are only deductible over the life of a loan. Say, for example, you paid $3,000 in points on a 30-year refinance loan. Your tax deduction would be limited to $100 a year ($3,000/30 years). If you decided to pay your loan off early, say after 15 years, you could write off the balance of the points ($1,500) in that year. An exception to the general rules lets you deduct in full, points you pay in connection with obtaining a mortgage to purchase, construct or improve your main home. Seller-paid points can even be deducted by a home buyer, but the amount deducted reduces the home's basis. Reporting Gains/LossesExclusion of Gain: When you sell your principal home at a gain, you can exclude all (or a portion) of the gain if you meet certain occupancy and holding period requirements. To qualify for this exclusion, you must have owned and occupied the residence for two out of the five year period that ends on the date of the sale.  If you meet those qualifications and are filing a joint return with your spouse, you may exclude up to $500,000 ($250,000 for a single individual) of gain from the sale. A partial exclusion may be allowed even if the two-of-five year ownership and occupancy tests aren't met if the sale is due to a job-related move, health, or certain unforeseen circumstances.  If you do not qualify for the full or partial exclusion, there is no deferral privilege and the gain not eligible for exclusion is fully taxable. NOTE: A second home, such as a mountain cabin or lake cottage, doesn't qualify for the exclusion of gain. Caution: Gains in excess of any allowed exclusion are treated as investment income and may be subject to the 3.8% Unearned Income Medicare Contribution Tax. Previously Postponed Gain: Under prior tax law (generally pre-'98), gain from the sale of a principal residence could be deferred into your replacement residence. Those gains were accumulated from home to home as long as each replacement home cost more than the adjusted selling price (i.e., sales price less expenses of sale and pre-sale “ fix-up” costs) of the previous home. Although gain deferral from a principal residence is no longer permitted under current law, the gains deferred under prior law into a home currently being sold must be accounted for. Sales at a Loss: Losses from the sales of business or investment properties are normally tax-deductible. However, a loss from the sale of your main home is considered personal in nature and therefore, unless the law changes, it is not allowed as a deduction. This rule also applies to second homes. Reporting the Sale: You do not need to report the sale of your main home on your tax return unless you have a gain and at least part of it is taxable - i.e., if the gain is greater than your allowed exclusion, the sale is reportable.  Otherwise, if the gain is totally offset by the exclusion, the sale should not be shown on your tax return.  However, to be certain that no reporting is required, you should provide your tax advisor with the sales documents, cost basis information, etc., to evaluate your situation.  You may receive Form 1099-S showing the gross proceeds from the sale, although settlement agents (escrow companies) are not required to issue a Form 1099-S for most sales of main homes.  If you do receive a Form 1099-S, let your tax advisor review it and determine if it is necessary to report the sale. Exclusion Qualifications Under prior law. . . (generally pre-1998), individuals were entitled to a once-in-a-lifetime exclusion of gain from the sale of their principal residence. To qualify for that exclusion, the taxpayer or spouse must have reached the age of 55 prior to the sale and they must have resided in the home for three of the prior five years. Having exercised that exclusion does not bar a taxpayer from qualifying for the current law exclusion. Under current law... there is no age requirement associated with the exclusion. The period of time the home must be owned and occupied as a principal residence is two out of the past five years. The exclusion amount is $500,000 for couples filing jointly and $250,000 for other individuals. Taxpayers are permitted to exclude a gain every two years if they meet all of the other conditions. There are no gain-deferral provisions in the current law for purchasing a replacement residence; thus, any gain not excludable is immediately taxable. Five-Year Holding Period: If you originally acquired the home you intend to sell by means of a tax-deferred exchange (sometimes referred to as a 1031 exchange), the required ownership period to qualify for the home sale exclusion becomes five years as opposed to the normal two years.Non-Qualified Use: If the home was previously used as other than your main home (non-qualified use), for example, as a second home or a rental, and converted to your personal residence after December 31, 2008, the portion of the prorated gain attributable to the non-qualified use will not qualify for the home gain exclusion. Special Military Rules: Generally, the five-year qualification period for the 2-out-of-5-year use test can be suspended for up to 10 years for persons on qualified extended duty in the U.S. Armed Services or the Foreign Service. Please call this office for more details.Tax Planning and Your HomeThe information outlined here is only a brief overview of the tax rules involving home ownership. Since the rules are complicated, if you're thinking of buying or selling your home, or refinancing a home loan, it's best to discuss the plans with your tax advisor to interpret closing documents and to make absolutely certain the transaction meets the necessary qualifications. Mon, 04 Mar 2013 19:00:00 GMT Household Employees and Your Taxes http://www.messnerandhadley.com/blog/household-employees-and-your-taxes/409 http://www.messnerandhadley.com/blog/household-employees-and-your-taxes/409 Messner & Hadley LLP Employment Tax Responsibilities for Employers of Household Workers Household employees are workers you hire for “ domestic services,” i.e., those services performed in and about your home. Duties of cooks, butlers, housekeepers, governesses, maids, valets, babysitters, caretakers, gardeners, janitors, or personal chauffeurs all can qualify as “domestic services.” Not everyone you hire for work at your home is considered a household employee, though. For example, a self-employed gardener may take care of your lawn and several others in your neighborhood, providing all his own tools and job assistants and setting his own work schedule. That gardener probably won't be considered your household employee because he is running an independent operation over which you have no “say-so.” You see, a worker at your home becomes an employee when you control what work that person is to do AND how and when the work is to be done. If you qualify as a household employer, you may have to pay certain federal payroll taxes, including social security and Medicare taxes and unemployment taxes. You withhold some of these taxes from your employee's wages; others you must pay from your own funds. (Some states require certain taxes too, so be sure to check with the state employment department in your area.)Taxes You Withhold from WagesSocial Security and Medicare Taxes:If you pay cash wages in excess of a specified threshold amount during the year to a given employee, you must withhold social security and Medicare taxes from the employee's wages. This threshold amount $1,800 (2012 and 2013) will vary from year to year and applies to each separate household employee you hire. Call for amounts applicable to other years.Example: This year, Jane hired Louise, a housekeeper, and Rose, a babysitter. She withheld social security and Medicare taxes from their wages. Over the course of the entire year, however, she paid Louise only $500 and Rose $800. Since neither worker's yearly wage equaled the threshold amount, Jane owes no social security or Medicare tax for them. That being the case, she must repay to the workers the taxes she already had withheld from their wages.Federal Income Tax:Household employees may also ask you to withhold income tax from their wages; you aren't required to agree to the request. If you choose to withhold, however, you must collect the income tax from the employee's wages (the IRS publishes tables to let you know how much to withhold) and you pay the amount withheld to the government. Additional Taxes You Must PayEmployer's Share of Social Security and Medicare Taxes: As an employer, you must match the amount of social security and Medicare tax you withhold from your employee's wages. For instance, if you withheld $50 in social security from your housekeeper's wages, you would be required to pay to the government $100 (the $50 withheld from your employee, plus another $50 from your own funds). Federal Unemployment Tax (FUTA): You are also responsible for FUTA taxes if you paid a total of $1,000 (2012 and 2013) threshold amount, call this office for other years) or more in household employee wages during any calendar quarter of the current year or the previous year. FUTA tax isn't a withholding tax but is paid by you alone on behalf of your employees. (Certain states also assess unemployment taxes - check with the appropriate agency in your area.)Paying the TaxYou report and pay the required federal payroll taxes for your household employees along with your regular individual income tax return. Schedule H, Household Employment Taxes, is used to figure the amount of the tax that you owe. Reporting Wages to EmployeesYou need to give your household employees Form W- 2 ,Wage and Tax Statement, to report wages and tax withholding for the year. The W-2 is due to the employee by Jan. 31 of the year following the year in which you paid the wages . You must also file a copy of the W-2 with the Social Security Administration (usually by the end of February). To accurately prepare W-2s, you need certain information from your employee, including his/her name, address, and social security number. So that you have all the necessary information available for timely filing, you may want to have your workers fill out Form W-9, Request for Taxpayer Identification Number and Certification, when you hire them. That way you will have data on file to complete W-2s when the time comes.Other Paperwork ChoresForm SS-4:If you have household employees, you will need to obtain an employer identification number for yourself. This number is not the same as your Social Security Number. You get the number by filling out and mailing Form SS-4, Application for Employer Identification Number, to the IRS (it's also possible to have the number assigned by telephone or to apply online at the IRS website - www.IRS.gov - the SS-4 instructions explain how to do this). Employee Form W-4: If you agree to withhold income tax for an employee, ask him/her to complete Form W-4, Employee's Withholding Allowance Certificate. The information on this form will help you determine the correct amount of income tax to withhold. Payroll Journal: You should record in a journal each payday the wages and withholding of household employees. Set up a separate record for each employee with room for the following information: Payment date Check number Gross wages (before withholding) Social security tax withheld Medicare tax withheld Federal withholding, if any State withholding amounts (establish a column for each separate kind of tax withheld) For computer users, an inexpensive payroll program may simplify the recordkeeping job. Keep employment tax records for at least four years after the later of: the due date of the return on which you report the taxes, or the date you pay the taxes.If You Have Other EmployeesIf, in addition to your household employees, you have employees in a sole proprietorship, you can choose whether to pay the employment taxes of your household workers with your personal tax return or along with your business payroll returns. If you choose the latter option, you file W-2s for you household employees along with those of all your business employees. Have You Forgotten Anything?Here's a quick checklist of issues you should make sure you have considered when you hire and pay household employees: Legality of worker's employment in the United States - complete Form I-9, Employment Eligibility Verification. This is not a tax form but required by the U.S. Citizenship and Immigration Services and available at the USCIS web site (www.uscis.gov). Applicability of state employment taxes and state return filing requirements Applicability of withholding social security and Medicare taxes Income tax withholding agreements with employees Recordkeeping system Employer identification number application W-2 filing with employees and Social Security Administration Return filing and payment deadlines Are the Payroll Taxes you Pay Deductible?In most cases, the payroll taxes you pay in connection with your household workers' wages are not deductible on your individual tax return. The IRS considers these taxes, and the wages on which they are based, to be personal, nondeductible expenses. However, there are a couple of circumstances when you may be eligible for a tax benefit for the payroll taxes you pay: Child Care Credit - If you are eligible to claim a Child or Dependent Care Credit based on wages you pay a household employee who cares for your child, other dependent, or spouse, the payroll taxes you pay on the wages are counted as part of your eligible expenses when figuring the credit. Medical Care Providers - The wages and associated payroll taxes you pay to a household worker who provides nursing services for you, your spouse, or your dependent are medical expenses that may be deductible on your return if you itemize your deductions. (Note that the same expense can't be used both as a medical deduction and for the Dependent Care Credit.) In these two situations, the payroll taxes that you include are the FUTA (federal unemployment) tax, state unemployment tax, and your portion of the Social Security and Medicare taxes that you have actually paid during your tax year. For example, if you paid FUTA tax in January for medically deductible wages that you paid to a nurse in the prior year, you would include the FUTA tax as part of your medical expenses on your current year return (return for the year in which the FUTA tax was actually paid). (The wages paid in the prior year are deductible on your prior year return.) Do not include the Social Security and Medicare taxes, federal and state income taxes, or other state or local taxes you've withheld from the employee's wages, since these amounts are already part of the gross wages for which you are claiming the credit or deduction. Are 1099s Required for Non-Employees Working at Your Home? If the person whom you paid during the year for household services is not your employee - as was the case of the gardener described at the beginning of this article - you would not issue a Form 1099-MISC to that individual. Form 1099-MISC is issued by a business to independent contractors who were paid $600 or more during the year for services performed for the business. You are not considered to be operating a business when you engage someone such as a self-employed gardener strictly to provide services at your home (unless, of course, you are operating a business at your home). Mon, 04 Mar 2013 19:00:00 GMT Tax Breaks for Higher Education http://www.messnerandhadley.com/blog/tax-breaks-for-higher-education/414 http://www.messnerandhadley.com/blog/tax-breaks-for-higher-education/414 Messner & Hadley LLP Over the years, Congress has continued to enhance tax breaks for students and their parents.  These tax benefits provide taxpayers with a large number of options for tax-favored financing of their education and the education of their family members.  This brochure highlights the various education benefits included within the U.S. income tax system. Coverdell Education Savings Account Qualified State Tuition Program American Opportunity Credit Lifetime Learning Credit Penalty-Free IRA Withdrawals for Education Purposes Deduction for Education Loan Interest Tax-Free Savings Bond Interest Student aid is available from the Department of Education for students of limited means. The aid can include educational grants such as a “Pell” grant or various types of student and parent educational loans.  Planning and saving for future education can limit or eliminate potential student aid, because these resources will be taken into consideration at the time the need for student aid is determined. Understanding the tax terms: You will encounter several tax terms in this brochure that may be unfamiliar to you. Understanding their full meaning will help give you a better picture of the limits, qualifications and restrictions that apply to the benefits for education. Phase Out: Instead of just eliminating certain deductions and credits, the tax law often decreases them gradually to zero (“phases them out”) over a specific income range. For example, say a hypothetical $1,000 deduction is allowed, but “phases out” when a taxpayer's “modified adjusted gross income (AGI)” is between $40,000 and $60,000. A taxpayer with a modified AGI of $40,000 or less will be allowed the full $1,000 deduction, while the taxpayer with a modified AGI of $60,000 or more would get no deduction. For modified AGIs between $40,000 and $60,000, the taxpayer would be allowed a pro-rated deduction amount. Regular AGI and Modified AGI: AGI is the abbreviation for “adjusted gross income.” “Regular AGI” is the total of all income, allowable losses and adjustments before subtracting itemized or standard deductions and personal exemptions. However, several tax benefits described in this brochure are limited or not available to taxpayers whose so-called “modified AGI ” is too high. Generally, the modified AGI for educational benefits adds back certain amounts from foreign, U.S. Possession and Puerto Rican sources that are excluded from income. Qualified Educational Institutions: These institutions are generally accredited, post-secondary educational institutions that offer credit toward a bachelor's degree, an associate's degree, or some other recognized post-secondary credential. Certain proprietary institutions and post-secondary vocational institutions also qualify if they are eligible to participate in Department of Education student aid programs. Coverdell Education Savings AccountOriginally referred to as an Education IRA, the Coverdell Education Savings Account is actually a nondeductible education savings account. The investment earnings from this account accrue and are withdrawn tax-free if the proceeds are used to pay qualified education expenses of the account beneficiary. These accounts first became available in 1998, and nondeductible contributions of up to $500 were permitted per year for the benefit of the designated beneficiary.  Contributions are only allowed for designated beneficiaries under the age of 18. Beginning in 2002, the allowable nondeductible contribution has been increased to $2,000 per year per beneficiary. The annual contribution limit is gradually reduced if the contributing taxpayer's “modified AGI” is within the phase-out range and eliminated for taxpayers above the range. Since 2002, the phase-out range for married taxpayers filing jointly has been $190,000 - $220,000 and $95,000 - $110,000 for single taxpayers. Anyone is allowed to make the contribution, provided the total contribution for the under 18 beneficiary does not exceed the annual contribution limit and the contributing taxpayer's AGI is within limits. If the AGI limits the contribution, the funds can be gifted to someone else whose contribution would not be AGI-limited, even the beneficiary. Distributions from the Coverdell Education Savings Account are tax-and penalty-free (including interest on the account) if they are used to pay for qualified education expenses of the designated beneficiary or a member of the beneficiary's family. The definition of qualified education expenses includes elementary or secondary education, kindergarten through grade 12, as well as post-secondary education. Because of the phase-out provision for contributions, taxpayers cannot always be sure they can contribute to the accounts.  Recognizing this problem, the tax law permits Coverdell contributions to be made after the close of the tax year for which the contribution is being made and before the April 15 filing due date for that year.  (Note: if the April 15 due date falls on a Saturday, Sunday or holiday, the due date is the next business day.) Additional rules apply for dealing with rollovers, changes in designated beneficiaries, death of taxpayer or beneficiary, excess contributions, special needs beneficiaries and unauthorized use of distributions.Qualified State Tuition Programs A qualified state tuition program is one generally set up by a state or state instrumentality that lets individuals make contributions to an account established for a designated beneficiary's higher education. Unlike the Coverdell Education Savings Account, there is no limit on the annual contributions to Qualified State Tuition programs.  However, contributions to these plans are considered gifts to the beneficiary, making the annual gift exclusion amount the practical annual limit per contributor. The long-standing annual gift exclusion amount of $10,000 is now inflation-adjusted ($14,000 for 2013); please call this office for the limit for other years. A special rule allows a donor who makes total contributions exceeding the annual gift limit to elect to take the contributions into account ratably over a five-year period, starting with the year of the contribution. This allows a donor to contribute as much as $50,000 adjusted for inflation ($70,000 for 2013) in one year, while avoiding the gift tax implications. The donor must file a gift tax return for the year of the contribution, and a five-year election must be made on the return. Care should be exercised in determining the total contributed to any individual's account to avoid nonqualified distributions if the amount exceeds the educational needs. Virtually all of the high population states now have these programs, which are professionally managed and tailor the investments and risk potential to the potential student's current age. Individuals are not restricted to using the program established in their home state but instead can pick and choose among the programs of any of the states that have established programs. A major benefit of these programs is that the distributions of earnings from the programs can be excluded from income if used for qualified education expenses. This puts the Qualified State Tuition Programs on par with Coverdell Education Savings Accounts, but without the annual contribution limit. Additional rules apply for designated beneficiaries, death of taxpayer or beneficiary, and unauthorized use of distributions.Penalty-Free IRA WithdrawalsGenerally, when funds are withdrawn from an IRA before a taxpayer reaches age 59-1/2, a 10% early withdrawal penalty applies to the distribution. However, penalty-free IRA withdrawals are permitted if the funds are used to pay qualified higher education expenses. The withdrawals will still be subject to regular income tax. Qualified “higher education expenses” include tuition at a qualified educational institution, as well as related room, board, fees, books, supplies, and equipment. The expenses can be for the taxpayer, his or her spouse, or taxpayer's or spouse's children and grandchildren.Deduction For InterestGenerally, taxpayers can only deduct home mortgage interest, investment interest, and business interest. However, interest paid on student loans used to pay tuition, room and board and related expenses for qualified higher education is deductible even if the taxpayer uses the standard deduction. The amount annually deductible is limited to $2,500. Note: Student loan interest is not limited to government student loans and could be home equity loans, credit card debt, etc., provided the debt was incurred solely to pay qualified higher education expenses.The annual deduction begins to phase out when modified AGI reaches the threshold amount and is fully phased out when the modified AGI reaches the top of the phase-out range. The phase-out ranges are inflation adjusted in $5,000 increments. For example, the 2013 ranges are between $60,000 and $75,000 for single taxpayers and between $125,000 and $155,000 for joint return filers. Please call this office for other years' phase-out levels.Education Tax CreditsThe law provides for two nonrefundable tax credits, the American Opportunity Tax Credit and the Lifetime Learning Credit, as explained on the following panel. Both credits will reduce a taxpayer's tax liability dollar for dollar until the tax reaches zero. Any credit in excess of the tax liability is lost. The credit is not allowed for taxpayers who file married separate returns. The credits are elective, and the taxpayer must choose between the two credits for each student. In general, most taxpayers will find the American Opportunity Credit to be more beneficial in the initial years of college and then the Lifetime Credit for subsequent education. The American Opportunity and Lifetime credits phase out when a taxpayer's modified AGI reaches a threshold amount and is fully phased out when the modified AGI reaches the top of the phase-out range. These phase-out levels are annually adjusted for inflation. The phase-out amounts for 2013 for the Lifetime Credit are between $53,000 and $63,000 for unmarried taxpayers and $107,000 and $127,000 for jointly filing couples. The phase-out ranges for the American Opportunity Credit are $80,000 to $90,000 ($160,000 - $180,000 for a joint return). Please call this office for the Lifetime Learning Credit phase-out levels after 2013. American Opportunity Tax CreditThe American Opportunity Tax Credit replaces the Hope Credit for 2009 through 2017.  It provides a credit for four years (as opposed to the first two years for the Hope credit) of college expenses, and the maximum credit per student is $2,500 per year.  The credit is based on 100% of the first $2,000, and 25% of the next $2,000, of tuition, fees and course material (including books) expenses paid during the tax year.  40% of the credit is refundable, provided the taxpayer is not: (1) a child under the age of 18 or (2) under the age of 24, a full-time student and is not self-supporting.  As noted above, this credit begins to phase out for AGI in excess of $80,000 ($160,000 for married couples filing jointly). This enhanced credit can be used to offset the alternative minimum tax.Lifetime Learning Credit The Lifetime Learning Credit is a credit of up to 20% of the first $10,000 of qualifying educational expenses for: (1) undergraduate, graduate, or certificate level courses for a student attending classes on at least a halftime basis; or (2) any course at an eligible institution to acquire or improve job skills of the student (no attendance time requirements). Example: A taxpayer has two children attending college on a full-time basis. The taxpayer pays qualified tuition expenses for the two children in the amount of $12,000, and there is no reimbursement or other tax benefit claimed for the tuition expense. Under the Lifetime Learning Credit rules, the taxpayer is entitled to a tax credit of $2,000 (20% of the first $10,000) for the tax year.Qualifying expenses...for these credits include tuition and fees but not expenses for room, board, books and nonacademic fees such as student activity, athletic, insurance, etc.  Also excluded are expenses for courses that involve sports, games, or hobbies that are not part of a degree program.  Expenses qualifying for the credit must be reduced by tax-free scholarships or fellowships and other tax-free educational benefits.Qualifying students...must attend a qualified educational institution (one that is eligible to participate in U.S. Dept. of Education student aid programs).  The student must be the taxpayer, his or her spouse, or someone who is a dependent of the taxpayer.  In addition, in the case of the American Opportunity (or Hope) Credit, the student must have no federal or state felony drug convictions for the academic period to which the credit would apply.Savings Bond Interest Exclusion Interest earned on U.S. savings bonds is, by Federal law, excludable from taxation for state income tax purposes but taxable on the federal return. However, for certain savings bonds, an individual can even exclude the interest on the Federal return. To qualify for this Federal exclusion, the bonds must be Series EE U.S. savings bonds issued after 1989, or Series I Bonds, and the bond proceeds must be used to pay higher education expenses. Other qualifications... The bond purchaser must be age 24 or over and must be the sole owner of the bond (or, if married, joint owner with a spouse). Bonds purchased by others (except the spouse) or purchased by the taxpayer and placed in another's name do not qualify for the exclusion. Redemption of bonds... When the bonds are redeemed, the interest earned is excludable from income to the extent the proceeds are used to pay qualified higher education expenses for the taxpayer, spouse, or any dependent of the taxpayer. Such expenses include tuition and fees but not room and board or courses involving sports, etc., that aren't part of a degree program. Phase out... Like so many of the other education benefits described earlier in this brochure, the interest exclusion phases out when modified AGI is between certain inflation-adjusted limits. For 2013, the phase out occurs between $74,700 and $89,700 for single taxpayers and between $112,050 and $142,050 for married taxpayers filing joint returns. For phase-out levels for other years, please call this office.Above-the Line Education DeductionA deduction from gross income, up to a maximum of $4,000, is allowable for higher education tuition expenses (same definition as for the education credits) as long as the taxpayer's income is $65,000 ($130,000 on a joint return) or less. The maximum is $2,000 if income is between $65,000 and $80,000 ($130,000 - $160,000 joint), and no deduction if the top of the range is exceeded. This deduction is not allowed in years when education credits are claimed.  Scheduled to expire several times, this deduction has been extended by Congress each time.  When this article was written, the deduction had  been extended through 2013. Mon, 04 Mar 2013 19:00:00 GMT Tax-Advantaged College Savings http://www.messnerandhadley.com/blog/tax-advantaged-college-savings/416 http://www.messnerandhadley.com/blog/tax-advantaged-college-savings/416 Messner & Hadley LLP Overview Section 529 Plans (named after the section of the IRS Code that created them) are plans established to help families save and pay for college in a tax-advantaged way and are available to everyone, regardless of income. These state-sponsored plans allow you to gift large sums of money for a family member 's college education, while you maintain control of the funds. The earnings from these accounts grow tax-deferred and are tax-free if used to pay for qualified higher education expenses. They can be used as an estate-planning tool as well, providing a means to transfer large amounts of money without gift tax. With all these tax benefits, 529 plans are an excellent vehicle for college funding.Types of PlansSection 529 Plans come in two types, allowing you to either save funds in a tax-free account to be used later for higher education costs, or to prepay tuition for qualified universities.College Savings Plans - These allow you to contribute after-tax dollars that are invested in some sort of savings vehicle. Many of these plans offer more aggressive investments when a child is quite young, which will then be transferred to more conservative investments as the child gets closer to college age. As with any investment, there are no guarantees of growth, and the plans are subject to the normal investment risks, even though state governments sponsor them. A big plus for these plans is that they are not geared towards in-state schools but are meant to be applied to whichever school your child chooses to attend.Prepaid Tuition Plans - As the name implies, a Prepaid Tuition Plan allows parents to pay for college education at today's tuition rates. By locking in your tuition payments, worries about the increase of tuition costs in the future can be set aside. This gives the assurance that the child will have the money to attend college when that time comes. These plans sound very attractive; however, most of these plans guarantee that you will be covered only if your child chooses to go to a public in-state college or university. Therefore, if your child decides to attend an out-of-state school, you won't be fully covered, simply because these plans are not meant to fund the higher costs of private or out-of-state education. However, prepaid tuition programs may be set up and maintained by private institutions, and distributions from private tuition plans are eligible for tax-free treatment. Control If you make sacrifices to save for a child's college education, you certainly want to make sure those savings end up being used for college and not some other purpose. 529 Plans allow you to keep control of the account. If you save money for college in a UGMA or UTMA (the name depends on the state in which you live and are essentially custodial accounts, set up for minors), the account becomes the child's property once he or she reaches the age of maturity - usually 18 or 21 and you lose control. Unlike UGMA/UTMAs, Section 529 plans are not irrevocable gifts and you retain control. Control stays in the hands of the adult responsible for the account. Generally, this is the same person who contributed the money, but it doesn't have to be the case. Someone else, for example a grandparent, could make the donation but name the child's parent as the account owner. Money does not come out of the account without permission from the account owner. If the designated beneficiary of the plan decides not to go to school, then the account owner can simply change the beneficiary to someone else in the family.Tax BenefitsThere is no federal tax deduction for making contributions, but taxes on the earnings within a 529 plan are tax-deferred while they are held in the account, and are tax-free when withdrawn to pay for qualified education expenses. This allows you to accumulate money for college at a much faster rate than you can in an account where you had to pay tax on the investment gains and earnings. In the graph below,   compare the growth of $10,000 accumulating tax-free (the green line) to the same $10,000 after taxes (the black line). To be tax-free when withdrawn, the funds must be used to pay for qualified college expenses such as tuition, room and board, books, supplies, and equipment. The more time you have until your child needs the money for college, the more significant this tax-free compounding becomes. How Much Can Be Contributed?Unlike the Coverdell Education Savings Accounts that limit the annual contribution to $2,000, Sec 529 Plans allow you to put away larger amounts of money. There are no income or age limitations for the Sec 529 Plans. The maximum amount that can be contributed per beneficiary is based on the projected cost of a college education and will vary between state plans. Some states base their maximum on an in-state four-year education, while others use the cost of the most expensive schools in the U.S., including graduate studies. Most have limits in excess of $200,000. Generally, once an account reaches that level, additional contributions cannot be made, but that doesn't prevent the account from continuing to grow. Contributions to a 529 college savings plan must, by Federal law, be made in cash and always consist of after-tax money. Most programs also have a minimum contribution that is within everyone's budget. Many have payroll or automatic withdrawal programs. PenaltiesIf the earnings from the 529 Plan are withdrawn and not used for higher-education expenses, the earnings withdrawn will be subject to both regular taxes and a 10% penalty. Before you become concerned, refer back to Figure #1. Had you not utilized the tax deferral benefits of the Sec 529 Plan, you would have accumulated significantly less in the account, which will generally more than offset the 10% penalty. You can avoid penalties by making a tax and penalty-free rollover from one 529 Plan to another, and remember that you are able to change beneficiaries to a 529 Plan without penalty. Impact on Financial Aid Predicting financial aid eligibility is no easy task, since it's based on a myriad of factors, including income, the age of the parents, and the methodology used. A question that always arises when discussing the benefits of saving for college is the impact those savings will have on future financial aid. Investing in a college savings plan could affect your financial aid eligibility but are typically viewed as a parental asset, rather than a child's , and that means that a financial aid officer would count only a small portion of the assets toward the financial aid eligibility. However, don't let the fear of hurting your child's eligibility for financial aid deter you from developing a sound savings strategy. Keep in mind that a lot of financial aid comes in the form of student loans, which means you'll save yourself (or your child) some money by planning ahead. Gift and Estate Considerations Contributions to Section 529 Plans are considered completed gifts and are subject to the gift tax rules. Under these rules, individuals can annually give away (gift) up to the annual limit to another individual (double for a married couple) without triggering gift taxes or reducing their lifetime gift and inheritance exclusion. The long-standing annual gift exclusion amount of $10,000 ($14,000 in 2013) is inflation-adjusted. Please call this office for the current limit. In addition, individuals are allowed to make five years' worth of gifts to a Section 529 Plan in one year. That means an individual could contribute $70,000 in 2013 and a couple $140,000 in 2013. However, no additional gift could be given to the beneficiary of the Section 529 Plan for that entire five-year period. The gift would reduce the donor's estate by the full amount of the gift by the end of the five-year period. Should the donor die before the five-year period elapses, any amount in excess of the allowable annual exemptions would revert back to the donor's estate. Note: A gift tax return must be filed for the year of the contribution if it exceeds the annual gift tax exclusion claiming this special exemption. Section 529 Plans are increasingly being promoted as an estate-planning device for wealthy grandparents, since making a large contribution to a 529 Plan reduces your taxable estate much quicker than the current annual gift exclusion. But while the assets leave your estate, they don't leave your control. Please Note: Transfers and change of beneficiaries can trigger gift and generation-skipping taxes if not planned correctly. If you are contemplating a change in beneficiary or transferring an account to another beneficiary, you are cautioned to call this office in advance.We can plan the change or transfer in such a way to avoid or minimize any potential gift or generation-skipping taxes. Plan Sponsors Section 529 Plans are state-sponsored programs. You are actually investing in a program authorized by the Federal government and run by the various states. To attract their own residents, some states offer tax deductions for contributions, while others will disregard the account balances when calculating state financial aid. It is important to understand that you are not limited to establishing a plan with your resident state. You should investigate the various state plans available and evaluate their performance, expenses, and investment options before making your selection. Getting Started Evaluating the various plans available, selecting one that meets your needs, and deciding on the amount of money to contribute to the fund can be time-consuming and complex. If you need professional assistance, please call this office. Frequently Asked QuestionsQ - Must the student attend a college in the state that sponsors the selected plan? A - No, you can utilize the plan of any state regardless of your state residency, and the student can attend virtually any college, graduate school, and even certain vocational schools anywhere in the country. Q - I am used to selecting my own investments. Can I direct the investments for the plan? A - No, Section 529 Plans do not allow you to self-direct the investments. Each plan has its own investment strategy generally based upon the child's age. Some allow you to select certain investment options. Q - If I wish to move the funds to a different plan, may I do so? A - Yes , you are allowed a penalty-free rollover once a year from one plan to another. However, some states will penalize you if you move the plan to another state. Mon, 04 Mar 2013 19:00:00 GMT Selling Your Home http://www.messnerandhadley.com/blog/selling-your-home/417 http://www.messnerandhadley.com/blog/selling-your-home/417 Messner & Hadley LLP Federal tax laws allow each individual taxpayer to exclude up to $250,000 of gain from the sale of his/her main home, if he/she meets certain ownership and occupancy requirements. (A married couple that meets the qualifications can exclude up to $500,000.) If an individual/ couple is unable to exclude all or part of the gain, then the gain is taxable as a capital gain in the year of sale.Exclusion QualificationsUnless they meet the reduced exclusion qualifications,taxpayers must meet the ownership and use tests in order to qualify for exclusion of gain.This means that during the five-year period ending on the date of the sale, taxpayers must have: 1) Owned the home for at least two years (if a joint return only one spouse need meet the ownership test), and 2) Except for short temporary absences, lived in (used) the home as their main home for at least two years. The required two years of ownership and use during the five-year period ending on the date of the sale do not have to be continuous. Taxpayers meet the tests if they can show that they owned and lived in the property as their main home for either 24 full months or 730 days during the five-year period ending on the date of sale. Also see ownership-use exceptions elsewhere in this brochure. Temporary Absence: Generally, a temporary absence would be for illness, education, business, vacation, military service, etc. for less than one year, and the taxpayer intends to return to the home, and continues to maintain the home in anticipation of such return. Land: Generally, if a taxpayer sells the land on which his/her main home is located, but not the house itself, the taxpayer cannot exclude any gain from the sale of the land. However, the home sale exclusion will apply to vacant land sold or exchanged if the taxpayer owned or used the land as part of the principal residence, provided the disposition of the dwelling unit occurs within two years before or after the disposition of the vacant land, the land was adjacent to land containing the dwelling unit and the land sale or exchange otherwise satisfies the home gain exclusionrequirements. Only one maximum exclusion amount applies to the combined sales/exchanges of both the home and the vacant land.Ownership and Use ExceptionsUse Test After Divorce - In divorce situations,the terms of the divorce or separation document often allow one spouse to use the jointly-owned home for an extended period of time,then to sell the home and split the proceeds with the former spouse.When this happens,the spouse who does not occupy the home will no longer meet the use test and would be barred from excluding the gain except for a special rule for divorced couples.Under this special exemption,that spouse is considered to have used the property as his or her main home during any period they owned it. Disability - Individuals who have become physically or mentally unable to care for themselves are considered to have used their home during any period that they own the home and live in a licensed facility, including a nursing home that cares for individuals with the taxpayer's condition.However, to qualify for this exception, the individual must have owned and lived in his or her home for at least one year. This exception does not apply to the ownership test. Irrevocable Trust Is Owner - Some taxpayers use revocable (living) trusts as an alternative to having their property transferred by will. A home owned in the name of a revocable trust is treated as being owned by the taxpayers for purposes of the ownership test, and such ownership does not jeopardize the ownership test for claiming the exclusion. However, when the first spouse dies, two things occur. The decedent's trust becomes irrevocable and the portion of the home inherited receives a new basis (an exception may apply for decedents dying in 2010). If all or part of the home is placed in the decedent's (bypass) trust, the IRS has ruled that to the extent a home is owned by an irrevocable trust, it is not owned by the surviving spouse, even if the surviving spouse continues to reside in the home. As a result, the portion of the home owned by the irrevocable trust would not qualify for the exclusion. Death of Spouse Before Sale - If your spouse died before the date of sale and you do not meet the ownership and use tests yourself, you are considered to have owned and lived in the property as your main home during any period of time when your deceased spouse owned and lived in it as a main home. Home Transferred in Divorce - If the home was transferred to you by your spouse,or former spouse, incident to divorce, and you do not meet the ownership test, you are considered to have owned it during any period of time when your spouse,or former spouse, owned it. Home Destroyed or Condemned - If you were able to defer gain from a prior home to your current home because it was destroyed or condemned, you can add the time you owned and lived in that previous home when figuring the ownership and use tests for the current home. Maximum ExclusionA taxpayer who meets the ownership and occupancy tests can exclude the entire gain on the sale of his/her main home up to $250,000,provided gain has not been excluded on a sale of another home within two years of the sale of the current home.The maximum exclusion amount is $500,000 if all the following are true:a) The taxpayers are married and file a joint return for the year.b) Either the taxpayer or the taxpayer's spouse meets the ownership test.c) Both the taxpayer and taxpayer's spouse meet the use test.d) During the two-year period ending on the date of the sale,neither the taxpayer nor the taxpayer's spouse excluded gain from the sale of another home.Two-Year Period Between SalesUnless taxpayers qualify for the reduced exclusion, they can only exercise the exclusion once every two years. Therefore, taxpayers cannot exclude the gain on the sale of their home, if during the two-year period ending on the date of the sale, they sold another home at a gain and excluded all or part of that gain. Home Acquired by Tax-Deferred ExchangeIf the home was originally acquired via a Sec 1031 tax-free exchange, the home must be owned for a minimum of five years before a home-sale gain exclusion can be utilized, provided the taxpayer also meets the 2-year use test. Reduced Exclusion A taxpayer who does not qualify for the full exclusion may still qualify to exclude a reduced amount if the taxpayer(s) did not meet the ownership and use tests, or the exclusion was disallowed because of the once every two-year rule, but sold the home due to:a) A change in place of employment;b) Health; orc) Unforeseen circumstances,to the extent provided in IRS regulations.Amount of Reduced Exclusion - If qualified, the reduced exclusion is determined on an individual basis, and in the case of married taxpayers, the individually computed amounts are combined for the joint exclusion. To determine the reduced exclusion,multiply $250,000 (maximum exclusion amount) by a fraction whose denominator is 730 and numerator is the shorter of: (1) The number of days during the five-year period just prior to the current sale that the property was owned and used by the taxpayer as his/her principal residence;or (2) The number of days between that sale and the current sale, if a home was sold just prior to the current sale and the exclusion applied to that sale. More Than One HomeIf a taxpayer has more than one home,the taxpayer can only exclude gain from the sale of the taxpayer's main home,even if the other home meets the two-out-of-five-year ownership and use test. Main Home: The property that the taxpayer uses the majority of the time during a year will ordinarily be considered the taxpayer's main home or principal residence.A taxpayer's main home can be a house, houseboat, mobile home, cooperative apartment, or condominium.  In addition to the taxpayer's use of the property, the home sale regulations list relevant factors in determining a taxpayer's principal residence which include, but are not limited to: the taxpayer's place of employment; the principal place of abode of the taxpayer's family members; the address listed on the taxpayer's Federal and state tax returns, driver's license, automobile registration and voter registration card; the taxpayer's mailing address for bills and correspondence; the location of the taxpayer's banks; and the location of religious organizations and recreational clubs with which the taxpayer is affiliated. Example: Figure #1 illustrates a situation where a taxpayer has two homes,both of which meet the ownership test.The taxpayer also meets the occupancy test,since the taxpayer has lived in both homes more than two years of the prior five-year period. However, only the New York home qualifies, since the taxpayer lived in the New York home the majority of the time in all five preceding years, thus qualifying it as the taxpayer's main home. Gain or Loss on SaleA taxpayer's main home and other homes are considered personal-use property. Gains from personal-use property are generally taxable, but losses from personal-use property are not deductible. Therefore, if you sell your home at a loss,the loss is not deductible. On the other hand, if you sell a home for a gain and the gain is more than your allowable exclusion, or you do not qualify for the main home exclusion, then the gain from the home sale becomes taxable as a capital gain in the year of sale. Determining Gain or LossThe gain or loss from the sale of a home is the sales price less the sum of (1) the costs of selling the home and (2) the basis. Basis is a technical term used in taxes that generally represents the original cost plus the costs of improvements to the home. That is why it is so important to maintain records and keep track of your home's cost and subsequent improvements. In the tax business, this is referred to tracking your basis.The exclusion amount may seem like a lot right now, but after a few years of inflation, you may discover it is not enough to offset the potential gain. Other Factors Affecting Basis - There are numerous tax situations that can affect a home's basis.The following are those most frequently encountered: Deferred Gain - Prior to May 7, 1997, home sale rules allowed taxpayers to avoid paying on home sale gains by deferring the gain into their replacement home. If you deferred gain under those rules,the deferred gain reduces the replacement home's basis. Casualty Loss - Usually, a casualty loss resulting from damages to a home, taken as a tax deduction, will reduce a home's basis. Depreciation - Generally, depreciation resulting from the business use of a home may also reduce the basis (see “Business Use of Your Home” below). Inherited Home - If a home is inherited, the portion inherited will have a new basis that is usually the fair market value of the home on the date of the decedent's death. This is frequently referred to as a step-up (or step-down) in basis. If you inherited the home you are about to sell, please call this office for further details and clarification. Business Use of the Home Depreciation - The tax law assumes business assets will decline in value due to obsolescence and wear and tear. Therefore, taxpayers are allowed to take an annual deduction called depreciation, which represents the decline in value. If the value increases instead, then upon its sale, any gain attributable to the depreciation is generally taxed at rates higher than the gain would otherwise be taxed. In addition, the home sale exclusion does not apply to any depreciation taken on the home after May 6, 1997. This means that even if the gain is less than the allowable exclusion, the portion that represents depreciation after May 6, 1997 will still be taxable and generally at a higher rate than the other portion. Mixed-Use or Separate Property? When a home that was used entirely or partially for business is sold, the home gain exclusion may be limited, and some portion of the business deduction for depreciation may be taxable. How much of the gain is taxable, and the amount of gain that is subject to the gain exclusion, depends if the business portion was part of the dwelling unit (mixed-use property) or whether it was a separate structure. Mixed-Use Property: When the business use was within the same dwelling unit, no allocation of gain is required between the business portion and the personal (home) use portion. However, any depreciation attributable to periods after May 6,1997, would be taxable to the extent of any gain.Allowable depreciation reduces the basis of the home.Example: Jake,a single taxpayer, sells his home for $300,000. He had originally purchased the home for $65,000 and added a room, which cost $20,000, giving him a cost basis of $85,000. He also had a business office in the home for which the allowable depreciation before May 7,1997, was $2,500 and after May 6,1997, was $3,000. The cost of selling the home was $27,000. He meets all of the qualifications for a home sale gain exclusion of up to $250,000. Sale Price . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $300,000Less Sales Expenses . . . . . . . . . . . . . . . . . . . . . . .Cost Basis . . . . . . . . . . . . . . . . . . . .85,000Allowable depreciation . . . . . . . . . .Tax Basis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Gain . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .193,500Home Sale Exclusion . . . . . . . . . . . . . . . . . . . . . . .Net Gain (losses not allowed - not less than zero) . . . 0Taxable Amount (depreciation after 5/6/97) . . . . . . . 3,000 Separate Property: If the business use was within a separate structure, such as a guesthouse or detached garage, the tax treatment will depend upon whether the separate structure itself meets the exclusion qualification requirements. Generally, if a home office in a separate structure does not meet the ownership and use tests, the home gain exclusion will not apply to the gain attributable to the office portion. Please call this office for assistance. Rental Converted to a HomeThe sale of residential rental property is governed by an entirely different set of tax rules than those applying to an individual's main home. However, had the home also been used as the taxpayer's main home either before or after being used as a rental, then it can still qualify for the home sale exclusion if it meets the ownership and use tests.This can provide a significant tax benefit for individuals who carefully plan their sales. As with the home office, the rental's depreciation is not subject to exclusion, and all or part may be taxable to the extent of the sale profit (gain). However, if the home was previously used as other than a taxpayer's main home (non-qualified use), for example, as a second home or a rental, and converted to a personal residence after December 31, 2008, the portion of the pro-rated gain attributable to the non-qualified use will not qualify for the home gain exclusion.Taxpayers contemplating such tax strategy, should consult with this office in advance to verify qualifications and determine the tax implications including depreciation recapture. Special ConsiderationsSeparate Returns - If you and your spouse sell a jointly-owned home and file separate returns, each of you should figure your own gain or loss according to your ownership interest in the home.Joint Owners Not Married - If you own a home jointly with other joint owner(s), other than your spouse, each of you would apply the rules discussed in this brochure to your individual ownership.Credit Recapture - If you claimed a First-Time Homebuyer Credit and in a later year ceased using it as your residence, you may be required to repay some or all of the credit, depending on when you purchased the home and when it stopped being your residence or was sold. Other Dispositions - Foreclosures, repossessions, and exchanges of your home are generally treated as sales. Unearned Income Medicare Contribution Tax - Gain from the sale of your home in excess of the amount excludable may be subject to this 3.8% surtax.  Please call this office for additional information. Mon, 04 Mar 2013 19:00:00 GMT Required Minimum IRA Distributions http://www.messnerandhadley.com/blog/required-minimum-ira-distributions/419 http://www.messnerandhadley.com/blog/required-minimum-ira-distributions/419 Messner & Hadley LLP Overview The most recent IRS regulations substantially simplify rules for required minimum distributions (RMD) from IRAs. There are life expectancy tables that allow smaller distributions to be taken over a longer period. The calculation of the RMD has been simplified by eliminating certain variables. Rules regarding separate accounts with different beneficiaries have been clarified. Some flexibility is now available to change beneficiaries and split accounts, allowing the heirs to retain more of the tax-deferred income for a longer period of time. Beginning Date RequirementsIRA owners must take at least a minimum amount from their IRA each year, starting with the year they reach age 70 1/2. If a taxpayer fails to take a distribution in the year they reach 70 1/2, they can avoid a penalty by taking that distribution no later than April 1 of the following year. However, that means the IRA owner must take two distributions in the following year, one for the year in which they reached age 70 1/2 and one for the current year. If an IRA owner dies after reaching age 70 1/2, but before April 1 of the next year, no minimum distribution is required because death occurred before the required beginning date.Multiple IRA AccountsFor purposes of determining which account the minimum distribution is to be withdrawn from, all Traditional IRA accounts owned by an individual are treated as one, and the minimum distribution can be taken from one or any combination of the accounts. If the owner chooses not to take the minimum distribution from each account, it is not uncommon for IRA trustees to require written certification that the owner took the minimum distribution from other accounts. Determining the Distribution The minimum amount that must be withdrawn in a particular year is the value of the IRA account divided by the number of years the IRA owner is expected to live. If there are multiple IRA accounts, this calculation is done for each one and then the results are totaled to determine the RMD for the year. VALUE__________________ DISTRIBUTION PERIOD = MINIMUMDISTRIBUTION Determining Value: The value is what the account was worth at the end of the business day on Dec. 31 of the PRIOR year. Generally, IRA account trustees will provide this information on the year-end statements or on IRS Form 5498. Determining the Distribution Period: The IRS provides two tables for use in determining the IRA owner's life expectancy (referred to as "distribution period" by the IRS). Generally, IRA owners will use the "Uniform Lifetime Table" to determine their "distribution period." If the IRA owner's spouse is the sole beneficiary (on all the IRA accounts), the Joint and Last Survivor Table may be used. However, the Uniform Lifetime Table will always produce the smallest minimum distribution, unless the spouse is more than 10 years younger than the IRA account owner. Example: The IRA owner is 75 and from the "Uniform Lifetime Table," the owner's life expectancy is 22.9 years. Determining Age: Use the owner's oldest attained age for the year of the distribution. Example: Suppose an IRA owner takes a distribution in February, when the owner's age is 74, but later in November, he turns 75. For purposes of determining the owner's life expectancy, the oldest attained age for the year, 75, would be used in computing the minimum distribution. The same rule is used for the spouse beneficiary, if applicable. Example: The IRA account owner is age 75 and the owner's spouse, who is the sole beneficiary of the accounts, is age 72. Since the spouse is less than 10 years younger than the IRA account owner, the Uniform Lifetime Table will produce the smallest required distribution. From the table, we determine the owner's life expectancy to be 22.9. The value of the IRA account at the end of the prior year is $87,000. The minimum distribution is $3,799 ($87,000 / 22.9).Timing of the DistributionThe minimum distribution computation determines the amount that must be withdrawn during the calendar year. The distributions can be taken all at once, sporadically, or in a series of installments (monthly, quarterly, etc.), as long as the total distributions for the year are at least the minimum required amount. Amounts that must be distributed (required distributions) during a particular year are not eligible for rollover treatment. Maximum Distribution There is no maximum limit on distributions from a Traditional IRA, and as much can be withdrawn as the owner wishes. However, if more than the required distribution is taken in a particular year, the excess cannot be applied toward the minimum required amounts for future years. Underdistribution Penalty Distributions that are less than the required minimum distribution for the year are subject to a 50% excise tax (excess accumulation penalty) for that year on the amount not distributed as required. Example: The owner's required minimum distribution for the calendar year was $10,000, but the owner only withdrew $4,000. The excess accumulation penalty is $3,000, computed as follows: 50% of ($10,000 - $4,000). If the failure to withdraw the minimum amount or part of the minimum amount was due to reasonable error, and the owner has taken, or is taking, steps to remedy the insufficient distribution, the owner can request that the penalty be excused. Not Required to FileEven though the IRA owner is not required to file a tax return, they are still subject to the minimum required distribution rules and could be liable for the underdistribution penalty even if no income tax would have been due on the underdistribution. Death of the IRA OwnerIf the IRA owner dies on or after the required distribution beginning date, a distribution must be made in the year of death, as if the IRA owner had lived the entire year. If the distribution is after the owner's death, the minimum amount must be distributed to a beneficiary. Beneficiary DistributionsWhen an IRA owner dies after beginning the required distributions, and the beneficiary is an individual, the beneficiary must begin taking distributions the year after the IRA owner's death as follows: Spouse as Sole Beneficiary: The IRS permits a sole beneficiary spouse far more options than it does other beneficiates. When the spouse is the sole beneficiary, the spouse has the following options: Convert the IRA to his/her own account, thereby delaying additional distributions until he/she reaches age 70-1/2. Or, if already age 70-1/2, convert the IRA to his/her own account and begin taking RMD based on his/her attained age using the Uniform Distribution Table. Treat the IRA as if it were his/her own, frequently referred to as recharacterizing the IRA to a "Beneficial IRA" and naming new beneficiaries. The spouse must begin taking minimum distributions in the year following the owner's death based on his/her life expectancy using the Single Life Table. Distributions from Beneficial IRAs are not subject to the premature distribution penalties. Later, after no longer being subject to the premature distribution penalty, the spouse can convert the IRA to his/her own and then choose to stop taking distributions until age 70-1/2. The choice depends on the surviving spouse's financial needs and goals and in most cases requires careful planning. Caution: The sole beneficiary requirement is not met if the beneficiary is a trust, even if the spouse is the sole beneficiary of the trust. Life Expectancy Tables The following tables are taken from the IRS regulations and are used to determine life expectancy for purposes of determining the Required Minimum Distribution from Traditional IRA accounts (Reg 1.401(a)(9)-5). All of the tables illustrated have been abbreviated to fit this brochure. For ages not shown, please consult this office. Other Individual Beneficiaries: If the beneficiary or beneficiaries include individuals other than the spouse, then the first required distribution is the calendar year following the year of the IRA owner's death. Using the Single Life Table, the post-death distribution period used to determine the RMD is the longer of: 1.The remaining life expectancy of the deceased IRA owner using the deceased's attained age in the year of death and subtracting one for each subsequent year after the date of death. 2.The remaining life expectancy of the IRA beneficiary using the beneficiaries' attained age in the year of death and subtracting one for each subsequent year after the date of death. The beneficiaries' remaining life expectancy is determined using the oldest beneficiary's age as of their birthday in the calendar year immediately following the IRA owner's death OR for those accounts that were separated by the end of the year after the year after death, the age of each beneficiary. Where the beneficiaries include the spouse, account separation must be completed by Sept. 30 instead of year-end to take advantage of the spouse sole beneficiary provisions. Five-Year Option: A beneficiary who is an individual may be able to elect to take the entire account by the end of the fifth year, following the year of the owner's death. If this election is made, no distribution is required for any year before that fifth year. The above rules apply only to distributions where the beneficiaries are all individuals and occur after the IRA owner has begun or is required to begin minimum IRA distributions. For distribution options for nonindividual beneficiaries or for distribution options where the IRA owner dies prior to beginning the required minimum distributions, please call this office.Planning Can Minimize the TaxAdvance planning can, in many cases, minimize or even avoid taxes on Traditional IRA distributions. Often, situations will arise where a taxpayer's income is abnormally low due to losses, extraordinary deductions, etc., where taking more than the minimum in a year might be beneficial. This is true even for those who may not need to file a tax return but can increase their distributions and still avoid any tax.**Special IRA to Charity Contributions - For years through 2013, taxpayers can make direct IRA to charity contributions, up to $100,000, that will also count towards the RMD.  Please call this office for details. Mon, 04 Mar 2013 19:00:00 GMT Coverdell Education Savings Accounts - Planning Your Child's Education http://www.messnerandhadley.com/blog/coverdell-education-savings-accounts-planning-your-childs-education/450 http://www.messnerandhadley.com/blog/coverdell-education-savings-accounts-planning-your-childs-education/450 Messner & Hadley LLP Overview of Coverdell Education Savings AccountsThese accounts, originally referred to as Education IRAs, became available in 1998 and subsequent years. These accounts are nondeductible education savings accounts. The investment earnings from a Coverdell account accrue and are withdrawn tax-free, provided the proceeds are used to pay qualified education expenses of the account beneficiary.Annual ContributionsWhen these accounts first became available, the nondeductible contributions were limited to $500 per year for the benefit of the designated beneficiary. Beginning in 2002, the allowable nondeductible contribution has been increased to $2,000 per year per beneficiary. Contributions are only allowed for designated beneficiaries under the age of 18. ContributionsContributions that CANNOT be made: Those that aren’t made in cash; Those that are made after the accountholder reaches age 18 (special needs students discussed later), or Those that exceed the annual contribution limit (except for rollovers) Timing of the Contributions Contributions to these accounts must be made by April 15 of the subsequent tax year. If the April 15 due date falls on a Saturday, Sunday or legal holiday, the due date is delayed until the next business day. Projecting the Account GrowthThe table below allows you to predict the growth of an account over various periods and at selected investment rates. ACCOUNT GROWTH FACTORS BASED ON THE SAME CONTRIBUTION EVERYYEAR AT VARIOUS INTEREST RATES YEAR 123456789101112131415161718 4%1.0002.0403.1224.2465.4166.6337.8989.21410.58312.00613.48615.02616.62718.29220.02421.82523.69825.645 6%1.0002.0603.1844.3755.6376.9758.3949.89711.49113.18114.97216.87018.88221.01523.27625.67328.21330.906 8%1.0002.0803.2464.5065.8677.3368.92310.63712.48814.48716.64518.97721.49524.21527.15230.32433.75037.450 10%1.0002.1003.3104.6416.1057.7169.48711.43613.57915.93718.53121.38424.52327.97531.77235.95040.54545.599 Example of how to use the table: Assume contributions of $1,500 are made each year for 14 years to the account and the account is earning 8%. From the table, the growth factor for 14 years at 8% is 24.215. To determine the value of the account at the end of the 14-year period, multiply the factor times the annual contribution of $1,500. In this example, the account value would be $36,322.50.Who Can Make Contributions? Contributions to Coverdell Education Savings Accounts can be made by any individual, i n cluding the beneficiary, if the “modified adjusted gross income (AGI)” of the contributor is less than the statutory phase out limit. The annual contribution per beneficiary is available in full only to an individual contributor with a modified AGI below a certain phase out limit. Corporations and other entities (including tax-exempt organizations) are permitted to make contributions to these accounts, regardless of the amount of the income of the corporation or entity during the year of the contribution. Phase Out LimitsThe annual contribution per beneficiary is available in full only to an individual contributor with a modified AGI below the phase out limits. PHASE OUT LIMITS – MODIFIED AGI Filing Status Modified AGI Married Taxpayers Filing Jointly $160,000– $220,000 All Others $95,000 – $110,000 “Modified AGI” is figured by adding back to regular AGI any income the contributor excluded under the foreign provisions (e.g., foreign earned income or income from U.S. possessions). The contribution limit is phased out ratably for contributors with modified AGIs between the lower and top modified AGI levels. No contributions are allowed once the Coverdell account beneficiary reaches age 18. If you think you will be limited in making contributions because of your AGI level, one option might be gifting the funds for the contribution to either the beneficiary or someone else whose modified AGI is low enough to allow the contribution on behalf of the beneficiary. A 6% excise tax applies to excess contributions - i.e., any contribution over the annual limit. Contributions may be made to both a Coverdell Savings Account and a Qualified Tuition Plan for the same beneficiary without penalty. The excise tax also isn’t charged if: The contribution is withdrawn before the due date (including extensions) of the contributor’s income tax return; or The contribution is a rollover. Caution: Without Congressional action, after 2012 contributions to both a Coverdell and A Sec 529 plan will no longer be allowed in the same tax year. Qualified Education ExpensesIf a beneficiary’s “qualified education expenses” in a year equal or exceed total Coverdell account distributions for the year, the distributions are 100% excluded from the beneficiary’s gross income. “Qualified education expenses” are limited to expenses for school or higher education and generally include tuition, fees, books, supplies, equipment and certain room and board expenses. The term “school” for this definition includes any school that provides elementary or secondary education (kindergarten through 12th grade, as determined under state law). “Qualified elementary and secondary education expenses” are defined as follows: (a) Expenses for tuition, fees, academic tutoring, special needs services in the case of a “special needs beneficiary,” books, supplies, and other equipment, which are incurred in connection with the enrollment or attendance of the designated beneficiary of an education IRA’s trust as an elementary or secondary school student at a public, private, or religious school. (b) Expenses for room and board, uniforms, transportation, and supplementary items and services (including extended day programs), which are required or provided by a public, private, or religious school in connection with the enrollment or attendance of the designated beneficiary at the school. (c) Expenses for the purchase of any computer technology or equipment or for Internet access and related services if the technology, equipment, or services are to be used by the beneficiary and the beneficiary's family during any of the years that the beneficiary is in school. This will not include expenses for computer software designed for sports, games, or hobbies unless the software is educational in nature. Distributions Used to Pay Qualified ExpensesDistributions are generally taxed under rules similar to those for annuities. They are made up of principal (under all circumstances excludable from gross income) and earnings (which may or may not be excludable from income). If the beneficiary uses the entire distributions to pay qualified expenses, the distribution is completely tax-exempt. However, when all or part of the distribution is used for other than qualified expenses, then a portion of the earnings is taxable. Example: The account for Will Jones contains $10,508, of which $7,000 is from contributions to the account and $3,508 is due to earnings.Will withdraws $6,000 from the account and uses $5,000 for qualified educational expenses and $1,000 for a downpayment on a car. Under the annuity rules, 66.62% ($7,000/$10,508) of the distribution is treated as principal. This equals $3,997 ($6,000 x .6662). Will can exclude this amount from his taxable income. The balance, $ 2,003, must be allocated to earnings, and it is potentially taxable to Will depending on his use of the funds. In this case, he used 16.67% ($1,000/$6,000) of the distribution for unqualified purposes (the car purchase). Therefore, Will must pay tax on 16.67% of the earnings, $334 ($2,003 x .1667). Delayed DistributionEven though contributions to the account are not permitted past the age of 18, the funds can remain in the account and continue to accrue investment earnings up to the mandatory distribution age (prior to age 30). The longer the income accrues tax-free in the account, the greater the benefit derived by the recipient. To maximize the tax-free income, one would want to delay the distribution as long as possible and still be able to utilize all of the funds to pay qualified education expenses. Use the table below to predict growth after the education account beneficiary turns 18. Investment Rate of Return (Annually) YRS1234567891011 AGE1920212223242526272829 2%1.0201.0401.0611.0821.1041.1261.1491.1721.1951.2191.243 4%1.0401.0821.1251.1701.2171.2651.316 1.3691.4231.4801.539 6%1.0601.1241.1911.2621.3381.4191.5041.5941.6891.7911.898 8%1.0801.1661.2601.3601.4691.5871.7141.8511.9992.1592.332 10%1.1001.2101.3311.4641.6111.7721.9492.144 2.3582.5942.853 12%1.1201.2541.4051.5741.7621.9742.2112.4762.7733.1063.479 Table assumes the Coverdell Education Savings Account is not immediately utilized and allowed to continue to accumulate during the period in which no contributions are allowed and up to the age at which mandatory distribution or qualified rollover is required. Distributions at Death of BeneficiaryIf the designated beneficiary of an account dies, the account balance must be distributed within 30 days after the death to his/her estate. Distribution Requirements When Beneficiary Reaches Age 30 Account funds must be withdrawn or rolled over to another qualified Coverdell account before the beneficiary reaches age 30. Distributions that aren’t withdrawn or rolled over are taxable and subject to penalties. Like IRA accounts, the Coverdell Education Savings Accounts can be rolled over once a year, and they can be transferred at will for the benefit of the same beneficiary. The rollover must be within 60 days of the original distribution. The accounts can also be rolled over or transferred to another qualified member of the taxpayer's family who meets the age requirement. Penalties For Distributions When Not Used For EducationA 10% withdrawal penalty applies to the taxable portion of all distributions unless they are: Made after death of the designated beneficiary; Due to the beneficiary’s disability; Made on account of a tax-free scholarship or other payment to the extent the amount of the distribution isn’t more than the amount of the tax-free payment; or Excess contributions (over the annual maximum) and the excess is returned, along with income attributable to it, by the due date of the contributor’s income tax return. The net income is included in the distributee’s income in the year of the contribution. Other Requirements Can’t invest in life insurance contracts. The Coverdell account assets can’t be commingled except in common trust or investment funds. The trustee must be a bank or another person who will administer the trust as required (to the IRS’ satisfaction) Mon, 04 Mar 2013 19:00:00 GMT Roth IRA - Is It For You? http://www.messnerandhadley.com/blog/roth-ira-is-it-for-you/452 http://www.messnerandhadley.com/blog/roth-ira-is-it-for-you/452 Messner & Hadley LLP Traditional IRAs are familiar to most taxpayers, providing a relatively simple method of saving for retirement AND deferring taxes in the process. But one drawback of the Traditional IRA is that once withdrawals from them begin, distributed earnings and contributions that were tax-deductible get taxed. In contrast, a Roth IRA allows no tax deduction of contributions. However, it does allow tax-free accumulation on the account so that at retirement ALL distributions from a Roth IRA are tax-free, both contributions and earnings. Naturally, to get this tax-free treatment, certain conditions must be met.Lump Sum Accumulation $1 Rolled Over “X” Years INVESTMENT RATE OF RETURN (ANNUALLY) YRS510152025303540 2%1.10411.21901.34591.48591.64061.81141.99992.2080 4%1.21671.48021.80092.19112.66583.24343.94614.8010 6%1.33821.79082.39663.20714.29195.74357.686110.2857 8%1.46932.15893.17224.66106.848510.062714.785321.7245 10%1.61052.59374.17726.727510.834717.449428.102445.2593 12%1.7623 3.10585.47369.646317.000129.959952.799693.0510 Example: A rollover contribution of $30,000 left to accumulate for 25 years at 6% will be worth $128,757 ($30,000 x 4.2919) at the end of the period.IRA Growth with $1,000 Annual ContributionFor larger contributions, extrapolate the results. Example:contribute $3,000 annually, simply triple the table results. INVESTMENT RATE OF RETURN (ANNUALLY) YRS5 101520253035404550 2%5,20410,95017,29424,29832,03140,56849,99560,40271,89384,580 4%5,41712,00620,02429,77841,64656,08573,65295,026 121,030152,667 6%5,63713,18123,27636,78654,86579,058111,435154,762 212,744290,336 8%5,86714,48727,15245,76273,106113,283172,317259,057 386,506573,770 10%6,10515,93831,77357,27598,347164,494271,025442,593 718,9051,163,909 12%6,35317,54937,28072,053133,334241,333431,664767,092 1,358,2302,400,018 Example: $2,000 annually contributed to an IRA earning 6% per annum would have a value of $109,730 (54,865 x 2) after 25 years. Based on the two examples above, a taxpayer who rolled $30,000 into an IRA and then continued to contribute $2,000 a year to that IRA would have $238,487 in the IRA account at the end of 25 years.How Much Can You Contribute?As with a Traditional IRA, to be eligible for a contribution to a Roth IRA, you (or your spouse, if you aren't employed or self-employed) must have taxable compensation like wages, earnings from a self-employed business, or alimony. The IRA contribution annual limit slowly rose over the years as a result of specified increases in the law, but has leveled off recently because of low inflation rates. In addition to normal contributions, taxpayers age 50 and older are allowed to make "catch-up" contributions, allowing them larger contributions in their later years to fund their approaching retirement needs. The table below illustrates the annual contribution limit applicable to each year by age.   Contribution Limits Year201220132014 and after Under Age 505,0005,500Inflation Adjusted Age 50 and Over6,0006,500Inflation Adjusted Call for amounts applicable to other years. The annual limit applies to all of your IRA contributions in a given year. So, you can contribute to a Traditional IRA and a Roth IRA as long as the combined total does not exceed the annual IRA limits and you meet all of the other requirements. Your income level can limit your Roth contributions. Contributions are gradually reduced (i.e., phased out) for married joint taxpayers with adjusted gross income (AGI) between $178,000 and $188,000 and for other taxpayers when the AGI is between $112,000 and $127,000. The contributions of married separate taxpayers who lived together at anytime during the year are reduced when the AGI is between $0 and $10,000. The phase out applies regardless of whether you (or spouse, if married) are an active participant in another plan. The amounts indicated are for 2013.  Call this office for the rates for other years.Note: the income limitations for making Roth contributions can be circumvented by first making a traditional IRA contribution and then subsequently converting it to a Roth IRA.  Please call this office for additional information. With Traditional IRAs, contributions cannot be made once you turn age 70-1/2. However, there is no such age limit for making contributions to Roth accounts. Handling Roth IRA DistributionsGenerally, distributions from a Roth IRA (unless due to a conversion from a Traditional IRA) are treated as coming first from contributions (principal) on which you have already paid the tax. Therefore, any distribution to the extent of the principal is tax-free. Distributions of earnings are also tax-free (qualified distributions) if: They are not made within the five-year tax period beginning with the first tax year in which you contributed to the Roth account, AND They meet one of the following conditions: They are made after you reach age 59-1/2; OR They are made after your death; OR They are made on account of you becoming disabled; OR They are made so that you can pay up to $10,000 in expenses as a first-time homebuyer. Another big advantage of Roth IRAs over Traditional IRAs is that the former is not subject to the minimum required distribution rules at age 70-1/2. This means that if you don't need to utilize your Roth IRA for retirement, you can leave it untapped for heirs (who would also get deferral on withdrawals, but would be subject to certain required distribution rules that apply to beneficiaries). Conversions of Traditional IRAs to Roth AccountsBecause of the tax-free nature of Roth accounts, Congress has provided taxable rollover provisions that allow you to convert your Traditional IRAs to Roth accounts. Once you convert, all future earnings in the new Roth account accumulate tax-free. The catch is that the tax on the Traditional IRA must be paid in the year the conversion is made to the Roth. Whether it is beneficial to elect this taxable rollover depends on a number of variables.Beginning in 2010, a Traditional-to-Roth IRA conversion can be made by anyone regardless of filing status or income.  Paying the Tax on ConversionThe taxability of a Traditional IRA to Roth IRA conversion depends on whether or not nondeductible contributions were made to your Traditional IRA. If you did, your Traditional IRA includes amounts that have already been taxed. These post-tax contributions don't get taxed again when converting to the Roth. However, you must pay the tax on any interest the Traditional IRA earned on contributions deducted prior to conversion.Effects of Paying the Tax on a Roth Conversion from IRA Funds The tax on a Roth conversion may be paid either from other funds or from the IRA funds being converted. However, if you choose to pay from the IRA funds, those funds will not be considered part of the rollover. Therefore, they will be subject to early withdrawal penalties if you are under 59-1/2 at the time of the withdrawal.Payment of the tax from the IRA funds can severely limit the benefit of a conversion to a Roth by eroding the capital that can be invested. For example, in a conversion of a $50,000 IRA to a Roth and paying the tax from the conventional withdrawal, only $29,429 (amount left in the IRA after paying taxes and penalties) actually would get invested in the Roth account. The result, shown below in after-tax dollars, assumes a 6% interest rate and an accumulation period of 25 years. Years Of Accumulation Roth(Tax-Free) Conventional(After Tax) Rollover Amount5 10 152025 29,42968,00091,900122,980164,580220,240 50,00074,66099,920133,720178,960239,460 Time Limits on Holding Converted Roth AccountsWhen a Traditional IRA is converted to a Roth account, the converted amount must be held in the Roth IRA for at least five years; otherwise a penalty may apply. Any converted amount withdrawn before the end of the five-year period, to the extent it was included in income due to the conversion, is subject to a 10% early withdrawal penalty even if you have reached age 59-1/2. After the five-year period has been satisfied, the 10% penalty still applies to distributions of earnings if you have not attained the age of 59-1/2 or an exception applies. Any withdrawal made from a Roth IRA containing converted amounts before the five-year holding period ends are treated as coming FIRST from amounts that were included in income due to the conversion.Impact of Conversions on Other Tax ConsequencesWhen considering whether or not to convert to a Roth IRA, carefully consider how the move will increase your taxable income in the conversion year. The increase could have drastic effects on other tax consequences. For instance, the increase may: Limit the American Opportunity/Hope and Lifetime Learning Credits allowed for higher education expenses; Cause more of your social security income to be taxed; Limit your losses on rental real estate; and Mean some or all of your medical and miscellaneous itemized deductions aren't deductible. The income “catch” for Roth conversions can be averted with appropriate tax planning.That's why it's important to consult with your tax advisor before making a final Roth investment decision. Only by looking at your entire tax picture will you really be able to decide whether the Roth option is best for you. Factors That Favor Your Conversion to a Roth Your Traditional IRA has been open for a relatively short time. A large part of your Traditional IRA comes from nondeductible contributions. Roth accounts don't require distribution at age 70-1/2. You have other funds from which to pay the tax on the conversion. Factors That Don't Favor Your Conversion to a Roth You may need to withdraw from the Roth account before meeting the five-year holding period. You have a short time until retirement and you expect to make withdrawals soon. You expect to be in a lower tax bracket when you withdraw from your IRA. You do not have other funds with which to pay the tax on the conversions. Saver's Credit The Retirement Savings Contribution Credit, frequently referred to as the Saver's Credit, was established to encourage low- to moderate-income taxpayers to put funds away for their retirement. Up to $2,000 per taxpayer of contributions to an IRA (traditional or Roth) or other retirement plans, such as a 401(k), may be eligible for a nonrefundable tax credit that ranges from 10% to 50% of the contribution, depending on the taxpayer's income. The maximum credit per person is $1,000.The contribution amount on which the credit is based is reduced if the taxpayer (or spouse if filing jointly) received a taxable retirement plan distribution for the year for which the credit is claimed (including up to the return due date in the following year) or in the prior two years. If the modified AGI exceeds $29,500 (single and married separate), $59,000 (married joint) or $44,250 (head of household), no credit is allowed.  The amounts indicated are for 2013.  Call this office for the rates for other years. An individual who is under age 18, a full-time student, or a dependent of someone else is ineligible. The credit is in addition to any deduction allowed for traditional IRA contributions. Mon, 04 Mar 2013 19:00:00 GMT 401(k) Contribution Limits http://www.messnerandhadley.com/blog/401k-contribution-limits/291 http://www.messnerandhadley.com/blog/401k-contribution-limits/291 Messner & Hadley LLP Many employers offer what are commonly referred to as 401(k) plans, named after the tax code section that created the plans. These plans allow employees to defer part of their earnings for retirement. Some employers offer matching contributions that increase the attractiveness of the programs.The value of 401(k) plans is enhanced even further by increasing the general contribution limit and allowing individuals over age 50 to make additional contributions. Where an employer’s plan permits, individuals can contribute amounts that are not excluded from income to a 401(k) plan in a manner similar to Roth IRA contributions. Catch-up contributions are exempt from the regular dollar limits on deferrals provided that all 401(k) plan participants are permitted to make catch-up contributions. The table below summarizes the inflation adjusted limits for 401(k) plans for 2009 through 2013. If you have additional questions about participating in your employer’s 401(k) plan, please call this office. Year 2009 - 2011 2012 2013 Under Age 50 16,500 17,000 17,500 Age 50 & Over 22,000 22,500 23,000 Thu, 28 Feb 2013 19:00:00 GMT Parents Should Encourage Roth IRAs For Their Children http://www.messnerandhadley.com/blog/parents-should-encourage-roth-iras-for-their-children/297 http://www.messnerandhadley.com/blog/parents-should-encourage-roth-iras-for-their-children/297 Messner & Hadley LLP The long-term benefits of tax-free accumulation provided by Roth IRAs are hard to ignore. Parents can do their children a real service by encouraging them to establish a Roth IRA at the first opportunity. A Roth IRA, left untouched until retirement, will ensure that your child has a substantial nest egg.Take for example a youngster, age 17, who contributes $2,000 to a Roth IRA and allows that single deposit to accumulate untouched until retirement at age 65. At a 8% annual growth, the Roth IRA will have grown to $80,421.Consider what the result would be if that same young person continued to deposit $2,000 a year to their Roth IRA. Assuming an 8% annual growth, the Roth IRA will grow to $980,264 by the time they reach retirement age of 65. But keep in mind that children, like adults, must have "earned income" to establish a Roth IRA. Generally, earned income is income from working, not from investments. Earned income can include income from a part-time job, summer employment, baby-sitting, yard work, etc. The amount that can be contributed to either a Traditional or a Roth IRA is limited to the lesser of earned income or the annual contribution limit. The following is the annual limits by year for younger individuals. For 2013, the contribution limit is $5,500, up from $5,000 in 2012. Your children may balk at having to give up their earnings, especially since their focus at their age will not be on retirement. But this is not an obstacle if parents, grandparents or others are willing to fund all or part of the child's Roth contribution. If the parents or others contribute the funds, they need to keep in mind that once the funds are in the child's IRA account, the funds belong to the child. The child will be free to withdraw part or all of the funds at any time. If the child withdraws funds from the Roth IRA, the child will be liable for any early withdrawal tax liability. Thu, 28 Feb 2013 19:00:00 GMT Saver's Credit http://www.messnerandhadley.com/blog/savers-credit/298 http://www.messnerandhadley.com/blog/savers-credit/298 Messner & Hadley LLP The Saver's Credit provides a nonrefundable tax credit for contributions made by eligible, low income taxpayers to IRAs and qualified elective income deferrals. The plan provides incentives for lower income individuals to save for their retirement through available qualified plans. To qualify, the taxpayer must have reached the age of 18 by the close of the year and cannot be a full-time student or dependent of another. The credit ranges from 10% to 50% of the first $2,000 contributed by each taxpayer to a qualified plan during the year. The credit gradually phases out as a taxpayer’s modified AGI increases. The tables below are for 2012 and 2013. The phase outs are inflation adjusted from year to year; please call for the phase outs for other than the years shown. Modified AGI- Adjusted gross income is determined without regard to foreign and protectorate income exclusions or foreign housing exclusions. The credit is nonrefundable and offsets alternative minimum tax liability as well as regular tax liability. Example – Eric and Heather, both age 28, are married and file a joint return for 2013. Eric contributed $3,000 through his 401(k) plan at work, and Heather contributed $500 to her IRA account. Their modified AGI for the year was $30,000. The credit is computed as follows: Example – Eric and Heather file a return using the standard deduction for a married couple and their tax for the year is computed as follows: Caution – To prevent taxpayers from withdrawing contributions from existing plans, and subsequently recontributing the funds in order to qualify for the credit, Congress built in a two-year look back period that generally reduces a taxpayer’s current year contribution by withdrawals during the look-back period. Thu, 28 Feb 2013 19:00:00 GMT Minimum Required IRA Distributions http://www.messnerandhadley.com/blog/minimum-required-ira-distributions/302 http://www.messnerandhadley.com/blog/minimum-required-ira-distributions/302 Messner & Hadley LLP The IRS does not allow IRA owners to keep funds in a Traditional IRA indefinitely. Eventually, assets must be distributed and taxes paid. If there are no distributions, or if the distributions are not large enough, the IRA owner may have to pay a 50% penalty on the amount not distributed as required. Generally, distribution begins in the year the IRA owner attains the age of 70½.BEGINNING DATE REQUIREMENT IRA owners must take at least a minimum amount from their IRA each year, starting with the year they reach age 70½. This amount is referred to as the required minimum distribution, or RMD. If a taxpayer fails to take a distribution in the year they reach 70½, they can avoid a penalty by taking that distribution no later than April 1st of the following year. However, that means the IRA owner must take two distributions in the following year, one for the year in which they reached age 70½ and one for the current year. If an IRA owner dies after reaching age 70½, but before April 1st of the next year, no minimum distribution is required because death occurred before the required beginning date. DETERMINING THE DISTRIBUTION For each Traditional IRA, the  minimum distribution (RMD) amount in a particular year is the total value of  that IRA account divided by the number of years the IRA owner is expected to live. The RMDs of all accounts are then combined to determine the total RMD for the year. TOTAL VALUE_____DISTRIBUTION PERIOD = MINIMUMDISTRIBUTION Determining Total Value: The total value is based on the value of the owner's account at the end of the last business day (usually December 31st) of the prior year. Generally, IRA account trustees will provide this information on the year-end statements or on IRS Form 5498. Determining the Distribution Period: The IRS provides two tables for use in determining the IRA owner's life expectancy (referred to as “distribution period” by the IRS). Generally, IRA owners will use the “Uniform Lifetime Table” to determine their “distribution period.” If the IRA owner's spouse is the sole beneficiary (on all the IRA accounts), the Joint and Last Survivor Table may be used. However, the Uniform Lifetime Table will always produce the smallest minimum distribution, unless the spouse is more than 10 years younger than the IRA account owner. Example: The IRA owner is 75 and from the “Uniform Lifetime Table,” the owner's life expectancy is 22.9 years. Determining Age: Use the owner's oldest attained age for the year of the distribution. Example: Suppose an IRA owner takes a distribution in February, when the owner's age of 74, but later in November, turns 75. For purposes of determining the owner's life expectancy, the oldest attained age for the year, 75, would be used in computing the minimum distribution. The same rule is used for the spouse beneficiary, if applicable. Example: The IRA account owner is age 75 and the owner's spouse, who is the sole beneficiary of the accounts, is age 72. Since the spouse is less than 10 years younger than the IRA account owner, the Uniform Lifetime Table will produce the smallest required distribution. From the table, we determine the owner's life expectancy to be 22.9. The owner has a Traditional IRA account with a value of $87,000 at the end of the prior year. The required minimum distribution is  $3,799 ($87,000 / 22.9). UNIFORM LIFETIME TABLE - The following table is the one that is generally used to determine the Required Minimum Distribution from Traditional IRA accounts. Not illustrated, because of the size, are the Joint and Survivor Life Table used to determine RMDs when the sole beneficiary spouse is more than 10 years younger than the IRA owner and the Single Life Table used for certain beneficiary RMD determinations. For table values not illustrated, please call this office. UNIFORM LIFETIME TABLE Age Life Age Life Age Life Age Life Age Life 70717273747576777879 27.426.525.624.723.822.922.021.220.319.5 80818283848586878889 18.717.917.116.315.514.814.113.412.712.0 90919293949596979899 11.410.810.29.69.18.68.17.67.16.7 100101102103104105106107108109 6.35.95.55.24.94.54.23.93.73.4 110111112113114115 3.12.92.62.42.11.9   TIMING OF THE DISTRIBUTION The minimum distribution computation determines the amount that must be withdrawn during the calendar year. The distributions can be taken all at once, sporadically or in a series of installments (monthly, quarterly, etc.), as long as the total distributions for the year are at least the minimum required amount. Amounts that must be distributed (required distributions) during a particular year are not eligible for rollover treatment. MULTIPLE IRA ACCOUNTS  For purposes of determining the minimum distribution, the RMD must be figured separately for each Traditional IRA account owned by an individual, but the total RMD for the year can be taken from any one or a combination of the owner's accounts. If the owner chooses not to take the minimum distribution from each account, it is not uncommon for IRA trustees to require written certification that the owner took the minimum distribution from other accounts. SPECIAL TAX-FREE IRA TO CHARITY CONTRIBUTIONS - 2009 THROUGH 2013 Taxpayers over the age of 70.5 can make tax-free distributions (up to $100,000) from individual retirement plans for charitable purposes. To constitute a qualified charitable distribution, the distribution must be made directly by the IRA trustee to a qualified charity on or after the date the IRA owner attains age 70-1/2. No Charitable Contribution - Amounts excluded as a qualified charitable distribution, up to the $100,000 limit, cannot be used as charitable contributions when itemizing deductions on Schedule A. Required Minimum Distribution (RMD) - The amount of a qualified charitable distribution is treated as being part of the taxpayer's RMD for the tax year. Regular IRAs (Traditional or Roth) Only - The exclusion does not apply to distributions made from “ongoing” simplified employee pensions (SEPs), or “ongoing” SIMPLE IRAs.  The term “ongoing” means the taxpayer is still making contributions.  However, the exclusion would apply to SEPs and SIMPLEs where the taxpayer is retired and will not contribute to the account during the year. Caution - Direct Transfer Requirement - A qualified charitable distribution must be made directly by the IRA trustee to a charitable organization.  Thus, a distribution made to an individual, and then rolled over to a charitable organization, would not be excludible from gross income.  The result would be a separate IRA distribution and charitable contribution, both subject to the normal rules. (An exception applies for IRA distributions made in December 2012 followed by cash contributions to qualified organizations in January 2013 - check with this office for details if this situation affects you.) A check from the IRA made payable to an eligible charitable organization that is delivered to the organization by the IRA owner will be considered to be made directly by the IRA trustee to the organization. MAXIMUM DISTRIBUTION There is no maximum limit on distributions from a Traditional IRA and as much can be withdrawn as the owner wishes. However, if more than the required distribution is taken in a particular year, the excess cannot be applied toward the minimum required amounts for future years. UNDERDISTRIBUTION PENALTY Distributions that are less than the required minimum distribution for the year are subject to a 50% excise tax (excess accumulation penalty) for that year on the amount not distributed as required. Example: The owner's required minimum distribution for the calendar year was $10,000, but the owner only withdrew $4,000. The excess accumulation penalty is $3,000, computed as follows: 50% of ($10,000 - $4,000). If the failure to withdraw the minimum amount or part of the minimum amount was due to reasonable error, and the owner has taken, or is taking, steps to remedy the insufficient distribution, the owner can request that the penalty be excused. NOT REQUIRED TO FILE Even though the IRA owner is not required to file a tax return, they are still subject to the minimum required distribution rules and could be liable for the under-distribution penalty even if no income tax would have been due on the under-distribution. DEATH OF THE IRA OWNER If the IRA owner dies on or after the required distribution beginning date, a distribution must be made in the year of death, as if the IRA owner had lived the entire year. If the distribution is after the owner's death, the minimum amount must be distributed to a beneficiary. BENEFICIARY DISTRIBUTIONS When an IRA owner dies after beginning the required distributions and the beneficiary is an individual, the beneficiary must begin taking distributions the year after the IRA owner's death as follows: Spouse as Sole Beneficiary: The IRS permits a sole beneficiary spouse far more options than it does other beneficiates. When the spouse is the sole beneficiary the spouse has the following options: Convert the IRA to their own account, thereby delaying additional distributions until they reach age 70½. Or, if already age 70 ½, convert the IRA to their own account and begin taking RMD based on their attained age using the Uniform Distribution Table. Treat the IRA as if it were their own, frequently referred to as recharacterizing the IRA to a “Beneficial IRA” and naming new beneficiaries. The spouse must begin taking minimum distributions in the year following the owner's death based on their life expectancy using the Single Life Table. Distributions from Beneficial IRAs are not subject to the premature distribution penalties. Later, after they are no longer subject to the premature distribution penalty, the IRA can be converted as their own and they can choose to stop taking distributions until age 70 ½. The choice depends on the surviving spouse's financial needs and goals and in most cases requires careful planning. Caution: The sole beneficiary requirement is not met if the beneficiary is a trust, even if the spouse is the sole beneficiary of the trust. Other Individual Beneficiaries: If the beneficiary or beneficiaries include individuals other than the spouse, then the first required distribution is the calendar year following the year of the IRA owner's death. Using the Single Life Table, the post-death distribution period used to determine the RMD is the longest of: 1. The remaining life expectancy of the deceased IRA owner using the deceased's attained age in the year of death and subtracting one for each year subsequent year after the date of death. 2. The remaining life expectancy of the IRA beneficiary using the beneficiaries attained age in the year of death and subtracting one for each year subsequent year after the date of death. The beneficiaries' remaining life expectancy is determined using the oldest beneficiary's age as of their birthday in the calendar year immediately following the IRA owner's death or for those accounts that were separated by the end of the year after the year after death, the age of each beneficiary. Where the beneficiaries include the spouse, account separation must be completed by September 30th instead of year-end to take advantage of the spouse sole beneficiary provisions. 5-Year Option: A beneficiary, who is an individual, may be able to elect to take the entire account by the end of the fifth year, following the year of the owner's death. If this election is made, no distribution is required for any year before that fifth year. The above rules apply only to distributions where the beneficiaries are all individuals and occur after the IRA owner has begun or is required to begin minimum IRA distributions. For distribution options for non-individual beneficiaries or for distribution options where the IRA owner dies prior to beginning the required minimum distributions, please call this office. PLANNING CAN MINIMIZE THE TAX Advance planning can, in many cases, minimize or even avoid taxes on Traditional IRA distributions. Often, situations will arise where a taxpayer's income is abnormally low due to losses, extraordinary deductions, etc., where taking more than the minimum in a year might be beneficial. This is true even for those who may not need to file a tax return but can increase their distributions and still avoid any tax. If you need assistance with your planning needs, please call this office for assistance. Thu, 28 Feb 2013 19:00:00 GMT IRA Contribution Limits and Catch-Up Contributions http://www.messnerandhadley.com/blog/ira-contribution-limits-and-catch-up-contributions/303 http://www.messnerandhadley.com/blog/ira-contribution-limits-and-catch-up-contributions/303 Messner & Hadley LLP For those who annually contribute to their IRA account and wish they could contribute more, there is good news. The annual contribution limit is inflation adjusted each year and is slowly increasing. Taxpayers 50 and older are allowed larger contributions through so-called “make-up” provisions (see table below).The contribution limit for Traditional IRA Accounts for taxpayers that do not have a qualified plan with their employer is as follows. IRA Contribution Limits Year 2008-2012 2013 2014 Under Age 50 5,000 5,500 Inflation Adjusted Age 50 & Over 6,000 6,500 Inflation Adjusted However, if a taxpayer is an active participant in an employer’s pension plan or a self-employed pension plan, the deductible amount will be ratably phased out if their income for the year (AGI) is within the phase out range and not allowed at all if the AGI exceeds the phase out range (see the table below). The phase-out ranges are adjusted annually for inflation. Phase-Out Ranges Filing Status 2012 2013 Single & Head of Household 58,000 - 68,000 59,000 - 69,000 Married Filing Jointly 92,000 - 112,000 95,000 - 115,000 Married Filing Separately 0 - 10,000 0 - 10,000 Special rule for a nonactive participant spouse - The limits for deductible IRA contributions do not apply to the spouse of an active participant. Rather, the maximum deductible IRA contribution for an individual who is not an active participant but whose spouse is an active participant, is phased out for the non-active participant if their combined AGI is between the inflation adjusted limits for the year as illustrated in the table below. Nonactive Spouse Phase-Out Ranges Year 2012 2013 Phase-Out Range 173,000 - 173,000 178,000 - 188,000 Thu, 28 Feb 2013 19:00:00 GMT Retired Spouse IRA Strategy http://www.messnerandhadley.com/blog/retired-spouse-ira-strategy/305 http://www.messnerandhadley.com/blog/retired-spouse-ira-strategy/305 Messner & Hadley LLP When one spouse works and the other does not, tax law allows the non-working spouse to base their contribution to an IRA on the income of the working spouse. This tax benefit is frequently overlooked when spouses have been working and basing their individual contributions on their own income for years, retire and fail to recognize the opportunity to make IRA contributions for a retired spouse. Even if the working spouse has a pension plan at work and his or her income precludes him or her from making an IRA contribution, the non-working retired spouse can still make a contribution based on the working spouse's income. However, be careful since traditional IRA contributions, both deductible and nondeductible, are not allowed in the year an individual turns 70-½ and all subsequent years. This restriction does not apply to Roth IRA contributions. The maximum deductible IRA contribution for an individual who is not an active participant, but whose spouse is an active participant, is phased out for the non-active participant based upon their combined AGI. See the AGI phase-out limits in the table below. Non-Active Participant Spouse Year Phase-Out Range 2011201220132014 169,000 - 179,000173,000 - 183,000178,000 - 188,000Inflation Adjusted Example - Phase Out for Joint Taxpayers - Sandra actively participates in a retirement plan at work, but her husband, Tim, is not involved in any plan. The couple has a combined AGI of $200,000 for 2013. Result: Sandra: No Traditional IRA deduction due to her active participation in another plan and AGI is over $115,000. Tim: No Traditional IRA deduction because combined AGI is over $188,000. Assume that the couple's combined AGI was only $125,000. Result: Sandra: No Traditional IRA deduction due to her active participation in another plan and AGI is over $115,000. Tim: No active participation & AGI under $178,000. Deductible Traditional IRA is allowed. If you have questions related to qualifying for a deductible IRA contribution, please call this office. Thu, 28 Feb 2013 19:00:00 GMT Keeping Your Tax Records http://www.messnerandhadley.com/blog/keeping-your-tax-records/406 http://www.messnerandhadley.com/blog/keeping-your-tax-records/406 Messner & Hadley LLP When it comes to your taxes, good records are the best protection you can have if the government decides to audit your returns. But just as important as your effective recordkeeping are the measures you take to make certain that your records are kept safe. While it may cause a chuckle to picture a mythical taxpayer confessing to an IRS auditor that tax records were destroyed by the family pet, it probably wouldn't be nearly as funny to give a similar response in a real audit of your own.The Advantage of Good Records: A good set of records can help you cut your taxes. Detailed records reduce the chance that you will overlook deductible expenses when your tax return is prepared. After all, how many people remember the exact details of their expenditures months after the fact? Nothing is more frustrating than knowing you incurred deductions yet not being able to prove them. The ultimate consequence of poor recordkeeping is enforced payment of more tax than the law requires. Explicit records provide the best assurance of a favorable outcome if you are audited. Oral testimony alone is seldom enough to prove the deductions you claim on your tax return—auditors want to see a paper trail of receipts, logs, etc. When you're missing adequate backup records, it can cost a great deal in time and effort to get duplicates. The unfortunate fact is that many businesses balk at hunting down receipts for past sales (you can't really blame them since it raises their expenses). Your ongoing recordkeeping effort is your best remedy to counteract this problem. Good records help others who might have to handle your financial affairs in an emergency — e.g., an illness. The better your records are, the easier it could be for someone else to temporarily “step into your shoes” to handle your monetary transactions. Tracking IncomeHow you track your income is largely dependent on the type of income you are receiving. For certain kinds of income, you will receive statements from the income payers to tell you the amount. These statements are called “information returns” by the IRS. Examples include: Type of Income Type of Information Return WagesPensions/IRAsInterest DividendsStock SalesReal Property SalesMiscellaneous Income(e.g., rent, prizes, non-employee payments) Gambling Winnings Unemployment Comp Tax RefundCanceled Debts   Form W-2Form 1099-RForm 1099-INTForm 1099-DIVForm 1099-BForm 1099-SForm 1099-MISC Form W-2G Form 1099-GForm 1099-GForms 1099-A, -C When you receive an information return, you should compare it to your own records, and if there is a discrepancy in the amount of income reported, you should determine whether your records or the payer's are in error. If you find your records are accurate, contact the payer to issue a corrected information return or explain to you how they determined the amount they have reported. Be sure to keep information returns you receive in a safe place so that the amounts reported on them can be shown accurately on your tax return. Payers must submit the data to the government as well as to you. The IRS will compare what they have received with your return to see that your reporting and their data match. If there's a mismatch, you will get a letter asking 'Why?' or assessing additional tax. Since the IRS may misinterpret return reporting, check carefully before paying any extra tax they try to assess!Income from Other SourcesIncome not traceable to information returns also needs to be reported on your tax return. It could include such items as: Receipts from a self-employed business, Rental income, Interest income on a personal loan. Taxpayers who receive income from sources like these have a more complicated job in tracking it. It's recommended that you record it in a separate ledger or through a computer spreadsheet program. In addition, you may want to deposit the funds in a separate bank account earmarked for that income alone.Getting OrganizedNo one method is the only way to maintain your records. What's important is to develop a system that is the most convenient and comprehensive for your situation, and then to stick to it. The IRS estimates that a taxpayer who files a 1040 return with itemized deductions, dividend or interest income, and some stock sales will spend about eleven hours doing recordkeeping. For a more complex return, such as one with rental properties or self-employment income, add at least another three to six hours. The following suggestions may help you organize your records, and also reduce the time you spend doing so.Decide first if you will maintain your records manually or by computer. Bookkeeping software - Some taxpayers, even though they aren't operating a business, choose computerized “bookkeeping” software that uses their check register data to track their income and expenses by category. Monthly and yearly reports conveniently recap the income and expenses, especially if the accounts (income and expense categories) are consistent with how the information is reported for tax purposes. Spreadsheet method - In lieu of purchasing bookkeeping software, a spreadsheet file (for example, in Excel) may be set up where you record your yearly income and expenses by tax return category. If you normally itemize your deductions, set up a separate sheet for each of the major deduction categories - medical, taxes, contributions, etc. - as found on Schedule A . For medical expenses, for example, record each expense by provider 's name, type, date, amount paid, and payment method. Note medically related auto mileage at the same time. At year's end, sort income and expenses of the same type together to get a yearly total. For income items, a cross-check from the spreadsheet to the 1099 forms for all bank interest or other income sources is an accurate way to verify that all needed 1099s have been received. If your tax advisor gives you a “tax organizer” to help you prepare for your appointment , you can quickly transfer the totals from your spreadsheet to the organizer, or, instead, you can provide your advisor with a copy of the spreadsheet. Manual lists - If you keep track of your records manually, the same type of system applies as for a spreadsheet, except you'll set up a paper sheet for each category of income and expense that you normally have on your tax return. Write each payment you receive or expense you incur on the applicable list. At the end of the year, each list is ready to be totaled. If you make your entries no less frequently than monthly, you'll find that the overall time you spend will be less, and the accuracy of the information will be greater, than if you wait until just before your tax appointment to put together the year's lists. Methods for retaining source documents - In addition to your lists of income and expenses, the receipts, canceled checks, credit card slips, income statements, etc., that back up the amounts need to be retained in case your tax return is audited. This is true whether you computerize or manually summarize your data. Choose from the following methods the one, or combination of methods, that suits you best: Envelopes - Using several blank envelopes, write the tax year and names of the income and expense categories that correspond to your spreadsheet or manual list of accounts. After you've recorded an item on your list, insert the corresponding receipt, canceled check, etc., into the envelope. By storing the source documents by category throughout the year, instead of throwing all of them in a box to get to “later,” you'll not only save time but considerable frustration if you must search for a particular item. There is also less likelihood that a receipt or other document will be lost. Store the envelopes in a larger master envelope or box. File folders - Some taxpayers prefer to use file folders labeled by income and expense categories. These work well for manually maintained records, as the lists can go right in the folders along with the substantiating receipts, checks, credit card slips, etc. Small-sized receipts should be taped or stapled to a letter-sized sheet of paper to prevent them from falling out of the folder. Binders - A binder, set up with dividers labeled by income and expense categories, is also useful for keeping your lists and paper records. Three-hole plastic sheet protectors are convenient for keeping source documents together by category in the binder(s). Binders are especially useful for filing monthly or quarterly brokerage or bank account statements. Start now - If you aren't already in the habit of keeping your records organized and maintaining them contemporaneously, start now! The effort will be worth it in time saved when you prepare for your next tax return preparation appointment. And most likely your records will be more accurate than they've ever been before.Knowing When to Discard RecordsTaxpayers often question how long records must be kept and how long the IRS has to audit a return after it is filed. ANSWER: It all depends on the circumstances! In many cases, the federal statute of limitations can be used to help you determine how long to keep records. With certain exceptions, the statute for assessing additional tax is three years from the return due date or the date the return was filed, whichever is later. However, the statute of limitations for many states is one year longer than the federal. The reason for this is that the IRS provides state taxing authorities with federal audit results. The extra time on the state statute gives states adequate time to assess tax based on any federal tax adjustments.In addition to lengthened state statutes clouding the recordkeeping issue, the federal three-year rule has a number of exceptions: The assessment period is extended to six years instead of three if a taxpayer omits from gross income an amount that is more than 25 percent of the income reported on a tax return. The IRS can assess additional tax with no time limit if a taxpayer: (a) doesn't file a return; (b) files a false or fraudulent return in order to evade tax, or (c) deliberately tries to evade tax in any other manner. The IRS gets an unlimited time to assess additional tax when a taxpayer files an unsigned return. If no exception applies to you, for Federal purposes, you can probably discard most of your tax records that are more than three years old; add a year or so to that if you live in a state with a longer statute. Examples:Sue filed her 2012 tax return before the due date of April 15, 2013. She will be able to safely dispose of most of her records after April 15, 2016. On the other hand, Don filed his 2012 return on June 2, 2013. He needs to keep his records at least until June 2, 2016. In both cases, the taxpayers may opt to keep their records a year or two longer if their states have a statute of limitations longer than three years. Note: If a due date falls on a Saturday, Sunday or holiday the due date becomes the next business day. Important note:Even if you discard backup records, never throw away your file copy of any tax return (including W- 2 s ). Often, the return itself provides data that can be used in future return calculations or to prove amounts related to property transactions, social security benefits, etc.Records to Keep Longer than Three YearsYou should keep certain records for longer than three years. These records include: Stock acquisition data. If you own stock in a corporation, keep the purchase records for at least four years after the year you sell the stock. This data will be needed in order to prove the amount of profit (or loss) you had on the sale. Stock and mutual fund statements where you reinvest dividends. Many taxpayers use the dividends they receive from a stock or mutual fund to buy more shares of the same stock or fund. The reinvested amounts add to basis in the property and reduce gain when it is finally sold. Keep statements at least four years after final sale. Tangible property purchase and improvement records. Keep records of home, investment, rental property, or business property acquisitions AND related capital improvements for at least four years after the underlying property is sold. Thu, 28 Feb 2013 19:00:00 GMT Caring for an Elderly or Incapacitated Individual http://www.messnerandhadley.com/blog/caring-for-an-elderly-or-incapacitated-individual/181 http://www.messnerandhadley.com/blog/caring-for-an-elderly-or-incapacitated-individual/181 Messner & Hadley LLP With people generally living longer, we frequently find ourselves in the position of a caregiver for elderly or incapacitated individuals. Whether it be an incapacitated or elderly spouse, an elderly parent or even a child, there are tax implications that need to be considered and can relieve some of the financial burden associated with being a caregiver. The following are some tax aspects of taking on the care of an elderly or incapacitated individual.• Dependency exemption - You may be able to claim the cared-for individual as your dependent, thus qualifying for an exemption. To qualify: o You individually or through a multiple support agreement must provide more than 50% of the individual’s support costs, o The individual must either live with you for the entire year or be related, o For 2013, the individual must not have gross income in excess of the exemption amount of $3,900 (up from $3,800 in 2012, call for exemption rates for prior years), o The individual must not himself file a joint return for the year, and o The individual must be a U.S. citizen or a resident of the U.S., Canada or Mexico. • Medical expenses - If the cared-for individual qualifies as your dependent or medical dependent, you can include any medical expenses you incur for the individual along with your own when determining your medical deduction. Amounts paid to a nursing home are fully deductible as a medical expense if the principal reason that a person stays at the nursing home is for medical, as opposed to custodial, etc., care. If a person isn’t in the nursing home principally to receive medical care, then only the portion of the fee that is allocable to actual medical care qualifies as a deductible medical expense. But if the individual is chronically ill (as defined above), all of the individual’s qualified long-term care services, including maintenance or personal care services, are deductible. A "Chronically ill person" is one who has been certified by a licensed healthcare practitioner within the previous 12 months as: (1) unable to perform at least two activities of daily living (eating, toileting, transferring, bathing, dressing, continence) without substantial assistance for a period of 90 days due to loss of functional capacity, (2) having a similar level of disability as determined in regulations, or (3) requiring substantial supervision to protect from threats to health and safety due to severe cognitive impairment. The requirement that a qualified long-term care insurance contract must base its determination of whether an individual is chronically ill by taking into account five activities of daily living applies only to (1) above (being unable to perform at least two activities of daily living). • Reverse mortgage as alternative to nursing home - It is often desirable for an elderly person to remain in his or her own home with proper in-home care rather than entering a nursing home. A reverse mortgage loan may make this a feasible alternative to a nursing home. If this approach is taken, don’t forget the household help is deductible in the same manner as the nursing home. In addition, household employees must be paid by payroll. • Filing status - If you aren’t married, you may qualify for “head of household” status by virtue of the cared-for individual. If the cared-for individual: (a) lives in your household for over half the year, (b) you pay more than half the household costs, (c) the individual qualifies as your dependent, and (d) is a relative, you can claim head of household filing status. If the person you’re caring for is your parent, he or she does not need to live with you, as long as you provide more than half of the household costs and he or she qualifies as your dependent. For example, if a parent is confined to a nursing home and you pay more than half the cost, you are considered as maintaining a principal home for your parent. • Dependent care credit - If the cared-for individual qualifies as your dependent, lives with you, and physically or mentally cannot take care of themselves, you may qualify for the dependent care credit for costs you incur for their care to enable you (and your spouse, if married and filing a joint return) to go to work. • Exclusion for payments under life insurance contracts - Any lifetime payments received under a life insurance contract on the life of a person who is either terminally or chronically ill are excluded from gross income. A similar exclusion applies to the sale or assignment of a life insurance contract to a person who regularly buys or takes assignments of such contracts and meets other qualifying standards. If you are a caregiver and would like to discuss your situation further, please call this office. Wed, 27 Feb 2013 19:00:00 GMT Impairment-Related Medical Expenses http://www.messnerandhadley.com/blog/impairment-related-medical-expenses/183 http://www.messnerandhadley.com/blog/impairment-related-medical-expenses/183