Tax Planning Archives | Page 3 of 9

CPA Tax Tip: For You High Earners, The Net Investment Income Tax

There are some taxes that sneak up on taxpayers when paying their estimated taxes such as self-employment tax, alternative minimum tax, and the net investment income tax. The net investment income tax is added to your overall taxes, so don’t forget to include that in your computations. Or better yet, have a CPA prepare a tax projection for you.

The IRS has simplified the net investment tax for those who earn in the upper brackets. You may owe this tax if you have income from investments and your income for the year is more than certain limits. Here are four things from the IRS that you should know about this tax:

1. Net Investment Income Tax. The law requires a tax of 3.8 percent on the lesser of either your net investment income or the amount by which your modified adjusted gross income exceeds a threshold amount based on your filing status.

2. Net investment income. This amount generally includes income such as:

interest
dividends
capital gains
rental and royalty income
non-qualified annuities

This list is not all-inclusive. Net investment income normally does not include wages and most self-employment income. It does not include unemployment compensation, Social Security benefits or alimony. Net investment income also does not include any gain on the sale of your main home that you exclude from your income.

After you add up your total investment income, you then subtract your deductions that are properly allocable to this income. The result is your net investment income. Refer to the instructions for Form 8960, Net Investment Income Tax for more on how to figure your net investment income or MAGI.

3. Income threshold amounts. You may owe the tax if you have net investment income and your modified adjusted gross income is more than the following amount for your filing status:

Filing Status Threshold Amount
Single or Head of household            $200,000
Married filing jointly                        $250,000
Married filing separately                  $125,000
Qualifying widow(er) with a child       $250,000

4. How to report. If you owe this tax, you must file Form 8960 with your federal tax return. If you had too little tax withheld or did not pay enough estimated taxes, you may have to pay an estimated tax penalty.

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IRS CIRCULAR 230 NOTICE: To ensure compliance with requirements imposed by the U.S. Department of the Treasury and Internal Revenue Service, we inform you that any tax advice contained in this e-mail (including any attachments) is not intended or written to be used, and may not be used, for the purpose of (a) avoiding penalties under the Internal Revenue Code or state tax authority, or (b) promoting, marketing, or recommending to another party any transaction or matter addressed herein.

CPA Tip: U.S. Taxpayers with Foreign Income

Every year we acquire international clients, and clients that work internationally. These circumstances involve some tax issues, sometime those that are complicated.

Did you live or work abroad or receive income from foreign sources in 2013? If you are a U.S. citizen or resident, you must report income from all sources within and outside of the U.S. The rules for filing income tax returns are generally the same whether you’re living in the U.S. or abroad. Here are seven tips from the IRS that U.S. taxpayers with foreign income should know:

1. Report Worldwide Income. By law, U.S. citizens and resident aliens must report their worldwide income. This includes income from foreign trusts, and foreign bank and securities accounts.

2. File Required Tax Forms. You may need to file Schedule B, Interest and Ordinary Dividends, with your U.S. tax return. You may also need to file Form 8938, Statement of Specified Foreign Financial Assets. In some cases, you may need to file FinCEN Form 114, Report of Foreign Bank and Financial Accounts. See IRS.gov for more information.

3. Consider the Automatic Extension. If you’re living abroad and can’t file your return by the April 15 deadline, you may qualify for an automatic two-month filing extension. You’ll then have until June 16, 2014 to file your U.S. income tax return. This extension also applies to those serving in the military outside the U.S. You’ll need to attach a statement to your return to explain why you qualify for the extension.

4. Review the Foreign Earned Income Exclusion. If you live and work abroad, you may be able to claim the foreign earned income exclusion. If you qualify, you won’t pay tax on up to $97,600 of your wages and other foreign earned income in 2013. See Form 2555, Foreign Earned Income, or Form 2555-EZ, Foreign Earned Income Exclusion, for more details.

5. Don’t Overlook Credits and Deductions. You may be able to take a tax credit or a deduction for income taxes you paid to a foreign country. These benefits can reduce the amount of taxes you have to pay if both countries tax the same income.

6. Use IRS Free File. Everyone can prepare and e-file their federal tax return for free by using IRS Free File. If you make $58,000 or less, you can use brand-name tax software. If you earn more, you can use Free File Fillable Forms, an electronic version of IRS paper forms. Free File is available only through the IRS.gov website. Some Free File software products and fillable forms also support foreign addresses for those who live abroad.

7. Get Tax Help Outside the U.S. The IRS has offices in Frankfurt, London, Paris and Beijing. IRS staff at these offices can help you with tax filing issues and answer your tax questions. Visit IRS.gov for more information.

You can get more on this topic in Publication 54, Tax Guide for U.S. Citizens and Resident Aliens Abroad. IRS forms and publications are available on IRS.gov or by calling 800-TAX-FORM (800-829-3676).
Additional IRS Resources:

Taxation of U.S. Resident Aliens
Publication 514, Foreign Tax Credit for Individuals
International Taxpayer

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CPA Tax Tip: My Interview by The Freelance Strategist

Several times a year I am interviewed for articles and radio pod-casts. (Nobody has had the guts (or fool-hardiness) to throw my face on the screen). During tax season, freelance writers are looking for the latest and greatest tax tips. The article 5 Tips for Freelance Writers by Kylie Jane Wakefield, set out to give a few tips to freelance writers. But frankly, the tips do not differ much to any other struggling entrepreneur who is trying to fulfill a dream while working a day job.

The main point only slightly stressed is that your tax planning starts at the completion of your last year’s tax return. Don’t wait until March of the following year to tax plan for the previous year. That is like trying to put in the drain plug in a speed boat after you have launched it into the ocean. For example, when I clean out my garage, I lay everything out in the driveway that I am taking to Goodwill. I then take multiple photographs. I also usually list what I have to donate. When I arrive at the Goodwill drop off, I copy the list onto the Goodwill receipt and get it signed. At home, I print out the pictures (nothing special, just on regular paper) and staple the pictures to the receipt. I stick the whole package in a big tax envelope and forget about it until I prepare my tax returns. Simple planning, simple result.

You can use the same method for any business expense paid by cash. Always take a receipt and throw it into the tax envelope to be resurrected again during the preparation of your tax return next year.

However, no financial decision should be made on the basis of tax savings. The first concern for any decision should be whether it makes good business sense. Remember, you are only getting about 1/3 benefit, from a tax deduction. So, if you spend $100 solely on the basis that you will get “to write it off,” you may be making a bad business decision. The decision will ultimately cost you $70 ($100 less taxes returned into your pocket.)

Plan and understand you tax situation and you will be more informed and maybe more satisfied come April 15.

CPA Tax Tip: Healthcare and Taxes

There is a lot of confusion about healthcare and taxes.

The IRS has provided some guidance that may help.

1. Employment Status

If you are employed your employer may report the value of the health insurance provided to you on your W-2 in Box 12 with Code DD. However, it is not taxable.
If you are self-employed, you can deduct the cost of health insurance premiums, within limits, on your income tax return.

2. Tax Favored Health Plans

If you have a health flexible spending arrangement (FSA) at work, money you put into it normally reduces your taxable income.
If you have a health savings account (HSA) at work, money your employer puts into it for you, within limits, is not taxable.
Money you put into an HSA usually counts as a deduction and can lower your taxes.
Money you take from an HSA to use for qualified medical expenses is not taxable income; however, withdrawals for other purposes are taxable and can even be subject to an additional tax.
If you have a health reimbursement arrangement (HRA) at work, money you receive from it is generally not taxable.

3. Age

If you are age 65 or older, the threshold for itemized medical deductions remains at 7.5 percent of your Adjusted Gross Income (AGI) until 2017; for others the threshold increased to 10 percent of AGI in 2013. Your AGI is shown on your Form 1040 tax form.

More Information

Find out more about the tax-related provisions of the health care law at IRS.gov/aca.

Find out more about the health care law at HealthCare.gov.

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CPA Tip: Are Your Social Security Benefits Taxable?

Some people that are retired do not have access to tax advice. One question that arises is whether their social security benefits are taxable? The answer is “maybe.” Here are some guidelines from the IRS and a link to help you find the answer.

1. If you received social security benefits , you should have received a Form SSA-1099, Social Security Benefit Statement, showing the amount.

2. If Social Security was your only source of income, your benefits may not be taxable. You also may not need to file a federal income tax return.

3. If you get income from other sources, then you may have to pay taxes on some of your benefits.

4. Your income and filing status affect whether you must pay taxes on your Social Security.

5. The best, and free, way to find out if your benefits are taxable is to use IRS Free File to prepare and e-file your tax return. If you made $58,000 or less, you can use Free File tax software. The software will figure the taxable benefits for you. If your income was more than $58,000 and you feel comfortable doing your own taxes, use Free File Fillable Forms. Free File is available only at IRS.gov/freefile.

6. If you file a paper return, visit IRS.gov and use the Interactive Tax Assistant tool to see if any of your benefits are taxable.

For more on this topic visit IRS.gov.

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CPA Tax Tip: What is Taxable? Almost Everything.

“The only difference between death and taxes is that death doesn’t get worse every time Congress meets.” – Will Rogers

We get a number of calls throughout the year from individuals asking if certain types of income is taxable. The fact is that all income is taxable unless the law specifically excludes it.

Taxable income includes money you receive, such as wages, tips, interest, dividends, and retirement. It can also include noncash income from property or services. For example, both parties in a barter exchange must include the fair market value of goods or services received as income on their tax return. (From a business standpoint, I usually don’t recommend barters because it seems one party ultimately feels that they got cheated.)

Some types of income are not taxable except under certain conditions, including:

Life insurance proceeds paid to you are usually not taxable. But if you redeem a life insurance policy for cash, any amount that is more than the cost of the policy is taxable. Be careful with your life insurance strategies so you don’t get an unpleasant surprise at the end of the year.
Income from a qualified scholarship is normally not taxable. This means that amounts you use for certain costs, such as tuition and required books, are not taxable. However, amounts you use for room and board are taxable. This is a little tricky. It has changed somewhat from the days when my wife was in graduate school since the 1980’s.
If you got a state or local income tax refund, the amount may be taxable. You should have received a 2013 Form 1099-G from the agency that made the payment to you. If you didn’t get it by mail, the agency may have provided the form electronically. Contact them to find out how to get the form. Report any taxable refund you got even if you did not receive Form 1099-G. One of the important facts as to its tax-ability is whether you itemized the previous year, and did the state tax deduction provide a tax benefit to you.

Here are some types of income that are usually not taxable:

Gifts and inheritances
Child support payments
Welfare benefits
Damage awards for physical injury or sickness
Cash rebates from a dealer or manufacturer for an item you buy
Reimbursements for qualified adoption expenses

IRS Sources:

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CPA Tax Tips: Tax Benefits for Parents

Raising children can be a financial strain. There are some tax benefits that you should not forget. Here are eight CPA tax benefits parents should look out for when filing their federal tax returns.

1. Dependents. In most cases, you can claim your child as a dependent. This applies even if your child was born anytime in 2013. For more details, see Publication 501, Exemptions, Standard Deduction and Filing Information. Watch out for joint custody arrangements. As CPAs, we have had tax returns rejected because the other spouse had claimed the child as a dependent.

2. Child Tax Credit. You may be able to claim the Child Tax Credit for each of your qualifying children under the age of 17 at the end of the year. The maximum credit is $1,000 per child. If you get less than the full amount of the credit, you may be eligible for the Additional Child Tax Credit. For more about both credits, see the instructions for Schedule 8812, Child Tax Credit, and Publication 972, Child Tax Credit.

3. Child and Dependent Care Credit. You may be able to claim this credit if you paid someone to care for one or more qualifying persons. Your dependent child or children under age 13 are among those who are qualified. You must have paid for care so you could work or look for work. For more, see Publication 503, Child and Dependent Care Expenses. You should have the name, address, federal ID number, and amount paid ready for your CPA at tax time.

4. Earned Income Tax Credit. This is the most audited area by the IRS due to fraud. If you don’t make too much money and have dependents, you may be able to take advantage of it. Use the EITC Assistant tool at IRS.gov to find out if you qualify or see Publication 596, Earned Income Tax Credit. A CPA is at risk also, if a client misleads them in regards to this item.

5. Adoption Credit. You may be able to claim a tax credit for certain expenses you paid to adopt a child. For details, see the instructions for Form 8839, Qualified Adoption Expenses.

6. Higher education credits. If you paid for higher education for yourself or an immediate family member, you may qualify for either of two education tax credits. Both the American Opportunity Credit and the Lifetime Learning Credit may reduce the amount of tax you owe. If the American Opportunity Credit is more than the tax you owe, you could be eligible for a refund of up to $1,000. See Publication 970, Tax Benefits for Education.

7. Student loan interest. You may be able to deduct interest you paid on a qualified student loan, even if you don’t itemize deductions on your tax return. For more information, see Publication 970.

8. Self-employed health insurance deduction. If you were self-employed and paid for health insurance, you may be able to deduct premiums you paid to cover your child under the Affordable Care Act. It applies to children under age 27 at the end of the year, even if not your dependent. See Notice 2010-38 for information. Be careful if you are an owner of an S-corporation, partnership, or LLC. There are specific rules to follow in order to get the deduction. A CPA can help guide you through the process but you should contact us well before the end of each year to make sure things like W-2’s correctly reflect this if applicable.

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CPA Tip: What Is AMT or Alternative Minimum Tax? My Taxes Don’t Seem So Minimum to Me?

Back in the day…(Pre-Reagan), Alternative Minimum Tax didn’t affect too many of our clients. You may ask, “alternative what?” Please don’t fall into deer in the headlight’s blank stare. Many pay “alternative” tax but don’t know it unless it is pointed out on line 46 of their form 1040.

In a nutshell, AMT is computed by adding certain expenses back to your taxable income like state taxes, miscellaneous deductions, and several other things the IRS doesn’t think you are REALLY entitled to when push comes to shove. There are planning opportunities that may eliminate this devil tax , but that has to happen well before the year end.

In any event, here are some things from the IRS that you should know about AMT:

1. You may have to pay the tax if your taxable income, plus certain adjustments, is more than the AMT exemption amount for your filing status. If your income is below this amount, you usually will not owe AMT.

2. Know the current year AMT exemption amounts.

3. The rules for AMT are more complex than the rules for regular income tax. The best way to make it easy on yourself is to use IRS e-file to prepare and file your tax return. E-file tax software will figure AMT for you if you owe it.

4. If you file a paper return, use the AMT Assistant tool on IRS.gov to find out if you may need to pay the tax.

5. If you owe AMT, you usually must file Form 6251, Alternative Minimum Tax – Individuals. Some taxpayers who owe AMT can file Form 1040A and use the AMT

One possibility to eliminate the Miscellaneous Deduction problem is to incorporate. This alternative may make sense for people like actors who receive a form W-2 but have large miscellaneous deductions like agent’s commissions.

In any event, the sooner you try to tax plan, the more likely you are structure a tax strategy that can save you money the following April.

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CPA Alert: Top Ten Tips to Help You Choose a Tax Preparer

Believe it or not, taxpayers are not the only persons hurt by fraudulent or unprepared tax preparers. The IRS has an interest in weeding those people out. Every year we acquired new clients that have tax returns that were improperly prepared. Sometimes we have to amend the prior years return. One time a person came to us because their S-corporation was suspended for not filing its returns. After we checked into it, we discovered that the tax preparer had not filed ANY corporate returns from its inception. The tax preparer had been fabricating numbers from the corporation onto the client’s personal return. We had to file five years of tax returns which racked up penalties and interest.

The IRS has some good tips when reviewing a tax preparer because you are still responsible for what is on it regardless if you prepared it or not.

1. Check the preparer’s qualifications. All paid tax preparers are required to have a Preparer Tax Identification Number or PTIN. In addition to making sure they have a PTIN, ask the preparer if they belong to a professional organization and attend continuing education classes.

2. Check the preparer’s history. Check with the Better Business Bureau to see if the preparer has a questionable history. Check for disciplinary actions and for the status of their licenses. For certified public accountants, check with the state board of accountancy. For attorneys, check with the state bar association. For enrolled agents, check with the IRS Office of Enrollment.

3. Ask about service fees. Avoid preparers who base their fee on a percentage of your refund or those who say they can get larger refunds than others can. Always make sure any refund due is sent to you or deposited into your bank account. Taxpayers should not deposit their refund into a preparer’s bank account.

4. Ask to e-file your return. Make sure your preparer offers IRS e-file. Any paid preparer who prepares and files more than 10 returns for clients generally must file the returns electronically. IRS has safely processed more than 1.2 billion e-filed tax returns.

5. Make sure the preparer is available. Make sure you’ll be able to contact the tax preparer after you file your return – even after the April 15 due date. This may be helpful in the event questions come up about your tax return.

6. Provide records and receipts. Good preparers will ask to see your records and receipts. They’ll ask you questions to determine your total income, deductions, tax credits and other items. Do not use a preparer who is willing to e-file your return using your last pay stub instead of your Form W-2. This is against IRS e-file rules.

7. Never sign a blank return. Don’t use a tax preparer that asks you to sign a blank tax form.

8. Review your return before signing. Before you sign your tax return, review it and ask questions if something is not clear. Make sure you’re comfortable with the accuracy of the return before you sign it.

9. Ensure the preparer signs and includes their PTIN. Paid preparers must sign returns and include their PTIN as required by law. The preparer must also give you a copy of the return.

10. Report abusive tax preparers to the IRS. You can report abusive tax preparers and suspected tax fraud to the IRS. Use Form 14157, Complaint: Tax Return Preparer. If you suspect a return preparer filed or changed the return without your consent, you should also file Form 14157-A, Return Preparer Fraud or Misconduct Affidavit. You can get these forms at IRS.gov or by calling 800-TAX-FORM (800-829-3676).

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CPA Tax Tip: High Tech Tax Tools to Help You

I know, don’t trust the government when it gives you something free. But in the area of phone tapping, drones, and internet bugging, it probably won’t compromise your privacy too much to take advantage of the high tech candy. Here are some of the IRS tips to help you:

Are you on the go but need the latest tax information at your fingertips? There’s an app for that. The latest version of the innovative IRS2Go app is now available.

Here’s what you can do with the redesigned IRS Smartphone app IRS2Go, version 4.0, available in English and Spanish:

Check the status of your refund. The new version of IRS2Go includes an easy-to-use refund status tracker so taxpayers can follow their tax return step-by-step throughout the IRS process. Just enter your Social Security number, filing status and your expected refund amount. You can start checking on the status of your refund 24 hours after the IRS confirms receipt of an e-filed return or four weeks after you mail a paper return. Since the IRS posts refund updates on a daily basis, there’s no need to check the status more than once each day.
Find free tax preparation. You may qualify for free tax help through the IRS Volunteer Income Tax Assistance or Tax Counseling for the Elderly programs. A new tool on IRS2Go will help you find a VITA location. Just enter your ZIP code and select a mileage range to see a listing of VITA/TCE sites near you. Select one of the sites and your Smartphone will show an address and map to help you navigate.
Get tax records. You can request a copy of your tax bill or a transcript of your tax return using IRS2Go. The post office will deliver to your address on record.
Stay connected. You can interact with the IRS by following the IRS on Twitter @IRSnews, @IRStaxpros and @IRSenEspanol. You can also watch IRS videos on YouTube, register for email updates or contact the IRS using the “Contact Us” feature.

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