ABC Taxes, Tips & Tools

The Current & Projected Deficit Means Taxes Will Rise

March 8th, 2010

Nobody wants new taxes, but the fact of the matter is our government is spending more than it is taking in. Given that the lending market is tight, the only place the government can get their revenue is from you, me and Bobby Magee Enterprises. One estimate is that federal deficit is supposed to exceed $600 Billion dollars over the next 10 years, which would result in a $15 Trillion dollar deficit by 2020. Yes that is Trillion with a T; 15 followed by 12 zeros. To put it in perspective, by 2020 the projected budget deficit will be roughly $50,000 for every man, woman and child currently residing in the United States. Something’s gotta give.

So what are the possibilities.

One option is to raise the income and capital gains tax rates on upper income folks. How much? Obama would like to see a top rate of 39.6% for income tax and raise the capital gains tax rate from 15% to 20% as well. In addition, he would like to cap the amount itemized deductions can reduce a high income filer’s tax liability to 28%. By the way, high income is something like singles with $196,000 in taxable income or $231,00o for married folks.
A payroll tax increase is being kicked about. Some are discussing raising the Medicare tax rate and also discussing having those with high incomes pay Medicare tax on unearned income.
A graduated surtax is being bandied about. A plan passed by the house in 2009 had the surtax start on incomes of Singles $280,000/$350,000 Married and had a top tax rate of 5.4% on Singles earning more than $800,000/$1,000,000 Marrieds.
A consumption tax (VAT) is being discussed. If items like food are exempted then obviously the rate on other things would have to be made higher to offset the exempted items-the tax rate likely be 3% or more.
Higher employment taxes on S-corporations is definitely in the works-both parties think that too many people are skirting employment taxes by taking income as dividends instead of pay. Right now the rules let them.
Expect more required reporting to find revenue targets, including corporations, landlords, and filers with overseas accounts.
Tighter rules on independent contractors verses employees is a possibility. Why try to pluck the feathers of many hissing geese when you pluck the feathers of just one?
Of course the government could also reduce spending. Don’t hold your breath, you will turn blue and pass out, just like your mother said.

You can expect at least one variation on these themes to be passed eventually, and which one(s) that do pass depend largely on which party is in charge when the legislation passes. Yes, these are controversial measures but the government has to pay the piper sooner or later and when it happens there are bound to be some very unhappy constituents.

What do you think can or should be done about the federal deficit? Who should pay? Should entitlements be cut? What is your take on all this taxation and spending? Remember, even though this topic is a very sensitive subject, we at Art & Business Consulting would ask that you try to keep the name calling and vitriol to a minimum in this hopefully civil discourse.

As always, small business services and taxation are our business, if you need help with this issue or any others, Please give Art & Business Consulting a call. We would love to engage you as a client.

The usual disclaimers: Although ABC has made every effort to insure the accuracy of Taxes, Tips and Tools, misinformation, disinformation, changes, mistakes, typos and hackers happen, therefore Art & Business Consulting LLC takes no responsibility for any action taken or results based on the information supplied here in. Internal Revenue Service Circular 230 Disclosure: As provided for in Treasury regulations, advice (if any) relating to federal taxes that is contained in this communication (including attachments) is not intended or written to be used, and cannot be used for the purpose of (1) avoiding penalties under the Internal Revenue Code or (2) promoting, marketing or recommending to another party any plan or arrangement address herein. Art & Business Consulting LLC currently does not have a certified public accountant or an attorney on staff; this information is purely for educational purposes and not to be construed as legal or financial advice. Art & Business Consulting LLC and its employees, members and associates are not engage to practice law; you always should discuss legal matters with your attorney before talking to anyone else.

Tags: federal deficit, how much, options, solutions, tax debate, taxation, who pays
Posted in Business Taxes, Individual Taxes, Other Information | No Comments »

Receiving Incorrect 1099s

March 5th, 2010

The due date for 1099 reporting to the Federal government for the tax year 2009 just passed. If you have just noticed that a 1099 you have received doesn’t really belong to you or that it contains incorrect information, I wish you lots of luck in getting the issuer to change it at this late date. Even if you asked them to fix it immediately after receiving the form many issuers are reluctant for various reasons, will not acknowledge the communication, and do not make the change to the statement.

So what do you do if you get one that is incorrect? Sometimes people do receive interest, income, estate distributions and dividend income statement for income that belongs to someone else. Sometimes the amounts are incorrect. Sometimes the 1099 issued to the wrong taxpayer identification, e.g. your Social Security Number instead of your business taxpayer identification number. It could even be fraudulent use of your identity.

The first thing you can do is ask the person or entity reporting the income to fix the 1099. In any case where the name, taxpayer identification, or address is wrong – you should give the issuer a w-9 & advise them to update their records immediately. You should keep records of this contact. Maybe you get lucky and they do reissue the 1099. Hey, it does happen… so you should ask.

If the issuer does not respond by correcting the information return… then you will have to make the adjustments on your tax return.

Wrong taxpayer ID: If you know the person who actually received the income and you have their taxpayer information: Name, current address and taxpayer identification, you can do a “nominee distribution.” You accept the income as reported and then deduct it telling the IRS to whom the income properly belongs. Be sure to include a nominee distribution statement, which includes the issuer’s name, address and taxpayer ID, the name of the person or entity who did receive the income, including their address & taxpayer identification number as well a declaration that this income is not yours. This solution will also work for the situation where the income is reported to your Social Security number but belongs to your partnership or corporation – you would do a 1040 Schedule C reporting the income then expense the entire amount out as an other item referring to the appropriate business tax form including the business’s name, address and tax ID.

To be technically correct you should also report this nominee distribution using the appropriate 1099 form and form 1096 & issue your own 1099 to the payee.

If you are listed as a payee and you do not know who should have received the 1099, then you should treat it using the “wrong amount” procedure listed below.

Wrong amount: Too little? What’s the problem? Just report the correct higher amount according to your records. The IRS is not going to question you reporting more money than they were expecting. Too much is another story.

If you have a 1099-MISC and you have extra income that was not reported on any 1099s, which is often the case as 1099-MISCs report payments of more than $600 in a tax year and you probably have a few sources that were less than that – in theory the easiest method is to just soak up the difference with non-1099 income. But if you want to be technically correct, or if you do not have enough money to soak up the excess, or if income is being fraudulently attributed to you, you will want to report the income as stated and subtract off the excess as an other expense supported by a statement saying why that particular 1099 was wrong; this statement should include the issuer’s information, the correct income …and expenses-if applicable. Realize an incorrect 1099-MISC may happen as a result of the issuer including things that you do not think of as income; for example if part of the money you received was “reimbursements.” If reimbursement income is included on the 1099-MISC, then you are entitled to deduct the associated expenses – not the 1099 issuer – claim them.

If you suspect someone has stolen your identity, you need to file a police report, report it the credit bureaus and otherwise deal with that issue aggressively. Handling identity theft is beyond the scope of this discussion

There is a different procedure for incorrect w-2 information reporting, whether it is excess or not issued at all.

But the first step is the same – you must contact the employer and attempt to get them to resolve the issue. Keep records of the contact including a registered letter receipt (and the letter itself if it is returned).
If the employer does not respond or does not correct the form, then you will have to call the IRS and file a w-2 Form complaint.
Then you will have to file a Form 4852, Substitute for Form W-2, Wage and Tax Statement, or Form 1099-R, Distributions from Pensions, Annuities, Retirement or Profit-Sharing Plans, IRAs, Insurance Contracts, etc. with your tax return.

FYI: There are many kinds of information returns:

W-2 (wages) & W-2G (gambling income) is one most people are familiar with
1099-INT reports interest income
1099-DIV reports dividends income
1099-MISC reports rent income, non-employee compensation and other miscellaneous forms of income
1099-OID reports income from a certain kind of bond
1099-PATR reports farming patronage dividend income
1099-G reports government payments such as state tax refunds and unemployment income
1099-A reports secured property abandonment or acquisition
1099-C reports cancellation of debt income
1099-R reports retirement income from annuities etc.
1099-MSA reports distributions from Medical Savings Accounts
1099-LTC reports Long Term Care benefits
1099-B reports broker and barter transactions
1099-S reports income from real estate sale
1042-s reports US income paid to a foreign person
1098 reports home mortgage interest etc.
1098-E reports student loan interest
1098-T reports tuition
5498-reports contributions to retirement accounts

Tags: 1099, 1099-DIV, 1099-INT, 1099-MISC, fraudulent use of taxpayer identity, how to, incorrect income, incorrect information, incorrect taxpayer information, information returns, W-2, W2
Posted in Business Taxes, Individual Taxes | No Comments »

Federal tax legislative update

March 2nd, 2010

Senate tax-writers are working hard on tax proposals. One item would spur hiring by granting an exemption for Social Security taxes for each new worker hired in 2010 who had been unemployed for at least 60 days (employers would still owe the medicare tax). In another item, section 179 would continue at the $250,000 level. Another extension of the COBRA subsidy law is being considered and would include workers who are reduced in hours and then terminated. Pension plan sponsors would get relief to avoid big hikes in contributions to underfunded plans. Some expired tax provisions could be revived through 2010: tax free status for IRA distributions made directly to charities, add-on standard deduction for state and local property taxes, state sales tax tax-break, college tuition, teacher’s school supplies, 15-year write-offs for leasehold improvements, and the R&D credit also could be revived.

However, even though congress says the estate tax will be revived and retro-active to January 1, there is no bipartisan consensus on where to set the exempt amount and the tax rate. If no action is taken the 2011 exempt amount will fall to $1 million dollars and the top estate tax rate could be 60%, which is a far worse scenario than either side wants.

There is also the President’s well publicized desire to remove tax cuts for “wealthy” individuals (those earning more than $250,000) and higher capital gains tax rates, but there are other less well publicized items under Obama’s plan; he would like to see Corporations getting 1099-MISCs for services performed (meaning they are tax revenue target) and he would like to end the use of Last In First Out (LIFO) and Lower of Cost or Market Inventory Methods.

Of course this doesn’t mean we will see any of this legislation passed or passed soon. In the last few years, patches have been late in coming, but Art & Business Consulting will strive to stay on top of these issues.

As always, small business services and taxation are our business, if you need help with business or individual taxes, Please give Art & Business Consulting a call. We would love to engage you as a client.

Tags: federal tax, legislative update, speculation
Posted in Business Taxes, Individual Taxes, Other Information | No Comments »

Last days to make a 2009 deductible donation for Haiti

February 25th, 2010

A new law bolsters charitable donations made for recovery efforts in Haiti – donors can deduct gifts made before March 1, 2010 on their 2009 tax returns. Furthermore phone bills can be used as proof of donations made via text message.

As always, small business services and taxation are our business. If you need help with your business or individual taxes, Please give Art & Business Consulting a call. We would love to engage you as a client.

Tags: 2009, 2010 deadline, Charity, donation, February 28, Haiti, tax deduction
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When is it placed in service?

February 24th, 2010

Under tax law, business property only becomes deductible beginning in the tax year that it is placed in service, the first date it is in a condition or state of readiness for its specifically designed function.

At that point all the expenses associated with equipment: the set-up, shipment, cost of the equipment, sales taxes paid, etc. are all added up to determine its basis for depreciation and other purposes.

Section 179 allows for the expensing of new equipment in the tax year it is first placed in service.

Under a new ruling [Brown v. Commissioner, TC Summ Op. 2009-171] the concept of the date equipment is placed in service is solidified.

Brown was an employee who was working on starting his own business. He operated a part-time business as a sole proprietor and he purchased equipment in 2002, 2003 and 2004. He tested some of the equipment to become familiar with it. None of the equipment was fully functional until it was interconnected, which happened in 2004. In 2004 Brown turned the Sole Proprietorship into an LLC and went into business full-time. He took section 179 and depreciation deductions for all the equipment placed in service in 2004.

The IRS denied the deduction for the equipment purchased in 2002 and 2003. However the Tax Court held for the taxpayer. Why? Because the parts of equipment purchased in 2002 and 2003 were functionally interdependent with the property purchased in 2004; the taxpayer showed each piece was necessary for the operation as a whole and no one piece of equipment could support the operation until all were purchased, interconnected and ready to operate.

As always, small business services and taxation are our business. If you need help figuring out when something will become deductible, or if something can be expensed under 179, or advice on what kind of depreciation you should take, Please give Art & Business Consulting a call. We would love to engage you as a client.

Tags: date, depreciation, equipment deduction, placed in service, section 179
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Traditional IRA to Roth Conversion in 2010

February 18th, 2010

It is a special time for people considering converting their IRA into a Roth IRA. Why?

Because the federal government is allowing taxpayers to split their tradition IRA into 2 parts and pay the tax on a Roth Conversion over 2 years
And because the restrictions against high income taxpayers has been removed
And because the economy is still in the tank so IRA valuations are lower than they have been, and taxpayers may be earning less in this year than years preceding.

What is the difference between a Traditional and Roth IRA?

Income contributed to a Traditional IRA is usually pre-tax income, but Roth IRA contributions are after-tax income; therefore all ordinary distributions from a Traditional IRA are taxable, but the ordinary distributions from a Roth IRA including interest and dividends earned are not taxable.
Traditional IRAs can only be accessed without penalty upon reaching age 59 ½ or retiring or under a handful of other very specific situations. The amounts the taxpayer contributes to a Roth IRA can be accessed without penalty after 5 years; only the interest can’t be accessed until retirement age.
Taxpayers are not required to take minimum distributions from a Roth IRA upon reaching age 70 ½.

Why would a taxpayer consider doing the conversion now? If they think it will save them taxes in the long run. Many factors come into play. Will tax rates go up for the taxpayer or down? Are they going to need the money in short order or will it be sitting in an account gathering interest and dividends tax-free. Can they pay the tax now?

Whether or not a Roth conversion makes sense must be handled on a case by case basis. Reasons why it might not make sense are:

If the taxpayer’s time-line to retirement date is too short to make paying the taxes now worthwhile-this timeline should be at least 10 years as the longer the Roth grows tax-free the more advantageous the conversion,
If the taxpayer expects their retirement income to be substantially less than it is right now-making the conversion now could cost the taxpayer a lot more in income tax.
If the taxpayer can’t pay the tax now from non IRA sources, Remember if the taxpayer uses part of the money from the Traditional IRA to pay the taxes on the conversion, that amount is subject to the 10 Percent Penalty for Early Withdrawal.
Many items of adjustment and credit are tied to the taxpayer’s AGI. Adding IRA income to the taxpayers current income base, may cause them to lose these credits and adjustments to income. This year there are a couple of big ones: the First-time Homebuyers Credit and the American Opportunity Credit.
Furthermore for a retired taxpayer, the conversion can make part of their Social Security taxable and increase their medicare Part B premiums by increasing income for the tax years of the conversion. But remember – once the conversion is made these seniors will not have to take minimum distributions from their Roth IRAs.

If the taxpayer decides it is advantageous to make the Roth Conversion now, they will only have to pay the tax on the converted amounts; there is no early withdrawal penalty. Converting a Traditional IRA is an all or nothing scenario though. In most years the taxpayer had to come up with all the tax due for a Traditional IRA to Roth Conversion in one year. However for tax years 2010 and 2011 the taxpayer will be allowed to split their Traditional IRA and pay the tax on the conversion over two years. As with all Roth conversions the taxpayer will have the option to reverse the 2010 conversion by October 15, 2011 (assuming they timely file or file for an extension and timely pay their taxes). The tax for the portion of the 2010 conversion will be due in 2011 and the tax due on the 2011 portion will be due in 2012.

Because a person can re-characterize the conversion as late as October next year, it makes sense that anyone who is considering the conversion do so now rather than later, especially if the account is still beaten down from hits the economy has taken over the last several years. If the IRAs value goes up over the next year, then the rise will be attributable to gains in a Roth IRA instead of a traditional IRA. If it goes down the taxpayer can re-characterize the conversion if they want. The taxpayer gets a do-over. However taxpayers should be aware they can’t flip back and forth many times in one year, the conversion and do-over is a one-shot deal in a given tax year.

NOTE: This conversion is also available for amounts in employer retirement plans but participants in a SIMPLE plan must make sure they don’t fall afoul the 2-year holding period for those plans.

If you decide a Roth Conversion is right for you, hire an advisor who has specialized knowledge in this area.

As always, small business services and taxation are our business. If you need help Please give Art & Business Consulting a call. We would love to engage you as a client.

Tags: cons, conversion, do-over, pros, recharacterization, Roth IRA, Traditional IRA
Posted in General Individual, Individual Taxes | No Comments »

Correcting Employment Tax Errors Without Penalty or Interest

February 14th, 2010

Employment tax forms are corrected by filing a 941-X. The due date of the amended tax return is the same as the due date of the quarter in which the error was discovered.

e.g. L-corporation discovers in February that it under-reported and under-paid employment taxes for the 4th quarter of the preceding year. Since the error was discovered in February the amended return and tax is not due until April 30th.

However, Interest will be charged if you do not file the amended tax return AND pay the taxes by the due date.

NOTE: If you do not pay the taxes before the IRS asks for them, interest will be charged, therefore it is to your company’s advantage to report the error and pay the taxes when the mistake is discovered.

If you need help with this issue or any other, remember, small business services and taxation are our business. Please give Art & Business Consulting a call. We would love to engage you as a client.

Tags: 941-x, amended, due date, employment tax return, interest, penalties
Posted in Business Taxes, HR Info | No Comments »

Jerks in the Workplace

February 9th, 2010

The recession has hit America’s workplaces hard. Employees who remain after multiple rounds of layoffs are stressed out, and anyone who has been laid off probably harbors feelings of hurt as well. With emotions running high, all this stress is spilling out into offices and other industrial settings. But that does not mean your company needs to be a hotbed of vulgar comments, taunts and demeaning behaviors.

Most employers have a sexual harassment policy, but many do not have a similar code of conduct for general interpersonal relationships. Why would your business want a civil code of conduct?

Employers who fail to have such a policy may leave themselves open to a hostile work environment claim. Keep in mind that employees are more litigious than ever.
Weeding out offenders will help with employee retention, which may become an issue as the economy rises out of the recession and workers feel more secure about venturing out to find a new job.
A civil work environment is a lot better for morale, benefiting productivity and employee health.
In extreme circumstances allowing jerks to prosper could lead to workplace violence, which no employer ever wants to face.

If you do not have a civil code of conduct, develop a simple one now. A civility policy needs to the usual sections, a simple statement of the code of conduct, separate from your harassment policy, a means of documenting violators, counseling them, and the usual escalation procedures, up to an including firing the offender.

Then of course your company must uniformly enforce these rules. This last bit is really important…

In a recent case a professor of Middle Eastern descent faced anonymous harassment. The jerk in this case would leave notes threatening the professor calling him racist names, but the culprit could not be identified. The administration emailed all the students and faculty campus-wide reminding everyone to treat one another with respect and asked students to come forward if they had any information regarding the harassment. The college also filed a police report regarding the harassment. Later on the professor was terminated for unrelated reasons; he went to court claiming he had been subjected to a hostile work environment. The court disagreed stating the college had done everything it could.

What does your workplace civil code of conduct look like? Do you have a story you would like to share with other readers? We would love to hear from you.

If you need help with this issue or any other, remember, small business services and taxation are our business. Please give Art & Business Consulting a call. We would love to engage you as a client.

Tags: anonymous harassment, civil code of conduct, civility, employee relations, employer policy, harassment, jerks in the workplace
Posted in General Business, HR Info, Other Information | No Comments »

Casual Gambling Winnings & Losses Must Be Netted Daily

February 6th, 2010

You are not a professional gambler, but you gamble a little. Over the long haul odds are that you are not a winner overall. The natural tendency for casual gamblers is to net their winnings and losses over the year and report the difference, if any, as income. What the casual gambler may or may not realize is that winnings over a certain amount are reported to the IRS; indeed they may receive a W-2 G from the gaming parlor when they hit big. What the casual gambler may not realize is that netting heir losses and their winnings over the year is not the proper way to report these winnings and losses for tax purposes.

A new tax court ruling (Shollenberger, TC Memo, 2009-306) reiterates this fact. If you win a pretty penny one day, and lose a pretty penny down the road in a given tax year, you cannot net the two together to figure out your taxable income from gambling.

Casual gambling winnings are are other income reported on the front page of Form 1040. However, the way to properly report gambling losses is on Form 1040 Schedule A, on the miscellaneous deductions not subject to the 2% limitation of income line. If you do not itemize your deductions, the casual gambling losses do not offset your gambling winnings.

Furthermore, failure to report all of your gambling winnings on your tax form may set you up for an audit scenario because gaming winnings are reported and may trigger an income mismatch. Basically the IRS will want to know why you didn’t report all of your income.

If you need help with this issue or any other, remember, small business services and taxation are our business. Please give Art & Business Consulting a call. We would love to engage you as a client.

Tags: casual gambling, deduction, income, losses, reporting, tax, winnings
Posted in Individual Taxes, Other Information | No Comments »

Changes to Arizona’s Tax Credit For The Working Poor in 2010

February 2nd, 2010

Last year the AZ Tax Credit For The Working Poor got better as the so called base period restriction was removed.

This year, the Arizona Department of Revenue (AZ DOR) is tasked with making sure all the charities on the list for this credit meet the condition that 50% or more of every dollar donated goes directly toward assisting the working poor, so they sent out a questionnaire to every charity on the 2009 list. Several responded, “Yeah, yeah, we know, we do not qualify.” Others have not responded at all. The net result is the 2010 list of eligible organizations is much shorter that the one for 2009.

Before you donate to a charity expecting to receive this credit you may want to check to see if they are still on the list.

Just because the charity doesn’t appear on the list doesn’t mean you can’t make a charitable contribution to them and take a deduction, it merely means you will not be eligible for this Tax Credit.

Also just because your favorite charity has not yet showed up on the list, doesn’t mean that they won’t; it means they have not completed the questionnaire and returned it to the AZ DOR. Until they do they will not be a charity eligible for the tax credit in 2010.

In other news, this year the AZ DOR is NOT distributing 2009 Income Tax Forms at the local post offices nor at local libraries. They will NOT mail them even if you call to order one. The only ways to get the income tax forms is from an AZ DOR office or to download it from their website: http://www.azdor.gov/Forms/Individual.aspx. If you follow the links to the AZ DOR website, please be advised that you’re navigating away from ArtAndBusinessConsulting.com and you will be subject to their policies-we do not know what they are nor do we have control of them.

If you need help with these issues or any other, remember, small business services and taxation are our business. Please give Art & Business Consulting a call. We would love to engage you as a client.

Tags: 2009, 2010, Arizona, arizona income tax forms, change, eligible charity, Working Poor Tax Credit
Posted in General Individual, Individual Taxes | No Comments »

ABC Taxes, Tips & Tools

The Current & Projected Deficit Means Taxes Will Rise

Receiving Incorrect 1099s

Federal tax legislative update

Last days to make a 2009 deductible donation for Haiti

When is it placed in service?

Traditional IRA to Roth Conversion in 2010

Correcting Employment Tax Errors Without Penalty or Interest

Jerks in the Workplace

Casual Gambling Winnings & Losses Must Be Netted Daily

Changes to Arizona’s Tax Credit For The Working Poor in 2010

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