Personal tax planning Archives

CPA Tip: Charitable Contributions and the World of Doing Good

It is never too early for tax planning, especially when it comes to charitable contributions. This seems to be an area where clients come up short in April because they forget what they contributed during the year, or lack the proper documentation.

The IRS has provided some tips.

1. You must donate to a qualified charity if you want to deduct the gift. You can’t deduct gifts to individuals, political organizations or candidates. Many times clients ask if they can deduct payments made to a family member that is struggling financially.

2. In order for you to deduct your contributions, you must file Form 1040 and itemize deductions. File Schedule A, Itemized Deductions, with your federal tax return.

3. If you get a benefit in return for your contribution, your deduction is limited. You can only deduct the amount of your gift that’s more than the value of what you got in return. Examples of such benefits include merchandise, meals, tickets to an event or other goods and services. If you received any benefits from your contribution to a tax-exempt organization, you must compare that you paid.

4. If you give property instead of cash, the deduction is usually that item’s fair market value. Fair market value is generally the price you would get if you sold the property on the open market.

5. Used clothing and household items generally must be in good condition to be deductible. Special rules apply to vehicle donations.

6. You must file Form 8283, Noncash Charitable Contributions, if your deduction for all noncash gifts is more than $500 for the year.

7. You must keep records to prove the amount of the contributions you make during the year. The kind of records you must keep depends on the amount and type of your donation. For example, you must have a written record of any cash you donate, regardless of the amount, in order to claim a deduction. It can be a cancelled check, a letter from the organization, or a bank or payroll statement. It should include the name of the charity, the date and the amount donated. A cell phone bill meets this requirement for text donations if it shows this same information.

8. To claim a deduction for donated cash or property of $250 or more, you must have a written statement from the organization. It must show the amount of the donation and a description of any property given. It must also say whether the organization provided any goods or services in exchange for the gift. I recommend that clients get documentation for all charitable deductions as a matter of discipline.

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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 Tax Tip: IRS Guidance on Medicare Taxes

A new Medicare tax kicked in back in 2013. There is a lot of confusion, so here are some IRS guidelines that can help in tax planning:

1. The Additional Medicare Tax is 0.9 percent. It applies to the amount of your wages, self-employment income and railroad retirement (RRTA) compensation that is more than a threshold amount. The threshold amount that applies to you is based on your filing status. If you’re married and file a joint return, you must combine your spouse’s wages, compensation, or self-employment income with yours to determine if you exceed the “married filing jointly” threshold.

2. The threshold amounts are:

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

3. You must combine wages and self-employment income to determine if your income exceeds the threshold. You do not consider a loss from self-employment when you figure this tax. You must compare RRTA compensation separately to the threshold. See the instructions for Form 8959, Additional Medicare Tax, for examples.

4. Employers must withhold this tax from your wages or compensation when they pay you more than $200,000 in a calendar year, without regard to your filing status, wages paid to you by another employer, or income that you may have from other sources. Your employer does not combine the wages for married couples to determine whether to withhold Additional Medicare Tax.

5. You may owe more tax than the amount withheld, depending on your filing status and other income. In that case, you should make estimated tax payments /or request additional income tax withholding using Form W-4, Employee’s Withholding Allowance Certificate. If you had too little tax withheld, or did not pay enough estimated tax, you may owe an estimated tax penalty. For more on this topic, see Publication 505, Tax Withholding and Estimated Tax.

6. If you owe this tax, file Form 8959, with your tax return. You also report any Additional Medicare Tax withheld by your employer on Form 8959.

Your tax preparer will compute this on your tax return, but the real risk is not paying enough estimated taxes during the year. You should have a proper tax projection prepared early in the tax year to know whether you are subject to such tax.

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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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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: 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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Entertainment Film Tax Credits: A CPA’s Holistic Approach to Individual State Taxes

L A Times article, Hollywood’s new financiers make deals with state tax credits, discusses the growing trend of film and TV production moving out of California because of the increased tax credits. The article displays aspects of the credits that Entertainment CPAs have known for years, such as the mechanics of declaring a tax credit against the state taxes.

In company taxation, the article brushes on the thought processes of producers when selecting a location to shoot, whether within California, or outside California. The bottom line in the article is that the decision sometimes comes down to “the bottom line” since a scene can be shot almost anywhere these days.

Individual investor considerations are also mentioned when making a decision of where to shoot or just invest in an entertainment project. But what this piece ignores is what an entertainment CPA analyzes when considering a decision for a client to invest in a film in another state. One of the important question is what state does the individual investor reside in? More specifically, where is this investor’s tax residency?

Now to a person not versed in taxation, it may not seem important, but to an entertainment CPA, it is vital. For example, if an individual resides in Nevada where there is no state taxation, then a film tax credit in another state would make sense on its face because it may offset taxes in that state derived from production income.

However, let’s say the investor is a California resident. In California, a tax resident is taxed on all of their income. But does that mean this resident will be double taxed?

Not necessarily. If a California investor recognizes income in another state WITHOUT a tax credit thus paying other state income taxes, then the California resident may be able to use the out of state tax (partially or totally) as a credit against their California tax liability.

On the other hand, if the California investor reports out of state income WITH a tax credit, then they may still wind up paying California taxes on that income even though the credit wiped out taxes in the other state.

The real bottom line is that a holistic approach should be taken to determine the total taxes paid everywhere in order to determine the net cash and tax effect. CPAs should do tax projections that span different states. The existence of another state’s credit may not matter to the bottom line.

I have discussed only the tax aspects. What about the financial aspects of these entertainment ventures? A proper rate of return on investment calculation should be performed on an after-tax basis. In fact, a broker that pushes these type of entertainment vehicles would include a state tax credit which would show a larger return on capital. The problem with such an analysis is that it may ignore the fact that the California investor may end up paying taxes somewhere, even with a state credit abroad. This may have a substantial impact on the return on investment, and the decision of whether to invest.

Before making any investment in another state, determine the return in investment looking at the whole tax picture, not just the tax situation of the state providing the credit.

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Raising Kids Have Some Tax Benefits…Get Them All

Do your kids treat you like an ATM on legs? They certainly can cost you money. Well, depending on your tax situation and tax level, your kids can also put money in your pockets and you don’t have to hire them.

Here are some tips:

1. Dependents. In most cases, you can claim a child as a dependent even if your child was born anytime during the tax year. For more information, see IRS Publication 501, Exemptions, Standard Deduction and Filing Information.

2. Child Tax Credit. You may be able to claim the Child Tax Credit for each of your children that were under age 17 at the end of the year. If you do not benefit from the full amount of the credit, you may be eligible for the Additional Child Tax Credit. For more information, 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 your child or children under age 13, so that you could work or look for work. See IRS Publication 503, Child and Dependent Care Expenses.

4. Earned Income Tax Credit. If you worked but earned less, you may qualify for EITC. If you have qualifying children, you may get dollars back when you file a return and claim it. Use the EITC Assistant to find out if you qualify. See Publication 596, Earned Income Tax Credit.

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

6. Higher education credits. If you paid higher education costs for yourself or another student who is an immediate family member, you may qualify for either the American Opportunity Credit or the Lifetime Learning Credit. Both credits 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 small refund. See IRS 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 do not itemize your deductions. For more information, see IRS Publication 970, Tax Benefits for Education.

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. It applies to children under age 27 at the end of the year, even if not your dependent. See IRS.gov/aca for information on the Affordable Care Act.

Always check with your tax advisor because these rules may change from year to year, and your situation may be special.

Source: www.irs.gov

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Additional Medicare Tax For Upper Income Earners Explained

A new Additional Medicare Tax goes into effect starting in 2013. The 0.9 percent Additional Medicare Tax applies to an individual’s wages, Railroad Retirement Tax Act compensation, and self-employment income that exceeds a threshold amount based on the individual’s filing status.

The threshold amounts are:

• $250,000 for married taxpayers who file jointly,
• $125,000 for married taxpayers who file separately, and
• $200,000 for all other taxpayers.

An employer is responsible for withholding the Additional Medicare Tax from wages or compensation it pays to an employee in excess of $200,000 in a calendar year.

The IRS and the Treasury Department have issued proposed regulations on the Additional Medicare Tax.

Self-employed individuals must be careful when making their estimated tax payments which will include these taxes if they are above the threshholds. Make sure you check with your tax professional before making any decisions.

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