WHICH WAY SHOULD I GO - MARRIED FILING JOINTLY OR MARRIED FILING SEPARATELY?

Q. We have not filed our 2010 return. We are trying to decide if we should file married filing joint or married filing separately. What should we look at?

A. You really need to be working with a tax professional on this. If you are married, you generally have two choices: married filing jointly and married filing separate. In most cases, if you are married and choose to file as married filing separate, you will usually pay more tax. Usually. Some exceptions apply. But in the great majority of cases, you will pay more tax.

If you file as married filing separate, you still have to coordinate a bit with your spouse.
• While you include only your own income, deductions, exemptions and tax credits, you still have to include your spouse’s information, including Social Security Number or Taxpayer ID.
• You also have to elect the same deduction option as your spouse: you must both opt to itemize or you must both opt to take the standard deduction. You may not each independently elect itemized or standard deductions.
• If you file as married filing separate, you lose the option of claiming some tax preference items. For example, you cannot take the student loan interest deduction, the tuition and fees deduction, the education credits, or the earned income credit.

So why do it? There are a few scenarios where electing married filing separate status makes sense:
• Privacy. It’s rare that your spouse’s tax return will be made public but if it is, filing separately ensures that your own returns stay private. Who falls into this category? Generally, the spouses of politicians. Think Teresa Heinz-Kerry or Cindy McCain, both wealthy women in their own right who might not want the world to know their business.
• Trust (or lack thereof). These days, many married couples maintain separate accounts and have separate assets. Sometimes it’s for convenience purposes. Sometimes it’s to keep some semblance of independence. And sometimes it’s for professional reasons. That doesn’t always translate into separate tax returns. However, if you maintain separate financial lives to the point where you don’t understand/care/want to know what’s going on with your spouse’s finances, you may also not wish to file a joint tax return. You can’t simply claim ignorance if your spouse makes a significant error: the IRS expects you to review and understand your tax return before you sign it. If you don’t have a level of comfort signing a joint return, don’t. That’s a great reason to file separately.
• Protection. There’s a great line in the movie, Steel Magnolias when Truvy says to Clairee, “If you can achieve puberty, you can achieve a past.” It’s true. Many taxpayers these days marry someone with a past… past tax debts, defaulted student loans, you name it. It happens. Filing separately may preserve a spouse’s right to claim a refund (yes, you can file some extra papers to achieve the same goal but that’s an awful lot of work).
• Medical or Other Expenses. Occasionally one spouse has significant medical or other expenses but little income. Since medical expenses must meet that 7.5% floor before you can deduct them, joint filers may have a hard time meeting that threshold. However, a taxpayer filing separately with a relatively low income can hit the floor much more quickly. Ditto for miscellaneous expenses subject to the 2% floor. Keep in mind, though, that your spouse has to itemize if you do, so this only works if there are enough combined deductions between the both of you.
• Money. Sometimes, the numbers just work out better. And why pay more than you have to?

So there you go. There is no rule that says, “Thou shalt elect married filing jointly.” Sometimes it makes sense to elect married filing separate. Sometimes. Run the numbers – or discuss with your tax pro – to see if it makes sense for you.

LONGTIME PARTNER

I have to take a few minutes and pay tribute to Bob Sylvester CPA who died September 23, 2011

Bob Sylvester was a former partner of mine and a close friend. Bob had been ill for some time and he was in hospice for the past few weeks. Bob and I go way back. In 1972, Bob gave me a chance and hired me as new junior accountant with the firm of Lindell, Sylvester Lindell. He was my mentor and taught me a lot about business. Eventually we became partners to form Kopsa, Swanson & Sylvester accounting firm. In 1999, Bob became sick and retired to enjoy his family. Much of the success that I have had is attributable to valuable lessons from Bob. He will be missed.

To read more about Bob's life: Robert Sylvester

YOU MAY WANT TO UNWIND YOUR ROTH CONVERSION

Many taxpayers elected in 2010 to convert their regular IRA to a Roth and either pay the tax in 2010 or spread it out over 2011 and 2012. If you converted your Roth as long as you timely filed your income tax return or got an extension to October 15, 2011, you have until October 17th “unwind” the conversion and treat it as if it never happened.

The primary reason for considering this is the drop in stock prices from 2010 until now. By unwinding the conversion, you may be able to then redo the conversion and save substantial tax this year.

For example, let’s assume a taxpayer had $500,000 in his IRA on June 1, 2010 when he converted it into a ROTH. Now, let’s assume the value of the ROTH is only $300,000. By unwinding the ROTH conversion, the taxpayer does not pay tax on the difference between the $500,000 last June and the $300,000 value now. At the highest tax bracket including applicable state income taxes, the total tax savings could approach $100,000.

Remember, you only have until October 17, 2011 to unwind this conversion

ACCOUNTANTS IN THE MOVIES

In Hollywood, accounting can seem like a pretty glamorous profession, or not.

Charles Grodin plays Jonathan "The Duke" Mardukas, an accountant for the Mob who gets nabbed by bounty hunter Jack Walsh, played by Robert De Niro in the 1988 comedy-action hit "Midnight Run." To collect the $100,000 bounty on the Duke's head, De Niro needs to get him from New York to LA, but the Mafia and the FBI are both on their tails. Grodin made a bit of a mini-career out of playing accountants. In the 1993 flick "Dave," he appeared as CPA Murray Blum. In one scene, Murray the accountant helped President Dave Kovic, played by Kevin Kline, find an extra $650 million in the federal budget to open homeless shelters. We could use him in Washington now.

FEDERAL REGULATIONS MULTIPLY AT RECORD PACE

With working with small businesses, I know first-hand the impact of federal and state regulations. The regulations are there to serve a useful purpose, but sometimes enough is enough. It seems like a vicious circle. The more regulations we have, the more bureaucrats we need, and more bureaucrats sit in their office and create more regulations…which create more bureaucrats.

The U.S. Chamber of Commerce reports that the administration last week "released version 2.0 of its regulatory review, which looks back at existing regulations to determine which regulations it can streamline or eliminate." In his commentary at http://www.chamberpost.com/, the U.S. Chamber's regulatory expert, Bill Kovacs writes that while the administration is to be commended for taking the initiative, "results of this look-back will not have a material impact on the real regulatory burdens facing businesses today." In 2007, there were around 110,000 federal regulations. Today, those rules are proliferating at a rate of about 4,000 additional regulations annually. There are currently more than 22,580 pages of federal regulations on environmental protection; 15,700 pages of tax code; 10,800 pages to regulate agriculture; 6,555 pages for the transportation sector; 5,575 pages on banking regulation; and 4,955 pages of labor law. Still, the rules keep coming. According to reports, the federal agencies added $9.5 billion in new regulatory costs in July alone by proposing 229 new rules and finalizing another 379 rule changes.

TALKING APPLE LINGO

Apple Store employees are trained to say things a certain way.

• "That's stupid" or "That wasn't smart."
They say: "That's not recommended."

• "Do you have any questions?"
They say: "What questions do you have?"

• "Unfortunately."
They say: "As it turns out...."

We say GREAT customer service training!!!

TAXES ON THE CUTTING EDGE

Q. My 14-year-old son is cutting lawns this summer. Does he have to report this income?

A. Yes, if it exceeds $400. However, the income can be sheltered from federal income tax by the standard deduction. The normal standard deduction for 2011 is $5,800. However for dependents, the standard deduction is the lesser of: 1) Earned income plus $300, or 2) $5,800. In other words, he most likely will not owe federal or state taxes. That's the good news.

Here is the bad news. If your sons net income is over $400 he will need to file a return and pay self-employment tax.

'BUREAUCRACY GONE WILD: OBAMA'S UNHELPFUL ADVICE TO A FARMER'

(Politico) -- Politico.com reports on the publication's unsuccessful attempt to get an answer to a simple question from a farmer. The story was written after an ag producer in Illinois told President Obama recently when he visited Illinois that he was concerned about, "more rules and regulations — including those concerning dust, noise and water runoff — that he heard would negatively affect his business."

According to the story, the president, on day three of his Midwest bus tour, replied: "Contact USDA. Talk to them directly....my suspicion is, a lot of times, they're going to be able to answer your questions and it will turn out that some of your fears are unfounded." MJ Lee, a Politico.com reporter, writes that when he "decided to take the president's advice and call the USDA for an answer to the Atkinson town hall attendee's question," he found himself "in a bureaucratic equivalent of hot potato — getting bounced from the feds to Illinois state agriculture officials to the state farm bureau." After more than four hours of phone calls spread over two days, "still no answer to the farmer's question."

Full Story

And these types of bureaucrats will soon be running our health care system.

FEDERAL BUDGET VS. HOUSEHOLD BUDGET

This information has been running around the Internet. I thought it explains our predicament really well.

The Federal Budget
1) U.S. Tax revenue: $2,170,000,000,000
2) Fed budget $3,820,000,000,000
3) New Debt: $1,650,000,000,000
4) National debt: $14,271,000,000,000
5) Recent Budget cut: $38,500,000,000

Now remove 8 zeros and pretend it is a….

Household Budget:
1) Annual family income: $21,700
2) Money family spent: $38,200
3) New dept on credit card: $16,500
4) Outstanding balance on credit card: $142,710
5) Total budget cuts: $385

The family is not going to make it.

Now those are some numbers I can relate to!

LABOR BOARD ISSUES RULE REQUIRING EMPLOYERS TO POST NOTICES ON UNION RIGHTS

The National Labor Relations Board (NLRB) in Washington, D.C., has just issued an advance copy of its final rule requiring nearly every U.S. employer to post a notice in the workplace about the right to organize a union. The rule will take effect in 75 days, or on November 14th. For a fact sheet, visit: http://www.nlrb.gov/

I am on the Nebraska Chamber of Commerce board of directors and earlier this year, the Nebraska Chamber of Commerce & Industry signed onto comments regarding NLRB's proposed rule, arguing, among other things, that the notice requirement is unnecessary, biased and beyond the authority of the NLRB. It appears the NLRB did make some modest changes to its February draft. For example, it dropped the requirement that employers must "distribute the posting by e-mail, Twitter or other electronic means." NLRB member, Brian Hayes (R) voted against the final rule, while Chair Wilma Liebman (D) and members, Mark Pearce (D) and Craig Becker (D) voted to approve. With NLRB Chair Liebman's term expiring soon, some analysts believe that the NLRB may issue a flurry of decisions over the next few weeks.

ACCOUNTANTS IN THE MOVIES

In Hollywood, accounting can seem like a pretty glamorous profession, or not.

Cher won an Academy Award playing accountant Loretta Castorini in the 1987 romantic comedy "Moonstruck." She works as an accountant for several Brooklyn businesses, including her uncle's deli, and is engaged to be married to Danny Aiello, until she falls for his younger brother, played by Nicolas Cage. When the moon hits your eye like a big pizza pie, that's amore!

WATCH OUT, THE IRS MAY WANT YOUR QUICKBOOKS FILE

Recently, the courts have given the IRS the right to demand your software files. The IRS has gotten very aggressive in demanding the actual accounting software file, especially Quickbooks and other common software accounting programs. Before the advent of these software programs, providing a print out of the actual accounting data was usually sufficient for the IRS during an exam.

Now, with most agents being able to utilize these accounting software packages on their computers, they are demanding a backup of the whole accounting software, even if there are years in the accounting software that are not under exam. Also, any comments, memo or notes section of your software would be available for review by the IRS.

Just be careful what you write in your accounting software comments section. And remember, an IRS agent may be reading it in the future.

MY THOUGHTS ON THE PAYROLL TAX CUT IN OBAMAS NEW PLAN

President Obama will send his new jobs creation plan to Congress on Monday September 12th. He pitched it first in the Rose Garden surrounded by the kinds of folks that make for good press (vets and teachers, for example) and then send it to Congress for consideration.

I am not going to comment on all of the details of the plan at this time. First of all the press has given the details plenty of coverage and more importantly the specifics of the plan change and it goes through the legislative process. Outlining it early seems to confuse people when provisions that started out in the plan change. Once we see what the final bill, if any, looks like we will let you know.
I do want to give you my thoughts on the payroll break that is in the plan. Obama wants to extend the holiday and make the cut even deeper. The extension is a no-brainer.

Impact on Individuals

Making the cuts a bit larger is an interesting suggestion. Clearly, taxpayers like it when taxes get cut. But let’s keep this in perspective. It’s not a huge benefit for most taxpayers (a family making $40,000 would keep an extra $440 over the span of the year – or about $8/week). But most concerning, these are cuts to payroll taxes which are out of the Social Security fund. The Social Security fund is in enough trouble already and now they are putting less money in. That is hard for me to understand. How are we going to make that up later? Oh I know… Thanks kids and grandkids. Constantly banking on the idea that we’ll make up extra funds later is how we’ve gotten ourselves into the pickle we’re in now.

Impact on Business

Obama also wants to cut payroll taxes for businesses by 50%, to 3.1%, on the first $5 million in wages. As a business owner, I love this idea. But as a tax professional, I worry about it – for the same reasons articulated above. And I will say that while the cuts might make me happy because it’s less money out of my pocket, it wouldn’t make my business likely to hire new employees. Temporary fixes like that rarely benefit small businesses, in my opinion, because the long term consequences of a new hire are so uncertain. With the added responsibilities under the new health care law, for example, a temporary cut in payroll taxes won’t encourage small businesses to hire. I think they’re still going to be looking to cut employees – and take on cheaper, benefit-free independent contractors – rather than make new hires for employers. But maybe that’s just me.

In contrast, another business tax break in Obama’s plan that I do think has legs is the tax credit for hiring workers who have been out of a job for at least six months. The break is a $4,000 tax credit – not bad. Remember that tax credits are a dollar for dollar reduction in taxes which can be fairly significant, depending on your tax rate.

In terms of comparison of the two employer-side tax breaks, the tax credit for new hires is equal to the suggested “payroll tax cut” for employers paying nearly $130,000 in wages. In other words, you would pay $130,000 in wages as an employer under the new scheme before you would “save” as much as the amount of the credit. However, the payroll tax cut puts more in your pocket as you go while a tax credit generally gives you more of a benefit come tax time.

“Back to School” Tax Planning Beats an Apple for the Teacher!

September is halfway over , and school is back in session. If you have kids, you’ve probably already met the teachers. You may have even watched a football game or two.

It’s probably been a long time since you’ve sat in a classroom yourself. But school is never out if you’re looking to make the most of your money in today’s challenging economy.

What classes would you take to keep more of your income in your pocket? Try these:

• Math 1040: Where are tax rates headed?
• History 2008: Lessons from last year’s mistakes?
• Social Studies 463: Write off meals and entertainment
• Chemistry 162: Is there a “secret formula” for paying less?
• Anatomy 213: What’s the best strategy for healthcare benefits?

If you want to keep the most of what you make, you can’t wait ‘til finals for answers. You need to study now. Putting tax-wise ideas and strategies in place today could help avoid an ugly surprise when “Report Cards” come due April 15!

Email us today for your free tax analysis. We’ll find the mistakes and missed opportunities that may be costing you thousands today, and show you how “back to school” tax planning can save thousands more tomorrow. We guarantee you’ll leave with valuable new lessons, or we’ll donate $50 to your local school. Email now to schedule your Analysis.

ACCOUNTANTS IN THE MOVIES

In Hollywood, accounting can seem like a pretty glamorous profession, or not.

Jack Nicholson plays a philandering CPA tax attorney coming to terms with his troubled relationships with women in "Carnal Knowledge." The 1971 movie co-stars Art Garfunkel as Nicholson's best friend in one of his few dramatic roles, along with Ann-Margret (right) and Candice Bergen as the women in their lives.

1099-K FORMS FROM CREDIT & DEBIT CARDS

The new payment card reporting rule is prompting revisions to the tax forms. For 2011, credit and debit card companies will begin to issue 1099-K forms on payments to merchants, and third-party networks such as PayPal will give 1099-Ks to payees with over 200 sales transactions and over $20,000 in annual sales volume.

These amounts will be reported on a separate line on Schedule C and Forms 1065, 1120 and 1120S. This way, the Service will be able to match the amounts shown on the 1099-K with what’s reported on a return, making discrepancies easier to spot. The IRS is hoping that this should reduce underreporting of gross receipts by sellers of goods and services.

$3.5 TRILLION TAX HIKE INCLUDED IN THE RECENT DEBT LEGISLATION

(Tax Foundation) -- TaxFoundation.org reports, "One of the least reported facts about the 11th hour debt limit deal between the White House and Congressional leaders is that it assumes that on January 1, 2013, virtually every working American will begin paying much higher taxes than they are today." According to the Tax Foundation, "baked into the deal is a $3.5 trillion tax increase, yet plan supporters say it does not raise taxes" since the "current law” (baseline) assumes that all of the Bush-era tax laws expire as scheduled at the stroke of midnight on December 31, 2012.

This means that all income tax rates will go up across the board, the child credit will fall from $1,000 to $500 and the marriage penalty will return. The analysis notes that meanwhile, federal spending is expected to total nearly $46 trillion over the next ten years.

If Congress should decide to not let the Bush/Obama tax laws expire, then there is an additional $3.5 trillion overdraft in the works.

This is just like if you were working on your family budget and because of past debts, you were close to bankruptcy. In order to make the budget balance, you budget that in six months you and your spouse were going to both get a second job and earn an additional $25,000. But six months later, you decide that you can’t handle working another part-time job and so, you default.

SALE OF BUSINESS QUESTION

Q. I am at the point where I am speaking with attorneys to try to figure out who would be best to represent us in the sale of our business. So far, I have spoken with two and each have given me very different information. One says we should try to sell the business's stock and that would mean a lower tax implication for the sale and would save time and money on attorney's fees over an asset sale. The other said we should do an asset sale and it wouldn't make a difference in the tax implications or the time needed to write up contracts.

I would love your advice on which would be most favorable for us. ~Paula

A: Here’s the deal. There are two ways to sell your corporation.

• You could sell your stock.
o In that case, the owner just steps into your shoes.
o The new owner is just buying the paper that represents ownership in the assets and liabilities.
o If there are liabilities that the corporation owes such as accounts payable, notes etc., the new owners will be assuming.

• The corporation can sell assets to the new owners.
o After the sale, the corporation is normally liquidated.

A stock sale is best for you because this would be a capital gain and the maximum tax rate is 15% federal plus state. On an asset sale, the gain is at ordinary income rates which vary from, I would imagine 15% to 35%, plus state tax.

Most of the time the buyer wants to do an asset purchase because:

• They get to depreciate the equipment. This will save them some future tax dollars. They do not get new depreciation on a stock sale.
• If they finance the purchase, it is easier to deduct the interest.
• If they buy stock, they are buying whatever dirty laundry you might have in the closet. For example, if the IRS should audit the corporation and impose additional tax then, since they are the owners the corporation would have to pay the tax, so they are on the hook.

I hope that this helps.

BACK TO SCHOOL TAX TIPS

I sent my youngest child, Ryan off to his first day of high school and my oldest son, James is celebrating his 16th wedding anniversary. I bet not many people can say that. With school starting, I have had several calls regarding tax strategies. I recently posted a blog about college credits and deductions. If you have a child in post- secondary or you or your spouse are headed back to school, you should check out that blog. Here is some other information about education:

1. School uniforms are not deductible, no matter how ugly they are. The IRS does not allow deductions for school uniforms, even if required, for public or private schools.

2. The cost of private school is not deductible. This includes both traditional private and parochial schools, though exceptions apply in some circumstances such as for special needs children and when it serves as child care.

3. The cost of private kindergarten – and some upper grades for students up to the age of 13 – may be deductible. Okay, I know I just said that the cost of private school is not deductible. And that’s generally true for tuition costs. However, if you can separate the educational costs of your program from any child care component, you may be able to deduct the child care piece. Clearly, this is easier for younger children since many programs are already separated out for you (half day kindergarten, for example, is often supplemented by a child care program in the afternoons).

4. Expenses for before-or after-school care of a child in kindergarten or a higher grade may be deductible as long as the costs qualify. Generally, qualifying costs for child care are limited to the care for your own children under the age of 13, qualifying as your dependents, for care while you work or while you are looking for work. Some cost limitations and other restrictions may apply.

5. You must subtract the cost of goods received when you contribute to band and sports fundraisers. Yes, I’m talking about the popcorn, Christmas wrapping and scented candles. Inevitably you feel obligated into buying stuff. In my case, I don’t feel comfortable asking friends and neighbors to buy stuff, so I just buy more. I now have enough Christmas wrapping to last me for the rest of my life and if food becomes scarce, the Kopsa family will be living on popcorn (if the microwave still works). There is no, or little to no tax deduction since the IRS requires you to subtract the value of anything you receive in return for a charitable donation.
Better solution: Just write a check directly to the school. In this case, the school gets to keep the entire amount and you take the full donation…unless, of course, you need more scented candles.

6. You may not deduct moving expenses for heading to college. I get asked this question quite a bit, but the answer is still no, year after year. The IRS doesn’t consider going to school a job.

7. The earnings in 529 plans are not taxable for federal purposes. A 529 plan is an education savings plan which takes its name from section 529 of the Internal Revenue Code. Investments in these plans grow tax-free and withdrawals are never federally taxable so long as you use them for eligible college expenses, which includes most costs associated with college such as tuition and room and board. The plans vary from state to state and there are entire web sites and publications devoted to them.

If you have any school-related questions, send them to me. Remember that you can email them, ask me on twitter or post a question on Facebook.

ACCOUNTANTS IN THE MOVIES

In Hollywood, accounting can seem like a pretty glamorous profession, or not.

Edmund O'Brien plays accountant Frank Bigelow in the fast-paced 1950 film noir crime drama "D.O.A." The movie opens with Bigelow entering a police station to report his own homicide and then in flashback traces how he came to learn that he had been poisoned by a former client who needed him to notarize an incriminating document. The movie was later remade in 1988 with Dennis Quaid playing O'Brien's role, but in the remake Quaid is a college professor. O'Brien is shown here with Laurette Luez, who plays his client's mistress Marla Rakubian.

TAX DEDUCTIONS AND FUNERALS

A week ago, I attended a memorial service for one of my dear clients. This person lived a full life and died of natural causes. This person had passed away earlier this year, but they just held the memorial service last week. As I drove home from the service, I thought of our previous conversations and her intellect and knowledge of the world after living and teaching in Egypt for some time with all her travels.

As I drove on, my thoughts normally turned to…what else,...taxes. It was twenty-four miles to the memorial service and another twenty-four back home. I wondered how many times people miss these short drives and deducting it for tax purposes. Let's look at the calculation:

Twenty-four miles times 55 1/2 cents, (which is the new allowable mileage rate) means, that I get a tax deduction of $26.64. When I take into consideration my federal, state and social security bracket, this $26 saves me right at $11 in income taxes. Eleven bucks in my pocket because I'm paying fewer taxes. I never stop there. I always try to think of how much money I would have to earn to have the tax saving in my pocket. Given that it takes me about $18 before tax dollars to have $11, this is a deal.

I say over and over again, "It's not the big items that cause the tax savings, it's the little items that add up."

The message: Don’t forget to deduct all of your miles,…even the short trips.