income
What’s a 1099-K?
Friday, February 3rd, 2012 | consulting, tax | No Comments
Have you received a 1099-K this year? This new form reports electronic financial transactions. If your business takes debit or credit card payments, then you will receive a 1099-K if you process more than $20,000 AND more than 200 transactions.
Business tax returns contain a new line to report 1099-K amounts. For this tax season though, the IRS is deferring the requirement that you report your 1099-K income on this line. Instead, report your gross receipts as you have in the past on the appropriate line of the form. Forms 1065 and 1120 contain the instruction, “For 2011, enter zero.” The IRS has issued an advisory that tells filers of Form 1040 Schedules C, E, and F to do the same.
We anticipate that this will necessitate some record-keeping changes in 2012; for example, accounting for tips charged to a credit or debit card. We are assessing potential impacts of the new reporting requirements and advising our clients.
Payroll tax cut extension with a lump of coal
Thursday, January 5th, 2012 | tax | No Comments
Congress extended the payroll tax cut for sixty days after weeks of posturing. The 2% reduction in Social Security tax withholding will continue to put a little extra money in employees’ pockets through the end of February 2012, but Congress threw in a lump of coal with its Christmas gift. If you earn too much in January and February, you will be required to pay back part of that 2% tax cut when you file your tax return next year.
Here’s how it works. Everyone pays Social Security tax on earned income up to a yearly maximum ($110,100 in 2012). If you earned that amount equally over the course of the year, in two months you would earn $18,350. This law says that if you earn more than $18,350 in the first two months of 2012, you must pay back the 2% tax cut you received on the excess. You will report that on your tax return for 2012 when you file in 2013.
In other words, if you try to maximize your tax cut by accelerating your earned income for the year into January and February, it’s only temporary. Linda Dyer, our firm’s tax guru, has calculated that the most you will have to pay back is $1,835 if you get paid the maximum $110,100 in January and February [($110,100-$18,350)x2%].
Not even Santa Claus knows what good or bad will come out of the next round of negotiations aimed at extending the payroll tax cut for the entire year. We can hope that this lump of coal disappears in the hot air sure to circulate in the halls of the Capitol this winter.
Offshore voluntary disclosure deadline
Tuesday, August 9th, 2011 | consulting, tax | No Comments
The deadline in the IRS Offshore Voluntary Disclosure Initiative is August 31. For several years, the IRS has required taxpayers to disclose their accounts and income from foreign countries. The 2011 program offers taxpayers penalty reductions if they voluntarily disclose their offshore holdings and income rather than waiting for the IRS to find them.
The foreign financial account disclosure regulations carry onerous civil and criminal penalties for hiding offshore accounts and income. If you are concerned about your exposure to the IRS foreign financial account disclosure requirements, please contact us right away to discuss your options.
Minimize capital gains tax
Thursday, March 31st, 2011 | consulting, tax | No Comments
When you sell an asset for more than your investment in it, the IRS says you must pay tax on the difference, called capital gain. For some years, the tax rate on such gains has been lower than regular rates if the asset is held for a long term (currently, more than one year). Hence the nickname, capital gains tax. The asset may be stocks, bonds, mutual funds, other assets such as equipment and real estate, or an entire company.
On the tax return, short-term and long-term capital gains and losses are accumulated in a specific manner to arrive at net short-term and long-term capital gain or loss from which the tax is calculated.
With good planning, there are several methods that you might use to minimize capital gains, and thereby minimize the tax you must pay on them. Here are six tips (with nods to Alan Haft, CPA Insider):
- When selling stock, specify which shares to sell. By choosing, you can decide the amount of gain or loss on the sale. This method can be used in conjunction with other sales to exercise some control over the net capital gain or loss amount reported on the tax return.
- Make all gains long-term. In 2010, short term capital gains are taxed at your ordinary income tax rate, which can be as high as 35% depending upon your income level. Long-term capital gains are taxed at a maximum of 15%, with additional breaks for lower-income taxpayers. So by holding onto your assets at least one year before selling, you take advantage of the lower tax rate on long-term gains.
- Use capital losses to offset capital gains. Short-term and long-term capital losses reduce their respective gains dollar-for-dollar. If you have more capital losses than gains, the net loss can reduce other income. This loss utilization is limited to $3,000 per year, but the excess loss can be carried forward to future years.
- Replace losing investments. If a stock or fund investment is depressed, you may sell it to lock in a tax loss. If you still believe it’s a good investment, wait 30 days before buying into it again to avoid the “wash-sale” rule. If you buy an identical stock within a period 30 days before or after the sale, the wash-sale rule prevents you from claiming a loss on the sale.
- Replace winners. The wash-sale rule does not apply when you sell an investment to lock in a gain. You may sell it and then buy it back immediately. You might do this if you have a loss to offset the gain, reducing the tax bill on the sale. When you buy the stock back at the higher price, you will pay less tax on future gains because your basis (the cost of the investment) is higher.
- Check mutual fund’s tax efficiency. If you invest in mutual funds, check a fund’s tax-efficiency ratio before investing. This is the percentage of total return you keep after taxes.
Another mutual fund idiosyncrasy is capital gains distributions. Funds may realize capital gains when they sell their underlying investments. During the financial meltdown, we saw large taxable capital gain distributions on 1099s even as mutual funds were losing value. Fund managers were forced to sell appreciated investments in order to redeem shares as investors pulled out of the funds. The resulting capital gains were distributed to all investors, who faced potential tax liability even though they remained fully invested and received no cash from the funds.
Tax impact is not the only criterion behind investment decisions, but it can play a part. By consulting with your CPA or an investment advisor familiar with tax implications, you can balance all factors to make the best decisions. Minimizing capital gains tax can be complicated, but with good planning, it can help you keep your money in your pocket and out of Uncle Sam’s.
What’s taxable? Prizes
Wednesday, March 16th, 2011 | tax | No Comments
What’s taxable? According to the IRS, all receipts from all sources in any form, unless specifically excluded from taxation. Did you win the lottery? Taxable, although you can deduct the cost of the lottery tickets you bought (you saved them as proof, right?) Did you win a TV in a giveaway? Taxable. ‘Tax-exempt’ interest income? Might be taxable, depending on your income and other factors.
A Houston man won coupons for a year’s supply of donuts and coffee at the Astros Fan Appreciation Day last year. Great, right? That sweetness took on a bitter aftertaste when he received a Form 1099 for the fair market value of the coupons, $927.61. He must report that as income and pay taxes on it, whether he uses the coupons or not.
One way to make the tax pill easier to swallow might be for him to donate some of the coupons to charity or use them to promote his business, brewing up tax deductions in the process. Thinking like that is how we help our clients make the best of their tax situations. How can we help solve your tax problem?
Avoid 1099 requirement
Thursday, February 10th, 2011 | consulting, tax | No Comments
The new credit card reporting rule has created a potential money-saving opportunity for businesses subject to 1099 reporting. Everyone engaged in a trade or business (including landlords beginning in 2011) must report payments of $600 or more to non-corporate service providers on Form 1099 to the payees and the IRS. Beginning January 1, 2011, banks and online payment networks are required to report credit card sales to participating merchants and the IRS on Form 1099-K.
The combination of these two rules created the specter of duplicate 1099s and a processing nightmare for payees receiving payments by credit card. The IRS has issued a regulation that exempts payments reported on Form 1099-K from duplicate reporting (e.g., on Form 1099-MISC). So if businesses and landlords pay their service providers by debit or credit card, they may be able to avoid the expense of issuing and filing Forms 1099.
If you are a service provider who normally receives Forms 1099 from your customers, you may see this new regulation as an opportunity to enhance your relationships and your cash flow by setting yourself up to accept debit and credit card payments. Payment networks charge a fee for processing transactions, but the process is easier than ever. Processing options even extend to smartphones, so you can process payments immediately at the work site. That sure beats the thirty- to sixty-day cycle of traditional invoicing and billing.
Renting to relatives
Monday, June 28th, 2010 | consulting, tax | No Comments
Renting property to your relatives can be a good thing. You know them, and you probably have a good idea of how they will take care of the property. You may consider renting to your retired parents or to your children attending college. You must play by IRS rules to retain the tax advantages of renting out property. If you don’t, the deductions will be disallowed while the income is taxed - a double tax hit. You may also suffer unfavorable tax consequences when you sell the property.
Special rules apply to rental of a residence (rental house or apartment) and to vacation home rental.
You must charge a fair rent to your relative on a residence to avoid having that property reclassified as a second home (and losing rental deductions).
- Prove fair rent by collecting third-party documentation about rents for similar properties in the area from the want ads and craigslist. Letters from property managers and independent appraisals are good evidence to support fair rent.
- Do not make gifts to help your tenant pay the rent. The gift will be deemed to reduce the rent, putting it below fair value and jeopardizing the rental claim.
- One alternative for your relative who needs rent money is gifting business assets and having your company lease them back so that your tenant receives rental income. Another option is to hire your relative, although that generates payroll taxes.
- You may consider a good-tenant discount of no more than 10%. One justification for this discount is that there is no need for a rental management company, passing the savings to the tenant.
- If you wish to set up a rent-to-own situation, you must follow the rules for a shared-equity financing agreement for the rental to stand.
- Your relative must use the rental property as a principal residence.
If you have a vacation home that you rent for part of the year and also use personally, the tax code provides a break on rental income. Your personal use of the vacation home must not exceed the greater of 14 days or 10% of rental days per year. If your relatives use the vacation home, their use counts toward these limits even if you charge fair rent. If your combined use exceeds these limits, the property becomes a second home, which makes the rent income taxable while eliminating the usual rent expense deductions.
If you are considering renting to relatives, a call to us will help ensure that everything is done in a way that secures the greatest tax advantages and best financial outcome for your family.
1099 Traps
Monday, March 1st, 2010 | tax | No Comments
The IRS computer-matches Forms 1099 with your tax return, so it’s important that you gather 1099’s from all sources and report them on your return even if they contain errors. There are ways to correct errors, but if the computers cannot match the numbers in the first place, they will automatically generate tax-due notices that are time-consuming to clear up. Read more in this article from Forbes magazine.