Posted in General on Feb 22, 2012

Did you know that almost everything you own and use for personal or investment purposes is a capital asset? Capital assets include a home, household furnishings and stocks and bonds held in a personal account. When you sell a capital asset, the difference between the amount you paid for the asset and its sales price is a capital gain or capital loss.

Here are 10 facts from the IRS about how gains and losses can affect your federal income tax return.

1. Almost everything you own and use for personal purposes, pleasure or investment is a capital asset.

2. When you sell a capital asset, the difference between the amount you sell it for and your basis ? which is usually what you paid for it ? is a capital gain or a capital loss.

3. You must report all capital gains.

4. You may only deduct capital losses on investment property, not on personal-use property.

5. Capital gains and losses are classified as long-term or short-term. If you hold the property more than one year, your capital gain or loss is long-term. If you hold it one year or less, the gain or loss is short-term.

6. If you have long-term gains in excess of your long-term losses, the difference is normally a net capital gain. Subtract any short-term losses from the net capital gain to calculate the net capital gain you must report.

7. The tax rates that apply to net capital gain are generally lower than the tax rates that apply to other income. For 2011, the maximum capital gains rate for most people is 15 percent. For lower-income individuals, the rate may be 0 percent on some or all of the net capital gain. Rates of 25 or 28 percent may apply to special types of net capital gain.

8. If your capital losses exceed your capital gains, you can deduct the excess on your tax return to reduce other income, such as wages, up to an annual limit of $3,000, or $1,500 if you are married filing separately.

9. If your total net capital loss is more than the yearly limit on capital loss deductions, you can carry over the unused part to the next year and treat it as if you incurred it in that next year.

10. This year, a new form, Form 8949, Sales and Other Dispositions of Capital Assets, will be used to calculate capital gains and losses. Use Form 8949 to list all capital gain and loss transactions. The subtotals from this form will then be carried over to Schedule D (Form 1040), where gain or loss will be calculated.

Last Updated by Mike C on 2012-02-22 09:16:38

Posted in General on Jan 25, 2012

There are many benefits that come from being your own boss. If you work for yourself, as an independent contractor, or you carry on a trade or business as a sole proprietor, you are generally considered to be self-employed.

Here are six key points the IRS would like you to know about self-employment and self- employment taxes:

1. Self-employment can include work in addition to your regular full-time business activities, such as part-time work you do at home or in addition to your regular job.

2. If you are self-employed you generally have to pay self-employment tax as well as income tax. Self-employment tax is a Social Security and Medicare tax primarily for individuals who work for themselves. It is similar to the Social Security and Medicare taxes withheld from the pay of most wage earners. You figure self-employment tax using a Form 1040 Schedule SE. Also, you can deduct half of your self-employment tax in figuring your adjusted gross income.

3. You file an IRS Schedule C, Profit or Loss from Business, or C-EZ, Net Profit from Business, with your Form 1040.

4. If you are self-employed you may have to make estimated tax payments. This applies even if you also have a full-time or part-time job and your employer withholds taxes from your wages. Estimated tax is the method used to pay tax on income that is not subject to withholding. If you fail to make quarterly payments you may be penalized for underpayment at the end of the tax year.

5. You can deduct the costs of running your business. These costs are known as business expenses. These are costs you do not have to capitalize or include in the cost of goods sold but can deduct in the current year.

6. To be deductible, a business expense must be both ordinary and necessary. An ordinary expense is one that is common and accepted in your field of business. A necessary expense is one that is helpful and appropriate for your business. An expense does not have to be indispensable to be considered necessary.

Last Updated by Mike C on 2012-01-25 09:21:26

Posted in General on Jan 13, 2012

Determining your filing status is one of the first steps to filing your federal income tax return. There are five filing statuses: Single, Married Filing Jointly, Married Filing Separately, Head of Household and Qualifying Widow(er) with Dependent Child. Your filing status is used to determine your filing requirements, standard deduction, eligibility for certain credits and deductions, and your correct tax.

Some people may qualify for more than one filing status. Here are eight facts about filing status that the IRS wants you to know so you can choose the best option for your situation.

1. Your marital status on the last day of the year determines your marital status for the entire year.

2. If more than one filing status applies to you, choose the one that gives you the lowest tax obligation.

3. Single filing status generally applies to anyone who is unmarried, divorced or legally separated according to state law.

4. A married couple may file a joint return together. The couple?s filing status would be Married Filing Jointly.

5. If your spouse died during the year and you did not remarry during 2011, usually you may still file a joint return with that spouse for the year of death.

6. A married couple may elect to file their returns separately. Each person?s filing status would generally be Married Filing Separately.

7. Head of Household generally applies to taxpayers who are unmarried. You must also have paid more than half the cost of maintaining a home for you and a qualifying person to qualify for this filing status.

8. You may be able to choose Qualifying Widow(er) with Dependent Child as your filing status if your spouse died during 2009 or 2010, you have a dependent child, have not remarried and you meet certain other conditions.

Last Updated by Mike C on 2012-01-13 11:27:41

Posted in General on Jan 11, 2012

 The IRS reopened the Offshore Voluntary Disclosure Program, which closed on 9/9/11. The third offshore program will be open indefinitely, until otherwise announced, and will provide the same penalty structure except for taxpayers in the highest penalty category. Participants will have to pay a penalty of 27.5% of the highest aggregate balance in foreign bank accounts/entities or value of foreign assets during the eight full tax years prior to the disclosure, which is up from 25% in the 2011 program. However, some will be eligible for a 5% or 12.5% penalty rate. Those who feel that the penalty is disproportionate may opt instead to be examined. As before, participants will have to file all original and amended tax returns and include payment of back-taxes and interest for up to eight years, as well as accuracy-related and/or delinquency penalties. News Release IR-2012-5 .

Last Updated by Mike C on 2012-01-11 09:53:06

Posted in General on Jan 11, 2012

Even though each individual tax return is different, some tax rules affect every person who may have to file a federal income tax return. These rules include dependents and exemptions. The IRS has six important facts about dependents and exemptions that will help you file your 2011 tax return.

1. Exemptions reduce your taxable income. There are two types of exemptions: personal exemptions and exemptions for dependents. For each exemption you can deduct $3,700 on your 2011 tax return.

2. Your spouse is never considered your dependent. On a joint return, you may claim one exemption for yourself and one for your spouse. If you?re filing a separate return, you may claim the exemption for your spouse only if they had no gross income, are not filing a joint return, and were not the dependent of another taxpayer.

3. Exemptions for dependents. You generally can take an exemption for each of your dependents. A dependent is your qualifying child or qualifying relative. You must list the Social Security number of any dependent for whom you claim an exemption.

4. If someone else claims you as a dependent, you may still be required to file your own tax return. Whether you must file a return depends on several factors including the amount of your unearned, earned or gross income, your marital status and any special taxes you owe.

5. If you are a dependent, you may not claim an exemption. If someone else ? such as your parent ? claims you as a dependent, you may not claim your personal exemption on your own tax return.

6. Some people cannot be claimed as your dependent. Generally, you may not claim a married person as a dependent if they file a joint return with their spouse. Also, to claim someone as a dependent, that person must be a U.S. citizen, U.S. resident alien, U.S. national or resident of Canada or Mexico for some part of the year. There is an exception to this rule for certain adopted children. See IRS Publication 501, Exemptions, Standard Deduction, and Filing Information for additional tests to determine who can be claimed as a dependent.

Last Updated by Mike C on 2012-01-11 09:49:09

Posted in General on Jan 10, 2012

The taxpayer took a four-month leave from his full-time marketing job to travel to different countries, take photographs, and journal his experiences to be used in a self-published book about his travels and the planning and execution involved. The Tax Court denied taxpayer's Schedule C losses from travel, meals and telephone expenses because he failed to show that his efforts were for the purposes of producing income and a livelihood. Even if writing is not the sole activity of an individual, it can qualify as a trade or business when there is some conscientious intent to produce income. Michael Oros , TC Memo 2012-4 (Tax Ct.).

Last Updated by Mike C on 2012-01-10 09:01:01

Posted in General on Jan 04, 2012

You are required to file a federal income tax return if your income is above a certain level, which varies depending on your filing status, age and the type of income you receive. However, the Internal Revenue Service reminds taxpayers that some people should file even if they aren't required to because they may get a refund if they had taxes withheld or they may qualify for refundable credits.

Even if you don?t have to file for 2011, here are six reasons why you may want to:

1. Federal Income Tax Withheld You should file to get money back if your employer withheld federal income tax from your pay, you made estimated tax payments, or had a prior year overpayment applied to this year?s tax.

2. Earned Income Tax Credit You may qualify for EITC if you worked, but did not earn a lot of money. EITC is a refundable tax credit; which means you could qualify for a tax refund. To get the credit you must file a return and claim it.

3. Additional Child Tax Credit This refundable credit may be available if you have at least one qualifying child and you did not get the full amount of the Child Tax Credit.

4. American Opportunity Credit Students in their first four years of postsecondary education may qualify for as much as $2,500 through this credit. Forty percent of the credit is refundable so even those who owe no tax can get up to $1,000 of the credit as cash back for each eligible student.

5. Adoption Credit You may be able to claim a refundable tax credit for qualified expenses you paid to adopt an eligible child.

6. Health Coverage Tax Credit Certain individuals who are receiving Trade Adjustment Assistance, Reemployment Trade Adjustment Assistance, Alternative Trade Adjustment Assistance or pension benefit payments from the Pension Benefit Guaranty Corporation, may be eligible for a 2011 Health Coverage Tax Credit.

Eligible individuals can claim a significant portion of their payments made for qualified health insurance premiums.

Last Updated by Mike C on 2012-01-04 15:51:08

Posted in General on Jan 04, 2012

Under IRC Sec. 274(n) , the cost of meals furnished to employees in an employer-operated facility on the employer's business premises are not subject to the 50% deduction limit if the meals are excludable fringe benefits under IRC Sec. 132(e) . In this Chief Counsel Advice, the IRS held that the value of meals provided by an airline to its crew members through a third party vendor was not excludable as de minimis fringe benefits, and the airline was subject to the 50% deduction limit. The meals were catered on the planes and did not satisfy the requirement that they be provided at an "eating facility." Although the term eating facility is not defined in the statute of regulations, it implies a designated location for the preparation and consumption of meals. CCA 201151020 .

Last Updated by Mike C on 2012-01-04 09:12:14

Posted in General on Dec 30, 2011

 The President signed the Temporary Payroll Tax Cut Continuation Act of 2011 on 12/23/11 extending the 2% payroll tax cut first introduced under the 2010 Tax Relief Act for employees through 2/29/12. The Act adds a recapture provision for employees who receive more than $18,350 (two-twelfths of the 2012 social security wage base) in wages during the two-month period equal to 2% of the amount over $18,350. The IRS will issue additional guidance and revised forms and instructions, including information on the new recapture provision.

Last Updated by Mike C on 2011-12-30 09:32:08

Posted in General on Dec 23, 2011

House and Senate approve bill temporarily extending the payroll tax cut

Late on December 22, House and Senate leaders agreed to end their stalemate over extending the payroll tax break. Under the agreement, for the first two months of 2012, a 4.2% Social Security tax would continue to apply to workers? pay (10.4% OASDI tax for self-employment income).

However, the agreement calls for new language to be inserted into the tax relief bill to prevent a potential payroll tax problem for employers. According to information provided by the House Ways & Means Committee, the revision would allow employers to withhold employee payroll taxes at 4.2% (instead of 6.2%) on all wages paid during the two-month extension period, subject only to the full 2012 wage base ($110,100) and without regard to the $18,350 cap (two-twelfths of the wage base of $110,100) on wages earned through the end of February, 2012.  If an employee?s wages during the first two months of 2012 exceed $18,350, and the payroll tax reduction is not extended for the remainder of 2012, an amount equal to 2% of those excess wages would ultimately be recaptured on the worker?s individual tax return for 2012. 

Both the Senate and House approved the bill on the morning of December 23.  It will now be sent to the President for his expected signature.

Under the agreement, both Republicans and Democrats in the Senate and House will immediately appoint negotiators to a conference to forge a full-year extension of the payroll tax reduction.

Last Updated by Mike C on 2011-12-23 09:26:29

Posted in General on Dec 09, 2011

The IRS doesn't contact taxpayers by email to alert them of a pending tax refund, inform them they are eligible for a tax refund, initiate taxpayer communications, or ask for detailed personal and financial information like social security numbers, PIN numbers, passwords, bank or credit card account numbers, or security-related information such as date of birth or mother's maiden name. Taxpayers receiving such messages should not release any personal information. Furthermore, they should not reply to the email, open any attachments, or click on any links to avoid malicious code that can infect their computers. More information on reporting scams and what to do if you've been victimized is available at www.irs.gov , keyword "phishing."

Last Updated by Mike C on 2011-12-09 08:47:10

Posted in General on Dec 06, 2011

Required minimum distributions (RMDs) are amounts you must take from qualified retirement plans and IRAs in order to avoid a 50% penalty on insufficient withdrawals. Five things to know:

Last Updated by Mike C on 2011-12-06 14:34:33

Posted in General on Nov 08, 2011

State Warns of Phony Letters Demanding Tax Payments from Businesses

The California Board of Equalization is warning businesses of phony solicitations from the California Labor Compliance Bureau requesting immediate payment of a $275 "processing fee." The California Labor Compliance Bureau is not a government agency.

The requested fee is purportedly for labor-related notices that California employers are required to post at their businesses, informing employees of their legal rights under the National Labor Relations Act. Such notices are free and available at the NLRB's website.

Last Updated by Mike C on 2011-11-08 12:01:41

Posted in General on Nov 03, 2011

The taxpayer, an elementary school teacher who taught classes in health, nutrition, and fitness deducted unreimbursed employee supplies of almost $9,000 for: (1) "candy and sugar" used as student incentives, (2) a computer, (3) classroom improvements and maintenance, (4) a specialty chair purchased because of a back injury suffered in relocating her classroom, and (5) fitness clothing. The Tax Court denied the deductions since gifts to students are not deductible, no matter how well intentioned; there was a lack of substantiation on the business use of the computer; the classroom improvements and specialty chair were not ordinary and necessary expenses of the job; and the fitness clothing was not essential in taxpayer's employment and unsuitable for general or personal wear. Eliana Farias , TC Memo 2011-248 (Tax Ct.).

Last Updated by Mike C on 2011-11-03 09:54:56

Posted in General on Nov 02, 2011

Get ready to pay more employment taxes!!

The social security wage base will increase from $106,800 in 2011 to $110,100 in 2012. The increase in wage base will increase the employment taxes $409.20.

As in prior years, there is no limit to the wages subject to the Medicare tax, so all covered wages are subject to the 1.45% tax. The FICA tax rate, which is the combined social security tax rate of 6.2% (4.2% on the employee portion in 2011) and the Medicare tax rate of 1.45%, is normally 7.65%, while the self-employment tax rate is normally 15.3% (13.3% in 2011). The threshold for coverage for domestic employees will be $1,800 in 2012.

Last Updated by Mike C on 2011-11-02 09:07:15

Posted in General on Oct 26, 2011

Home Office Deductions: The taxpayer operates a tax preparation business out of his home and uses one room regularly and exclusively as his office as required under IRC Sec. 280A(c) . He also built a bathroom for his clients' use that is across the hall from his office. In addition to home office deductions, the taxpayer deducted wage expenses for administrative assistance provided by his two daughters who he compensated by paying their credit card bills. The Tax Court allowed the home office deductions attributable to the area of the bedroom, but not the hallway and the bathroom since the taxpayer's children and personal guests occasionally used the bathroom. The court also denied the wage deductions since there was no evidence to substantiate the amounts paid. Luis Bulas , TC Memo 2011-201 (Tax Ct.).

Last Updated by Mike C on 2011-10-26 09:21:12

Posted in General on Oct 17, 2011

Depreciation "Idle Asset" Rule: Under the idle asset rule, you can continue to take depreciation deductions over the useful life of the asset. The rule applies when the asset is available for use should the occasion arise, even though you don?t actually use it.A recent Tax Court Memo clarified this rule.

Charles Douglas , TC Memo 2011-214 (Tax Ct.).
Taxpayer operated a delivery company (taxed as an S corporation) that deducted $125,000 of the $135,000 purchase price of a Cessna 172 aircraft in 2007. Taxpayer's husband took flying lessons in 2007, but never advanced beyond a student license, and no one else in the company was licensed to use the aircraft for delivery purposes. The Tax Court dismissed taxpayer's attempt to employ the "idle asset" rule?the Cessna was used for training but was "simply never available for its alleged business function . . . ." Since the Cessna was not available to perform its intended function in 2007, the Tax Court disallowed the Section 179 (and related upkeep and storage) deductions. According to the Tax Court: "An aircraft cannot be considered ready and available for business use without a suitable pilot to fly it."

Last Updated by Mike C on 2011-10-17 10:07:08

Posted in General on Sep 29, 2011

Charitable Deduction for Postage Stamp Purchase: The Multinational Species Conservation Funds Semipostal Stamp Act of 2010 requires the Postal Service to issue special first-class postage stamps (Save Vanishing Species stamps). The stamps are sold for more than the regular amount of first-class postage, with part of the excess transferred to the U.S. Fish and Wildlife Service to operate the Multinational Species Conservation Funds. According to an IRS information letter, when a taxpayer, with the intention of making a gift, purchases an item of value from a qualified charity, the excess over the value received is a charitable contribution. Therefore, a taxpayer who purchases a Save Vanishing Species stamp can treat the difference between the price of the Save the Vanishing Species stamp and the price of regular first-class postage as a charitable contribution.

Last Updated by Mike C on 2011-09-29 08:52:59

Posted in General on Sep 22, 2011

Detroit tax preparer accused of falsifying client income to maximize Earned Income Tax Credits

Last Updated by Mike C on 2011-09-22 09:15:42

Posted in General on Sep 16, 2011

Lately there has been a lot of discussion regarding states losing out on collecting sales tax from out of state businesses. California changed it's laws effect July 1st, sometimes referred as the Amazon Law. Basically it means an out of state business with an affiliate located within the state of CA will be required to collect sales tax from CA purchasers. The in state affiliate usually gets paid a commission for referring business to the out of state business. With many states with budget crisis you can assume other states will adopt a similiar law to California. 

 

Last Updated by Mike C on 2011-09-16 10:38:06

Posted in General on Sep 13, 2011

The next few months may provide a last chance opportunity for taxpayers who itemize deductions to deduct state and local sales taxes in lieu of state and local income taxes.The option to deduct sales taxes is set to expire at the end of 2011. While it may be extended, there is no way of knowing what Congress may do. Accordingly, individuals who are considering the purchase of a big-ticket item may want to accelerate the purchase into this year to achieve a higher itemized deduction for sales taxes.

Last Updated by Mike C on 2011-09-13 15:49:48

Posted in General on Sep 08, 2011

This is the home of our new blog. Check back often for updates!

Last Updated by Mike C on 2011-09-09 09:12:09