Tax Planning year end tips

Well, Christmas has passed, and that means that the next big thing coming is…. the final throes of the 2012 tax planning period. Never mind parties, football, and the Rose parade. Who can think of anything else while there is still time to do a few things that will lower your income taxes for 2012? But time is running out. If you don’t act now you may be writing larger checks come April 15!

Here are a few things to consider:

1.       Donations to charity this week will impact your taxes in April if you itemize deductions. Time to clean out the closets and make a Goodwill run. Keep a detailed list of what you donate and get a receipt. If you leave stuff at a drop box document what you left and the date and time.

2.       Make sure your final paycheck maxes out your contribution into elective retirement plans such as your 401k or Simple Ira plans.

3.       If you drive a car for business and are taking business deductions, take it in for service this week. Not only will you incur a deductible expense, but the service ticket will document the odometer reading by a third party.

4.       Consider selling losing investments now. The trades must settle by 12/31 so you have to act fast if you want this to impact your 2012 taxes.

5.       You may want to prepay some of your state taxes by 12/31. If you are not subject to AMT and you will owe the state in April it may be a wise move to write the check by Dec 31 and get a federal deduction for the payment.

You should consult with your tax advisor before doing anything. Depending on your situation these tactics may not have the desired effect, and there may be other things that you can do as well.

Regardless of what you decide to do, I wish all of you a safe and Happy New Year.

Paul

Tax Planning Sea Change

Each year, just in time to take the fun away from the Holidays, we reach out to our clients and attempt to project tax liabilities and recommend strategies to reduce their tax burden. It’s particularly important to think about this now, before year end, while you still have time to make changes to your tax profile. It’s an unfortunate situation when we have clients who ask us on April 15^th what they can do to reduce the tax they owe. In most cases the horse is already out of the barn by then and there are few tactics we can employ to change the outcome.

In the past, one typical tactic was to defer income and accelerate expenses. In a case of static or decreasing tax rates, over time this can be an effective way to lower your overall burden and keep your money working for you longer.  But things are different now.

With the reelection of President Obama there is no chance of Obamacare being repealed in the near future. Consequently, despite all the talk about the fiscal cliff negotiations and everything being “on the table”, one thing for certain is that the new taxes ushered in as part of the Affordable Care Act will not be repealed. At a minimum we are looking at unearned income in 2013 being taxed at a rate 3.8% higher than your statutory rate, whatever that may be. Note: There are earnings thresholds that trigger this tax at $200k for singles, $250k for joint filers. If you are below that it won’t affect you.

Further, we are listening to calls to tax the rich and leave the middle class alone, but the definitions of middle class and rich seem to vary depending on the politician.  Bottom line – whether the current “Bush” tax rates are extended fully, partially, or not at all, tax rates are not declining. Some are clearly increasing, and most likely a good percentage of filers will see marginal rates increase next year.

As a result, this is the first time in years that the general rule of deferral is the opposite of what we are telling many clients to do.  If you know that your income will cost you more in tax next year, and that your deductions will save you more in taxes then, the drill should be to accelerate your income now (get your billings invoiced, deposit all your checks) and /or to put off paying tax deductible bills until January. Its crazy, but paying tax now may save you money next year.

Self-serving Caveat: Each situation is different. If you have any questions about what you should do you really should consult with a tax professional.

Are You a One Percenter?

Do you know that old saying that figures don’t lie, but liars can figure? Well, much hyperbole came out of the election regarding who is in the top 1% of income earners, and who pays what in taxes. A lot of the stats were misused or misquoted. Here are the latest figures that IRS recently released for 2010:

If you are in the top 50% of income earners, your Adjusted Gross Income (AGI, line 37 on your 1040) was at least $34,338. You paid an average tax rate of 13.1% on your AGI, and your group as a whole paid 97.6% of all federal income taxes.

If you are in the top 25% of income earners, your AGI was at least $69,126. You paid an average tax rate of 15.22% on your AGI, and your group as a whole paid 87.1% of all federal income taxes.

If you are in the top 10% of income earners, your AGI was at least $116,623. You paid an average tax rate of 18.4% on your AGI, and your group as a whole paid 70.6% of all federal income taxes.

If you are in the top 5% of income earners, your AGI was at least $161,579. You paid an average tax rate of 20.6% on your AGI, and your group as a whole paid 59.1% of all federal income taxes.

And if you have managed to be in the top 1% of all income earners, your AGI was at least $369,691. You paid an average tax rate of 23.4% on your AGI, and your group as a whole paid 37.4% of all federal income taxes.

Note that if these rates were calculated based on Taxable Income instead of AGI, the rates shown would be much higher.

So the next time Warren Buffet is bending your ear at a cocktail party about fairness and tax rates, ask him if he thinks it’s fair that only 10% of the population shoulder the burden of 70.6% of all income taxes.

Elections

I have not posted a tax blog since last Spring not because there was nothing noteworthy or entertaining in the tax world, but because I just can't seem to find the time to do it. Some court cases and pronouncements would make great fodder for discussion, but it seems there is always something a bit more pressing at the moment. 

Well, the elections have forced me to sit down and take up the pen (ok, keyboard) once again. I won't speculate on what types of tax changes MAY happen as a result of the reelection of Pres Obama and the status quo in Congress, but I can tell you what absolutely did change on Tuesday. 

Here in California we had two propositions on the ballot that were passed that will somehow affect every person and business in the state.

First, state sales taxes will be increasing ¼ of a percent statewide. Since localities are able to pile on additional sales taxes, the total sales tax rate will vary by area. Bottom line: the sales tax you pay (or collect, if you are a business) will go up starting January 1, 2013.

Along with that personal income tax rates were raised between 1-3% for those earning $500k or more. These rates were retroactively increased effective January 1, 2012. If you have been planning your taxes at the former levels you may now be surprised to find that you will owe more money for 2012. We now have the highest income tax rates in the nation. 

To add to the fun, companies that do business both within and outside of California now are forced to calculate the California portion of their earnings in a manner that is expected to skew the California tax upward. It’s a conversation too large for this forum, but suffice it to say that if your business does business out of state and you end up filing in various states, the California tax piece just got bigger. This will be effective January 1, 2013.

I'll write on the Federal changes that are currently scheduled to go into effect January 1, 2013 in a future posting.

 

More Tax Scam

This one came across the news wire today and I’m sorry, but I just can’t resist a snarky comment.

An H&R Block manager was arrested in Van Nuys, CA in February for identity theft. Apparently he was using client’s information to prepare bogus tax returns on their behalf and obtain refunds using the H&R Block “Emerald” cards to withdraw the refunds from ATM machines.

The usual corporate caveats are being ladled out, ie H&R Block takes the matter very seriously, it involves only a handful of clients, they are cooperating with law enforcement, and so on.

First off, let me say that there are a lot of experienced, competent H&R Block people out there. We have a former HRB person in our office that is very knowledgeable. However, the little secret that you won’t see in their advertising is that each year they hire a lot of inexperienced people that have taken only a 3 month class on tax prep. Just enough to be dangerous.

If you want to avoid being the subject of a tax related fraud, you should deal with a legitimate professional you know or who has been around a long time. This guy was released on Bond and could conceivably be working again in a tax office somewhere right now.

Secondly, when police picked this guy up he was loitering around ATM machines at midnight with pantyhose over his head. Apparently none of his conduct during the daytime alerted anyone to his crimes, but if you are a confused cross-dresser, it’s a dead giveaway.

It’s Scammertime!

As we close in on April 15, the traditional tax filing hysteria with all the media attention helps spawn another side industry – tax scams. This time of year criminals use the fear of IRS to prey on victims and get them to disclose valuable info to steal identities and money.

The IRS issued a warning recently about one scam that offers free money to taxpayers who have little or no income based on the American Opportunity Tax Credit. Promoters take money to file fraudulent returns applying for bogus refunds. These tax schemes are often promoted to members of local churches or over the internet.

Recently Intuit, parent company of TurboTax software has seen an increase in phony “Phishing” scams. These thieves send emails that purport to be from Intuit or QuickBooks and ask you for personal information to complete processing of your tax returns. Once obtained, they have personal data that enables them to steal your identity and file false tax returns on your behalf.

Some things you can do to prevent becoming a victim:

Never respond to an email purporting to be from IRS. IRS does not contact taxpayers via email except when they issue public announcements to subscribers. Your email address is not on your tax return anywhere.

If you are contacted by someone purporting to be from IRS, they will have a badge and a business card. Do not disclose any information to them. If they are from IRS they will already have access to your tax files and will not need copies from you. Request their name and location and call them back on a telephone number that you obtain from public sources (phone book) as opposed to a printed business card. Ask for their supervisor’s name and which group they are located in to help you locate them.

Never deal with a tax preparer firm that is from out of state, or that promises free money from some government entitlement.

If you use tax prep software, do not disclose any personal information via email or respond to any such requests. If you have trouble with the software, deal with someone directly over the phone, and never disclose your SSN or other personal data to them.

Biting the hand that feeds

Usually whenever any political body starts tinkering with taxes it is another Right To Work act for accountants. Virtually every “tax simplification” or “tax reduction” act that comes along only serves to make compliance more difficult for the taxpaying public.
Given that tax accountants are arguably the only constituency that will always benefit from any change in the tax structure, it is interesting to note two recent events in the California State Capitol. First, AB 1963 was introduced which will extend the state sales tax to most services effective Jan 1, 2013. This bill has some special interest exceptions (of course) and lowers the overall rate to 4%, but would apply to sales of just about any services or goods as opposed to the current framework of only sales of tangible personal property.
Second, the California CPA Society has come out against this bill. Never mind the huge list of potential new clients who never had to file sales tax returns before, or the expanded list of taxable transactions for existing clients all of which will need to have help complying with the law. CalCPA opposes it.
It’s no wonder why the CPA profession is held in such high regard compared to most others.

Crisis Averted

If you operate a business or are a sole proprietor you may
have noticed a few new lines that appeared on your tax forms for 2011. In 2008
Congress passed a tax law that requires all businesses to separately disclose
the amount of their gross revenue that was collected via credit cards. This
amount was to be reconciled by the taxpayer to the new form 1099-K that reports
such transactions by month. Any differences were to be explained on the tax
return.

This was going to create an accounting nightmare. Just think
of all the problems a small restaurant might have trying to reconcile their
gross income to a 1099-k showing all credit card receipts that include sales
tax and tips that are not a part of the restaurant’s earnings at all. It would be
even worse for businesses that report revenue on an accrual method (when it is
earned) versus a cash method (when it is received). The potential list of disparities
was enough to send any bookkeeper into early retirement.

IRS realized there were obstacles to compliance, and allowed
that even though the 2011 forms had lines set up for this data, they announced
that for this year only taxpayers can disregard those input lines and report
gross income as before. They gave everyone a one year reprieve.

The good news: After hearing the complaints from industry
groups IRS has backed off and will not require the reconciliations in 2012 or
in the foreseeable future. However we will still be required to disclose credit
card receipts, and any differences between taxpayer’s amounts and form 1099-k
amounts could be a red flag for future audits.

Man Boobs?

I didn’t expect to have time to update my Blog today, but as
I write this our server is down and the phone system is dead due to a power
outage (thanks So Cal Edison!) so it looks like it will be kind of quiet for a
Monday morning…

Tax season is in full swing here and it can be a challenge
to keep up with the latest tax news coming in over the wires when you have no free
time to read. However this one stood out and I had to share it.

A little background: medical costs are generally only
deductible for medical necessities. As a result, cosmetic and elective
treatments that do not treat a specific medical disorder are not deductible.
However a taxpayer recently convinced the Tax Court that a sex change operation was treatment for gender identity disorder (GID) and that the disease fell within the meaning of
a treatable mental disorder. Because GID was considered a disease the costs of
hormone therapy and the sex-reassignment surgery were all deductible medical
expenses. IRS‘s position that GID was mere “social construct” was rejected.

Unfortunately, it was not a complete victory for the
taxpayer. Although the costs listed above were allowed, she also had breast
augmentation as part of the treatment. IRS was successful in having that
portion treated as cosmetic surgery and disallowed. Apparently the new breasts
were considered unnecessary.

Makes you wonder how he looked before the surgery.

New Perspective

It's been well over a month since my last posting and I’m
feeling pretty guilty about it. Instead of having a typical slow January our
office started right off into tax season the first week. And we have been going
strong ever since. I guess that’s a good thing.

In previous postings I have, on occasion, been somewhat
critical of IRS employees. My experience with the local representatives has
rarely left me with good impressions in terms of training or knowledge. They
just don’t seem to be where they ought to be in order to do the best job for
the government, or the taxpayer, which in many cases is the same thing.

However I was recently handed a “paradigm shift”. I was
appointed to an IRS advisory committee and will be traveling to Wash. D.C. several times a year for the foreseeable future to work with IRS folks helping them implement new reporting laws. I was there for a few days last month working with IRS staff and others at the IRS national office, and came away with two conclusions: 1. Anyone working in the D.C. office of any organization is probably the smartest person in the room wherever they go, and 2. The people working for IRS in the national office are very hard working, intelligent, dedicated folks that are doing the best they can in the environment they are working in. I was definitely impressed by all the people I met back there.

There, I said it. However I still have a problem with the local talent.