In my blogs, I have been warning that inflation seems inevitable even though Washington tries to tell us that they have everything under control. Well, maybe they don’t. It's time to prepare yourself for higher interest rates and higher costs.
U.S. core inflation, which excludes food and fuel prices, rose 0.3% in May, the biggest one-month increase in the past five years. The annual core inflation rate for the first five months of this year is 2.4%. The accelerating rate is likely to trigger interest-rate increases, experts said. See the full article below.
http://www.thefiscaltimes.com/Columns/2011/06/27/Core-Inflation-Rises-Interest-Rates-May-Follow.aspx
Thursday, June 30, 2011
FOURTH OF JULY WEEKEND - BEER, BBQ AND THE TAX ON BEER
The 4th of July is fast-approaching and soon, it will be time for sitting back with some beer and BBQ in the back yard. So, get ready to fire up the grill and pack plenty of ice on the brewskis!
You know the government will never pass up a chance to tax us. There is a so-called “sin tax” on beer. So when you stop and pick up the pack of beer you are paying a hidden alcohol tax and most likely sales tax.
I thought you might want to see what your state beer tax is. The link below will show you the excise tax rates of beer sales for off-premises consumption, as of January 1, 2011.
http://www.taxfoundation.org/blog/show/27160.html
You know the government will never pass up a chance to tax us. There is a so-called “sin tax” on beer. So when you stop and pick up the pack of beer you are paying a hidden alcohol tax and most likely sales tax.
I thought you might want to see what your state beer tax is. The link below will show you the excise tax rates of beer sales for off-premises consumption, as of January 1, 2011.
http://www.taxfoundation.org/blog/show/27160.html
Tuesday, June 28, 2011
POINTS TO CONSIDER WHEN BORROWING MONEY FROM A RELATIVE
Financial emergencies come up for all of us. You may be forced to ask a relative for financial help because you don’t have adequate reserves to drawn on. Before you consider that route, as either the recipient or the giver, here are some points to consider:
• Even small gifts may come with expectations that might have little to do with the money itself. If you don’t meet the giver’s expectations—showing up for every holiday dinner, for example—the relationship can become strained. Or, if you give money to a family member, you may find yourself scrutinizing the recipient’s future financial behavior.
• Borrowing money from a parent, for instance, may make you feel dependent, even if you pay the money back.
• Lending, rather than giving, a family member money might be a better idea. But, to avoid problems, always formulate a loan contract with specific repayment and interest terms.
Gift or loan, thoroughly talk about the transaction beforehand to make sure everyone is in agreement. In addition, make arrangements with your financial advisor to start building an adequate emergency fund of your own, so you’ll be prepared to handle a financial emergency yourself.
• Even small gifts may come with expectations that might have little to do with the money itself. If you don’t meet the giver’s expectations—showing up for every holiday dinner, for example—the relationship can become strained. Or, if you give money to a family member, you may find yourself scrutinizing the recipient’s future financial behavior.
• Borrowing money from a parent, for instance, may make you feel dependent, even if you pay the money back.
• Lending, rather than giving, a family member money might be a better idea. But, to avoid problems, always formulate a loan contract with specific repayment and interest terms.
Gift or loan, thoroughly talk about the transaction beforehand to make sure everyone is in agreement. In addition, make arrangements with your financial advisor to start building an adequate emergency fund of your own, so you’ll be prepared to handle a financial emergency yourself.
IMPORTANT IF YOU HAVE A FOREIGN ACCOUNT
IRS Issues Warning on FBAR Filing Deadline
The Internal Revenue Service is reminding anyone who has a bank account or other financial account in a foreign country, or who has signature authority over such an account, that they may be required to report the account to the U.S. Department of the Treasury by June 30 each year.
The IRS has recently been extending the filing deadline for the Report of Foreign Bank and Financial Accounts, also known as an FBAR, under certain circumstances (see IRS Offers Another FBAR Filing Extension and IRS Extends FBAR Filing Deadline for Some Finance Pros). However, the FBAR filing deadline is June 30 each year. Many people in the U.S. have foreign financial accounts, the IRS noted in its announcement last Friday. While there is nothing improper about setting up or maintaining such accounts, many people may mistakenly believe their accounts are not large enough on a combined basis to trigger reporting obligations. Foreign account owners may have to report their accounts to the government, even if the accounts do not generate any taxable income.
U.S. persons are required to file a Report of Foreign Bank and Financial Accounts , or Treasury Department Form TD F 90-22.1, each year if they have a financial interest in or signature authority over financial accounts, including bank, securities or other types of financial accounts, in a foreign country, if the aggregate value of these financial accounts exceeds $10,000 at any time during the calendar year. For 2010, the due date for filing the FBAR is Thursday, June 30, 2011. Unlike with federal income tax returns, requests for an extension of time to file an FBAR cannot be granted.
The FBAR is not an income tax return and should not be mailed with any income tax returns, the IRS noted. It is due by June 30 of the year following the calendar year in which the aggregate value of the foreign accounts, on any one day, exceeds $10,000. But for 2009 and earlier years, the due date is generally Nov. 1, 2011 for individuals whose filing deadline was properly deferred under Notice 2009-62 or Notice 2010-23, and have no financial interest in a foreign financial account but with signature or other authority over that account.
FBARs are filed with the U.S. Department of the Treasury, P.O. Box 32621, Detroit, Mich. 48232-0621. Civil and criminal penalties for non-compliance with the FBAR filing requirements are significant. Civil penalties for a non-willful violation can range up to $10,000 per violation. Civil penalties for a willful violation can range up to the greater of $100,000 or 50 percent of the amount in the account at the time of the violation. Criminal penalties for violating the FBAR requirements while also violating certain other laws can range up to a $500,000 fine or 10 years imprisonment or both. Civil and criminal penalties may be imposed together.
The address for delivery of an FBAR by a method other than U.S. mail is: U.S. Department of the Treasury, Currency Transaction Reporting, 985 Michigan Avenue, Detroit, Mich., 48226.
The Internal Revenue Service is reminding anyone who has a bank account or other financial account in a foreign country, or who has signature authority over such an account, that they may be required to report the account to the U.S. Department of the Treasury by June 30 each year.
The IRS has recently been extending the filing deadline for the Report of Foreign Bank and Financial Accounts, also known as an FBAR, under certain circumstances (see IRS Offers Another FBAR Filing Extension and IRS Extends FBAR Filing Deadline for Some Finance Pros). However, the FBAR filing deadline is June 30 each year. Many people in the U.S. have foreign financial accounts, the IRS noted in its announcement last Friday. While there is nothing improper about setting up or maintaining such accounts, many people may mistakenly believe their accounts are not large enough on a combined basis to trigger reporting obligations. Foreign account owners may have to report their accounts to the government, even if the accounts do not generate any taxable income.
U.S. persons are required to file a Report of Foreign Bank and Financial Accounts , or Treasury Department Form TD F 90-22.1, each year if they have a financial interest in or signature authority over financial accounts, including bank, securities or other types of financial accounts, in a foreign country, if the aggregate value of these financial accounts exceeds $10,000 at any time during the calendar year. For 2010, the due date for filing the FBAR is Thursday, June 30, 2011. Unlike with federal income tax returns, requests for an extension of time to file an FBAR cannot be granted.
The FBAR is not an income tax return and should not be mailed with any income tax returns, the IRS noted. It is due by June 30 of the year following the calendar year in which the aggregate value of the foreign accounts, on any one day, exceeds $10,000. But for 2009 and earlier years, the due date is generally Nov. 1, 2011 for individuals whose filing deadline was properly deferred under Notice 2009-62 or Notice 2010-23, and have no financial interest in a foreign financial account but with signature or other authority over that account.
FBARs are filed with the U.S. Department of the Treasury, P.O. Box 32621, Detroit, Mich. 48232-0621. Civil and criminal penalties for non-compliance with the FBAR filing requirements are significant. Civil penalties for a non-willful violation can range up to $10,000 per violation. Civil penalties for a willful violation can range up to the greater of $100,000 or 50 percent of the amount in the account at the time of the violation. Criminal penalties for violating the FBAR requirements while also violating certain other laws can range up to a $500,000 fine or 10 years imprisonment or both. Civil and criminal penalties may be imposed together.
The address for delivery of an FBAR by a method other than U.S. mail is: U.S. Department of the Treasury, Currency Transaction Reporting, 985 Michigan Avenue, Detroit, Mich., 48226.
Monday, June 27, 2011
SAVE TAXES BY HIRING YOUR CHILDREN (PART 3)
The Impact of Wages on the Kiddie Tax
Over the last few weeks I have talked about hiring your children. Here is additional information that you need to be aware of.
Keep in mind that bracket-shifting works even if the child is subject to the kiddie tax. The kiddie tax only causes a child’s investment income in excess of $1,900 for 2011 to be taxed at the parent's marginal rate. It has no impact on the child’s wages and other earned income, which can be sheltered by the child’s standard deduction.
As a refresher, the kiddie tax applies to a child who is age 18 or a full-time student age 19 through 23, if the child’s earned income for the year doesn't exceed one-half of his or her support. Thus, employing a child age 18 or a full-time student age 19–23 could also help to avoid the kiddie tax on his or her unearned income.
Over the last few weeks I have talked about hiring your children. Here is additional information that you need to be aware of.
Keep in mind that bracket-shifting works even if the child is subject to the kiddie tax. The kiddie tax only causes a child’s investment income in excess of $1,900 for 2011 to be taxed at the parent's marginal rate. It has no impact on the child’s wages and other earned income, which can be sheltered by the child’s standard deduction.
As a refresher, the kiddie tax applies to a child who is age 18 or a full-time student age 19 through 23, if the child’s earned income for the year doesn't exceed one-half of his or her support. Thus, employing a child age 18 or a full-time student age 19–23 could also help to avoid the kiddie tax on his or her unearned income.
CELEBRITY TAX PROBLEM OF THE WEEK
Michael Jackson’s Former Manager Pleads Guilty to Tax Charges
Raymone Bain, a public relations specialist and the former general manager of the late pop star Michael Jackson, has pleaded guilty in federal court in Washington, D.C., to charges that she failed to file federal and District of Columbia income tax returns.
Bain, a resident of Washington, D.C., pleaded guilty Wednesday to two counts of failure to file federal income tax returns (Forms 1040) and District of Columbia income tax returns (Forms D-40). U.S. Magistrate Alan Kay scheduled sentencing for Aug. 31, 2011. The federal criminal violation carries a maximum penalty of 12 months in prison and a $100,000 fine. The District of Columbia criminal violation carries a maximum penalty of six months in prison and $5,000 fine.
According to the evidence presented in court, Bain worked in the sports and entertainment industry in the District of Columbia and founded her public relations firm, Davis, Bain & Associates. Beginning in 2006, Bain became personal general manager for the performer Michael Jackson and president of the Michael Jackson Company. In that capacity, she was responsible for daily operations of the Michael Jackson Company, including financial, public relations and marketing tasks. Bain was compensated for her services.
Despite earning substantial income, Bain knowingly failed to file her federal her District of Columbia income tax returns, and she failed to pay income taxes owed during 2006 through 2008.
According to the plea documents filed in court, the tax loss is between $200,000 and $400,000.
Saturday, June 25, 2011
CELEBRITY TAX PROBLEM OF THE WEEK
The U.S. Tax Court ruled against South African golfer, Retief Goosen in a case last week involving the two-time U.S. Open champion’s royalty income, disagreeing with his claim that only 7 percent of it came from U.S. sources.
Goosen had endorsement agreements with a variety of sponsors, including Acushnet, TaylorMade, Izod, Upper Deck, Electronic Arts and Rolex. They were allowed to use his name, face and likeness in advertising and marketing campaigns worldwide, and he was paid a base endorsement fee by all the sponsors.
Acushnet, TaylorMade and Izod also pro-rated the base endorsement fee if he did not annually play in a specific number of golf tournaments, the court noted. The three companies also paid him a bonus if he achieved a specific finish in a PGA or European Tour tournament, or reached a specific spot on the World Golf Rankings.
Goosen characterized the endorsement fees and bonuses from Acushnet, TaylorMade and Izod as 50 percent services income and 50 percent royalty income on his nonresident federal income tax returns for 2002 and 2003. The endorsement fees from Upper Deck, Electronic Arts and Rolex were characterized as 100 percent royalty income.
The golfer reported approximately 7 percent of the total endorsement income as U.S. source income. The IRS, however, determined that he should have characterized the endorsement fees and bonuses from Acushnet, TaylorMade and IZod as 100 percent personal services income. The IRS also re-allocated a larger percentage of his endorsement fees as U.S. source income. The Tax Court ruled on June 9th that the endorsement fees and bonuses Goosen had received from Acushnet, TaylorMade and Izod should be allocated 50 percent to personal services income and 50 percent to royalty income, and that the royalty income he had received from Acushnet, TaylorMade and Izod was 50 percent U.S.-source income effectively connected with a U.S. trade or business. The court also held that the royalty income he had received from Rolex was 50 percent U.S.-source income not effectively connected with a U.S. trade or business.
However, the royalty income he had received from the Upper Deck was considered by the court to be 92 percent U.S.-source income not effectively connected with a U.S. trade or business. In addition, the royalty he received from Electronic Arts was deemed 70 percent U.S.-source income not effectively connected with a U.S. trade or business. On top of that, the court ruled that Goosen should not benefit from any provision under either the 1975 or the 2001 income tax treaty between the United States and the United Kingdom.
Goosen had endorsement agreements with a variety of sponsors, including Acushnet, TaylorMade, Izod, Upper Deck, Electronic Arts and Rolex. They were allowed to use his name, face and likeness in advertising and marketing campaigns worldwide, and he was paid a base endorsement fee by all the sponsors.
Acushnet, TaylorMade and Izod also pro-rated the base endorsement fee if he did not annually play in a specific number of golf tournaments, the court noted. The three companies also paid him a bonus if he achieved a specific finish in a PGA or European Tour tournament, or reached a specific spot on the World Golf Rankings.
Goosen characterized the endorsement fees and bonuses from Acushnet, TaylorMade and Izod as 50 percent services income and 50 percent royalty income on his nonresident federal income tax returns for 2002 and 2003. The endorsement fees from Upper Deck, Electronic Arts and Rolex were characterized as 100 percent royalty income.
The golfer reported approximately 7 percent of the total endorsement income as U.S. source income. The IRS, however, determined that he should have characterized the endorsement fees and bonuses from Acushnet, TaylorMade and IZod as 100 percent personal services income. The IRS also re-allocated a larger percentage of his endorsement fees as U.S. source income. The Tax Court ruled on June 9th that the endorsement fees and bonuses Goosen had received from Acushnet, TaylorMade and Izod should be allocated 50 percent to personal services income and 50 percent to royalty income, and that the royalty income he had received from Acushnet, TaylorMade and Izod was 50 percent U.S.-source income effectively connected with a U.S. trade or business. The court also held that the royalty income he had received from Rolex was 50 percent U.S.-source income not effectively connected with a U.S. trade or business.
However, the royalty income he had received from the Upper Deck was considered by the court to be 92 percent U.S.-source income not effectively connected with a U.S. trade or business. In addition, the royalty he received from Electronic Arts was deemed 70 percent U.S.-source income not effectively connected with a U.S. trade or business. On top of that, the court ruled that Goosen should not benefit from any provision under either the 1975 or the 2001 income tax treaty between the United States and the United Kingdom.
Friday, June 24, 2011
SAVE TAXES BY HIRING YOUR CHILDREN (PART 2)
Last week I talked about hiring your children. Here is additional information that you need to be aware of.
What about income tax withholding?
Your business may have to withhold federal income taxes on your child’s wages. It is possible for the child to avoid withholding by claiming exempt status if he or she:
• had no federal income tax liability for last year, and
• expects to have none for this year.
However, exemption from withholding can't be claimed if:
• the employee's income exceeds $950 for 2011, and includes more than $300 of unearned income (such as dividends), and
• the employee can be claimed as a dependent on someone else's return.
Keep in mind that your child probably will get a refund for part or all of the withheld tax when he or she files a return for the year.
Social security tax savings too.
If your business is not incorporated, you can also save some self-employment (i.e., social security) tax dollars by shifting some of your earnings to a child. That's because employment for FICA tax purposes doesn't include services performed by a child under the age of 18 while employed by a parent.
Example:
Let’s say a sole proprietor who usually takes $120,000 of earnings from the business pays $5,800 to her 17-year-old child in 2011. The sole proprietor's self-employment income would be reduced by $5,800, saving her $168.20 (the 2.9% Medicare portion of the self employment tax she would have paid on the $5,800 shifted to her daughter). This doesn't take into account a sole proprietor's income tax deduction for one-half of his or her own social security taxes.
A similar, but more liberal exemption applies for FUTA, which exempts earnings paid to a child under age 21 while employed by his or her parent.
The FICA and FUTA exemptions also apply if a child is employed by a partnership consisting solely of his parents.
Note that there is no FICA or FUTA exemption for employing a child if your business is incorporated or a partnership that includes non-parent partners. However, there's no extra cost to your business if you're paying a child for work you'd pay someone else to do anyway.
Keep in mind that some of the rules about employing children (such as the maximum amount they can earn tax-free) change from year to year, and may require your income shifting strategy to change too.
What about income tax withholding?
Your business may have to withhold federal income taxes on your child’s wages. It is possible for the child to avoid withholding by claiming exempt status if he or she:
• had no federal income tax liability for last year, and
• expects to have none for this year.
However, exemption from withholding can't be claimed if:
• the employee's income exceeds $950 for 2011, and includes more than $300 of unearned income (such as dividends), and
• the employee can be claimed as a dependent on someone else's return.
Keep in mind that your child probably will get a refund for part or all of the withheld tax when he or she files a return for the year.
Social security tax savings too.
If your business is not incorporated, you can also save some self-employment (i.e., social security) tax dollars by shifting some of your earnings to a child. That's because employment for FICA tax purposes doesn't include services performed by a child under the age of 18 while employed by a parent.
Example:
Let’s say a sole proprietor who usually takes $120,000 of earnings from the business pays $5,800 to her 17-year-old child in 2011. The sole proprietor's self-employment income would be reduced by $5,800, saving her $168.20 (the 2.9% Medicare portion of the self employment tax she would have paid on the $5,800 shifted to her daughter). This doesn't take into account a sole proprietor's income tax deduction for one-half of his or her own social security taxes.
A similar, but more liberal exemption applies for FUTA, which exempts earnings paid to a child under age 21 while employed by his or her parent.
The FICA and FUTA exemptions also apply if a child is employed by a partnership consisting solely of his parents.
Note that there is no FICA or FUTA exemption for employing a child if your business is incorporated or a partnership that includes non-parent partners. However, there's no extra cost to your business if you're paying a child for work you'd pay someone else to do anyway.
Keep in mind that some of the rules about employing children (such as the maximum amount they can earn tax-free) change from year to year, and may require your income shifting strategy to change too.
Thursday, June 23, 2011
IRS INCREASES MILEAGE RATE TO 55.5 CENTS PER MILE
WASHINGTON — The Internal Revenue Service today announced an increase in the optional standard mileage rates for the final six months of 2011. Taxpayers may use the optional standard rates to calculate the deductible costs of operating an automobile for business and other purposes.
The rate will increase to 55.5 cents a mile for all business miles driven from July 1, 2011, through Dec. 31, 2011. This is an increase of 4.5 cents from the 51 cent rate in effect for the first six months of 2011, as set forth in Revenue Procedure 2010-51.
In recognition of recent gasoline price increases, the IRS made this special adjustment for the final months of 2011. The IRS normally updates the mileage rates once a year in the fall for the next calendar year.
"This year's increased gas prices are having a major impact on individual Americans. The IRS is adjusting the standard mileage rates to better reflect the recent increase in gas prices," said IRS Commissioner Doug Shulman. "We are taking this step so the reimbursement rate will be fair to taxpayers."
While gasoline is a significant factor in the mileage figure, other items enter into the calculation of mileage rates, such as depreciation and insurance and other fixed and variable costs.
The optional business standard mileage rate is used to compute the deductible costs of operating an automobile for business use in lieu of tracking actual costs. This rate is also used as a benchmark by the federal government and many businesses to reimburse their employees for mileage.
The new six-month rate for computing deductible medical or moving expenses will also increase by 4.5 cents to 23.5 cents a mile, up from 19 cents for the first six months of 2011. The rate for providing services for charitable organizations is set by statute, not the IRS, and remains at 14 cents a mile.
Taxpayers always have the option of calculating the actual costs of using their vehicle rather than using the standard mileage rates.
MILEAGE RATE CHANGES
Rates 1/1 through 6/30/11
Business: 51
Medical/Moving: 19
Charitable: 14
Rates 7/1 through 12/31/11
Business: 55.5
Medical/Moving: 23.5
Charitable: 14
The rate will increase to 55.5 cents a mile for all business miles driven from July 1, 2011, through Dec. 31, 2011. This is an increase of 4.5 cents from the 51 cent rate in effect for the first six months of 2011, as set forth in Revenue Procedure 2010-51.
In recognition of recent gasoline price increases, the IRS made this special adjustment for the final months of 2011. The IRS normally updates the mileage rates once a year in the fall for the next calendar year.
"This year's increased gas prices are having a major impact on individual Americans. The IRS is adjusting the standard mileage rates to better reflect the recent increase in gas prices," said IRS Commissioner Doug Shulman. "We are taking this step so the reimbursement rate will be fair to taxpayers."
While gasoline is a significant factor in the mileage figure, other items enter into the calculation of mileage rates, such as depreciation and insurance and other fixed and variable costs.
The optional business standard mileage rate is used to compute the deductible costs of operating an automobile for business use in lieu of tracking actual costs. This rate is also used as a benchmark by the federal government and many businesses to reimburse their employees for mileage.
The new six-month rate for computing deductible medical or moving expenses will also increase by 4.5 cents to 23.5 cents a mile, up from 19 cents for the first six months of 2011. The rate for providing services for charitable organizations is set by statute, not the IRS, and remains at 14 cents a mile.
Taxpayers always have the option of calculating the actual costs of using their vehicle rather than using the standard mileage rates.
MILEAGE RATE CHANGES
Rates 1/1 through 6/30/11
Business: 51
Medical/Moving: 19
Charitable: 14
Rates 7/1 through 12/31/11
Business: 55.5
Medical/Moving: 23.5
Charitable: 14
Wednesday, June 22, 2011
IRS RECOGNIZED FOR CLEAR WRITING
You aren’t going to believe this – The IRS received an award for the written clarity of its official notices, while insurance provider, CareFirst Blue Cross Blue Shield of Maryland received an award for the most confusing language.
Here is an example from the tax code on the “simple” language about the home sale exclusion. Does this look clear to you?
§ 121 Exclusion of gain from sale of principal residence.
________________________________________
(a) New Law Analysis Exclusion.
Gross income shall not include gain from the sale or exchange of property if, during the 5-year period ending on the date of the sale or exchange, such property has been owned and used by the taxpayer as the taxpayer's principal residence for periods aggregating 2 years or more.
(b) Limitations.
(1 In general.
The amount of gain excluded from gross income under subsection (a) with respect to any sale or exchange shall not exceed $250,000.
(2) Special rules for joint returns.
In the case of a husband and wife who make a joint return for the taxable year of the sale or exchange of the property—
(A) $500,000 limitation for certain joint returns. Paragraph (1) shall be applied by substituting “$500,000” for “$250,000” if—
(i) either spouse meets the ownership requirements of subsection (a) with respect to such property;
(ii) both spouses meet the use requirements of subsection (a) with respect to such property; and
(iii) neither spouse is ineligible for the benefits of subsection (a) with respect to such property by reason of paragraph (3).
(B) Other joint returns. If such spouses do not meet the requirements of subparagraph (A) , the limitation under paragraph (1) shall be the sum of the limitations under paragraph (1) to which each spouse would be entitled if such spouses had not been married. For purposes of the preceding sentence, each spouse shall be treated as owning the property during the period that either spouse owned the property.
(3) Application to only 1 sale or exchange every 2 years.
(A) In general. Subsection (a) shall not apply to any sale or exchange by the taxpayer if, during the 2-year period ending on the date of such sale or exchange, there was any other sale or exchange by the taxpayer to which subsection (a) applied.
(B) Pre-May 7, 1997, sales not taken into account. Subparagraph (A) shall be applied without regard to any sale or exchange before May 7, 1997.
Here is an example from the tax code on the “simple” language about the home sale exclusion. Does this look clear to you?
§ 121 Exclusion of gain from sale of principal residence.
________________________________________
(a) New Law Analysis Exclusion.
Gross income shall not include gain from the sale or exchange of property if, during the 5-year period ending on the date of the sale or exchange, such property has been owned and used by the taxpayer as the taxpayer's principal residence for periods aggregating 2 years or more.
(b) Limitations.
(1 In general.
The amount of gain excluded from gross income under subsection (a) with respect to any sale or exchange shall not exceed $250,000.
(2) Special rules for joint returns.
In the case of a husband and wife who make a joint return for the taxable year of the sale or exchange of the property—
(A) $500,000 limitation for certain joint returns. Paragraph (1) shall be applied by substituting “$500,000” for “$250,000” if—
(i) either spouse meets the ownership requirements of subsection (a) with respect to such property;
(ii) both spouses meet the use requirements of subsection (a) with respect to such property; and
(iii) neither spouse is ineligible for the benefits of subsection (a) with respect to such property by reason of paragraph (3).
(B) Other joint returns. If such spouses do not meet the requirements of subparagraph (A) , the limitation under paragraph (1) shall be the sum of the limitations under paragraph (1) to which each spouse would be entitled if such spouses had not been married. For purposes of the preceding sentence, each spouse shall be treated as owning the property during the period that either spouse owned the property.
(3) Application to only 1 sale or exchange every 2 years.
(A) In general. Subsection (a) shall not apply to any sale or exchange by the taxpayer if, during the 2-year period ending on the date of such sale or exchange, there was any other sale or exchange by the taxpayer to which subsection (a) applied.
(B) Pre-May 7, 1997, sales not taken into account. Subparagraph (A) shall be applied without regard to any sale or exchange before May 7, 1997.
YOUR HOUSEHOLD'S SHARE OF UNFUNDED OBLIGATIONS: $527,000
This is a scary, but true fact that we all need to be worried about. I am sure you already have heard this, but...(USA TODAY) – The federal government’s financial condition deteriorated rapidly last year, far beyond the $1.5 trillion in new debt taken on to finance the budget deficit, a USA Today analysis shows.
The government added $5.3 trillion in new financial obligations in 2010, largely for retirement programs such as Medicare and Social Security. That brings to a record of $61.6 trillion the total of financial promises not paid for.
This gap between spending commitments and revenue last year equals more than one-third of the nation’s gross domestic product.
Medicare alone took on $1.8 trillion in new liabilities, more than the record deficit that’s prompting heated debate between Congress and the White House over lifting the debt ceiling.
Social Security added $1.4 trillion in obligations, partly reflecting longer life expectancies. Federal and military retirement programs also added to the financial hole.
Corporations would be required to count these new liabilities when they were taken on – and report a big loss to shareholders. Unlike businesses, however, Congress postpones recording spending commitments until it writes a check.
The government added $5.3 trillion in new financial obligations in 2010, largely for retirement programs such as Medicare and Social Security. That brings to a record of $61.6 trillion the total of financial promises not paid for.
This gap between spending commitments and revenue last year equals more than one-third of the nation’s gross domestic product.
Medicare alone took on $1.8 trillion in new liabilities, more than the record deficit that’s prompting heated debate between Congress and the White House over lifting the debt ceiling.
Social Security added $1.4 trillion in obligations, partly reflecting longer life expectancies. Federal and military retirement programs also added to the financial hole.
Corporations would be required to count these new liabilities when they were taken on – and report a big loss to shareholders. Unlike businesses, however, Congress postpones recording spending commitments until it writes a check.
The $61.6 trillion in unfunded obligations amounts to $527,000 per household. That’s more than five times what Americans have borrowed for everything else – mortgages, car loans and other debt. It reflects the challenge as the number of retirees soars over the next 20 years and seniors try to collect on those spending promises.
“The (federal) debt only tells us what the government owes to the public. It doesn’t take into account what’s owed to seniors, veterans and retired employees,” said accountant, Sheila Weinberg, founder of the Institute for Truth in Accounting, a Chicago-based group that advocates better financial reporting. “Without accurate accounting, we can’t make good decisions”.
USA Today has calculated federal finances based on standard accounting rules since 2004 using data from the Medicare and Social Security annual reports and the little-known audited financial report of the federal government.
“The (federal) debt only tells us what the government owes to the public. It doesn’t take into account what’s owed to seniors, veterans and retired employees,” said accountant, Sheila Weinberg, founder of the Institute for Truth in Accounting, a Chicago-based group that advocates better financial reporting. “Without accurate accounting, we can’t make good decisions”.
USA Today has calculated federal finances based on standard accounting rules since 2004 using data from the Medicare and Social Security annual reports and the little-known audited financial report of the federal government.
Saturday, June 18, 2011
McCASKILL TO PAY BACK TAXES ON PRIVATE PLANE
Sen. Claire McCaskill, D-Mo., said she would pay $287,273 in property taxes owed on a private plane that she and her husband co-own.
McCaskill said she and her husband plan to sell the aircraft immediately. “I have convinced my husband to sell the damn plane,” she said on a conference call, according to Politico.com. “I will never set foot on the plane again.”
McCaskill was reported to have spent $76,000 from her Senate budget to travel on the plane over the past four years. McCaskill said she had not tried to evade taxes on the plane and noted that she had paid $38,800 in sales taxes on the aircraft.
She said she accepted full responsibility for the mistake, but noted that she should not have assumed that others would have made sure the property tax had been paid.
McCaskill said she and her husband plan to sell the aircraft immediately. “I have convinced my husband to sell the damn plane,” she said on a conference call, according to Politico.com. “I will never set foot on the plane again.”
McCaskill was reported to have spent $76,000 from her Senate budget to travel on the plane over the past four years. McCaskill said she had not tried to evade taxes on the plane and noted that she had paid $38,800 in sales taxes on the aircraft.
She said she accepted full responsibility for the mistake, but noted that she should not have assumed that others would have made sure the property tax had been paid.
Friday, June 17, 2011
CONFISCATE IRAS AND 401K
Q. Last week a co-worker of mine claimed that Congress recently introduced a bill that called for a government take-over of IRA’s and 401K plans and would offer a 3% rate of return. Talk of the idea that Washington will not cut spending nor raise taxes and will go after the pension funds, as that is where the money is, has circulated the internet and talk radio for several years. One individual advised people to cash in their pension funds to pay their taxes and be happy with what is left! What is your take on this?
A: I read about this a while back and am not too concerned about the pension change. As you know, there are a lot of ideas that have floated in Washington that have never seen the light of day. I have not seen anything on this for over a year and it could have been one piece of one of those blog scares. There has not been anything in the tax announcements from our library or from the IRS.
A: I read about this a while back and am not too concerned about the pension change. As you know, there are a lot of ideas that have floated in Washington that have never seen the light of day. I have not seen anything on this for over a year and it could have been one piece of one of those blog scares. There has not been anything in the tax announcements from our library or from the IRS.
Wednesday, June 15, 2011
SAVE TAXES BY HIRING YOUR CHILDREN (PART 1)
Summer is here and it is time to consider saving taxes by hiring the kids. If you own a business you can save family income and payroll taxes by putting younger family members on the payroll. You may be able to turn high-taxed income into tax-free or low-taxed income, achieve social security tax savings (depending on how your business is organized) and even make retirement plan contributions for your child. In addition, employment of a child under age 18 (or if a full-time student, age 19–23) may be a way to save taxes on the child’s unearned income.
Here are the key considerations:
Turning your income into tax-free or low-taxed income.
You can turn some of your income into tax-free or low-taxed income by shifting some of your business earnings to a child as wages for services performed by him or her. In order for your business to deduct the wages as a business expense, the work done by the child must be legitimate and the child’s salary must be reasonable.
Example:
Suppose a business owner operating as a sole proprietor is in the 35% tax bracket. He hires his 17-year-old daughter to help with office work full-time during the summer and part-time into the fall. She earns $5,800 during the year (and doesn't have earnings from other sources).
The business owner saves $2,030.00 (35% of $5,800) in income taxes at no tax cost to his daughter, who can use her $5,800 standard deduction for 2011 to completely shelter her earnings. The business owner could save an additional $1,750 in taxes if he could keep his daughter on the payroll for a longer period and pay her an additional $5,000. She could shelter the additional amount from tax by making a tax-deductible contribution to her own traditional IRA.
More on shifting to family members next week.
Here are the key considerations:
Turning your income into tax-free or low-taxed income.
You can turn some of your income into tax-free or low-taxed income by shifting some of your business earnings to a child as wages for services performed by him or her. In order for your business to deduct the wages as a business expense, the work done by the child must be legitimate and the child’s salary must be reasonable.
Example:
Suppose a business owner operating as a sole proprietor is in the 35% tax bracket. He hires his 17-year-old daughter to help with office work full-time during the summer and part-time into the fall. She earns $5,800 during the year (and doesn't have earnings from other sources).
The business owner saves $2,030.00 (35% of $5,800) in income taxes at no tax cost to his daughter, who can use her $5,800 standard deduction for 2011 to completely shelter her earnings. The business owner could save an additional $1,750 in taxes if he could keep his daughter on the payroll for a longer period and pay her an additional $5,000. She could shelter the additional amount from tax by making a tax-deductible contribution to her own traditional IRA.
More on shifting to family members next week.
Tuesday, June 14, 2011
VERY IMPORTANT INFORMATION FOR EMPLOYERS
Because of the declining employment, there was a .2% federal unemployment tax surcharge that the government placed in effect from January 1, 2011, through June 30, 2011.
Unless Congress takes action soon, the .2% federal unemployment tax FUTA will actually expire. An IRS spokesman indicated that if the surtax is not extended, employers will need to simply track FUTA taxes paid before July 1st and after June 30th.
We’ll keep you posted if things should extend the surtax. With low employment numbers where they are, I wouldn’t be surprised.
Unless Congress takes action soon, the .2% federal unemployment tax FUTA will actually expire. An IRS spokesman indicated that if the surtax is not extended, employers will need to simply track FUTA taxes paid before July 1st and after June 30th.
We’ll keep you posted if things should extend the surtax. With low employment numbers where they are, I wouldn’t be surprised.
Monday, June 13, 2011
IRS ERRONEOUSLY GAVE OUT $151 MILLION IN AUTO TAX BREAKS
Do you remember the credit that government gave out a couple of years ago if you purchased a new car? The tax incentive was designed to boost vehicle sales by allowing taxpayers up to a certain income level to deduct some state and local taxes from buying a car, light truck, motorcycle or motor home between February 2009 and January 2010. The deduction expired Dec. 31, 2009, and hasn’t been extended.
Now the IRS tells us that they stumbled in handling a tax incentive designed to promote automobile sales, handing a tax incentive designed to promote automobile sales, handing out more than $151 million in erroneous deductions, as well as 473 credits given to people who were imprisoned, dead or underage.
The IRS missed 4,257 individuals who claimed more than $151 million in underserved tax deductions as part of the 2009 stimulus package program designed to boost automobile sales.
In 473 cases, the tax agency erroneously allowed 439 prisoners who were in jail the entire year, 16 dead people and 18 children under the age of 15 to claim just over $1 million in deductions.
Now the IRS tells us that they stumbled in handling a tax incentive designed to promote automobile sales, handing a tax incentive designed to promote automobile sales, handing out more than $151 million in erroneous deductions, as well as 473 credits given to people who were imprisoned, dead or underage.
The IRS missed 4,257 individuals who claimed more than $151 million in underserved tax deductions as part of the 2009 stimulus package program designed to boost automobile sales.
In 473 cases, the tax agency erroneously allowed 439 prisoners who were in jail the entire year, 16 dead people and 18 children under the age of 15 to claim just over $1 million in deductions.
Friday, June 10, 2011
MOODY'S ISSUES WARNING ON DEBT LIMIT
If you have been following my blogs, you know that I am concerned about the federal government’s debt load. Now theHill.com reports, "If policymakers cannot make progress on a deal to raise the debt limit in the next few weeks, the nation's credit rating could be endangered", Moody's Investors Service said Thursday. According to The Hill newspaper, "The credit rating agency said in a statement that it was surprised by the level of political gamesmanship surrounding the debt-limit debate," and that "a long-term deficit-reduction deal must be reached as part of a deal to raise the $14.3 trillion limit if the nation wants to protect its perfect AAA rating."
http://thehill.com/blogs/on-the-money/801-economy/164455-moodys-issues-debt-limit-warning
You don’t have to be a CPA to know that you cannot continue to spend more than you make.
http://thehill.com/blogs/on-the-money/801-economy/164455-moodys-issues-debt-limit-warning
You don’t have to be a CPA to know that you cannot continue to spend more than you make.
Thursday, June 9, 2011
HOME OFFICE DEDUCTIONS
Q. In a previous issue, you stated that you could deduct home office expenses based on the number of rooms in the home. Do you have any authority for this statement?
A. Yes. Typically, home office deductions are based on the percentage of business use (square footage of the business portion of the home divided by the total square footage). But the IRS says in Publication 587, Business Use of Your Home, a taxpayer can base the percentage on the number of rooms if the rooms are about the same size. Say you use one room of an eight-room house for business. The room is 300 square feet out of a total of 3,000 square feet. In this case, the “rooms method” (12.5%) yields a bigger deduction than the square-footage method (10%).
You can find the IRS publication at www.IRS.gov.
A. Yes. Typically, home office deductions are based on the percentage of business use (square footage of the business portion of the home divided by the total square footage). But the IRS says in Publication 587, Business Use of Your Home, a taxpayer can base the percentage on the number of rooms if the rooms are about the same size. Say you use one room of an eight-room house for business. The room is 300 square feet out of a total of 3,000 square feet. In this case, the “rooms method” (12.5%) yields a bigger deduction than the square-footage method (10%).
You can find the IRS publication at www.IRS.gov.
CELEBRITY TAX PROBLEM OF THE WEEK
Casey Anthony on Trial, Liened by IRS
It has been quite an eventful month for Casey Anthony. The 25-year-old Florida woman faced prosecutors in court for the first time this month on charges of first-degree murder in connection with the 2008 death of her daughter, Caylee. Caylee was reported missing to the Orange County Sheriff’s Office on July 15, 2008, by her grandmother, Cynthia Anthony. Prosecutors allege that Casey killed Caylee because the little girl was complicating her dating and social life, while the defense alleges that Caylee accidentally drowned in the family pool.
It has been quite an eventful month for Casey Anthony. The 25-year-old Florida woman faced prosecutors in court for the first time this month on charges of first-degree murder in connection with the 2008 death of her daughter, Caylee. Caylee was reported missing to the Orange County Sheriff’s Office on July 15, 2008, by her grandmother, Cynthia Anthony. Prosecutors allege that Casey killed Caylee because the little girl was complicating her dating and social life, while the defense alleges that Caylee accidentally drowned in the family pool.
Just days before opening arguments in Anthony’s murder trial, the IRS filed a federal tax lien against Casey, claiming she owes $68,520.41 in unpaid federal income taxes, interest and penalties. The lien is for the same year, 2008, in which Caylee was allegedly murdered.
Casey Anthony was arrested three times between July 2008 and October 2008 on various charges ranging from forgery, fraudulent use of personal information, and petty theft. She was arrested a fourth time in October 2008, those charges related to the murder of her daughter. It is not clear whether Casey held a regular job at any point during that year although at one point, she had worked as a manager at a nightclub. An acquaintance testified at trial that Casey Anthony told her that she paid a nanny at least $400 per week for childcare, and one would assume that would be so that she could work. Of course, she would have had to have done quite well over the course of her employment that year to run up a tax bill of over $68,000. Under the circumstances, it isn’t likely that the income is solely attributed to wages.
It seems that Casey might be taking a page from former Survivor champion Richard Hatch’s playbook. A television network – in this case, ABC – had a deal with Anthony to pay $200,000 in exchange for family videos and photos. As we know from the Hatch case, this makes it taxable to the recipient. If the money was paid directly to Casey (or on her behalf), she would be responsible for reporting the money to the IRS and paying any related taxes due.
The deal was allegedly crafted with ABC by Anthony’s attorney with the understanding that the money was going to be used for defense costs. That would be a great deal for her defense attorney but unfortunately for Casey, attorney’s fees for personal reasons (and that would include criminal defense work for a homicide case) are not deductible on your federal income tax return.
Assuming a 33% tax rate for a single taxpayer in 2008, that $200,000 ABC payment would likely result in a tax bill approximating that $68,520.41 lien. That’s a little bit of educated speculation on my part and I can’t say for certain that the payment resulted in the lien though the evidence tends to suggest that it did. What is clear is that with Anthony’s freedom – and future – in limbo until after the trial, it’s likely that the IRS may never collect.
TAXABLE INVESTMENT SEMINAR MEAL
Q. I received an invitation for a free meal at an investment seminar. Is this taxable, if I go?
A: No. The event is governed by the tax rules for meal and entertainment expenses. Therefore, as the recipient of the meal, you don’t owe any income tax on this benefit. But, it’s not completely “free”. Undoubtedly, you’ll have to listen to a sales pitch from a financial planner, plus, you may have to endure follow-up contacts.
A: No. The event is governed by the tax rules for meal and entertainment expenses. Therefore, as the recipient of the meal, you don’t owe any income tax on this benefit. But, it’s not completely “free”. Undoubtedly, you’ll have to listen to a sales pitch from a financial planner, plus, you may have to endure follow-up contacts.
Tuesday, June 7, 2011
DEDUCTIBLE HOME ENTERTAINMENT
Q. In a recent article, you said you can deduct home entertainment even if you never discuss business at the party. Is this really possible?
A. Yes. The first paragraph of the article you reference explains that deductible entertainment may precede or follow a substantial business discussion. Later on I mentioned that business doesn’t actually have to be discussed during the party, which is true, although a prior or subsequent business discussion is implied.
Don’t forget that only the amount attributable to business guests at a house party is deductible. Deductions are limited to 50% of qualified expenses, but if this is a company party such as a Christmas party or summer outing, then the costs are 100% deductible.
A. Yes. The first paragraph of the article you reference explains that deductible entertainment may precede or follow a substantial business discussion. Later on I mentioned that business doesn’t actually have to be discussed during the party, which is true, although a prior or subsequent business discussion is implied.
Don’t forget that only the amount attributable to business guests at a house party is deductible. Deductions are limited to 50% of qualified expenses, but if this is a company party such as a Christmas party or summer outing, then the costs are 100% deductible.
Thursday, June 2, 2011
KNOW THE DIFFERENCE BETWEEN GIFTS AND COMPENSATION
If you give a favorite employee a big check at Christmas, you might consider it a gift, but the IRS will likely consider it income. Another example would be, that you have an employee this is getting married, so you purchase that expensive food processor and think that you made a gift. Nope! The IRS may just say that the value should be added back to the W-2.
It’s hard to believe, but these examples could be true even if the employee and owner are family. In one case, the IRS said payments to an owner’s daughter (who was an employee) were for the past services, not a gift.
If you have the occasion to make a gift to an employee, talk to us so that we can keep the IRS off of your back.
It’s hard to believe, but these examples could be true even if the employee and owner are family. In one case, the IRS said payments to an owner’s daughter (who was an employee) were for the past services, not a gift.
If you have the occasion to make a gift to an employee, talk to us so that we can keep the IRS off of your back.
Wednesday, June 1, 2011
BEWARE OF PHONY EMAILS FROM THE IRS
We’ve said it before and we’ll say it again: Never send personal financial data in response to unsolicited email. The IRS says scam artists are sending emails to random people, telling them they’re due for a refund or are under investigation. The message directs people to a fake IRS web site that asks for personal data. In reality, the IRS won’t contact you via e-mail.
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