Tax Tips Blog

Answers to your Federal income tax questions
                     
                          TaxTipsBlog.com

13 Ways to Get More Social Security
A nice quick guide on Social Security. Social Security

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Posted by David Greenslit CPA at 1/20/2013 1:31 PM | View Comments (0) | Add Comment | Trackbacks (0)
Tax filings delayed this year
The start of the 2012 tax filing season has been pushed back, due to some last minute activity in Washington D.C.
Delay
Not too bad, but I don't know if people subject to the Alternative Minimum Tax, will be subject to a further delay. The AMT was part of negotiations and did change from being bad news for many filers, to being about the same as the year before.
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Posted by David Greenslit CPA at 1/10/2013 4:01 PM | View Comments (0) | Add Comment | Trackbacks (0)
Missed RMDs. What to do?
Mary Kay Foss, CPA, gives good advice about missed required minimum distributions:
Mary Kay Foss
It is possible in some cases to have the penalty waived.
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Posted by David Greenslit CPA at 1/10/2013 3:51 PM | View Comments (0) | Add Comment | Trackbacks (0)
Required Minimum Distributions
The required minimum distributions rules for Individual Retirement Accounts (IRAs) rely on IRS provided tables that use standardized life expectancies based upon your age. When using their tables (IRS tables) you use your age as of the end of the year to which the distribution applies, and the Fair Market Value of all your IRAs as of the beginning of the year.

CCH has an easy to use calculator here:  RMD   When using their calculator, you should enter your beneficiaries age if you have one. Because of the distribution rules that cover what to do when you don't have beneficiary, I recommend that you do have a beneficiary.
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Posted by David Greenslit CPA at 3/21/2008 8:25 AM | View Comments (0) | Add Comment | Trackbacks (0)
Stimulus Rebate and Dependents
People claimed on another's return do not qualify for the Stimulus Rebate. When deciding if parents should claim their child for one last year, the Stimulus Rebate should be considered. There are no age limits on the Rebate that I am aware of. We often compare the total tax a family would pay two ways. With them claiming their child and without them claiming the child. This often occurs when children are of college age. The potential $600 that they could get, if they have enough income, should be considered when figuring who should claim the child, MAYBE.

Part of my uncertainty here is caused by what I call the 2008 Make Up filing. I expect that those who missed out on this May's payment will still have chance at getting it later. According to the IRS, "If you're not eligible this year but you become eligible next year, you can claim the economic stimulus payment next year on your 2008 tax return."

So, if a child aged 18 is claimed by their parents for 2007, can they next year when filing their 2008 return, in effect claim that they are entitled to their $600, because they actually claimed themselves on their 2008 return, the period to which the Stimulus Rebate is tied to? If this is allowed, the parents can benefit from claiming them for one more year, and they can get the rebate. This is different than the rule that says, dependents can't get the rebate. I am not offering an opinion about whether this will be possible? I am asking for my readers comments on it.
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Posted by David Greenslit CPA at 3/18/2008 10:57 PM | View Comments (1) | Add Comment | Trackbacks (0)
Lease with Option to Buy Real Estate
I have a client who is renting out their former residence and giving the renter a $1000 credit per month towards the purchase of the house at the end of a 2 year lease. The question is, did my client really sell his house or is he leasing it out? There doesn't seem to be a hybrid answer where the $1000/month is treated differently from the rent payment. The IRS has I think in this case said that you have one or the other and that the total monthly payments are either all rent or all payments on the sale of the house. We ended up here, treating all the payments as rent income, based on the circumstances. I good description of the rules is available from CIRE Magazine:   Lease Option
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Posted by David Greenslit CPA at 3/18/2008 4:57 PM | View Comments (0) | Add Comment | Trackbacks (0)
Unrecovered costs at death in annuities and retirement plans
There's a question of what to do with the remaining basis of an annuity upon the death of its owner? In Minnesota many people receive Public Employee Retirement Association (PERA) when they retire. I expect to see on their 1099-Rs a slightly larger Gross distribution than Taxable distribution. The difference represents a part of their unrecovered basis in the plan (of their after tax money). Where does this untaxed money go upon their death? I think it goes to their beneficiary when there is one.

I noticed a surviving spouse taking over the payments recently. The spouses 1099-R didn't show basis because the Gross distribution equaled the Taxable distribution. It seems we should either convince PERA to change how it does things, or find out what the remaining basis is and figure the basis recovered each your ourselves.

In looking into this issue if found this clear as mud support for my position:   Basis    Cornell who has this information is thanked. The problem with trying to understand it is with the IRS, who wrote what Cornall reproduces, who often fails to write in simple terms for normal people. I can also write that carrying forward and using this uncovered basis makes sense to an accountant because it balances the books. Because the money that was once taxed, is not taxed again.

"the deduction...   ...shall be allowed to the person entitled to such payments for the taxable year in which such payments are received." - The IRS
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Posted by David Greenslit CPA at 3/16/2008 5:29 PM | View Comments (2) | Add Comment | Trackbacks (0)
Reporting Sales of Covered Calls
Selling Covered Calls is when you own a stock and sell the right for someone else to "Call" it away from you and make it theirs, at an agreed upon price. If your stock is trading for $100/share, you might sell a call for sometime to buy it at $105/share. So, if the stock rises above $105 before the call expires, this other person will most likely buy it. If the stock prices rises to $110, they can buy it from you for $105 and turn around and sell it for $110, making a quick profit. So what would sell such an option for? The market will determine this. I'd say all calls have an expiration date.

It to me is similar to selling an option on land. You can sell an option for someone to buy your land at an agreed upon price for a certain amount of time. The question de jour is, how to report the money from covered call sales on your 1040?

If the Call expires worthless, that means it isn't exercised, you report the income as capital gain. If the stock is called away from you, you add it to your Gross Proceeds when you report the sale of the stock, you just had to sell, because it was called away from you.

Most Covered Calls are written for less than a year. So the next question is, is the income from an expired call Long or Short term gain? It has some attributes of both long and short term. If the stock is called, this money is treated the same as the underlying stock, so it would be long term if the stock has been held for more than a year. But in the case of an expired call, it seems a short term bet was made that the stock wouldn't rise much. That's a question this CPA wishes to look into another day, and I'd appreciated your comments hopefully with links that support your position.

Brokers are getting good about providing Realized Gain and Loss Summaries. If you receive one of these from your Broker to help you with your income taxes, and you have Covered Call Sales, ask the broker if they correctly treated the Sales by adding them to any stock that was Called? And then ask them to prove it to you, by showing how they came up with the basis numbers related to covered calls sales?

Thanks to: slcg.com
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Posted by David Greenslit CPA at 3/15/2008 7:53 PM | View Comments (0) | Add Comment | Trackbacks (0)
Child and Dependent Care Credit and Single Parent Students
For the Child and Dependent Care Credit, married couples generally need compensation for the credit to be taken. If only one spouse works, the credit in not allowed. There is an exception to this rule if the spouse is a full time student. Being a full time student counts as having compensation for the credit.   2441 instructions

What is unclear is what to do when there is a single parent that is a student? We could conclude that even though the IRS doesn't say that the credit is allowed in the situation, it is.  We might argue that what the IRS writes about married couples, would apply to single parents.

My current position is that an informed client of mine can decide to claim the credit. What I'd like see is more discussion about this issue, and for the IRS to clarify its position.
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Posted by David Greenslit CPA at 3/15/2008 12:32 PM | View Comments (1) | Add Comment | Trackbacks (0)
Sale of an Inherited House
When you've inherited a house and later sell it, you could be looking at a taxable gain or loss. At the time of sale, you will generally compare the house's Fair Market Value on the date of death to what you get for it, less selling costs. During the time you hold the house, you can deduct property taxes. Here's a rather aggressive opinion from TaxMama, about what to do with some of the other costs related to maintaining the house: Inherited House
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Posted by David Greenslit CPA at 3/11/2008 10:10 PM | View Comments (0) | Add Comment | Trackbacks (0)
Don't Mess With Taxes
The award for funniest name for a tax related website goes to: Don't Mess With Taxes, a site that covers: "money news, notices, tips, commentary, insight and humor". The site appears to be Texas journalist Kay Bell's.  Taxes
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Posted by David Greenslit CPA at 3/11/2008 9:59 PM | View Comments (0) | Add Comment | Trackbacks (0)
Babysitters and Newspaper Carriers under the age of 18
From kiplinger.com: "...teenage babysitters are normally considered employees, so they are exempt from paying self-employment tax. There's also a specific exemption for newspaper carriers under age 18.

If a child under 18 is working part-time as a household worker (this means babysitters, gardeners, people who do housecleaning or repair work, or anyone who is employed in or around someone else's home), he or she is also exempt from the Social Security tax."
http://www.kiplinger.com/columns/drt/archive/2007/dt070703.html

It's been my general advice that if your child is in a similar situation, they don't have to pay the Self Employment Tax. The income is reported on line 21 of form 1040. I code it "Child's non SE earned income", so that my tax preparation software knows its relevant attributes and treats it in the correct way. Line 21 is used for almost everything that doesn't fit someplace else on the return. In the case of a child with earned income from babysitting entered on line 21, their standard deduction should be tied to this line 21. As their line 21 increases, their standard deduction generally also increases, up to the 2007 maximum of $5350.

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Posted by David Greenslit CPA at 3/10/2008 5:32 PM | View Comments (0) | Add Comment | Trackbacks (0)
Online Sales - Here comes the IRS

From CNET News: "The U.S. Treasury Department wants Congress to force auction sites like eBay, Amazon.com and uBid.com to turn over the identities and Social Security numbers of a large portion of their users to the IRS--so tax collectors know how much each person made through online selling.

The effort is part of a larger plan, which enjoys enthusiastic support from both Democrats and Republicans, to close what's known as the "tax gap." It's a broad term that covers Americans who don't file tax returns or those who underreport their income, and the IRS believes it to total around $345 billion for the 2001 tax year."   More

My comments: This type of income should be reported when there is a material amount of it. There may be some arguments for not reporting it in limited situations. If you sell your old boat on eBay, mostly like you'll have a non-reportable personal loss. If you are buying boats to resell them on eBay, then I'd say you have a business, and you need to be reporting it on your 1040. Material omissions of income from your 1040 tax return is a serious matter. Whether or not Congress acts to require auction sites to report these sales doesn't matter. If someone fails to report to you taxable income that you earned, the law (and this CPA) says you still have to report it.

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Posted by David Greenslit CPA at 3/8/2008 3:56 PM | View Comments (0) | Add Comment | Trackbacks (0)
Home Foreclosure debt cancellation income exclusion
From: The LA Times: "Debt cancellation exclusion. Before last year, if you lost your house in foreclosure or were forced to sell it for less than the loan amount, you'd typically be subject to "debt cancellation income." The short version: The IRS assessed income tax on the money you didn't have to pay back.

Let's say you had a home with a $500,000 mortgage and a market value of $450,000. Before Congress passed a three-year exception to help people cope with the sub-prime crisis, if the lender took the home in foreclosure and you walked away owing nothing, the $50,000 difference was taxable income to you.

For 2007 through 2009, debt cancellation on your primary residence, whether as the result of a so-called "short sale" or a foreclosure, is not taxable. (Taxpayers are likely to get a 1099C showing the phantom income, however, so you must fill out a Form 982 to exclude that income from tax, Perlman said.)"   Debt income

My advice here is to not automatically assume you have taxable income to report. Another aspect of the situation is that the Exclusion on the sale of your home can apply and cancel out the difference between what you paid for it (plus additions), and what it was worth when it was foreclosed upon.

At this next link, there is guidance on other ways to exclude canceled debt from income. Of note is the general rule that, "The cancellation takes place when you are insolvent...    ...and the amount excluded is not more than the amount by which you are insolvent."  Canceled  So, it would seem that canceled credit card debt, may in some cases be excluded from income.
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Posted by David Greenslit CPA at 3/5/2008 2:59 PM | View Comments (0) | Add Comment | Trackbacks (0)
Top ten ways to annoy an IRS Agent
  
Top ten ways to annoy an IRS Agent.
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Posted by David Greenslit CPA at 3/5/2008 12:10 PM | View Comments (0) | Add Comment | Trackbacks (0)
Veterans Disability Payments and the Tax Rebate
The question arose as to how to inform the IRS about the amount of a client's only source of income, Veterans disability payments. Since they are generally non-taxable, the IRS has no line on their forms for it, yet it is qualifying income for the rebate. Here is a link to the answer:  Veterans
The IRS is telling us to put the income on the same line as total Social Security Benefits. Also note at the top of the page the words, "Stimulus Payment". Be sure to have that on the return for Rebate Only Filings.
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Posted by David Greenslit CPA at 3/3/2008 3:26 PM | View Comments (0) | Add Comment | Trackbacks (0)
Casino Drawing Winnings and Deducting Loses
Casino drawing winnings are taxable. The question arises as to whether or not someone can deduct their gambling losses from a drawing winning? Guidance is provided here:
Drawings
It seems the crux of the matter is proving a direct relationship between the drawing and other gambling activity. If there is one, I'd be OK with an informed client taking the deduction. It would be helpful if Casinos took this into account, and structured their drawings in such a way as to require a minimal amount of gambling in order to enter the drawing.
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Posted by David Greenslit CPA at 3/2/2008 6:56 PM | View Comments (0) | Add Comment | Trackbacks (0)
Tax Rebate Calculator
A handy tool for calculating what your 2008 income tax rebate should be is provided by Kiplinger.com: http://kiplinger.com/tools/rebate/
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Posted by David Greenslit CPA at 2/28/2008 4:23 PM | View Comments (0) | Add Comment | Trackbacks (0)
Inherited IRAs and transfers
I had a client who inadvertently transfered an inherited IRA into their regular traditional Individual Retirement Account. This transfer is not "allowed" by the IRS. Inherited IRAs, that are not from a deceased spouse, have special rules that generally say that the IRA will be taxed because the custodian of the IRA is required to make taxable distributions of the IRA to its beneficiary.

The required and allowed distributions range from taking all the money right away, to over many years. Typically, people like the option of not having to take any distributions, but that isn't possible.

So the IRS wants people to keep their inherited IRAs separate from their regular traditional IRAs, since there are different rules for each.

I advised my client that the inherited IRA that was transfered was taxable and he'd have to pay taxes on it. The next question was, what to do with the combined IRA account? Could he take the inherited money out tax free because he just payed taxes on it? Another possible answer was that his new combined IRA has what we call a basis. When he took money out in the future, part of it wouldn't be taxed to balance the books on what he had already paid tax on. After some research, I couldn't find any guidance for him.

We considered a complete distribution of the account so as to avoid uncertainty. If that was done, he wouldn't pay tax on his assumed basis, or his perhaps allowed distribution of what he'd paid tax on. So I figured that the IRS couldn't have it both ways, by not allowing him both his basis and a 'corrective' distribution. This wasn't too appealing of an option, since his IRA would be gone. But it would hopefully end the problem. Fortunately, the problem was resolved. The bank (IRA custodian) took responsibility and un-transfered the money. What the bank apparently did is, transfer money from an account entitled: the beneficiary IRA of John Doe into an account entitled: the IRA of John Doe. This is something we might assume it would know not to do.

Still, I have a question for my readers. What happens to the inherited IRA money that was transfered into the normal traditional IRA account? Can it be distributed tax free the next year, is it part of the basis, or is there some answer I haven't thought of? 
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Posted by David Greenslit CPA at 2/26/2008 11:41 PM | View Comments (0) | Add Comment | Trackbacks (0)
Federal changes not adopted by Minnesota
Due to a number of circumstances, Minnesota has once again failed to adopt or renew some Federal tax laws. Minnesota generally follows the IRS's rules when it comes to personal income taxes. It is expected that they will "renew" some provisions of its tax code. But that hasn't happened yet for tax year 2007. This year there are a number of adjustments some taxpayers should be making when filing their form M-1.

Some of these adjustments relate to:
The tuition and fees deduction on federal Form 1040
The educator expenses deduction on federal Form 1040
Qualified mortgage insurance premiums on federal Schedule A
See More

If the Minnesota legislature does eventually renew these expired provisions, people who have already filed, should amend their Minnesota form M-1s.
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Posted by David Greenslit CPA at 2/26/2008 4:08 PM | View Comments (0) | Add Comment | Trackbacks (0)
Minnesota Property Tax Refund and Household Income
The State of Minnesota offers a Property Tax Refund for individual filers. It is based on Household income and the amount of property taxes paid by a homeowner, or in the case of renters, the amount of deemed property taxes paid through their rent.

Some people with middle and higher incomes do not qualify for the refund as it is progressive. The more Household income one has the greater the chance that they will not get a property tax refund. Household income is similar to one's Adjusted Gross Income, but there can be adjustments to it.

An important adjustment to it can be when two or more unmarried people share the same household. In some cases, the income from this other person or people should be combined with the filers income, to arrive at Household income for the Property Tax Refund. The rules for when to do this are found here: 
http://www.taxes.state.mn.us/taxes/prop_refund/instructions/m1pr_inst_07.pdf

It is this accountant's wish that the rules were a little more helpful.

I have seen a Minnesota Revenue auditor claiming that they have information that another party lives with a Property Tax Refund filer. I would assume, they use a data base of all returns filed and look for matching addresses. They then might attempt to question a Property Tax Refund's legitimacy by arguing that the Household income was under-reported. I would advise property tax refund filers who live with others, to review the Household income rules.

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Posted by David Greenslit CPA at 2/19/2008 10:06 PM | View Comments (0) | Add Comment | Trackbacks (0)
The Residential Energy Credit
More good guidance for understanding what qualifies for the Residential Energy Credit is found at: http://www.energystar.gov/index.cfm?c=products.pr_tax_credits
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Posted by David Greenslit CPA at 2/19/2008 3:14 PM | View Comments (0) | Add Comment | Trackbacks (0)
Many non-filers eligible for 2007 Tax Return Rebate
The IRS has clarified the status of non-filers and the 2007 Tax Return Rebate. Some low income people are not required to file a return. Often times there is no tax benefit for them filing, but 2007 will be an exception for many of them.

The IRS recently stated on its website:

"The law also allows for payments for select taxpayers who have no tax liability, such as low-income workers or those who receive Social Security benefits or veterans' disability compensation, pension or survivors' benefits received from the Department of Veterans Affairs in 2007. These taxpayers will be eligible to receive a payment of $300 ($600 on a joint return) if they had at least $3,000 of qualifying income.

Qualifying income includes Social Security benefits, certain Railroad Retirement benefits, certain veterans' benefits and earned income, such as income from wages, salaries, tips and self-employment. While these people may not be normally required to file a tax return because they do not meet the filing requirement, the IRS emphasizes they must file a 2007 return in order to receive a payment."

The IRS further stated that: "Recipients of Social Security, certain Railroad Retirement and certain veterans' benefits should report their 2007 benefits on Line 14a of Form 1040A or Line 20a of Form 1040. Taxpayers who already have filed but failed to report these benefits can file an amended return by using Form 1040X. The IRS is working with the Social Security Administration and Department of Veterans Affairs to ensure that recipients are aware of this issue."

Some filers may not have used line 14a or 20a as they are not required to do so by the IRS when their Social Security is not taxable. Low income filers should review their situation. I'd consider any problems one might have receiving the rebate, correctable.  

Many retired people with lower incomes will benefit from this rebate. The rebate is automatic for people who file a return.

As usual, there are limits and qualifications for the rebate. Some higher income taxpayers will not receive a rebate check, as the IRS states on its site: "Payments to higher income taxpayers will be reduced by 5 percent of the amount of adjusted gross income above $75,000 for individuals and $150,000 for those filing jointly."

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Posted by David Greenslit CPA at 2/17/2008 12:49 AM | View Comments (7) | Add Comment | Trackbacks (0)
Residential Energy Credit - Air Conditioners
The IRS instructions for what Air Conditioners qualify for the Residential Energy Credit appears a little light on specifics. This link from the Consortium for Energy Efficiency is helpful:

http://www.cee1.org/resid/rs-ac/rs-ac-tax-credits.php3
 
I as a practicing CPA, am relying on it and its content to keep my clients safe from reasonable IRS auditors.

I've found that the standards for these Energy Credits are quite high. However, one improvement that seemingly always qualifies is more attic insulation. Remember that these credits don't pay you back for what you spent, they just give you some of your money back.

They are also non-refundable meaning, some low income that don't normally file income taxes, will not derive a tax benefit. Of course they still save energy and money on their utilities.

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Posted by David Greenslit CPA at 2/17/2008 12:10 AM | View Comments (0) | Add Comment | Trackbacks (0)
IRAs can own Real Estate
I had a recent question about the viability of one's Individual Retirement Account (IRA) owning real estate? It is allowed, but close attention should be paid to the IRA rules. You don't want to make a disqualifying transaction that could subject the IRA to being taxed early.  Article about disqualifying transactions

If you have decided that your IRA needs to own real estate, you'll have to find a custodian who specializes in this type of thing. Expect the custodian to be compensated for their efforts, and consider how much that is going to cost you per year?

In theory, what makes this so appealing is that if a property appreciates after your IRA buys it, the gain is deferred. It's my opinion that transferring property that your already own is not allowed and doing so would cause major problems. Nor can you buy property from your brother and put it into your IRA as he would be a disqualified (related) party. 

Having your IRA own real estate may be a good idea. Traditional investing involves putting a certain percentage of your assets into: Stocks, Bonds, Hard Assets like Real Estate or Gold, and Cash. You may already own enough hard assets, and real estate though it has a history of appreciating, can be risky. 
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Posted by David Greenslit CPA at 8/31/2007 1:14 PM | View Comments (0) | Add Comment | Trackbacks (0)
The Alternative Minimum Tax and Capital Gains
The question is sometimes asked, why would capital gains trigger the Alternative Minimum Tax (AMT)? On form 6251 where the AMT is calculated, there is even a section thats purpose is to give people the lower capital gains tax rate on their gains. A lower capital gains rate wouldn't mean much to some filers if they still had pay the higher of the AMT rate or the capital gains rate. But as I see it, the problem is not with the form 6251, and it generally does pass through to the individual the lower rate.

Capital gains can and do phase out the income exemption amount so even though you might still be getting the 15% maximum capital gains rate on form 6251, you can lose your exemption, and the resulting tax rate might be 17% rather than 15%. So it's been my practice to mention the possibility of a higher effect gain rate because of the AMT.

What I've covered is only one aspect of the AMT. I often use my tax prep software to run a projection when clients ask me how much tax they are going to owe on a big capital gain, and I think this is a standard practice, however any software used should take into account relevant changes to the tax laws. 
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Posted by David Greenslit CPA at 8/27/2007 12:52 PM | View Comments (0) | Add Comment | Trackbacks (0)
Re: You’re Being Investigated for Tax Fraud

TAXGIRL writes: "The IRS wants you to understand that you'll never actually see that message in a subject line from IRS. It's the newest scam to target taxpayers.
Taxpayers have reported the receipt of an email allegedly from "IRS Criminal Investigation" claiming that an investigation is underway for filing of a false return or other complaint. The email has an attachment and link which may result in a virus commonly called a Trojan Horse which allows hackers access to your computer's hard drive.
If you receive any emails claiming to be from the IRS, please remember that the IRS does not send out unsolicited e-mails or ask for detailed personal and financial information. Additionally, the IRS will never ask for your PIN numbers, passwords or other access information for credit card, bank or other financial accounts.
Do not open the attachment! Instead, forward the e-mails to phishing@irs.gov."   TAXGIRL

My comments: Just use common sense. The IRS is going to use a letter to announce something this drastic. I can't say that I have ever seen email correspondence from the IRS. I am on some of their email lists, where updates on tax changes are given to preparers, but that's about it from the IRS. It's true that things are evolving. but this future isn't here yet.
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Posted by David Greenslit CPA at 8/3/2007 11:59 PM | View Comments (0) | Add Comment | Trackbacks (0)
New Form 990-N for small tax-exempts

From the IRS: "WASHINGTON — The Internal Revenue Service today announced that it began mailing educational letters this month to more than 650,000 small tax-exempt organizations that may be required to submit a new annual notice, Form 990-N, “Electronic Notice (e-Postcard) for Tax-Exempt Organizations Not Required to File Form 990 or 990-EZ.”

IRS expects to mail the letters over a period of several months, finishing in December.
With the enactment of the Pension Protection Act of 2006 (PPA), the majority of small tax-exempt organizations are now required to submit the e-Postcard. Previously, tax-exempt organizations with gross receipts of $25,000 or less were not required to submit information returns. The first e-Postcards are due in calendar year 2008. The IRS intends to have an option available for free electronic submission of the e-Postcard.  Form 990-N

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Posted by David Greenslit CPA at 7/22/2007 5:44 PM | View Comments (0) | Add Comment | Trackbacks (0)
Reporting Farm Income and Expenses
From the IRS: "Farmers may receive income from many sources, but the most common source is the sale of livestock, produce, grains, and other products raised or bought for resale. The entire amount a farmer receives, including money and the fair market value of any property or services, is reported on IRS Schedule F, Profit or Loss From Farming."  Farmers
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Posted by David Greenslit CPA at 7/9/2007 3:26 PM | View Comments (4) | Add Comment | Trackbacks (0)
The IRS Plans to start Random Audits

From SmartPros: "Beginning this fall, the Internal Revenue Service plans to revive a once-controversial practice of randomly targeting thousands of taxpayers for audits, even when the agency has no reason to suspect them of wrongdoing. IRS officials expect the tax probes to provide fresh data to update the top-secret formulas the agency uses to help select which returns to audit and thus enable it to do a better job of combating tax-dodging.

The first wave of random audits will start in October and target about 13,000 income-tax returns for the 2006 tax year, selected from various income categories. The IRS says it expects to conduct random audits on similar-size groups in subsequent years."  Audit

My comment: At 13,000 returns, your chances of being audited at less than 1 in 5000.

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Posted by David Greenslit CPA at 6/26/2007 2:42 PM | View Comments (0) | Add Comment | Trackbacks (0)
Form 990 Due Dates
Most non-profits with sufficient revenue (more that $25,000) must file a form 990 or 990-EZ. The due date for this filing is the 15th of the 5th month following the close of their year. They can file for an automatic 3 month extension of time to file using form 8868, and after that, an additional 3 month extension providing they have an adequate reason for doing so in the eyes of the IRS. Filing late without a valid extension can cost the organization $20/day or $100/day if their gross receipts exceed $1,000,000/year.  See: http://www.irs.gov/pub/irs-pdf/i990-ez.pdf
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Posted by David Greenslit CPA at 6/20/2007 6:39 PM | View Comments (0) | Add Comment | Trackbacks (0)
Pre-paying a mortgage?
I've been asked if it makes sense to make pre-payments on a mortgage? Disregarding income taxes for the moment, it usually does. If you have $10,000 earning interest of say 3 percent, and your mortgage has a rate of 6.5%, you "earn" an additional 3.5% by investing the $10,000 into your mortgage. The money you will save over the life of the mortgage, will give you a return of 6.5% on your $10,000. Not having to pay interest of 6.5% is the same as earning it. One problem with doing this is you can't easily get your $10,000 back out of your mortgage if you decide you need it.

Taking income taxes into account complicates the situation. Not having to pay taxes on the 3% earnings of the $10,000 lowers your taxes by let's say $45/year. Not being able to deduct the interest on $10,000 of mortgage, raises your taxes by about $95/year, so you lose $50/year here, but that is offset by you earning an additional $350/year. I assumed a 15% tax bracket here, so I think we can say, income taxes reduce the benefits I wrote about in the first paragraph, but only by 15%. So in this case, you only got 85% (1.00 - .15) of the benefit. If your tax bracket is higher and/or you pay state income taxes, your benefit will be reduced more. Also, a lot of people don't itemize, so a lost mortgage deduction, is irrelevant, which would mean, pre-paying your mortgage lowers your income taxes since your interest income is less.

Debt isn't everything some people claim it is. The value of its write-off is in many cases, overstated.
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Posted by David Greenslit CPA at 6/9/2007 9:39 PM | View Comments (6) | Add Comment | Trackbacks (0)
Tax return e-filing sets records in '07

From the CourierPost Online: "The recently completed 2007 tax filing season set a number of electronic records, highlighted by more than 76 million electronically filed individual tax returns and more than 140 million visits to IRS.gov, the Internal Revenue Service said. This year's tax season saw a surge in electronic filing among last-minute filers, a group that has traditionally sent in paper returns, the IRS said. Records were also set for the number of returns e-filed by home computer users, the number of balance-due returns filed electronically and the number and amount of direct-deposit refunds."

My comments: There's no going back with electronic filing. More and more people will do it, especially younger taxpayers. At our office, our supply of paper tax forms is almost irrelevant. We just print them off as needed.

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Posted by David Greenslit CPA at 6/1/2007 9:15 PM | View Comments (0) | Add Comment | Trackbacks (0)
Improvement or Repair?

Work on buildings that you own are costs that may be either an improvement or a repair, and which of these categories they fit in can make a difference in your taxes. One definition of the difference between the two is that an improvement makes it better than what you had. New windows for instance, can be argued to be an improvement if they are more energy efficient than the original windows were when purchased. The same goes with furnaces. Most new furnaces are more efficient.

One case where the definition matters is when you sell your home for a gain that is more than the gain exclusion amount, which is currently $500,000 for the Married Filing Joint status, and 1/2 that for others. In that case, you want to have as many improvements as you can find to lower your tax bill. If you put a new roof on your house, that probably should be treated as a repair, and that would not reduce any gain you might have, unless you argued, that when you bought the house, the roof was in poor shape, leaking perhaps. It can be a subjective thing. Painting your house is probably not a repair, but adding no maintenance siding probably is, because you could say its lower maintenance is an improvement.

Whether a cost is a repair or an improvement is usually even more important when it comes to a 2nd home you may own, because there are no normal gain exclusion rules in place for that.

This issue also matters for buildings that are used commercially. In that case, you have a bias to call things repairs, in order to get a fast write-off versus the typical 27.5 and 39.5 year depreciation lives.

This IRS covers some of this in publication 523: http://www.irs.gov/pub/irs-pdf/p523.pdf on page 9, where it defines an improvement as adding value, prolonging its useful life, or adapts it to new uses. It also gives a list of typical improvements.

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Posted by David Greenslit CPA at 5/29/2007 12:23 AM | View Comments (0) | Add Comment | Trackbacks (0)
Home acquisition mortgage debt limit
There are limits on the amount of mortgage interest you can deduct. One of them has to do with what you can think of as your primary mortgage. You are allowed to deduct interest on the first 1 million dollars of home acquisition debt plus you can generally deduct the interest on another $100,000 of what is called home equity debt. This makes your grand total, $1.1 million of debt on your house. These numbers also apply to a second home you may own. The grand total for two homes is the same $1.1 million. Divide the above numbers in half if your filing status is, Married Filing Separate. This leads us to one drastic way around these limits for some married people. It seems that two single people jointly owning a house could each have half the debt, and claim half the interest deduction, in effect doubling the limits.

These limits illustrate something quite common in the tax code. I don't recall the last time these amounts were raised for inflation or any other reason. So, it's logical to assume they effect more and more people each year. It is a back door tax increase, the failure to index key numbers in the tax code. This reflects poorly on those making our tax laws.

I have only covered a limited amount of the home interest deduction rules here. More information is available in IRS Publication 936:  Interest
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Posted by David Greenslit CPA at 5/23/2007 5:20 PM | View Comments (0) | Add Comment | Trackbacks (0)
Average Tax Return Fees

According to the National Society of Accountants (NSA) the typical tax preparation firms charges the following:

$110 for a form 1040, not itemized
$640 for a form 1120 (corporation)
$1732 for a form 706 (estates)
$201 for an itemized form 1040

Their information was taken from the NSA 2006 Income & Fees Survey.

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Posted by David Greenslit CPA at 5/21/2007 12:46 PM | View Comments (0) | Add Comment | Trackbacks (0)
Many Churches, Nonprofits Qualify for Telephone Tax Refund
From the IRS: "The annual May 15 filing deadline is here for many nonprofits, and the IRS urges any of these organizations that paid the three percent telephone tax to be sure to request this special refund. The telephone tax refund is also available to churches and small tax-exempt organizations that don’t normally file annual returns with the IRS." Phone Tax
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Posted by David Greenslit CPA at 5/17/2007 1:30 PM | View Comments (0) | Add Comment | Trackbacks (0)
Hobby Losses
From the IRS: "The Internal Revenue Service reminds taxpayers to follow appropriate guidelines when determining whether an activity is a business or a hobby, an activity not engaged in for profit...

In order to make this determination, taxpayers should consider the following factors:
  • Does the time and effort put into the activity indicate an intention to make a profit?
  • Does the taxpayer depend on income from the activity?
  • If there are losses, are they due to circumstances beyond the taxpayer's control or did they occur in the start-up phase of the business?
  • Has the taxpayer changed methods of operation to improve profitability?
  • Does the taxpayer or his/her advisers have the knowledge needed to carry on the activity as a successful business?
  • Has the taxpayer made a profit in similar activities in the past?
  • Does the activity make a profit in some years?
  • Can the taxpayer expect to make a profit in the future from the appreciation of assets used in the activity?"  Hobby  

The rules might apply to hobbies such as: Amateur auto racing, and horse operations,  but each situation has its own characteristics.

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Posted by David Greenslit CPA at 5/3/2007 12:29 PM | View Comments (6) | Add Comment | Trackbacks (0)
Reporting Internet Sales
From cnet news: "Americans who sell items through Internet auction sites could be in for an unpleasant surprise at tax time next year, thanks to an IRS proposal designed to identify taxpayers who don't report income from those sales."  auction

My comment: CPAs know that all taxable income must be reported. I don't see much if any room for exceptions here. The sale of personal property, for instance the types of things sold at a garage sale, most often result in a non-deductible personal loss. You compare what you paid for it, to what you got. If you lose money, I can see not even reporting it. If your ebay activities consist of you selling your old golf clubs for less than you paid for them, I would say no reporting is required. But if you are running a business, you need to give a lot of thought to reporting that. Even these losses may not be deductible if it is determined your activity is a hobby.
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Posted by David Greenslit CPA at 4/30/2007 5:30 PM | View Comments (0) | Add Comment | Trackbacks (0)
The Estate Tax

The estate tax is a tax on ones net worth on the day they die. Because of the exemption amount, it generally only applies if your net worth exceeds $2 million for the years 2007 and 2008. So you can think of your estate as having the first $2 million to itself ($3.5 million for 2009). Then what is in excess of that being taxed at steep rates.

The question might be, If one gifted away all their assets, a day before they died, would the estate tax not apply? The answer is maybe. The gift tax and the estate tax are related, and one reason for that, is to limit the effectiveness of death bed gifts. Ones lifetime gifts, reduces ones exemption amount. So the $2 million amount above, is really $2 million less your lifetime gifts. And your lifetime gifts, are really what you give away, less the annual exemption amount that applies to gifts, when you made them. For 2007 the annual amount you can give away to one individual with out chipping away at your $2 million is $12,000. So one strategy if you seek to avoid the estate tax, is to start making gifts of $12,000 every year, to your family members.

Another factor to consider is that when virtually all of your assets transfer to your spouse upon your death, there are generally no estate tax issues, it does not apply. This assumes your spouse is a U. S. Citizen. But when your spouse dies, they are subject to the same rules, so if their estate is in excess of the $2 million, the government will tax it. So one way to reduce this tax, is to not leave everything to your spouse.

If ones net worth is $4 million and they are married, they could leave half to their spouse, and half to their children upon their death, and the half they leave to their children could go into what I call an A-B Trust, where the surviving spouse gets the income from the assets in the trust, and the beneficiaries get the principle of the trust upon the surviving spouses death. Half the estate is shielded by the unlimited martial deduction, and the remaining half is just at the exemption amount, and therefore not taxed. An A-B trust certainly requires legal advice, but it isn't that complicated. I'd guess on a $4 million net worth, it would save 2/3s of a million dollars.
The savings is capped at the $2 million exemption amount times the 33% estate tax rate, so estates larger than $4 million would not save more than the 2/3s of a million dollars.

It is difficult to know what congress will do with the estate tax in the future? Apparently it all goes away in 2010 for one year. What happens after that is anybodies guess.

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Posted by David Greenslit CPA at 4/27/2007 7:37 PM | View Comments (0) | Add Comment | Trackbacks (0)
Taxable Refunds and the AMT
A client of mine recently received a CP2000 notice from the IRS, proposing that they include their state income tax refund received during 2005 in their taxable income. Based on my advice, he replied that it was not taxable. I am confident the IRS will go along with this.

My client's 2004 Federal 1040 had about $1200 of Alternative Minimum Tax (AMT) on it. He had to pay that much AMT on top of his regular tax for 2004. His 2004 state return resulted in an $800 refund. He did itemize his deductions in 2004 and claimed $9000 of state income taxes as a deduction. It would seem he would have to claim a refund as taxable, but that is not the case.

Since he could have claimed only $8200 of state income taxes and still got the same bottom line number on his 2004 1040, the refund is not taxable. He could have claimed only $8200 of state taxes and got the same answer because of the AMT. Often the AMT results in this: No matter how much in state taxes you add in to your itemized deductions, your total tax doesn't change, because as you lower your regular tax by $100, your AMT rises by $100. Since my client was in this flat zone, another $800 of state income taxes (the amount of his refund,) did him no good in 2004, so it is not taxable as a refund in 2005.

There is a term some accountants use. It is "buried". He had so much in state income taxes deducted, that more of the same, would have done him no good. Think of it as meaning, you have reached zero, and can go no lower. At the point where you have so much in deductions, that additional deductions do you no good, you have buried something, in this case, his state income tax deduction. Other clients of mine, bury their taxable income. They have so much in deductions, they have negative taxable income. This matters when they get a state income tax refund, and we have to decide if it is taxable?

So my client with the AMT in the prior year, doesn't have to report his state income tax refund as taxable, but there are cases where one can have AMT in the prior year, and have at least a partially taxable state income tax refund. I have not covered all situations here. What helps in following along with this situation, is a cardinal rule of tax preparation: The tax benefit rule. If you derived a benefit from a prior deduction, a refund is at least partially taxable. If you did not derive a benefit, a refund is not taxable. What you may find helpful here is IRS Publication 525, pages 25-26 of the 2006 edition. What is missing from publication 525 is a worksheet for this specific situation.


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Posted by David Greenslit CPA at 4/24/2007 8:56 PM | View Comments (1) | Add Comment | Trackbacks (0)
IRS Extends Turbo Tax E-filing Deadline
From AccountingWEB.com - Apr-19-2007:  "Taxpayers who were unable to e-file their tax returns Tuesday using Intuit Inc. software products have until midnight on Thursday, April 19, to file their returns, the Internal Revenue Service announced Wednesday.

Potentially up to several hundred thousand last-minute tax filers were affected by company server problems on Tuesday evening, and they or their accountants may have been unable to electronically file returns. Intuit confirmed Wednesday that those problems had been resolved, and it was successfully accepting e-file returns on Wednesday."  Turbo Tax

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Posted by David Greenslit CPA at 4/19/2007 5:57 PM | View Comments (0) | Add Comment | Trackbacks (0)
Thank you
Our firm, Tulberg and Greenslit, CPAs, just finished another successful year. I would like to thank our clients, who are what our firm is all about, about taking care of their income tax issues. As you know, we are available all year to answer your questions, and otherwise help you with your tax and financial matters. Thank You.  
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Posted by David Greenslit CPA at 4/18/2007 11:58 AM | View Comments (0) | Add Comment | Trackbacks (0)
Sales Tax deductions
A few years back, Congress brought back the sales tax deduction, but there are limitations. If you live in a state that has its own income tax, you can deduct the higher of your state and local income taxes, or your sales tax paid. Your sales tax paid can be figured three ways. Actual, table, or table plus major purchases. Actual is self explanatory, the table method references your Adjusted Gross Income and your exemptions claimed. Table plus major purchases, adds the table amount to your major purchases which includes, cars, trucks, boats and RVs.

We've found that most people continue to deduct their income taxes, but we practice in Minnesota, a state with an income tax. This change can be said to most help people in no income tax states like South Dakota, Florida, and Texas. This deduction applies to personal purchases generally. Businesses have always been able to deduct their sales tax paid. For instance, when supplies are purchased for a business, the whole cost including the sales tax, is written off.

Even if you do deduct your income taxes, the taxability of any state income tax refund you might get, may be effected by the sales tax table amounts. Generally, if you deduct sales tax paid instead of income taxes paid to a state, a state income tax refund is not taxable. But let's say your refund from the state is $500 and your state income taxes only exceeded your sales taxes paid by $200 in the year you deducted your state income taxes. Only $200 would be taxable, because that is the extent of your benefit from the deduction of your state income taxes. Is it any wonder that, accountants rely on their software? This interpretation, though not part of the instructions to form 1040, is on firm ground, relying on the tax benefit rule, which states that if you didn't get a benefit for deducting something, a later refund related to it, is not taxable. 
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Posted by David Greenslit CPA at 4/14/2007 12:38 AM | View Comments (0) | Add Comment | Trackbacks (0)
Passive Losses on Rental Properties and Limited Partnerships
If you own a rental property, it's not unusual for it to generate tax losses. Back in the mid 80s, Congress came up with the concept of passive income and losses, and deemed rental income and losses to be passive. What this means to rental property owners is that if their filing status is Married Filing Joint (MFJ), and their Modified Adjusted Gross Income (MAGI) is over $150,000, they won't be reporting net passive losses on their tax return. Any losses will be suspended and carried forward, to be used against future passive income. The most typical source of future passive income is selling the property. When the property sold, all passive losses associated with it are released and can be taken.

This is an example of a tax loss taken away from taxpayers, but only for a while. Upon the sale of a property with suspended losses, all debts are settled so to speak, and the books balance. What Congress told you you couldn't take, you finally get to take. It is a timing difference, a deferral.

If your MAGI is less than $150,000, and your status is MFJ, then you are granted a special allowance of up to $25,000 of passive losses per year. These passive losses rules also apply to Limited Partnerships (LPs) that own Rental Properties. Just as notable as Congress coming the the idea of passive losses, is when brokers came up with the idea of selling high commission LPs for their write-offs, only to find that Congress put an end to that,  with the introduction of the passive rules, denying taxpayers their promised write-offs. I had clients during this time who told me they couldn't even find a market to sell these dogs of an investment. It did influence me have a critical eye towards brokers. The reason LP owners can't take the special allowance write-off, is that they do not materially participate in the operation of the rental property. As with rental property owners, the suspended losses on an LP can be taken upon its disposition.

It is true that some of these LPs did make money, but many others where put together by promoters ignoring underlying economic fundamentals. A good rule of thumb is to rate making money first, and worrying about taxes, second. Don't reverse the two and make tax avoidance your highest goal. Another mistake that brokers offering LPs made, is they didn't anticipate the the lowering of tax rates, that make tax write-offs, less valuable. And a mistake a limited number of brokers made, is selling these LPs to my lower income clients, with apparently no rational for them doing so beyond, I assume, their own self interest.

Not all LPs are bad. But some question should be asked before buying into one. For instance, what is the broker's commission? What does the price history of the LP look like for the last 5 years? Is there even a market you can find this thing listed on? Will you able to use any expected losses or do you have to suspend them? Why is this investment better than an S & P 500 index fund? What litigation is the LP current involved in?

And yet another consideration of owning LPs is that many of them don't feel the pressing need to get your tax information for the year, sometime not sending it out until after April 15th. And the final consideration is that if you own an LP, you will probably hiring someone like me to do your tax return, because now it's likely to be more complicated.
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Posted by David Greenslit CPA at 4/12/2007 1:35 AM | View Comments (0) | Add Comment | Trackbacks (0)
UltraTax CS
Our accounting firm uses UltraTax CS tax preparation software. Because of the size of their company and the number of accountants they serve, their product has taken on a sort of artificial intelligence. One feature of the software is its diagnostics function. It finds some problems and brings them to my attention.

The resources that the company puts into making its product, to getting every schedule right, to keeping its users happy, results in a good product. UltraTax listens to its users, and changes its software as needed. A few accountants call in and point out something that UltraTax is doing wrong, or causing extra work for us, and within days, the software is changed. It is this listening to it users, that results in the product evolving in the direction of greater usefulness. Yes, it might be said, UltraTax learns. Not by itself, but with the help of many people.

One of my rules for using UltraTax, is to never override what it is doing with a return. When a problem occurs, and the software isn't doing what I expect it to, I have learned to not force UltraTax to do what it doesn't want to do, but rather discuss it with tech support, or do some more research on the particular issue. I've learned to trust UltraTax and work with it. In most cases, UltraTax is right, and when it's not, they will change their software.

In our office, there are sometimes three opinions. My partner's, mine and UltraTax's. I have even been heard to say, "This is what UltraTax thinks." Having it in my office, is like having a little additional help, that I can count on to give me good answers and good performance, and in some respects, watch over my clients.
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Posted by David Greenslit CPA at 4/10/2007 9:15 PM | View Comments (0) | Add Comment | Trackbacks (0)
Free Scratch off with every return

This is a promotion H & R Block is running. You can win money to pay your rent or gas bills and so forth. Do gambling and tax returns go together? I am not associated with H & R Block.
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Posted by David Greenslit CPA at 4/7/2007 7:12 PM | View Comments (0) | Add Comment | Trackbacks (0)
Tips for last minute filers
From 7online.com: "The tax filing deadline is quickly approaching and if you are filing a paper return to the IRS, now is the time to make certain that all information is complete and accurate before mailing the return to the government agencies. Simple precautions can help you avoid mistakes that can delay your refund or result in correspondence from the IRS"  Filing
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Posted by David Greenslit CPA at 4/7/2007 11:02 AM | View Comments (0) | Add Comment | Trackbacks (0)
Compilations and Issues
My partner and I do a lot of form 1040 tax returns. When we get a new client, we often see their priors years return that was prepared by someone else. Not long ago we saw this additional charge that one of our new clients paid to their old accountant: $90 for "Compilations and Issues". I'd think that there is a better word to use besides "Issues". The impression I got from my new client, was that this extra charge was the reason I had a new client.
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Posted by David Greenslit CPA at 4/5/2007 9:32 PM | View Comments (0) | Add Comment | Trackbacks (0)
New Federal Income Tax Deduction for Mortgage Insurance Premiums
From PR Newswire: "...a new federal tax deduction allows many qualified families to write-off premiums for private and government mortgage insurance on loans that close in 2007."  Mortgage Insurance
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Posted by David Greenslit CPA at 4/5/2007 11:13 AM | View Comments (0) | Add Comment | Trackbacks (0)
Non-periodic Non-qualified Annuity Distributions
An annuity purchased not as a part an employers retirement plan, that is, from an insurance agent or stock broker, is referred to as a non-qualified annuity. Like most annuities, its earnings are tax deferred. Distributions from it can be either periodic or non-periodic. Periodic means, a series of substantial equal payments, over a significant amount of time. Non-periodic means, you decide you want to make a withdrawal, and leave the rest alone for now, or you have started periodic distributions, and want and are allowed to, take out an extra amount. A non-periodic distribution from a non-qualified annuity, is fully taxable, until all the tax deferred earnings are used up, and its basis is reached. Many annuities have a basis. If you invest $10,000 after tax dollars in an annuity you buy from your insurance agent, your basis is $10,000. If 5 years later, after taking no distributions, you withdraw the entire balance that has now grown to $13,000, your taxable part of the distribution is only $3,000.  If in the above case, you withdrew only $7,000, you would still have $3,000 of taxable income, and $4,000 of non-taxable basis coming out. Your remaining basis in the annuity would be $6,000. You can see that for these types of distributions, your earnings come out first, then the basis. IRS Publication 575 covers this subject.
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Posted by David Greenslit CPA at 4/4/2007 10:49 PM | View Comments (0) | Add Comment | Trackbacks (0)
More than 125 Jackson Hewitts being looked at

From NewsFlash: "WASHINGTON (AP) -- The government said Tuesday it is trying to shut down more than 125 Jackson Hewitt tax preparation stores in four states, including Michigan, for systematic "tax-fraud schemes."

The Justice Department accuses the franchises of bilking the government out of more than $70 million through fraudulent practices such as using phony W-2 forms, bogus deductions and fuel tax credits and false claims regarding the earned income tax credit."   Tax Scams

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Posted by David Greenslit CPA at 4/3/2007 8:45 PM | View Comments (0) | Add Comment | Trackbacks (0)
Efiling continues at a record pace
From the IRS: "The Internal Revenue Service announced today that taxpayers are continuing to electronically file their tax returns at a record pace, up almost 6 percent from the same period last year....

Also, more people than ever before are opting to have their refunds directly deposited. So far this year, the IRS has directly deposited almost 45 million refunds, or 71 percent of all refunds issued this tax filing season, up from almost 69 percent of the total for the same period last year."  efile
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Posted by David Greenslit CPA at 4/2/2007 11:15 PM | View Comments (0) | Add Comment | Trackbacks (0)
Deducting Mortgage Interest in divorce situations
When two people get divorced and they retain joint ownership of the house, the question may arise about who does the IRS allow to deduct the mortgage interest and property taxes on that house? I would say in the general case, if the spouse that no longer lives at the house, pays half the interest and taxes, they are allowed to deduct half the interest and taxes on their schedule A. If they are required to pay all the mortgage payments, roughly half the payments are alimony, and roughly half of them are interest and taxes. See publication 504 page 12, and I advise consulting with a CPA to cover possible variations from this general case, both before and after a divorce.
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Posted by David Greenslit CPA at 4/2/2007 11:13 PM | View Comments (0) | Add Comment | Trackbacks (0)
Filing season statistics
From the IRS: "The Internal Revenue Service announced today that taxpayers are continuing to electronically file their tax returns at a record pace, up more than 5 percent from the same period last year.

"Taxpayers are filing electronically at a record pace this year," said IRS Commissioner Mark W. Everson. "We encourage people to consider e-file and Free File as the tax deadline approaches. E-file reduces taxpayer errors and gets refunds back quickly.""  Filing Season

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Posted by David Greenslit CPA at 3/29/2007 10:42 AM | View Comments (1) | Add Comment | Trackbacks (0)
3 guys to avoid getting tax advice from
"Actor Wesley Snipes
Was allegedly seeking $12 million in fraudulent refunds and has failed to file six years of tax returns.
Country singer Willie Nelson
Had to pay $16.7 million in back taxes; his home and assets were seized by the IRS.
"Survivor" winner Richard Hatch
Served a 51-month sentence for not paying taxes on his $1 million winnings."  From: The Hub
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Posted by David Greenslit CPA at 3/28/2007 11:53 PM | View Comments (0) | Add Comment | Trackbacks (0)
Excluding Gain on a Home sale while in a Nursing Home

Nursing Home Stays - "For people living in a nursing home, the ownership and use test is lowered to one out of five years before entering the facility. And time spent in the nursing home still counts toward ownership time and use of the residence. For example, if you lived in a house for a year, and then spent the next five in a nursing home before selling the home, the full $250,000 exclusion would be available."  Nolo


My comment: The emphasis is on the word, "before". Meet the reduced test before entering the nursing home, and the exclusion is still available, even after five years.

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Posted by David Greenslit CPA at 3/26/2007 11:21 AM | View Comments (0) | Add Comment | Trackbacks (0)
Taxation of Social Security Benefits

From Fox News: "If you are receiving Social Security benefits, at tax time you have to perform an additional computation to come up with your "base amount" of income. First, figure your adjusted gross income. Then add any municipal bond interest you earned over the past year (you won't pay federal income tax on this, but it still counts toward your "base amount"), plus one-half of the Social Security benefits you received. (1)

If this number exceeds the threshold of $25,000 in the case of a single individual or $32,000 for a couple filing married/joint, then up to 50 percent of your Social Security benefit must be added to your AGI. This entire amount will be subject to income tax."  Social Security

I agree with two of the authors points: It is a stealth tax, and the threshold amounts have never been indexed for inflation.

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Posted by David Greenslit CPA at 3/23/2007 10:44 PM | View Comments (1) | Add Comment | Trackbacks (0)
401(k) Rollovers

A question from the Baltimore Sun:

"
 
On a direct rollover from a company retirement plan to a 401(k) at a bank, is the gross distribution amount on the form 1099-R added to the total earnings, even though no federal tax is withheld?

Direct rollovers between retirement plan accounts are generally not taxable. If you received a 1099-R, you should report the gross amount on Line 16a of Form 1040, but report $0 on Line 16b." Rollover

My advice is always to roll. You can get at your money later if you need to. Taxes on early distributions can be excessive.

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Posted by David Greenslit CPA at 3/20/2007 11:48 PM | View Comments (0) | Add Comment | Trackbacks (0)
Divorce Buy-out Payments
In divorce situations, one spouse will sometimes buy out the other spouse and get full ownership of the house. If gain exclusion options for the sale of ones primary residence are not available for whatever reason, the sale of the house can present a tax problem.

The gain on the sale of a house is the difference between the sales price and what you payed for it, plus improvements, plus qualifying closing costs. Buy-out payments to a spouse do not reduce your gain, and are irrelevant. Usually with some planning, the sale of the house can be done tax free, but if it cannot, do not try to reduce the gain by counting what your paid your spouse for their share of the house.

Different assets have different tax attributes. Houses can contain future taxes owed, as do almost all 401(k) plans, and appreciated stock.
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Posted by David Greenslit CPA at 3/18/2007 6:07 PM | View Comments (0) | Add Comment | Trackbacks (0)
Corporate Returns due today
March 15 is the due date for C-Corporation and S-Corporation tax returns. Form 7004 can be filed to get an automatic extension of time to file forms 1120 and 1120S. 
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Posted by David Greenslit CPA at 3/15/2007 10:11 AM | View Comments (0) | Add Comment | Trackbacks (0)
2003 Refunds Expiring
"Apparently, three years ago 1.8 million individuals decided they had better things to do than file their 2003 tax returns, even though they were due refunds. In total, more than $2.2 billion from that tax year is still sitting in the Internal Revenue Service account."  Refunds

In states with income taxes, a proportionate amount of refunds are probably sitting there too.
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Posted by David Greenslit CPA at 3/13/2007 10:21 AM | View Comments (0) | Add Comment | Trackbacks (0)
Deducting rent and lease expenses

From the IRS: "The Internal Revenue Service reminds taxpayers to follow specific guidelines when deducting rent and lease expenses incurred as part of a trade or business.

In general, taxpayers may deduct ordinary and necessary expenses for renting or leasing property used in a trade or business. An ordinary expense is an expense that is common and accepted in the taxpayer's trade or business. A necessary expense is one that is appropriate for the business."   Rent

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Posted by David Greenslit CPA at 3/9/2007 1:51 PM | View Comments (0) | Add Comment | Trackbacks (0)
Taxpayer Advocate Service Meetings
The Taxpayer Advocacy Panel and the Taxpayer Advocate Service will hold public Town Hall Meetings in Omaha, Nebraska, on March 22 and in Phoenix, Arizona, on March 29. Details are on the TAP Web site.
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Posted by David Greenslit CPA at 3/8/2007 12:58 PM | View Comments (0) | Add Comment | Trackbacks (0)
Stay on top of changes to tax code

From PE.com: "WASHINGTON - Telephone customers, energy-savvy homeowners and parents of older teens should pay special attention at tax time. Many changes affecting 2006 tax returns are aimed squarely at you.

On balance, the news is good. Even if you don't have to file a tax return you can get a refund on certain telephone taxes." Changes

My comment: As the story says, even people that are not required to file, can get the telephone excise tax refund. This would include retired people living mostly on Social Security. The form is easy to file, and the standard amount of the credit for a single person is $30. Dependents cannot get the standard amount, and must use their actual tax paid, if they file.

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Posted by David Greenslit CPA at 3/4/2007 8:03 PM | View Comments (0) | Add Comment | Trackbacks (0)
Taxes and Investing
An article from WebCPA talks about taxes and investing and covers: Deferred Long Term Capital Gains, Deferred Ordinary Income and Realized Long Term Gains:   WebCPA
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Posted by David Greenslit CPA at 2/25/2007 2:09 PM | View Comments (0) | Add Comment | Trackbacks (0)
Non-Spousal IRA rollovers
There has been some improvement in the rules applying to inherited IRAs, in some cases.

"The Pension Protection Act of 2006 included a provision, applicable to distributions after Dec. 31, 2006, permitting the rollover of plan assets of a deceased participant in a qualified plan to an IRA for a non-spousal beneficiary. Previously, the law had permitted such rollovers only if done by a participant during their lifetime or, if after death, only to a spousal IRA." - WebCPA
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Posted by David Greenslit CPA at 2/23/2007 6:17 PM | View Comments (0) | Add Comment | Trackbacks (0)
Child Tax Credit Questions
A rule of thumb for claiming the Child Tax Credit in divorce situations is that the credit follows the exemption. If you claim your child, you claim the credit. The IRS says that, who the child lives with, is not relevant.  An approach I recommend, is to see which parent benefits most claiming the kids and their credits while following the IRS's rules, then fairly divide the tax savings. In adversarial situations, where one parent has improperly claimed the tax benefits related to their children, it is possible to get the IRS to eventually see the light, and in effect, go after the offending parent, and give credit to the offended parent. Patience and knowledge of the IRS rules is often required here.   Child Credit see Hot Topics EITC vs. CTC
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Posted by David Greenslit CPA at 2/21/2007 11:49 PM | View Comments (0) | Add Comment | Trackbacks (0)
IRS Forms 944 and 941
In some cases, quarterly 941 filings can be replaced by an annual form 944 filing. The 941 is used by employers with employees to report payroll taxes.  Form 944
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Posted by David Greenslit CPA at 2/21/2007 11:48 AM | View Comments (0) | Add Comment | Trackbacks (0)
IRS Raiding Tax Preparers

The IRS is making a mission of preventing people from claiming excess Federal Telephone Excise Tax Credits:

"IR-2007-36, Feb. 16, 2007 WASHINGTON -- Search warrants were carried out in seven cities this week by special agents from the Internal Revenue Service. According to affidavits filed in federal court, the IRS is seeking evidence from tax-preparation businesses suspected of preparing returns on behalf of clients requesting egregious amounts involving this year's special telephone excise tax refund."    Raid

Another area of great IRS concern is the Earned Income Credit. This credit, that for some low income people qualify for, can amount to thousands of dollars.

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Posted by David Greenslit CPA at 2/21/2007 11:16 AM | View Comments (0) | Add Comment | Trackbacks (0)
Coverdell Education Savings Accounts
A Coverdell Education Savings Account (ESA) allows after tax contributions to a savings account that grows tax deferred. When you incur educational expenses, typically for your children, the withdrawals are tax free, generally. The point for it, the tax advantage is, tax free earnings on your investment, assuming it appreciates. There are income limits for making contributions, and other potential complications. Be well informed before starting an ESA, but I do recommend an ESA or section 529 plan if you have children. A good site (that I am not affiliated with) for some background information on the Coverdell Education Savings Accounts is here:  ESA
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Posted by David Greenslit CPA at 2/19/2007 12:06 AM | View Comments (0) | Add Comment | Trackbacks (0)
Death and Taxes

In situations involving the death of a taxpayer there often are questions about filing income tax returns. When a person dies, they may still be required to file a final 1040. The main exception to this requirement is when their income, up to their date of death, is below the filing requirements. For 2006, this filing requirement is, more than $8450 of taxable income. If they are required to file, they can only report income up to their date of death. Income earned after that, generally is reported by their beneficiaries. This makes sense, as they will end up owning the assets that generate the income.

Income earned, post date of death, may flow through a 1041 estate. I think of an estate being created upon all deaths. The estate holds the assets until they are distributed to the beneficiaries. If there is more than $600 of income earned during a year by an estate, a form 1041 is required to be filed. Less than $600, and no 1041 is required. An estate is usually a pass through entity. It’s income and losses are passed to the beneficiaries. The beneficiaries receive a K-1 from the estate reporting their share. Some estates elect to pay the tax on their income, but this is not advised, as 1041 estate tax rates are unusually high. Passing through the income is generally preferred.

So the general idea is to get the assets out of the estate and to the beneficiaries as soon as possible. Though I am not a lawyer, it is my opinion that not all assets owned by the deceased end up in the estate. Some are owned so as to pass, instantly upon death, to the beneficiary(s). If the case is that one spouse dies, and leaves everything, cleanly and without complications to the other spouse, we are generally not looking at doing a 1041 estate tax return. An estate covers assets in limbo, those not yet finally and completely owned by the beneficiaries. I have not addressed the other estate tax, where ones total assets, if over $2,000,000, are taxed here.

I recommend you consult a CPA specializing in taxes if you end up having to take care of an estate.

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Posted by David Greenslit CPA at 2/17/2007 8:07 PM | View Comments (0) | Add Comment | Trackbacks (0)
The Better Tax deduction
Mortgage interest paid and 401(k) contributions are both deductible. Which is the better deduction? One way of looking at the question is to consider that you will never get the interest paid on your mortgage back. You, or your heirs will get your 401(k) contributions back one day. Yes, it is possible to have poor returns on your 401(k) investments, and houses in general appreciate. Still in some ways, elective retirement contributions that are deductible, are the best deductions.
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Posted by David Greenslit CPA at 2/13/2007 2:01 AM | View Comments (0) | Add Comment | Trackbacks (0)
Surrender of Life Insurance policy
If you surrender a life insurance policy for cash, you have taxable income if the proceeds exceed your cost. If this is the case, the insurance company will generally issue a 1099-R showing the income. See the IRS's explanantion of this, half way down the page:  Cash out
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Posted by David Greenslit CPA at 2/13/2007 1:56 AM | View Comments (0) | Add Comment | Trackbacks (0)
Five tax audit red flags
From CNNMoney.com: "The IRS conducted 1.3 million audits last year, up more than 5 percent from the year before.

And now, President Bush's recently released budget calls for a step-up in efforts to close the $300 billion "tax gap," the difference between what is owed in taxes and what is collected.

What's more, there are some new rules on the books that could trip up tax filers. Any way you look at it, more tax audits may be on the way. Here are five red flags the IRS is likely to watch out for this tax season."  Audit
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Posted by David Greenslit CPA at 2/8/2007 11:26 AM | View Comments (0) | Add Comment | Trackbacks (0)
Tips from the IRS on the Telephone Tax Refund
The news for this years early tax season involves the Federal telephone excise tax refund. The IRS has commented twice so far on problems with people claiming excessive amounts.

More from the IRS on the Telephone-Tax Refund "If you paid more than the standard amount, you may figure your refund using the actual amount of tax shown on your phone bills and other records. Base your refund request on the three-percent federal tax paid, not the total phone bill. Do not count tax paid on local-only service. You must have the phone bills or other records adequate to support the amount you are requesting. These documents should not be sent along with the refund request but should be retained in case the IRS questions the amount requested."  Tips

Keep in mind that those not required to file a Federal tax return can still file for this refund. The lowest standard amount is $ 30 and the highest is $ 60. Be prepared to produce adequate records to support a claim for more than the standard amount.
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Posted by David Greenslit CPA at 2/6/2007 11:18 AM | View Comments (0) | Add Comment | Trackbacks (0)
Kiddie Tax changes for 2006
"A nasty surprise for many taxpayers is masquerading under the harmless-sounding moniker "kiddie tax."

Better beware because it may pack a wallop.

Children under 18 with unearned income, including certain college savings funds and other investments, are likely to owe more in taxes, thanks to a provision Congress made retroactive to January 2006.

That means an unexpected tax bite for parents who assumed they left that hurdle behind when their child turned age 14." - Kiddie Tax

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Posted by David Greenslit CPA at 2/5/2007 11:21 AM | View Comments (0) | Add Comment | Trackbacks (0)
Helpful tools for filing your form 1040
Two tools are available from the IRS.  One for deciding when to deduct sales tax versus state income taxes as an itemized deduction on schedule A of form 1040? See the: Sales Tax Deduction Calculator  The second tool helps out with Alternative Minimum Tax, our parallel tax system that disallows some deductions. See the:
Alternative Minimum Tax (AMT) Assistant
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Posted by David Greenslit CPA at 1/30/2007 6:53 PM | View Comments (0) | Add Comment | Trackbacks (0)
IRS reports problems with Telephone Tax Refund
From the IRS: "The Internal Revenue Service said today that early filings show some individual taxpayers have requested large and apparently improper amounts for the special telephone tax refund. The IRS is investigating potential abuses in this area and will take prompt action against taxpayers who claim improper refund amounts and the return preparers who help them." Excise
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Posted by David Greenslit CPA at 1/30/2007 6:24 PM | View Comments (0) | Add Comment | Trackbacks (0)
April 17th is the new IRS due date

A recent change has moved the 1040 individual return due date to April 17th. It turns out that Washington D.C. recognizes Emancipation Day as a legal holiday. This has caused the IRS to move the date back one day from April 17th. April 15 falls on a Sunday, so the old due date was the 16th. Whether or not your state will follow the IRS's lead, is something you should check into.  Holiday

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Posted by David Greenslit CPA at 1/29/2007 11:36 PM | View Comments (0) | Add Comment | Trackbacks (0)
Federal Per Diem Rates
A nice to resource to look up Per Diem rates is here: GSA  Keep in mind that this site's rates are for the fiscal year ended 9/30. And remember that for 2006, those in the transportation industry are allowed to deduct 75% of their meal costs, versus 50% for the rest of us.
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Posted by David Greenslit CPA at 1/27/2007 11:00 PM | View Comments (0) | Add Comment | Trackbacks (0)
Federal telephone excise tax credit
It is possible to not qualify for the Federal telephone excise tax credit. My reading of the instructions finds the requirement that you actually paid some of the tax during some of the 41 month period the credit covers. That is, from 3/1/03 to 7/31/06.  In the situation where an adult lives with their parents, they may not have paid any of the federal excise tax on long distance. 

Cell phones qualify just as much as home phones do for the credit.

Dependents, those claimed by another, may qualify for the credit, but they must use the actual amounts, typically from their cell phone. The standard amount is not allowed to be claimed by dependents.

Following the general accounting rule, parents and dependents can not both claim the same Federal excise tax paid.  
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Posted by David Greenslit CPA at 1/27/2007 12:20 PM | View Comments (0) | Add Comment | Trackbacks (0)
Tax changes, delays usher in '07 filing season
"More new tax laws, continued new e-filing mandates, an expected increase in total returns, and a delay in processing are certain to mark the start of the 2007 tax filing season." - accounting today
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Posted by David Greenslit CPA at 1/27/2007 12:18 PM | View Comments (0) | Add Comment | Trackbacks (0)
Collecting Taxable Benefit Information

From the SSA/IRS Reporter: "One of the challenges of the year-end payroll process is the correct collection and treatment of information about any and all taxable fringe benefits so that they are reported on Forms W-2 and taxes are withheld and deposited.

A good resource, which includes the rules on valuing and taxing various benefits, is IRS’ Employer's Tax Guide to Fringe Benefits
(Publication 15-B, http://www.irs.gov/pub/irs-pdf/p15.pdf)."

More:
Benefit

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Posted by David Greenslit CPA at 1/25/2007 12:32 PM | View Comments (0) | Add Comment | Trackbacks (0)
Help with the Earned Income Tax Credit
Help on claiming the correct Earned Income Tax Credit is available from the IRS at this site: EITC

What I found helpful is in the Overview Section, and titled, Earned Income Tax Credit versus Child Tax Credit. It without qualifications says that one parent can claim the exemption for a dependent while the other parent claims the earned income tax credit for that same child. With the introduction of the new dependent rules in 2005, whether this was allowed, was unclear.
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Posted by David Greenslit CPA at 1/24/2007 5:02 PM | View Comments (0) | Add Comment | Trackbacks (0)
IRS e-file 2007 Refund Cycle Chart
Here is the IRS e-file 2007 Refund Cycle Chart: IRS  Based upon when you file your Federal 1040, this tells you when to expect your refund. Direct Deposit is faster and easy to do. Our firm has never encountered a significant problem associated with a direct deposit of a client's refund.
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Posted by David Greenslit CPA at 1/23/2007 4:46 PM | View Comments (0) | Add Comment | Trackbacks (0)
National Taxpayer Advocate Releases 2006 Report to Congress

From the IRS: Jan. 9, 2007 WASHINGTON — National Taxpayer Advocate Nina E. Olson today released her annual report to Congress, designating the alternative minimum tax for individuals (AMT) and the federal tax gap as the most serious problems facing taxpayers. The report also focuses extensively on concerns about IRS collection policies and the transparency of IRS information to the taxpaying public.    Report

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Posted by David Greenslit CPA at 1/17/2007 4:10 PM | View Comments (0) | Add Comment | Trackbacks (0)
Free Tax Help Available

From the IRS: "The IRS offers free assistance by computer and telephone and in person. The IRS can help taxpayers get forms and publications and answer a wide range of tax questions. The IRS can also help find free tax preparation services for those who qualify." - complete story

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Posted by David Greenslit CPA at 1/9/2007 7:21 PM | View Comments (0) | Add Comment | Trackbacks (0)
The Zen of Accounting
For every debit there must be a credit.

Accounting is binary. Everything is either a credit or a debit.

Perhaps the most important goal of accounting is to provide information that is useful to management, the users of the data, the owners.

When the books balance, when the debits equal the credits, things are good.
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Posted by David Greenslit CPA at 1/9/2007 1:40 PM | View Comments (0) | Add Comment | Trackbacks (0)
Earning limits while receiving Social Security
  • If you are under normal (or full) retirement age (FRA): when you start getting your Social Security payments, $1 in benefits will be deducted for each $2 you earn above the annual limit. For 2007 that limit is $12,960 and for 2006, that limit is $12,480. Remember, the earliest age that you can receive Social Security retirement benefits remains 62 even though the FRA is rising.
  • In the year you reach your FRA: $1 in benefits will be deducted for each $3 you earn above a different limit, but only counting earnings before the month you reach FRA. For 2007, this limit is $34,440; for 2006, this limit is $33,240
  • Starting with the month you reach FRA:, you will get your benefits with NO limit on your earnings.
  • The above is from: the Social Security Administration.

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    Posted by David Greenslit CPA at 1/5/2007 6:01 PM | View Comments (0) | Add Comment | Trackbacks (0)
    Tranportation Costs as Work Related Education Deductions
    If you have Qualifying Work Related Education that is deductible, the next question is often, are the associated Transportation Expenses also deductible? You can deduct the costs of going directly from work to school.

    If you are going to school on a Temporary Basis, meaning you expect it to last less than 1 year, and you are regularly employed, you can also deduct the cost of returning home from school. And you can also deduct the cost of going from home to school on days you do not work.
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    Posted by David Greenslit CPA at 1/4/2007 11:58 PM | View Comments (0) | Add Comment | Trackbacks (0)
    Online Auction Sellers
    From the IRS: "More and more people are using the Internet as a place to sell goods. In some cases, these are sales of the seller's personal used items and the seller realizes no profit. In other situations, however, online sellers are pursuing a profit and earn income from this activity. Online auction sellers must report gains from Internet sales by including those earnings in income for tax purposes." More from: the IRS
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    Posted by David Greenslit CPA at 1/4/2007 1:31 PM | View Comments (0) | Add Comment | Trackbacks (0)
    Renewal of expiring IRS provisions for 2006

    Usually each year Congress renews some expiring provisions of the income tax laws. Three provisions it renewed late this year were: the deduction for sales tax, the deduction for higher education tuition, and the educators expense deduction. These changes were made after the paper forms were printed, so minor adjustments need to be made by people filing paper returns. These deductions will still be allowed for paper filers. Efilers should not be effected except for a small delay by the IRS in processing their returns. See the complete story: here

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    Posted by David Greenslit CPA at 12/27/2006 1:54 PM | View Comments (0) | Add Comment | Trackbacks (0)
    New rules for 2007 Monetary donations

    From the IRS: "To deduct any charitable donation of money, a taxpayer must have a bank record or a written communication from the charity showing the name of the charity and the date and amount of the contribution. A bank record includes canceled checks, bank or credit union statements and credit card statements. Bank or credit union statements should show the name of the charity and the date and amount paid. Credit card statements should show the name of the charity and the transaction posting date.

    Donations of money include those made in cash or by check, electronic funds transfer, credit card, and payroll deduction. For payroll deductions, the taxpayer should retain a pay stub, Form W-2 wage statement or other document furnished by the employer showing the total amount withheld for charity, along with the pledge card showing the name of the charity.

    Prior law allowed taxpayers to back up their donations of money with personal bank registers, diaries or notes made around the time of the donation. Those types of records are no longer sufficient."

    These changes will be effective for the tax year 2007. The IRS is upping the record keeping requirement here. If you are relying on online bank statements these days, find out how long those records are available free of charge? If you are getting written acknowledgements for all your donations, this change shouldn't effect you.

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    Posted by David Greenslit CPA at 12/18/2006 9:49 PM | View Comments (0) | Add Comment | Trackbacks (0)
    New non-cash charitable donation rules
    According to the IRS: "To be deductible, clothing and household items donated to charity after Aug. 17, 2006, must be in good used condition or better. However, a taxpayer may claim a deduction of more than $500 for any single item, regardless of its condition, if the taxpayer includes a qualified appraisal of the item with the return. Household items include furniture, furnishings, electronics, appliances, and linens."

    I see two changes here. The IRS or more accurately Congress, dropped the appraisal requirement down to $500 from $5,000 effective August 18th. They also added the phase, "good used condition or better", to the average non-cash donations situation. The second change is in the subjective area.

    The recommendation for non-cash donations totaling less than $500 a year is to make an itemized list of them including each item's fair market value. Get some type of a dated receipt from the donee organization, they often will not value them for you. List the total on line 16 of the 2006 schedule A. Do not include your list with your return, keep it in case you need it some day.
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    Posted by David Greenslit CPA at 12/18/2006 9:26 PM | View Comments (0) | Add Comment | Trackbacks (0)
    Traditional IRA conversions with a basis
    I have been asked a number of times about theory going around these days being pushed by financial planning types. Some people own traditional IRAs that contain non-deductible contributions (they have a basis). The theory is to split a conversion whereby the non-deductible basis goes into a Roth IRA tax free, and the pretax part of the IRA goes into a traditional IRA. This is done without having to pay any taxes currently.

    This theory goes against the general principles laid out in IRS from 8606 that says distributions of an IRA basis are proportionate. This also goes against the general annuity rules that say you can't get just your after tax money out and not pay any tax on just that.

    My conclusion as of this day is that this theory going around is unsupported. I would welcome your comments that would enlighten me in this area.
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    Posted by David Greenslit CPA at 12/15/2006 8:06 PM | View Comments (0) | Add Comment | Trackbacks (0)
    New Residential Energy Credit
    For 2006 and 2007 there is a new energy credit for homeowners. Beta versions of the new form 5695 to use for this are available today (form 5695), but I haven't been able to find the instructions. I was asked what to do if you purchased some new windows in 2006, but install them in 2007? My guess is that you claim the credit when the new energy efficient windows are placed in service, in this case on your 2007 tax return. The soon to be available instructions will most likely clarify the situation.

    Of note is the fact that the credit cannot reduce your taxes below zero. Accountants call this one a non-refundable credit. So if you have a small amount of taxable income, the credit may do you no good.

    This credit is available for "existing" homes, and in my opinion, this rules out claiming the credit for costs associated with the construction of a new home.

    "During 2006, individuals can make energy-conscious purchases that will provide tax benefits when filling out their tax returns next year. The credit will also be available for purchases in 2007.  Manufacturers offering energy efficient items such as insulation or storm windows can assure their customers that their energy efficient items will qualify for the tax credit if certain energy efficiency requirements are met." - More for the IRS
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    Posted by David Greenslit CPA at 12/14/2006 11:46 PM | View Comments (0) | Add Comment | Trackbacks (0)
    IRAs and Charitable Contributions for taxpayers over 70 1/2
    There is a new tax saving strategy for people over age 70 1/2 who have IRAs and make charitable contributions. This is change is part of the Pension Protection Act of 2006.

    "Under the new law, for the years of 2006 and 2007, an individual age 70 ½ or older can make direct charitable gifts of up to $100,000 per year from an IRA to a qualified charity and not have to report the IRA distributions as taxable income on his or her federal income tax return. Moreover, such distributions count toward the required minimum distribution." - Advisor Report

    The Advisor report allows states that, "Furthermore, the distribution has to be made to a qualified charity and be distributed directly to the organization." I read this to say that the taxpayer must not have the money in their hands at any time. 

    The reason this strategy saves some people some tax money is by using it, is that lowering ones Adjusted Gross Income (AGI), which this does, is good or has no harmful effect.
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    Posted by David Greenslit CPA at 12/12/2006 2:42 PM | View Comments (0) | Add Comment | Trackbacks (0)
    Inherited Traditional IRA distribution rules for non-spouses
    "Heirs who are not surviving spouses don't have the option of treating inherited IRAs as their own. However, they do have two choices of withdrawal rules. First, minimum withdrawals can be taken over the life expectancy of the beneficiary starting no later than Dec. 31 of the year after death. The other choice is to withdraw the entire balance no later than Dec. 31 of the fifth year after death." - more: IRA

    My comments: So you are looking at two choices. For about five years, you can withdraw the money as you like, including taking a total distribution. The withdrawals should be code 4 distributions, on account of the prior owners death, and not subject to the 10% early distribution tax, but subject to regular income tax as ordinary income. The other option is to treat the IRA as a quasi annuity. Receiving payouts over a long number of years, based upon life expectancy rules. For example, if the life expectancy is 25 years, you would receive roughly 4 percent of the total value per year. Traditional IRAs on occasion have a basis. Any basis your inherited IRA may have would be on account of prior non-deductible contributions. Tracking down this basis from prior years, may be worth the effort. If a $100,000 value IRA has a basis of $10,000, 10 percent of its distributions would be excluded from tax.
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    Posted by David Greenslit CPA at 12/7/2006 3:27 PM | View Comments (0) | Add Comment | Trackbacks (0)
    Payroll deductions to charities substantiation rules
    From the IRS: December 1, 2006 - WASHINGTON — The Internal Revenue Service announced today new guidelines for taxpayers to follow to substantiate donations to charities that were made by payroll deductions.

    "This makes it easier for businesses and individuals to support worthwhile charities without fear of losing the deduction," said IRS Commissioner Mark W. Everson. - More here

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    Posted by David Greenslit CPA at 12/4/2006 11:02 PM | View Comments (0) | Add Comment | Trackbacks (0)