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Year-end planning is a bigger challenge this year than in past years because, unless Congress acts, tax rates will go up, many more individuals will be snared by the alternative minimum tax (AMT), and various deductions and other tax breaks will be unavailable. As a result of expiring Bush-era tax cuts individuals will face higher tax rates next year on their income, including capital gains and dividends. With the passage of the Health Care Act there will be a .9% Medicare surtax on wages earned in excess of $250k and a 3.8% Medicare surtax on Net Investment Income where modified adjusted gross income exceeds $250k. The AMT problem arises because the 2012 AMT exemption amount has dropped and fewer personal credits can be used to offset the AMT.
Increase the amount you set aside for next year in your employer's health flexible spending account (FSA) if you set aside too little for this year.
If you become eligible to make health savings account (HSA) contributions late this year, you can make a full year's worth of deductible HSA contributions even if you were not eligible to make HSA contributions for the entire year.
If you are thinking of selling assets that are likely to yield large gains, try to make the sale before year-end, with due regard for market conditions. This year, long-term capital gains are taxed at a maximum rate of 15%, but the rate could be higher next year.
Lock in the 15% gain on appreciated-in-value stock by selling the stock and then repurchasing it.
Consider making contributions to Roth IRAs instead of traditional IRAs.
If you believe a Roth IRA is better than a traditional IRA, consider converting traditional IRAs to Roth IRAs this year to avoid a possible hike in tax rates next year.
Take required minimum distributions (RMDs) from your IRA or 401(k) plan (or other employer-sponsored retired plan) if you have reached age 70-1/2.
Since the AGI floor for medical expenses will rise from 7.5% to 10% for those under 65, consider accelerating known medical expenses to 2012.
These are just some of the year-end steps that can be taken to save taxes.
Last Updated by Admin on 2012-11-06 03:20:57 PM
Posted in general
With kids headed back to school this topic is forefront on the minds of many people. This article will provide a brief overview of some of the education benefits that may be available.
Recent legislation allows a tax credit and/or deduction to many adults enrolled in classes or seminars. There are effectively two education tax credits and two above the line deductions available for education expenses. The two credits are the American Opportunity tax credit (AOTC) and the Lifetime Learning credit (LC). There is also a third called the HOPE credit, but the AOTC is more favorable and was meant to replace the HOPE credit through at least 2012. If changes are not made during current legislation then the AOTC will no longer be allowed beginning in 2013. The two deductions are for education expenses and interest paid on student loans.
The AOTC is a partially refundable $2500 per student per year credit. It may only be used for the first four years of undergraduate education at an eligible educational institution. The LC is a non-refundable $2000 per student per year credit. It may be used for any post-high school education at an eligible education institution. Both credits phase out for taxpayers with high AGI. Both credits cannot be used for the same student in the same year.
The tuition and fees deduction is an above-the-line deduction of up to $4000 for tuition and fees required for enrollment at an eligible educational institution. You may not take the deduction for books, supplies, etc. and you cannot claim the deduction in a year that you use a credit for the same student. The student loan interest deduction is an above-the-line deduction of up to $2500 per taxpayer per year. If you are currently paying back a student loan then the interest portion of those payments may be deductible.
If your AGI is too high you may still be able to deduct the cost of education expenses if they are related to your trade or business or employment. If you have incurred education expenses that maintain or improve your skills related to your current position then the costs can be deducted either on schedule A or directly by your business. If the education is for minimum standards to obtain a job, or if it could qualify you for a different trade or business, it would not be deductible even if it also improves your skills in your current position.
Education savings accounts provide an alternative you might take advantage of in order to pay your education expenses. These require some tax planning to be beneficial.
Last Updated by Admin on 2012-08-06 11:26:10 AM
Posted in general
If you typically receive a large refund from the IRS after you file your income tax return, or you owe the IRS a substantial amount at that time, you should consider adjusting your income tax withholding. Your employer withholds income tax from your paycheck based on the number of withholding allowances you claim on Form W-4, Employee's Withholding Allowance Certificate. You must give your employer a Form W-4 when you first begin work. If your tax circumstances change, it's up to you to give your employer a new W-4. Many employees neglect to take this step, resulting in withholding that is either too high or too low.
If your withholding is too high you are in effect giving the government an interest-free loan. Although the overpaid tax will be refunded once you file your return you would have been better off using the money during the year to generate income or for personal purposes. In this case, you should reduce the amount your employer withholds to increase your regular take-home pay.
At the other extreme are taxpayers who have too little withheld and who owe substantial amounts come April 15th. While they enjoy the ?extra? amounts received in each paycheck they must pay back the taxes owed in April and will likely incur additional costs in the form of a penalty. If this is your situation you should increase your withholding. As a rough guideline you should either owe less than 10% of your tax bill come April or pay in 100% (110% in some cases) of your prior year liability to avoid a penalty.
Even if you have had too little tax withheld for most of the year you still may be able to avoid a penalty by asking your employer to withhold additional amounts for the rest of the year. This is because the increased withholding at year's end will be treated as paid equally throughout the year. You should also check your withholding whenever significant personal or financial changes occur in your life, including the following:
· Changes in filing status or exemptions: You get married or divorced; you have a new child; a child goes off on his or her own.
· Changes in wage income: You or your spouse start or stop working, or start or stop a second job.
· Changes in income not subject to withholding: You have an increase or decrease in rental income, interest income, dividends, capital gains, or IRA distributions.
· Changes in deductions and credits: You take out or pay off a mortgage; you become entitled to the dependent care credit, child tax credit, or the higher education credit; you have changes in medical, alimony, or job expenses.
in other taxes: You owe
self-employment tax or employment taxes for your household workers.
The procedures for arriving at the proper withholding amounts can be among the more complex ones taxpayers confront. Several factors such as exemptions, deductions, credits, marital status, your spouse's income, and others must be considered. If you think your situation calls for a withholding adjustment (up or down), and you would like some guidance in getting through this maze, please contact us.
Last Updated by Admin on 2012-07-06 06:58:19 AM
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IRS will examine (audit) hundreds of thousands of individual tax returns this year. Although that represents but a small percentage of all returns filed, this is little consolation if your return is among those selected. However, with proper preparation and planning, you should fare well.
The purpose of the examination is to verify items reported on a tax return. Typically one of two things has taken place to cause the IRS to send you a letter. First is that a third party has reported something to the IRS that appears to not have been included on your return. This might be a missing interest or dividend statement or a missing statement from a stock sale. Second is from a random selection of your return where an examiner determines an adjustment to your return is likely. The easiest way to survive a tax examination is to prepare for one in advance. On an ongoing basis you should systematically maintain documentation-invoices, bills, cancelled checks, receipts or other proof for all items reported on your tax return. Keep all your records in one place and hold on to your calculations.
The government normally has three years to conduct an examination, and often the examination won't begin until a year or more after you file your return. So don't trust your memory. Leave a good trail. If you have to go back to your records later you should be able to backtrack all of the entries on your return.
Much like a police officer, the purpose of the IRS is to impose and collect taxes (enforcement), not to make the laws. Tax laws are created by congress and interpreted by the courts. Just because the IRS takes a position does not mean it is the correct position. Similarly, the IRS cannot always match the source documents they receive with the information reported on the tax return. This is one reason the letters they send out may be incorrect. You should not simply "take their word for it" and pay anything they request. You want to discuss the letter with a tax professional before you decide how to proceed. Even if you prepared your own return, it is often advisable to have a tax professional represent you at an examination. Your representative knows what issues the IRS agent is likely to focus on and can prepare accordingly. More importantly, a tax professional knows that in many instances IRS agents will take a position (for example, to disallow deduction of a certain type of expense) even though courts and other authority have expressed a contrary opinion on the issue. A properly prepared representative can direct the agent to appropriate tax authority and often convince the agent to reconsider their position.
Last Updated by Admin on 2012-06-29 10:35:54 AM
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If you use part of your personal residence for business you may be able to take a deduction. You may take a deduction whether you are self-employed or an employee. But just because you can take a deduction doesn?t mean you should. The home-office deduction has traditionally been a high audit area so if you use it you should be certain you use it correctly.
To take the deduction part of your home must be used exclusively and regularly for business. Exclusively means that the part of your home used for business may not be used personally. Space that is used jointly would not qualify for the deduction. This is typically interpreted very narrowly and the deduction has been disallowed for non-business use as little as a place where the kids sometimes watch television. If providing a daycare facility in your home or using your home to store inventory that you resell, the exclusive use requirement is loosened.
Several issues go into determining if the use is regular. First you have to consider the relative importance of activities performed in your home as compared to other places. You should also consider where you conduct the administrative functions of your business. Meeting clients or using the office as the primary location where you perform administrative functions certainly qualifies for the deduction. Inconsistent or occasional use of the home office would not meet this criterion. If you are an employee the home office must additionally be for the convenience of the employer.
If you meet the exclusive and regular use tests and you decide to take the deduction the next step is to figure the amount. The expenses that are deductible as a home-office include mortgage interest, real estate taxes, property insurance, utilities, general repairs, depreciation, and other expenses for keeping up and running your home. The amount of the deduction for these types of expenses is generally based on the relative size of the office compared to the whole structure. You can deduct 100% of direct expenses to the office such as repairs or painting.
Expenses for self-employed persons are deducted before determining AGI while expenses for employees are deducted on Schedule A and subject to a 2% floor. The deduction is further limited by the income from the activity. If depreciation is deducted there are some potential negative issues with regard to the gain exclusion on the sale of a personal residence. If you have a separate structure for your office space or use your home as a daycare facility, there are other things to consider. These issues are too complex for this article but should be addressed if you are considering using this deduction.
Hopefully this gives you an overview of how the home-office deduction works. For a more complete discussion see IRS publication 587 or contact us.
Last Updated by Admin on 2012-06-29 10:32:28 AM
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It is interesting that people will go to a physician annually for a physical but they do not use a CPA for tax preparation. What we do is much more than just preparing tax returns. We seek to develop relationships. We seek to help clients manage their withholdings. We are available year round to help answer questions, questions that are more easily answered when we are already familiar with your tax situation. Tax time should not be a time for surprises but a time for finishing up your plan for last year and formulating your plan for the current year. This is an opportunity for an annual financial checkup.
A CPA offers experience that most people who choose to prepare their own returns don't have. This experience comes from having prepared thousands of tax returns. People who don't prepare as many returns are more likely to make mistakes. When the IRS discovers a mistake they will contact the taxpayer. Correcting the mistake can be time consuming and expensive since the IRS charges penalties and interest if money is owed to them. On more than one occassion I've had new clients who came to me after having to pay penalties and interest to the IRS or State on honest mistakes they made. These costs could have paid for professional preparation for five years or more.
CPAs are required to stay current with tax law. The tax law changes every year and sometimes will change one year and then change back a few years later. Most CPAs will spend time each year at a conference on tax law changes and then countless hours throughout the year reading technical journals that discuss tax and accounting topics. This allows us to stay more up to date and to assist during tax planning. It also creates an atmosphere that promotes your receiving all deductions available to you and therefore minimizing your tax liability.
People who prepare their own returns can never know for sure that they have done it correctly. Even answering a series of questions can not guarantee it has been done correctly. Answering a question that is vague could lead you down a path that never asks the question to which you really know the answer. When using big box tax preparation services you do not know the experience of your individual preparer and you do not typically have access to that preparer after April 15th. Using an experienced CPA you have more of a human element to make sure you have answered those questions correctly and you know they are available throughout the year.
So, yes, you really do need a CPA. No matter how simple your information may appear you need someone with experience to guide you through the process. Someone you feel comfortable with who can create peace and serenity in an otherwise chaotic process. Someone who is there year round to answer your questions. And someone who will help you, not only with last year, but also with this year and for many years to come.
Last Updated by Admin on 2012-06-29 10:31:15 AM