MY DAD WAS WRONG

I remember when I was a high school student my dad told me that I had a choice as I selected a career.  I could work for the private sector or I could work for the government.  He said that the government workers were pretty much guaranteed that they would not lose their job and they had a really good pension plan but that was offset by the fact that they were not paid as well. 

Little did he know how things would change.  Now they have job security, a good pension and are paid better.

TheHill.com reports that "the Congressional Budget Office found Monday that federal workers are compensated 16% more than comparable private-sector workers on average. ... For those with only a high-school degree, workers earned 21% more and were given benefits worth 72% more than in the private sector."  For federal workers with a college degree, "wages were about the same but benefits were 46% better in the government."  According to the story, "President Obama's 2013 budget request, due to be sent to Congress on Feb. 13, will ask for a 0.5% cost-of-living raise for workers."

To read more of this article: READ MORE

STATUTORY EMPLOYEE

Q: Hello, I am a sales consultant and I am on the road calling on customers. The company I worked for the last few years was bought out by a larger company. Prior to being bought out I was always treated as a statutory employee. When receiving our w2’s just a few days ago, we are not statutory employees. Does this mean we will owe a lot more in taxes? I really appreciate some information. Thank you.

A: This certainly is an issue for you. To give you the simple answer to your question: if you have a considerable amount of unreimbursed employee business expenses you are most likely going to pay significantly more in taxes. Having said that, all situations are different so to give you an accurate answer I would have to see your numbers.

Here is the deal. If you are a “statutory employee” your business deductions are deducted in determining your Adjusted Gross Income (bottom of page one of the 1040). You have been most likely filing a Schedule C to report those deductions. As an regular employee (non statutory) your employee business expenses are considered itemized deductions reported on schedule A.

What’s the difference you might ask? Well there are two differences. First employee business expenses are considered miscellaneous itemized deductions and therefore are only the amount greater than 2% of Adjusted Gross Income is deductible for regular tax calculations. Secondly, and the big thing, is that Miscellaneous Itemized Deductions are not deducted for Alternative Minimum Tax purposes. In other words, most people in that situation get no tax advantage from their employee business expenses.

I hope that this was helpful.

With normal disclaimers because I do not know your particular situation. Contact your tax advisor in order to determine how this impacts you personally

I WON A $55,000 FORD MUSTANG

Recently I was talking to an acquaintance of mine who’s tax work I am not involved with. I congratulated him on the hole in one that he had and the $55,000 Ford Mustang that went along with the ace. He said he talked to his tax guy and he realizes this will be taxable to him.

He said, “Because I won this car, I’m looking for all the deductions I can possibly get.”

I thought about his comment for a second and then I asked him, “Shouldn’t you always be looking for all the deductions you can get?”

He looked at me and said, “You know you’re right.”

The lesson here is the fair market value of the car that he won is going to be taxable to him. This will be ordinary income so if he’s in a 25% tax bracket plus a 7% state bracket, his income tax will be roughly $17,600. In addition to this, he has to buy license plates, pay property tax on the vehicle, plus the insurance. It’s still a good deal but at the same time there are some taxes involved.

But the real lesson to be learned is even if you don’t hit a hole in one and win a vehicle, you still should try to take all the deductions that are allowable.

S CORPORATION REASONABLE COMPENSATION

It seems that lately the IRS has been challenging owners of S corporations stating that their compensation is too low and reclassifying distributions (which are not subject to Social Security and Medicare tax) to wages. At a 15.3% rate this can get expensive. The key is to show that your wage is reasonable.

Here are the 5 factors that the courts look at:

1. The employee's role in the company
2. External comparison with other companies
3. Character and condition of the company
4. Potential conflicts of interest (The hypothetical independent investor)

5. Consistency in the compensation

DEADLINE COMING UP FOR FLEX PLANS

A deadline for many flex plan participants is coming up.  The 2011 set-asides must be used by March 15 if the plan uses IRS’ 2½-month grace period.  Any funds left over are forfeited. The deadline for other FSAs was Dec. 31, 2011.

Remember that after this year, the ceiling on FSA set-asides will drop to $2,500.

THE IRS WARNS OF REFUND DELAYS

Last week the Internal Revenue Service warned that tax refunds could be delayed a week this tax season because of new anti-fraud safeguards.

“The IRS has opened its filing season successfully this month, and refunds have started going out to many taxpayers,” the agency said in an email to tax professionals. “As with the start of any tax season, there are system validations that occur requiring some fine-tuning of our systems. As part of this, some taxpayers will receive refunds approximately one week later than initial projections they may have received, but these are still in line with historical refund delivery times.”

The IRS noted that the one-week delay is related to the fine-tuning of IRS systems to adjust for new safeguards that were put in place this tax season to provide for stronger protection against tax refund fraud. The agency has come under heavy criticism for the increasing number of identity theft cases related to tax refunds, and it recently added more stringent measures.

The IRS said it is providing additional screening for fraud this year before issuing refunds, but the vast majority of taxpayers can still continue to expect to receive their refunds in a timely fashion.

The IRS also noted that the refund time frames provided by the “Where’s My Refund” tool on its Web site are projected time frames and are subject to revision. “Many different factors can affect the timing of the refund after the IRS receives the return for processing,” said the agency. “The IRS apologizes for any inconvenience caused by the revised refund dates.”

The IRS promised that the delay only affects some early filers, and taxpayers whose returns were accepted by the IRS on or after January 26 would not experience the delay.

I CAN’T GET A W-2, NOW WHAT DO I DO?

Q.  A company that I worked for is now defunct and I don’t expect to get a W-2.  What do I do?

A. The short answer is file your return with a Form 4852, Substitute for Form W-2, Wage and Tax Statement.

Here is what is on the IRS web site dealing with your problem. 

 If you haven’t received your W-2, the IRS recommends that you follow these four steps:

1. Contact your employer  If you have not received your W-2, contact your employer to inquire if and when the W-2 was mailed.  If it was mailed, it may have been returned to the employer because of an incorrect or incomplete address.  After contacting the employer, allow a reasonable amount of time for them to resend or issue the W-2.

2. Contact the IRS  If you do not receive your W-2 by Feb. 14, contact the IRS for assistance at 800-829-1040. When you call, you must provide your name, address, Social Security number, phone number and have the following information:

•  Employer’s name, address and phone number

•  Dates of employment

•  An estimate of the wages you earned, the federal income tax withheld, and when you worked for that employer during 2011. The estimate should be based on year-to-date information from your final pay stub or leave-and-earnings statement, if possible.

3. File your return  You still must file your tax return or request an extension to file by April 17, 2012, even if you do not receive your Form W-2. If you have not received your Form W-2 in time to file your return by the due date, and have completed steps 1 and 2, you may use Form 4852, Substitute for Form W-2, Wage and Tax Statement. Attach Form 4852 to the return, estimating income and withholding taxes as accurately as possible.  There may be a delay in any refund due while the information is verified.

4. File a Form 1040X  On occasion, you may receive your missing W-2 after you file your return using Form 4852, and the information may be different from what you reported on your return. If this happens, you must amend your return by filing a Form 1040X, Amended U.S. Individual Income Tax Return.

Form 4852, Form 1040X and instructions are available on this website or by calling 800-TAX-FORM (800-829-3676).