There is no certainty about the Death of Taxes

The income tax celebrated its 100^th birthday last year.  After two failed attempts, Congress enacted the income tax through the passage of the 16th Amendment in 1913.  

While often associated with the growth in government spending, its biggest effect has been to shift the balance of power toward the federal government and away from the states, many of which already had enacted state income taxes. In the area of military power and international affairs, the effect of the 16th Amendment is so great that it is difficult to imagine how things would be today without it.

One thing is for sure, the income tax has changed dramatically over the years.  The top marginal tax rates have been anywhere and everywhere between a low of 7% in 1913 to a high of 94% just three decades later in 1944.   We sifted through 100 years of tax tables to create charts like the following.

Like many things that have been around for 100 years, it is full of stories and changes and “fun facts”.   We explore the rise and fall of the Income Tax and its Rates in this week’s blog post.

Smart Individual and Business Planning Moves for Year-End

Year-End planning is always important, which is why we constantly remind clients that December 31^st is the most important deadline of the year. It is especially important this year due to the tax law changes new to 2013. 

2013 is the last year for some key deductions such as:

• Sales taxes (especially important for Tennesseans)
• Qualified higher education expenses
• 50% bonus depreciation on new equipment.
• Equipment expensing election up to $500,000.  Next year cap is expected to be only $25,000.

 High income individuals should be mindful of the new taxes applicable for 2013:

• New 39.6% tax rate on couples earning >$450,000.
• New 3.8% surtax on investment income over $250,000
• New .9% Medicare tax on wages and self-employment earnings over $250,000
• New 20% capital gains and dividends rate for couples earning >$450,000.

There are many opportunities in addition to considering new taxes and expiring deductions.   Don’t miss out on the most important tax deadline of the year! 

Click here for dozens of smart individual and business tax planning moves you should consider before year end.   

This is tax planning season!   We can help you determine where you stand for 2013 and what you can do to manage your tax liability.  Call or email us to get started.

Healthcare Exchanges and other Affordable Care Act Provisions

Healthcare Exchanges, a key feature of the 2010 Affordable Care Act, began open enrollment on October 1^st.  The exchanges, setup by individual states (or the federal government for states like Tennessee that did not setup their own exchanges) can be accessed online at www.healthcare.gov. 

While all the plans will meet the minimum coverage requirements, the prices will differ and they will be grouped into categories indicating the amount of out of pocket expenses they are designed to cover.   

You can run your own estimate on the Kaiser Family Foundation Calculator Here:

Below are the topics we explore in this week’s addition to our blog:

• Individual Coverage Mandate
• How do Healthcare Exchanges Work
• Premium Assistance Credit
• Surtax on Investment Income (3.8%)
• Surtax on wages (.9%)
• Employee Notification Requirement (including sample forms)
• Employer Mandate (update)
• Credit for Small Employer Health Insurance Premiums

Mid-Year Tax Planning Checklist

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. Now is a great 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 refinance your home or take out a second home mortgage this year?
 Are you prepared for the new 3.8% surtax on net investment income?
 Are you taking advantage of tax-advantaged retirement savings?
 Have you made any significant equipment purchases for your business?
 Did you make any unplanned withdrawals from an IRA or pension plan?

“Flipping” Homes – A Reviving Trend in Real Estate

With mortgage interest rates low and home prices rebounding, house 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. 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. 

• Dealers – If you flip more than 5 properties or make a living flipping houses, you are most likely a dealer.  Federal taxes could run as high as 55% on dealers.
• Investors – If you flip only the occasional property, you are most likely an investor.  Investors that hold properties for at least a year pay no more than 23.8% in federal taxes.
• Homeowner – If you occupy the property as your primary residence you MAY be able to exclude the entire gain from taxation. 

There are a lot of factors to consider.  

Don’t Panic If You Receive an IRS Notice

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 immediately fax or email us 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 our office review the notice prior to making any payment or response.

It is important to deal with any IRS correspondence promptly and correctly.  We can handle these matters for you, so please call for assistance.

President’s Proposed Tax Changes for 2014

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.

Here are a few of the more significant proposals:

• Limit Value of Deductions - Reduce the value of deductions such as: home mortgage interest, charity, retirement plan contributions, muni-bond interest exclusion, employer health insurance cost to 28% for families with income greater than $223,050.
• Buffet Rule - Require taxpayers earning more than $1 million to pay no less than 30% of their income (after charitable contributions) in taxes.
• College Education Credit - Permanently extend the American Opportunity Tax Credit worth up to $10,000 per student over the course of four years of college.
• Limit Retirement Savings - Prohibit individuals from accumulating over $3 million in tax-preferred retirement accounts.
• Small Business Depreciation - Make permanent the $500,000 Sec. 179 deduction for small business asset purchases.
• Increase Estate and Gift Taxes - 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. 

Read the full article for more details on these and many other proposed tax changes for 2014.

Energy Costs Rise as Tax Incentives Fade

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.
• 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.
• 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.

We explore each of the incentives in more detail in this week’s addition to our blog.

3 Technologies to Simplify Your Financial Life and Reduce Identity Theft

Most people today use their smartphones and/or tablets to keep up with emails, maintain calendars, and maybe even play a game or two. But did you know you can use these devices to help protect your personal and financial information? Experts recommend monitoring your account balances and getting statements online as one of the best ways to prevent identity theft.

Most financial institutions offer websites and mobile apps that make this easy to do. This, however, is only the tip of what technology can do to simplify and secure your financial life. We recommend the following 3 sites or apps to enhance your financial security. These tools seamlessly integrate your desktop, smartphone and tablet. They are all user-friendly and will make you wish you had known about them sooner!

1. LastPass - password management
2. Mint - account aggregation
3. ShareFile - secure document storage

How well do you know the Client Document Vault?

What is the Client Document Vault?

The Client Document Vault powered by ShareFile is a cloud-based service that Baker Sullivan Hoover uses to share and store your files. The technology is both convenient and confidential.

Easy to Use

• It is an easy way to share big business files with people
• To send a file, just click on the “Send a File” link on the navigation bar, enter an email address and click to upload your file
• Large individual files can be uploaded
• The service is compatible with both Mac and PC

Secure

• Audited data centers ensure privacy and security of confidential information
• Files are encrypted in transfer and storage
• You have access to customizable security settings

Multiple Ways to Access Your Client Document Vault:

• Via the Baker Sullivan Hoover Website
• Via the Free Phone and Tablet App*
• Via the Desktop Widget

BSH’s goal through the Client Document Vault is to make exchanging information both simple and safe. There are several ways to utilize this service and hopefully one of them is a convenient way for you to connect with us. If you have any questions about using your Client Document Vault please give us a call.

It’s Tax Time! Are You Ready?

If you’re like most taxpayers, you find yourself with an ominous stack of “homework” around TAX TIME! Unfortunately, the job of pulling together the records is never easy, but the effort usually pays off when it comes to the extra tax you save!

We are here to help. By now, you should have received your Tax Organizer in the mail. If you have not, please contact our office. We are again offering the option of a paperless organizer that we designed specifically for our clients. The eOrganizer is a PDF file that is simple to download and complete from the convenience of your computer. You can print and mail it to us with your tax forms (W-2, 1099, etc.) or save it to your Client Document Vault. As you assemble your tax information, please use our Tax Return Checklist to guide you in providing us all of the tax information we need to smoothly prepare and process your returns.    

Keep in mind, when you are fully prepared, it allows us to:

• Consider every possible legal deduction;
• Better evaluate your options for reporting income and deductions to choose those that are best suited to your situation;
• Explore current law changes that affect your tax status;
• Talk about possible law changes and discuss tax planning alternatives that could reduce your future tax liability.

 We explore just where to begin in this week’s addition to our blog. 

The Fiscal Cliff tax bill will be particularly painful for high income households.

Taxpayer’s won’t feel much tax relief from The American Taxpayer Relief Act of 2012.   Actually, 77% of American households will see a tax increase compared to their 2012 tax levels, according to an analysis by the Tax Policy Center.  The biggest impact for most households comes from the expiration of 2% Social Security tax break that existed for 2011 and 2012 and not extended.  

The average tax increase for U.S. households is projected to be about $1,635. That figure is somewhat skewed by the significant tax increases in store for high-income households.  

The key provisions of the tax bill are:

• Reinstates the 39.6% tax rate for couples making more than $450,000 (singles making more than $400,000).

• Reinstates the 20% tax rate on capital gains and dividends for households making more than $450,000 (singles making more than $400,000).

• Reinstates phaseouts of personal exemptions and itemized deductions for couples making more than $300,000 (singles making more than $250,000).

• Preserves the $5 million estate exemption and spousal portability but raises the top estate tax rate to 40% from 35%.

• Permanently patches the Alternative Minimum Tax (AMT) for millions of Americans.

• Extends several expiring tax breaks such as education credits, deductibility of sales tax and accelerated depreciation rules.

We explore the entire tax bill in detail in this week’s addition to our blog.

What’s the latest on health care reform?

Taxes and government spending are going to be on the agenda in Washington during 2013. Where does that leave health care reform, the legislation passed in 2010 overhauling the health care system in this country?

In this week’s addition to our blog, we give you a quick update that covers provisions in the health care legislation that have already gone into effect and those that, absent any changes made in the coming months, will go into effect in 2013 and thereafter.

The 6 provisions that will take effect in 2013 include the following:

1.    FSA contribution limits are reduced to $2,500 per year.

2.    Medical expense deduction threshold is increased to 10% for those under 65.

3.    Deductible executive compensation for certain health insurance companies is limited to $500,000 per year.

4.    New  Medicare tax of .9% for earnings above $200,000 single or $250,000 married.

5.    New  Medicare tax of 3.8% on unearned income for taxpayers with income above $200,000 single or $250,000 married.

6.    Medical device sales tax of 2.3% imposed on the sale of certain medical devices.

Certain provisions in the original health reform legislation have already been changed or repealed. Clearly, the massive law will affect every taxpayer. 

Are We Headed for a Fiscal Cliff?

If Congress does nothing, there will be a huge tax increase across the board affecting just about every taxpayer, rich and poor alike. Federal Reserve Chairman Bernanke referred to this problem as a “fiscal cliff.”

To understand the enormity of the problem, here is a rundown of a number of the more significant expiring provisions.

1. Capital Gains Rates Increase from 15% to 20%
2. Tax Rates (Brackets) Increase – all rates increase and the top rate increases to 39.6%
3. The 2011–2012 Payroll Tax Cuts Expire – 2% tax hike for all income earners.
4. Education Benefits Take A Hit – no more credits or student loan interest deductions.
5. Lower-Income Taxpayers Lose Benefits – child tax credit cut in half.
6. "Obamacare" Taxes Kick In – new 3.8% investment tax and 0.9% Medicare tax.

We explore each of these provisions in more detail in this week’s addition to our blog.

Year-End Tax Planning Moves

Year-end planning is a bigger challenge this year than in past years because, unless Congress acts, tax rates will go up next year, many more individuals will be snared by the alternative minimum tax (AMT), and various deductions and other tax breaks will be unavailable.

Congress could extend the Bush-era tax cuts for some or all taxpayers, retroactively “patch” the AMT for 2012 to increase exemptions and availability of credits, revive some favorable tax rules that have expired, and extend those that are slated to expire at the end of this year.

While these uncertainties make year-end tax planning more challenging than in prior years, don’t let them be an excuse for inaction. The prospect of higher taxes next year makes it even more important to engage in year-end planning this year.

We have compiled a checklist of actions that can help you save tax dollars if you act before year-end:

• 17 Year-End Tax Planning Moves for Individuals

• 7 Year-End Moves for Business Owners

As always, we are here to help you narrow down the specific actions that make the most sense for you.   Just give us a call or drop us an email.

Inheritances Can Be Tricky

The process of claiming an inheritance can be quite complex. It helps to understand the basics and to be aware of potential tax liabilities. Exactly how the estate is handled will depend upon whether the assets were owned individually or in a trust.  

The tax rate you pay on inheritances vary widely depending on the type of asset you inherit.  In very general terms, the following are the likely tax rates for various types of assets you might inherit:

*There are many factors to consider and this summary provides very general information. Therefore, it is important to let us know if you are expecting an inheritance so that we can help you navigate the intricacies of the tax laws.

October 2012 Due Dates

Individual Due Dates

October 10

·         Report Tips to Employer

October 15

·         Extended Individual Tax Returns

·         SEP IRA & Keogh Contributions

Business Due Dates

October 15 

·         Electing Large Partnerships (1065-B)

·         Social Security, Medicare and withheld income tax

·         Nonpayroll Withholding

October 31

·         Social Security, Medicare and Withheld Income Tax

·         Certain Small Employers – Deposit 3^rd Quarter Tax Liability

·         Federal Unemployment Tax

September 2012 Due Dates

Individual Due Dates

September 17 - Estimated Tax Payment Due

The third installment of 2012 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 employers;
• Pension withholding for retirees; and
• Estimated tax payments for self-employed individuals and those with other sources of income not covered by withholding.

Business Due Dates

September 17 -  Final due date for all Calendar Year Corporations, S Corporations, Partnerships, and Estates and Trusts tax returns

File a 2011 calendar year income tax return and pay any tax, interest, and penalties due. This due date applies only if you timely requested an automatic 6-month extension. No additional extensions are available for these returns.
 

Middle-Class Tax Cuts: Will Congress Act Soon?

The President has repeatedly used earnings of $250,000 for married couples and $200,000 for single individuals as the threshold for what he considers the wealthy and those who should not benefit from tax cuts.

What happens if those provisions are allowed to expire and what happens to taxpayers who earn more than $250,000 if the President’s proposal succeeds?  

• Individual income tax rates will rise to 15%, 28%, 31%, 36%, and 39.6%.
• Long-term capital gains will be taxed at a maximum rate of 20%.
• Dividends will be taxed as ordinary income.
• The limit on personal exemptions will be restored.
• The limit on itemized deductions will be restored.
• Cut backs in the child tax credit, adoption credit and dependent care credit
• The education incentives will disappear.

If you have questions or wish to explore strategies to hedge against whatever Congress decides to do – or not do – please give us a call.

August 2012 Due Dates

Individual Due Dates

August 10 - 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 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.

Business Due Dates

August 10 - Social Security, Medicare and Withheld Income Tax

File Form 941 for the second quarter of 2012. 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.

August 31 – TN Gross Receipts Tax Returns

Summertime Child Care Expenses May Result in Tax Savings

Many parents who work or are looking for work must arrange for the care of their children during school vacation. If you are in this situation and your children requiring care are under 13 years of age, you may qualify for a child care tax credit. The credit offsets income tax, potentially to zero, but cannot be used to reduce special taxes, such as self-employment tax, and is not refundable.

Qualifying costs can included:

1. Day Care Facility
2. Day Camps
3. Overnight Camp or Tutoring
4. School Expenses
5. In Home Care

Tax Decisions facing all New Business Owners

If you are planning to open a new business, there are a number of tax and accounting issues you need to be aware of.  The following are some of the more commonly encountered issues a new business owner needs to cope with and discuss with their CPA.

1. Entity Selection
2. Taxes
3. EIN
4. Local Business License
5. Sales Tax Permit
6. Payroll
7. Information Reporting
8. Recordkeeping System
9. Accounting Method

It is always easier and less expensive to set things up correctly in the first place than it is to fix the mistakes later.

Haven’t Filed an Income Tax Return? Watch Out!

If you have been procrastinating about filing your 2011 tax return or have other back returns that have not been filed, you should consider the consequences.
Facts about Filing Tax Returns

• Failing to file a return or filing late can be costly.
• If a refund is due, there is no penalty for failing to file a tax return.
• Taxpayers who are entitled to the Earned Income Tax Credit must file a return to claim the credit, even if they are not otherwise required to file.
• 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.

Amazon.com and Tennessee Consumer Use Tax

Thanks to a new law passed by the Tennessee legislature on March 23, 2012, Amazon.com customers across Tennessee are receiving emails informing them of their potential Tennessee Consumer Use Tax liability.

The tax itself is not new.  Tennessee Consumer Use Tax has been around since 1947. When purchases are made online or over the phone from a seller that does not have a connection to (nexus) Tennessee, interstate commerce laws generally exempt the seller from collecting sales tax.  However, Tennessee consumers are responsible for paying use tax for the right to use the property purchased in Tennessee. The use tax rate is equal to the sales tax rate.

Example of Use Tax Computation:

Purchases subject to Tennessee Consumer Use Tax           $205.98
Use Tax Rate (Davidson County)                                              x    9.25%
Tennessee Consumer Use Tax due                                          $  19.05

The new law requires Amazon to notify each of its customers, with purchases shipped to Tennessee, of their potential use tax liability. The emails being received by Amazon.com customers include the total amount of purchases the customer had delivered to Tennessee during calendar year 2011.

Note:  If you made Amazon.com purchases it is likely you have made other purchases where sales tax was not collected and, therefore, subject to the Tennessee Consumer Use Tax.

Did You Overlook Something on a Prior Tax Return?

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.

Sole Proprietors are Three Times More Likely to be Audited by the IRS

Schedule C is the tax form that unincorporated sole proprietor businesses use to report their income and expenses as part of their individual income tax returns. Schedule C's have been center stage in recent IRS “tax gap” estimates.

Since Schedule C underreporting represents the largest category, and over half of the underreporting, it is no wonder that the audit rate for Schedule C returns has increased substantially and is among the highest of the rates. Based on 2010 IRS figures, Schedule C's have a 300% higher chance of being audited than either an LLC, partnership or an S Corporation. Of the Schedule C's audited in 2010, the average adjustment exceeded $9,000.

Among the areas of underreporting are:

• Personal Expenses
• Underreporting Income
• Worker Misclassification
• Failing to Issue Information Returns
• Hobby Losses

Are You Recording Information for 1099s?

If you use independent contractors to perform services for your business or rental 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.)

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. 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.

The penalty for not filing a 1099 is as high as $250 PER 1099 and possibly the loss of the tax deduction!