Tri-Valley Tax & Financial Services Inc Blog http://www.mytrivalleytax.com/blog/ Read the latest articles from Tri-Valley Tax & Financial Services Inc en-us Tips to Avoid Tax Penalties for 2014 http://www.mytrivalleytax.com/blog/tips-to-avoid-tax-penalties-for-2014/39813 http://www.mytrivalleytax.com/blog/tips-to-avoid-tax-penalties-for-2014/39813 Tri-Valley Tax & Financial Services Inc Article Highlights: Under-distribution penalty Required minimum distributions Underpayment penalties Withholding Thanksgiving marks the beginning of the holiday season and the time when we begin to think about family get-togethers, holiday gift sharing and parties. But don’t overlook what comes right after the holidays: tax season. And don’t overlook a couple of things you can do now to avoid or reduce potential penalties on your 2014 tax return. Under-Distribution Penalty - If you are over 70-1/2 years of age, don’t forget to take your required minimum distribution (RMD) from your IRA account; otherwise you could face a penalty equal to 50% of what you should have taken as a distribution in 2014. The RMD is based on your age and the balance of the IRA account on December 31, 2013. Please call this office for the distribution percentage for your age. If you just turned 70-1/2 in 2014, you can delay your first RMD until 2015 (but you must take it by April 1). However, that means you will have to double up your distributions in 2015, taking the one for 2014 and the one for 2015. This may or may not be beneficial taxwise, depending on your tax brackets in each year. If 2014 was your retirement year, your income tax bracket may be higher than it will be for 2015, so it may be advantageous taxwise to delay the 2014 distribution until 2015. Underpayment Penalty - If you are a wage earner and have not been having enough income tax withheld from your paycheck to meet your tax liability for 2014, or if you also have taxable income from other sources, you may be facing the possibility of underpayment penalties. If your advance payments toward your 2014 tax liability, through withholding and estimated tax payments, are less than 90% of your 2014 tax liability or 100% (110% for high-income taxpayers) of your prior year tax liability, you will be hit with an underpayment penalty. There is no penalty if your tax liability is less than $1,000. The underpayment penalty is figured on a quarterly basis, so making an estimated tax payment late in the year will not reduce the penalties from earlier in the year. However, wage withholding is deemed paid evenly throughout the year, allowing you to mitigate underpayments earlier in the year by increasing your withholding late in the year. If your state has a state income tax, be sure to consider whether you also need to adjust your state income tax withholding to offset under-withholding earlier in the year to avoid or reduce a state underpayment penalty. If you have questions related to either of these issues, please give this office a call. Thu, 20 Nov 2014 19:00:00 GMT Year-End Planning Strategies to Lower Your Taxes http://www.mytrivalleytax.com/blog/year-end-planning-strategies-to-lower-your-taxes/39800 http://www.mytrivalleytax.com/blog/year-end-planning-strategies-to-lower-your-taxes/39800 Tri-Valley Tax & Financial Services Inc Article Highlights Retirement Plan Strategies Deduction Strategies Gifting Strategies Charitable Contribution Strategies Low- & High-income Year Strategies The following is a checklist that might help you save taxes if you act before the year’s end. Not all strategies will apply to everyone, but many clients will benefit from more than one item. Not all available strategies are listed either. If you are over 70 ½ years of age and have retirement plans, make sure you take the required minimum distribution before the end of the year. If you turned 70 ½ in 2014, you can wait until next year to take your distribution, provided you take it before April 2, 2015. You will still need to take another distribution for 2015, so if you delay the 2014 distribution until 2015, you will essentially be doubling your distributions for that year. The penalty for failing to make the proper distribution is an additional tax equal to 50% of the under-distribution amount. If you anticipate having a tax liability for 2014, you can increase your withholding for the balance of the year and eliminate or reduce underpayment penalties. Withholding is treated as paid evenly throughout the year, so additional withholding toward the end of the year can reduce penalties in earlier underpaid quarters as well. If you have stocks that have declined in value, you may wish to sell them before the end of the year and use the loss to offset other gains for the year or to produce a deductible loss. The net capital loss on a tax return is limited to $3,000 for the year, but any excess loss carries over to future years. You can repurchase them after 30-days have passed and avoid the wash sale rules. If a job-related bonus is expected to be paid around the end of the year, you might be able to defer that income into the following year if that is appropriate in your situation, such as when you expect less ‘other’ income next year. See if your employer is willing to put off payment until just after the first of the year. If itemizing deductions, a taxpayer can increase those deductions for the year by prepaying certain taxes. Consider one or both of the following: o Prepay the next installment of your property taxes before the end of 2014, or o Pay your 4th quarter state tax estimate in December. Caution: This strategy will not work if you are subject to the Alternative Minimum Tax (AMT), since taxes are not deductible for AMT purposes. Reduce your gift and estate taxes by making gifts before the year’s end. For 2014, the amount you may give without creating a gift tax filing requirement is $14,000 per person. You can make gifts each year to an unlimited number of individuals, but you can’t carry over unused annual gift tax exclusions from one year to the next. If you have a substantial gain in a stock or other asset you want to sell, but don’t want the resulting tax liability, there are a couple of techniques you can employ to simply give away the appreciated asset and let the recipient take the gain: o Charitable Gift – Consider replacing your cash charitable gifts with gifts of appreciated property. By giving the asset to your favorite charity, you receive a charitable contribution deduction equal to the fair market value of the gift and at the same time avoid having to report the gain from selling the asset on your return. However, the maximum deduction for gifts of this type can be as low as 20% or 30% of AGI as compared to 50% for cash gifts. Caution: If the value of the stock you are considering gifting is less than what you paid for it, sell it, take the loss on your return, and then contribute the cash to the charity. o Gifts to Individuals – Giving a gift of appreciated property to an individual (donee) transfers the gain from that property to the donee. This can work to your advantage by gifting the appreciated asset rather than giving the donee cash. Caution, this strategy will not work for children who are subject to the kiddie tax. If you are retired and taking IRA distributions, make sure that you are maximizing your withdrawal with respect to your tax bracket. It may be tax-effective to actually withdraw more than the minimum required by law. If you receive Social Security benefits, IRA distributions can sometimes be planned to minimize the taxability of this income. If you are marginally able to itemize each year, it may be appropriate to “bunch” deductions in one year and then claim the standard deduction in the alternate year. For example, by paying two years of church tithing or pledges to a charitable organization all in one year, deducting the total in that year, and the next year contributing nothing and taking the standard deduction, the combined tax for the two years may be less than if a contribution was made in each year. If your taxable income is low or a negative amount for the year, it may be appropriate to convert some or all of your taxable traditional IRA to a Roth IRA for little or no tax cost. Roth IRAs provide the benefit of tax-free income for retirement. If you qualify for one of the higher education tax credits and have not paid enough tuition during the year to achieve the maximum credit, the law allows you to prepay tuition for an academic period beginning within the first three months of the next year and claim the tuition for the current year’s credit. If you own an interest in a partnership or S corporation, you may need to increase your basis in the entity so you can deduct a loss from it for this year. Business clients also should consider making expenditures that qualify for the $25,000 business property expensing (Sec 179) election. If taxed by the AMT, you might consider deferring payments that would qualify as a “miscellaneous” itemized deduction, since you will receive no benefit for those expenses. On the other hand, if you are not taxed by the AMT, consider accelerating those expenses. If you’re thinking of making non-cash charitable donations, do so before the end of the year to maximize your charitable deduction. And remember that, if you write a check to make a charitable donation, it must be mailed by December 31 to count as a current-year deduction. The foregoing is a brief summary of several year-end tax strategies. However, you are cautioned not to implement them without first determining how they might impact your particular set of circumstances. Please call for a year-end tax planning appointment if you would like assistance from this office with comprehensive year-end tax planning. Wed, 19 Nov 2014 19:00:00 GMT December 2014 Individual Due Dates http://www.mytrivalleytax.com/blog/december-2014-individual-due-dates/35301 http://www.mytrivalleytax.com/blog/december-2014-individual-due-dates/35301 Tri-Valley Tax & Financial Services Inc December 1 - Time for Year-End Tax Planning December is the month to take final actions that can affect your tax result for 2014. Taxpayers with substantial increases or decreases in income, changes in marital status or dependent status, and those who sold property during 2014 should call for a tax planning consultation appointment. December 10 - Report Tips to Employer If you are an employee who works for tips and received more than $20 in tips during November, you are required to report them to your employer on IRS Form 4070 no later than December 10. Your employer is required to withhold FICA taxes and income tax withholding for these tips from your regular wages. If your regular wages are insufficient to cover the FICA and tax withholding, the employer will report the amount of the uncollected withholding in box 12 of your W-2 for the year. You will be required to pay the uncollected withholding when your return for the year is filed.December 31 - Last Day to Make Mandatory IRA Withdrawals Last day to withdraw funds from a Traditional IRA Account and avoid a penalty if you turned age 70½ before 2014. If the institution holding your IRA will not be open on December 31, you will need to arrange for withdrawal before that date.December 31 - Last Day to Pay Deductible Expenses for 2014 Last day to pay deductible expenses for the 2014 return (doesn’t apply to IRA, SEP or Keogh contributions, all of which can be made after December 31, 2014). Taxpayers who are making state estimated payments may find it advantageous to prepay the January state estimated tax payment in December (Please call the office for more information). December 31 - Caution! Last Day of the Year If the actions you wish to take cannot be completed on the 31st or a single day, you should consider taking action earlier than December 31st. Tue, 18 Nov 2014 19:00:00 GMT December 2014 Business Due Dates http://www.mytrivalleytax.com/blog/december-2014-business-due-dates/35302 http://www.mytrivalleytax.com/blog/december-2014-business-due-dates/35302 Tri-Valley Tax & Financial Services Inc December 15 - Social Security, Medicare and Withheld Income Tax If the monthly deposit rule applies, deposit the tax for payments in November.December 15 - Nonpayroll Withholding If the monthly deposit rule applies, deposit the tax for payments in November.December 15 - Corporations The fourth installment of estimated tax for 2014 calendar year corporations is due. December 31 - Last Day to Set Up a Keogh Account for 2014 If you are self-employed, December 31 is the last day to set up a Keogh Retirement Account if you plan to make a 2014 Contribution. If the institution where you plan to set up the account will not be open for business on the 31st, you will need to establish the plan before the 31st. Note: there are other options such as SEP plans that can be set up after the close of the year. Please call the office to discuss your options.December 31 - Caution! Last Day of the Year If the actions you wish to take cannot be completed on the 31st or a single day, you should consider taking action earlier than December 31st. Tue, 18 Nov 2014 19:00:00 GMT Recordkeeping Tips to Keep the IRS Away http://www.mytrivalleytax.com/blog/recordkeeping-tips-to-keep-the-irs-away/39797 http://www.mytrivalleytax.com/blog/recordkeeping-tips-to-keep-the-irs-away/39797 Tri-Valley Tax & Financial Services Inc Article Highlights: Tax Recordkeeping Tips Receipts Auto Deductions Gifts Business Equipment Ordinary and Necessary Meals & Lodging Entertainment Home Office With the ever-increasing complexity of our tax system, it is commonplace for many small businesses to make mistakes with bookkeeping and filing. One way to avoid making errors is to be aware of the most commonly encountered pitfalls. Here are some tips to help keep the proper records. Receipts – Even though the IRS does not require receipts for meal and entertainment expenses of less than $75, it is nevertheless wise to hang onto them. There is no better documentation than a credit card receipt since it has all the expense information required. All you need to do is write on the slip the purpose of the event, the individual you were with, and your business relationship with that person. Auto Deductions – Generally, small businesses use either the actual expense method or the optional mileage method of deducting the business use of a vehicle, and both must account for any personal use of the vehicles, including commuting. When using the actual expenses method, the deducible business portion of the expenses is determined by multiplying the total expenses by the percentage of business use, which is found by dividing the business miles driven by the total miles driven. When using the optional mileage method, the business miles are multiplied by the IRS published standard mileage rate, which is 56 cents per mile for 2014. So, regardless of the method used, make sure you keep track of the total and business use miles for the year since it is required for either option. Gifts – Do not overspend on gifts to clients and business associates. The IRS will allow a deduction of only up to $25 worth of gifts to any individual per year. Being too generous will cost you. With only that first $25 per recipient considered a deductible business expense, the rest will be nondeductible. For deductible gifts, be sure to keep a copy of the purchase receipt and note on it the business purpose for making the gift or the benefit you expect to receive, as well as the name of the person to whom you gave the gift, his/her occupation or title, or some other designation that will establish your business relationship to the individual. Business Equipment – Since equipment is considered a capital expenditure, it has to be depreciated. That is why lumping equipment together with supplies is not a good idea. This is true even when you elect to expense equipment purchases under Sec. 179. If the purchases are not reported properly, the IRS could rule that the expense was improperly characterized. If that is the case, you would not be entitled to the deduction claimed on your return. There could be other repercussions, leaving you with no current deduction at all. Ordinary and Necessary – To be deductible, an expense must be ordinary and necessary. An expense is “ordinary” if it is customary and conventional for the taxpayer’s line of business. A “necessary” expense is helpful in the taxpayer’s business; but it need not be indispensable. Meals and Lodging – When traveling for business, lodging is 100% deductible but the away-from-home meals deduction is limited to 50% of the cost. So, if the meals are charged to a hotel room, they must be accounted for separately, and keeping a copy of the statement from the hotel that shows the charges, as well as a credit card receipt or other payment receipt, is advisable. Entertainment at Sports Events and Theaters – When entertaining customers at sporting events and theaters, the deduction is limited to 50% of the face value of the ticket. The cost of the entertainment must be “directly related to” or “associated with” business or the production of income. Home Office Deductions – There are two methods for deducting the business use of a home. One is the conventional method of prorating the expenses (with some limitations) of the home by multiplying the allowable expenses times the business use square footage divided by the total square footage of the home. The other method, referred to as the simplified method, allows $5 per square foot deduction (maximum 300 square feet) without having to keep records of expenses. Both methods have the same eligibility requirements. Every business is unique, so if you need assistance in setting up your recordkeeping system or need further clarification on any of the topics discussed, please call this office. Tue, 18 Nov 2014 19:00:00 GMT Using Statements in QuickBooks - The Basics http://www.mytrivalleytax.com/blog/using-statements-in-quickbooks-the-basics/39815 http://www.mytrivalleytax.com/blog/using-statements-in-quickbooks-the-basics/39815 Tri-Valley Tax & Financial Services Inc Most small businesses use invoices for billing customers. But there are times when you may want to send statements instead of – or in addition to – invoices. One of the more enjoyable parts of your job is probably sending invoices to your customers to bill for products and/or services is probably one of the more enjoyable parts of your job – second only to recording payments received. Thanks to the company file you’ve built in QuickBooks, creating invoices is generally a very simple process that requires no duplicate data entry. Figure 1: You probably use QuickBooks’ invoice forms frequently, so you know how much easier it is to fill them out than to create paper bills. QuickBooks also includes easy-to-use templates for another kind of customer form: the statement. These forms are generally not used nearly as frequently as invoices. However, you may find them more appropriate if you: Want to create a form that lists all of a customer’s open charges Have a customer who accrues multiple charges before being billed Receive advance – or regular -- payments, or Need a historical accounting of a customer’s activity, including charges, payments, and balance. Limitations of Statements QuickBooks places some restrictions on statements. For example if you have a number of related charges for which you want to create a subtotal for, you’ll have to use an invoice. Statements also cannot include sales tax, percentage discounts, or payment items. Products or services requiring descriptions that run more than a paragraph can’t go on a statement. Customization options, too, are limited: you can’t add custom fields to the statement form, nor can you include a message to your customers, like, “We appreciate your business.” The “Reminder Statement” There may be occasions when you want to create a form that lists invoices received, payments made, and any credits given for one or more customers. This may be necessary when, for example, a customer disputes a charge. You may also want to send out these statements to remind customers of delinquent payments. You do not have to enter any new data for these statements. Instead QuickBooks will pull the existing activity that you ask for in the Create Statements window, shown below. To get there, either click on the Statements icon on the home page, or open the Customers menu and select Create Statements. Figure 2: The Create Statements window in QuickBooks offers multiple options for defining the statements you want to send to customers. As you can see, QuickBooks offers a lot of flexibility in the creation of statements. You can specify: The active date range. Under SELECT STATEMENT OPTIONS, you can either enter a date range or request a statement for every customer who has open transactions as of the Statement Date (be sure that this date is correct before proceeding). You can also ask to include only transactions that are past due by a specified number of days. The customers to include. Do you want to use the conditions you just outlined to apply to All Customers? If so, click on the button in front of that options. If you choose Multiple Customers, a small button labeled Choose… will appear. Click on it, and a window displaying your customer list opens. One Customer also opens your list of customers. If you’ve assigned types to your customers and want to include only those in one category (like Residential or Commercial), click Customers of Type. And Preferred Send Method lets you limit your statement output to customers who receive either emailed or printed forms. The template to use. Click the down arrow to see the statement templates available. If you have not customized QuickBooks’ standard form and want to do so, let us help. Whether QuickBooks prepares one statement per customer or per job. This is a very important distinction, so choose carefully. Miscellaneous attributes of your statement run. Click on the box in front of any that should apply. If you assess finance charges, you can do so here. This is an advanced activity in QuickBooks, and we’d be happy to provide guidance in this area. When you’re done, you can Preview your statements, Print, or E-Mail them by clicking those buttons. Entering Individual Charges If you need to enter individual charges, you’ll have to work with QuickBooks’ customer registers. You’ll find these by either opening the Customers menu and selecting Enter Statement Charges or highlighting a customer in the Customer Center, then clicking the down arrow next to New Transactions and selecting Statement Charges. Figure 3: A Statement Charge in the customer register. We highly recommend that you let us help you get started if individual charges are necessary. Like many of QuickBooks’ functions, this isn’t a difficult activity once you understand it. But it’s much easier and economical for you to get upfront guidance than for us to come in and untangle your company file. Tue, 18 Nov 2014 19:00:00 GMT Writing Off Your Start-Up Expenses http://www.mytrivalleytax.com/blog/writing-off-your-start-up-expenses/39785 http://www.mytrivalleytax.com/blog/writing-off-your-start-up-expenses/39785 Tri-Valley Tax & Financial Services Inc Article Highlights: Startup expenses first-year write off  Expense amortization  First-year write-off limitations  Qualifying expenses  Business owners, especially those operating small businesses, may deduct up to $5,000 of their start-up expenses in the first year of the business's operation. This is in lieu of amortizing the expenses over 180 months (15 years). Generally, start-up expenses include all expenses incurred to investigate the formation or acquisition of a business or to engage in a for-profit activity in anticipation of that activity becoming an active business. To be eligible for the election, an expense also must be one that would be deductible if it were incurred after the business actually began. An example of a start-up expense is the cost of analyzing the potential market for a new product. As with most tax benefits, there is always a catch. Congress put a cap on the amount of the start-up expenses that can be claimed as a deduction under this special election. Here's how: If the expenses are $50,000 or less, you can elect to deduct up to $5,000 in the first year, plus you can amortize the balance over 180 months. If the expenses are more than $50,000, then the $5,000 first-year write-off is reduced dollar-for-dollar for every dollar start-up expenses exceed $50,000. For example, if start-up costs were $54,000, the first-year write-off would be limited to $1,000 ($5,000 - ($54,000 - $50,000)). The election to deduct start-up costs is made by claiming the deduction on the return for the year in which the active trade or business begins, and the return must be filed by the extended due date. On IRS Schedule C, Profit or Loss from Business (Sole Proprietorship), the deduction is taken as part of the “Other Expenses” in Part V. If the entire amount of start-up costs isn't deductible in the business's first year, use Form 4562 to amortize the excess amount over 180 months, beginning with the month that you start operating the business. For example, the $53,000 of start-up expenses in the prior example that couldn't be deducted as an expense in the first year of business would be deductible at $294 per month ($53,000/180), beginning with the first month the business became operational. Qualifying Start-Up Costs - A qualifying start-up cost is one that would be deductible if it were paid or incurred to operate an existing active business in the same field as the new business, and the cost is paid or incurred before the day the active trade or business begins. Not includible are taxes, interest or research and experimental costs. Examples of qualified start-up costs include: Surveys/analyses of potential markets, labor supply, products, transportation facilities, etc.;  Wages paid to employees and their instructors while they are being trained;  Advertisements related to opening the business;  Fees and salaries paid to consultants or others for professional services; and  Travel and other related costs to secure prospective customers, distributors, and suppliers.  For the purchase of an active trade or business, only investigative costs incurred while conducting a general search for or preliminary investigation of the business (i.e., costs that help the taxpayer decide whether to purchase a new business and which one to purchase) are qualified start-up costs. Costs incurred while attempting to buy a specific business are capital expenses that aren't treated as start-up costs. If you have any questions related to the start-up expenses election and whether it will benefit your business, please give this office a call. Thu, 13 Nov 2014 19:00:00 GMT Failed to Report Your Foreign Financial Assets? The IRS's Streamlined Voluntary Filing Compliance Program May Be for You. http://www.mytrivalleytax.com/blog/failed-to-report-your-foreign-financial-assets-the-irss-streamlined-voluntary-filing-compliance-program-may-be-for-you/39773 http://www.mytrivalleytax.com/blog/failed-to-report-your-foreign-financial-assets-the-irss-streamlined-voluntary-filing-compliance-program-may-be-for-you/39773 Tri-Valley Tax & Financial Services Inc Article Summary: How to come into compliance with foreign financial asset reporting  Non-willful conduct certification  Miscellaneous offshore penalty  Possibility of subsequent audit  If you are a U.S. taxpayer who has not reported your foreign financial assets on your tax returns and you can certify that the reporting failure and nonpayment of all tax due related to those assets did not result from willful conduct on your part, you can come into compliance with the IRS by doing the following: (1) For each of the most recent three years for which the U.S. tax return due date (including extended due dates) has passed, file amended tax returns, together with all required information returns (e.g., Forms 3520, 3520-A, 5471, 5472, 8938, 926, and/or 8621). These three years are referred to as the “covered tax return period”; (2) For each of the most recent six years for which the FBAR (foreign bank account report) due date has passed, file any delinquent FBAR returns (FinCEN Form 114, previously Form TD F 90-22.1). These six years are referred to as the “covered FBAR period”; and (3) Pay a 5% miscellaneous offshore penalty plus any tax and interest due on the amended returns. The full amount of the tax, interest, and miscellaneous offshore penalty due in connection with these filings should be remitted with the amended tax returns. Penalty - The miscellaneous offshore penalty is equal to 5% of the highest aggregate balance/value of your foreign financial assets during the years in the “covered tax return period” and the “covered FBAR period.” For this purpose, the highest aggregate balance/value is determined by aggregating the year-end account balances and year-end asset values of all the foreign financial assets and selecting the highest aggregate balance/value from among those years. After you have completed the streamlined filing compliance procedures, you will be expected to comply with U.S. law for all future years and file returns according to regular filing procedures. Returns submitted under the streamlined offshore procedures will not automatically be subject to IRS audit, but they may be selected for audit under the IRS's audit selection processes applicable to any U.S. tax return. If selected, they will be checked for accuracy and completeness, just as with any other audit. If errors or omissions are discovered, you could be subject to additional civil penalties, and even criminal liability, if appropriate. This is a simplified overview of the streamlined compliance program; not all taxpayers will qualify. Please call this office for additional details and assistance with bringing you into compliance with your foreign asset reporting requirements. Tue, 11 Nov 2014 19:00:00 GMT How Employee Stock Options Are Taxed http://www.mytrivalleytax.com/blog/how-employee-stock-options-are-taxed/39759 http://www.mytrivalleytax.com/blog/how-employee-stock-options-are-taxed/39759 Tri-Valley Tax & Financial Services Inc Article Highlights: Non-statutory Option  Wage Income Statutory (Incentive) Options  Capital Gains  Alternative Minimum Tax  Many companies, as an incentive to employees to help grow the companies' market value, will offer stock options to key employees. The options give the employee the right to buy up to a specified number of shares of the company's stock at a future date at a specific price. Generally, options are not immediately vested and must be held for a period of time before they can be exercised. Then, at some later date, and assuming the stock price has appreciated to a value higher than the option price, the employee can excise the options (buy the shares), paying the lower option price for the stock rather than the current market price. This gives the employee the opportunity to participate in the growth of the company through gains from the sale of the stock without the risk of ownership. There are two basic types of employee stock options for tax purposes, a non-statutory option and a statutory option (also referred to as the incentive stock option), and their tax treatment is significantly different. Non-statutory Option - The taxability of a non-statutory option occurs at the time the option is exercised. The gain is considered ordinary income (compensation) and is supposed to be included in the employee's W-2 for the year of exercise. We say “supposed to be” because it is not uncommon to see smaller firms mishandle the reporting. The employee has the option to sell or hold the stock he or she has just purchased, but regardless of what he or she does with the stock, the gain, which is the difference between the option price and market price of the stock at the time of the exercise, is immediately taxable. Because of the immediate taxation, most employees who have been granted options will, when exercising their options, immediately sell their stock. Under that scenario, the W-2 will reflect the profit and Form 8949 (the tax form used to report sales of stock and other capital assets) may need to be prepared to show the sale, essentially with no gain or loss, so that the gross proceeds of sale reported on the return are matched up with the sale reported to IRS (on Form 1099-B). If there was a sales cost, such as a broker's commission, then the result would be a reportable loss, albeit usually a small amount. Since the difference between the option price and market price is included in wages, it is also subject to payroll taxes (FICA). If an employee chooses to hold the stock, he or she would have to pay the tax on the difference between the option price and exercise price, plus the FICA tax, from other funds. If the stock subsequently declines in value, the employee is still stuck with the gain reported when the option was exercised. Any loss on the subsequent sale of the stock would be limited to the overall capital loss limitation of $3,000 per year. Statutory (Incentive) Options - What makes the taxation of a statutory option different from a non-statutory option is that no amount of income is included in regular income when the option is exercised. Thus, the employee can continue to hold the stock without any tax liability; and, if he or she holds it long enough, any gain would become a long-term capital gain. To achieve long-term status, the stock must be held for: More than 1 year after the stock option was exercised, and  More than 2 years after the option was granted.  The advantage of long-term capital gains is that they are taxed at lower maximum rates. For example, the capital gains tax rate is 15% for a taxpayer who is in the 25% tax bracket. There is a dark side to statutory options, however. The difference between the option price and market price, termed the spread, is what is called a preference item for alternative minimum tax (AMT) purposes. If the spread is great enough, that might cause the AMT to kick in for the year of exercise. If a taxpayer is already subject to the AMT, this would add to the tax; and, even if not, it might push him or her into the AMT. The current year AMT will be in addition to any tax when the stock is ultimately sold but will establish a higher tax basis for the AMT should it come into play in the year the stock is eventually sold. Not all AMT scenarios can be addressed in this article in detail, so additional guidance may be appropriate. If the stock is sold before it achieves the long-term holding period requirements described above, the tax treatment is essentially the same as for a non-statutory option. If you are planning to exercise stock options and have questions, or wish to do some tax planning to minimize the tax bite, please give this office a call.  Thu, 06 Nov 2014 19:00:00 GMT Avoid Tax Surprises: Report Life Changes to the Marketplace http://www.mytrivalleytax.com/blog/avoid-tax-surprises-report-life-changes-to-the-marketplace/39744 http://www.mytrivalleytax.com/blog/avoid-tax-surprises-report-life-changes-to-the-marketplace/39744 Tri-Valley Tax & Financial Services Inc Article Highlights: Reasons for reporting life changes to the insurance marketplace  Changes that should be reported  How to report changes  Applying for 2015 coverage  If you are enrolled in insurance coverage through a government Health Insurance Marketplace, it is important that you report certain changes to the marketplace when they happen, such as changes to your household income or family size and other issues that affect your eligibility for and the amount of the advance premium tax credit (APTC). The APTC is used to reduce the amount you must pay for your monthly health insurance premiums. Timely reporting can also help to eliminate complications on your tax return so the marketplace can properly report your coverage premiums and APTC when there has been a change in family circumstances such as a divorce or legal separation. The marketplace will report the premium cost and APTC on Form 1095-A (to be issued in January 2015) so the APTC can be reconciled to the premium tax credit you are entitled to on your tax return. Keeping the marketplace informed of changes throughout the year can help avoid unpleasant surprises when your tax return is prepared. Changes in circumstances that you should report to the marketplace include: Getting married or divorced  Having a child, adopting a child, or placing a child for adoption  Changes in income  Getting health coverage through a job or a program like Medicare or Medicaid  Changing your place of residence  Having a change in disability status  Gaining or losing a dependent  Becoming pregnant  Experiencing other changes that may affect your income and household size  Other changes to report include change in tax filing status; change of citizenship or immigration status; incarceration or release from incarceration; change in status as an American Indian/Alaska Native or tribal status; and correction to name, date of birth, or Social Security number.  There is still time left this year to report changes. Reporting changes will help you avoid getting too much or too little advance payment of the premium tax credit. Getting too much means you may owe additional money or get a smaller refund when you file your taxes. Getting too little could mean missing premium assistance to reduce your monthly premiums. Therefore, it is important that you report changes in circumstances that may have occurred since you signed up for your plan. Reporting Changes - To report changes to your 2014 coverage, which ends December 31, 2014, log into your account on the marketplace website, select your existing 2014 application, and choose "Report a life change" from the menu. For additional assistance, check the website for your marketplace. Applying for 2015 Coverage - After November 15, when you log into your account, you'll see a 2015 application pre-filled with some information from 2014. If you make updates to the information, you'll get your new eligibility results for 2015 coverage. You can then pick a plan and enroll. If you have questions about the premium tax credit or reconciling the credit's advance payments, please give this office a call. Tue, 04 Nov 2014 19:00:00 GMT Ever Wonder What a Tax Deduction Might Save You? http://www.mytrivalleytax.com/blog/ever-wonder-what-a-tax-deduction-might-save-you/39719 http://www.mytrivalleytax.com/blog/ever-wonder-what-a-tax-deduction-might-save-you/39719 Tri-Valley Tax & Financial Services Inc Article Highlights: Non-business deductions  AMT  Tax bracket  Above-the-line deductions  Business deductions  Taxpayers frequently ask what benefit is derived from a tax deduction. Unfortunately, there is no straightforward answer. The reason the benefit cannot be determined simply is because some deductions are above-the-line, others must be itemized, some must exceed a threshold amount before being deductible, and certain ones are not deductible for alternative minimum tax purposes, while business deductions can offset both income and self-employment tax. In other words, there are many factors to consider, and the tax benefits differ for each individual, depending on his or her particular situation. For most non-business deductions, the savings are based upon your tax bracket. For example, if you are in the 25% tax bracket, a $1,000 deduction would save you $250 in taxes. However, if taxable income is close to transitioning into the next-lower tax bracket, the benefit will be less. You also need to consider whether the particular deduction is allowed on your state return and what your state tax bracket is to determine the total tax savings. Some deductions, such as IRA and self-employed retirement plan contributions, alimony, student loan interest, moving expenses, etc., are adjustments to income or what we call above-the-line deductions. These deductions, to the extent permitted by law, provide a dollar deduction for every dollar claimed. Deductions that fall into the itemized category must exceed the standard deduction for your filing status before any benefit is derived. In addition, the medical deductions are reduced by 10% (7.5% if age 65 or over) of your AGI (income), and the miscellaneous deductions are reduced by 2% of your AGI. High-income taxpayers are also subject to a phase-out of overall itemized deductions, and taxpayers subject to the alternative minimum tax will not be able to deduct miscellaneous deductions above the 2%-of-AGI floor, taxes, and home equity interest to the extent that the taxpayer is subject to the AMT. The most beneficial deductions, business deductions, fall into two categories: employee business expenses, which are treated as miscellaneous itemized deductions subject to the limitations described previously, and self-employed business expenses that offset both income tax and, depending upon the circumstances, self-employment tax. For 2014, the self-employment tax rate is 12.4% of the first $117,000 of income subject to SE tax plus 2.9% for the Medicare tax with no cap. In addition, for high-income taxpayers, an additional 0.9% Medicare tax may apply. For self-employed businesses with less than $117,000 of net income, the SE tax rate is 15.3%. Thus, for small businesses with profits of less than $117,000, the benefit derived from deductions generally will include the taxpayer's tax bracket plus 15.3%. For example, for a taxpayer in the 25% tax bracket, the benefit could be as much as 40.3% (25% + 15.3%) of the deduction. If the deduction were $2,000, the tax savings could be as much as $806 and more when the taxpayer's state income tax bracket is included. If you are planning an expenditure and expect the tax deduction to help cover the cost, please give us a call in advance to ensure that the tax benefit is what you anticipate. Thu, 30 Oct 2014 19:00:00 GMT Watch Out for Charity Scams http://www.mytrivalleytax.com/blog/watch-out-for-charity-scams/39691 http://www.mytrivalleytax.com/blog/watch-out-for-charity-scams/39691 Tri-Valley Tax & Financial Services Inc Article Highlights: Fraudsters  Urgent appeals  Tips to avoid scams & ID theft  Cash contribution tax documentation  Fall is a traditional time of year for gift giving, including charitable giving. But before you write those checks, you should also be aware that there are fraudsters out there who solicit on behalf of bogus charities or who aren't entirely honest about how a so-called charity will use your contribution. Urgent appeals for aid that you get in person, by phone or mail, by e-mail, on websites, or on social networking sites may not be on the up-and-up. Fraudsters also pop up whenever there are natural disasters such as earthquakes, floods, etc., trying to coax you into making a donation that will go into their pockets, not to help victims of the disaster. Unfortunately, legitimate charities face competition from fraudsters, so if you are thinking about giving to a charity with which you are not familiar, do your research to avoid swindlers who try to take advantage of your generosity. Here are tips to help make sure that your charitable contributions actually go to the cause you support. Donate to charities you know and trust. Be alert for charities that seem to have sprung up overnight in connection with current events.   Ask if a caller is a paid fundraiser, who he/she works for, and what percentage of your donation goes to the charity and to the fundraiser. If you don't get a clear answer — or if you don't like the answer you get — consider donating to a different organization.   Don't give out personal or financial information — including your credit card or bank account number — unless you know for sure that the charity is reputable.   Never send cash: you can't be sure the organization will receive your donation, and you won't have a record for tax purposes.   Never wire money to someone who claims to be a charity. Scammers often request donations to be wired because wiring money is like sending cash: once you send it, you can't get it back.   If a donation request comes from a group claiming to help your local community (for example, local police or firefighters), ask the local agency if they have heard of the group and are getting financial support therefrom.   Check out the charity with the Better Business Bureau's (BBB) Wise Giving Alliance, Charity Navigator, Charity Watch, or GuideStar.  Remember, in order to deduct a charitable contribution on your tax return, it must be a legitimate charity. Contributions to religious, charitable, scientific, educational, literary, and other institutions that are incorporated or recognized as organizations by the IRS may be deducted. Sometimes these organizations are referred to as 501(c)(3) organizations after the code section that allows them to be tax-exempt. Gifts to state and local government, the federal government, qualifying veterans and fraternal organizations, and certain nonprofit cemetery companies also may be deductible. Gifts to other kinds of nonprofits, such as business leagues, social clubs and homeowner's associations, as well as to individuals, cannot be deducted. To claim a cash contribution, you must be able to document the contribution with a bank record that includes the name of the qualified organization, the date of the contribution, and the amount of the contribution or a receipt (or a letter or other written communication) from the qualified organization that shows the same information. Bank records may include a canceled check, a bank or credit union statement, or a credit card statement. In addition, to deduct a contribution of $250 or more, you must have an acknowledgment of your contribution from the qualified organization or certain payroll deduction records. Be aware that, to claim a charitable contribution, you must also itemize your deductions. It may also be beneficial for you to bunch your deductions in one year and skip the next. Please contact this office if you have questions related to charitable giving tax benefits associated with your particular tax situation. Tue, 28 Oct 2014 19:00:00 GMT Obamacare Adds New Levels of Complexity to Tax Returns http://www.mytrivalleytax.com/blog/obamacare-adds-new-levels-of-complexity-to-tax-returns/39670 http://www.mytrivalleytax.com/blog/obamacare-adds-new-levels-of-complexity-to-tax-returns/39670 Tri-Valley Tax & Financial Services Inc Article Highlights: New tax return complexities caused by Obamacare  Penalty for not being insured  Premium assistance credit  Insurance marketplace subsidies and possible repayments  New 1095 series reporting forms  Obamacare - or, more officially, the Affordable Care Act (ACA) - insurance mandate, along with its health insurance premium subsidies available from insurance marketplaces, premium tax credit (PTC), and penalty for not being insured, is going to affect just about every taxpayer in one way or another. It is important for everyone to understand that new, substantial, and sometimes complicated reporting requirements have been added to the 2014 tax return to facilitate the ACA insurance mandate. As a result, taxpayers need to be prepared for a variety of new forms they will be receiving starting in January 2015 from their insurance companies, employers, and the marketplace that they will need in order to prepare their tax returns. These forms, which are also filed with the government, will: Provide proof of ACA acceptable monthly insurance coverage for all family members that you will use on your 2014 tax return to avoid being assessed a penalty for not being insured.   Provide the government, and you, with the amount of monthly advance premium tax credit (APTC) - sometimes referred to as a premium subsidy - you may have benefited from if you purchased health insurance from a government-run insurance marketplace (also known as an exchange). These amounts are needed to determine if you are entitled to an additional PTC or if you must repay some portion of the APTC. The insurance marketplaces will provide this information on a Form 1095-A. Private insurance companies will provide proof of coverage on Form 1095-B.  Things can get pretty complicated if your tax family or household income changed during the year and you did not report the change to the marketplace. When a taxpayer was married or divorced during the year or an individual who is not in your tax family was included in insurance purchased through the marketplace, the insurance premiums and APTC must be allocated among those insured by the month. To make matters worse, the IRS is letting both employers and insurance companies use alternative means of providing the required information for 2014, which means you will need to watch out for substitute reporting not included on the official IRS forms. All of this additional reporting and allocating, if necessary, greatly adds to the complexity of 2014 tax returns, especially for taxpayers who qualify for the PTC and those who've received APTC through the marketplace. If you have friends or family members who may need assistance with this new tax return complexity, please suggest they contact this office. Thu, 23 Oct 2014 19:00:00 GMT Depositing Payments in QuickBooks: The Basics http://www.mytrivalleytax.com/blog/depositing-payments-in-quickbooks-the-basics/39677 http://www.mytrivalleytax.com/blog/depositing-payments-in-quickbooks-the-basics/39677 Tri-Valley Tax & Financial Services Inc Creating bank deposits manually can be a huge chore. QuickBooks simplifies this task. Satisfying though it may be to enter all of those customer payments manually on a paper deposit slip, it can also be tedious and time-consuming. The more successful in business you are, the more time and care it takes. Whether you accept cash, checks, or credit/debit cards, QuickBooks has tools that help you streamline the process of moving the funds into your physical bank accounts. In fact, part of your job is done when you enter the payments on the Receive Payments or Sales Receipt screens. An Important Decision When you record a payment in QuickBooks, you can enter it in one of two ways. Ask us if you're not certain which one best suits your business. Payments can be deposited: In a specific bank account. QuickBooks lets you specify an individual account for each transaction. If you select this option, a box labeled DEPOSIT TO will appear on the Sales Receipt and Receive Payment screens. Select an account from the drop-down list, and your payment will be automatically deposited into it.  Figure 1: You can choose to deposit customer payments to specific accounts. In Undeposited Funds. This is an asset account that can hold multiple payments, but they are not automatically deposited.  If you decide to have all payments sent to the Undeposited Funds account, you can establish that as your default. Open the Edit menu and select Preferences | Payments | Company Preferences. Then make sure that the box in front of Use Undeposited Funds as a default deposit to account is checked. Figure 2: Check the box on the right if you want payments sent to the Undeposited Funds asset account. You will make the actual deposits later. If this box is not checked, a DEPOSIT TO field will appear on the Sales Receipt and Receive Payments screens. Other Deposits What about money you receive that is neither payment on an invoice you sent or payment for an item or service received immediately? There are many situations where this might be the case, including: Vendor refunds, rebates, etc.,   Unsolicited donations [for non-profits], or  An owner's investment in the business.  To record incoming funds like these, open the Banking menu and select Make Deposits to open the Payments to Deposit window. Click OK to skip to the Make Deposits window. Complete the Deposit To, Date, and Memo fields, then click in the table below them if you haven't already used the Tab key to get there. Use the drop-down lists to select (or add) the individual or company who submitted the payment, the account where it should be tracked, the payment method, and the amount. Enter any additional information needed, fill in the optional Cash back goes to fields, and then save the transaction. Note: While you're working in the Make Deposits window, you can click the Payments button at any time to open a new window containing customer payments that need to be deposited if you want to process them simultaneously. You may also want to use the Attach tool for miscellaneous payments to store related documentation. Depositing Undeposited Funds You should process your Undeposited Funds on a regular basis, whether every day, every few days, or weekly, depending on your banking needs. To do this, go to Banking | Make Deposits. Figure 3: You can either view all of the unprocessed payments in Undeposited Funds in a single list, or you can display them by type. The Payments to Deposit window will open if you have pending payments in your Undeposited Funds account. Put a check mark in front of all of the payments you want to deposit by clicking in the column to the left of the DATE column. Click OK, and the Make Deposits window will open, displaying the payments you just chose. As we instructed previously, select the account where you want the money deposited and the date, add a memo, and request cash back if desired. Save your work when you're finished. These are the steps you'll take to deposit payments by cash and check. If you're planning to open a merchant account so you can accept debit and credit cards, the process is similar, but there are additional steps you must take to ensure that your books balance. We can show you the ropes and answer any other questions you have about depositing payments. You work hard for your money, so make sure you see it in your bank accounts. Thu, 23 Oct 2014 19:00:00 GMT When Can You Dump Old Tax Records? http://www.mytrivalleytax.com/blog/when-can-you-dump-old-tax-records/39664 http://www.mytrivalleytax.com/blog/when-can-you-dump-old-tax-records/39664 Tri-Valley Tax & Financial Services Inc Article Highlights: General statute is 3 years Some states are longer Fraud, failure to file and other issues can extend the statute Keeping the actual return Taxpayers often question how long records must be kept and the amount of time IRS has to audit a return after it is filed. It all depends on the circumstances! In many cases, the federal statute of limitations can be used to help you determine how long to keep records. With certain exceptions, the statute for assessing additional tax is 3 years from the return due date or the date the return was filed, whichever is later. However, the statute of limitations for many states is one year longer than the federal limitation. The reason for this is that the IRS provides state taxing authorities with federal audit results. The extra time on the state statute gives states adequate time to assess tax based on any federal tax adjustments. In addition to lengthened state statutes clouding the recordkeeping issue, the federal 3-year rule has a number of exceptions: The assessment period is extended to 6 years instead of 3 years if a taxpayer omits from gross income an amount that is more than 25 percent of the income reported on a tax return. The IRS can assess additional tax with no time limit if a taxpayer: (a) doesn’t file a return; (b) files a false or fraudulent return in order to evade tax; or (c) deliberately tries to evade tax in any other manner. The IRS gets an unlimited time to assess additional tax when a taxpayer files an unsigned return. If no exception applies to you, for federal purposes, you can probably discard most of your tax records that are more than 3 years old; add a year or so to that if you live in a state with a longer statute. Examples: Susan filed her 2013 tax return before the due date of April 15, 2014. She will be able to safely dispose of most of her records after April 15, 2017. On the other hand, Don filed his 2013 return on June 1, 2014. He needs to keep his records at least until June 1, 2017. In both cases, the taxpayers may opt to keep their records a year or two longer if their states have a statute of limitations longer than 3 years. Important note: Even if you discard backup records, never throw away your file copy of any tax return (including W-2s). Often the return itself provides data that can be used in future tax return calculations or to prove amounts related to property transactions, social security benefits, etc. You should keep certain records for longer than 3 years. These records include: Stock acquisition data. If you own stock in a corporation, keep the purchase records for at least 4 years after the year you sell the stock. This data will be needed in order to prove the amount of profit (or loss) you had on the sale. Stock and mutual fund statements where you reinvest dividends. Many taxpayers use the dividends they receive from a stock or mutual fund to buy more shares of the same stock or fund. The reinvested amounts add to basis in the property and reduce gain when it is finally sold. Keep statements at least 4 years after final sale. Tangible property purchase and improvement records. Keep records of home, investment, rental property, or business property acquisitions AND related capital improvements for at least 4 years after the underlying property is sold. If you have questions about what records to retain and what you can dispose of now, please give this office a call. Tue, 21 Oct 2014 19:00:00 GMT November 2014 Individual Due Dates http://www.mytrivalleytax.com/blog/november-2014-individual-due-dates/34877 http://www.mytrivalleytax.com/blog/november-2014-individual-due-dates/34877 Tri-Valley Tax & Financial Services Inc November 10 - Report Tips to Employer If you are an employee who works for tips and received more than $20 in tips during October, you are required to report them to your employer on IRS Form 4070 no later than November 10. Your employer is required to withhold FICA taxes and income tax withholding for these tips from your regular wages. If your regular wages are insufficient to cover the FICA and tax withholding, the employer will report the amount of the uncollected withholding in box 12 of your W-2 for the year. You will be required to pay the uncollected withholding when your return for the year is filed. Mon, 20 Oct 2014 19:00:00 GMT November 2014 Business Due Dates http://www.mytrivalleytax.com/blog/november-2014-business-due-dates/34878 http://www.mytrivalleytax.com/blog/november-2014-business-due-dates/34878 Tri-Valley Tax & Financial Services Inc November 10 - Social Security, Medicare and Withheld Income Tax File Form 941 for the third quarter of 2014. This due date applies only if you deposited the tax for the quarter in full and on time. November 15 - Social Security, Medicare and Withheld Income Tax If the monthly deposit rule applies, deposit the tax for payments in October. November 15 - Nonpayroll Withholding If the monthly deposit rule applies, deposit the tax for payments in October. Mon, 20 Oct 2014 19:00:00 GMT Tax Breaks for Charity Volunteers http://www.mytrivalleytax.com/blog/tax-breaks-for-charity-volunteers/36904 http://www.mytrivalleytax.com/blog/tax-breaks-for-charity-volunteers/36904 Tri-Valley Tax & Financial Services Inc Article Highlights: Away-from-home travel Lodging and meals Entertaining for charity Automobile travel Uniforms Substantiation requirements If you volunteer your time for a charity, you may qualify for some tax breaks. Although no tax deduction is allowed for the value of services performed for a charity, there are deductions permitted for out-of-pocket costs incurred while performing the services. The normal deduction limits and substantiation rules also apply. The following are some examples: Away-from-home travel expenses while performing services for a charity, including out-of-pocket round-trip travel cost, taxi fares, and other costs of transportation between the airport or station and hotel, plus lodging and meals at 100%. These expenses are only deductible if there is no significant element of personal pleasure associated with the travel, or if your services for a charity do not involve lobbying activities. The cost of entertaining others on behalf of a charity, such as wining and dining a potential large contributor (but the cost of your own entertainment or meal is not deductible). If you use your car while performing services for a charitable organization, you may deduct your actual unreimbursed expenses directly attributable to the services, such as gas and oil costs, or you may deduct a flat 14 cents per mile for the charitable use of your car. You may also deduct parking fees and tolls. You can deduct the cost of the uniform you wear when doing volunteer work for the charity, as long as the uniform has no general utility. The cost of cleaning the uniform can also be deducted. There are some misconceptions as to what constitutes a charitable deduction and the following are frequently encountered issues: No deduction is allowed for the depreciation of a capital asset as a charitable deduction. This includes vehicles, computers, etc. Example: Kathy volunteers as a member of the sheriff’s mounted search and rescue team. As part of volunteering, Kathy is required to provide a horse. Kathy is not allowed to deduct the cost of purchasing or to depreciate her horse. She can, however, deduct uniforms, travel, and other out-of-pocket expenses associated with the volunteer work. However, a taxpayer may deduct the cost of maintaining a personally owned asset to the extent its use relates to providing services for a charity. Thus, for example, a taxpayer was allowed to deduct the fuel, maintenance and repair costs (but not depreciation or the fair rental value) of piloting his plane in connection with volunteer activities for the Civil Air Patrol. Similarly, a taxpayer, such as Kathy in our example, who participated in a mounted posse that was a civilian reserve unit of the county sheriff’s office, could deduct the cost of maintaining a horse (shoeing and stabling). A taxpayer who buys an asset and uses it while performing volunteer services for a charity can’t deduct its cost if he retains ownership of it. That’s true even if the asset is used exclusively for charitable purposes. No charitable deduction is allowed for a contribution of $250 or more unless you substantiate the contribution with a written acknowledgment from the charitable organization. To verify your contribution: Get written documentation from the charity about the nature of your volunteering activity and the need for related expenses to be paid. For example, if you travel out of town as a volunteer, request a letter from the charity explaining why you’re needed at the out-of-town location. You should submit a statement of expenses if you are paying out of pocket for substantial amounts and, preferably, a copy of the receipts to the charity, then arrange for the charity to acknowledge the amount of the contribution in writing. Maintain detailed records of your out-of-pocket expenses—receipts plus a written record of the time, place, amount, and charitable purpose of the expense. For additional details related to expenses incurred as a charity volunteer, please contact this office. Thu, 16 Oct 2014 19:00:00 GMT Naming Your IRA Beneficiary – More Complicated Than You Might Expect http://www.mytrivalleytax.com/blog/naming-your-ira-beneficiary-8211-more-complicated-than-you-might-expect/33815 http://www.mytrivalleytax.com/blog/naming-your-ira-beneficiary-8211-more-complicated-than-you-might-expect/33815 Tri-Valley Tax & Financial Services Inc Article Highlights: How naming beneficiaries impacts Traditional IRA distributions The impact of naming your trust as a beneficiary IRA beneficiary taxation The decision concerning whom you wish to designate as the beneficiary of your traditional IRA is critically important. This decision affects: The minimum amounts you must withdraw from the IRA when you reach age 70 ½; Who will get what remains in the account after your death; and How that IRA balance can be paid out to beneficiaries. What's more, a periodic review of whom you've named as IRA beneficiaries is vital to ensure that your overall estate planning objectives will be achieved in light of changes in the performance of your IRAs and in your personal, financial, and family situation. The issue of naming a trust as the beneficiary of an IRA comes up regularly. There is no tax advantage to naming a trust as the beneficiary of an IRA. Of course, there may be a non-tax related reason, such as controlling a beneficiary’s access to money; thus, naming a trust rather than an individual(s) as the beneficiary of an IRA could achieve that goal. However, that is not typically the case. Naming a trust as the beneficiary of an IRA eliminates the ability for multiple beneficiaries to maximize the opportunity to stretch the required minimum distributions (RMDs) over their individual life expectancies. Generally, trusts are drafted so that IRA RMDs will pass through the trust directly to the individual trust beneficiary and, therefore, be taxed at the beneficiary’s income tax rate. However, if the trust does not permit distribution to the beneficiary, then the RMDs will be taxed at the trust level, which has a tax rate of 39.6% on any taxable income in excess of $12,150 (2014 rate). Distributions from traditional IRAs are always taxable whether they are paid to you or, upon your death, paid to your beneficiaries. Once you reach age 70 ½, you are required to begin taking distributions from your IRA. If your spouse is your beneficiary, he or she can delay distributions until he or she reaches age 70 ½ if he or she is under the age of 70 ½ upon inheritance of your IRA. The rules are tougher for non-spousal beneficiaries, who generally must begin taking distributions based upon a complicated set of rules. Since IRA distributions are taxable to beneficiaries, beneficiaries usually wish to spread the taxation over a number of years. However, the tax code limits the number of years based on whether the decedent had, or had not, begun his or her age 70 ½ RMDs at the time of his or her death. To ensure that your IRA will pass to your chosen beneficiary or beneficiaries, be certain that the beneficiary form on file with the custodian of your IRA reflects your current wishes. These forms allow you to designate both primary and alternate individual beneficiaries. If there is no beneficiary form on file, the custodian’s default policy will dictate whether the IRA will go first to a living person or to your estate. This is a simplified overview of the issues related to naming a beneficiary and the impact on post-death distributions. Uncle Sam wants the tax paid on the distributions, and the rules pertaining to how and when beneficiaries must take taxable distributions are very complicated. It may be appropriate to consult with this office regarding your particular circumstances before naming beneficiaries. Tue, 14 Oct 2014 19:00:00 GMT Health Savings Accounts Offer Tax Breaks http://www.mytrivalleytax.com/blog/health-savings-accounts-offer-tax-breaks/39622 http://www.mytrivalleytax.com/blog/health-savings-accounts-offer-tax-breaks/39622 Tri-Valley Tax & Financial Services Inc Article Highlights: Health Saving Accounts Tax Breaks  Eligibility  Contribution Limits  Example  A health savings account (HSA) is a trust account into which tax-deductible contributions can be deposited by qualified taxpayers who have high-deductible medical insurance plans. These accounts are set up at a bank or other financial institution. Income earned on the HSA balance is income tax-free. The funds from these accounts are then used to pay qualified medical expenses not covered by an eligible individual's medical insurance. If these funds are not used, they roll over year to year. At age 65, the funds can be used like a retirement plan (taxable when withdrawn, but not subject to a withdrawal penalty) or continue to be saved for future medical expenses. Since the contribution is an above-the-line deduction, a taxpayer need not itemize to take advantage of this tax break. The rules discussed here are applicable to federal tax returns and may not apply to your particular state. Who qualifies for an HSA? An eligible individual is one who is covered by a high-deductible plan (defined below) and, while covered by that high-deductible plan, is not also covered by another plan that does not have a high deductible. For purposes of determining if there is coverage that does not have a high deductible, the law allows certain types of coverage such as worker's compensation, insurance for a specific condition, dental care, vision, long-term care, and certain others to be disregarded. Any eligible individual, whether employed, unemployed or self-employed, may contribute to an HSA. Unlike IRAs, there is no requirement that the individual have compensation and there are no phase-out rules for high-income taxpayers. High-deductible Plans - For 2014, high-deductible plans are defined as those with the following deductible amounts: o Self-only coverage with an annual deductible of $1,250 or more and limits on annual expenses, other than premiums, required to be paid by the plan during the year, up to $6,350; or o Family coverage with an annual deductible of $2,500 or more and limits on annual expenses, other than premiums, required to be paid by the plan during the year, up to $12,700. Qualified Medical Expenses - Qualified medical expenses that can be paid from these accounts are generally defined as those that would be allowable as a medical deduction on your tax return.   Contribution Limits - The eligibility and contribution amounts for these accounts are determined monthly. Therefore, during any month in which you qualify, you would be entitled to contribute 1/12 of the annual limits. However, an eligible individual who establishes an HSA plan during the year and is still an eligible individual during the last month of the year (December) can contribute the full-year amount (does not need to prorate the contribution). For 2014, the annual limits (note these values are adjusted annually for inflation) are:   $3,300 for single coverage plans;  $6,550 for family coverage plans; and  $1,000 additional for individuals age 55 or older.  Individuals entitled to benefits under Medicare and those claimed as a dependent on another person's tax return cannot make contributions. Contributions can be made as late as the due date of the tax return without extensions, and contributions in excess of the allowable amounts are subject to an annual 6% excise penalty. If you are eligible for an HSA and your employer contributes to your HSA, the contributions (within the limits) are treated as employer-provided coverage for medical expenses under an accident or health plan and are excludable from your gross income. They are not subject to income tax or FICA withholding (or FUTA tax). If contributions to your HSA are made through your employer's cafeteria plan, the contributions are treated as employer contributions. An employee may not deduct the employer's HSA contributions as either an HSA contribution or a medical expense on his or her return. Example: John, a single taxpayer, age 58, begins a high-deductible health plan with an annual deductible of $5,000 in March of 2014. He continues in the plan through the end of the year. He may set up an HSA, and is eligible to contribute the full year's maximum of $4,300 ($3,300 plus $1,000 for being over 55) since he was in the high-deductible health plan in December. John's employer does not contribute to the HSA. When John files his 2014 tax return, he claims an above-the-line deduction of $4,300. If John were in the 25% tax bracket, he would realize a tax savings of $1,075. In January of 2015, John has $800 worth of medical expenses that are not covered by his health plan, so he withdraws $800 from his HSA to pay for them. The $800 distribution is not taxable income, but he can't include the $800 as a medical expense for itemized deductions. If you have questions related to health savings accounts, please give this office a call. Thu, 09 Oct 2014 19:00:00 GMT Tax Benefits for Grandchildren http://www.mytrivalleytax.com/blog/tax-benefits-for-grandchildren/39609 http://www.mytrivalleytax.com/blog/tax-benefits-for-grandchildren/39609 Tri-Valley Tax & Financial Services Inc Article Highlights: Financially assisting grandchildren  College savings  Education savings  Retirement accounts  Medical expenses  If you are a grandparent there are a number of things you can do to teach your grandchildren financial responsibility and set aside money for their future education and retirement. Before we get into actual suggestions, it is important that you understand the gift tax rules. You can give anyone, every year, an amount up to the annual gift tax exclusion. The gift tax exclusion is inflation-adjusted and is currently $14,000, which means that, in 2014, you can give any number of recipients up to $14,000. Thus, you can give each grandchild $14,000 per year; and, if you are married, both you and your spouse can each give $14,000 for a total of $28,000 per year. Gifts in excess of $14,000 per donee can certainly be made, but doing so will mean the grandparent must file a Gift Tax Return (Form 709) and pay gift tax on taxable gifts in excess of a lifetime gift and estate tax exclusion ($5.34 million for 2014). Of course, just handing out money to your grandchildren will not teach financial responsibility or meet specific goals you might have in mind for the money. The following are some suggestions. Savings for College: The tax code allows taxpayers to put away large amounts of money limited only by the contributor's gift tax concerns and the contribution limits of the intended state plan. There are no income or age limitations for these plans, often referred to as Sec. 529 Plans (the tax code number) or Qualified Tuition Plans. The maximum amount - per beneficiary - that can be contributed is based on the projected cost of a college education and will vary among state plans. Some states base their maximum on an in-state four-year education, while others use the cost of the most expensive schools in the U.S., including graduate studies. These plans allow for tax-free accumulation provided the funds are used for qualified college expenses. Thus, a grandparent can currently contribute up to $14,000 per year to a Sec. 529 Plan. There are also special provisions that permit 5 years' worth of contributions up front (this requires filing gift tax returns). Savings for Education: Funds from a Sec. 529 plan can only be used for college. Coverdell Education Accounts also provide tax-free accumulation like Sec. 529 plans; but, unlike Sec. 529 Plans, the funds can be used for education beginning with kindergarten and continuing through college. So, you might want to consider contributing the first $2,000 (Coverdell annual contribution limit) to a Coverdell account. One downside to a Coverdell account is that it becomes the child's account to do with as the child wishes when the child reaches the age of majority (age varies by state); while, with the Sec. 529 plan, the contributor maintains control of the plan's distributions. Roth Retirement Account: You may have a teenage grandchild who has a part-time job. To the extent the child has earnings from work, you - the grandparent - could fund an IRA for him or her. Generally, a child with a part time job will benefit very little, if any, from a traditional IRA deduction, so a Roth IRA is generally a better choice. Any contribution for 2014 would be limited to the lesser of $5,500 or the child's earned income. A Roth IRA accumulates earnings tax-free and distributions are tax-free at retirement age. The amount of the IRA contribution you pay is considered a gift to the grandchild, and it goes against the annual gift tax exclusion amount. For example, if your grandchild had $3,500 of wage income in 2014 and you funded $3,500 into an IRA for the grandchild, the remaining balance of the $14,000 annual exclusion would be $10,500. If you decided to buy your grandchild a $12,000 used car later the same year, you would be over the annual exclusion amount by $1,500 and would need to file a gift tax return. You would likely not owe any gift tax unless you've previously made large gifts, but the $1,500 does reduce your lifetime gift and estate tax exclusion. Tuition and Medical Gift Exclusion - In addition to the annual exclusion, a grandparent may make gifts that are totally excluded from the gift tax in the following circumstances: Payments made directly (Sec. 529 plans are not direct) to an educational institution for tuition. This includes college and private primary education. It does not include books or room and board. This could also create a tax credit of up to $2,500 for the individual who claims your grandchild as a dependent.   Payments made directly to any person or entity providing medical care for the donee. In both cases, it is critical that the payments be made directly to the educational institution or health care provider. Reimbursement paid to the donee will not qualify. The tuition/medical exclusion is often overlooked, but these expenses can be quite significant. Grandparents interested in reducing the value of their estate should strongly consider these gifts.  Establish Trusts - Although a somewhat more complicated possibility and one that will require the services of a trust attorney, there are a variety of trusts that can be established to make future distributions to a grandchild based upon the grandchild's future achievements, such as completing his or her college education, holding a job, overcoming an addiction, etc. Although none of these suggestions provides any current tax benefits for grandparents other than reducing the value of their future estate, they will help grandchildren get off to a good start in life. Please call this office for further details. Tue, 07 Oct 2014 19:00:00 GMT Some Tax Facts for Military Reservists http://www.mytrivalleytax.com/blog/some-tax-facts-for-military-reservists/39589 http://www.mytrivalleytax.com/blog/some-tax-facts-for-military-reservists/39589 Tri-Valley Tax & Financial Services Inc Article Highlights: Travel expenses  Uniforms  Early pension plan withdrawals  Members of the U.S. Armed Forces reserve component often have questions about the tax deductibility of expenses they incur as part of their service in a reserve unit. A member of a reserve component of the Armed Forces is an individual who is in the: Army, Navy, Marine Corps, Air Force, or Coast Guard Reserve;  Army National Guard of the United States;  Air National Guard of the United States; or  Reserve Corps of the Public Health Service.  Travel Expenses - Travel related to service as a reservist is limited. Generally anyone traveling to and from a work location within the general area in which they live is unable to deduct the travel expense. That would include the travel costs of reservists going between home and their local reserve unit. However, Armed Forces reservists who travel more than 100 miles away from home and stay overnight in connection with service as a member of a reserve component can deduct travel expenses as an adjustment to gross income. Deductible expenses include unreimbursed expenses for transportation, meals (subject to a 50% limit) and lodging, but the deduction is limited to the amount the federal government pays its employees for travel expenses; i.e., the general federal government per diem rate for lodging, meals and incidental expenses applicable to the locale, as well as the standard mileage rate for car expenses plus parking and ferry fees and tolls. This is in lieu of deducting those expenses as a miscellaneous itemized deduction (subject to a reduction equal to 2% of adjusted gross income). Thus, this deduction can be taken even if the taxpayer does not itemize his/her deductions. Military Uniforms - Taxpayers generally cannot deduct the cost of uniforms if they are on full-time active duty in the Armed Forces. However, Armed Forces reservists can deduct the unreimbursed cost of uniforms if military regulations restrict them from wearing their uniforms except while on duty as a reservist. If the taxpayer is a student at an Armed Forces academy, they cannot deduct the cost of the uniforms if they replace regular clothing. However, the cost of insignia, shoulder boards, and related items are deductible. Civilian faculty and staff members of a military school can deduct the cost of uniforms. Early Withdrawal Exception - Qualified reservists are permitted penalty-free withdrawal from IRAs, 401(k)s, and other retirement arrangements if ordered or called to active duty. A “qualified reservist distribution” is any distribution to an individual if distribution is made during the period beginning with the reservist's call to active duty through the close of the active duty period and provided the active duty period is in excess of 179 days or is for an indefinite period. Even though the penalty is waived, the distributions would still be taxable. If you have questions related to these tax benefits, please give this office a call. Thu, 02 Oct 2014 19:00:00 GMT Business Owners Beware — New IRS Matching Program http://www.mytrivalleytax.com/blog/business-owners-beware--new-irs-matching-program/39572 http://www.mytrivalleytax.com/blog/business-owners-beware--new-irs-matching-program/39572 Tri-Valley Tax & Financial Services Inc Article Highlights: Form 1099-K  IRS Matching 1099-K reported income to tax return reported income  Letters from the IRS  Beginning in 2012, banks, credit card companies, and other third-party organizations that settle transactions were required to file informational returns with the IRS that reported a business's credit and debit card transactions and other electronic types of reportable income. The form used to file that information with the IRS is the 1099-K. If your business has credit/debit card transactions, then you, along with the IRS, have received this form in the past. The information provided on the Form 1099-K allows the IRS to determine the business's gross income from credit and debit card sales and makes it easier to segregate credit/debit card sales from cash sales. With Form 1099-K, the IRS is in the position to see if the credit card dollar figure reported on the tax return matches the bank's information return; the form will also allow them to see if a business's other sales from cash and check payments makes sense in the context of the firm's overall business. As expected, the IRS has developed a program to match reported income on the income tax returns filed by businesses to the income reported on the 1099-Ks. The IRS' analysis includes comparing the percentage of income a specific business reported as coming from credit/debit cards and cash sales, for example, to what the typical percentage is for other businesses in the same industry. If you receive a letter from the IRS related to the 1099-K, then the IRS's computer thinks you underreported your business income and the agency is requesting an explanation for the discrepancy. Don't procrastinate or ignore the letter; it only makes matters worse. If you receive one of these letters, it may be appropriate for you to seek professional assistance with preparing a response. Please give this office a call. Tue, 30 Sep 2014 19:00:00 GMT How to Cut Your Utility Bills While Reducing Your Taxes http://www.mytrivalleytax.com/blog/how-to-cut-your-utility-bills-while-reducing-your-taxes/39543 http://www.mytrivalleytax.com/blog/how-to-cut-your-utility-bills-while-reducing-your-taxes/39543 Tri-Valley Tax & Financial Services Inc Article Highlights: 30% credit for installing certain power-generating systems  Solar water-heating systems  Solar electric system  Fuel cell plant  Qualified small wind energy  Qualified geothermal heat pump  Limited carryover  Certification After installing solar or other alternative energy systems in their homes, taxpayers generally benefit from lower utility bills. Taxpayers may also see a lower federal income tax bill for the year of the installation. Through 2016, taxpayers get a 30% tax credit on their federal tax returns for installing certain power-generating systems in their homes. The credit is non-refundable, which means it can only be used to offset a taxpayer's current tax liability, but any excess can be carried forward to offset tax through 2016. Systems that qualify for the credit include: Solar water-heating system - Qualifies if used in a dwelling unit that is utilized by the taxpayer as a main or second residence where at least half of the energy used by the property for such purposes comes from the sun. Heating water for swimming pools or hot tubs does not qualify for the credit. The property must be certified for performance by the Solar Rating Certification Corporation or a comparable entity endorsed by the state government where the property is installed.   Solar electric system - Qualified system that uses solar energy to generate electricity for use in a dwelling unit (taxpayer's main or second residence) located in the U.S.   Fuel cell plant - This is a fuel cell power plant installed in the taxpayer's principal residence that converts a fuel into electricity using electrochemical means. It must have an electricity-only generation efficiency of greater than 30% and generate at least 0.5 kilowatt of electricity. The credit is 30% of qualified fuel cell expenditures but limited to $500 for each 0.5 kilowatt of the fuel cell property's capacity to produce electricity.   Qualified small wind energy - A wind turbine used to generate electricity for use in connection with a dwelling unit used as a main or second residence by the taxpayer.   Qualified geothermal heat pump - Must use the ground, or ground water, as a thermal energy source to heat the dwelling unit or as a thermal energy sink to cool the dwelling unit, and must meet the Energy Star program requirements that are in effect when the expenditure is made. The dwelling unit must be used as a main or second residence by the taxpayer.  Other aspects of the credit: Limited carryover - The credit is a non-refundable personal credit, which limits the credit to the taxpayer's tax liability for the year. However, the portion of the credit that is not allowed because of this limitation may be carried to the next tax year and added to the credit allowable for that year. Thus, the credit carryover is available through 2016 (the final year for the credit).   Installation costs - Expenditures for labor costs allocable to onsite preparation, assembly, or original installation of property eligible for the credit, as well as for piping or wiring connecting the property to the residence, are expenditures that qualify for the credit.   Swimming pool - Expenditures that are for heating a swimming pool or hot tub are not taken into account for purposes of the credit.   Newly constructed homes - The credit can be taken for newly constructed homes if the costs of the residential energy-efficient property can be separated from the home construction and the required certification documents are available.  Certification - A taxpayer may rely on a manufacturer's certification that a product is a Qualified Energy Property. A taxpayer is not required to attach the certification statement to the return on which the credit is claimed. However, taxpayers are required to retain the certification statement as part of their records. The certification statement provided by the manufacturer may be a written copy of the statement that is posted on the manufacturer's website with the product packaging details in printable form or in any other manner that will permit the taxpayer to retain the certification statement for tax recordkeeping purposes. If you have questions about how you can benefit from this credit, please give this office a call. Thu, 25 Sep 2014 19:00:00 GMT Gambling Income and Losses http://www.mytrivalleytax.com/blog/gambling-income-and-losses/39522 http://www.mytrivalleytax.com/blog/gambling-income-and-losses/39522 Tri-Valley Tax & Financial Services Inc Article Highlights: Reporting Gambling Winnings  Comps  Reporting Gambling Losses  Netting Specific Wagers  Proving Gambling Losses  Supporting Documentation  Generally, a taxpayer must report the full amount of his recreational gambling winnings for the year as income on his 1040 return. Gambling income includes, but is not limited to, winnings from lotteries, raffles, horse and dog races, and casinos, as well as the fair market value of prizes such as cars, houses, trips or other non-cash prizes. A taxpayer may not reduce his gambling winnings by his gambling losses and just report the difference. Instead, gambling winnings are reported in full as income, and losses (subject to limitation as discussed below) are deducted on Schedule A. Therefore, if a taxpayer does not itemize his deductions, he is unable to deduct gambling losses. Frequently, taxpayers with winnings will expect to report only those winnings included on Form W-2G. However, those winnings reported on W-2G forms generally do not include all winnings for the year, and the tax code requires all winnings to be reported. All winnings from gambling activities must be included when computing the deductible gambling losses, which is generally always an issue in a gambling loss audit. A taxpayer may deduct as a miscellaneous itemized deduction (not subject to the 2% of AGI limitation) gambling losses suffered in the tax year, but only to the extent of that year's gambling gains. In other words, you can never show a net loss. Gains - “Gains” include “comps” (complimentary goods and services the taxpayer may receive from a casino). Losses - Losses from one kind of gambling are deductible against gains from another kind. The IRS has ruled that transportation and meal and lodging expenses incurred while engaged in gambling activities are nondeductible personal expenses that cannot be deducted against gambling winnings. Individuals deduct gambling losses (to the extent of gambling gains) only as miscellaneous itemized deductions (but not subject to the 2%-of-AGI floor). Comps - Gambling casinos often provide their customers with complimentary goods and services (“comps”) to encourage future patronage. The IRS says that extraordinary comps, such as autos and jewelry, are taxable income. But it reserves the question of whether “normal comps,” such as food, drink, lodging and entertainment, can be excluded from income as purchase price adjustments. Netting Specific Wagers - The amount of income from a winning bet or wager is the full amount of the winnings less the cost of placing that specific winning bet or wager. Thus, the winner of a sweepstakes includes as income the amount by which the prize money exceeds the ticket price, and the winner of a horse race includes as income the amount of prize money less the cost of the winning race ticket. In computing the amount of income from winnings, the cost of losing tickets (or other forms of wager) is not netted against the winnings. Proving Gambling Losses - An accurate diary or similar record regularly maintained by the taxpayer, supplemented by verifiable documentation, will usually be acceptable evidence for substantiation of wagering winnings and losses. In general, the diary should contain at least the following information: (1) Date and type of specific wager or wagering activity; (2) Name of gambling establishment; (3) Address or location of gambling establishment; (4) Names of other persons (if any) present with the taxpayer at the gambling establishment; and (5) Amounts won or lost. Verifiable documentation includes wagering tickets, canceled checks and credit records. Where possible, the IRS says the documentation should be backed up by other documentation of the activity or visit to a gambling establishment; e.g., hotel bills, airline tickets, etc. Affidavits from “responsible gambling officials” (not further defined) regarding gambling activities can also be used. Other supporting documentation - Winnings and losses may be further supported by the following items: Keno - Copies of keno tickets purchased by the taxpayer and validated by the gambling establishment.   Slot Machines - A record of all winnings by date and time that the machine was played.   Table Games - Twenty-One (Blackjack), Craps, Poker, Baccarat, Roulette, Wheel of Fortune, etc. - The number of the table at which the taxpayer was playing. Casino credit card data indicating whether credit was issued in the pit or at the cashier's cage.   Bingo - A record of the number of games played, cost of tickets purchased and amounts collected on winning tickets.   Racing - Horse, Harness, Dog, etc. - A record of the races, entries, amounts of wagers and amounts collected on winning tickets and amounts lost on losing tickets. Supplemental records include unredeemed tickets and payment records from the racetrack.   Lotteries - A record of ticket purchase dates, winnings and losses. Supplemental records include unredeemed tickets, payment slips and winnings statements. Winnings from lotteries and raffles are gambling and therefore are included in gross income. In addition to cash winnings, the taxpayer must include income bonds, cars, houses and other noncash prizes at fair market value. If a state lottery prize is payable in installments, the annual payments and amounts designated as interest on the unpaid balance must be included in gross income.  Gambling Sessions - There is a concept of gambling “sessions” where the IRS allows netting of gain and losses. However, the record-keeping requirements are so stringent that they make its application extremely limited, and it is not covered in detail in this article. The concept basically allows gamblers to net gains and losses from gambling sessions. However, a gambling session is very limited in scope. It must be the same type of uninterrupted wagering during a specific uninterrupted period of time at a specific location. Thus if a taxpayer entered a casino and played slots for an hour, then switched to craps for the next hour, that would be two separate gambling sessions. If a taxpayer entered Casino #1 and played slots for an hour and then went to Casino #2 and continued to play slots, that would be two separate gambling activities because two locations were involved. Plus all of that must be adequately documented. Charity Raffles - The IRS considers raffles, bingo, lotteries, etc., to be gambling, even if the sponsor of the activity is a charitable organization. So winnings and losses are treated the same as for any other gambling activity, and the amounts paid to buy raffle or lottery tickets or to play bingo or other games of chance are not deductible as a charitable contribution. If you have winnings and want more information on how those winnings will impact your tax liability, please give this office a call. Tue, 23 Sep 2014 19:00:00 GMT October 2014 Individual Due Dates http://www.mytrivalleytax.com/blog/october-2014-individual-due-dates/34391 http://www.mytrivalleytax.com/blog/october-2014-individual-due-dates/34391 Tri-Valley Tax & Financial Services Inc October 10 - Report Tips to Employer If you are an employee who works for tips and received more than $20 in tips during September, you are required to report them to your employer on IRS Form 4070 no later than October 10. Your employer is required to withhold FICA taxes and income tax withholding for these tips from your regular wages. If your regular wages are insufficient to cover the FICA and tax withholding, the employer will report the amount of the uncollected withholding in box 12 of your W-2 for the year. You will be required to pay the uncollected withholding when your return for the year is filed.October 15 - Individuals If you have an automatic 6-month extension to file your income tax return for 2013, file Form 1040, 1040A, or 1040EZ and pay any tax, interest, and penalties due.October 15 - SEP IRA & Keogh Contributions Last day to contribute to SEP or Keogh retirement plan for calendar year 2013 if tax return is on extension through October 15. Mon, 22 Sep 2014 19:00:00 GMT October 2014 Business Due Dates http://www.mytrivalleytax.com/blog/october-2014-business-due-dates/34392 http://www.mytrivalleytax.com/blog/october-2014-business-due-dates/34392 Tri-Valley Tax & Financial Services Inc October 15 - Electing Large Partnerships File a 2013 calendar year return (Form 1065-B). This due date applies only if you were given an additional 6-month extension. March 17 was the due date for furnishing Schedules K-1 or substitute Schedule K-1 to the partners.October 15 - Social Security, Medicare and withheld income tax If the monthly deposit rule applies, deposit the tax for payments in September. October 15 - Nonpayroll Withholding If the monthly deposit rule applies, deposit the tax for payments in September. October 31 - Social Security, Medicare and Withheld Income Tax File Form 941 for the third quarter of 2014. Deposit or pay any undeposited tax under the accuracy of deposit rules. If your tax liability is less than $2,500, you can pay it in full with a timely filed return. If you deposited the tax for the quarter in full and on time, you have until November 10 to file the return.October 31 - Certain Small Employers Deposit any undeposited tax if your tax liability is $2,500 or more for 2014 but less than $2,500 for the third quarter.October 31 - Federal Unemployment Tax Deposit the tax owed through September if more than $500. Mon, 22 Sep 2014 19:00:00 GMT Billing for Time in QuickBooks: An Overview http://www.mytrivalleytax.com/blog/billing-for-time-in-quickbooks-an-overview/39533 http://www.mytrivalleytax.com/blog/billing-for-time-in-quickbooks-an-overview/39533 Tri-Valley Tax & Financial Services Inc If you sell your employees’ time and skills, you can use QuickBooks to record those hours and bill your customers for them. If your small business sells products, you know how precisely you must track your starting stock numbers, ongoing inventory levels, and your reorder points. QuickBooks provides tools to help with this process, but human factors can sometimes throw off your careful counts. Fortunately, QuickBooks is remarkably flexible when it comes to recording the time your employees spend on customers and jobs. You can enter information about a single activity -- either billable or unbillable -- and/or document hours in a timesheet. A built-in timer (the “Stopwatch”) helps you count the minutes automatically; you can also type them in manually. One Work Session All versions of desktop QuickBooks include dialog boxes designed to help you enter all the details related to a single timed activity. To get there, either open the Employees menu and select Enter Time | Time/Enter Single Activity or click the down arrow next to the Enter Time icon on the Home Page and choose Time/Enter Single Activity. Figure 1: QuickBooks helps you create records for individual activities completed by employees, which can be either billable or unbillable. You fill out the fields in this window like you would any other in QuickBooks. Click the calendar icon in the DATE field to reflect the date the work was completed (not the current date), and click the down arrows in the fields that contain them to select options from a list. If you already know the duration of the activity, simply enter it in the field to the right of the clock icon. Otherwise, use the Start, Stop, and Pause buttons to let QuickBooks time it. The Time/Enter Single Activity dialog box is designed to record one activity, not necessarily an entire workday, unless an employee only provides one service for one customer in a day. If he or she provides more than one service for one or more customers, you’ll need a fresh record for each. Note: If the employee selected is timesheet-based, an additional field will appear above the CLASS field asking for the related PAYROLL ITEM. And if you’ve turned on workers’ compensation (and the employee is timesheet-based), a field titled WC CODE will drop into place below it. This must be done absolutely correctly, and it can get complicated. We can help you manage this feature. A Comprehensive View At the top of the Time/Enter Single Activity dialog box, you’ll see an icon labeled Timesheet. If you click on this with an employee’s name selected, his or her timesheet will open and display the hours already entered for that period. Or you can open a blank timesheet by opening the Employees menu and selecting Enter Time | Use Weekly Timesheet. You can also click the Enter Time icon on the Home Page. Figure 2: You can access an employee’s timesheet from the Time/Enter Single Activity dialog box, from the Employees menu, or from the Home Page. If you’ve entered all of the hours individually for an employee in a given time period, the timesheet should be correct when you click through from the Time/Enter Single Activity box. If not, you can edit cells by clicking in them and changing the data. Be sure that the Billable box is checked or unchecked correctly. You can also enter hours directly on a timesheet instead of recording individual activities. Just select the employee’s name by clicking on the arrow in the NAME field at the top of the Weekly Timesheet dialog box and fill in the boxes. Note: Individual activities that you enter for employees are automatically transferred to the timesheet format and vice-versa. Billing for Time QuickBooks keeps track of all entered billable hours and reminds you of them when it’s time to invoice. If customers have outstanding time and/or costs, this dialog box will open the next time you start to create an invoice for them: Figure 3: This dialog box is one of the ways QuickBooks helps you bill customers for everything they owe. QuickBooks also provides several reports related to billing for time. We’ll be happy to go over them and – as always – help with any other questions you might have. Mon, 22 Sep 2014 19:00:00 GMT October 15th Extension Deadline Approaching http://www.mytrivalleytax.com/blog/october-15th-extension-deadline-approaching/37797 http://www.mytrivalleytax.com/blog/october-15th-extension-deadline-approaching/37797 Tri-Valley Tax & Financial Services Inc Article Highlights: Extended due date Late filing penalties Interest on tax due If you were unable to file your 2013 individual tax return by April 15th and filed an extension, you should be aware that the extension gave you until October 15th to file your return or face a late filing penalty, which is 4 1/2% of the tax due per month, with a maximum penalty of 22 1/2% of the tax due. There is also a minimum penalty of the lesser of $135 or 100% of the tax due. If you prepaid your 2013 taxes timely through a combination or withholding or estimated taxes and will receive a refund when your return is ultimately filed, there is no penalty for filing late. You should also be aware that the extension provided you additional time to file your return but not additional time to pay any tax you might owe. Thus, even though the extension avoids the late filing penalty, you are still subject to interest on any unpaid balance through the date of filing. Therefore, you can minimize interest charges by filing as soon as possible. There are no additional extensions available, so if you owe tax it is important you file by the October 15th due date even if you have to estimate the missing items and file an amended return at a later date. If you are on extension and have the information needed to complete your return, it is important that you provide that information to this office as soon as possible to avoid being caught up in a last-minute rush. If you are on extension and cannot obtain the information required to complete your return, please call this office as soon as possible to discuss your options. Thu, 18 Sep 2014 19:00:00 GMT Getting Around the Kiddie Tax http://www.mytrivalleytax.com/blog/getting-around-the-kiddie-tax/39507 http://www.mytrivalleytax.com/blog/getting-around-the-kiddie-tax/39507 Tri-Valley Tax & Financial Services Inc Article Highlights: Reason for the Kiddie Tax  Legal Ways to Avoid It  Investments that Avoid the Kiddie Tax  Other Tax-advantaged Moves for Children  Congress created the “Kiddie Tax” to prevent parents from placing investments in their child's name to take advantage of the child's lower tax rate. Kiddie Tax rules apply most often to children through the age of 17, although children aged 18 through 23 who are full-time students may also be affected. Under the Kiddie Tax, a child's investment income in excess of an annual inflation adjusted floor amount ($2,000 for 2014) is taxed at the parent's tax rate rather than the child's. These rules do not apply to married children who file a joint return with their spouse. Depending upon your circumstances, this can be either a tax return preparation nuisance or a penalty tax - or, maybe, both. Parents have the option of including their children's investment income on their own return and thus avoiding the hassle and cost of filing a separate tax return for the children. For higher-income taxpayers who are subject to the net investment income tax, electing to include a child's income on their own return may subject the child's investment income to this new, punitive 3.8% surtax on net investment income tax. Many insightful parents seek tax-advantaged ways to put money aside for their children's education, first home, etc. They should not be deterred by the Kiddie Tax, as there are legal ways to avoid it. This is generally accomplished by making investments that produce tax-free income or that defer income until the year the child reaches age 18 (age 24 if a full-time student). If, at that time, the child has little or no other income, the deferred income could be realized with little to no income tax. The following are examples of investments that either defer income or generate tax-free income. However, you must also consider that some of these might have a lower rate of return than a taxable investment U.S. savings bonds - Interest can be deferred until the bonds are cashe  Municipal bonds - Generally produce tax-free interest income for federal taxes. Most states with a state income tax also permit tax-free treatment of interest from bonds of that state or local governments within that state.  Growth stocks - Stocks that focus more on capital appreciation than current income. The child could wait to sell them until after attaining age 18 (or age 24 if a full-time student) at a time when he or she has little or no other income. Another technique is for the parents to gift appreciated stock to their children, thereby shifting gain to the children when the stock is sold. Thus, each parent could gift appreciated property, such as stock, value not to exceed the annual gift tax exclusion amount ($14,000 for 2014) to each child without current tax consequences. Later, when the child sells the appreciated property, the child would pay the tax on the parent's appreciation.   Mutual funds - Mutual funds that focus on growth stocks or municipal bonds. Although they might throw off some taxable income, their primary goal is capital appreciation or tax-free income.   Unimproved real estate - This provides appreciation without current income.  If the family has a business, the business could employ the child. The child's earned income is not subject to the Kiddie Tax rules and will generate a deduction for the family business (assuming the wages are reasonable for work actually performed). The child's earned income can offset the standard deduction for a dependent and the excess income will be taxed at the child's rate (not the parent's). In addition, the child would also qualify for an IRA, which provides additional income shelter. If you have questions related to the “Kiddie Tax,” please give this office a call.  Tue, 16 Sep 2014 19:00:00 GMT Repeated Warning about Phone Scams http://www.mytrivalleytax.com/blog/repeated-warning-about-phone-scams/39493 http://www.mytrivalleytax.com/blog/repeated-warning-about-phone-scams/39493 Tri-Valley Tax & Financial Services Inc Article Highlights: Scammers who pretend to be from the IRS are calling people across the country.  IRS never initiates contact by phone or e-mail.  IRS never asks for credit card numbers or account PINs over the phone.  IRS never demands immediate payment.  Don't get hoodwinked!  This office has repeatedly warned clients about scams related to taxes. The problem has only gotten worse, so we feel obligated to issue another warning. The scammers out there are pretty sophisticated and are trying to steal your identity and your money. This office doesn't want you to become a victim, so please read this article and let family and friends know about this rapidly escalating scam based upon individuals' fears of the Internal Revenue Service (IRS) and their overreaction to calls claiming to be from the IRS. You can even forward this article to your friends and family, and especially be sure to make your elderly family members aware of these scams. The IRS and the Treasury Inspector General for Tax Administration (TIGTA) continue to hear from taxpayers who have received unsolicited calls from individuals demanding payment while fraudulently claiming to be from the IRS. Based on the 90,000 complaints that TIGTA has received through its telephone hotline, through mid-year, TIGTA has identified approximately 1,100 victims who have lost an estimated $5 million from these scams. We can only imagine how many thousands of taxpayers haven't reported their losses and encounters with these scammers. Taxpayers should remember their first contact with the IRS will not be a call from out of the blue, but through official correspondence sent through the mail. A big red flag for these scams is an angry, threatening call from someone who says he or she is from the IRS and urging immediate payment. This is not how the IRS operates. If you receive such a call, you should hang up immediately. Additionally, it is important for taxpayers to know that the IRS: Never asks for credit card, debit card, or prepaid card information over the telephone.  Never insists that taxpayers use a specific payment method to pay tax obligations.  Never requests immediate payment over the telephone.   Will not take enforcement action immediately following a phone conversation. Taxpayers usually receive prior written notification of IRS enforcement action involving IRS tax liens or levies.  Potential phone scam victims may be told that they owe money that must be paid immediately to the IRS; or, on the flip side, that they are entitled to big refunds. When unsuccessful the first time, sometimes phone scammers call back trying a new strategy. Other characteristics of these scams include: Scammers use fake names and IRS badge numbers. They generally use common names and surnames to identify themselves.   Scammers may be able to recite the last four digits of a victim's Social Security number. Make sure you do not provide the rest of the number or your birth date...that is information ID thieves can use to make your life miserable.   Scammers spoof the IRS toll-free number on caller ID to make it appear that it's the IRS calling.   Scammers sometimes send bogus IRS e-mails to some victims to support their bogus calls.   Victims hear background noise of other calls being conducted to mimic a call site.   After threatening victims with jail time or driver's license revocation, scammers hang up and others soon call back pretending to be from the local police or DMV, and the caller ID supports their claim.  DON'T GET HOODWINKED...it is a scam. If you get a phone call from someone claiming to be from the IRS, DO NOT give the caller any information or money. Instead, you should immediately hang up. Call this office if you are concerned about the validity of the call. The IRS does not initiate contact with taxpayers by e-mail to request personal or financial information. This includes any type of electronic communication, such as text messages and social media channels. The IRS also does not ask for PINs, passwords, or similar confidential access information for credit card, bank, or other financial accounts. If you receive such a request or communication, DO NOT open any attachments or click on any links contained in the message. If you wish to help the government combat these scams, forward the e-mail to phishing@irs.gov. This is not the only scam currently making the rounds; you should be aware that there are other, unrelated, scams (such as a lottery sweepstakes) and solicitations (such as debt relief) that fraudulently claim to be from the IRS. When in doubt, please call this office. Thu, 11 Sep 2014 19:00:00 GMT Alcoholism & Drug Addiction http://www.mytrivalleytax.com/blog/alcoholism--drug-addiction/39488 http://www.mytrivalleytax.com/blog/alcoholism--drug-addiction/39488 Tri-Valley Tax & Financial Services Inc Article Highlights: Potential medical deductions  Medical dependent  Divorced parents  Medical AGI limitations  Taxpayers are allowed a deduction for medical expenses paid during the taxable year, not compensated for by insurance or otherwise, for medical care of the taxpayer, the taxpayer's spouse, or a dependent. Alcoholism and drug addiction are treated as medical ailments for tax purposes. People with addictions often cannot quit on their own. Addiction is an illness that requires treatment. Generally, treatment expenses are tax deductible as an itemized deduction medical expense. Possible deductible expenses include the costs of the following: Doctors  Prescribed medications  Laboratory testing  Psychological services  Treatment programs  Inpatient treatment at a therapeutic center for alcoholism or drug abuse, including meals and lodging furnished as necessary incident to the treatment  Counseling  Behavioral therapies  To claim these expenses for someone other than the taxpayer or a spouse, the person must have been a dependent either at the time that the medical services were provided or at the time that the expenses were paid. The qualifications for a medical dependent are less stringent than those for a regular dependent. A person generally qualifies as a dependent for purposes of the medical expense deduction if: That person lived with the taxpayer for the entire year as a member of the household (temporary absence to obtain medical treatment is an exception) or is related to the person,   That person was a U.S. citizen or resident or a resident of Canada or Mexico for some part of the calendar year in which the tax year began, and   The taxpayer provided over half of that person's total support for the calendar year. Medical expenses of any person who is a dependent may be included, even if an exemption for him or her cannot be claimed on the return.  Thus, the dependent's age and income are not limiting factors for purposes of determining whether an individual is a dependent for purposes of deducting medical expenses. For example, suppose an adult child has an addiction problem, and even though the child is an adult and generates an income, a parent may still be able to deduct medical expenses that he or she pays for the adult child if the three requirements above are met. The parent must pay the medical service providers directly and not just give the money to the dependent to pay the bills. In the case of divorced parents, if either parent meets the regular dependency qualifications, then each parent can deduct the medical expenses each paid for the child. But consider the AGI limitations, discussed below, that might preclude any deduction for one of the parents, and plan payments accordingly. Another issue related to medical expenses is that a taxpayer must itemize deductions in order to claim them, and medical deductions are only allowed as an itemized deduction to the extent that they exceed 10% of the taxpayer's AGI. If the taxpayer or spouse is age 65 or older, that limitation is reduced to 7.5% of the taxpayer's AGI. As you can see, these and other tax rules related to medical deductions can become complicated. If you need assistance in planning medical expenditures for maximum tax benefits or determining whether you can deduct certain expenses, please call. Tue, 09 Sep 2014 19:00:00 GMT Better to Sell or Trade a Business Vehicle? http://www.mytrivalleytax.com/blog/better-to-sell-or-trade-a-business-vehicle/39480 http://www.mytrivalleytax.com/blog/better-to-sell-or-trade-a-business-vehicle/39480 Tri-Valley Tax & Financial Services Inc Article Highlights: Dispositions for Gain Dispositions for Loss Vehicle Trade-in When replacing a business vehicle, it does make a difference for tax purposes whether you decide to sell it or trade it for the replacement vehicle. If you sell a vehicle that was used for business, the resulting gain or loss is reported on your tax return. As a result, it is generally better to sell a vehicle if the disposition of the vehicle will result in a loss. If, on the other hand, the disposition will result in a gain, it would be better to trade it. Since trade-ins are treated as a tax-deferred exchange and any gain or loss is absorbed into the replacement vehicle’s depreciable basis, it is generally better to trade in a vehicle that would result in a gain. As an example, suppose you sell your business vehicle for $12,000. Your original purchase price was $32,000 and $17,000 is taken in depreciation. As illustrated below, the sale results in a loss, so it generally would be better for you to sell the vehicle and deduct the loss rather than trade in the vehicle. On the other hand, had you sold the business vehicle for $16,000, the sale would have resulted in a $1,000 taxable gain, and trading it in would have been a better option. If the vehicle is used partially for business and personal purposes, the loss or gain must be prorated for the business use. Loss on the personal portion is not deductible. Since trade-in values are generally less than the sales value of the vehicle, the trade-in decision must also consider whether the tax benefits will exceed the additional money received from selling the old business vehicle. Of course, there is always the hassle of selling a car to be considered as well. This sell/trade-in concept also applies when selling or disposing of other business assets. If you have any questions related to the disposition of vehicles or any other business asset and how the sale will impact you business wise, please give this office a call. Fri, 05 Sep 2014 19:00:00 GMT Charity Purchases and Auctions http://www.mytrivalleytax.com/blog/charity-purchases-and-auctions/30867 http://www.mytrivalleytax.com/blog/charity-purchases-and-auctions/30867 Tri-Valley Tax & Financial Services Inc Article Highlights Quid pro quo contributions Documentation requirements Separating charitable contribution from purchase price A regular form of fundraising by charitable organizations consists of sales or auctions of property or services at a price in excess of value. These are referred to as “quid pro quo” contributions or dual payments made that consist partly of a charitable gift and partly of consideration for goods or services provided to the donor. Quid pro quo in Latin is “something for something.” When used in the context of charitable contributions, quid pro quo contributions typically include the purchase of tickets for sightseeing tours, all-expense-paid trips, theatrical or concert performances, books or subscriptions to magazines, stationery, candy, and more. They are sold with a generous mark-up that is designed to help the charity in performing its functions. In these cases, the charitable deduction is the excess of the payment over the value received by the purchaser-contributor. For instance, when tickets to a show are purchased from a charity at a price in excess of the normal admission charge, the excess over the latter (plus tax) is a charitable contribution. Determining and documenting the amount of the purchase that represents the charitable portion is the key to being able to take a charitable tax deduction for quid pro quo purchases. Tax law requires charitable organizations that receive a quid pro quo contribution in excess of $75 to provide a written statement, in connection with soliciting or receiving the contribution, that informs the donor that the amount of the contribution that is deductible for federal income tax purposes is limited to the amount of the purchase that is in excess of the value of the property or service purchased and a good-faith estimate of the value of the goods or services purchased. Example #1 - A taxpayer purchases a cookbook from a charity for $100. The charity provides the taxpayer with a good faith estimate of $20 for the value of the book in a written disclosure statement. Thus, the taxpayer’s charitable deduction is $80 ($100 minus the $20 value of the book). Example #2 - A taxpayer attends a charity auction. The charity provides a catalog of the items for auction and a good-faith estimate of the value of each item. The taxpayer is the successful bidder for a vase valued at $100 in the catalog, for which the taxpayer bid and paid $500. The taxpayer’s charitable deduction is $400 ($500 minus the good-faith valuation of $100). Example #3 - A taxpayer pays $40 to see a special showing of a movie for the benefit of a qualified charity. The ticket reads “Contribution $40.” If the regular price for the movie is $10, the contribution would be $30 ($40 minus the regular $10 ticket price). If you made or are considering making a quid pro quo purchase from a charitable organization and have questions relating to the amount that will represent a charitable contribution, please give this office a call. Wed, 03 Sep 2014 19:00:00 GMT Hiring Family Members in a Family Business http://www.mytrivalleytax.com/blog/hiring-family-members-in-a-family-business/39434 http://www.mytrivalleytax.com/blog/hiring-family-members-in-a-family-business/39434 Tri-Valley Tax & Financial Services Inc Article Summary: Employing Your Child  Employing Your Spouse  Employer Tax Savings  IRA and Retirement Plan Considerations  In today's tough job market, students seeking part-time employment, young adults looking for full-time employment, and college graduates looking to begin their careers are finding it difficult to land a job. The family business may be the only place for some family members to find work, even if only temporarily until another opportunity arises. Financially, it makes more sense to keep the family employed rather than hiring strangers, provided of course the family member is suitable for the job - and not all are. So rather than helping to support them with your after-tax dollars, you can instead hire them in your business and pay them with tax-deductible dollars. Of course the employment must be legitimate and the pay commensurate with the hours and the job worked. The following are typical situations encountered when hiring family members. Employing a Child - A reasonable salary paid to a child reduces the self-employment income and tax of the parents (business owners) by shifting income to the child. When a child under the age of 19 or a student under the age of 24 is claimed as a dependent of the parents, the child is generally subject to the kiddie tax rules if their investment income is above $2,000. Under these rules, the child's investment income is taxed at the same rate as the parent's top marginal rate, using a lower $1,000 standard deduction. However, earned income (income from working) is taxed at the child's marginal rate, and the earned income is reduced by the lesser of the earned income plus $350 or the regular standard deduction for the year, which is $6,200 for 2014. Assuming that a child has no other income, the child could be paid $6,200 and incur no income tax. If paid more, the next $9,075 earned by the child is taxed at 10%. Example: You are in the 25% tax bracket and own an unincorporated business. You hire your child (who has no investment income) and pay the child $11,700 for the year. You reduce your income by $11,700, which saves you $2,925 of the income tax (25% of $11,700), and your child has a taxable income of $5,500 ($11,700 less the $6,200 standard deduction), on which the tax is $550 (10% of $5,500). If the business is unincorporated, and the wages are paid to a child under age 18, he or she will not be subject to FICA - Social Security and Hospital Insurance (aka Medicare or HI) - taxes because employment for FICA tax purposes does not include services performed by a child under the age of 18 while employed by a parent. Thus, the child will not be required to pay the employee's share of the FICA taxes, and the business will not have to pay its half either. In addition, paying the child, and thus reducing the business's net income, reduces the parent's self-employment tax. Use the same example from above. Assume your business profits are $130,000. By paying your child the $11,700, you not only reduce your self-employment income for income tax purposes, but you also reduce your self-employment tax (HI portion) by $313 (2.9% of $11,700 times the SE factor of 92.35%). But if your net profits for the year were less than the maximum SE income ($117,000 for 2014), that is subject to Social Security tax, so the savings would include the 12.4% Social Security portion in addition to the 2.9% HI portion. A similar but more liberal exemption applies for FUTA, which exempts from federal unemployment tax the 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 or her parents. However, the exemptions do not apply to businesses that are incorporated or a partnership that includes non-parent partners. However, there is no extra cost to your business if you are paying a child for work that you would pay someone else to do anyway. Retirement Plan Savings - Additional savings are possible if the child is paid more (or works more than part-time) and deposits the extra earnings into a traditional IRA. For 2014, the child can make a tax-deductible contribution of up to $5,500 to his or her own IRA. The business also may be able to provide the child with retirement plan benefits, depending on the type of plan it uses and its terms, the child's age, and the number of hours worked. By combining the standard deduction ($6,200) and the maximum deductible IRA contribution ($5,500) for 2014, a child could earn $11,700 of wages and pay no income tax. However, referring back to our original example, the tax to be saved by making a traditional IRA contribution is only $550, and it might be appropriate to make a Roth IRA contribution instead, especially because the child has so many years before retirement, and the future tax-free retirement benefits will far outweigh the current $550 savings. Hiring Your Spouse - Reasonable wages paid to a spouse entitles the employer-spouse to a business deduction. The wages are subject to FICA taxes, and the spouse may qualify for Social Security benefits to which he or she might not otherwise be entitled. In addition, the spouse may also be eligible to receive coverage under the business's qualified retirement plan, and the employer-spouse may obtain a business deduction for health insurance premium payments made on behalf of the employed spouse. While maintaining the same family coverage, the business deductions could be increased by providing the spouse with family health insurance coverage as an employee. If you have questions about the information provided here and other possible tax benefits or issues related to hiring your spouse or child, please give this office a call. Thu, 28 Aug 2014 19:00:00 GMT Inheritances Can Be Tricky http://www.mytrivalleytax.com/blog/inheritances-can-be-tricky/34319 http://www.mytrivalleytax.com/blog/inheritances-can-be-tricky/34319 Tri-Valley Tax & Financial Services Inc Article Highlights: Bank Accounts Capital Assets IRA or Other Qualified Retirement Plans Life Insurance Proceeds Annuities and Installment Sale Notes Estate Income Tax Returns and K-1s If you have received an inheritance or anticipate receiving one in the future, this article may answer many of your questions. The process of claiming an inheritance can be quite complex, and it helps to understand the basics and be aware of potential tax liabilities. An inheritance is generally received after all applicable taxes (on estate returns, estate or trust income tax returns, decedent’s final tax return, decedent’s back taxes, etc.) have been paid, along with any outstanding liabilities the decedent may have had. Exactly how the estate is handled will depend upon whether the assets were owned individually or in a trust. Without going into the intricacies of estates, trusts and probate, the results for a beneficiary will generally be the same. Inherited items on which the decedent had already paid taxes and upon which the estate tax (if any) has been paid will pass to the beneficiary tax-free. On the other hand, items of income that had not previously been taxed to the decedent and any appreciation or depreciation of assets acquired from the decedent will have tax implications. Some possible scenarios are provided below: Bank Account - Take for instance, an inherited bank account worth $25,000, where the funds are not immediately distributed to the heir. The $25,000 account earns $375 of interest income after the decedent’s date of death and up to the time at which the funds are paid to the beneficiary. Out of the $25,375 the beneficiary receives, the $25,000 is tax-free, but the $375 is taxable as interest income. Capital Asset -The basis for gain or loss from the sale of an inherited capital asset, such as stock, real estate, collectibles, etc., is generally based on the value of the asset at the time of the decedent’s death. That is one reason why qualified appraisals are so important. To explain this further, let’s assume that a vacant parcel of land is inherited with a date-of-death appraisal that values it at $15,000. If that property is sold for a net price of $15,000, there is neither gain nor loss and the $15,000 is tax-free to the beneficiary. If, on the other hand, the net sales price is more or less than the $15,000, there would be a reportable capital gain or loss. For capital gains tax purposes, the holding period is important. Assets held longer than one year are generally taxed substantially less than those held for a shorter period of time. However, for inherited property, the beneficiary receives long-term treatment immediately, whether or not the decedent or the beneficiary had held it for more than one year. If there are expenses associated with selling the asset, then those expenses are deductible in figuring the gain or loss. If the heir in this example held onto the land and did not sell it, he has no income or loss to report just because he inherited the land; the value of the land when he passes away will determine the amount to be included in his estate, his heirs will receive it at that value, and the cycle will start over. IRA or Other Qualified Retirement Plan - Suppose the decedent had a traditional IRA account and the distributions from that account were taxable to the decedent. If you inherited that account, the distributions would be taxable to you as the beneficiary. Why? Because the decedent had never paid taxes on the income that went to fund the traditional IRA and therefore you, the beneficiary, would be stuck with the tax liability. The good news is that there are options for taking the income over a number of years that can soften the tax blow. Life Insurance Proceeds - Generally, the proceeds from a life insurance policy are tax-free to the heirs. However, if the policy is not paid immediately, as most are not, the insurance company will include interest. That interest is taxable to the heirs. Annuities and Installment Sale Notes - If the decedent purchased an annuity or had an installment sale note from property he previously sold, the decedent’s basis will be tax-free, but the heirs will be obligated to pay tax on any amount received in excess of the decedent’s basis. For an annuity, the decedent’s basis would be what he paid for it. For an installment note, payments include: (1) a return of a portion of the asset’s cost (basis), which is not taxable; (2) a portion from the prior sale of the asset, which is taxable as a capital gain; and (3) taxable interest on the note. A trust or estate is required to file an income tax return and to report income earned by the estate or trust after the decedent’s passing and before the assets are distributed to the heirs. Each heir will generally receive a form called a Schedule K-1 (1041). It will include that heir’s share of income and must be included on the heir’s individual tax return. Although infrequent because the taxes are generally higher, the trust or estate may pay the income tax on the income. The executor or trustee is responsible for making sure the required tax returns are filed and for sending K-1s to the heirs. There may be taxable income to the heir, even though the inheritance has not yet been received. In addition, there are other factors to consider that have not been discussed herein. Please call this office if you are or expect to be a beneficiary and need assistance with the tax implications of an inheritance. Tue, 26 Aug 2014 19:00:00 GMT September 2014 Individual Due Dates http://www.mytrivalleytax.com/blog/september-2014-individual-due-dates/33942 http://www.mytrivalleytax.com/blog/september-2014-individual-due-dates/33942 Tri-Valley Tax & Financial Services Inc September 1 - 2014 Fall and 2015 Tax Planning Contact this office to schedule a consultation appointment. September 10 - Report Tips to Employer If you are an employee who works for tips and received more than $20 in tips during August, you are required to report them to your employer on IRS Form 4070 no later than September 10. Your employer is required to withhold FICA taxes and income tax withholding for these tips from your regular wages. If your regular wages are insufficient to cover the FICA and tax withholding, the employer will report the amount of the uncollected withholding in box 12 of your W-2 for the year. You will be required to pay the uncollected withholding when your return for the year is filed.September 15 - Estimated Tax Payment Due The third installment of 2014 individual estimated taxes is due. Our tax system is a “pay-as-you-go” system. To facilitate that concept, the government has provided several means of assisting taxpayers in meeting the “pay-as-you-go” requirement. These include: Payroll withholding for employees; Pension withholding for retirees; and Estimated tax payments for self-employed individuals and those with other sources of income not covered by withholding. When a taxpayer fails to prepay a safe harbor (minimum) amount, they can be subject to the underpayment penalty. This penalty is equal to the federal short-term rate plus 3 percentage points, and the penalty is computed on a quarter-by-quarter basis. Federal tax law does provide ways to avoid the underpayment penalty. If the underpayment is less than the $1,000 de-minimis amount, no penalty is assessed. In addition, the law provides "safe harbor" prepayments. There are two safe harbors: The first safe harbor is based on the tax owed in the current year. If your payments equal or exceed 90% of what is owed in the current year, you can escape a penalty. The second safe harbor is based on the tax owed in the immediately preceding tax year. This safe harbor is generally 100% of the prior year’s tax liability. However, for higher-income taxpayers whose AGI exceeds $150,000 ($75,000 for married taxpayers filing separately), the prior year’s safe harbor is 110%. Example: Suppose your tax for the year is $10,000 and your prepayments total $5,600. The result is that you owe an additional $4,400 on your tax return. To find out if you owe a penalty, see if you meet the first safe harbor exception. Since 90% of $10,000 is $9,000, your prepayments fell short of the mark. You can't avoid the penalty under this exception. However, in the above example, the safe harbor may still apply. Assume your prior year’s tax was $5,000. Since you prepaid $5,600, which is greater than the 110% of the prior year’s tax (110% = $5,500), you qualify for this safe harbor and can escape the penalty. This example underscores the importance of making sure your prepayments are adequate, especially if you have a large increase in income. This is common when there is a large gain from the sale of stocks, sale of property, when large bonuses are paid, when a taxpayer retires, etc. Timely payment of each required estimated tax installment is also a requirement to meet the safe harbor exception to the penalty. If you have questions regarding your safe harbor estimates, please call this office as soon as possible. CAUTION: Some state de-minimis amounts and safe harbor estimate rules are different than those for the Federal estimates. Please call this office for particular state safe harbor rules. Thu, 21 Aug 2014 19:00:00 GMT September 2014 Business Due Dates http://www.mytrivalleytax.com/blog/september-2014-business-due-dates/33943 http://www.mytrivalleytax.com/blog/september-2014-business-due-dates/33943 Tri-Valley Tax & Financial Services Inc September 15 - Corporations File a 2013 calendar year income tax return (Form 1120 or 1120-A) and pay any tax, interest, and penalties due. This due date applies only if you timely requested an automatic 6-month extension.September 15- S Corporations File a 2013 calendar year income tax return (Form 1120S) and pay any tax due. This due date applies only if you requested an automatic 6-month extension. September 15- Corporations Deposit the third installment of estimated income tax for 2014 for calendar year corporations.September 15 - Social Security, Medicare and withheld income tax If the monthly deposit rule applies, deposit the tax for payments in August. September 15 - Nonpayroll Withholding If the monthly deposit rule applies, deposit the tax for payments in August. September 15 - Partnerships File a 2013 calendar year return (Form 1065). This due date applies only if you were given an additional 5-month extension. Provide each partner with a copy of K-1 (Form 1065) or a substitute Schedule K-1.September 15 - Fiduciaries of Estates and Trusts File a 2013 calendar year return (Form 1041). This due date applies only if you were given an additional 5-month extension. If applicable, provide each beneficiary with a copy of K-1 (Form 1041) or a substitute Schedule K-1. Thu, 21 Aug 2014 19:00:00 GMT Home Modifications for Disabilities http://www.mytrivalleytax.com/blog/home-modifications-for-disabilities/39397 http://www.mytrivalleytax.com/blog/home-modifications-for-disabilities/39397 Tri-Valley Tax & Financial Services Inc Article Highlights Improvements that increase the home value  Improvement that do not increase the home value  Medical AGI limitations  Generally, home improvements are not deductible except to offset home gain when the home is sold. But a medical expense deduction may be claimed when the home modification is a medical necessity. The modification expense is only deductible as a medical expense to the extent it exceeds any resulting increase in the value of the property. For example, a doctor recommends that a taxpayer with severe arthritis have daily hydrotherapy. The taxpayer has a hot tub installed for a cost $21,000. A certified home appraiser determined the hot tub addition increased the home value by $20,000. The taxpayer's medical deduction for installing the hot tub is only $1,000. Not all improvements result in an increase in the home's value. In fact, some improvements could actually decrease the resale value, such as lowering cabinets for an occupant confined to a wheelchair. Certain improvements do not usually increase the value of the home and the cost can be included in full as medical expenses. These improvements include, but are not limited to, the following items: Constructing entrance or exit ramps for the home  Widening doorways at entrances or exits to the home  Widening or otherwise modifying hallways and interior doorways  Installing railings, support bars, or other modifications  Lowering or modifying kitchen cabinets and equipment  Moving or modifying electrical outlets and fixtures  Installing porch lifts and other forms of lifts but generally not elevators  Modifying fire alarms, smoke detectors, and other warning systems  Modifying stairways  Adding handrails or grab bars anywhere (whether or not in bathrooms)  Modifying hardware on doors  Modifying areas in front of entrance and exit doorways  Grading the ground to provide access to the residence. Only reasonable costs to accommodate a person in a disabled condition are considered medical care. Additional costs for personal motives, such as for architectural or aesthetic reasons, are not medical expenses.  However, medical expenses can be claimed only to the extent that they exceed 10% of the taxpayer's adjusted gross income (AGI). The 10% is reduced to 7.5% for taxpayers if either spouse is age 65 or over. Please call this office if you have questions related to this deduction and whether you will benefit, tax-wise, from any impairment-related home modifications. Thu, 21 Aug 2014 19:00:00 GMT Customize QuickBooks’ Reports, Make Better Business Decisions http://www.mytrivalleytax.com/blog/customize-quickbooks8217-reports-make-better-business-decisions/39398 http://www.mytrivalleytax.com/blog/customize-quickbooks8217-reports-make-better-business-decisions/39398 Tri-Valley Tax & Financial Services Inc QuickBooks simplifies and speeds up your daily accounting work, but you’re missing out on valuable insight if you don’t tailor your report data. Do you remember why you started using QuickBooks? You may have simply wanted to produce sales forms and record payments electronically. Gradually, you expanded your use of the software, perhaps paying and tracking bills through it and keeping an eagle eye on your inventory levels. Certainly, you’ve run at least some of the pre-built report templates offered by all versions of QuickBooks since their inception. QuickBooks’ automation of your daily bookkeeping tasks has undoubtedly served you well. But that’s merely limited use; now it’s time to take advantage of QuickBooks’ greatest strength: customizable reports. One of the rewards for diligently entering all of your accounting information is a better grasp of your company’s financial performance to date. That insight ultimately leads to better business decisions that can contribute to your future growth and success. Figure 1: QuickBooks’ Report Center can help you learn about what each report is designed to tell you. But smart customization requires deeper insight. Making Reports Meaningful Like many other tasks in QuickBooks, report customization tools aren’t that difficult to master. What’s challenging is: Understanding what each report is designed to tell you Determining which reports are most relevant to your business information needs, and Designing each to produce the critical insight you need in order to move forward. The first of these is fairly clear. You can understand what many reports do by their titles, their content, and the descriptions QuickBooks offers. We recommend that you spend some time looking at the Report Center in QuickBooks to familiarize yourself with your options. The second two challenges are a bit more formidable. It’s our job to assist you in establishing a workflow in QuickBooks to keep accurate records and produce necessary transactions. But we want you to do more than just maintain the status quo. When you analyze and interpret what your reports are telling you, you can make smart business decisions. So if we haven’t gone over this with you already, we encourage you to schedule some time with us so you can get the maximum benefit from your QuickBooks reports. Figure 2: You can’t miss QuickBooks’ customization link when you open a report. But the trick is knowing how to best use its options for your business. A Simple Set of Steps Let’s take a look at a report you may already be generate: Sales by Customer Detail (Reports | Sales | Sales by Customer Detail). QuickBooks comes with a commonly-used set of default columns in its reports. This particular report contains column labels like Type (invoice, sales receipt, etc.), Item and Quantity, and Sales Price. You can easily change the date range that’s offered as a default up below the toolbar. But to get to QuickBooks’ powerful customization tools, click Customize Report. A window with four tabs opens. They are: Display. Options in this window help you specify the columns you want to appear in your report. In the lower left corner, there’s a list titled Columns that contains every possible column label for that report. If you scroll down, you’ll see a check mark in front of the default columns. Click on any of those to uncheck them, and click in front of any that you’d like to add. Other options here include how your data should be totaled and sorted. Some reports let you choose between cash and accrual basis. Filters. This is the difficult one – and the tool that will provide the most insight. Filters determine which subsets of related data you’ll see (accounts, items, customer types, zip codes, etc.) by including only those that meet certain conditions. Here’s where we can really help you answer critical business questions that will lead you to smart decisions. Figure 3: In this example, you’ve created a filter that will find all commercial drywall jobs that have been invoiced in the current fiscal quarter. You could narrow this report further by, for example, class, state, and paid status. Header/Footer and Fonts & Numbers. You can tailor the design and layout of your reports here. Well-formulated reports can help you spot cash flow problems, maintain the right inventory levels, see which jobs are the most profitable, and compare your estimates to actual costs. You’ll also be able to identify your best customers, your most sought-after items, and your most successful sales reps. Careful customization of your reports – and thorough analysis of their data – will make the answers to your constant questions about your company’s future direction much clearer. We can help you take full advantage of these powerful tools. Thu, 21 Aug 2014 19:00:00 GMT Can You Take a Home Office Deduction? http://www.mytrivalleytax.com/blog/can-you-take-a-home-office-deduction/39388 http://www.mytrivalleytax.com/blog/can-you-take-a-home-office-deduction/39388 Tri-Valley Tax & Financial Services Inc Article Highlights: Home Office Deduction For Self-Employed Individuals Employee Home Office Issues Safe Harbor Home Office Deduction If you run your small business out of your home, you may want to “write off” many of your household expenses. But how do you know what is deductible and what is not? Generally, expenses related to the rent, purchase, maintenance and repair of a personal residence are not deductible. However, if you use part of your home for business purposes, you may be able to take a deduction for the business use of your home on your self-employed business schedule. This deduction is commonly referred to as the home-office deduction, but it need not necessarily be an “office” to qualify. Expenses that can be deducted include the business portion of real estate taxes, mortgage interest (but not principal payments), rent, utilities, insurance, painting, repairs and depreciation. Expenses that are for both the business-use and non-business-use areas of the home (example: real estate tax) are prorated, generally in the ratio of the square footage of the office area to total square footage of the home, unless an expense is exclusive to the office (example: painting only the office area). As an alternative, the IRS provides a safe harbor deduction as explained below. In order to claim a deduction for the business use of your home, you must use part of your home exclusively in your trade or business on a regular, continuing basis. You must be able to provide sufficient evidence to show the use is regular. Exclusive use means there can be no personal use (other than de minimis) at any time during the tax year. Use of only a portion of a room is acceptable as long as the taxpayer shows that section is totally for business. In addition, one of the following must apply: It is the principal place of business for a trade or business of the taxpayer; It is used for storing inventory for a wholesale or retail business for which the taxpayer’s home is the only fixed location of the business; It is a place where the taxpayer meets with customers, patients or clients (just telephone contact with clients isn’t enough to meet this test); It is used as a licensed day care center; or It is in a separate structure not attached to the taxpayer’s home. If you work as an employee you can claim this deduction only if the regular and exclusive business use of the home is required by and for the convenience of your employer and the employer does not rent that portion of the home. If the home-office deduction is challenged by the IRS, an employee will have to provide documentation from the employer that the employer requires the employee to have a home office as a condition of employment. “Exclusive use” means a specific area of the home is used only for trade or business. “Regular use” means the area is used regularly for trade or business. Incidental or occasional business use is not regular use. In addition, employees must deduct the office as a miscellaneous itemized deduction, which has three additional limitations: the employee must itemize deductions (can’t take the standard deduction), this type of miscellaneous deduction is reduced by 2% of AGI (income), and it is not deductible at all to the extent the taxpayer is subject to the alternative minimum tax (AMT). Non-business profit-seeking endeavors, such as investment activities, do not qualify for a home office deduction, nor do not-for-profit activities, such as hobbies. Example: An attorney uses the den in his home to write legal briefs or prepare clients’ tax returns. The family also uses the den for recreation. The den is not used exclusively in the attorney’s profession, so a business deduction cannot be claimed for its use. As an alternative, where taxpayers (either self-employeds or employees) meet the qualifications for deducting business use of the home, they can elect a simplified deduction rather than itemizing expenses. This simplified method is referred to as the “safe-harbor” method and allows a deduction of $5 per square foot with a maximum square footage of 300. Thus, the maximum deduction is $1,500 per year. This method can be used in any year in lieu of the regular method. If you have questions regarding how the home office deduction might apply to your unique situation, please give this office a call. Tue, 19 Aug 2014 19:00:00 GMT Vacation Home Rentals: How the Income Is Taxed http://www.mytrivalleytax.com/blog/vacation-home-rentals-how-the-income-is-taxed/39370 http://www.mytrivalleytax.com/blog/vacation-home-rentals-how-the-income-is-taxed/39370 Tri-Valley Tax & Financial Services Inc Article Highlights: Home never rented Home rented less than 15 days Personal use less than the greater of 15 days or 10% of the rental days Personal use exceeds the greater of 14 days or 10% of the rental days • Selling a vacation home If you have a second home in a resort area, or if you have been considering acquiring a second or vacation home, you may have questions about how rental income is taxed should you decide to rent it part of the time. Vacation home rental rules include some interesting twists that you should know about before you begin renting. Although some individuals prefer to never rent out their homes, others find this to be a helpful way to cover the cost of the home. If you choose never to rent it out at all and it is your designated second home, the property taxes and the home mortgage interest may be written off as part of your itemized deductions. However, the interest is deductible only as long as the combined acquisition debt on your first and second homes does not exceed $1,000,000. In addition, the interest on up to $100,000 of equity debt for the two homes can be deducted. If you are unfortunate enough to be subject to the alternative minimum tax (AMT), to the extent that you are taxed by the AMT, the property taxes and equity debt interest are not deductible. If the home is partly rented out, then there are three rules to consider, based on the length of the rental: Rent Less Than 15 Days - If the property is rented out for less than 15 days, the money can be pocketed tax-free, and the interest and taxes can continue to be deducted as if the property were not rented out at all. In this situation, any other directly related rental expenses, such as the agent fee, utilities, post-rental cleaning, etc., are not deductible. This rule has led to some significant tax-free income for individuals who own a home or second home that is suitable as a filming location. Personal Use Is Less Than the Greater of 15 Days or 10% of the Rental Days - In this scenario, the home’s use would be allocated into two separate activities: a rental home and a second home. Let’s say that the home is used 5% for personal use; 5% of the interest and taxes would be treated as home interest and taxes that can be deducted as an itemized deduction. The other 95% of the interest and taxes would be rental expenses, combined with 95% of the insurance, utilities, allowable depreciation and 100% of the direct rental expenses. The result can be a deductible tax loss, which would be combined with all other rental activities and limited to a $25,000 loss per year for taxpayers with adjusted gross incomes (AGI) of $100,000 or less. This loss allowance is ratably phased out between $100,000 and $150,000 of AGI. Thus, if your income exceeds $150,000, the loss cannot be deducted; it is carried forward until the home is sold or there are gains from other passive activities that can be used to offset the loss. Personal Use Exceeds the Greater of 14 Days or 10% of the Rental Days - In this scenario, no rental tax loss is allowed. Let’s assume that the personal use of the home is 20%. As for the remaining 80%, it is used as a rental. The rental income is first reduced by 80% of the taxes and interest. If, after deducting the interest and taxes, there is still a profit, the direct rental expenses (such as the rental portion of the utilities, insurance and any other direct rental expenses) are deducted, but not more than will offset the remaining income. If there is still a profit, you can take depreciation, but it is again limited to the remaining profit. End result: No loss is allowed, but any remaining profit is taxable. The other personal 20% of the interest and taxes is deducted as an itemized deduction, subject to the interest and AMT limitations discussed earlier. Take note that if the rental income becomes less than the business portion of the interest and taxes, the balance of the interest and taxes is still deductible as home mortgage interest and taxes. Sale of the Vacation Home - A vacation home rental is considered personal use property. Gains from the sale of personal use property are taxable, but losses are not deductible. Thus, when the sale of a vacation home results in a loss, the loss may or may not be deductible. If the property was treated partly as personal-use property and partly as a rental (as discussed in #2 above); then, depending upon the overall use of the property, the loss may be allowed, but divided between a nondeductible personal-use portion and the deductible rental portion. In all of our other scenarios, the loss would not be deductible at all. Unlike a primary home, the second home does not qualify for the home gain exclusion. Any gain would be taxable, unless the rental is the primary residence for two of the five years preceding the sale–meaning the vacation home was occupied as the taxpayer’s primary residence for two of the prior five years immediately preceding the sale and it was not rented during that two-year period. In that scenario, the taxpayer would qualify for the home sale exclusion provided he had not used that exclusion for another property in the prior two years. As a result, the gain in excess of the depreciation previously claimed on the home could be offset by the home gain exclusion ($250,000/$500,000 for a married couple filing jointly where the spouse also qualifies). Tax law also includes some complicated rules related to the gain exclusion where a home was acquired by tax-deferred exchange or converted from a rental to primary residence that may require careful planning to utilize the home gain exclusion. An additional note: in situations where the property is rented for short-term stays or when significant personal services (such as maid services) are provided to guests, the taxpayer may likely be considered to be operating a business and not just renting a home. If so, reporting requirements may be different. As with all tax rules, there are certain exceptions to be aware of. Please call this office so we can discuss your particular situation in detail. Thu, 14 Aug 2014 19:00:00 GMT Child Care Credit Available to Student-Parents http://www.mytrivalleytax.com/blog/child-care-credit-available-to-student-parents/39366 http://www.mytrivalleytax.com/blog/child-care-credit-available-to-student-parents/39366 Tri-Valley Tax & Financial Services Inc Article Highlights: Student Parents May Qualify for Child Care Credit  Determining the Artificial Income for Credit Computation  How the Credit Is Determined  If your family is among the many families that incur child care expenses so that a parent can attend school, you may be eligible for a child care tax credit. Generally, the child care credit is only available to couples where both parents work, but a special provision of the tax law permits married parents attending college to also get the credit, if they meet certain criteria, even if the student-parent has no income. Normally, the child care credit is based on care expenses for children under the age of 13 (limited to $3,000 for one child and $6,000 for two or more) and further limited to the lesser of (1) the taxpayer's earned income, (2) the spouse's earned income, or (3) the actual child care expenses. If one of the spouses does not have an income, then no credit would be available, thus penalizing families where one parent is attending school full time with no earned income. To correct this inequity, the tax law includes a special provision for spouse-students. To qualify for this tax break, the student-parent must be a full-time student for some part of five months during the year (the months don't have to be consecutive). For each month the student-parent qualifies as a full-time student, their earned income is considered to be the greater of $250 ($500 if the care is for two or more children) or their actual earned income for that month. If the student-parent is a full-time student for the entire year, the artificial income would be $3,000 for one child and $6,000 for two or more, permitting the student-parent the maximum allowable child care credit. This phantom income is used only for computing the child care credit and doesn't become income that is taxed. The actual credit is based upon the taxpayer's income (AGI). For incomes between zero and $43,000, the credit ranges from 35% to 21%. For incomes above $43,000, the credit is 20%. The credit will reduce both income tax and the alternative minimum tax, but it is not refundable. For example, a couple has two children under the age of 13. One spouse works full time and earns $45,000 a year. The other spouse attended college full time for nine months during the year and was not employed. Their annual child care expenses for the two children are $5,000. The student-spouse's artificial income (from the chart) is $4,500. The couple's child care credit is computed based upon the artificial earned income $4,500, since it is less than the actual expenses of $5,000 and the expense limitation is $6,000 for two children. Assuming the couple met all the other care qualification criteria, their credit would be $900 (20% of $4,500). This article focused on the special full-time student provisions of the child care credit. There are also special provisions that apply for the care of a disabled spouse. If you have questions regarding these special provisions or any provision of the child and dependent care credit, please call. Tue, 12 Aug 2014 19:00:00 GMT Borrowing Money to Finance an Education? http://www.mytrivalleytax.com/blog/borrowing-money-to-finance-an-education/39360 http://www.mytrivalleytax.com/blog/borrowing-money-to-finance-an-education/39360 Tri-Valley Tax & Financial Services Inc Article Summary: Education Loans  Home Equity Loans  Tapping Retirement Accounts  College is just around the corner for many, and paying for tuition and college expenses may require borrowing money. If you are in this situation, here are some tax implications to consider before taking out a loan. There are two possible types of loans that can generate a tax deduction for the interest paid: home equity loans and education loans. Each has its own special rules and limitations: Education Loan - An education loan can be almost any type of loan as long as it is a single purpose loan; i.e., proceeds are only used for qualified educational purposes. The most commonly thought of education loan is a government-guaranteed student loan, but one could even use a credit card if the card was only used for qualified educational purposes. Probably not a good choice, however, since the interest on credit cards is so high. Interest in this category is an above-the-line deduction—meaning you don't have to itemize your deductions to claim this benefit, provided the student was enrolled at least half-time in a program leading to a degree, certificate, or other recognized educational credential. However, the maximum interest deduction per year is $2,500, and the deduction phases out for higher income married taxpayers with an AGI between $130,000 and $160,000. For singles, the phase-out range is between $65,000 and $80,000. (These are the 2014 ranges; call for the values for other years.) While loans from relatives or a qualified employer plan are also potential borrowing sources, the interest paid on these loans will not qualify as deductible education interest.   Home Equity Loan - If you itemize your deductions and have sufficient equity in your home, you might consider borrowing the needed cash from your home. Generally, homeowners can take $100,000 of equity debt on their home and still deduct the interest paid on the loan against the regular tax. Unfortunately, the interest on equity debt is not deductible against the Alternative Minimum Tax (AMT), so consider other alternatives first if you are subject to the AMT. However, even if you are subject to the AMT, your best option may still be taking equity from your home. You may lose the benefit of the interest deduction, but the low interest rate on home loans is still in your favor.  Generally, the borrowed funds must be used for qualified expenses within a reasonable period of time, usually 90 days before or after borrowing the funds. A home equity line of credit can be used to meet these requirements by paying education expenses as they become due, provided the loan is not also used for another purpose. If you are considering tapping a retirement account to pay for education expenses, explore all other options first. Retirement account distributions are generally taxable and subject to early withdrawal penalties if you are under retirement age, generally 59 1/2. Please call this office to discuss your education loan options, especially if you are considering tapping a retirement account. Thu, 07 Aug 2014 19:00:00 GMT Know the Rules before You Break Open Your Retirement Piggy Bank http://www.mytrivalleytax.com/blog/know-the-rules-before-you-break-open-your-retirement-piggy-bank/39354 http://www.mytrivalleytax.com/blog/know-the-rules-before-you-break-open-your-retirement-piggy-bank/39354 Tri-Valley Tax & Financial Services Inc Article Highlights: Early Withdrawal Penalties  Reduction in Retirement Savings  Exceptions from the Early Withdrawal Penalty  If you are looking for cash for a specific purpose, your retirement piggy bank may be a tempting source. However, if you are under age 59½ and plan to withdraw money from your Traditional IRA or qualified retirement account, you will likely pay both income tax and a 10% early distribution tax (also referred to as a penalty) on any previously untaxed money that you take out. Withdrawals from a Simple IRA before you are age 59½ and during the “2-year period” may be subject to a 25% additional early distribution tax instead of 10%. The 2-year period is measured from the first day that contributions are deposited. These penalty rates are what you'd pay on your federal return; your state may also charge an early withdrawal penalty in addition to regular state income tax. So before making any withdrawals from an IRA or other retirement plan, including 401(k) plans, 403(b) tax sheltered annuity plans, and self-employed retirement plans, carefully consider the resulting decrease in your retirement savings and the increase in tax and penalties. There are a number of exceptions to the 10% early distribution tax depending on whether you take money from an IRA or a retirement plan. But even if you are not subject to the 10% penalty, you will still have to pay taxes on the distribution. The following are some exceptions that may help you avoid the penalty. Withdrawals from any retirement plan to pay medical expenses - Amounts withdrawn to pay unreimbursed medical expenses that would be deductible on Schedule A during the year and that exceed 10% of your AGI are exempt from penalty. This is true even if you do not itemize.   Withdrawals from any retirement plan as a result of a disability - You are considered disabled if you can furnish proof that you cannot perform any substantial gainful activity because of a physical or mental condition. A physician must certify your condition.   IRA withdrawals by unemployed individuals to pay medical insurance premiums - The amount that is exempt from penalty cannot be more than the amount you paid during the year for medical insurance for yourself, spouse, and dependents. Unemployment compensation must have been received for at least 12 weeks.   IRA withdrawals to pay higher education expenses - Withdrawals made during the year for qualified higher education expenses for yourself, spouse, or children or grandchildren are exempt from the early withdrawal penalty.   IRA withdrawals to buy, build or rebuild a first home - Generally, you are a first-time homebuyer for this exception if the you had no present interest in a main home during the 2-year period ending on the date of acquisition of the home which the distribution is being used to buy, build, or rebuild. If you are married, your spouse must also meet this no-ownership requirement. This exception applies to the first $10,000 of withdrawals used for this purpose. If married, both you and your spouse can withdraw up to $10,000 penalty-free from your respective IRA accounts.   IRA withdrawals annuitized over your lifetime - To qualify, the withdrawals must continue, unchanged, for a minimum of 5 years and after you reach age 59½.   Employer retirement plans withdrawals - To qualify, you must have separated from service and be age 55 or older in that year (age 50 for qualified public service employees such as police and firefighters); or elect to receive the money in substantially equal periodic payments after separation from service.  You should be aware that the information provided above is an overview of the penalty exceptions and there may be additional conditions, not listed, that must be met to qualify for a particular exception. You are encouraged to contact this office before tapping your retirement funds for uses other than retirement. Distributions are most often subject to both tax and penalties that can take a significant bite out of the distribution. However, with carefully planned distributions, both the tax and penalties can be minimized. Please call for assistance. Tue, 05 Aug 2014 19:00:00 GMT Misclassifying Workers Can Be Costly! http://www.mytrivalleytax.com/blog/misclassifying-workers-can-be-costly/27423 http://www.mytrivalleytax.com/blog/misclassifying-workers-can-be-costly/27423 Tri-Valley Tax & Financial Services Inc Article Highlights: Independent Contractor Cost Savings Penalties For Misclassification Primary Determining Factors Additional Determining Factors Requesting the IRS to Make the Determination Most business owners and executives tend to be financially conservative and preserve the cash of the business. This conservative approach frequently carries over to hiring activities, with many employers choosing to hire independent contractors/freelancers as opposed to full-time employees. In doing so, they eliminate the cost of company benefits such as vacation, sick pay, health insurance and retirement funding. Another big benefit is eliminating the employer’s matching share of Social Security and Medicare payroll taxes, not to mention the savings on unemployment taxes and worker’s compensation insurance. Eliminating all those costs associated with employees and hiring independent contractors may save a lot of money, but it can also be a minefield. Just because you pay a worker like an independent contractor does not necessarily make him one. And if you are subsequently challenged on that classification by the IRS or your state taxing authority, and lose, you will pay back all those savings plus penalties and interest. The company’s retirement plan could also be in jeopardy of losing its qualifying status if workers who should have been eligible to participate have been excluded from the plan. The line between independent contractor and employee is not always clear, but the following are some guidelines that can be used in making the determination. The three primary characteristics the IRS uses to determine the relationship between businesses and workers are: Behavioral Control, Financial Control and the Type of Relationship. Behavioral Control - Relates to facts that show whether the business has a right to direct or control how the work is done through instructions, training or other means. Financial Control - Relates to facts that show whether the business has a right to direct or control the financial and business aspects of the worker's job. Type of Relationship – This factor relates to how the workers and the business owner perceive their relationship. If you have the right to control or direct not only what is to be done, but also how it is to be done, then your workers are most likely employees. If you can direct or control only the result of the work done, and not the means and methods of accomplishing the result, then your workers are probably independent contractors. Here are some additional factors to consider when making a determination: Sole Employer - An independent contractor is in business for him or herself and generally will have additional clients for whom services are provided. If you are the only client and he or she is not actively pursuing work from others, then it becomes an indicator favoring employee status. Work Schedule - Independent contractors generally set their own work schedule. Requiring the worker to maintain regularly scheduled work hours is an indicator of employee status. Materials & Supplies - Independent contractors generally provide their own materials and equipment and invoice their clients for labor and materials. If you provide all of the material and supplies, that is another indicator of employee status. Work Location – Another indicator of employee status is when a worker performs services only at your work location and does not maintain an office or facilities elsewhere. If, after considering all the factors and issues, you feel you cannot reach a definitive determination, then you, as an employer, can request the IRS to make a determination on whether a specific individual is an independent contractor or an employee by filing a Form SS-8 (Determination of Worker Status for Purposes of Federal Employment Taxes and Income Tax Withholding) with the IRS. However, the IRS does not issue determinations for proposed or hypothetical situations. A worker may also file Form SS-8 requesting an IRS determination. A word of caution: if a worker that you classified as an independent contractor is subsequently determined to be an employee, you will be open to a lawsuit for back benefits or even other demands related to the worker’s specific circumstances. If you need more information about the critical determination of a worker’s status as an independent contractor or employee, please give this office a call. Thu, 31 Jul 2014 19:00:00 GMT Tax Tips for the Well-traveled Businessperson http://www.mytrivalleytax.com/blog/tax-tips-for-the-well-traveled-businessperson/36939 http://www.mytrivalleytax.com/blog/tax-tips-for-the-well-traveled-businessperson/36939 Tri-Valley Tax & Financial Services Inc Article Highlights: Acceptable Records Meals Spouse Expenses Food and lodging expenses are generally deductible when away from home for business purposes. This may be particularly beneficial for self-employed individuals who travel extensively. Like everything involving taxes, there are rules to follow. The IRS requires that lodging expenses (and other expenses of $75 or more) be substantiated by records or other evidence. Acceptable records include diaries, logs, receipts, paid bills and expense reports. The records should disclose the amount, date, place and essential character of each expense. Diaries and logs should be notated close to the time of the expense; newly created diary, log and calendar entries made months (or years) later when the IRS requests documentation in an audit are less likely to pass muster than those that were prepared when the travel and expenses occurred. Keep good records of your travel expenses. Document the business purpose and the expected business benefit. Retain your travel itinerary to document the business activity while away. Travel expenses are deductible only if the individual is away from his or her “tax home” for more than one business day. “Tax home” usually means the individual’s regular place of business. Meal expenses are only deductible if the trip is overnight or long enough that there is a need to stop for sleep or rest in order to properly perform one’s duties. The amount of the meal expenses must be substantiated, but instead of keeping records of the actual cost of meal expenses, a “standard meal allowance” ranging from $46 to $71 per day can generally be used, depending on where and when the individual travels. Generally, the deduction for unreimbursed business meals is limited to 50% of the cost that would otherwise be deductible. Lodging expenses must be substantiated with actual receipts and are 100% deductible. Meals included in lodging expenses, such as room service or dining costs charged to a hotel room, must be separately identified, since meals have the 50% limitation noted above. Taking the Spouse Along? - Generally, deductions are denied for travel expenses paid or incurred for a spouse, dependent or employee of the taxpayer on business unless the: (1) The spouse or dependent is an employee of the taxpayer, and (2) The ravel of the spouse, dependent or employee is for a bona fide business purpose, and (3) The expenses would otherwise be deductible by the spouse, dependent or employee. Strategy - The law allows a deduction for the single rate for lodging, and there is frequently no rate difference between one and two occupants for a room. Thus, virtually the entire lodging expenses for an accompanying spouse will be deductible. When traveling by car, the law does not require any allocation because the spouse is also traveling in the vehicle. Thus, if traveling by vehicle, the entire cost of the transportation would be deductible. This generally also applies to taxis at the destination. The only substantial cost that is not allowed is the costs of the spouse’s meals that, even if they were deductible, would be reduced by the 50% rule. If traveling by air or rail, the cost of the spouse’s tickets is also not deductible.Have questions about business travel expenses? Give our office a call. Tue, 29 Jul 2014 19:00:00 GMT Selling Your Home http://www.mytrivalleytax.com/blog/selling-your-home/417 http://www.mytrivalleytax.com/blog/selling-your-home/417 Tri-Valley Tax & Financial Services Inc Federal tax laws allow each individual taxpayer to exclude up to $250,000 of gain from the sale of his/her main home, if he/she meets certain ownership and occupancy requirements. (A married couple that meets the qualifications can exclude up to $500,000.) If an individual/ couple is unable to exclude all or part of the gain, then the gain is taxable as a capital gain in the year of sale.Exclusion QualificationsUnless they meet the reduced exclusion qualifications,taxpayers must meet the ownership and use tests in order to qualify for exclusion of gain.This means that during the five-year period ending on the date of the sale, taxpayers must have: 1) Owned the home for at least two years (if a joint return only one spouse need meet the ownership test), and 2) Except for short temporary absences, lived in (used) the home as their main home for at least two years. The required two years of ownership and use during the five-year period ending on the date of the sale do not have to be continuous. Taxpayers meet the tests if they can show that they owned and lived in the property as their main home for either 24 full months or 730 days during the five-year period ending on the date of sale. Also see ownership-use exceptions elsewhere in this brochure. Temporary Absence: Generally, a temporary absence would be for illness, education, business, vacation, military service, etc. for less than one year, and the taxpayer intends to return to the home, and continues to maintain the home in anticipation of such return. Land: Generally, if a taxpayer sells the land on which his/her main home is located, but not the house itself, the taxpayer cannot exclude any gain from the sale of the land. However, the home sale exclusion will apply to vacant land sold or exchanged if the taxpayer owned or used the land as part of the principal residence, provided the disposition of the dwelling unit occurs within two years before or after the disposition of the vacant land, the land was adjacent to land containing the dwelling unit and the land sale or exchange otherwise satisfies the home gain exclusionrequirements. Only one maximum exclusion amount applies to the combined sales/exchanges of both the home and the vacant land.Ownership and Use ExceptionsUse Test After Divorce – In divorce situations,the terms of the divorce or separation document often allow one spouse to use the jointly-owned home for an extended period of time,then to sell the home and split the proceeds with the former spouse.When this happens,the spouse who does not occupy the home will no longer meet the use test and would be barred from excluding the gain except for a special rule for divorced couples.Under this special exemption,that spouse is considered to have used the property as his or her main home during any period they owned it. Disability – Individuals who have become physically or mentally unable to care for themselves are considered to have used their home during any period that they own the home and live in a licensed facility, including a nursing home that cares for individuals with the taxpayer’s condition.However, to qualify for this exception, the individual must have owned and lived in his or her home for at least one year. This exception does not apply to the ownership test. Irrevocable Trust Is Owner – Some taxpayers use revocable (living) trusts as an alternative to having their property transferred by will. A home owned in the name of a revocable trust is treated as being owned by the taxpayers for purposes of the ownership test, and such ownership does not jeopardize the ownership test for claiming the exclusion. However, when the first spouse dies, two things occur. The decedent’s trust becomes irrevocable and the portion of the home inherited receives a new basis (an exception may apply for decedents dying in 2010). If all or part of the home is placed in the decedent’s (bypass) trust, the IRS has ruled that to the extent a home is owned by an irrevocable trust, it is not owned by the surviving spouse, even if the surviving spouse continues to reside in the home. As a result, the portion of the home owned by the irrevocable trust would not qualify for the exclusion. Death of Spouse Before Sale – If your spouse died before the date of sale and you do not meet the ownership and use tests yourself, you are considered to have owned and lived in the property as your main home during any period of time when your deceased spouse owned and lived in it as a main home. Home Transferred in Divorce – If the home was transferred to you by your spouse,or former spouse, incident to divorce, and you do not meet the ownership test, you are considered to have owned it during any period of time when your spouse,or former spouse, owned it. Home Destroyed or Condemned – If you were able to defer gain from a prior home to your current home because it was destroyed or condemned, you can add the time you owned and lived in that previous home when figuring the ownership and use tests for the current home. Maximum ExclusionA taxpayer who meets the ownership and occupancy tests can exclude the entire gain on the sale of his/her main home up to $250,000,provided gain has not been excluded on a sale of another home within two years of the sale of the current home.The maximum exclusion amount is $500,000 if all the following are true:a) The taxpayers are married and file a joint return for the year.b) Either the taxpayer or the taxpayer’s spouse meets the ownership test.c) Both the taxpayer and taxpayer’s spouse meet the use test.d) During the two-year period ending on the date of the sale,neither the taxpayer nor the taxpayer’s spouse excluded gain from the sale of another home.Two-Year Period Between SalesUnless taxpayers qualify for the reduced exclusion, they can only exercise the exclusion once every two years. Therefore, taxpayers cannot exclude the gain on the sale of their home, if during the two-year period ending on the date of the sale, they sold another home at a gain and excluded all or part of that gain. Home Acquired by Tax-Deferred ExchangeIf the home was originally acquired via a Sec 1031 tax-free exchange, the home must be owned for a minimum of five years before a home-sale gain exclusion can be utilized, provided the taxpayer also meets the 2-year use test. Reduced Exclusion A taxpayer who does not qualify for the full exclusion may still qualify to exclude a reduced amount if the taxpayer(s) did not meet the ownership and use tests, or the exclusion was disallowed because of the once every two-year rule, but sold the home due to:a) A change in place of employment;b) Health; orc) Unforeseen circumstances,to the extent provided in IRS regulations.Amount of Reduced Exclusion – If qualified, the reduced exclusion is determined on an individual basis, and in the case of married taxpayers, the individually computed amounts are combined for the joint exclusion. To determine the reduced exclusion,multiply $250,000 (maximum exclusion amount) by a fraction whose denominator is 730 and numerator is the shorter of: (1) The number of days during the five-year period just prior to the current sale that the property was owned and used by the taxpayer as his/her principal residence;or (2) The number of days between that sale and the current sale, if a home was sold just prior to the current sale and the exclusion applied to that sale. More Than One HomeIf a taxpayer has more than one home,the taxpayer can only exclude gain from the sale of the taxpayer’s main home,even if the other home meets the two-out-of-five-year ownership and use test. Main Home: The property that the taxpayer uses the majority of the time during a year will ordinarily be considered the taxpayer’s main home or principal residence.A taxpayer’s main home can be a house, houseboat, mobile home, cooperative apartment, or condominium. In addition to the taxpayer’s use of the property, the home sale regulations list relevant factors in determining a taxpayer's principal residence which include, but are not limited to: the taxpayer's place of employment; the principal place of abode of the taxpayer's family members; the address listed on the taxpayer's Federal and state tax returns, driver's license, automobile registration and voter registration card; the taxpayer's mailing address for bills and correspondence; the location of the taxpayer's banks; and the location of religious organizations and recreational clubs with which the taxpayer is affiliated. Example: Figure #1 illustrates a situation where a taxpayer has two homes,both of which meet the ownership test.The taxpayer also meets the occupancy test,since the taxpayer has lived in both homes more than two years of the prior five-year period. However, only the New York home qualifies, since the taxpayer lived in the New York home the majority of the time in all five preceding years, thus qualifying it as the taxpayer’s main home. Gain or Loss on SaleA taxpayer's main home and other homes are considered personal-use property. Gains from personal-use property are generally taxable, but losses from personal-use property are not deductible. Therefore, if you sell your home at a loss,the loss is not deductible. On the other hand, if you sell a home for a gain and the gain is more than your allowable exclusion, or you do not qualify for the main home exclusion, then the gain from the home sale becomes taxable as a capital gain in the year of sale. Determining Gain or LossThe gain or loss from the sale of a home is the sales price less the sum of (1) the costs of selling the home and (2) the basis. Basis is a technical term used in taxes that generally represents the original cost plus the costs of improvements to the home. That is why it is so important to maintain records and keep track of your home’s cost and subsequent improvements. In the tax business, this is referred to tracking your basis.The exclusion amount may seem like a lot right now, but after a few years of inflation, you may discover it is not enough to offset the potential gain. Other Factors Affecting Basis – There are numerous tax situations that can affect a home’s basis.The following are those most frequently encountered: Deferred Gain – Prior to May 7, 1997, home sale rules allowed taxpayers to avoid paying on home sale gains by deferring the gain into their replacement home. If you deferred gain under those rules,the deferred gain reduces the replacement home’s basis. Casualty Loss – Usually, a casualty loss resulting from damages to a home, taken as a tax deduction, will reduce a home’s basis. Depreciation – Generally, depreciation resulting from the business use of a home may also reduce the basis (see “Business Use of Your Home” below). Inherited Home – If a home is inherited, the portion inherited will have a new basis that is usually the fair market value of the home on the date of the decedent’s death. This is frequently referred to as a step-up (or step-down) in basis. If you inherited the home you are about to sell, please call this office for further details and clarification. Business Use of the Home Depreciation – The tax law assumes business assets will decline in value due to obsolescence and wear and tear. Therefore, taxpayers are allowed to take an annual deduction called depreciation, which represents the decline in value. If the value increases instead, then upon its sale, any gain attributable to the depreciation is generally taxed at rates higher than the gain would otherwise be taxed. In addition, the home sale exclusion does not apply to any depreciation taken on the home after May 6, 1997. This means that even if the gain is less than the allowable exclusion, the portion that represents depreciation after May 6, 1997 will still be taxable and generally at a higher rate than the other portion. Mixed-Use or Separate Property? - When a home that was used entirely or partially for business is sold, the home gain exclusion may be limited, and some portion of the business deduction for depreciation may be taxable. How much of the gain is taxable, and the amount of gain that is subject to the gain exclusion, depends if the business portion was part of the dwelling unit (mixed-use property) or whether it was a separate structure. Mixed-Use Property: When the business use was within the same dwelling unit, no allocation of home gain is required between the business portion and the personal use portions. Except for depreciation claimed for the business use of the home, the entire gain may be excluded up to the maximum allowed. However if the result is a loss, the loss is not allowed. Example: Jake, a single taxpayer, sells his home for $300,000. He had originally purchased the home for $65,000 and added a room, which cost $20,000, giving him a cost basis of $85,000. He also had a business office in the home for which the allowable annual depreciation totaled $5,550. The cost of selling the home was $27,000. He meets all of the qualifications for a home sale gain exclusion of up to $250,000.Sale Price . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 300,000Less Sales Expenses . . . . . . . . . . . . . . . . . . . . . . .< 27,000>Cost Basis . . . . . . . . . . . . . . . . . . . . .85,000Allowable Depreciation (1) . . . . . . . . . Tax Basis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Gain . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 193,500Home Sale Exclusion . . . . . . . . . . . . . . . . . . . . . . . Net Gain (Before Taxable Depreciation Recapture). . . 0Taxable Amount (the Lesser of Gain or Allowable Depreciation) . .. . .5,500(1) Please note, special rules apply if any of the allowable depreciation occurred prior to May 7, 1997. Please call for additional information. Separate Property: If the business use was within a separate structure, such as a guesthouse or detached garage, the tax treatment will depend upon whether the separate structure itself meets the exclusion qualification requirements. Generally, if a home office in a separate structure does not meet the ownership and use tests, the home gain exclusion will not apply to the gain attributable to the office portion. Please call this office for assistance. Rental Converted to a HomeThe sale of residential rental property is governed by an entirely different set of tax rules than those applying to an individual’s main home. However, had the home also been used as the taxpayer’s main home either before or after being used as a rental, then it can still qualify for the home sale exclusion if it meets the ownership and use tests.This can provide a significant tax benefit for individuals who carefully plan their sales. As with the home office, the rental’s depreciation is not subject to exclusion, and all or part may be taxable to the extent of the sale profit (gain). However, if the home was previously used as other than a taxpayer’s main home (non-qualified use), for example, as a second home or a rental, and converted to a personal residence after December 31, 2008, the portion of the pro-rated gain attributable to the non-qualified use will not qualify for the home gain exclusion.Taxpayers contemplating such tax strategy, should consult with this office in advance to verify qualifications and determine the tax implications including depreciation recapture. Special ConsiderationsSeparate Returns – If you and your spouse sell a jointly-owned home and file separate returns, each of you should figure your own gain or loss according to your ownership interest in the home.Joint Owners Not Married – If you own a home jointly with other joint owner(s), other than your spouse, each of you would apply the rules discussed in this brochure to your individual ownership.Credit Recapture – If you claimed a First-Time Homebuyer Credit and in a later year ceased using it as your residence, you may be required to repay some or all of the credit, depending on when you purchased the home and when it stopped being your residence or was sold. Other Dispositions – Foreclosures, repossessions, and exchanges of your home are generally treated as sales. Tax Net Investment Income Tax – Gain from the sale of your home in excess of the amount excludable may be subject to this 3.8% surtax. Please call this office for additional information.DISCLAIMER - The tax advice included in this online brochure is an overview of some complex tax rules and is not intended as a thorough in-depth analysis of the tax issues discussed. Do not act on the information included in this online brochure without first determining how these issues apply to your particular set of circumstances and if there are any special tax laws or regulations that might apply to your situation. Sun, 27 Jul 2014 19:00:00 GMT Understanding the Health Insurance Mandate http://www.mytrivalleytax.com/blog/understanding-the-health-insurance-mandate/38511 http://www.mytrivalleytax.com/blog/understanding-the-health-insurance-mandate/38511 Tri-Valley Tax & Financial Services Inc Beginning in 2014, the Affordable Care Act will impose the new requirement that all people in the United States, with certain exceptions, have minimum essential health care insurance or they will be subject to a penalty. How this will affect your family will depend upon a number of issues. Already Insured If you have insurance through Medicare, Medicaid, or the Veterans Administration, then you will not be subject to the penalty. You will also avoid the penalty if you are insured through an employer plan or a private insurance plan that provides minimum essential care. US individuals and those claimed as their dependents who reside outside the US are deemed to have adequate coverage and are not subject to the penalty. Some Are Exempt from the Penalty Certain individuals are exempt from the health insurance mandate and are therefore not subject to the penalty. Included are: Those unlawfully present in the US Those whose income is below the federal tax filing requirement (the sum of the standard deduction and exemption amounts for the filer and spouse, if any) Those who cannot afford coverage based on formulas contained in the law (generally when the cost of the insurance coverage exceeds 8% of the individual’s household income) Members of American Indian tribes Incarcerated individuals, certain religious objectors, and those meeting hardship requirements Household Income The term “household income” is used as a measure of who qualifies for a premium assistance subsidy or tax credit and is used extensively in calculations related to the mandatory insurance requirements. Household income includes the modified adjusted gross incomes (MAGIs) of an individual, the individual’s joint filing spouse, if any, and all of the individual’s dependents that are required to file a tax return(1). MAGI is an individual’s regular adjusted gross income plus non-taxable social security and railroad retirement benefits, excluded foreign earned income, and non-taxable interest and dividends. (1) An individual is required to file a tax return if their income exceeds the sum of their standard deduction and allowable exemptions. Thus, for example, a single person who only made $1,000 for the year would not be required to file a return and their income would not be included in the household income even if they did file to claim a refund. Can’t Afford Coverage? Families with household incomes below 400% of the federal poverty guideline may receive help to pay all, or a portion of, the cost of the premiums for health insurance. Where the household income is below 100% of the federal poverty level, the family qualifies for Medicaid. There are no premiums for Medicaid. If the household income is between 100% and 400% of the federal poverty level (FPL), the family qualifies for an insurance premium subsidy, also known as a premium assistance credit, provided the insurance is purchased through a government marketplace (exchange). The actual credit is based upon the current year’s household income but can be estimated and allowed in advance as a subsidy. When it is used in advance as a subsidy and the subsidy turns out to be greater than the allowable credit, the excess subsidy may have to be paid back. On the other hand, if the subsidy was not used or the subsidy was less than the credit, the difference becomes a refundable credit on the tax return. The maximum credit is available at 100% of the poverty level and becomes less as the percentage increases and is totally phased out at 400% of the poverty level. For family sizes larger than 4, increase the 100% rate by $4,020 for each additional child. Dollar amounts for Alaska and Hawaii are larger. Note that the table is condensed for this brochure and the actual percentage of poverty level will need to be extrapolated for income not shown in the table. Credit/Subsidy Qualifications To qualify for the credit, an individual must: Have household income for the year of at least 100% but not more than 400% of the federal poverty level Purchase the insurance through a government marketplace (exchange) Not be claimed as a dependent of another Not be eligible for minimum essential care through Medicaid If married, file a joint tax return Not be offered minimum essential insurance under an employer-sponsored plan How Much Will the Subsidy Be? The amount of the subsidy is based on need and therefore those in the lowest percentage of the poverty level will receive the greatest subsidy. The government has predetermined how much each family must pay toward their own insurance in the form of a percentage of the family’s household income. To determine how much a family must pay toward their own insurance, first determine where their income falls within the poverty table above and then determine their percentage from the table below. That percentage represents the portion of their household income that they should pay toward their own insurance. Note: the table is condensed for this brochure and the actual percentage of household income that must be paid toward one’s own insurance will need to be extrapolated for poverty levels between those shown. Once the percentage in the right-hand column is determined, multiply that by the family’s household income to determine what the family’s annual responsibility is and divide it by 12 to determine their monthly responsibility. Then, to determine the subsidy, go to the government marketplace and determine the cost of the Silver(2) level of insurance for the family and subtract the amount they are required to pay themselves; the difference, if any, is the subsidy. Example: Family of two with a household income of $31,020. From the Federal Poverty Level Chart it is determined that a family of 2 with that income is at 200% of the federal poverty level. Using the 200% of poverty level it is determined from the second table that their responsibility toward their own insurance should be 6.3% of their household income or $1,954 (.063 x $31,020) or $162.83 per month. If the cost of the Silver level of insurance is $350 per month, then the premium subsidy would be $187.17 ($350 - $162.83). (2) Insurance acquired through the marketplace (exchange) is available in four levels of cost (premium), designated by the names of metals. The least expensive is the Bronze coverage, which is also the insurance that provides the “minimum essential coverage” needed to avoid a penalty. Next is the Silver level, which is referred to as the “benchmark premium.” The Silver or benchmark premium is the one used when determining the subsidy. The Gold and Platinum designations complete the four levels of coverage. The Bronze coverage, on an overall average, is supposed to cover 60% of the insured’s medical cost. Silver plans cover 70%, the Gold 80%, and the Platinum 90%. Paying Back Excess Subsidies When an insured individual receives a subsidy in excess of the allowable credit based upon the current year’s actual household income, some portion, but not necessarily all, of the excess must be paid back on the tax return for the year. If the household income is above 400% of the poverty level then the entire amount of the excess must be repaid. If the insured’s household income is between 100% and 400% of the poverty level, then payback is capped at the following amounts: To help ensure that the proper subsidy is being received, the insured should report changes to income or family size (births, deaths, divorce, marriage) that occur during the year to the exchange from which the policy was purchased.Penalty for Not Being Insured Beginning in 2014, there is a penalty for not being insured unless one of the exemptions mentioned earlier is met. The penalty is being phased in over three years. The monthly penalty for 2014 is the greater of $7.92 per uninsured adult plus $3.96 for each uninsured child(3), but not to exceed $23.75 per month for a family, OR, 1% of household income in excess of the individual’s income tax filing threshold(4) divided by 12. In 2016, when the penalty is fully phased in, the monthly penalty will be $57.92 per uninsured adult and $28.96 per uninsured child(3), not to exceed $173.75 per family OR 2.5% of household income over the income tax filing threshold(4) divided by 12. The penalty can never be greater than the national average premium for a minimum essential coverage plan purchased through a government marketplace (exchange). (3) The child rate will apply to family members under the age of 18. (4) Filing threshold is the sum of the standard deduction and personal exemption amounts for the tax filer and spouse, if any. Example: A married couple without insurance in 2014 has one dependent child and a household income of $50,000. The couple’s standard deduction is $12,400 and with two exemptions at $3,950 each, their filing threshold for 2014 is $20,300. Their monthly penalty is the greater of $19.80 (2 x $7.92 plus $3.96) or $24.75 (.01 x ($50,000 - $20,300)/12). Thus their monthly penalty would be $24.75. There is no penalty when the first lapse in coverage during a year is less than three months. Insurance Marketplaces Residents of states that did not set up their own exchanges must use the federal marketplace. All policies sold through a marketplace have standardized applications, no pre-existing exclusions, and pre-set copays and deductibles. Where an insured family’s household income is between 100% and 200% of the federal poverty level, copays and deductibles are reduced by two-thirds. They are reduced by 1/2 where the insured’s income is between 200% and 300% , and 1/3 for those between 300% and 400%. Individuals who need to purchase health insurance are not required to use the government marketplaces – they can purchase plans privately. However, privately purchased plans will not be eligible for the premium assistance credit or subsidy, but if they meet the minimum essential coverage requirements, they will qualify the individual to avoid the mandatory coverage penalty. Those shopping for health insurance should check both the private and government marketplaces to compare their net out-of-pocket premium costs. Dependents The filer, or filers if filing jointly, is subject to the penalty for every dependent who can be claimed on their tax return. That includes children, parents, and other related individuals. This is true even if they do not claim the dependent, but were qualified to do so. Sun, 27 Jul 2014 19:00:00 GMT Reap the Tax Benefits of Education Planning http://www.mytrivalleytax.com/blog/reap-the-tax-benefits-of-education-planning/39271 http://www.mytrivalleytax.com/blog/reap-the-tax-benefits-of-education-planning/39271 Tri-Valley Tax & Financial Services Inc Article Highlights: Education Financing American Opportunity Credit Lifetime Learning Credit Coverdell Education Savings Account Qualified Tuition Programs (Sec 529 Plans) Savings Bond Program The tax code includes a number of incentives that, with proper planning, can provide tax benefits while you, your spouse, or your children are being educated. Education Financing: A major planning issue is how to finance your children’s college education. Those with substantial savings simply pay the expenses as they go, while some parents, sometimes with the help of the children’s grandparents, begin setting aside money far in advance of the education need, perhaps utilizing a Coverdell account or Sec. 529 plan. Other parents or their student-children will need to borrow the funds, obtain financial aid, or be lucky enough to qualify for a scholarship. Although student loans provide one ready source of financing, the interest rates are generally higher than a home equity loan, which can also provide a longer term and lower payments. When choosing between a home equity loan or a student loan, keep in mind the following limitations: (1) Interest on home equity debt is deductible only if you itemize and then only on the first $100,000 of debt, and not at all to the extent you are taxed by the alternative minimum tax; and (2) student loans must be single-purpose loans; the interest deduction is limited to $2,500 per year, and the deduction phases out for joint filers with income (MAGI) between $130,000 and $160,000 ($65,000 to $80,000 for unmarried taxpayers, and no deduction if filing married separate). Education Tax Credits: The tax code also provides tax credits for post-secondary education tuition paid during the year for the taxpayer and dependents. There are two types of credits: the American Opportunity Credit, which is available through 2017 and is limited to the first four years of post-secondary education, and the Lifetime Learning Credit which provides credit for years after the first four years of post-secondary schooling and can be used for graduate studies. The American Opportunity Credit, in many cases, offers greater tax savings than other existing education tax breaks! Here are some key features of the credit: Tuition, related fees, books, and other required course materials generally qualify. The credit is equal to 100 percent of the first $2,000 of education expenses and 25 percent of the next $2,000. This means the full $2,500 credit may be available to a taxpayer who pays $4,000 or more in qualified expenses for an eligible student. The full credit is available for taxpayers whose modified adjusted gross income (MAGI) is $80,000 or less (for married couples filing a joint return, the limit is $160,000 or less). The credit phases out for taxpayers with incomes above these levels. These income limits are higher than those for the Lifetime Learning Credit. Forty percent of the American Opportunity Credit is refundable. This means that even people who owe no tax can get an annual payment of the credit of up to $1,000 for each eligible student. Other existing education-related credits and deductions do not provide a benefit to people who owe no tax. The refundable portion of the credit is not available to any student whose investment income is taxed at the parent’s rate, commonly referred to as the “kiddie tax.” The Lifetime Learning Credit provides up to $2,000 of credit for each family each year. The Lifetime Learning Credit is phased out for joint filers with incomes (MAGI) for 2014 between $108,000 and $128,000 ($54,000 to $64,000 for single filers) and is not allowed at all for married individuals filing separately. Careful planning for the timing of tuition payments can provide substantial tax benefits. Taxpayers are allowed to prepay the first three months of the subsequent year’s tuition in advance, thereby allowing them to spread the payment and maximize the credits. Tax-Favored Savings Programs: For those who wish to establish a long-term savings program to provide funds to educate their children, the tax code provides two plans. The first is a Coverdell Education Savings Account, which allows the taxpayer to make $2,000 annual nondeductible contributions to the plan. The second plan is the Qualified Tuition Plan, more frequently referred to as a “Sec. 529 plan,” with annual contributions generally limited to the gift tax exemption amount for the year ($14,000 in 2014). However, the law allows up to five years of a contributor’s contributions to be made to a Sec. 529 in a year without gift tax implications, allowing substantial up-front contributions. Both plans provide tax-free earnings if they are used for qualified education expenses. When choosing between a Coverdell or Sec. 529 plan, keep the following in mind: (1) Coverdell accounts can be used for kindergarten through post-secondary education and become the property of the child at the age of majority, and contributions phase out for joint filers with income (MAGI) between $190,000 and $220,000 ($95,000 and $110,000 for others); and (2) Sec. 529 plans are only for post-secondary education, but the contributor retains control of the funds. Savings Bond Program: There is also an education-related exclusion of savings bond interest for Series EE or I Bonds purchased by an individual over the age of 24. All or part of the interest on these bonds is exempt from tax if qualified higher education expenses are paid in the same year the bonds are redeemed. As with other benefits, this one also has a phase-out limitation for joint filers with income (MAGI) between $113,950 and $143,950 (between $76,000 and $91,000 for unmarried taxpayers, but those using the married separate status do not qualify for the exclusion). The income ranges shown are for 2014. If you would like to work out a comprehensive plan to take advantage of these benefits, please give this office a call. Thu, 24 Jul 2014 19:00:00 GMT August 2014 Individual Due Dates http://www.mytrivalleytax.com/blog/august-2014-individual-due-dates/33379 http://www.mytrivalleytax.com/blog/august-2014-individual-due-dates/33379 Tri-Valley Tax & Financial Services Inc August 11 - Report Tips to Employer If you are an employee who works for tips and received more than $20 in tips during July, you are required to report them to your employer on IRS Form 4070 no later than August 11. Your employer is required to withhold FICA taxes and income tax withholding for these tips from your regular wages. If your regular wages are insufficient to cover the FICA and tax withholding, the employer will report the amount of the uncollected withholding in box 12 of your W-2 for the year. You will be required to pay the uncollected withholding when your return for the year is filed. Wed, 23 Jul 2014 19:00:00 GMT August 2014 Business Due Dates http://www.mytrivalleytax.com/blog/august-2014-business-due-dates/33380 http://www.mytrivalleytax.com/blog/august-2014-business-due-dates/33380 Tri-Valley Tax & Financial Services Inc August 11 - Social Security, Medicare and Withheld Income Tax File Form 941 for the second quarter of 2014. This due date applies only if you deposited the tax for the quarter in full and on time. August 15 - Social Security, Medicare and Withheld Income Tax If the monthly deposit rule applies, deposit the tax for payments in July. August 15 - Non-Payroll Withholding If the monthly deposit rule applies, deposit the tax for payments in July. Wed, 23 Jul 2014 19:00:00 GMT A Tour through QuickBooks' Payroll Setup Tool http://www.mytrivalleytax.com/blog/a-tour-through-quickbooks-payroll-setup-tool/39278 http://www.mytrivalleytax.com/blog/a-tour-through-quickbooks-payroll-setup-tool/39278 Tri-Valley Tax & Financial Services Inc Getting QuickBooks ready to process payroll is a complex, time-consuming process. Here's what you can expect. Payday. You look forward to it when you're young and working at your first part-time job. But as a grown-up who needs to start processing payroll for your employees, you probably anticipate it in a different way, perhaps even with a sense of dread. QuickBooks handles the real grunt work once you've done the initial setup, but those early hours you spend preparing to print your first paycheck can be challenging. Fortunately, QuickBooks' payroll setup tool can guide you through the process. Once you've signed up for payroll, open the Employees menu and select Payroll Setup. Figure 1: The QuickBooks Payroll Setup tool tells you'll what information you need to supply in order to start paying employees. Easy Operations The first screen you'll see in this step-by-step, wizard-like setup guide contains a link to QuickBooks' payroll setup checklist. You don't have to assemble all of the information you'll need about your company, your employees, and your payroll taxes, but we recommend that you gather as much as you can before you start. You'll advance through setup by completing the information requested and then clicking the Continue button in the lower right (or, sometimes, Next; there's also a Previous button available often). If you don't have a particular detail immediately at hand, you can continue on and come back later. You'll be able to edit your work then. To back out of the whole process and return at another time, click the Finish Later button in the lower left. Building a Framework QuickBooks first wants to know about the various types of compensation and employee benefits your company offers. To start adding your Compensation options, click Add New. Click in the box in front of any pay types you support (Salary, Hourly wage and overtime, Commission, etc.) to create a check mark. When you click Next, this window opens: Figure 2: It's easy to indicate the types of compensation your company offers. Keep clicking Next after you've completed each screen until you come to a page that lists all of the compensation types you've defined. To make any changes, highlight the type and click Edit to modify or Delete to remove. Then click Continue when you're finished. The next section is probably the most difficult: Employee Benefits. Here, using similar interface conventions to enter information and navigate, you'll provide information about your company's: Insurance benefits  Retirement benefits  Paid time off, and  Miscellaneous items (cash advance, wage garnishment, mileage reimbursement, etc.).  It's absolutely critical that you set these up accurately, or you'll have unhappy benefits providers - and employees. If you're not absolutely confident of an answer, it's better to leave an item unfinished and come back later. You may want to ask us to work with you as you complete this section. People and Taxes QuickBooks will then ask you about your employees. Have your W-4 forms handy for this section, as you'll need to know Social Security numbers, birth dates, etc. Figure 3: On this screen, you'll tell QuickBooks what type(s) of compensation and their dollar amounts apply to the employee. All of those details you entered earlier about company benefits comes into play here. Once you've defined an employee's compensation types and amounts, the next screen will display the additions and deductions that your company supports. You will have set up defaults for some of these, but you can modify them for individual employees. There are numerous other details that you'll have to supply for your staff, like how vacation and sick hours accrue, what state will want to collect taxes from them, and what their filing status is. Unless you've worked with payroll before, you're going to want our help in completing the payroll tax section. Once it's done correctly, QuickBooks will calculate taxes due and help you pay them. Finally, QuickBooks helps you determine whether you'll need to enter any previous payroll data from the current year before you start to process your payroll in the software. Whether you're switching from manual payroll or a payroll service, or simply getting ready to pay your first employee, QuickBooks payroll-processing tools can help you save time and foster accuracy - as long as you get the details from the start. Wed, 23 Jul 2014 19:00:00 GMT Beware of Trust Fund Penalties http://www.mytrivalleytax.com/blog/beware-of-trust-fund-penalties/39265 http://www.mytrivalleytax.com/blog/beware-of-trust-fund-penalties/39265 Tri-Valley Tax & Financial Services Inc Article Highlights Trust fund penalty Employers can be held personally liable Responsible persons of a corporation or limited liability firm can be held personally liable Factors used in determining a liable responsible person The term “trust fund recovery penalty” refers to a tax penalty assessed against the directors or officers of a business entity that failed to pay a required tax on behalf of its employees. For example, employers withhold income taxes and FICA payroll taxes from employees’ wages. These funds actually belong to the government and are referred to as “trust funds.” They cannot be used by the employer to pay other business expenses. Tax law provides that employers are personally responsible for remitting the trust funds to the government. If the employer is a business entity such as a corporation or a limited lia-bility company, then any person who was “required to collect, truthfully account for, and pay over” the funds is liable “for a penalty equal to the total amount of tax” that went unpaid. Once assessed, these “trust fund penalties” cannot be discharged in bankruptcy, and the employer or responsible person(s) will be liable for them even if the business entity itself is liquidated. Other civil penalties, as well as criminal penalties, could also apply. The trust fund recovery penalty (the amount of the tax that was collected and not paid) can be imposed on any person who: (1) Is responsible for collecting, accounting for, and paying over payroll taxes; and (2) Willfully fails to perform this responsibility. Willfulness involves a voluntary, conscious and intentional act to prefer other creditors over the U.S. Thus, if a responsible person knows that withholding taxes are delinquent and uses corporate funds to pay other expenses, such failure to pay withholding taxes is deemed “willful.” In determining whether an individual is a responsible person, courts consider various factors, including whether the individual: (1) Holds corporate office; (2) Has check-signing authority; (3) Can hire and fire employees; (4) Manages the day-to-day operations of the business; (5) Prepares payroll tax returns; (6) Signs financing contracts; and (7) Determines financial policy. If you can be judged to be a responsible person, make sure the trust fund payments are made before any other expenses are paid, even if encouraged not to do so by someone else of authority within the company. Otherwise you may be held responsible for the unpaid funds, and the liability could follow you to your grave. If you have questions about the trust fund rules and potential penalties, please give this office a call. Tue, 22 Jul 2014 19:00:00 GMT The Alimony Gap http://www.mytrivalleytax.com/blog/the-alimony-gap/39260 http://www.mytrivalleytax.com/blog/the-alimony-gap/39260 Tri-Valley Tax & Financial Services Inc Article Highlights: Alimony is deductible to the payer. Alimony is income for the recipient. The IRS matches alimony deductions and income by SSN. Alimony is often confused with child support payments. Audits can lead to filing penalties. Individuals who pay alimony can deduct the amount paid from income on their tax return to reduce the amount of their personal income tax. Conversely, individuals who receive alimony must claim the amount received as income on their tax returns. Recently, the Treasury Inspector General reported that for approximately half of all returns filed on which an alimony deduction was claimed, there were significant discrepancies in reporting the corresponding amount of taxable alimony received. Why does this happen? The primary reason is probably because of a misunderstanding of what constitutes alimony. For divorce, support and separation decrees and agreements made after 1984, the definition of alimony includes six attributes that define when payments are in fact alimony. To be alimony, the payments: Must be in cash, paid to the spouse, ex-spouse or a third party on behalf of a spouse or ex-spouse; Must be required by a decree or instrument incident to divorce, a written separation agreement or a support decree; Cannot be designated as child support; Only count if the taxpayers are living apart after the decree (spouses who share the same household cannot qualify for alimony deductions—this is true even if the spouses live separately within the dwelling unit); Must end on the death of the payee (recipient); and Cannot be contingent on the status of a child (that is, any amount that is discontinued when a child reaches 18, moves away, etc., is not alimony). Payments need not be for support of the ex-spouse or based on the marital relationship. They can even be payments for property rights as long as they meet the above requirements. Payments need not be periodic, but there are dollar limits and "recapture" provisions. Even if payments meet all of the alimony requirements, the couple may designate in their agreement or decree that the payments are not alimony, and that designation will be valid for tax purposes. One of the main sources of discrepancies lies with the distinctions between child support and alimony. For example, an individual is required to pay $1,500 per month to a former spouse, with the provision that the payment decreases to $1,000 per month when the couple’s child reaches age 18. In this situation (see #6 above), the alimony is only $1,000, and the $500 is nondeductible/nontaxable child support. Reporting the incorrect amount will undoubtly lead to an IRS inquiry since the one making the alimony payment must include the Social Security Number (SSN) of the recipient, and the IRS computer matches the income and deduction reported on the respective tax returns. A resulting examination could end with the assessment of tax and filing penalties for the individual declaring the incorrect amount. If the alimony payer reports an invalid recipient SSN, or fails to include it altogether, the IRS may assess a penalty, even if the recipient has properly reported the alimony income. Those receiving alimony may not be aware that alimony is treated as earned income for purposes of making IRA contributions. If you are concerned that the amount you are declaring or deducting as alimony might be incorrect, or are currently involved in a divorce action, and would like to understand the tax ramifications of alimony, child support and who will receive the tax benefits provided for your children, please call this office. Thu, 17 Jul 2014 19:00:00 GMT Scammers Getting More Brazen http://www.mytrivalleytax.com/blog/scammers-getting-more-brazen/39250 http://www.mytrivalleytax.com/blog/scammers-getting-more-brazen/39250 Tri-Valley Tax & Financial Services Inc Article Highlights: Taxpayers Receiving Bogus Call from Individuals Claiming To Be IRS Agents. Guidelines to Avoid Being a Victim of a Scam or ID Theft. Limit Accounts to Avoid ID Theft Exposure. We have previously cautioned you not to be duped by Internet and mail scams dreamed up by some pretty enterprising thieves. Most of those revolve around the Internet and e-mails, trying to steal your identity or have you pay tax liabilities that don’t exist. The latest schemes revolve around phone calls from individuals claiming to be IRS agents who demand immediate payment for fabricated tax liabilities. Don’t get caught up in these scams. Always remember, the first contact you will receive from the IRS is letter, never a phone call or e-mail. Here are some guidelines to follow to avoid becoming a victim: First and foremost, always remember, the first contact you will receive from the IRS will be by U.S. mail. If you receive e-mail or a phone call claiming to be from the IRS, consider it a scam. a. E-mails - Do not respond or click through to any embedded links. Instead, forward it to phishing@irs.gov. b. Phone calls - If someone calls claiming to be an IRS agent, ask for their name, badge number, and phone number. Tell them your representative will call them back. Then call this office. Never provide financial information over the phone via the Internet, or by e-mail unless you are absolutely sure with whom you are dealing. That includes: • Social Security Number - Always resist giving your Social Security number to anyone. The more firms or individuals who have it, the greater the chance it can be stolen. • Birth Date - Your birth date is frequently used as a cross check with your Social Security Number. A combination of birth date and Social Security number can open many doors for ID thieves. Is your birth date posted on social media? Maybe it should not be! That goes for your children, as well. • Bank Account and Bank Routing Numbers - This along with your name and address will allow thieves to tap your bank accounts. To counter this threat, many banks now provide automated e-mails alerting you to account withdrawals and deposits. • Credit/Debit card numbers - Be especially cautious with these numbers, since they provide thieves with easy access to your accounts. There are individuals whose sole intent is to steal your identity and sell it to others. Limit your exposure by minimizing the number of charge and credit card accounts you have. The more who have your information, the greater the chances of it being stolen. Don’t think all the big firms are safe; there have been several high-profile database breaches in the last year. The IRS is not the only disguise scammers use. They pretend to be attorneys representing estates, lottery payouts, and other such subterfuge to draw you into their web. If you ever have questions related to suspect e-mails or phone calls, please call this office before responding to them. Tue, 15 Jul 2014 19:00:00 GMT Mid-Year Tax Planning Checklist http://www.mytrivalleytax.com/blog/mid-year-tax-planning-checklist/33529 http://www.mytrivalleytax.com/blog/mid-year-tax-planning-checklist/33529 Tri-Valley Tax & Financial Services Inc All too often, taxpayers wait until after the close of the tax year to worry about their taxes and miss opportunities that could reduce their tax liability or financially assist them. Mid-year is the perfect time for tax planning. The following are some events that can affect your tax return; you may need to take steps to mitigate their impact and avoid unpleasant surprises after it is too late to address them. Did you get married, divorced, or become widowed? Did you change jobs or has your spouse started working? Did you have a substantial increase or decrease in income? Did you have a substantial gain from the sale of stocks or bonds? Did you buy or sell a rental? Did you start, acquire, or sell a business? Did you buy or sell a home? Did you retire this year? Are you on track to withdraw the required amount from your IRA (age 70.5 or older)? Did you refinance your home or take out a second home mortgage this year? Were you the beneficiary of an inheritance this year? Did you have a child? Time to consider a tax-advantaged savings plan! Are you taking advantage of tax-advantaged retirement savings? Have you made any significant equipment purchases for your business? Are you planning to purchase a new business vehicle and dispose of the old one? It makes a significant difference whether you sell or trade-in the old vehicle. Are your cash and non-cash charitable contributions adequately documented? Are you keeping up with your estimated tax payments or do they need adjusting? Did you purchase your health insurance through a government insurance exchange and qualify for an insurance subsidy? If your income subsequently increased, you may need to be prepared to repay some portion of the subsidy. Do you have substantial investment income or gains from the sale of investment assets? If so, you may be hit with the 3.8% surtax on net investment income and need to adjust your advance tax payments. Did you make any unplanned withdrawals from an IRA or pension plan? Have you stayed abreast of every new tax law change? If you anticipate or have already encountered any of the above events or conditions, it may be appropriate to consult with this office, preferably before the event, and definitely before the end of the year. Thu, 10 Jul 2014 19:00:00 GMT Have You Reviewed Your Will or Trust Lately? http://www.mytrivalleytax.com/blog/have-you-reviewed-your-will-or-trust-lately/39210 http://www.mytrivalleytax.com/blog/have-you-reviewed-your-will-or-trust-lately/39210 Tri-Valley Tax & Financial Services Inc Your will or trust was prepared so that your assets will be distributed according to your wishes after your death. These documents can also reduce estate taxes. However, certain events can cause these documents to become outdated and create family stress and unpleasant tax results. Revised tax laws and life’s ever-changing circumstances make estate planning an ongoing process. That’s why a periodic review of your will or trust is an essential part of estate planning. Here is a partial list of occurrences that could cause your will or trust to be outdated: Your marital status has changed Your heir’s marital status has changed You have relocated to a different state Your assets have changed significantly in value You have sold or acquired a major asset(s) There is a change in your personal representative You wish to change heirs Estate laws have changed Are your named beneficiaries up to date on your insurance policies, IRA accounts, and pension plans? For example, did you forget to remove your ex-spouse, or a deceased relative as your beneficiary? You should never overlook or put off these issues, because if you pass on, it is too late to make changes. If you have questions about how your changed circumstances may impact your estate taxes, please give this office a call. Tue, 08 Jul 2014 19:00:00 GMT Tax Tips for Recently Married Taxpayers http://www.mytrivalleytax.com/blog/tax-tips-for-recently-married-taxpayers/38516 http://www.mytrivalleytax.com/blog/tax-tips-for-recently-married-taxpayers/38516 Tri-Valley Tax & Financial Services Inc This is the time of year for many couples to tie the knot. If you marry during 2014, here are some post-marriage tips to help you avoid stress at tax time. Notify the Social Security Administration − Report any name change to the Social Security Administration so that your name and SSN will match when filing your next tax return. Informing the SSA of a name change is quite simple. File a Form SS-5, Application for a Social Security Card at your local SSA office. You can access the form on SSA’s Web site, by calling 800-772-1213, or at local offices. Your income tax refund may be delayed if it is discovered that your name and SSN don’t match at the time your return is filed. Notify the IRS - If you have a new address, you should notify the IRS by sending Form 8822, Change of Address. Notify the U.S. Postal Service - You should also notify the U.S. Postal Service when you move so that any IRS or state tax agency correspondence can be forwarded. Review Your Withholding and Estimated Tax Payments - If both you and your new spouse work, your combined income may place you in a higher tax bracket, and you may have an unpleasant surprise when we prepare your return for 2014. On the other hand, if only one of you works, filing jointly with your new spouse can provide a significant tax benefit, enabling you to reduce your withholding or estimated payments. In either case, it may be appropriate to review your withholding (W-4 status) and estimated tax payments, if any, for 2014 to make sure that you are not going to be under-withheld and that you don’t set yourself up to receive bad news for the next filing season. If you have any questions about how your new marital status will affect your tax filing, please call this office. Wed, 02 Jul 2014 19:00:00 GMT The Earned Income Tax Credit: the IRS's Nemesis http://www.mytrivalleytax.com/blog/the-earned-income-tax-credit-the-irss-nemesis/39151 http://www.mytrivalleytax.com/blog/the-earned-income-tax-credit-the-irss-nemesis/39151 Tri-Valley Tax & Financial Services Inc Article Highlights: EITC Fraud and Excess Claims  IRS Programs to Detect Fraud and Excess Claims  EITC Qualifications  Special Military Combat Pay Election  Years ago, Congress created the earned income tax credit (EITC) as a refundable tax credit for people who work but have lower incomes. This credit has been a nemesis for the IRS to administer ever since because, on the one hand, it is the frequent target of fraud and excess credit claims and, on the other hand, 20% to 25% of those who qualify for the credit do not claim it. A contributing factor to errors in claiming the credit or failure to take the credit when qualified is the complicated rules related to who qualifies for this credit. The rules are quite complex and best addressed by a tax professional. The government wants those who are entitled to the credit to claim it, and so the IRS widely promotes the credit. On the flip side, the IRS has numerous programs in place to detect fraud and excessive credit claims. The IRS estimates that the dollar value of improper EITC payments for fiscal 2013 was between $13.3 and $15.6 billion. As an example, the largest credits are paid to individuals with a child. A conflict is created when the parents are divorced or separated. Both may attempt to claim the same child in an effort to qualify for the EITC. In fiscal year 2013, the IRS sent letters to over 110,000 taxpayers alerting them to the fact that another taxpayer also claimed the same qualifying child as they had claimed for EITC purposes. The IRS is authorized to ban taxpayers from claiming the EITC for two years if it determines during an audit that they claimed the credit improperly due to reckless or intentional disregard of the rules. Last year, there were more than 67,000 two-year bans in effect. For those entitled to the credit, it could be worth up to $6,143 for 2014. So a taxpayer claiming the credit will pay less federal tax or get a larger refund. If you are employed for at least part of 2014, you may be eligible for the EITC based on these general requirements: You earned less than $14,590 ($20,020 if married filing jointly) and did not have any qualifying children.  You earned less than $38,511 ($43,941 if married filing jointly) and have one qualifying child.  You earned less than $43,756 ($49,186 if married filing jointly) and have two qualifying children.  You earned less than $46,997 ($52,427 if married filing jointly) and have three or more qualifying children.  In addition, you must meet a few basic rules:  You must have a valid Social Security Number, as must any child in order to qualify for the credit.  You must have earned income from employment or from self-employment.  Your filing status cannot be married, filing separately.  You must be a U.S. citizen or resident alien all year, or a nonresident alien married to a U.S. citizen, or a resident alien and filing a joint return.  You cannot be a qualifying child of another person.  If you do not have a qualifying child, you must:    o be age 25 but under 65 at the end of the year,  o live in the United States for more than half the year, and  o not qualify as a dependent of another person.   You cannot file Form 2555 or 2555-EZ (related to foreign earn income).  Members of the military can elect to treat all or none of their nontaxable combat pay as earned income for the purposes of computing the EITC. The one providing the larger EITC benefit can be used. If you have questions about how the EITC might apply to you, a family member, or a friend, please call this office for additional information. Please understand that a taxpayer who might not normally be required to file a return might still benefit from filing to claim the EITC. Thu, 26 Jun 2014 19:00:00 GMT Will the Affordable Care Act Impact Your Tax Return for 2014? http://www.mytrivalleytax.com/blog/will-the-affordable-care-act-impact-your-tax-return-for-2014/39136 http://www.mytrivalleytax.com/blog/will-the-affordable-care-act-impact-your-tax-return-for-2014/39136 Tri-Valley Tax & Financial Services Inc Article Highlights: Individual health insurance mandate Penalty for not being insured Premium assistance credit Insurance premium subsidies Repayment of excessive subsidies The Affordable Care Act (ACA), also referred to as Obamacare, imposes an individual mandate requiring all non-exempt U.S. Citizens and legal residents to enroll in government-approved health insurance in 2014 or pay a penalty. The penalty will be collected through the individual’s income tax returns (Form 1040). The penalty for not having insurance is generally the greater of $95 per adult ($47.50 per child) or 1% of the family’s household income. However, because the penalty is small in comparison to the cost of health insurance, it is estimated that between 8 and 12 million people will opt to pay the penalty rather than buy insurance. That number would be higher was it not for the fact that undocumented immigrants and very low-income households that are not required to file a tax return are exempt from the insurance mandate. An analysis by the Congressional Budget Office (CBO) estimates that about two-thirds of the uninsured population will be exempt from the mandate. Families with incomes between 100% and 400% of the Federal poverty level, whom are not covered by a government-approved plan with their employer and purchase their insurance through a state or federal insurance Marketplace, will receive financial aid to help pay for the cost of the insurance. The financial aid comes in the form of a refundable tax credit called the premium assistance credit. The amount of the credit is based on the family’s income for 2014; the lower the income, the greater the credit. For those at the lower end of the poverty level scale, the credit will cover a substantial portion of the cost of the insurance. The credit can be taken in advance, based upon an estimated income for 2014, in the form of a subsidy to reduce the monthly insurance premiums. However, basing the advance subsidy on estimated income for the year creates a potential tax liability since the credit is based on the year’s actual income, and if the estimated income provides a subsidy in excess of the credit, the excess may have to be paid back when the 2014 tax return is filed. Of course, if the subsidy taken during the year was less than the actual credit, the difference is refunded on the tax return. Those who substantially underestimated their income when signing up for healthcare insurance through one of the Marketplaces and took the advance subsidy may find themselves with a large unexpected tax liability. So the 2014 tax returns may hold some unexpected results for a large number of taxpayers. If you have questions related to how the penalty for being uninsured or how the premium assistance credit may impact your 2014 tax liability, please give this office a call. Tue, 24 Jun 2014 19:00:00 GMT July 2014 Individual Due Dates http://www.mytrivalleytax.com/blog/july-2014-individual-due-dates/32760 http://www.mytrivalleytax.com/blog/july-2014-individual-due-dates/32760 Tri-Valley Tax & Financial Services Inc July 1 - Time for a Mid-Year Tax Check Up Time to review your 2014 year-to-date income and expenses to ensure estimated tax payments and withholding are adequate to avoid underpayment penalties.July 10 - Report Tips to Employer If you are an employee who works for tips and received more than $20 in tips during June, you are required to report them to your employer on IRS Form 4070 no later than July 10. Your employer is required to withhold FICA taxes and income tax withholding for these tips from your regular wages. If your regular wages are insufficient to cover the FICA and tax withholding, the employer will report the amount of the uncollected withholding in box 12 of your W-2 for the year. You will be required to pay the uncollected withholding when your return for the year is filed.July 15 - Social Security, Medicare and Withheld Income TaxIf the monthly deposit rule applies, deposit the tax for payments in June. Sun, 22 Jun 2014 19:00:00 GMT July 2014 Business Due Dates http://www.mytrivalleytax.com/blog/july-2014-business-due-dates/32762 http://www.mytrivalleytax.com/blog/july-2014-business-due-dates/32762 Tri-Valley Tax & Financial Services Inc July 1 - Self-Employed Individuals with Pension Plans If you have a pension or profit-sharing plan, you may need to file a Form 5500 or 5500-EZ for calendar year 2013. Even though the forms do not need to be filed until July 31, you should contact this office now to see if you have a filing requirement, and if you do, allow time to prepare the return. July 15 - Non-Payroll Withholding If the monthly deposit rule applies, deposit the tax for payments in June. July 31 - Self-Employed Individuals with Pension Plans If you have a pension or profit-sharing plan, this is the final due date for filing Form 5500 or 5500-EZ for calendar year 2013. July 31 - Social Security, Medicare and Withheld Income Tax File Form 941 for the second quarter of 2014. Deposit or pay any undeposited tax under the accuracy of deposit rules. If your tax liability is less than $2,500, you can pay it in full with a timely filed return. If you deposited the tax for the quarter in full and on time, you have until August 11 to file the return.July 31 - Certain Small Employers Deposit any undeposited tax if your tax liability is $2,500 or more for 2014 but less than $2,500 for the second quarter. July 31 - Federal Unemployment Tax Deposit the tax owed through June if more than $500. July 31 - All Employers If you maintain an employee benefit plan, such as a pension, profit-sharing, or stock bonus plan, file Form 5500 or 5500-EZ for calendar year 2013. If you use a fiscal year as your plan year, file the form by the last day of the seventh month after the plan year ends. Sun, 22 Jun 2014 19:00:00 GMT 5 Ways You Can Use QuickBooks' Income Tracker http://www.mytrivalleytax.com/blog/5-ways-you-can-use-quickbooks-income-tracker/39121 http://www.mytrivalleytax.com/blog/5-ways-you-can-use-quickbooks-income-tracker/39121 Tri-Valley Tax & Financial Services Inc The Income Tracker is one of QuickBooks' more innovative features. If you're not using it, you should be. One of the reasons that QuickBooks appeals to millions of small businesses is because it offers multiple ways to complete the same tasks, which accommodates different work styles. Say, for example, you wanted to look up a specific invoice. You could: Go to the Customer Center and select the customer, and then scan through the list of transactions,  Use the Find feature (Edit | Find), or  Create a report.  There's also another way you can get there if you have a recent version of QuickBooks: the Income Tracker. (Note: Only the Administrator or a staff member with the correct permissions can access this feature. Talk to us about whether to allow other employees to use it, and how to set that up.) Figure 1: QuickBooks' Income Tracker provides a visual overview of your company's income. That's the first thing you can do with QuickBooks' Income Tracker. To get there, either click the link in the vertical navigation bar or go to Customers | Income Tracker. Four colored bars across the top of the screen represent unbilled estimates, open invoices, overdue invoices, and invoices paid within the last 30 days. Each bar contains two numerical values: the number of transactions of that type and the dollar amount involved. QuickBooks defaults to displaying all types of transactions, but when you click on a bar, the screen changes to show only that type of transaction. You can also filter the table of transactions using the drop-down lists below the colored bars. Your choices here include Customer:Job, Type, Status (Open, Paid, etc.) and Date (range). Click the arrow to the right of each filter's label to display your options. The column labels below these lists will change depending on the transaction type that's active. More Functionality The Income Tracker is great for simply viewing groups of transactions; double-clicking on one will open the original form. You can also open them by selecting an action to take. For example, open your estimates list and click on a transaction to highlight it. Then click the arrow next to Select in the Action column at the far right end of the row. Figure 2: You can modify transactions like estimates from within the Income Tracker. If you choose the first option here, QuickBooks opens a small window that asks you whether you'd like to create an invoice for 100 percent of the estimate, a percentage of it, specific items, or percentages of each item. When you make your selection and click OK, a completed invoice form opens, which you can then check over and save. As you can see above, you can also mark the estimate as inactive, print it, or email it. Each transaction type supports a different set of actions. In the open invoice action column, as you'd expect, you can click the option to Receive Payment, which opens the Customer Payment window with the customer and amount due already filled in. This can be edited to reflect a different amount, or you can just accept it as is, then save it. Flexible Forms You can even create a new transaction within the Income Tracker. Click on the arrow next to Manage Transactions in the lower left corner of the screen and select the form you want. Figure 3: You can open new transaction screens from within QuickBooks' Income Tracker. The Income Tracker also provides one of the fastest ways to print multiple forms. Just select the transactions you want to print by clicking in the box in front of them, and then click the arrow next to Batch Actions in the lower left corner. Finally, you can edit transactions from here, too. Either double-click on one or select it and click Edit Highlighted Row in the Manage Transactions menu. QuickBooks' Income Tracker doesn't do anything that can't be done another way in the program. But it provides an excellent one-glance view of the current state of your receivables movement. If you're consistently seeing patterns that you don't like, call us. We can evaluate your receivables process and suggest ways to accelerate it. Even if your sales aren't increasing, getting that “PAID” stamp on invoices quickly will improve your cash flow and strengthen your confidence as a business manager. Sun, 22 Jun 2014 19:00:00 GMT Do You Have An Online Gambling Account? http://www.mytrivalleytax.com/blog/do-you-have-an-online-gambling-account/39118 http://www.mytrivalleytax.com/blog/do-you-have-an-online-gambling-account/39118 Tri-Valley Tax & Financial Services Inc If so, you should be aware that each United States person who has a financial interest in or signature or other authority over any foreign 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, must report that relationship to the U.S. government each calendar year. This is done by electronically filing the FinCEN Form 114 (Report of Foreign Bank and Financial Accounts), commonly referred to as the FBAR, on or before June 30 of the succeeding year with the Department of the Treasury. Penalties for failing to comply can be draconian. For non-willful violations, civil penalties up to $10,000 may be imposed; the penalty for willful violations is the greater of $100,000 or 50% of the account’s balance at the time of the violation. You should also be aware that many of the online gaming sites are actually operating from outside of the U.S., and if, at any time during the year, your combined account balances from all of those accounts exceeds the $10,000 reporting threshold, you will have an FBAR reporting requirement. In a recent case, the court upheld the IRS’s imposed penalties for not filing FBARs for an online gaming account with an out-of-the-country online casino (Hom District Court CA 6/4/2014). In that case, the taxpayer gambled online and had accounts worth more than $10,000 during the years in question with two online poker companies, PokerStars and PartyPoker. He used a third company, an online financial organization, FirePay.com, to facilitate the transferring of money to and from his two poker accounts; he also had more than $10,000 in his FirePay account during one of the years in question. The taxpayer was assessed with 31 penalties for his non-willful failure to submit FBARs, regarding his interest in his FirePay, PokerStars, and PartyPoker accounts. If you or someone you know has an online gambling account and you need help in determining whether you have a filing requirement and/or you require help with filing the FBAR, please give this office a call. Thu, 19 Jun 2014 19:00:00 GMT Foreign Banks Forced to Report US Account Owners’ Tax Information to IRS http://www.mytrivalleytax.com/blog/foreign-banks-forced-to-report-us-account-owners8217-tax-information-to-irs/39116 http://www.mytrivalleytax.com/blog/foreign-banks-forced-to-report-us-account-owners8217-tax-information-to-irs/39116 Tri-Valley Tax & Financial Services Inc The Foreign Account Tax Compliance Act (FATCA) is a United States law that requires United States persons, including individuals who live outside of the US, to report their financial accounts held outside of the United States to the Treasury Department. This is done by completing and attaching IRS Form 8938, Statement of Foreign Financial Assets, to the individual’s income tax return, and is generally required if the value of the foreign accounts exceeds $50,000 (this threshold is higher for US persons residing abroad). In addition, FATCA requires foreign financial institutions to report about their US clients to the IRS. Congress enacted FATCA in order to make it more difficult for US taxpayers to conceal assets held in offshore accounts and shell corporations and thus, recoup federal tax revenues on unreported foreign-source income. The penalties for not reporting the accounts are draconian. Under FATCA, foreign financial institutions that refuse to share information with the IRS face penalties when doing business in the US. FATCA requires US banks to withhold 30% of certain payments to foreign banks that have refused to comply with the information-sharing program. That is a heavy price to pay for access to the world’s largest economy, and it has forced many reluctant countries to comply with the reporting requirement. As a result, nearly 70 countries, including Switzerland, the Cayman Islands, and the Bahamas—all places where Americans have traditionally hid assets in the past—have agreed to share information from their banks. Beginning in March 2015, more than 77,000 foreign banks, investment funds, and other financial institutions have agreed to supply the IRS with names, account numbers, and balances for accounts controlled by US taxpayers. Some foreign banks are refusing to accept US citizens as clients because they don’t want the paperwork headaches imposed by FATCA and the additional compliance costs. As a result, US persons living abroad may find their banking options curtailed. Oh, and did we mention that the FATCA filings are in addition to the long-standing Foreign Bank Account Report (FBAR) that US persons must file with the U.S. Treasury when the aggregate value of foreign accounts exceeds $10,000 in a calendar year? This report must be e-filed using FinCEN Form 114 and is due by June 30 for the prior calendar year—no extensions are available. Heavy penalties apply if a FBAR isn’t filed when one is required. If you have questions related to the individual FATCA or FBAR reporting requirements, please give this office a call. Tue, 17 Jun 2014 19:00:00 GMT Tips for Students Planning to Work during the Summer http://www.mytrivalleytax.com/blog/tips-for-students-planning-to-work-during-the-summer/39106 http://www.mytrivalleytax.com/blog/tips-for-students-planning-to-work-during-the-summer/39106 Tri-Valley Tax & Financial Services Inc Article Highlights: Form W-4 Watch Out for Payroll Surprises Tips Odd Jobs Self-Employment Tax Working for Parents ROTC Students Newspaper Delivery Retirement Contributions As the summer break from school approaches, many students are looking for part-time summer employment. Both parents and students should be aware of the tax issues that need to be considered when working a summer job. Here is a rundown of some of the more common issues: Completing Form W-4 - The W-4 form is used by employers to determine the amount of tax that will be withheld from your paycheck. Students with multiple summer jobs will want to make sure that all of their employers are withholding an adequate amount of taxes to cover their total income tax liability. Generally, a student with income only from summer and part-time employment, and who is claimed as a dependent of someone else, can earn as much as $6,200 (the standard deduction amount for 2014) without being liable for income tax. However, if the student has investment income, the tax determination becomes more complicated because, as he or she is a dependent of another, special rules apply. Watch Out for Payroll Surprises - Some employers may attempt to avoid their payroll tax liabilities by paying the student in cash and incorrectly treating them as an independent contractor, thus leaving the student with the responsibility of paying both the employee’s and employer’s payroll tax liability (see self-employment tax below). If a potential employer intends to do that, they will generally ask the student to complete a Form W-9 rather than a W-4 or simply ask for their Social Security Number (SSN) without requesting a W-4. Tips - If the student works as a waiter or a camp counselor, he or she may receive tips as part of his or her summer income. All tip income received is taxable income and is therefore subject to federal income tax. Employees are required to report tips of $20 or more received while working with any one employer in any given month. This reporting should be made in writing to the employer by the tenth day of the month following the receipt of tips. The employer withholds FICA (Social Security and Medicare taxes) and income taxes on these reported tips, then includes the tips and wages on the employee’s W-2. Odd Jobs - Many students do odd jobs over the summer and are paid in cash. Just because it is paid in cash does not mean that it is tax-free. Unfortunately, the income is taxable and may be subject to self-employment taxes (see next). These earnings include income from odd jobs like dog walking, babysitting, and lawn mowing. Self-Employment Tax - When a student works for an employer, the employer withholds Social Security tax and Medicare tax from his or her pay, matches the amount dollar for dollar, and remits the combined amount to the government. When a student is self-employed, he or she is required to pay the combined employee and employer amounts on their own (referred to as self-employment tax) if the net earnings are $400 or more. This tax pays for his or her benefits under the Social Security system and Medicare Part A. Even if he or she is not liable for income tax, this 15.3% tax may apply to a student’s odd jobs. Working for Parents - A child under the age of 18 working in a business solely owned by his or her parents is not subject to payroll taxes. This saves the child from having to pay the 7.65% payroll taxes and also provides the parent with relief from payroll taxes. The payroll tax exception won’t apply if the parent’s business is set up as a corporation. ROTC Students - Subsistence allowances paid to ROTC students participating in advanced training are not taxable. However, active duty pay – such as pay received during summer advanced camp – is taxable. Newspaper Carrier or Distributor - Special rules apply to services performed as a newspaper carrier or distributor. An individual is a direct seller and treated as self-employed for federal tax purposes if he or she meets the following conditions: o They are in the business of delivering newspapers; o All of their pay for these services directly relates to sales rather than to the number of hours worked; and o They perform the delivery services under a written contract which states that they will not be treated as an employee for federal tax purposes. Newspaper Carriers or Distributors Under Age 18 - Generally, newspaper carriers or distributors under age 18 are not subject to self-employment tax. Retirement Plan Contributions - Putting away money for retirement is probably the last thing a student will want to spend their summer earnings on. However, having earned income opens up the opportunity to make traditional and Roth IRA contributions. If you are a student or the parent of a student with questions about these or other issues associated with student employment, please call this office for assistance. Thu, 12 Jun 2014 19:00:00 GMT Tax Facts about Summertime Child Care Expenses http://www.mytrivalleytax.com/blog/tax-facts-about-summertime-child-care-expenses/36988 http://www.mytrivalleytax.com/blog/tax-facts-about-summertime-child-care-expenses/36988 Tri-Valley Tax & Financial Services Inc Article Highlights: Day Camps Overnight Camps or Tutoring School Expenses In-Home Care Credit Percentages Maximum Qualifying Expenses Recordkeeping Requirements State Tax Credit Many parents who work or are looking for work must arrange for care of their children during school vacations. If you are one of those, and your children requiring care are under 13 years of age, you may qualify for a tax credit that can reduce your federal income taxes. Here are some facts you need to know about the tax credit available for child care expenses. The Child and Dependent Care Credit is available for expenses incurred during the lazy, hazy days of summer and throughout the rest of the year. You must claim the qualifying child for whom you pay care expenses as your dependent in order to qualify to claim the credit (but there is an exception for divorced or separated parents). Day Camps - The costs of day camp generally count as expenses towards the child and dependent care credit. A day camp or similar program may qualify, even if the camp specializes in a particular activity, such as soccer or computers. The rule that a dependent care center must comply with applicable state and local laws also applies to a day camp where more than six persons are cared for in return for a fee. Overnight Camp or Tutoring - No portion of the cost of an overnight camp or a tutoring program is a qualified expense. School Expenses - Only school expenses for a child below the level of kindergarten will qualify for the credit. But expenses paid for before- and after-school care of a child in kindergarten or a higher grade are eligible. Day Care Facility - The expenses paid to the day care center qualify. If the day care center cares for more than six persons, it must comply with applicable state and local laws. In-Home Care - If your childcare provider is a “sitter” at your home, the sitter is considered your employee, and you may need to pay payroll taxes and file payroll returns. Credit Percentage - The actual credit can be between 20 and 35 percent of your qualifying expenses, depending upon your income. The higher your income, the lower the credit percentage. Maximum Qualifying Expenses - You may use up to $3,000 of the unreimbursed expenses paid in a year for one qualifying individual or $6,000 for two or more qualifying individuals to figure the credit. This will provide a tax credit of between $600 and $1,050 for one child and $1,200 and $2,100 for two or more, depending upon your income. If the expenses exceed your work earnings, use the earnings to figure the credit. Dependent care benefits received through your employer will also affect the computation of the credit and could result in no credit being allowed. Records Required - To claim the credit on your tax return, you will need to provide the care provider’s name, address and tax ID number. No credit is allowed without that information, except the tax ID number is not needed if the provider is a tax-exempt organization such as a church or school. You may run across care providers who are reluctant to provide their ID numbers because they don’t plan on reporting their income and paying their taxes. Just remember, without the ID number, you cannot claim the credit. Be sure to obtain the required information before you pay the provider. If you paid work-related expenses for the care of two or more qualifying persons, the expense dollar limit is $6,000. This $6,000 limit does not need to be divided equally among them. For example, if your work-related expenses for the care of one child are $3,200 and your work-related expenses for another child are $2,800, you can use the total, $6,000, when figuring the credit. State Child Care Credit - Some states also allow a similar credit on the state income tax return. If your state is one of those, additional information, such as the care provider’s phone number, may be required. This credit is also available if you are filing a joint return and need to pay for care for your child while you work and your spouse is a full-time student. You can also claim this credit if you are working and care for a spouse that is physically or mentally incapable of self-care. For more information about how this credit will affect your particular circumstances, or for information about claiming this credit for your spouse or a dependent age 13 or over who is not able to care for himself or herself, please call this office. Tue, 10 Jun 2014 19:00:00 GMT Important Date For Taxpayers Living Abroad http://www.mytrivalleytax.com/blog/important-date-for-taxpayers-living-abroad/39040 http://www.mytrivalleytax.com/blog/important-date-for-taxpayers-living-abroad/39040 Tri-Valley Tax & Financial Services Inc If you are a U.S. citizen or resident alien living and working (or on military duty) outside the United States and Puerto Rico, June 16 is the filing due date for your 2013 income tax return and to pay any tax due. If your return has not been completed and you need additional time to file your return, file Form 4868 to obtain 4 additional months to file. Then, file Form 1040 by October 15. However, if you are a participant in a combat zone, you may be able to further extend the filing deadline (see below). Caution: This is not an extension of time to pay your tax liability, only an extension to file the return. If you expect to owe, estimate how much and include your payment with the extension. If you owe taxes when you do file your extended tax return, you will be liable for both the late payment penalty and interest from the due date. Combat Zone - For military taxpayers in a combat zone/qualified hazardous duty area, the deadlines for taking actions with the IRS are extended. This also applies to service members involved in contingency operations, such as Operation Iraqi Freedom or Enduring Freedom. The extension is for 180 consecutive days after the later of: The last day a military taxpayer was in a combat zone/qualified hazardous duty area or served in a qualifying contingency operation, or have qualifying service outside of the combat zone/qualified hazardous duty area (or the last day the area qualifies as a combat zone or qualified hazardous duty area), or   The last day of any continuous qualified hospitalization for injury from service in the combat zone/qualified hazardous duty area or contingency operation, or while performing qualifying service outside of the combat zone/qualified hazardous duty area.  In addition to the 180 days, the deadline is also extended by the number of days that were left for the individual to take an action with the IRS when they entered a combat zone/qualified hazardous duty area or began serving in a contingency operation. It is not a good idea to delay filing your return because you owe taxes. The late filing penalty is 5% per month (maximum 25%) and can be a substantial penalty. It is generally better practice to file the return without payment and avoid the late filing penalty. We can also establish an installment agreement that allows you to pay your taxes over a period of up to 72 months. Please contact this office for assistance with an extension request or an installment agreement. Thu, 05 Jun 2014 19:00:00 GMT Have a Financial Interest in or Signature Authority over a Foreign Financial Account? Better Read This! http://www.mytrivalleytax.com/blog/have-a-financial-interest-in-or-signature-authority-over-a-foreign-financial-account-better-read-this/36946 http://www.mytrivalleytax.com/blog/have-a-financial-interest-in-or-signature-authority-over-a-foreign-financial-account-better-read-this/36946 Tri-Valley Tax & Financial Services Inc Article Highlights: Filing requirements  Filing due date  Failing to file penalties  Easily overlooked accounts  Family accounts inherited accounts  Business accounts  Foreign financial accounts  Filing Form 8938 is additional to FBAR filing  Each U.S. person who has a financial interest in or signature or other authority over any foreign financial accounts (including bank, securities, or other types of financial accounts in a foreign country) must report that relationship by filing a FinCEN Form 114 (more commonly known as FBAR) electronically with the Treasury Department's Financial Crimes Enforcement Network each year if the aggregate value of these financial accounts exceeds $10,000 at any time during the calendar year. The government uses this reporting mechanism as a means of uncovering hidden foreign accounts and ensuring that investment income earned in foreign countries by U.S. taxpayers is included on their U.S. tax returns. The Treasury Department has placed a new emphasis on foreign accounts, and taxpayers with a financial connection to a foreign country should determine whether or not they have a reporting requirement. Reporting is due on or before June 30 of the succeeding year. No extensions are available for filing this form. The filing is now required to be done electronically; FinCEN will no longer accept a paper FBAR form. In addition, taxpayers are generally required to answer “yes” or “no” to questions related to the foreign bank and financial accounts on their tax returns. Penalties for failing to comply can be draconian. For non-willful violations, civil penalties up to $10,000 may be imposed. The penalty for willful violations is the greater of $100,000 or 50% of the account's balance at the time of the violation. A reasonable-cause exception to the penalty is available for non-willful violations but not for willful violations. Overlooked Accounts - Many taxpayers overlook the fact that they have a reporting requirement in such situations as: Family Accounts - Recent immigrants to the U.S. may still have parents or other family members residing in the “old” country, and those relatives may have included them on an account in a foreign country. This practice is common for some ethnic groups. The taxpayer may not really consider the account to be his or hers; nevertheless, it falls under the reporting requirement if he or she has signature or other authority over the account and its value exceeds $10,000.   Inherited Accounts - Accounts in a foreign country that are inherited by a U.S. person fall under the FBAR reporting requirement, even if the funds are subsequently transferred to the U.S. The FBAR rules state that reporting is required if at any time during the year the foreign account exceeds $10,000.   Business Accounts - A corporate officer or board member may have signature authority over a business account in a foreign country and may overlook the need to meet the FBAR reporting requirements.   Foreign Financial Accounts - These financial accounts are maintained by foreign financial institutions and include other investment assets not held in accounts maintained by financial institutions. However, no reporting is required for interests that are held in a custodial account with a U.S. financial institution.  CAUTION: Some U.S. taxpayers with foreign accounts or other foreign assets also are required to file Form 8938, Statement of Specified Foreign Financial Assets, with their income tax returns. The 8938 and the FBAR are two separate forms with separate filing requirements, so if you have already filed your income tax return and included a Form 8938, don't assume that the 8938 has satisfied your FBAR filing! In addition to including any reportable foreign income on a tax return, the taxpayer must ensure that the foreign account questions are completed correctly on the tax return and that the FBAR form is filed, if required. If you have questions regarding this reporting requirement, please contact this office. Tue, 03 Jun 2014 19:00:00 GMT Passwords - Why a List Is Important http://www.mytrivalleytax.com/blog/passwords-why-a-list-is-important/39006 http://www.mytrivalleytax.com/blog/passwords-why-a-list-is-important/39006 Tri-Valley Tax & Financial Services Inc Article Highlights: Usernames & passwords  Problems for caregivers and survivors  Most overlook this very important issue  We now live in a digital world where we conduct many, if not all, of your financial affairs over the Internet. And we guard against others getting into our Internet accounts with usernames and passwords. We can even use passwords to keep others from accessing our cell phones, tablets and computers. If you are like most people, you have had to change passwords on some accounts for one reason or another. The result is that you don't have just one password; you have several. In fact, security specialists recommend against using the same password for all online accounts for the obvious reason that if one account is compromised, all others could be hacked as well. Now consider the problems that will arise if you become incapacitated or, worse yet, pass away. How are your family members or executor going to help manage your affairs? According to a recent survey only about 45% of Internet users have created an up-to-date list of usernames and passwords for all their online accounts. This is very important, as not all companies will provide a family member or personal representative with access to a decedent's accounts. Such situations often prove to be extremely time-consuming and problematic. If you haven't already done so, we strongly recommend organizing your usernames and passwords as soon as possible, so that your trusted family member, caregiver, trustee or executor can readily access important online accounts if need be. Keep the list in a safe place known and accessible by those individuals you wish to have access to the information. For each password included on the list, also include the username, device, website login address, and the “secret” security questions/answers, if any, for the account. If you have any questions, please call. Thu, 29 May 2014 19:00:00 GMT A New Twist on Your Favorite Game Show http://www.mytrivalleytax.com/blog/a-new-twist-on-your-favorite-game-show/38977 http://www.mytrivalleytax.com/blog/a-new-twist-on-your-favorite-game-show/38977 Tri-Valley Tax & Financial Services Inc Article Highlights: Tax Issues of Being a Game Show Winner  Setting Aside Winnings For taxes  Prizes Are Taxed at Retail For Non-cash Winnings, The Taxes Come Out of Your Pocket  We all have our favorite game shows such as Wheel of Fortune, The Price is Right, and Lets Make A Deal and we love to have the contestants win big. Often the game show hosts will ask “what you are going to do with the winnings?” The answer is usually “buy this or that” or maybe “go on vacation.” We seldom if ever hear a contestant or the host mention anything about giving the government part of their winnings. But after all the celebrating is over, the game show will issue the winning contestant a 1099 for the amount of the cash and fair market value of the prizes won, which is taxable on the contestant's state and federal tax returns. If a contestant wins cash they just need to set aside enough of the cash winnings to pay their taxes! The amount of the tax will vary by individual based on their tax bracket and the state they live in. The federal tax can be as high as 39.6% and some states' as high as 13%. Most individuals who are contestants on these programs are probably in the 10-25% federal tax brackets and 2-5% state brackets, making the tax on the winnings around 22%. But what happens to the contestant that wins a prize? They will be taxed on its fair market value, which is usually full retail value. So they will have to dig into their own pockets to come up with the cash to pay the taxes. And if the contestant wins something they have no use for, they are still stuck with taxes unless they refuse the prize or contribute it to charity. Then think about the individual with limited means that wins an $80,000 vehicle. It might well cost them $17,500 or more (which they probably don't have) just to pay the income taxes on the prize. Or consider the contestant that wins a bunch of expensive trips and will have to dig into their pocket to pay cash for them. Do they even have enough vacation time to take them? Thinking about how the contestant will deal with taxes can add a new twist to watching your favorite game show. Call this office if you have questions. Tue, 27 May 2014 19:00:00 GMT Don’t Panic if You Receive an IRS Notice http://www.mytrivalleytax.com/blog/don8217t-panic-if-you-receive-an-irs-notice/38969 http://www.mytrivalleytax.com/blog/don8217t-panic-if-you-receive-an-irs-notice/38969 Tri-Valley Tax & Financial Services Inc Article Highlights: Letter May Be In Error Let Your Tax Professional Respond Procrastination Leads to Bigger Problems Change of Address Complications If it is not your refund check in the mailbox, that letter from the IRS will probably increase your heart rate a little. Don’t panic; many of these letters can be dealt with simply and painlessly. Each year, the IRS sends millions of letters and notices to taxpayers to request payment of taxes, notify them of a change to their account, or to request additional information. The notice you receive normally covers a very specific issue about your account or tax return. Each letter and notice offers specific instructions on what needs to be done to satisfy the inquiry. However, the letters also must advise you of your rights and other information required by law. Thus, these letters can become overly lengthy and sometimes difficult to understand. That is why it is important to either call this office immediately or forward a copy of the letter or notice so it can be reviewed and handled accordingly. Do not procrastinate or throw the letter in a drawer hoping the issue will go away. Most of these letters are computer generated and, after a certain period of time, another letter will automatically be produced. And, as you might expect, each succeeding letter will become more aggressive and more difficult to deal with. Most importantly, don’t automatically pay an amount the IRS is requesting unless you are positive it is correct. Quite often, you really do not owe the amount being billed, and it will be difficult and time consuming to get your payment back. It is good practice to have this office review the notice prior to making any payment. Unfortunately, many taxpayers are issued these letters and don’t know it because they have moved and left no forwarding address. Even though the IRS will register your address change when you file your annual tax return, that may not be timely enough, especially if your return is on extension or you are behind in your filings. It is always better to notify the IRS, and your state if applicable, that you have a new address, just as you would your family and financial and business affiliations. You may not want to receive correspondence from the IRS, but it is easier to deal with the first notice. The complications can only increase as the notices go unanswered. The IRS provides Form 8822 – Change of Address for taxpayers who have relocated between tax filings. It is important for any IRS correspondence to be dealt with promptly and correctly. This office can handle these matters for you; so please call for assistance. Thu, 22 May 2014 19:00:00 GMT June 2014 Individual Due Dates http://www.mytrivalleytax.com/blog/june-2014-individual-due-dates/32072 http://www.mytrivalleytax.com/blog/june-2014-individual-due-dates/32072 Tri-Valley Tax & Financial Services Inc June 2 - Final Due Date for IRA Trustees to Issue Form 5498 Final due date for IRA trustees to issue Form 5498, providing IRA owners with the fair market value (FMV) of their IRA accounts as of December 31, 2013. The FMV of an IRA on the last day of the prior year (Dec 31, 2013) is used to determine the required minimum distribution (RMD) that must be taken from the IRA if you are age 70½ or older during 2014. If you are age 70½ or older during 2014 and need assistance determining your RMD for the year, please give this office a call. Otherwise, no other action is required and the Form 5498 can be filed away with your other tax documents for the year. June 10 - Report Tips to Employer If you are an employee who works for tips and received more than $20 in tips during May, you are required to report them to your employer on IRS Form 4070 no later than June 10. Your employer is required to withhold FICA taxes and income tax withholding for these tips from your regular wages. If your regular wages are insufficient to cover the FICA and tax withholding, the employer will report the amount of the uncollected withholding in box 12 of your W-2 for the year. You will be required to pay the uncollected withholding when your return for the year is filed.June 16 - Estimated Tax Payment Due It’s time to make your second quarter estimated tax installment payment for the 2014 tax year. Our tax system is a “pay-as-you-go” system. To facilitate that concept, the government has provided several means of assisting taxpayers in meeting the “pay-as-you-go” requirement. These include: Payroll withholding for employers; Pension withholding for retirees; and Estimated tax payments for self-employed individuals and those with other sources of income not covered by withholding. When a taxpayer fails to prepay a safe harbor (minimum) amount, they can be subject to the underpayment penalty. This penalty is equal to the federal short-term rate plus 3 percentage points, and the penalty is computed on a quarter-by-quarter basis. Federal tax law does provide ways to avoid the underpayment penalty. If the underpayment is less than the $1,000 de-minimis amount, no penalty is assessed. In addition, the law provides "safe harbor" prepayments. There are two safe harbors: The first safe harbor is based on the tax owed in the current year. If your payments equal or exceed 90% of what is owed in the current year, you can escape a penalty. The second safe harbor is based on the tax owed in the immediately preceding tax year. This safe harbor is generally 100% of the prior year’s tax liability. However, for higher-income taxpayers whose AGI exceeds $150,000 ($75,000 for married taxpayers filing separately), the prior year’s safe harbor is 110%. Example: Suppose your tax for the year is $10,000 and your prepayments total $5,600. The result is that you owe an additional $4,400 on your tax return. To find out if you owe a penalty, see if you meet the first safe harbor exception. Since 90% of $10,000 is $9,000, your prepayments fell short of the mark. You can't avoid the penalty under this exception.However, in the above example, the safe harbor may still apply. Assume your prior year’s tax was $5,000. Since you prepaid $5,600, which is greater than the 110% of the prior year’s tax (110% = $5,500), you qualify for this safe harbor and can escape the penalty. This example underscores the importance of making sure your prepayments are adequate, especially if you have a large increase in income. This is common when there is a large gain from the sale of stocks, sale of property, when large bonuses are paid, when a taxpayer retires, etc. Timely payment of each required estimated tax installment is also a requirement to meet the safe harbor exception to the penalty. If you have questions regarding your safe harbor estimates, please call this office as soon as possible.CAUTION: Some state de-minimis amounts and safe harbor estimate rules are different than those for the Federal estimates. Please call this office for particular state safe harbor rules. June 16 - Taxpayers Living Abroad If you are a U.S. citizen or resident alien living and working (or on military duty) outside the United States and Puerto Rico, June 16 is the filing due date for your 2013 income tax return and to pay any tax due. If your return has not been completed and you need additional time to file your return, file Form 4868 to obtain 4 additional months to file. Then, file Form 1040 by October 15. However, if you are a participant in a combat zone, you may be able to further extend the filing deadline (see below). Caution: This is not an extension of time to pay your tax liability, only an extension to file the return. If you expect to owe, estimate how much and include your payment with the extension. If you owe taxes when you do file your extended tax return, you will be liable for both the late payment penalty and interest from the due date. Combat Zone - For military taxpayers in a combat zone/qualified hazardous duty area, the deadlines for taking actions with the IRS are extended. This also applies to service members involved in contingency operations, such as Operation Iraqi Freedom or Enduring Freedom. The extension is for 180 consecutive days after the later of: The last day a military taxpayer was in a combat zone/qualified hazardous duty area or served in a qualifying contingency operation, or have qualifying service outside of the combat zone/qualified hazardous duty area (or the last day the area qualifies as a combat zone or qualified hazardous duty area), or The last day of any continuous qualified hospitalization for injury from service in the combat zone/qualified hazardous duty area or contingency operation, or while performing qualifying service outside of the combat zone/qualified hazardous duty area. In addition to the 180 days, the deadline is also extended by the number of days that were left for the individual to take an action with the IRS when they entered a combat zone/qualified hazardous duty area or began serving in a contingency operation. It is not a good idea to delay filing your return because you owe taxes. The late filing penalty is 5% per month (maximum 25%) and can be a substantial penalty. It is generally better practice to file the return without payment and avoid the late filing penalty. We can also establish an installment agreement which allows you to pay your taxes over a period of up to 72 months. Please contact this office for assistance with an extension request or an installment agreement. June 30 - Taxpayers with Foreign Financial InterestsA U.S. citizen or resident, or a person doing business in the United States, who has a financial interest in or signature or other authority over any foreign financial accounts (bank, securities or other types of financial accounts), in a foreign country, is required to file Form FinCen 114 with the Department of the Treasury (not the IRS). The form must be filed with the Treasury Department no later than June 30, 2014 for 2013. No extension of time to file is permitted. Effective for 2013 reports, the form must be filed electronically; paper forms are no longer allowed. This filing requirement applies only if the aggregate value of these financial accounts exceeds $10,000 at any time during 2013. Contact our office for additional information and assistance filing the form. Wed, 21 May 2014 19:00:00 GMT June 2014 Business Due Dates http://www.mytrivalleytax.com/blog/june-2014-business-due-dates/32073 http://www.mytrivalleytax.com/blog/june-2014-business-due-dates/32073 Tri-Valley Tax & Financial Services Inc June 16 - Employer’s Monthly Deposit Due If you are an employer and the monthly deposit rules apply, June 16 is the due date for you to make your deposit of Social Security, Medicare and withheld income tax for May 2014. This is also the due date for the non-payroll withholding deposit for May 2014 if the monthly deposit rule applies. June 16 - Corporations Deposit the second installment of estimated income tax for 2014 for calendar year corporations.June 30 - Taxpayers with Foreign Financial Interests A U.S. citizen or resident, or a person doing business in the United States, who has a financial interest in or signature or other authority over any foreign financial accounts (bank, securities or other types of financial accounts), in a foreign country, is required to file Form FinCen 114 with the Department of the Treasury (not the IRS). The form must be filed with the Treasury Department no later than June 30, 2014 for 2013. No extension of time to file is permitted. Effective for 2013 reports, the form must be filed electronically; paper forms are no longer allowed. This filing requirement applies only if the aggregate value of these financial accounts exceeds $10,000 at any time during 2013. Contact our office for additional information and assistance filing the form. Wed, 21 May 2014 19:00:00 GMT 8 QuickBooks Reports That You Should Be Running Regularly http://www.mytrivalleytax.com/blog/8-quickbooks-reports-that-you-should-be-running-regularly/38976 http://www.mytrivalleytax.com/blog/8-quickbooks-reports-that-you-should-be-running-regularly/38976 Tri-Valley Tax & Financial Services Inc QuickBooks provides dozens of customizable report templates. You know when you need some of them, but which are musts? You send invoices because you sold products and/or services. Purchase orders go out when you're running low on inventory, and there are always bills to pay, it seems like. All of this activity is, of course, important in itself, but all of your conscientious bookkeeping culminates in what's probably the most critical element of QuickBooks: your reports. Reports can tell you how many navy blue sweatshirts you sold in March, what you paid for health insurance premiums in the first quarter, and how much you bought from your favorite vendor last month. They're very good at drilling down to get the precise set of numbers you need. But reports - carefully customized and properly analyzed - can do more than tell you how many golf clubs to order and when it's time to switch phone services. They can help you make the business decisions that will help you take your growing company to the next level. There are several that you should be looking at regularly, some of which you can interpret easily and use in your daily workflow. We'll help you with the interpretation of the more complex financial reports. Who Owes Money? That's probably a question you ask yourself every day. You don't necessarily have to run the A/R Aging Detail report every day, but you'll want to run it frequently. It tells you who owes you money and whether they've missed the due date (and by how many days). Figure 1: By running the A/R Aging Detail report, you can see whether you need to follow up with customers who have past due invoices. As with any report, you can modify it to include the columns, data set and date range you want by clicking the Customize button. When you create a report in a format that you think you might want to run again, click the Memorize button. Enter a name that you'll remember, and assign it to a Memorized Report Group. Getting There There are two ways to find the reports you want to see. You can open the Reports menu and move your cursor down to the category you want, like Customers & Receivables, which will open a slide-out menu of options there. Or you can open the Report Center, which lets you explore reports in more depth. Each is represented by a small graphic with four icons under it. You can: Run the report with your own data in it  Open a small informational window  Designate it as a Favorite, and  View QuickBooks help.   Figure 2: If you access QuickBooks reports through the Report Center, you'll have several related options. Other accounts receivable reports that you should consult periodically include Open Invoices and Average Days to Pay. Tracking What You Owe Reports can also keep you up-to-date on money that you owe to other people and companies. An important one is Unpaid Bills Detail, accessible through the Vendors & Payables menu item. Though you can modify its columns, this report basically tells you who is expecting money from you, the date the bill was issued and its due date, any number assigned to it, the balance due, and relevant aging information. Vendor Balance Detail is critical, too. This report displays every transaction (invoices, payments, etc.) that contribute to the balance you have with each vendor. Standard Financial Reports Figure 3: We hope you'll let us help you by running and interpreting these standard financial reports. QuickBooks report categories include one labeled Company & Financial. These are reports that you can run yourself, but they're critical for understanding your company's financial status. We can customize and analyze these for you on a regular basis so you'll know where you stand. They include: Balance Sheet. What is the value of your company? The balance sheet breaks out this information by account (under the umbrella of assets, liabilities and equity).   Income Statement. Often referred to as Profit & Loss, this shows you how much money your business made or lost over a specific time period.   Statement of Cash Flows. How much money came in and went out during a specified time range?  Reports can only generate information about what you've entered in QuickBooks and exactly where it's been entered. So it's crucial that you follow standard accounting practice as you proceed through your daily workflow. We're always available to answer questions you have about QuickBooks' structure and your activity there. Your reports - and your critical business decisions - depend on it.  Wed, 21 May 2014 19:00:00 GMT Did You Overlook Something on a Prior Tax Return? http://www.mytrivalleytax.com/blog/did-you-overlook-something-on-a-prior-tax-return/36812 http://www.mytrivalleytax.com/blog/did-you-overlook-something-on-a-prior-tax-return/36812 Tri-Valley Tax & Financial Services Inc Article Highlights: Repercussions of Incorrect Tax Returns Filing Amended Returns Statute of Limitations for Refunds Potential of Audit It is not uncommon to discover that an item of income was overlooked, a deduction was not claimed, or that an amended tax document was received after the tax return was already filed. Regardless of whether the oversight will result in more tax due or a refund, it should not be dismissed. Failing to report an item of income will most certainly generate an IRS inquiry, which typically happens a year or more after the original return was filed and after the interest and penalties have built up. On the other hand, if you have a refund coming, you certainly don’t want that to go by the wayside. The solution is to file an amended return as soon as the error or omission is discovered. Amended returns can also be used to claim overlooked credit, correct filing status or number of dependents, report an omitted investment transaction, include items from delayed or unexpected K-1s and corrected or late filed 1099s, and account for an overlooked deduction or anything else that should have been reported on the original return. If the overlooked item will result in a tax increase, penalties and interest can be mitigated by filing an amended return as soon as possible. Procrastination leads to further complication once the IRS determines something is missing, so it is best to take care of the issues right away. Generally, to claim a refund, an amended return must be filed within three years from the date the original return was filed or within two years from the date the tax was paid, whichever is later. If you are concerned that an amended return might trigger an audit, be advised that the fact that you amend a return does not, in itself, increase your chances of being selected for an audit. In fact, it might actually reduce your chances, especially if you are fixing something the IRS will find later anyway, such as through their program that matches the information forms (W-2s, 1099s, etc.) that they receive from employers and other payers with the income reported on your return. What concerns many taxpayers about amending returns is that an IRS employee must manually compare the amended return changes with the original. That is why the amended return must include a clear explanation and justification for the amendment and back-up documentation to support the changes, even if these were not required on an original return. If back-up documentation cannot be provided, the IRS may want to dig deeper. That is why it is so important to provide proof or back-up documents to justify the changes being made. Let’s say you forgot to claim a $2,000 church donation. In this scenario, you definitely want to include documentation, such as copies of the acknowledgment letter from the church and your canceled check, supporting the increased deduction. If any of the above applies to your situation, please give this office a call so we can prepare an amended tax return for you. Tue, 20 May 2014 19:00:00 GMT IRS Tax Publications Are Not Binding Precedent http://www.mytrivalleytax.com/blog/irs-tax-publications-are-not-binding-precedent/38957 http://www.mytrivalleytax.com/blog/irs-tax-publications-are-not-binding-precedent/38957 Tri-Valley Tax & Financial Services Inc Article Highlights: IRS help line advice is not binding  IRS published guidance is not binding  Tax court's position on IRS published guidance  If you are a taxpayer who thinks the answers you receive when calling the IRS help line are always accurate and binding upon the IRS in a subsequent challenge, think again. The IRS will be the first to tell you that the information provided by its help line is not binding on the agency. In other words, even if you follow the advice provided by the IRS, you will not be protected from subsequently being challenged by the IRS and hit with additional taxes, penalties, and interest. The IRS does not stand behind the advice provided by their employees. The same holds true for IRS publications. In a recent tax court case (Bobrow, TC Memo 2014-21) involving a prominent tax attorney, the court reiterated and emphasized its long-standing position that IRS published guidance is not binding precedent and that taxpayers "rely on IRS guidance at their own peril." In the Bobrow case, the tax court ruled against the taxpayer, and even imposed a substantial accuracy-related understatement penalty against the taxpayer in spite of an IRS publication that supported his position. The IRS does not make tax laws; Congress does through the Internal Revenue Code (IRC). The IRS only interprets how the IRC applies in various situations. The advice provided in IRS publications is far more reliable than the opinion provided by a single IRS employee on the phone. However, neither provides binding precedent that can be cited in audit, appeal, or tax court. The moral of this story is to be cautious in interpreting how the tax laws apply to your particular situation and to seek professional assistance when needed. The IRC is huge and complicated. Please contact this office for assistance.  Fri, 16 May 2014 19:00:00 GMT Find Lost Money http://www.mytrivalleytax.com/blog/find-lost-money/38948 http://www.mytrivalleytax.com/blog/find-lost-money/38948 Tri-Valley Tax & Financial Services Inc Article Highlights: What is unclaimed property? How can you find unclaimed property? What are your chances of finding unclaimed property in your name? Unclaimed property refers to accounts in financial institutions and companies that have had no activity generated or contact with the owner for a period of one year or longer (depending upon state law). Common forms of unclaimed property include savings or checking accounts, stocks, uncashed dividends or payroll checks, refunds, traveler’s checks, trust distributions, unredeemed money orders or gift certificates (in some states), insurance payments or refunds and life insurance policies, annuities, certificates of deposit, customer overpayments, utility security deposits, mineral royalty payments, and contents of safe deposit boxes. Financial institutions and companies will turn these funds over to a state unclaimed property department where the funds are held until claimed by the owner. This typically occurs when you relocate, close a business address, misplace a check, etc. It can also occur if you are the beneficiary of an estate and the trustee is unable to locate you. There are various ways to locate these assets. There are commercial firms that may seek you out. However, you can perform a search for free in a number of ways. For instance, each state has a website for its unclaimed property department, allowing you to search state by state. Generally, one would only search the state that he or she has been a resident of. There is also a website developed by the National Association of Unclaimed Property Administrators (NAUPA) that provides links from a map to each individual’s state’s search site. NAUPA is also currently developing a search site that will locate unclaimed money in all states called missingmoney.com. However, that site is currently under development and does not include all states, so it is wise to check both it and all states in which you have been a resident. What are your odds of finding some lost money? Well, the author, while researching this article, found three accounts in his name totaling over $1,200. A nice bonus for writing the article! Who knows what you will find, but it only takes a few minutes to check and could yield some pleasant surprises. On its website, NAUPA indicated that the average claim was $892. If you have any questions, please give this office a call. Wed, 14 May 2014 19:00:00 GMT Get a Big Refund This Year? http://www.mytrivalleytax.com/blog/get-a-big-refund-this-year/38935 http://www.mytrivalleytax.com/blog/get-a-big-refund-this-year/38935 Tri-Valley Tax & Financial Services Inc Article Highlights: Average refund amounts  Tax-free loan to Uncle Sam  Plan your withholding and estimated tax payments  The IRS reported that approximately 118 million Americans received tax refunds in 2013 averaging around $2,640. The average refund this year is expected to be even higher. If you are among those who received a refund, you are probably celebrating. While some consider a large refund to be a cause for celebration, it's actually a financial mistake that becomes particularly costly for those who get refunds year after year. What's wrong with a refund you, ask? Well, it means that you've overpaid your tax all year. That's actually your own money that you are getting back after making an interest-free loan to Uncle Sam. Such unintended generosity costs you more than you might imagine, even at today's low interest rates. Consider what would have happened had you, instead, invested $220 per month into an investment program, such as a mutual fund, your credit union, an IRA, etc., rather than overpaying the IRS. Instead of waiting for a $2,640 refund, you would have had that amount plus investment earnings in your account - with no waiting. Or you could have paid off any outstanding debt and reduced the interest you paid during the year. If you historically receive refunds each year, you have forgone years' worth of investment income or paid far more interest on debt than you needed to. The alternative is to plan your annual prepayments through withholding and quarterly estimate payments so that they more closely match your projected tax liability for the year. Your withholding is generally adjusted by changing the number of allowances claimed on the W-4 form you turn in to your employer. The more allowances claimed, the less the withholding. However, be careful that you do not claim too many allowances and end up owing Uncle at the end of the year. You should always double-check your payroll deductions once the change has taken effect to ensure that the proper adjustment has been achieved. If you need assistance projecting next year's tax and adjusting your withholding allowances, please give this office a call.  Thu, 08 May 2014 19:00:00 GMT Are You In Danger of An Audit? http://www.mytrivalleytax.com/blog/are-you-in-danger-of-an-audit/38926 http://www.mytrivalleytax.com/blog/are-you-in-danger-of-an-audit/38926 Tri-Valley Tax & Financial Services Inc Article Highlights Chances of being audited EITC Returns Returns with and without a Schedule C Audit rates based upon income Audit rates for returns other than individual returns In recently-released data, the IRS divulged the audit statistics for returns the Service audited in fiscal year 2013. It provides information about the number of returns being audited and where the IRS is focusing their enforcement activities. During fiscal year 2013, the IRS collected almost $2.3 trillion in taxes (net of refunds) and processed more than 240 million returns. More than 118 million individual income tax return filers received tax refunds that totaled $312.8 billion. In fiscal year 2013, the IRS spent an average of 41 cents to collect each $100 of tax revenue. So what are your chances of being audited? A total of 1,404,931 individual income tax returns were audited, out of a total of 145.8 million individual returns that were filed in the previous year. This is about 0.8% of all individual returns filed, down from the previous year. This downward trend is expected to continue for the foreseeable future because of IRS budget reductions. Only 24.5% of the individual audits were office audits conducted by revenue agents, tax compliance officers, and tax examiners; the bulk of the audits (about 75.5%) were correspondence audits. These percentages are about the same as they were in the prior year. The IRS is pretty savvy at selecting which returns to audit, since approximately 85% of the audits result in the taxpayer owing additional taxes. What issues are the audits focusing on? Here is a roundup of selected audit rates: Earned Income Tax Credit (EITC) - EITC continues to be an area of high taxpayer fraud so it stands to reason these returns were and will be the subject of high audit rates. Of the total number of returns audited, 538,562 (34.6%) were selected on the basis of an earned income tax credit claim. Schedule F (Individual Farm Returns) - About 1.3 million individual returns included farm returns. Of this group, only 5,044 (0.4%) were audited. Individual returns can include additional business related schedules that can increase the odds of an audit. Among those are Schedule C (non-farm sole proprietorship), Schedule E (supplemental income and loss from rentals, partnerships and S-corporations), or Form 2106 (employee business expenses). The following statistics apply to non-EITC returns including these schedules: Individual Returns without a Schedule C, E, F, 2106 –0.4% Individual Returns with a Schedule E or 2106 – 1.0% Individual Returns with a Schedule C – These are categorized by size of gross receipts reported on the return: Under $25,000 – 1.0% $25,000 to $100,000 – 2.3% $100,000 to $200,000 – 3.0% $200,000 or more – 2.7% The IRS also focuses their audits on higher-income returns, as evidenced by the following statistics based on total positive income (TPI): Non-business returns with a TPI of at least $200,000 and under $1 million – 2.5% Business returns with a TPI of at least $200,000 and under $1 million – 3.2% All returns with a TPI of $1 million or more – 10.8% For returns other than individual returns, the audit rates by type were: Estate and trust income tax returns - 0.1% Corporations with less than $10 million of assets - 1.0% Corporations with $10 million or more of assets - 15.8% S corporations - 0.4% Partnerships - 0.4% Estate tax returns - 11.6% Gift tax returns - 1.1% In fiscal year 2013, the IRS assessed 29.07 million civil penalties against individual taxpayers, of which 58.3% were for failure to pay and 26.8% were for underpayment of estimated tax. There were also 731,696 assessments for accuracy and negligence penalties. The IRS received 74,000 offers in compromise in fiscal year 2013 (up from 64,000 in 2012). An offer in compromise is a proposal by a taxpayer to the federal government that would settle a tax liability for payment of less than the full amount owed. Absent special circumstances, an offer will not be accepted if the IRS believes the liability can be paid in full as a lump sum or through a payment agreement. In 2013, the IRS accepted 31,000 offers for an acceptance rate of about 42%. Because of the IRS’s high success rate for their audit programs, it is probably not wise for a taxpayer to represent themselves during an audit. This is best left to those who understand the audit process and can address potential issues that may arise. So, if you receive an audit notice, the next call you make should be to this office. Tue, 06 May 2014 19:00:00 GMT Read This Before Tossing Old Tax Records http://www.mytrivalleytax.com/blog/read-this-before-tossing-old-tax-records/36706 http://www.mytrivalleytax.com/blog/read-this-before-tossing-old-tax-records/36706 Tri-Valley Tax & Financial Services Inc Article Highlights: Discarding old tax records Statute of limitations Basis substantiation Now that you’ve completed your taxes for 2013, you are probably wondering what old tax records can be discarded. If you are like most taxpayers, you have records from years ago that you are afraid to throw away. To determine how to proceed, it is helpful to understand why the records needed to be kept in the first place. Generally, we keep “tax” records for two basic reasons: (1) in case the IRS or a state agency decides to question the information reported on our tax returns, and (2) to keep track of the tax basis of our capital assets so that the tax liability can be minimized when we actually dispose of the assets. With certain exceptions, the statute for assessing additional tax is three years from the return due date or the date the return was filed, whichever is later. However, the statute of limitations for many states is one year longer than the federal statute of limitations. In addition to lengthened state statutes clouding the recordkeeping issue, the federal three-year assessment period is extended to six years if a taxpayer omits an amount that is more than 25% of the gross income reported on a tax return. In addition, of course, the statutes don’t begin running until a return has been filed. There is no limit on the assessment period where a taxpayer files a false or fraudulent return in order to evade tax. If an exception does not apply to you, for federal purposes, most of your tax records that are more than three years old can probably be discarded. If you live in a state with a longer statute, then add a year or so to that number. For example: Sue filed her 2013 tax return before the due date of April 15, 2014. She will be able to safely dispose of most of her records after April 15, 2017. On the other hand, Don files his 2013 return on June 2, 2014. He needs to keep his records at least until June 2, 2017. In both cases, the taxpayers may opt to keep their records a year or two longer if their states have a statute of limitations longer than three years. Note: If a due date falls on a Saturday, Sunday or holiday, the due date becomes the next business day. The big problem! The problem with discarding records indiscriminately for a particular year once the statute of limitations has expired is that many taxpayers combine their normal tax records and the records needed to substantiate the basis of capital assets. They need to be separated, and the basis records should not be discarded before the statute expires for the year in which the asset is disposed. Thus, it makes more sense to keep those records separated by asset. The following are examples of records that fall into this category: Stock acquisition data - If you own stock in a corporation, keep the purchase records for at least four years after the year the stock is sold. This data will be needed in order to prove the amount of profit (or loss) you had on the sale. Stock and mutual fund statements - Many taxpayers use the dividends that they receive from a stock or mutual fund to buy more shares of the same stock or fund. The reinvested amounts add to the basis in the property and reduce gains when the stock is finally sold. Keep statements for at least four years after the final sale. Tangible property purchase and improvement records - Keep records of home, investment, rental property or business property acquisitions, AND related capital improvements for at least four years after the underlying property is sold. Have questions about whether or not to retain certain records? Give this office a call first. It is better to be sure before discarding something that might be needed down the road. Fri, 02 May 2014 19:00:00 GMT Virtual Currency & Taxes http://www.mytrivalleytax.com/blog/virtual-currency--taxes/38862 http://www.mytrivalleytax.com/blog/virtual-currency--taxes/38862 Tri-Valley Tax & Financial Services Inc Article Highlights: Taxation of transactions in virtual currency Wages paid in virtual currency Payments to contractors in virtual currency Virtual currency as capital asset Virtual currency as inventory or property for sale Virtual currency is a digital representation of value that functions as a medium of exchange, a unit of account, and/or a store of value. In some environments, it operates like “real” currency of any country that is designated as legal tender, circulates, and is customarily used and accepted as a medium of exchange in the country of issuance. However virtual currency does not have legal tender status in any jurisdiction. Virtual currency that has an equivalent value in real currency, or that acts as a substitute for real currency, is referred to as “convertible” virtual currency. Bitcoin is one example of a convertible virtual currency. It can be digitally traded between users and purchased for, or exchanged into, U.S. dollars, euros, and other real or virtual currencies. Virtual currency is treated as property, not currency, for U.S. federal tax purposes. General tax principles that apply to property transactions apply to transactions using virtual currency. Among other things, this means that: A taxpayer who receives virtual currency as payment for goods or services must, in computing gross income, include the virtual currency's fair market value. Wages paid to employees using virtual currency are taxable to the employee, must be reported by an employer on a Form W-2, and are subject to federal income tax withholding and payroll taxes. Payments using virtual currency made to independent contractors and other service providers are taxable and self-employment tax rules generally apply. Normally, payers must issue Form 1099. The character of gain or loss from the sale or exchange of virtual currency depends on whether the virtual currency is a capital asset in the hands of the taxpayer. A payment made using virtual currency is subject to information reporting to the same extent as any other payment made in property. When a virtual currency is sold, it is treated as property. o If the property is a capital asset like stocks or bonds or other investment property, gains or losses are realized as capital gains or losses. o If the property is inventory or other property mainly for sale to customers in a trade or business, then ordinary gains or losses are generally incurred. Virtual currency is not treated as currency that could generate foreign currency gain or loss for U.S. federal tax purposes. For U.S. tax purposes, transactions using virtual currency must be reported in U.S. dollars. Therefore, taxpayers must determine the fair market value of virtual currency in U.S. dollars as of the date of payment or receipt. If a virtual currency is listed on an exchange and the exchange rate is established by market supply and demand, the fair market value of the virtual currency is determined by converting the virtual currency into U.S. dollars (or into another real currency which in turn can be converted into U.S. dollars) at the exchange rate, reasonably and consistently. If you have transactions using virtual currency and have questions on how that might affect your taxes, please give this office a call. Tue, 29 Apr 2014 19:00:00 GMT Changes in Circumstances Can Affect Your Premium Assistance Credit http://www.mytrivalleytax.com/blog/changes-in-circumstances-can-affect-your-premium-assistance-credit/38838 http://www.mytrivalleytax.com/blog/changes-in-circumstances-can-affect-your-premium-assistance-credit/38838 Tri-Valley Tax & Financial Services Inc Article Highlights: Premium assistance credit based on actual family income and size. Overestimated assistance may have to be paid back. How family size is determined. How family income is determined. If you are signed up for health insurance through a health insurance marketplace, you may have qualified for the premium assistance tax credit. This credit provides financial assistance to help you pay for your health insurance premiums. Individuals and families that qualify for the credit are given the choice to receive the credit in advance to reduce the insurance premiums during the year, or they can pay the full insurance premiums and get the credit when they file their tax return next year. If you chose to take the advance credit (premium subsidy), you should be aware that the credit on which the subsidy is based was determined using estimated household income and family size for the year. If your estimated household income and family size are different from the actual amounts reported when you file your 2014 return next year, the following will happen: Overstated Income and Family Size: If your household income and family size was overestimated and you received premium subsidies based on an advanced credit that was less than you were entitled to, you will receive credit for the difference on your 2014 tax return. Understated Income and Family Size: If your household income or family size was underestimated and you received premium subsidies based on an advanced credit that was more than you were entitled to, you will have to pay back some or all of the difference on your 2014 tax return. A taxpayer's family size is the number of individuals for whom the taxpayer is allowed an exemption deduction for the tax year. For example, if you are married and filing jointly with two dependent children, your family size would be four. The term “household income” includes the modified adjusted gross income (MAGI) of the taxpayer plus the sum of MAGIs of all individuals taken into account when determining the taxpayer's family size and who had to file a tax return. MAGI is generally the same as your income unless you have certain adjustments. For example, say you are filing jointly with your spouse and only you work and make $40,000 per year. You also claim your two children as dependents and one of them has a part-time job and made $9,000 for the year. You have no adjustments to your income, so your household income would be $49,000 ($40,000 + $9,000). Your child's income is included in your household income because making $9,000 would have required the child to file a tax return. If you had not included your child's income in your projected household income, the advance credit, and the corresponding premium subsidy would be more than you were entitled to and you may have to pay part of it back. That is why, if you decided to get the credit in advance, it's important to report any changes in your income or family size to the marketplace throughout the year. Reporting these changes will help you get the proper type and amount of financial assistance so you can avoid getting too much or too little in advance. If you have questions related to the premium assistance credit, please give this office a call. Thu, 24 Apr 2014 19:00:00 GMT May 2014 Individual Due Dates http://www.mytrivalleytax.com/blog/may-2014-individual-due-dates/31256 http://www.mytrivalleytax.com/blog/may-2014-individual-due-dates/31256 Tri-Valley Tax & Financial Services Inc May 12 - Report Tips to Employer If you are an employee who works for tips and received more than $20 in tips during April, you are required to report them to your employer on IRS Form 4070 no later than May 12. Your employer is required to withhold FICA taxes and income tax withholding for these tips from your regular wages. If your regular wages are insufficient to cover the FICA and tax withholding, the employer will report the amount of the uncollected withholding in box 12 of your W-2 for the year. You will be required to pay the uncollected withholding when your return for the year is filed. Tue, 22 Apr 2014 19:00:00 GMT May 2014 Business Due Dates http://www.mytrivalleytax.com/blog/may-2014-business-due-dates/31257 http://www.mytrivalleytax.com/blog/may-2014-business-due-dates/31257 Tri-Valley Tax & Financial Services Inc May 12 - Social Security, Medicare and Withheld Income Tax File Form 941 for the first quarter of 2014. This due date applies only if you deposited the tax for the quarter in full and on time.May 15 - Employer’s Monthly Deposit Due If you are an employer and the monthly deposit rules apply, May 15 is the due date for you to make your deposit of Social Security, Medicare and withheld income tax for April 2014. This is also the due date for the non-payroll withholding deposit for April 2014 if the monthly deposit rule applies. Tue, 22 Apr 2014 19:00:00 GMT President Proposes Reinstating Gift Limits http://www.mytrivalleytax.com/blog/president-proposes-reinstating-gift-limits/38826 http://www.mytrivalleytax.com/blog/president-proposes-reinstating-gift-limits/38826 Tri-Valley Tax & Financial Services Inc Article Highlights: President's proposed gift and estate tax changes for 2018. The annual gift tax exclusion is $14,000 per recipient during the year. Estate and gift tax limit would revert to 2009 levels. If you are fortunate enough financially to be able to make significant gifts to family members and others, you may want to pay attention to the changes in gift tax law being proposed by the President. For a number of years, the amount of tax-free gifts one could make was limited to an annual per-recipient amount of $14,000 in 2014 and an additional lifetime amount of $1 million dollars. Those rules were liberalized beginning in 2010, when the gift and estate tax limits were unified so that the estate tax exclusion could be used for a combination of taxable gifts and estate tax exclusions. This currently permits gifts up to the estate tax exemption limit of $5.34 million for 2014 without incurring any gift tax. But gifts in excess of the annual $14,000 limit are not without future estate tax implications because a gift that exceeds the annual per-recipient exclusion reduces the estate tax exemption by the excess amount of that gift. Thus, current gifts could cause the taxable estate of the gift giver to be higher and taxed at rates substantially higher than normal income tax rates when he or she passes away. The President's estate and gift tax proposal would, beginning in 2018, return the estate, generation-skipping transfer (GST), and gift tax exemption and rates to 2009 levels. Thus, the top tax rate would be 45%, up from the current 40%, and the exclusion amount would be $3.5 million for estate and GST taxes, nearly $2 million less than the current exclusion amount. In addition, the lifetime exclusion for gifts would return to $1 million. The proposal makes no changes to the amount of the annual gifting limit. Although 2018 is over three years away and there are no assurances that the President's proposal will actually become law, its potential impact on gift giving should be considered in one's long-term gift planning. If you need assistance with long-term gift and estate tax planning, please give this office a call. Tue, 22 Apr 2014 19:00:00 GMT Do You Need to Use QuickBooks' Fixed Asset Tools? The Basics http://www.mytrivalleytax.com/blog/do-you-need-to-use-quickbooks-fixed-asset-tools-the-basics/38837 http://www.mytrivalleytax.com/blog/do-you-need-to-use-quickbooks-fixed-asset-tools-the-basics/38837 Tri-Valley Tax & Financial Services Inc Managing your company's fixed assets is a complicated process, one that will require some extra assistance. Much of the work you do in QuickBooks is short-term. You send an invoice and it gets paid. Your purchase order is fulfilled, and the products move into your inventory. You run payrolls and submit their related taxes and other payments. Managing the life cycle of your fixed assets is an exception. Simply, fixed assets are physical entities that you purchase to help your business generate revenue, like property, a vehicle or a commercial oven. By definition, they must be in use for over 12 months. Figure 1: You'll need our help in depreciating the book value of your fixed assets, but careful recording of them will make your QuickBooks reports, your taxes and your company's worth more accurate. QuickBooks can help you track these, but both the value of your company and your tax obligations - and the sale price, should you eventually sell them -- are affected by how the book value of your fixed assets is depreciated. It's important that you work closely with us over the life of each one. What you can do on your own, though, is to maintain absolutely accurate records in this area. Two Paths The best time to start recording information about a fixed asset is while you're creating a transaction related to its purchase. You can build an item record for it as you're filling out the Item section of Enter Bills, Write Checks, Enter Credit Card Charges or Purchase Order. Let's say you're writing a check for a new company truck. You'd go to Banking | Write Checks and fill in the blanks. Click the Items tab below the MEMO field, then click the down arrow in the ITEM field. Scroll up to the top of the list if necessary and select . You'll see this menu: Figure 2: Keep track of your company's fixed assets by creating item records for them. You can do this as you're entering transactions for their purchase. Click on Fixed Asset to open the New Item window. Transactions Not Required There may be times when you'll want to create an item record for a fixed asset when you're not processing a transaction. Such situations include: Cash purchases Transfer of a personal asset to your company Purchase of a fixed asset with personal funds, or A multi-item purchase. To do this, click on the Lists menu and select Fixed Asset Item List. If you're adding a new one, right-click anywhere in the list part of the screen and select New (or click the down arrow next to the Item button in the lower left of the screen and click New). The same New Item window that you opened from the check-writing screen appears. You've already chosen Fixed Asset as the TYPE, so your cursor should be in the Asset Name/Number field. Enter an easy-to-recognize name so that you'll be able to quickly identify it in reports. Select the correct Asset Account (ask us if you're not sure) and type a description in the Purchase Description field, clicking the correct button for new or used. Enter the Date purchased, the Cost and the Vendor/Payee. Don't worry about the SALES INFORMATION fields until - and if - you eventually sell the asset. Figure 3: You should be able to complete the New Item window in QuickBooks for your fixed assets on your own, but consult with us on any questions. Under ASSET INFORMATION, enter the Asset Description (you can write a lengthier description here), its Location, PO Number if applicable, Serial Number and warranty expiration date. Add Notes if you'd like, and you're done - unless you want to incorporate Custom Fields. If so, click the Custom Fields button in the upper right, then Define Fields. (We can provide the depreciation and book value numbers under FIXED ASSET MANAGER.) Your fixed asset records are critical elements of QuickBooks. You may be storing similar information elsewhere in your office records, but QuickBooks needs it, too, so you'll have a comprehensive accounting of your company's value. Tue, 22 Apr 2014 19:00:00 GMT IRS Reinterprets the Once-Per-Year IRA Rollover Limitation http://www.mytrivalleytax.com/blog/irs-reinterprets-the-once-per-year-ira-rollover-limitation/38816 http://www.mytrivalleytax.com/blog/irs-reinterprets-the-once-per-year-ira-rollover-limitation/38816 Tri-Valley Tax & Financial Services Inc There is a tax rule that allows taxpayers to take money out of their IRA and avoid paying income tax and the 10% early distribution penalty so long as they return that money to their IRA account within 60 days. However, tax law limits the number of rollovers to one per year. In the past, the IRS has taken a liberal view toward the one-per-year limitation by allowing one rollover per IRA account each year. In other words, if you have three separate IRA accounts, you can apply the 60-day rollover rule to each IRA account. However, a recent Tax Court Case ruled that the once-per-year rollover applied to the aggregate of all of the taxpayer’s IRA accounts, meaning all of a taxpayer’s IRAs are treated as one for the purposes of applying the once-per-year rollover limitation. The IRS has announced it will adopt the Tax Court’s ruling, meaning that an individual cannot make an IRA-to-IRA rollover if he or she made such a rollover involving any of individual IRAs in the preceding one-year period. Since both the IRS’s proposed regulations and Publication 590 currently permit one rollover per account, the IRS is extending transitional relief and will not apply the Tax Court’s interpretation to the rollover rule to any rollover that involves an IRA distribution occurring before January 1, 2015. These actions by the IRS will not affect the ability of an IRA owner to transfer funds from one IRA trustee directly to another because such a transfer is not a rollover and, therefore, is not subject to the one rollover-per-year limitation. Taxpayers considering utilizing the 60-day rollover rule should be cautious about possibly violating the once-per-year rollover rule. Please call this office if you have any concerns. Thu, 17 Apr 2014 19:00:00 GMT Bartering Is Taxable Income http://www.mytrivalleytax.com/blog/bartering-is-taxable-income/38803 http://www.mytrivalleytax.com/blog/bartering-is-taxable-income/38803 Tri-Valley Tax & Financial Services Inc Article Highlights: Exchange of goods or services Bartering is taxable income Bartering exchanges Bartering credit units Bartering is the trading of one product or service for another. Often there is no exchange of cash. In addition to individuals, small businesses sometimes barter to get the products or services they need. For example, a plumber might trade plumbing work with a dentist for dental services. Bartering may take place on an informal one-on-one basis between individuals and businesses, or it can take place on a third-party basis through a modern barter exchange company. Some individuals and small businesses believe that bartering avoids taxable income because there is no exchange of money. This is not true, however; barter exchanges are considered taxable income by the IRS. The fair market value of goods and services exchanged must be included in the income of both parties to the exchange. Business Owners - If you are the owner of a business, you may sometimes find it to your advantage to barter for goods and services rather than pay in cash. You should be aware, however, that the fair market value of the goods that you receive through bartering is taxable income, just as if you had received a cash payment. Exchanges of services result in taxable income for both parties. Say, for example, that a computer consultant agrees to an exchange of services with an advertising agency. Both parties to the transaction are taxed on the fair market value of the services received. This is the amount they would normally charge for the same services. If the parties agree to the value of the services in advance, this will be considered the fair market value, unless there is contrary evidence. Income is also realized when services are exchanged for property. For example, if an architectural firm does work for a corporation in exchange for shares of the corporation's stock, it will have income equal to the fair market value of the stock. Barter Exchanges - Individuals and business owners sometimes join barter clubs that facilitate barter exchanges. Some exchanges operate out of an office and others over the Internet. Unlike one-on-one bartering, members of exchanges are not obligated to barter or purchase directly from a seller. Instead, when a barter exchange member sells a product or a service to another member, their barter account is credited for the fair market value of the sale. When a barter exchange member buys, the account is debited for the fair market value of the purchase. These clubs generally use a system of “credit units” that are awarded to members who provide goods and services and can be redeemed for goods and services from other members. If you participate in a barter club, you'll be taxed on the value of credit units at the time they are added to your account, even if you don't redeem the units for actual goods and services until a later year. For example, say that in Year 1, you earn 2,000 credit units and each unit is redeemable for one dollar in goods and services. In Year 1, you'll have $2,000 of income. You won't pay additional tax if you redeem the units in Year 2, since you will already have been taxed once on that income. When you join a barter club, you'll be asked to give the club your social security number or employer identification number and to certify that you aren't subject to backup withholding. Unless you make this certification, the club must withhold tax from your bartering income at a 28% rate. By January 31st of each year, the barter club will send you a Form 1099-B, which shows the value of cash, property, services, and credits that you received from exchanges during the previous year. This information will also be reported to the IRS. If you have questions related to bartering income, please give this office a call. Tue, 15 Apr 2014 19:00:00 GMT Last Minute Payments and Filing Tips http://www.mytrivalleytax.com/blog/last-minute-payments-and-filing-tips/36644 http://www.mytrivalleytax.com/blog/last-minute-payments-and-filing-tips/36644 Tri-Valley Tax & Financial Services Inc Article Highlights: Filing an extension Extension is for filing, not paying any tax due Installment Agreements If you are up against the April deadline and still need some information to complete your tax return, you can obtain a six-month automatic time extension to file your 1040. The filing extension will give you extra time to get the paperwork together, but it does not extend the time to pay any tax due. You have to make an accurate estimate of any tax due and pay at least 90% when requesting an extension. Interest will be owed on any amounts not paid by the April deadline. If your return is completed but you are unable to pay the tax due, do not request an extension. File your return on time and pay as much as you can. The IRS will send you a bill or notice for the balance due and will charge interest and penalties only on the unpaid balance. If you cannot pay the full amount due with your return, you can ask to make monthly installment payments for the full or partial amount by requesting an installment agreement. The foregoing is only an overview of the options available to you and discusses the problems that may arise if you don’t file and pay your tax by the April 15 due date. If you are unable to file or pay on time, it is important to contact this office prior to April 15 so you can take the appropriate steps to mitigate penalties and interest. Thu, 10 Apr 2014 19:00:00 GMT Individual Estimated Tax Payments for 2014 Start Soon http://www.mytrivalleytax.com/blog/individual-estimated-tax-payments-for-2014-start-soon/38793 http://www.mytrivalleytax.com/blog/individual-estimated-tax-payments-for-2014-start-soon/38793 Tri-Valley Tax & Financial Services Inc Article Highlights: Pay-as-you-go tax system Tax law changes affecting estimates Underpayment penalties Safe harbor estimates Our tax system is a “pay-as-you-go” system, and if your pre-paid amount is not enough, you become liable for non-deductible interest penalties. To facilitate that concept, the government has provided several means of assisting taxpayers in meeting the “pay-as-you-go” requirement. The primary among these include: Payroll withholding for employees; Pension withholding for retirees; and Estimated tax payments for self-employed individuals and those with other sources of income not covered by withholding. Determining how much tax to pre-pay through withholding and estimated tax payments has always been difficult, and thanks to Congress' constant tinkering with the tax laws, ensuring there are no underpayment penalties or tax surprises when the tax return is prepared next year can be challenging. Recently, several new tax laws and changes took effect that add complexity to estimating one's tax liability, including: higher ordinary tax rates, higher capital gains tax rates, the phase out of exemptions and itemized deductions for higher income taxpayers, the 3.8% tax on net investment income, and .9% increase in self-employment tax for upper-income self-employed individuals, not to mention a myriad of sun setting tax provisions. When a taxpayer fails to prepay a safe harbor (minimum) amount, he or she can be subject to the underpayment of estimated tax penalty. This penalty is the short-term federal rate plus 3 percentage points, and the penalty is computed on a quarter-by-quarter basis. So, even if you pre-pay the correct amount for the year, if the amounts are not paid evenly, you could be subject to a penalty. Interestingly enough, withholding amounts are treated as paid ratably throughout the year, so taxpayers who are underpaid in the earlier part of the year can compensate by bumping up their withholding in the later part of the year. Federal tax law does provide ways to avoid the underpayment penalty. If the underpayment is less than $1,000 (referred to as the de minimis amount), no penalty is assessed. In addition, the law provides “safe harbor” prepayments. There are two safe harbors: The first safe harbor is based on the tax owed in the current year. If your payments equal or exceed 90% of what is owed in the current year, you can escape a penalty. The second safe harbor is based on the tax owed in the immediately preceding tax year. This safe harbor is generally 100% of the prior year's tax liability. However, for a higher income taxpayer who has AGI exceeding $150,000 ($75,000 for married taxpayers filing separately), the prior year's safe harbor is 110%. Example: Suppose your tax for the year is $10,000 and your prepayments total $5,600. The result is that you owe an additional $4,400 on your tax return. To find out if you owe a penalty, see if you meet the first safe harbor exception. As 90% of $10,000 is $9,000, your prepayments fell short of the mark. You can't avoid the penalty under this exception. However, in the above example, the safe harbor may still apply. Assume your prior year's tax was $5,000. As you prepaid $5,600, which is greater than 110% of the prior year's tax (110% = $5,500), you qualify for this safe harbor and can escape the penalty. If your state has a state tax, the state's de minimis amount and safe-harbor percentage and amount may be different. This example underscores the importance of making sure your prepayments are adequate, especially if you have a large increase in income. This is common when there is a large gain from the sale of stocks, sale of property, when large bonuses are paid, or when a taxpayer retires. If you have questions regarding your pre-payments or would like to review and adjust your W-4 payroll withholding, W-4P pension withholding, and estimated tax payments to provide the desired tax result for 2014, please give this office a call. Tue, 08 Apr 2014 19:00:00 GMT Not Able to Pay Your Taxes by the April Due Date? http://www.mytrivalleytax.com/blog/not-able-to-pay-your-taxes-by-the-april-due-date/36647 http://www.mytrivalleytax.com/blog/not-able-to-pay-your-taxes-by-the-april-due-date/36647 Tri-Valley Tax & Financial Services Inc Article Highlights: Unpaid tax liabilities are subject to substantial interest and penalties. Options for coming up with the money to pay your taxes. Making installment agreements with the IRS. The vast majority of Americans get a tax refund from the IRS each spring, but what if you are one of those who end ends up owing? The IRS encourages you to pay the full amount of your tax liability on time by imposing significant penalties and interest on late payments if you don’t. So, if you are unable to pay the taxes you owe, it is generally in your best interest to make other arrangements to obtain the funds for paying your taxes rather than be subjected to the government’s penalties and interest. Here are a few options to consider. Family Loan - Obtaining a loan from a relative or friend may be your best bet because this type of loan is generally the least costly in terms of interest. Credit Card - Another option is to pay by credit card with one of the service providers that work with the IRS. However, as the IRS will not pay the credit card discount fee, you will have to pay it and pay the higher credit card interest rates. Installment Agreement - If you owe the IRS $50,000 or less, you may qualify for a streamlined installment agreement where you can make monthly payments for up to six years. You will still be subject to the late payment penalty, but it will be reduced by half. Interest will also be charged at the current rate, and there is a user fee to set up the payment plan. In making the agreement, a taxpayer agrees to keep all future years’ tax obligations current. If the taxpayer does not make payments on time or has an outstanding past due amount in a future year, they will be in default of their agreement, and the IRS has the option of taking enforcement actions to collect the entire amount owed. Taxpayers seeking installment agreements exceeding $50,000 will need to validate their financial condition and an installment agreement by providing the IRS with a Collection Information Statement (financial statements). Taxpayers may also pay down their due balance to $50,000 or less to take advantage of the streamlined option. Tap a Retirement Account - This is possibly the worst option for obtaining funds to pay your taxes because you are jeopardizing your retirement and the distributions are generally taxable at your highest bracket, which adds more taxes to your existing problem. In addition, if you are under the age of 59½, the withdrawal is also subject to a 10% early withdrawal penalty that compounds the problem even further. Whatever you decide, don’t just ignore your tax liability, because that is the worst thing you can do. Please call this office for assistance. Thu, 03 Apr 2014 19:00:00 GMT Tax Filing Deadline Rapidly Approaching http://www.mytrivalleytax.com/blog/tax-filing-deadline-rapidly-approaching/38777 http://www.mytrivalleytax.com/blog/tax-filing-deadline-rapidly-approaching/38777 Tri-Valley Tax & Financial Services Inc Article Highlights: 2013 balance due payments IRA Contributions for 2013 Estimated tax payments for first quarter 2014 Statute of limitation 2010 refunds Just a reminder that the due date for 2013 tax returns is April 15, 2014! There is no penalty for filing late if you are receiving a refund. However, it is quite a different story if you have a balance due. There are two types of penalties. Late filings and late payments are quite severe. Filing an extension gives you until October 15th to file and avoid the late filing penalties. However, there is no extension for paying your tax liability even if you have a valid extension to file. In addition, the April 15, 2014 deadline also applies to the following: Tax year 2013 balance-due payments - Taxpayers that are filing extensions are cautioned that the filing extension is an extension to file, NOT an extension to pay a balance due. Late payment penalties and interest will be assessed on any balance due, even for returns on extension. Taxpayers anticipating a balance due will need to estimate this amount and include their payment with the extension request. Tax year 2013 contributions to a Roth or traditional IRA - April 15 is the last day that contributions for 2013 can be made to either a Roth or traditional IRA, even if an extension is filed. Individual estimated tax payments for the first quarter of 2014 - Taxpayers, especially those who have filed for an extension, are cautioned that the first installment of the 2014 estimated taxes is due on April 15. If you are on extension and anticipate a refund, all or a portion of the refund can be allocated to this quarter's payment on the final return when it is filed at a later date. Please call this office for any questions. Individual refund claims for tax year 2010 - The regular three-year statute of limitations for refunds expires on April 15 for the 2010 tax return. Thus, no refund will be granted for a 2010 original or amended return that is filed after April 15. Caution: The statute does not apply to balances due for unfiled 2010 returns. If this office is holding up the completion of your returns because of missing information, please forward that information as quickly as possible in order to meet the April 15 deadline. Keep in mind that the last week of tax season is very hectic, and your returns may not be completed if you wait until the last minute. If it is apparent that the information will not be available in time for the April 15 deadline, then let the office know right away so that an extension request and estimate tax vouchers may be prepared if needed. If your returns have not yet been completed, please call right away so that we can schedule an appointment and/or file an extension if necessary. Wed, 02 Apr 2014 19:00:00 GMT Refund Statute Expiring - Don't Miss Out! http://www.mytrivalleytax.com/blog/refund-statute-expiring-dont-miss-out/38758 http://www.mytrivalleytax.com/blog/refund-statute-expiring-dont-miss-out/38758 Tri-Valley Tax & Financial Services Inc Article Highlights: The refund statute expires on April 15, 2014 for unfiled 2010 returns. Unfiled returns will lose out on refundable credits. Refunds may be offset by unpaid child support, past due student loans, and back taxes. If you have not yet filed your 2010 tax return and have a refund coming, time is running out! The IRS estimates that there are more than 1 million taxpayers who have not filed their 2010 tax return approximately $1 billion of unclaimed refunds available for those taxpayers. If you fall in this category, you need to act quickly because the return must be filed by April 15, 2014 to claim a refund for 2010. Otherwise, the money becomes the property of the U.S. Treasury. People stand to lose more than a refund of taxes withheld or paid during 2010 by failing to file a return. In addition, many low- and moderate-income workers may not have claimed the Earned Income Tax Credit (EITC). The EITC provides financial assistance to individuals and families with incomes below certain thresholds. In addition, taxpayers may also qualify for the refundable child and education credits. When filing a 2010 return, the law requires that the return be properly addressed, mailed, and postmarked by April 15. There is no penalty for filing a late return that qualifies for a refund. As a reminder, taxpayers seeking a 2010 refund should know that their checks will be held if they have not filed tax returns for 2011 and 2012. In addition, the refund will be applied to any amounts still owed to the IRS and may be used to offset unpaid child support or past due federal debts, such as student loans. Please give this office a call as soon as possible if you have not filed your 2010 return. Sufficient time is needed to prepare and print the return and for you take it to the post office to send with proof of mailing. Thu, 27 Mar 2014 19:00:00 GMT Receiving Tips Can Be Taxing http://www.mytrivalleytax.com/blog/receiving-tips-can-be-taxing/30377 http://www.mytrivalleytax.com/blog/receiving-tips-can-be-taxing/30377 Tri-Valley Tax & Financial Services Inc Article Highlights: Tips are taxable and must be included on your tax return Tip splitting and cover charges Tip reporting to employer Employer tip allocation Daily log for tip record keeping If you work in an occupation where tips are part of your total compensation, you need to be aware of several facts relating to your federal income taxes: Tips are taxable - Tips are subject to federal income, social security, and Medicare taxes. The value of non-cash tips, such as tickets, passes, or other items of value, is also income and subject to taxation. Include tips on your tax return - You must include all cash tips received directly from customers, tips added to credit cards, and your share of any tips received under a tip-splitting arrangement with fellow employees in gross income. Tip-splitting and cover charges - Tips given to others under the tip-splitting arrangement are not subject to the reporting requirement by the employee who initially receives them. That employee should only report the net tips received to the employer. Service (cover) charges, which are arbitrarily added by the business establishment, are excluded from the tip reporting requirements. The employer should add each employee’s share of service charges to each employee’s wages. Report tips to your employer - If you receive $20 or more in tips in any month, you should report all of your tips to your employer. Your employer is required to withhold federal income, social security, and Medicare taxes. If the tips received are less than $20 in any month, they do not need to be reported to the employer. However, these tips are still taxable and must be reported on your tax return as they are subject to income and social security taxes. Employer allocation of tips - Tip allocation is applicable to “large food and beverage establishments” (i.e., food service businesses where tipping is customary and that have 10 or more employees). These establishments must allocate a portion of their gross receipts as tip income to those employees who “underreport.” Underreporting occurs if an employee reports tips that are less than 8% of the employee’s applicable share of the employer’s gross sales. The employer must allocate the difference between what the employee reported and the 8% to those underreported employees. The allocation amount is noted on the employee’s W-2, but it does not have to be reported as additional income if the employee has adequate records to show that the amount is incorrect. Note that these allocated tips are not included in the total wages shown on the employee’s W-2. The IRS frequently issues inquiries where the taxpayer’s W-2 shows an allocation of tips and a lesser amount is reported on the tax return. Keep a running daily log of tip income - Tips are a frequently audited item and it is a good practice to keep a daily log of your tips. The IRS provides a log in Publication 1244 that includes an Employee's Daily Record of Tips and a Report to Employer for recording your tip income. If you are receiving tips and have any questions about their tax treatment, please give this office a call. Tue, 25 Mar 2014 19:00:00 GMT April 2014 Individual Due Dates http://www.mytrivalleytax.com/blog/april-2014-individual-due-dates/36567 http://www.mytrivalleytax.com/blog/april-2014-individual-due-dates/36567 Tri-Valley Tax & Financial Services Inc April 1 - Last Day to Withdraw Required Minimum DistributionLast day to withdraw 2013’s required minimum distribution from Traditional or SEP IRAs for taxpayers who turned 70½ in 2013. Failing to make a timely withdrawal may result in a penalty equal to 50% of the amount that should have been withdrawn. Taxpayers who became 70½ before 2013 were required to make their 2013 IRA withdrawal by December 31, 2013.April 10 - Report Tips to Employer If you are an employee who works for tips and received more than $20 in tips during March, you are required to report them to your employer on IRS Form 4070 no later than April 10. Your employer is required to withhold FICA taxes and income tax withholding for these tips from your regular wages. If your regular wages are insufficient to cover the FICA and tax withholding, the employer will report the amount of the uncollected withholding in box 12 of your W-2 for the year. You will be required to pay the uncollected withholding when your return for the year is filed.April 15 - Individual Tax Returns Due File a 2013 income tax return (Form 1040, 1040A, or 1040EZ) and pay any tax due. If you want an automatic six-month extension of time to file the return, please call this office. Caution: The extension gives you until October 15, 2014 to file your 2013 1040 return without being liable for the late filing penalty. However, it does not avoid the late payment penalty; thus, if you owe money, the late payment penalty can be severe, so you are encouraged to file as soon as possible to minimize that penalty. Also, you will owe interest, figured from the original due date until the tax is paid. If you have a refund, there is no penalty; however, you are giving the government a free loan, since they will only pay interest starting 45 days after the return is filed. Please call this office to discuss your individual situation if you are unable to file by the April 15 due date.April 15 - Household Employer Return Due If you paid cash wages of $1,800 or more in 2013 to a household employee, you must file Schedule H. If you are required to file a federal income tax return (Form 1040), file Schedule H with the return and report any household employment taxes. Report any federal unemployment (FUTA) tax on Schedule H if you paid total cash wages of $1,000 or more in any calendar quarter of 2012 or 2013 to household employees. Also, report any income tax that was withheld for your household employees. For more information, please call this office.April 15 - Estimated Tax Payment Due (Individuals) It’s time to make your first quarter estimated tax installment payment for the 2014 tax year. Our tax system is a “pay-as-you-go” system. To facilitate that concept, the government has provided several means of assisting taxpayers in meeting the “pay-as-you-go” requirement. These include: Payroll withholding for employees; Pension withholding for retirees; and Estimated tax payments for self-employed individuals and those with other sources of income not covered by withholding. When a taxpayer fails to prepay a safe harbor (minimum) amount, they can be subject to the underpayment penalty. This penalty is equal to the federal short-term rate plus 3 percentage points, and the penalty is computed on a quarter-by-quarter basis. Federal tax law does provide ways to avoid the underpayment penalty. If the underpayment is less than the $1,000 de-minimis amount, no penalty is assessed. In addition, the law provides "safe harbor" prepayments. There are two safe harbors: The first safe harbor is based on the tax owed in the current year. If your payments equal or exceed 90% of what is owed in the current year, you can escape a penalty. The second safe harbor is based on the tax owed in the immediately preceding tax year. This safe harbor is generally 100% of the prior year’s tax liability. However, for higher-income taxpayers whose AGI exceeds $150,000 ($75,000 for married taxpayers filing separately), the prior year’s safe harbor is 110%. Example: Suppose your tax for the year is $10,000 and your prepayments total $5,600. The result is that you owe an additional $4,400 on your tax return. To find out if you owe a penalty, see if you meet the first safe harbor exception. Since 90% of $10,000 is $9,000, your prepayments fell short of the mark. You can't avoid the penalty under this exception. However, in the above example, the safe harbor may still apply. Assume your prior year’s tax was $5,000. Since you prepaid $5,600, which is greater than the 110% of the prior year’s tax (110% = $5,500), you qualify for this safe harbor and can escape the penalty. This example underscores the importance of making sure your prepayments are adequate, especially if you have a large increase in income. This is common when there is a large gain from the sale of stocks, sale of property, when large bonuses are paid, when a taxpayer retires, etc. Timely payment of each required estimated tax installment is also a requirement to meet the safe harbor exception to the penalty. If you have questions regarding your safe harbor estimates, please call this office as soon as possible. CAUTION: Some state de-minimis amounts and safe harbor estimate rules are different than those for the Federal estimates. Please call this office for particular state safe harbor rules.April 15 - Last Day to Make Contributions Last day to make contributions to Traditional and Roth IRAs for tax year 2013. Sun, 23 Mar 2014 19:00:00 GMT April 2014 Business Due Dates http://www.mytrivalleytax.com/blog/april-2014-business-due-dates/36568 http://www.mytrivalleytax.com/blog/april-2014-business-due-dates/36568 Tri-Valley Tax & Financial Services Inc April 1 - Electronic Filing of Forms 1098, 1099 and W-2G If you file forms 1098, 1099, or W-2G electronically with the IRS, this is the final due date. This due date applies only if you file electronically (not paper forms). Otherwise, February 28 was the due date. The due date for giving the recipient these forms was January 31. April 15 - Social Security, Medicare and Withheld Income Tax If the monthly deposit rule applies, deposit the tax for payments in March. April 15 - Non-Payroll Withholding If the monthly deposit rule applies, deposit the tax for payments in March. April 15 - Corporations The first installment of 2014 estimated tax of a calendar year corporation is due. April 15 - Partnerships File a 2013-calendar year return (Form 1065). Provide each partner with a copy of Schedule K-1 (Form 1065), Partner’s Share of Income, Deductions, Credits, etc., or a substitute Schedule K-1. If you want an automatic 5-month extension of time to file the return and provide Schedules K-1 or substitute Schedules K-1 to the partners, file Form 7004. Then, file Form 1065 and provide the K-1s to the partners by September 15.April 30 - Social Security, Medicare and Withheld Income Tax File Form 941 for the first quarter of 2014. Deposit or pay any undeposited tax under the accuracy of deposit rules. If your tax liability is less than $2,500, you can pay it in full with a timely filed return. If you deposited the tax for the quarter in full and on time, you have until May 12 to file the return.April 30 - Federal Unemployment Tax Deposit the tax owed through March if it is more than $500. Sun, 23 Mar 2014 19:00:00 GMT Spring-Clean Your QuickBooks Company File http://www.mytrivalleytax.com/blog/spring-clean-your-quickbooks-company-file/38739 http://www.mytrivalleytax.com/blog/spring-clean-your-quickbooks-company-file/38739 Tri-Valley Tax & Financial Services Inc There are a lot of clues that indicate trouble with your QuickBooks company file. Is it time for a check-up and tune-up? After this ridiculously long winter, you'll probably hear few complaints about things like puddles in the street, summer heat and spring cleaning. Most people are eager to throw open the doors and windows, and attack the dirt that the season left behind, both inside and outside of the house. It's not hard to see when your home is dirty. QuickBooks company file errors are harder to detect, but they're there, including: Performance problems Inability to execute specific processes, like upgrading Occasional program crashes Missing data (accounts, names, etc.) Refusal to complete transactions, and Mistakes in reports. Figure 1: If some transactions won't go through when you click one of the Save buttons - or worse, QuickBooks shuts down -- you may have a corrupted company file. Call for Help The best thing you can do if you notice problems like this cropping up in QuickBooks - especially if you're experiencing multiple ones - is to contact us. We understand the file structure of QuickBooks company data, and we have access to tools that you don't. We can analyze your file and take steps to correct the problem(s). One of the reasons QuickBooks files get corrupt is simply because they grow too big. That's either a sign of your company's success or of a lack of periodic maintenance that you can do yourself. QuickBooks contains some built-in tools that you can run occasionally to minimize your file size. One thing you can do on your own is to rid QuickBooks of old, unneeded data. The software contains a Condense Data utility that can do this automatically. But just because QuickBooks offers a tool doesn't mean that you should use it on your own.Figure 2: Yes, QuickBooks allows you to use this tool on your own. But if you really want to preserve the integrity of your data, let us help. A Risky Utility The program's documentation for this utility contains a list of warnings and preparation steps a mile long. We recommend that you don't use this tool. Same goes for Verify Data and Rebuild Data in the Utilities menu. If you lose a significant amount of company data, you can also lose your company. It's happened to numerous businesses. Be Proactive Instead, start practicing good preventive medicine to keep your QuickBooks company file healthy. Once a month or so, perhaps at the same time you reconcile your bank accounts, do a manual check of your major Lists. Run the Account Listing report (Lists | Chart of Accounts | Reports | Account Listing). Are all of your bank accounts still active? Do you see accounts that you no longer used or which duplicate each other? Don't try to “fix” the Chart of Accounts on your own. Let us help. Figure 3: You might run this report periodically to see if it can be abbreviated. Be very careful here, but if there are Customers and Vendors that have been off your radar for a long time, consider removing them - once you're sure your interaction with them is history. Same goes for Items and Jobs. Go through the other lists in this menu with a critical but conservative eye. If there's any doubt, leave them there. A Few Alternatives There are other options. Your copy of QuickBooks may be misbehaving because it's unable to handle the depth and complexity of your company. It may be time to upgrade. If you're using QuickBooks Pro, move up to Premier. And if Premier isn't cutting it anymore, consider QuickBooks Enterprise Solutions. There's cost involved, of course, but you may already be losing money by losing time because of your version's limitations. All editions of QuickBooks look and work similarly, so your learning curve will be minimal. Also, try to minimize the number of open windows that are active in QuickBooks. That will improve your performance. And what about your hardware? Is it getting a little long in the tooth? At least consider adding memory, but PCs are cheap these days. If you're having problems with many of your applications, it may be time for an upgrade. A Stitch in Time... We've suggested many times here that you contact us for help with your spring cleanup. While that may seem self-serving, remember that it takes us a lot less time and money to take preventive steps with your QuickBooks company file than to troubleshoot a broken one. Sun, 23 Mar 2014 19:00:00 GMT Haven’t Filed an Income Tax Return? http://www.mytrivalleytax.com/blog/haven8217t-filed-an-income-tax-return/38735 http://www.mytrivalleytax.com/blog/haven8217t-filed-an-income-tax-return/38735 Tri-Valley Tax & Financial Services Inc Article Highlights: Late filing penalties Three-year statute of limitations Forfeited refunds Earned income credit Self-employment income If you have been procrastinating on filing your 2013 tax return or have other prior year returns that have not been filed, you should consider the consequences. The April 15 due date for the 2013 returns is just around the corner. That is also the last day to file a 2010 return and be able to claim a refund. Taxpayers should file all tax returns that are due, regardless of whether or not full payment can be made with the return. Depending on an individual’s circumstances, a taxpayer filing late may qualify for a payment plan. All payment plans require continued compliance with all filing and payment responsibilities after the plan is approved. Facts about Filing Tax Returns. These rules apply to federal returns. Your state rules may be different. Failing to file a return or filing late can be costly. If taxes are owed, a delay in filing may result in penalty and interest charges that could substantially increase your tax bill. The late filing and payment penalties are a combined 5% per month (25% maximum) of the balance due. If you are due a refund, there is no penalty for failing to file a tax return. However, you can lose your refund by waiting too long to file. In order to receive a refund, the return must be filed within three years of the due date. If you file a return and later realize you made an error on the return, the deadline for claiming any refund due is three years after the return was filed, or two years after the tax was paid, whichever expires later. Taxpayers who are entitled to the refundable Earned Income Tax Credit must file a return to claim the credit, even if they are not otherwise required to file. The return must be filed within three years of the due date in order to receive the credit. If you are self-employed, you must file returns reporting self-employment income within three years of the due date in order to receive Social Security credits toward your retirement. Taxpayers who continue to not file a required return and fail to respond to IRS requests to do so may be subject to a variety of enforcement actions, all of which can be unpleasant. Thus, if you have returns that need to be filed, please call this office so we can help you bring your tax returns up-to-date, and - if necessary - advise you on a payment plan. Thu, 20 Mar 2014 19:00:00 GMT Don’t Get Scammed, They Are Very Clever http://www.mytrivalleytax.com/blog/don8217t-get-scammed-they-are-very-clever/37909 http://www.mytrivalleytax.com/blog/don8217t-get-scammed-they-are-very-clever/37909 Tri-Valley Tax & Financial Services Inc Article Highlights: Scammers disguise e-mails to look legitimate. Legitimate businesses and the IRS never request sensitive personal and financial information by e-mail. Don’t become a victim. Stop - Think - Delete You may think we harp a lot on protecting yourself against identity theft. You are right…because having your identity stolen becomes an absolute financial nightmare, sometimes taking years to straighten out. Identity thieves are clever, relentless, and always coming up with new schemes to trick you. And all you have to do is slip up just once to compromise your identity and your nightmare begins. What they try to do is trick you into divulging your personal information such as bank account numbers, passwords, credit card numbers, or Social Security number. One of the most popular methods these unscrupulous people use is requesting your personal information by e-mail. They are pretty good at making their e-mails look as if they came from a legitimate source such as the IRS, your credit card company, or your bank. You need to be very careful when responding to e-mails asking you to update such things as your account information, pin number, or password. First and foremost, you should be aware that no legitimate company would make such a request by e-mail. If they do, they should be deleted and ignored just like spam e-mails. We have seen bogus e-mails that looked like they were from the IRS, well-known banks, credit card companies, and other pseudo-legitimate enterprises. The intent is to trick you and have you click through to a website that also appears legitimate where they have you enter your secure information. Here are some examples: E-mails that appeared to be from the IRS indicating you have a refund coming and they need information to process the refund. The IRS never initiates communication via e-mail! Right away, you should know that it is bogus. If you are concerned, please free to call this office. E-mails from a bank indicating they are holding a wire transfer and need your bank routing information and account number. Don’t respond; if in doubt, call your bank. E-mails saying you have a foreign inheritance and they need your bank info so they can wire the funds. The funds that will get wired are yours going the other way. Remember, if it seems too good to be true, it generally is. We could go on and on with examples. The key here is for you to be highly suspect of any e-mail requesting personal or financial information. A good rule of thumb is to: STOP - THINK - DELETE. If you receive something from the IRS or your state taxing agency and feel uncomfortable ignoring it, call this office to check so you don’t need to worry. The IRS just published the 2014 “Dirty Dozen Tax Scams” which details current scams. However, the perpetrators of those scams are not the only ones trying to steal your financial information, so always be vigilant. Your life can become a nightmare if your identity is stolen. Identity thieves will even file tax returns under your Social Security number claiming huge refunds and leaving you with a horrendous mess to clean up with the IRS. Don’t be a victim. Please call this office if you believe your tax ID has been compromised. Tue, 18 Mar 2014 19:00:00 GMT Clock is Ticking for Retirement Plan Contributions http://www.mytrivalleytax.com/blog/clock-is-ticking-for-retirement-plan-contributions/38731 http://www.mytrivalleytax.com/blog/clock-is-ticking-for-retirement-plan-contributions/38731 Tri-Valley Tax & Financial Services Inc Article Highlights: 2013 IRA contributions can be made through April 15, 2014 2013 SEP IRA contributions can be made through October 15, 2014 2013 Health Savings Account contributions can be made through April 15, 2014 2013 Coverdell Education Account contributions can be made through April 15, 2014 Did you know that you can make tax-deductible retirement savings contributions after the close of the tax year? Well, you can and with April 15th looming, the window of opportunity to maximize retirement and other special-purpose plan contributions for 2013 is closing. Many of those contributions not only build the retirement nest egg, but also deliver tax deductions for the 2013 tax return. Let's take a look at some of the ways a taxpayer can benefit. Traditional IRA – The maximum contribution to an IRA for 2013 is $5,500 ($6,500 if over 49 years old). The 2013 contribution can be made up to April 15th. If the taxpayer is covered by another retirement plan, some or all of the contribution may not be deductible. To be eligible to contribute to an IRA of any type, the taxpayer, or spouse if married filing jointly, must have earned income, such as wages or self-employment income. Roth IRA – This is a nondeductible retirement account, but the earnings are tax-free upon withdrawal, provided that the holding period and age requirements are met. Roth IRAs are a good alternative for many taxpayers who aren’t eligible to deduct contributions to a traditional IRA. The maximum deductible contribution for the 2013 tax year is $5,500 ($6,500 if the taxpayer is over 49 years old). The 2013 contribution can be made up to April 15th. Caution: the combined traditional IRA and Roth IRA contributions are limited to $5,500 ($6,500 if the taxpayer is over 49 years old). Spousal IRA – A non-working spouse can open and contribute to a traditional IRA or Roth IRA based upon the working spouse’s earned income, subject to the same contribution limits as the working spouse, but the combined contributions of both spouses cannot exceed the earned income of the working spouse. SEP-IRA (Simplified Employee Pension) – SEP-IRAs are tax-deferred plans for sole proprietorships and small businesses. They are probably the easiest way to build retirement dollars, requiring virtually no paperwork. Maximum contributions depend on your net earnings from your business. For 2013, contributions are the lesser of 25 percent of compensation or $51,000. This figure increases to $52,000 for 2014. The 2013 contribution can be made up to the due date of the return, including extensions. Thus, unlike a traditional or Roth IRA, funding of a SEP-IRA for 2013 may occur up to October 15, 2014 when an extension has been granted. Solo 401(k) Plans – A growing number of self-employed individuals with no employees are forsaking the SEP-IRA for a newer type of retirement plan called the Solo 401(k), or Self-Employed 401(k), mostly for its higher contribution levels. For 2013, the maximum contribution to a Solo 401(k) is the sum of: (A) up to 25% of compensation, and (B) salary deferral up to $17,500. The total of A and B can't exceed $51,000 or 100% of compensation. The maximum contribution rises to $52,000 for 2014. On a last note, a Solo 401(k) account must have been established by December 31, 2013 to make 2013 contributions. If one was not established, open one now for 2014 contributions. Health Savings Accounts (HSA) – An HSA is a tax-exempt trust or custodial account established exclusively for the purpose of paying qualified medical expenses of the account beneficiary. An HSA is designed to assist individuals who have high-deductible health plans (HDHP). A taxpayer is only eligible to establish an HSA if he or she has an HDHP. For 2013, this means that the plan must have a deductible amount of $1,250 or more for self-only coverage or $2,500 for family coverage. In addition, the annual maximum out-of-pocket costs for covered expenses can’t exceed $6,250 for a self-only plan or $12,500 for a family plan. The maximum 2013 contribution for eligible individuals with self-only coverage under an HDHP is $3,250, while an eligible individual with family coverage under an HDHP can contribute up to $6,450. The contribution limit is increased by $1,000 for an eligible individual who was age 55 or older at the end of 2013; however, no contribution can be made as of the month that an individual is enrolled in Medicare. Amounts contributed to an HSA belong to individuals and are completely portable. Every year, the money not spent on medical expenses stays in the account and gains interest tax-free, just like an IRA. Unused amounts remain available for later years (unlike amounts in Flexible Spending Arrangements that may be forfeited if not used by the end of the year). Contributions to an HSA for 2013 can be made through April 15, 2014. Coverdell Education Savings Account – These plans were originally called Education IRAs, but that moniker created confusion since they were really not retirement accounts. They are now called Coverdell Education Savings Accounts, named after the late Senator from Iowa. Contributions, which can be made for a beneficiary who is under 18 years of age, are not tax-deductible, but the money grows tax-free if the distributions are used to pay qualified education expenses. The maximum annual contribution is $2,000 per beneficiary, but this amount could be reduced partly or totally depending on income. Contributions do not count toward IRA annual contribution limits; they are also due by April 15, 2014 to be considered as having been made for 2013. Please note that information for each plan or account above has been abbreviated. Contact this office for specific details on how they may apply to your situation. Thu, 13 Mar 2014 19:00:00 GMT Tax Breaks for Grandparents http://www.mytrivalleytax.com/blog/tax-breaks-for-grandparents/38720 http://www.mytrivalleytax.com/blog/tax-breaks-for-grandparents/38720 Tri-Valley Tax & Financial Services Inc Article Highlights: Head of household filing status Exemption deduction for the grandchild Earned income tax credit Child tax credit Childcare credit for certain working grandparents Grandchild education credits and deductions More and more individuals who thought their child-rearing days were over are now raising their grandchildren. The U.S. Census Bureau has found that there were 7 million grandparents whose grandchildren younger than 18 were living with them in 2010. Another study found that the number of grandchildren living with their grandparents has increased 50% over the past ten years. Grandparents in this challenging situation should be aware that a variety of tax breaks may be available to ease the financial burden of becoming primary caregivers for grandchildren. These include: Head of household filing status - An unmarried grandparent may be eligible to use head of household as his or her filing status. This filing status generally is more favorable than the single filing status. To qualify, the grandparent must maintain a household that is the principal place of abode for the grandchild for more than half the year. Generally the grandchild must not be self-supporting and under the age of 19 (24 if a full time student) at the close of the tax year or permanently and totally disabled. Exemption for the grandchild - If the grandchild qualifies as the grandparent’s dependent, the grandparent is entitled to a deduction equal to the exemption amount, which for 2014 is $3,950 (up from $3,900 in 2013). For a grandchild to qualify as a dependent, the grandchild generally must meet the definition of a “qualifying child,” which includes being under the age of 19 (24 if a full time student) at the close of the tax year or permanently and totally disabled, and a U.S. citizen, U.S. National, or a resident of the U.S., Canada, or Mexico. The grandchild may not have provided more than half of his or her own support. Additional rules apply if the grandchild is married. Earned income credit - A grandparent who is working and has a grandchild who is a qualifying child living with him or her may be able to take the earned income tax credit (EITC), even if the grandparent is 65 years of age or older. Generally, to be a qualified child for EITC purposes, the grandchild must meet the same requirements as to be a dependent but without the requirement that the child didn't provide more than half of his own support. To qualify for EITC for 2013 on account of a grandchild or grandchildren, a taxpayer's adjusted gross income (AGI) must be less than: $46,227 ($51,567 for married filing jointly) if he or she has three or more qualifying children; $43,038 ($48,378 for married filing jointly) if he or she has two qualifying children; and $37,870 ($43,210 for married filing jointly) if he or she has one qualifying child. There's no EITC if the taxpayer files as married filing separately, isn't a U.S. citizen or resident alien all year, files Form 2555 or Form 2555-EZ (relating to foreign earned income), doesn't have earned income, or has more than $3,300 of investment income for 2013 ($3,350 for 2014). Child tax credit - A grandparent who is raising a grandchild may be able to take the $1,000 child tax credit and, under specific circumstances, the credit may be refundable. To qualify, the grandchild must be under the age of 17, a U.S. citizen or resident alien, and the grandchild must be the grandparent’s dependent. The credit is reduced for higher-income taxpayers. Credit for grandchild care expenses - A grandparent may also qualify for the child and dependent care credit if the grandparent pays someone to care for a dependent grandchild under the age of 13 or a grandchild who is physically or mentally not able to care for himself or herself, and the grandparent works or looks for work and has the same principal place of abode as the grandparent for more than half the tax year. The credit is 35% of employment-related expenses for taxpayers with an AGI of $15,000 or less. The percentage decreases by 1% for each $2,000 (or fraction thereof) of AGI over $15,000, but not below 20%. The maximum amount of employment-related expenses that may be used to compute the credit is $3,000 for one qualifying individual or $6,000 for two or more qualifying individuals. These maximums must be reduced, dollar-for-dollar, by the total amount excludable from gross income through an employer’s dependent care assistance program. Grandchild education expenses - There are a number of tax breaks that may be available to a grandparent who pays his or her dependent grandchild's education costs. These include: o Education credits - An individual taxpayer may claim an income tax credit of up to $2,500 for the American Opportunity tax credit (AOTC) and the Lifetime Learning credit (up to $2,000) for higher education expenses of a grandchild at accredited post-secondary educational institutions. The AOTC is available for qualified expenses of the first four years of undergraduate education. The Lifetime Learning credit is available for qualified expenses of any post-high school education at "eligible educational institutions." Both credits can't be claimed in the same tax year for any one student’s expenses, and they phase out for higher-income taxpayers. o Deduction for interest on qualified education loans – Grandparents may qualify to claim an above-the-line deduction for up to $2,500 of interest paid on a qualified higher education loan for any debt incurred by the taxpayer solely to pay qualified higher education expenses for a grandchild, who is at least a half-time student. The deduction phases out for higher-income taxpayers. These education tax benefits only apply to a grandparent who claims the grandchild as a dependent. Many generous grandparents pay these types of expenses for a non-dependent grandchild, but unfortunately, they get no tax breaks for doing so. Medical and dental expenses - A grandparent who itemizes deductions can deduct certain unreimbursed medical and dental expenses paid for a dependent grandchild during the year. The grandchild’s medical expenses are combined with the grandparent’s medical deductions and are allowed to the extent that they exceed 10% of the grandparent’s adjusted gross income for the year. Where a grandparent is age 65 or older, the 10% is reduced to 7.5% through 2016. The foregoing is an overview of the tax benefits available to grandparents. Not all limits and requirements were covered in complete detail. Please contact this office to determine if you qualify for one or more of them. Tue, 11 Mar 2014 19:00:00 GMT Getting Hit With the Alternative Minimum Tax? http://www.mytrivalleytax.com/blog/getting-hit-with-the-alternative-minimum-tax/38703 http://www.mytrivalleytax.com/blog/getting-hit-with-the-alternative-minimum-tax/38703 Tri-Valley Tax & Financial Services Inc Article Hightlights: The alternative minimum tax, originally created to curb tax shelters and tax preferences of the wealthy, can now apply to the average taxpayer. Six commonly encountered deductions routinely cause the average taxpayer to be hit by the AMT. Incentive stock options can also have a profound impact on the AMT. There are two ways to determine your tax—the regular way that most everyone understands, and the alternative method. Your tax will be the higher of the two. So what is the alternative tax and why are you getting hit with it? Well, many, many years ago, Congress, in an effort to curb tax shelters and tax preferences of wealthy taxpayers, created an alternative way of computing tax that disallows certain tax deductions and preferences, and called it the alternative minimum tax (AMT). Although originally intended to apply to the wealthy, years of inflation caused more and more taxpayers to be caught up in the tax. It now no longer just affects wealthy taxpayers and can apply to almost any taxpayer if the conditions are correct. Congress has been discussing AMT reform for years but has failed to take any action. The list of tax deductions and preferences not allowed when computing the AMT is substantial and at times complicated. However, the following six items routinely cause the average taxpayer to be hit by the AMT: Medical Deductions - Prior to 2013, medical deductions were allowed to the extent they exceeded 7.5% of a taxpayer's income for regular tax purposes and 10% for the AMT computation. However that difference, except for the elderly, has been eliminated now that the Affordable Care Act raised the 7.5% to 10% for regular tax, making it the same as for the AMT. For taxpayers aged 65 and older, the regular tax adjustment remains at 7.5% through 2016, and that creates a medical AMT adjustment for seniors affected by the AMT. Tax Deductions - When itemizing deductions, a taxpayer is allowed to deduct a variety of taxes, including real property, personal property and state income tax. But for AMT purposes, none of the itemized taxes are deductible. For most taxpayers, this represents one of their largest tax deductions, and frequently triggers the AMT. If you are affected by the AMT, conventional wisdom would dictate deferring tax payments to a subsequent year when the AMT may not apply. When deferring, care should be exercised with regard to late payment penalties and interest on underpayments for certain taxes. In addition, taxpayers can annually elect to capitalize taxes on unimproved and unproductive real estate. This means foregoing the deduction currently and adding the tax paid to the cost basis of the real property. Home Mortgage Interest - For both the regular tax and AMT computations, interest paid on a debt to acquire or substantially improve a main home or second home is deductible as long as the debt limit (generally $1 million) isn't exceeded. This is true of refinanced debt, except that any increase in debt is treated as equity debt. For regular tax purposes, the interest on up to $100,000 of equity debt on the two homes can also be deducted. However, equity debt is not deductible against the AMT; neither is the acquisition or equity debt interest on a motor home or boat that qualifies as a second home. Therefore, taxpayers should exercise caution when incurring home equity debt. Generally, loan brokers are not aware of these limitations, and there are numerous pitfalls. Miscellaneous Itemized Deductions - The category of miscellaneous deductions, which includes employee business expenses and investment expenses, is not deductible for AMT purposes. For certain taxpayers with deductible employee business expenses, this can create a significant AMT. Employees with significant employee business expenses should attempt to negotiate an “accountable” reimbursement plan with their employer. Under this type of plan, the reimbursement for qualified expenses is tax-free. Because the employee has been reimbursed, he or she no longer claims a deduction for the expenses, thus eliminating the miscellaneous deduction. Another strategy would be to defer the expenses to a year not affected by the AMT. Personal Exemptions - Personal exemptions for dependents provide no benefit when taxed by the AMT method. Therefore, divorced or separated parents should carefully consider which party should claim the exemption for a dependent child. Standard Deduction - Since the regular tax standard deduction is not allowed as an AMT deduction, taxpayers affected by the AMT should always itemize. While the benefit of some deductions will be lost, there is still a partial advantage. Even the smallest of charitable deductions will benefit at a minimum of 26% (the lowest bracket for the AMT). Caution: Although not frequently encountered, incentive stock options (ISO) can have a profound impact on the AMT, and clients are strongly encouraged to seek our advice prior to exercising incentive stock options. The AMT is an extremely complicated area of tax law that requires careful planning to minimize its effects. Please contact this office for further assistance. Thu, 06 Mar 2014 19:00:00 GMT Don’t Overlook the Spousal IRA http://www.mytrivalleytax.com/blog/don8217t-overlook-the-spousal-ira/38696 http://www.mytrivalleytax.com/blog/don8217t-overlook-the-spousal-ira/38696 Tri-Valley Tax & Financial Services Inc Article Highlights: Non-working spouses can contribute to an IRA based upon the working spouse’s earned income. The combined contributions of both spouses cannot exceed the combined earned income. Each spouse’s contribution is limited to a maximum of $5,500 ($6,500 if over age 49). One frequently overlooked tax benefit is the “spousal IRA.” Generally, IRA contributions are only allowed for taxpayers who have compensation (the term “compensation” includes wages, tips, bonuses, professional fees, commissions, alimony received, and net income from self-employment). Spousal IRAs are the exception to that rule and allow a non-working spouse who files a joint return to contribute to his or her own IRA, otherwise known as a spousal IRA. The maximum annual amount that a non-working spouse can contribute is the same as the limit for a working spouse, which is $5,500 for the years 2013 and 2014. A non-working spouse who is age 50 or older can also make “catch-up” contributions (limited to $1,000 for 2013 and 2014), raising the overall yearly contribution limit to $6,500. These limits apply provided that the couple together has compensation equal to or greater than their combined IRA contributions. Example: Tony is employed and his W-2 for 2013 is $100,000. His wife, Rosa, age 45, has a small income from a part-time job totaling $900. Since her own compensation is less than the contribution limits for the year, she can base her contribution on their combined compensation of $100,900. Thus, Rosa can contribute up to $5,500 to an IRA for 2013. The contributions for both spouses can be made either to a Traditional or Roth IRA or split between them, as long as the combined contributions don’t exceed the annual contribution limit. Caution: The deductibility of the Traditional IRA and the ability to make a Roth IRA contribution are generally based on the taxpayer’s income: Traditional IRAs - There is no income limit restricting contributions to a Traditional IRA. However, if the working spouse is an active participant in any other qualified retirement plan, a tax-deductible contribution can be made to the IRA of the non-participant spouse only if the couple’s adjusted gross income (AGI) doesn’t exceed $178,000 for 2013 and $181,000 for 2014. This limit is phased out for AGI between $178,000 and $188,000 for 2013 and between $181,000 and $191,000 for 2014. Roth IRAs - Roth IRA contributions are never tax deductible. Contributions to Roth IRAs are allowed in full if the couple’s AGI doesn’t exceed $178,000 for 2013 and $181,000 for 2014. The contribution is ratably phased out for AGI between $178,000 and $188,000 for 2013 and between $181,000 and $191,000 for 2014. Example: Rosa, in the previous example, can designate her IRA contribution to be either a deductible Traditional IRA or a nondeductible Roth IRA since the couple’s AGI is under $178,000. Had the couple’s AGI been $183,000, Rosa’s allowable contribution to a deductible Traditional or Roth IRA would have been limited to $2,750 because of the phaseout. The other $2,750 could have been contributed to a nondeductible Traditional IRA. These contributions can be made up to the April due date of your tax return, and even if you have already filed your return, you can still make the contribution and file an amended tax return reporting the contribution and claiming a refund if the contribution is deductible. Please give this office a call if you would like to discuss IRAs or need assistance with your retirement planning. Tue, 04 Mar 2014 19:00:00 GMT Where's My IRS Tax Refund http://www.mytrivalleytax.com/blog/wheres-my-irs-tax-refund/38673 http://www.mytrivalleytax.com/blog/wheres-my-irs-tax-refund/38673 Tri-Valley Tax & Financial Services Inc Follow these 3 easy steps to check on your tax refund. Thu, 27 Feb 2014 19:00:00 GMT Retroactive Extension for Portability of Deceased Spouse's Unused Estate Tax Exemption Available http://www.mytrivalleytax.com/blog/retroactive-extension-for-portability-of-deceased-spouses-unused-estate-tax-exemption-available/38655 http://www.mytrivalleytax.com/blog/retroactive-extension-for-portability-of-deceased-spouses-unused-estate-tax-exemption-available/38655 Tri-Valley Tax & Financial Services Inc Article Highlights Estates of decedents who died after December 31, 2010 may elect to transfer any unused estate tax exclusion to the surviving spouse. The election must be made on an estate tax return for the decedent. The estate tax return must be timely filed. The IRS recently announced a retroactive automatic extension through December 31, 2014, to file for this election. Estates of decedents who died after December 31, 2010 may elect to transfer any unused estate tax exclusion to the surviving spouse. The amount received by the surviving spouse is called the “deceased spousal unused exclusion” (DSUE) amount. Making this election can have a profound effect on the taxation of the estate of the surviving spouse. Example: Bob and Jane were married when Bob passed away in 2012. Bob's estate was valued at $3,700,000. Since Bob's estate plan passed his entire estate to his wife, Jane, the Federal estate tax would have been zero due to the unlimited marital deduction afforded under the Internal Revenue Code. Since Bob's estate did not utilize any of his federal estate tax exemption ($5,120,000 for individuals who died in 2012), the exemption would have been “wasted.” However, under the portability provisions of the federal estate tax, Bob's estate could have elected to pass that unused exemption to Jane by filing a Federal Form 706 and making the “portability election” on Bob's estate tax return, resulting in Bob's unused estate tax exemption of $5,120,000 being transferred to Jane along with an increase in her future estate tax exemption by this unused amount. The highest marginal estate tax rate is currently 40%; therefore, the unused exemption passed from a decedent to his or her spouse via the “portability election” amount can result in significant estate tax savings. Example: Suppose Jane in our prior example passed away in 2013. Assuming that Jane's estate was valued at $6,000,000, if the “portability election” had not been made on Bob's estate tax return, Jane's taxable estate would be $750,000 ($6,000,000 less the $5,250,000 exemption for someone who dies in 2013). However, if the election had been made on Bob's return, Jane's taxable estate would be zero, as her total exclusion would be $10,370,000 (her $5,250,000 plus the portability from Bob's estate of $5,120,000). Making this election would thus result in a sizable reduction in estate taxes. A surviving spouse can apply the unused exclusion amount received from the estate of his or her last deceased spouse against any tax liability arising from subsequent lifetime gifts and transfers at death. Making the Election - To make the portability election, an estate tax return must be filed, even if the estate would not otherwise be required to file an estate tax return. Failure to file the estate tax return would result in the loss of the portability of the spouse's unused exclusion amount. When a surviving spouse's estate is expected to be valued at less than the estate tax exclusion amount when he or she passes, it may seem to be a waste of time and money to file a 706 Estate Tax Return for the pre-deceased spouse. However, in making that decision, one should consider the possibilities of the surviving spouse receiving inheritances or winning the lottery, or of Congress reducing the estate tax exemption at some time in the future. Any of these potential events could result in substantial estate tax considering the current tax rate on taxable estates is 40%. In January 2014, the IRS announced it was allowing a retroactive extension to make the portability election for estates that were not required to file Form 706. Prior to the IRS announcement, a return had to be filed in a timely manner to make the portability election. Now with the automatic retroactive extension, if the decedent spouse died in 2011, 2012, or 2013, it is possible to make the election by filing the required Form 706 through December 31, 2014. This special extension does not apply to situations in which Form 706 was required to be filed by the size of the estate or in which Form 706 was already filed for the year in question. If you believe that the election to transfer any unused exclusion to a surviving spouse applies to you, family members, or friends and would like additional information, please give this office a call. Tue, 25 Feb 2014 19:00:00 GMT 5 Ways to Accelerate Your Receivables in QuickBooks http://www.mytrivalleytax.com/blog/5-ways-to-accelerate-your-receivables-in-quickbooks/38634 http://www.mytrivalleytax.com/blog/5-ways-to-accelerate-your-receivables-in-quickbooks/38634 Tri-Valley Tax & Financial Services Inc Increasing your income is good. But even if you can't, you can still take steps to collect the money you're already owed faster. Here are five. If you asked five small business owners to name the top three roadblocks they face in their quest for ongoing profitability, it's likely that all five would point to slow payments. It's everyone's problem. Accounts receivable requires constant monitoring. As satisfying as it can be to dispatch a group of invoices, you know that it's going to take some work to bring in payment for at least some of them. By using QuickBooks' tools and complying with accounting best practices, you'll be more confident during the invoicing stage that what you're owed will actually be in your bank account in a reasonable amount of time. Here are five things that we suggest. Let customers pay invoices electronically. Figure 1: You're likely to get paid faster if you let customers pay electronically when they receive an invoice. Go to Edit | Preferences | Payments | Company Preferences. A few years ago, this was a good idea. In 2014, when people have stopped carrying checkbooks and are accustomed to using their mobile devices to pay for merchandise, it's become almost required. Whether or not you know it, you're probably losing some business if you don't have a merchant account that supports credit and debit card payments, and possibly e-checks. If you have an online storefront, you've undoubtedly been accepting plastic for a long time now. Not many shoppers want to place an order on a website and hunt for envelopes and stamps and blank checks to complete it. If you invoice customers, it's just as critical that you allow them to remit payment ASAP. Not set up with a merchant account yet? We can help you get started with the Intuit Payment Network. Keep a close watch on your A/R reports. Part of being proactive with your accounts receivable is being vigilant and informed. Create and customize A/R reports regularly. When you customize your A/R Aging Detail report, for example, in addition to the other columns that you include, be sure that Terms, Due Date, Bill Date, Aging and Open Balance are turned on (click Customize Report | Display and click in front of each column label). You should also be looking at Open Invoices and Collections Report frequently, or assigning someone else to monitor them closely. We can help here by creating more complex financial reports periodically, like Statement of Cash Flows. Send statements. Figure 2: In this window, QuickBooks wants you to create filters to identify customers who should receive statements. Here, everyone with transactions that are more than 30 days old will be included. Invoices are generally the preferred way to bill your customers, but you should consider sending statements in addition when customers have outstanding balances past a certain date. QuickBooks sometimes calls these reminder statements. You're not providing the recipients with any new information; you're simply sending a kind of report that lists all invoices sent, credit memos and payment received. To generate statements, click Customers | Create Statements. You'll see the window pictured above. You can send statements to everyone, a defined group or one customer, and you can define the past-due status that you want to target in addition to other options. Send accurate invoices the first time. Few things will slow down your accounts receivable more than incorrect invoices. The customer can wait until payment is almost due to dispute the charges, which means that they'll probably get another 15 or 30 days (or whatever their terms are) to pay the amended bill. So whoever is responsible for creating invoices needs to be checking and re-checking them. If it's logistically possible depending on your workflow, have them verified by a second employee. Offer discounts for early payment and assess finance charges.Offering discounts is a balancing act. You'll be getting less money for your sale - even 5 percent multiplied by many customers can add up - but it may make sense financially for you to take a small hit in return for being able to deposit the payment sooner. We can help you do the math here. To offer this, you'll have to set up your discount scenario as a Term option (Lists | Customer & Vendor Profile Lists | Terms List), as seen here: Figure 3: This Standard discount term gives customers a 5 percent discount if their invoice is paid within 10 days. To make a customer eligible for the discount, open the Customer Center and double-click on a customer, then on Payment Settings | Payment Terms. You might also want to be assessing finance charges. The revenue you bring in from finance charges will probably be negligible. But sometimes, just knowing that a late payment will be more costly may prompt your customers to settle up in a timely fashion. Whatever approaches you choose to accelerate your receivables, be consistent. If any of your customers should compare notes, you want to be regarded as being firm but fair. Sat, 22 Feb 2014 19:00:00 GMT Home Energy Credits http://www.mytrivalleytax.com/blog/home-energy-credits/4559 http://www.mytrivalleytax.com/blog/home-energy-credits/4559 Tri-Valley Tax & Financial Services Inc Tax Credit for Residential Energy Improvements - A reduced credit for home energy-savings improvements is available through 2013. The credit generally equals 10% of a homeowner's cost of eligible energy-saving improvements, up to a maximum lifetime tax credit of $500. The cost of certain high-efficiency heating and air conditioning systems, water heaters, and stoves that burn biomass all qualify, along with labor costs for installing these items. In addition, the cost of energy-efficient windows and skylights, energy-efficient doors, qualifying insulation, and certain roofs also qualify for the credit, though the cost of installing these items is not included. Tax Credit for Residential Energy Improvements - Energy property improvements to a principal residence located in the United States and placed in service through 2013 qualify for a credit of 10% of the cost of qualified improvements. The maximum lifetime credit allowed is $500. Thus for 2013, if the total of nonbusiness energy property credits taken since 2006 is more than $500, no credit is allowed in 2013. Some of the energy property categories have lower limits, such as $200 for exterior windows and skylights. No credit is allowed for amounts paid or incurred for onsite preparation, assembly, or original installation of the component. The improvement's original use must commence with the taxpayer, and the improvement must reasonably be expected to remain in use for at least five years. Credit generally applies to the following: Qualified advanced main air circulating fan (used in a natural gas, propane, or oil furnace); Qualified energy-efficient heat pumps; Qualified energy-efficient water heaters; Qualified energy-efficient central air conditioners; Qualifying insulation; Qualified exterior windows, including skylights; Qualified exterior doors; Qualified metal roofs coated with heat-reduction pigments; and Qualified asphalt roofing with appropriate cooling granules. Tax Credit for Residential Energy Efficient Property (REEP credit) - This credit is available for years 2009 through 2016. The installation must be on the taxpayer's main or second home located in the United States. A 30% credit with no maximums (except as noted) applies to the following items: Qualified solar water heaters; Residential solar electric systems; Fuel cell equipment - with a maximum credit of $500 for each half-kilowatt of capacity; Qualified wind energy equipment; and Qualified geothermal energy equipment Labor costs for onsite installation and for piping and wiring connections are qualifying costs for these credits. However, the credits do not apply to equipment used to heat swimming pools or hot tubs. Credit limitations - Although these credits can be used to offset both the regular tax and AMT, they are nonrefundable personal credits that can only reduce a taxpayer's tax to zero; any remaining balance is not refundable. If the amount of the credit for the residential energy efficient property credit (REEP - i.e., the credit for residential solar and fuel cell equipment and wind/geothermal energy equipment) exceeds the taxpayer's tax after subtracting other nonrefundable personal credits, the excess may be carried forward to the next tax year and added to the credit allowable for that year. Thu, 20 Feb 2014 19:00:00 GMT Child Tax Credit http://www.mytrivalleytax.com/blog/child-tax-credit/4561 http://www.mytrivalleytax.com/blog/child-tax-credit/4561 Tri-Valley Tax & Financial Services Inc Taxpayers who have a qualified child may qualify for the child tax credit. The maximum credit amount is $1,000. Taxpayers with “earned” (not investment) income whose child credit exceeds their regular and alternative minimum taxes are eligible for a refundable credit. This credit is 15% of the taxpayer's earned income in excess of a threshold amount, which is $3,000 through 2017. A qualifying child for purposes of this credit is a child who (1) is the taxpayer's son, daughter, stepchild, foster child, brother, sister, stepbrother, stepsister, or a descendant of any of them (for example, a grandchild); (2) is the taxpayer's dependent; (3) was under age 17 at the end of the tax year; (4) did not provide over half of his or her own support for the tax year; (5) lived with the taxpayer for more than half of the tax year; and (6) was a U.S. citizen, a U.S. national, or a resident of the United States. As with most tax benefits, the child tax credit begins to phase out when a taxpayer's income reaches a specified threshold amount. The threshold amounts are $110,000 for married taxpayers, $55,000 for married taxpayers filing separately, and $75,000 for all others. The phase-out amount is $50 for each $1,000 (or fraction) of income in excess of the phase-out threshold. In addition to being limited due to the AGI phase out, the child tax credit is also limited for most taxpayers by the taxpayer's total tax liability (both regular and AMT). However, when the credit is limited by the amount of tax liability, a portion of the credit may be refundable for certain taxpayers (see below). The child tax credit can be used to offset AMT. Taxpayers who are unable to claim the full amount of the child tax credit because their income tax liability is less than the credit amount may qualify to take a portion of the tax credit as a refundable credit. This refundable “additional” credit is limited to lower-income taxpayers and involves a rather complicated computation to determine the amount that is refundable. Special Benefit-Military - Excluded combat zone pay of military taxpayers is treated as earned income for purposes of the computation of the refundable portion of the credit. Thu, 20 Feb 2014 19:00:00 GMT Child & Dependent Care Credit http://www.mytrivalleytax.com/blog/child--dependent-care-credit/4562 http://www.mytrivalleytax.com/blog/child--dependent-care-credit/4562 Tri-Valley Tax & Financial Services Inc A nonrefundable tax credit is available to some taxpayers for the expenses incurred for the care of a child (generally under 13 years of age), disabled child, spouse, or other dependent while the taxpayer is gainfully employed, (or is job seeking). In addition, employer dependent care assistance programs allow employees to exclude from income certain payments expended for child and dependent care. Generally, the credit is 20% of the cost of the care with a maximum expense limit of $3,000 for one child and $6,000 for two or more. However, for lower-income taxpayers, the credit percentage can be as high as 35%. The expenses that are taken into account for the credit are limited to a taxpayer's earned income (i.e., income from working). The limit must be reduced by the amount a taxpayer excludes from gross income under an employer-provided dependent care assistance plan. For taxpayers who file joint returns, the expense is limited to the earned income of the lower paid spouse. Generally, self-employed taxpayers use the net earnings on Schedule C as earned income. The rules for qualifying for this credit are somewhat complicated and the following are some of more frequently encountered issues: Qualifying Person Test - Your child and dependent care expenses must be for the care of one or more qualifying persons. A qualifying person is: Your qualifying child who is generally your dependent and who was under age 13 when the care was provided, or Your spouse who was physically or mentally not able to care for him or herself and lived with you for more than half the year, or A person who was physically or mentally not able to care for him or herself, lived with you for more than half the year, and either: a. Was your dependent, or b. Would have been your dependent except that: i. he or she received gross income of $3,950 in 2014 or more, ii. he or she filed a joint return, or iii. you, or your spouse if filing jointly, could be claimed as a dependent on someone else's return. Work-Related Expense Test - Child and dependent care expenses must be work-related to qualify for the credit. Expenses are considered work-related only if both of the following are true. They allow you (and your spouse if you are married) to work or look for work. They are for a qualifying person's care. Special Situations Kindergarten - Generally, the cost of school (including private schools) from kindergarten and up are considered schooling, which does not count as a qualified expense. However, after school care generally qualifies if its cost is stated separately. Summer School, Day Camp - Costs of summer school and tutoring programs are not qualifying employment-related expenses because they are educational in nature. A day camp or similar program may constitute a qualifying employment-related expense, even though the camp specializes in a particular activity, such as soccer or computers. The full amount paid for an education day camp that focuses on reading, math, writing, and study skills may be a qualifying expense. No portion of the cost of an overnight camp is an employment-related expense. Absent from Work - A taxpayer must allocate the cost of care on a daily basis if expenses are paid during a period in which a taxpayer is not employed or in active search of employment. However, for short temporary absences (generally two consecutive calendar weeks) where the taxpayer is required to pay for the care, the expenses may be counted. Medical or Maternity Leave - Cost of care while a taxpayer is on short- or long-term disability leave under the Family Medical Leave Act, paid medical leave, or paid maternity leave are not employment-related expenses. Special Rule for Children of Separated or Divorced Parents - In the case of a child of divorced or separated parents, only the custodial parent may claim the credit, even if the non-custodial parent may claim the dependency exemption for that child. A custodial parent is the parent with whom a child shares the same principal place of abode for the greater portion of the calendar year. Disabled or a Full-Time Student Spouse - For taxpayers who file joint returns, the expense is limited to the earned income of the lower paid spouse. If the spouse is disabled or a full-time student, he or she generally will not have earned income. In this circumstance, the spouse's income is imputed for each month he or she is disabled or a full-time student. The imputed amounts are $250 where there is one qualifying person and $500 where there are two. If both spouses were full-time students or disabled (and not working) in any given month, then only one can be considered to have the imputed income for that month. A part of a month is treated as a whole month. Care Provided in Taxpayer's Home - If the care services are provided in the taxpayer's home, the care provider would be considered the taxpayer's household employee and the household employee rules may apply. Provider's Tax ID Information - To claim the credit, a taxpayer must include the care provider's name, address and tax ID number on the return when filing for the credit. It is recommended that IRS Form W-10 is used when obtaining the information. The form includes a place for the provider to sign. This credit can be complicated and not all the details about the credit are included in the article. If you have questions about whether or not you qualify for the credit, please call this office. Thu, 20 Feb 2014 19:00:00 GMT AMT Credit http://www.mytrivalleytax.com/blog/amt-credit/4565 http://www.mytrivalleytax.com/blog/amt-credit/4565 Tri-Valley Tax & Financial Services Inc The alternative minimum tax credit (AMT) is a frequently misunderstood and overlooked tax credit. Oversimplified, the AMT credit is the result of incurring an AMT in a prior year, which generates a credit that can be used to offset the excess of the taxpayer's regular tax over the alternative minimum tax in a subsequent year, with unused credit carried forward to future years. It doesn't mean that you will have an AMT credit just because you were affected by the AMT. The credit is the result of having an AMT adjustment known as a “deferral item of preference.” Sound complicated? It can be, but generally the deferral item that affects most taxpayers is the result of exercising a qualified stock option (frequently referred to as an “incentive stock option or ISO) but not selling the shares acquired through the option in the same year the option was exercised. Roughly speaking, the credit amount is the difference between the AMT computed with and without the deferral item of preference. If you were unfortunate enough to have been affected by the alternative minimum tax (AMT) in a prior year, then you may have a carryover of an unused minimum tax credit. Thu, 20 Feb 2014 19:00:00 GMT Saver's Credit http://www.mytrivalleytax.com/blog/savers-credit/4567 http://www.mytrivalleytax.com/blog/savers-credit/4567 Tri-Valley Tax & Financial Services Inc The Saver's Credit provides a nonrefundable tax credit for retirement plan contributions made by eligible, low-income taxpayers to IRAs and qualified elective income deferral arrangements. The credit provides incentives for lower income individuals to save for their retirement through available qualified plans. To qualify, the taxpayer must have reached the age of 18 by the close of the year and cannot be a full-time student or a dependent of another. The credit ranges from 10% to 50% of the first $2,000 contributed by each taxpayer to a qualified plan during the year. The credit gradually phases out as a taxpayer's modified AGI increases. This phase out is inflation adjusted from year to year, and the phase-outs for 2014 are illustrated below: Modified AGI - Adjusted gross income is determined without regard to foreign and protectorate income exclusions or foreign housing exclusions.The credit is nonrefundable and offsets alternative minimum tax liability as well as regular tax liability. Example - Eric and Heather are married and file a joint return. Eric contributed $3,000 through his 401(k) plan at work, and Heather contributed $500 to her IRA account. Their modified AGI for the year was $30,000. The credit is computed as follows: Eric's 401(k) contribution was $3,000, but only the first $2,000 can be used.....$2,000 Heather's IRA contribution was $500, so it can all be used....................................500 Total Qualifying contributions..............................................................................$2,500 Credit percentage for a Joint AGI of $30,000 from the table........................... X .50 Saver's credit......................................................................................................$1,250 Eric and Heather file a joint return using the standard deduction for a married couple and their tax for the year is computed as follows: AGI....................................................................................................................$30,000 Standard Deduction......................................................................................... Two Personal Exemptions ($3,950 each)....................................................... Taxable Income................................................................................................. 9,700 Tax rate............................................................................................................x 10% Tax.....................................................................................................................$ 970 Credit ($1,250 but limited to the amount of the tax).................................... Eric and Heather's tax for the year.................................................................. - 0 - Caution - To prevent taxpayers from withdrawing contributions from existing plans, and subsequently recontributing the funds in order to qualify for the credit, Congress built-in a testing period - withdrawals during this period reduce the contributions eligible for the credit. The testing period consists of the year for which the credit is claimed, the period after the end of that year up through the extended due date of the credit-year return, and the two years prior to the credit-year. Thu, 20 Feb 2014 19:00:00 GMT Don't Overlook the Earned Income Tax Credit http://www.mytrivalleytax.com/blog/dont-overlook-the-earned-income-tax-credit/22570 http://www.mytrivalleytax.com/blog/dont-overlook-the-earned-income-tax-credit/22570 Tri-Valley Tax & Financial Services Inc The Earned Income Tax Credit (EITC) is a refundable credit primarily for lower-income individuals and couples with qualifying children. The credit first offsets any tax liability of the taxpayer(s), and any credit left over is fully refundable. For 2013, the credit can be as much as $6,044 for a taxpayer with three children. The IRS reports that in the past, 1 in 5 individuals who qualified for the credit failed to claim it. The credit is based on an individual's financial, marital, and parental status for the year. The credit increases with earned income until the maximum credit is reached and phases out for higher-income taxpayers. For 2013, the following is the maximum credit, based on the number of children, and the income level at which the credit is fully phased out. Number of Qualifying Children:        None         One         Two         ThreeMaximum Credit .........                    $487      $3,250      $5,372      $6,044Totally Phased Out when AGI or Earned Income Exceeds:Joint Filers                  $19,680     $43,210    $48,378    $51,567Others                       $14,340     $37,870    $43,038    $46,227The following are the general requirements to claim the credit: A federal income tax return must be filed to claim the credit even if the taxpayer is not otherwise required to file. A qualifying child must live with the taxpayer in the U.S. for more than half the year. Temporary absence from home (such as to attend school) can still qualify as time spent at home. Requirements for a qualifying child:- The child must be under age 19 at the end of the tax year or be a full-time student under age 24 at the end of the tax year. A child who is permanently and totally disabled is a qualified child regardless of age.- The child will not be a qualifying child if he or she files a joint return, unless the return is filed solely to claim a refund.- The child must be younger than the taxpayer who is claiming the EIC. This means, for example, that a taxpayer cannot claim the credit for an older brother or sister. The credit is NOT available to individuals whose filing status is Married Filing Separately. The credit is NOT available to individuals whose “disqualified income” (i.e., investment income) is more than $3,300. The filer, spouse (if filing a joint return), and any qualifying child included in the computation must have a valid SSN issued by the Social Security Administration. The filer or spouse must have earned income. Earned income is income from working, such as wages, profits from self-employment, income from farming, and, in some cases, disability income. If a taxpayer retired on disability, benefits received under an employer's disability retirement plan are considered earned income until the taxpayer reaches minimum retirement age. Special rules apply to members of the U.S. Armed Forces in combat zones. Members of the military can elect to include their nontaxable combat pay in earned income for the EITC. If you make this election, the combat pay remains nontaxable. If you have questions related to the EITC and how it might apply to you, a friend, or a family member, please call. Thu, 20 Feb 2014 19:00:00 GMT First-Time Homebuyer’s Credit Recapture http://www.mytrivalleytax.com/blog/first-time-homebuyer8217s-credit-recapture/29251 http://www.mytrivalleytax.com/blog/first-time-homebuyer8217s-credit-recapture/29251 Tri-Valley Tax & Financial Services Inc To stimulate home sales, Congress established the first-time homebuyer credit in 2008, resulting in some complicated recapture rules. Unlike the 2009–2010 credit, which must be recaptured only when the home is not used as a principal residence any time within the 36 months after its purchase, the 2008 credit was actually a form of a no-interest loan that had to be paid back to the federal government in 15 equal annual installments beginning in 2010. The repayment amount is included as a tax on the homebuyer’s annual income tax returns through 2024 unless one of the exceptions noted next applies. Recapture Exceptions - Some exceptions apply to the recapture rules: Government Service Waiver - In the case of a disposition of a principal residence by an individual (or a cessation of use of the residence that otherwise would cause recapture) after Dec. 31, 2008, in connection with government orders received by the individual (or the individual's spouse) for qualified official extended duty service, no recapture applies by reason of the disposition of the residence, and any 15-year recapture with respect to a home acquired before Jan. 1, 2009, ceases to apply in the tax year of the disposition. Taxpayer’s Death - If a taxpayer dies, any remaining annual installments are not due. If a joint return was filed, and the taxpayer passes away, the surviving spouse would be required to repay his or her half of the remaining repayment amount. Ceases Being Main Home - If a taxpayer stops using a home as the main home, all remaining annual installments become due on the return for the year that this occurs. There are special rules for involuntary conversions. Home Sold - If a home is sold, all remaining annual installments become due on the return for the year of the sale. The repayment is limited to the amount of gain on the sale if the home is sold to an unrelated taxpayer. If there is no gain or if there is a loss on the sale, the remaining annual installments may be reduced or even eliminated. For example, in 2008, a home was purchased for $200,000, and the homebuyer was eligible for and claimed a credit of $7,500. Assuming that no improvements are made on the home, and it is sold for $195,000 after repaying $500 of the credit, the gain or loss would be measured for purposes of the accelerated credit recapture from $193,000 (the original cost of $200,000 less the $7,500 credit plus the $500 repayment). In this case, there would be a gain of $2,000 on the sale ($195,000 minus $193,000). Thus, the taxpayer would only be liable for repaying $2,000 of the credit when the home is sold. Had the home sold for $193,000 or less, there would be no repayment required. If the home is sold to a related party, the full recapture amount must be paid regardless of the amount of gain (or loss). Divorce - If a home is transferred to a spouse or to a former spouse (as part of a divorce settlement), that person is responsible for making all subsequent installment payments. Involuntary Conversion - If the home is involuntarily converted (e.g., it is destroyed in a storm), and the taxpayer buys a new principal residence within a two-year period beginning on the date of the disposition or the date the home ceases to be the principal residence, the accelerated recapture rule does not apply. However, the regular recapture rule applies to the replacement principal residence during the recapture period in the same way as if the replacement principal residence were the converted residence. Please call this office if you have questions related to the recapture of the First Time Homebuyer credit. Thu, 20 Feb 2014 19:00:00 GMT March 2014 Individual Due Dates http://www.mytrivalleytax.com/blog/march-2014-individual-due-dates/30367 http://www.mytrivalleytax.com/blog/march-2014-individual-due-dates/30367 Tri-Valley Tax & Financial Services Inc March 3 - Farmers and Fishermen File your 2013 income tax return (Form 1040) and pay any tax due. However, you have until April 15 to file if you paid your 2013 estimated tax by January 15, 2014. March 10 - Report Tips to Employer If you are an employee who works for tips and received more than $20 in tips during February, you are required to report them to your employer on IRS Form 4070 no later than March 10. Your employer is required to withhold FICA taxes and income tax withholding for these tips from your regular wages. If your regular wages are insufficient to cover the FICA and tax withholding, the employer will report the amount of the uncollected withholding in box 12 of your W-2 for the year. You will be required to pay the uncollected withholding when your return for the year is filed.March 15 - Time to Call For Your Tax Appointment It is only one month until the April due date for your tax returns. If you have not made an appointment to have your taxes prepared, we encourage you do so before it becomes too late.Do not be concerned about having all your information available before making the appointment. If you do not have all your information, we will simply make a list of the missing items. When you receive those items, just forward them to us. Even if you think you might need to go on extension, it is best to prepare a preliminary return and estimate the result so you can pay the tax and minimize interest and penalties. We can then file the extension for you. We look forward to hearing from you. Thu, 20 Feb 2014 19:00:00 GMT March 2014 Business Due Dates http://www.mytrivalleytax.com/blog/march-2014-business-due-dates/30368 http://www.mytrivalleytax.com/blog/march-2014-business-due-dates/30368 Tri-Valley Tax & Financial Services Inc March 17 - S-Corporation Election File Form 2553, Election by a Small Business Corporation, to choose to be treated as an S corporation beginning with calendar year 2013. If Form 2553 is filed late, S treatment will begin with calendar year 2015.March 17 - Electing Large Partnerships Provide each partner with a copy of Schedule K-1 (Form 1065-B), Partner’s Share of Income (Loss) From an Electing Large Partnership, or a substitute Schedule K-1. This due date is effective for the first March 15 following the close of the partnership’s tax year. The due date of March 15 applies even if the partnership requests an extension of time to file the Form 1065-B by filing Form 7004.March 17 - Social Security, Medicare and Withheld Income Tax If the monthly deposit rule applies, deposit the tax for payments in February. March 17 - Non-Payroll Withholding If the monthly deposit rule applies, deposit the tax for payments in February. March 17 - Corporations File a 2013 calendar year income tax return (Form 1120 or 1120-A) and pay any tax due. If you need an automatic 6-month extension of time to file the return, file Form 7004, Application for Automatic Extension of Time To File Certain Business Income Tax, Information and Other Returns, and deposit what you estimate you owe. Filing this extension protects you from late filing penalties but not late payment penalties, so it is important that you estimate your liability and deposit it using the instructions on Form 7004. Thu, 20 Feb 2014 19:00:00 GMT Understanding Your Tax Basics http://www.mytrivalleytax.com/blog/understanding-your-tax-basics/433 http://www.mytrivalleytax.com/blog/understanding-your-tax-basics/433 Tri-Valley Tax & Financial Services Inc No matter what the season or your unique circumstances, when it comes to your taxes, planning usually pays off in a lower tax bill. The following is provided so that you may have a basic understanding of taxes before you discuss filing options and strategies. Filing Status - Except for a surviving spouse, or married individuals who have lived apart for the entire year, your filing status depends on your marital status at the end of the tax year. Generally, if you are married at the end of the tax year, you have three possible filing status options: Married Filing Jointly, Married Filing Separate, or if you qualify, Head of Household. If you were unmarried at the end of the year, you would file as Single status, unless you qualify for the more beneficial Head of Household status.Head of Household is the most complicated filing status to qualify for and is frequently overlooked as well as incorrectly claimed. Generally, the taxpayer must be unmarried AND: • Pay more than one half of the cost of maintaining as his or her home a household which is the principal place of abode for more than one half the year of a qualifying child, or an individual (relative) for whom the taxpayer may claim a dependency exemption, or• Pay more than half the cost of maintaining a separate household that was the main home for a dependent parent for the entire year. A married taxpayer may be considered unmarried for the purpose of qualifying for the Head of Household status if the spouses were separated for at least the last six months of the year, provided the taxpayer maintained a home for a dependent child for over half the year.Surviving Spouse (also referred to as Qualifying Widow or Widower) is a rarely used status for a taxpayer whose spouse died in one of the prior two years and who has a dependent child at home. The joint tax rates are used, but no exemption is claimed for the deceased spouse. In the year the spouse passed away, the surviving spouse would file jointly with the deceased spouse if not remarried by the end of the year. Adjusted Gross Income (AGI) - AGI is the acronym for Adjusted Gross Income. AGI is generally the sum of a taxpayer's income less specific subtractions called adjustments (but before the standard or itemized deductions and exemptions). Many tax benefits and allowances, such as credits, certain adjustments and some deductions are limited by a taxpayer's AGI. Taxable Income - Taxable income is your AGI less deductions (either standard or itemized) and your exemptions. Your taxable income is what your regular tax is based upon using either the IRS tax tables or the rate schedule. Marginal Tax Rate - Not all of your income is taxed at the same rate. The amount equal to the sum of your deductions and exemptions is not taxed at all. The next increment is taxed at 10%, then 15%, etc., until you reach the maximum tax rate. When you hear people discussing tax bracket, they are referring to the marginal tax rate. Knowing your marginal rate is important, because any increase or decrease in your taxable income will affect your tax at the marginal rate. For example, suppose your marginal rate is 25% and you are able to reduce your income $1,000 by contributing to a deductible retirement plan. You would save $250 in Federal tax ($1,000 x 25%). Your marginal tax bracket depends upon your filing status and taxable income. Find your marginal tax rate using the table below.When using this table, keep in mind that the marginal rates are step functions and that the taxable incomes shown in the filing status column are the top value for that marginal rate range. 2014 MARGINAL TAX RATES TAXABLE INCOME BY FILING STATUS Marginal Tax Rate Single Head of Household Joint* Married Filing Separately 10.0% 9,075 12,950 18,150 9,075 15.0% 36,900 49,400 73,800 36,900 25.0% 89,350 127,550 148,850 74,425 28.0% 186,350 206,600 226,850 113,425 33.0% 405,100 405,100 405,100 202,550 35.0% 406,750 432,200 457,600 228,800 39.6% Over406,750 Over432,200 Over457,600 Over228,800 * Also used by taxpayers filing as Surviving Spouse Taxpayer & Dependent Exemptions - You are allowed to claim a personal exemption for yourself, your spouse (if filing jointly) and each individual who qualifies as your dependent. The amount you are allowed to deduct is adjusted for inflation annually; the amount for 2014 is 3,950 (up from $3,900 in 2013).Dependents - To qualify as your dependent, an individual must be your qualified child or pass all five dependency qualifications: (1) Member of the Household or Relationship Test, (2) Gross Income Test, (3) Joint Return Test, (4) Citizenship or Residency Test, and (5) Support Test. The gross income test limits the amount of income a dependent can make if he or she is over 18 and does not qualify for an exception for certain full-time students. The support test generally requires that you pay over half of the dependent’s support, although there are special rules for divorced parents and situations where several individuals together provide over half of the support.Qualified Child - A qualified child is one that meets the following tests:(1) Has the same principal place of abode as you for more than half of the tax year except for temporary absences.(2) Is your son, daughter, stepson, stepdaughter, brother, sister, stepbrother, stepsister, or a descendant of any such individual.(3) Is younger than you.(4) Did not provide over half of his or her own support for the tax year.(5) Is under age 19 or under age 24 in the case of a full-time student, or is permanently and totally disabled (any age).(6) Was unmarried (or if married, either did not file a joint return or filed jointly only as a claim for refund). Deductions - Taxpayers can choose between itemizing their deductions or using the standard deduction. The standard deductions, which are inflation adjusted annually, are illustrated below for 2014. Filing Status Standard Deduction Single $6,200 Head of Household $9,100 Married Filing Jointly $12,400 Married Filing Separately $6,200 The standard deduction is increased by multiples of $1,550 for unmarried taxpayers who are over age 64 and/or blind. For married taxpayers, the additional amount is $1,200. Those with large deductible expenses can itemize their deductions in lieu of claiming the standard deduction.Itemized deductions include:(1) Medical expenses (limited to those that exceed 10% of your AGI for the year). Note: the reduction rate is 7½% for seniors age 65 and older through 2016;(2) Taxes consisting primarily of real property taxes, state income (or sales*) tax and personal property taxes;(3) Interest on qualified home debt and investments; the latter is limited to net investment income (i.e. the interest cannot exceed your investment income after deducting investment expenses);(4) Charitable contributions are generally limited to 50% of your AGI, but in certain circumstances the limit can be as little as 20% or 30% of AGI,(5) Miscellaneous employee business expenses and investment expenses, but only to the extent that they exceed 2% of your AGI;(6) Casualty losses in excess of 10% of $100 per occurrence plus your AGI; and(7) Gambling losses to the extent of gambling income, and certain other rarely encountered deductions.*The option to deduct state and local sales tax instead of state and local income tax does not apply for 2014 and subsequent years, but there is a chance Congress may reinstate the provision retroactively. Please check with this office for updates. Alternative Minimum Tax (AMT) - The Alternative Minimum Tax is another way of being taxed that taxpayers frequently overlook. The Alternative Minimum Tax (AMT) is a tax that was originally intended to ensure that wealthier taxpayers with large write-offs and tax-sheltered investments paid at least a minimum tax. However, unlike the regular tax computation, for many years the AMT was not adjusted for inflation, and years of inflation drove most taxpayers’ income up to the point where more and more taxpayers were being affected by the AMT. Congress finally changed the law to allow annual inflation-adjustment of the amount of income exempt from the AMT, and raised the amount of AMT taxable income at which the higher of two AMT tax rates applies. These changes have helped limit the number of additional taxpayers subject to the AMT. A full overhaul of the AMT law is yet to come from Congress. Meanwhile, your tax must be computed by the regular method and by the alternative method. The tax that is higher must be paid. The following are some of the more frequently encountered factors and differences that contribute to making the AMT greater than the regular tax.- Personal and dependent exemptions - are not allowed for the AMT. Therefore, separated or divorced parents should be careful not to claim the exemption if they are subject to the AMT and instead allow the other parent to claim the exemption. This strategy can also be applied to taxpayers who are claiming an exemption under a multiple support agreement.- The standard deduction – is not allowed for the AMT and a person subject to the AMT cannot itemize for AMT purposes unless they also itemize for regular tax purposes. Therefore, it is important to make every effort to itemize if subject to the AMT. - Itemized deductions:Medical deductions – only allowed in excess of 10% of AGI, now the same as for regular tax (except the reduction rate is 7½% for taxpayers age 65 or older). This difference for seniors will end when the AGI threshold percentage increases for them to 10% in 2017.Taxes – are not allowed at all for the AMT.Interest – Home equity debt interest and interest on debt for non-conventional homes such as motor homes and boats are not allowed as AMT deductions.Miscellaneous deductions subject to the 2% of AGI reduction are not allowed against the AMT. - Nontaxable interest from Private Activity Bonds – is tax-free for regular tax purposes but some are taxable for the AMT.- Statutory Stock Options (Incentive Stock Options) when exercised produce no income for regular tax purposes. However, the bargain element (difference between grant price and exercise price) is income for AMT purposes in the year the option is exercised.- Depletion Allowance – in excess of a taxpayer’s basis in the property is not allowed for AMT purposes.The AMT exemptions are phased out for higher-income taxpayers. The amounts shown are for 2014. AMT EXEMPTION PHASE OUT Filing Status Exemption Amount Income Where Exemption Is Totally Phased Out Married Filing Jointly $82,100 $484,900 Married Filing Separate $41,050 $242,450 Unmarried $52,800 $328,500 AMT TAX RATES AMT Taxable Income Tax Rate 0 – $182,500 (1) 26% Over $182,500 (1) 28% (1) $91,250 for married taxpayers filing separatelyYour tax will be the higher of the tax computed the regular way or the Alternative Minimum Tax. Anticipating when the AMT will affect you is difficult, because it is usually the result of a combination of circumstances. In addition to those items listed above, watch out for transactions involving limited partnerships, depreciation and business tax credits only allowed against the regular tax. All of these can strongly impact your bottom line tax and raise a question of possible AMT. Tax Tip: If you were subject to the AMT in the prior year, itemized your deductions on your federal return for the prior year, and had a state tax refund for that year, part or all of your state income tax refund from that year may not be includable in the regular tax computation. To the extent you received no tax benefit from the state tax deduction because of the AMT, that portion of the refund is not includable in the subsequent year’s income. Tax Credits - Once your tax is computed, tax credits can reduce the tax further. Credits are divided into two categories: those that are nonrefundable and can only offset the tax, and those that are refundable. In addition, some credits are not deductible against the AMT, and some credits, when not fully used in a specific tax year, can carry over to the succeeding years. Although most credits are a result of some action taken by the taxpayer, there are two commonly encountered credits that are based simply on the number of your dependents or your income.Child Tax Credit - The child tax credit is $1,000 per child. If the credit is not entirely used to offset tax, the excess portion of the credit, up to the amount that the taxpayer's earned income exceeds a threshold ($3,000 2011 through 2017) is refundable. Taxpayers with three or more qualifying dependent children may use an alternate method for figuring the refundable portion of their credit. The credit is allowed against both the regular tax and the AMT for each dependent under age 17. The credit begins to phase out at incomes (AGI) of $110,000 for married joint filers, $75,000 for single taxpayers and $55,000 for married individuals filing separate returns. The credit is reduced by $50 for each $1,000 (or fraction of $1,000) of modified AGI over the thresholds.Earned Income Credit -This is a refundable credit for low-income taxpayers with income from working, either as an employee or a self-employed individual. The credit is based on earned income, the taxpayer’s AGI and the number of qualifying children. A taxpayer who has investment income such as interest and dividends in excess of $3,350 (up from $3,300 in 2013) is ineligible for this credit. The credit was established as an incentive for individuals to obtain employment. It increases with the amount of earned income until the maximum credit is achieved and then begins to phase out at higher incomes. The table below illustrates the phase-out ranges for the various combinations of filing status and earned income and the maximum credit available. 2014 EIC PHASE-OUT RANGE Number ofChildren Joint Return Others MaximumCredit None $13,540 - $20,020 $8,110 - $14,590 $496 1 $23,260 - $43,941 $17,830 - $38,511 $3,305 23 $23,260 - $49,186$23,260 - $52,427 $17,830 - $43,756 $17,830 - $46,997 $5,460 $6,143 Residential Energy-Efficient Property Credit – This credit is generally for energy-producing systems that harness solar, wind or geothermal energy including solar electric, solar water heating, fuel cell, small wind energy and geothermal heat pump systems. These items qualify for a 30% credit with no annual credit limit. Unused residential energy-efficient property credit is generally carried over through 2016. Withholding and Estimated Taxes - Our “pay-as-you-go” tax system requires that you make payments of your tax liability evenly throughout the year. If you don't, it's possible you could owe an underpayment penalty. Some taxpayers meet the “pay-as-you-go” requirements by making quarterly estimated payments. However, when your income is primarily from wages, you usually meet the requirements through wage withholding and rely on your employer's payroll department to take out the right amount of tax, based on the withholding allowances shown on the Form W-4 you filed with your employer. To avoid potential underpayment penalties, you are required to deposit by payroll withholding or estimated tax payments an amount equal to the lesser of: (1) 90% of the current year’s tax liability; or(2) 100% of the prior year’s tax liability or, if your AGI exceeds $150,000 ($75,000 for taxpayers filing Married Separate), 110% of the prior year’s tax liability. If you had a significant change in income during the year, we can assist you in projecting your tax liability to maximize the tax benefit and delay paying as much tax as possible before the filing due date. Wed, 19 Feb 2014 19:00:00 GMT Cut Taxes On Your Investments http://www.mytrivalleytax.com/blog/cut-taxes-on-your-investments/434 http://www.mytrivalleytax.com/blog/cut-taxes-on-your-investments/434 Tri-Valley Tax & Financial Services Inc Long-term capital gains tax rates will produce automatic tax savings by taxing the gain from capital assets at rates lower than the regular tax rate. To take advantage of the long-term rates, you need to hold the asset longer than one year. The long-term rate depends on two things: your marginal tax rate and how long you have held the asset. If your marginal rate is 15% or under - Your long-term capital gains rate will be 0% for property held longer than one year. To the extent your marginal rate is above 15% but below 39.6% - Your long-term capital gains rate will be 15% for property held longer than one year. To the extent your marginal rate is 39.6% - Your long-term capital gains rate will be 20% for property held longer than one year. Taxpayers in the 10% or 15% tax brackets with unrealized long-term capital gains should develop strategies to take advantage of the “zero” tax rate, possibly cashing in on existing gains while avoiding any federal tax on the gains. Also remember the gain itself adds to the taxpayer’s income, impacts income-based limitations, and possibly pushes the taxpayer into a higher regular tax bracket, so it is a balancing act to take advantage of this zero rate.Primarily because of this zero tax rate, Congress raised the age for the “kiddie” tax to include full-time students under the age of 25. Thus, Congress effectively nullified a popular strategy for funding college expenses by gifting appreciated stock to children who could then sell it with no or reduced tax liability.Long-term capital losses offset long-term capital gains before they offset short-term capital gains. Similarly, short-term capital losses offset short-term capital gains before they offset long-term capital gains. Keep in mind that taxpayers may use up to $3,000 ($1,500 for taxpayers filing as married separate) of total capital losses in excess of total capital gains as a deduction against ordinary income in computing adjusted gross income or AGI. Currently, individuals are subject to tax at a rate as high as 39.6% on short-term capital gains and ordinary income. But long-term capital gains are generally taxed at a maximum rate of 20%.All of this means that having long-term capital losses offset long-term capital gains should be avoided, since those losses will be more valuable if they are used to offset short-term capital gains or ordinary income. Avoiding this requires making sure that the long-term capital losses are not taken in the same year as the long-term capital gains. However, this is not just a tax issue; investment factors also need to be considered. It would not be wise to defer recognizing gain until the following year if there is too much risk that the property’s value will decline before it can be sold. Similarly, one wouldn't want to risk increasing a loss on property that is expected to continue declining in value by deferring its sale until the following year.To the extent that taking long-term capital losses in a different year than long-term capital gains is consistent with good investment planning, a taxpayer should take steps to prevent those losses from offsetting those gains.Special Considerations - Some long-term gains are treated differently. Long-term gain attributable to depreciation recaptured on certain depreciable real estate is taxed at a maximum rate of 25%, and long-term gain attributable to collectibles (works of art, coins, stamps, antiques and similar property) is taxed at a maximum of 28%. If a taxpayer owns shares of the same stock purchased at different times and prices and can specifically identify those blocks of stock, it may be to his or her benefit to pick the block of shares to sell based on their cost and holding period. If the taxpayer cannot specifically identify them, then the first-in first-out rule applies. Shareholders of mutual funds may choose to average the cost basis of shares bought at different times; for holding period purposes, the mutual fund shares that are sold are considered to be the ones acquired first.When deciding whether to take gain or hold for long-term rates, compare the savings associated with long-term rates to the financial risk of continuing to hold the investment. Careful handling of capital gains and losses can save substantial amounts of tax. Please contact this office to discuss year-end planning strategies that apply to your particular situation so as to maximize tax savings. Owners of luxury homes with gains exceeding the $250,000/$500,000 exclusion limits, and owners of second homes that do not qualify for the home sale gain exclusion, will especially benefit from the lower capital gain rates.DividendsDividends received by an individual shareholder from domestic corporations (and certain foreign corporations) are treated as net capital gain for purposes of applying the capital gain tax rates. This means dividends are taxed at no more than 20% for taxpayers in the highest marginal rate. Capital losses cannot offset the dividend income. Dividends on stock held in a retirement plan or Traditional IRA do not benefit from the lower rates; distributions from these plans are taxed at ordinary income rates.Deferring or Avoiding Tax When Disposing of AssetsDepending on the type of asset, there are a number of strategies that can be employed to reduce, defer, or even avoid the tax upon the asset’s disposition. Tax-Free Exchange - Commonly referred to as a Sec 1031 exchange in reference to the tax code section covering exchanges, this type of strategy is frequently used to defer taxes in real estate held for business or investment purposes by deferring the gain into a replacement real estate property also held for business or investment purposes. Tax-free exchanges are also available for non-real estate business assets, but must conform to stringent like-for-like requirements. Tax-free exchanges do not apply to personal-use real estate holdings, such as your home or second home, and generally do not apply to publicly-traded stock. If the property is mixed-use property, such as a house that is used partially as a home, the business portion may qualify under the Sec 1031 exchange rules. Please call this office for additional details. Installment Sale - By carrying back the paper (loan) on the sale of an asset, you can spread the gain over a period of years. In these types of arrangements, the gain and nontaxable return of capital are taxed proportionally over the term of the sale agreement, thereby deferring the tax on the gain portion until actually received. Charitable Gift - Consider replacing cash charitable gifts with gifts of appreciated property. By giving the asset to a favorite charity, the taxpayer receives a charitable contribution deduction equal to the fair market value of the gift and at the same time avoids having to report the gain from the asset on his or her return. However, the maximum deduction for gifts of this type can be as low as 20% or 30% of AGI as compared to 50% for cash gifts. Caution: If the value of the stock a taxpayer is considering gifting is less than what was paid for it, he or she should sell it, take the loss on their return and then contribute the cash to the charity. Charitable Remainder Trust - This technique allows a taxpayer to contribute his or her asset(s) to a trust, which in turn pays an income during the remainder of the taxpayer's life and leaves the balance at death to the charity. The assets contributed to the trust can be sold within the trust without any tax consequences to the taxpayer. In addition, when the trust is formed, the taxpayer will receive a charitable deduction for the estimated amount that the trust will leave to charity upon death. The amount of income paid to the taxpayer each year is flexible (within some limitations) and provides annual funds, which can then supplement retirement needs. Gifts to Individuals - Giving a gift of appreciated property to an individual (donee) transfers the gain from that property to the donee. This can work to your advantage by gifting the appreciated asset rather than giving the donee cash. Let’s say that a taxpayer is assisting a low-income parent with living expenses (but doesn't pay over half the parent's support so the taxpayer cannot claim the parent as a dependent). Instead of selling some appreciated stock to pay for the parent's household costs, for example, the stock should be gifted to the parent, who can sell it in a much lower tax bracket and pay for his or her own expenses. The foregoing are abbreviated summaries of tax strategies that may have additional restrictions or other tax ramifications. Please consult with this office before attempting to employ any of these strategies.Take Investment LossesIf a taxpayer has investments that are worth less than what was paid for them, he or she can use the losses to offset other gains and in certain circumstances other types of income. Capital Losses - Tax law allows you as an investor to offset capital gains with capital losses, and if the losses exceed the gains, you can deduct losses up to a maximum of $3,000 ($1,500 if filing married separate) for the tax year. Any additional losses carry over to future years. For this reason, review your securities portfolio at year’s end and search for stocks and other securities whose sales will result in a capital loss. This will help minimize your gains or maximize your losses for the year. When planning this strategy, keep in mind that under the wash sale rules, a loss is disallowed if the security sold at a loss is repurchased within 30 days. A loss will also be disallowed if the investor buys the same security 30 days before the sale.Another planning strategy is to avoid having long-term capital losses offset long-term capital gains, since those losses will be more valuable if they are used to offset short-term capital gains or ordinary income. Avoiding this requires making sure that the long-term capital losses are not taken in the same year as the long-term capital gains. However, this is not just a tax issue; investment factors also need to be considered. Variable Annuity Losses - If a taxpayer has a variable annuity that is worth less than what was paid for it, consider surrendering it before year’s end so that a deductible loss can be realized. Usually, the amount that is deductible will be the surrender value less the tax basis in the annuity. The tax basis is generally the amount originally invested less any amounts previously received from the annuity that were excludable from income. Before making a decision to surrender, consider any possible surrender penalties and the potential for the annuity to recover. Please call this office if we can assist you with your decision. Invest in Tax-Exempt Securities Municipal Bonds - Interest received on obligations of states and their municipalities is exempt from Federal tax and may also be free from state taxation. Although these bonds generally pay a lower interest rate, their “after-tax” return (yield) can be higher than other similar investments such as corporate bonds, CDs, etc. Taxpayers in higher tax brackets and children subject to the “kiddie tax” frequently use this investment. Taxpayers drawing Social Security benefits should be reminded that even though municipal bond income may be tax-free, it is still used as income for purposes of determining the taxable portion of Social Security income. In addition, interest on certain “private activity bonds” is not exempt for AMT purposes. EQUIVALENT TAXABLE YIELD TaxExempt Tax Equivalent Taxable Yield Marginal Tax Rate 10 15 25 28 33 35 39.6 2.0 2.2 2.35 2.67 2.78 2.98 3.08 3.31 2.5 2.75 2.94 3.33 3.47 3.73 3.85 4.14 3.0 3.30 3.53 4.00 4.17 4.48 4.62 4.97 3.5 3.85 4.12 4.67 4.86 5.22 5.38 5.79 4.0 4.40 4.7 5.33 5.56 5.97 6.15 6.62 4.5 4.95 5.29 6.00 6.25 6.72 6.92 7.45 5.0 5.50 5.88 6.67 6.94 7.46 7.69 8.28 5.5 6.05 6.47 7.33 7.64 8.21 8.46 9.10 6.0 6.60 7.06 8.00 8.33 8.96 9.23 9.93 Direct U.S. Government Obligations - Interest from U.S. Savings Bonds, T-Bills, HH Bonds, etc., is taxable only for Federal purposes. Federal law prohibits states from taking a bite out of this income. In addition, interest from U.S. Savings Bonds (series E, EE and I) may be deferred until the year the bond is cashed, providing a vehicle for deferral strategies. Wed, 19 Feb 2014 19:00:00 GMT Plan For Selling Your Home http://www.mytrivalleytax.com/blog/plan-for-selling-your-home/436 http://www.mytrivalleytax.com/blog/plan-for-selling-your-home/436 Tri-Valley Tax & Financial Services Inc Each individual taxpayer, regardless of age, is allowed to exclude up to $250,000 of gain from the sale of their main home if certain requirements are met. A married couple that meets the requirements can exclude up to $500,000. To qualify for the exclusion, a taxpayer must own and live in the home as their main home for two of the prior five years immediately before the sale (under certain circumstances the five-year period is extended for military personnel and intelligence community employees). Short temporary absences, such as for vacation or other seasonal absence (even though accompanied with rental of the residence), are counted as periods of use.If the home was originally acquired via a Sec 1031 tax-free exchange, the home must be owned for a minimum of five years before a home-sale gain exclusion can be utilized, provided the taxpayer also meets the two-year use test. Any gain in excess of the excludable amount is taxable. If the home was previously used as a rental, second home, used by a relative, unoccupied, etc., and converted to the taxpayer’s primary residence, the gain must be allocated between gain attributable to non-qualified use after December 31, 2008 and home sale gain. Non-qualified use is any use other than as a home between January 1, 2009 and the time it was converted to the taxpayer’s home. Only home sale portion of the gain qualifies for the $250,000/$500,000 gain exclusion.The exclusion can be used over and over again, as long as two years have elapsed between sales and the taxpayer otherwise meets the ownership and use tests. If there is a loss from the sale of your home, that loss is not deductible. Even if the taxpayer doesn’t qualify for the full exclusion, he or she may still qualify for a partial exclusion if the home is sold due to a job-related move, health reasons, involuntary conversions, death, loss of employment, divorce, or other unforeseen circumstances. Also, in divorce situations where one spouse remains in the home for an extended period after the divorce, the spouse who no longer lives in the home may still qualify for the exclusion based on the other spouse’s use period. If claiming, or have previously claimed, a home office deduction for an office that is an integral part of your home, the IRS has taken a liberal approach and allows the gain from the office portion to also be excluded, except for home office depreciation claimed after May 6, 1997. That depreciation, to the extent of any home sale gain, is taxable at 25%. However, this liberal treatment is not extended to gain derived from a portion of the property that is separate from the dwelling and that was used for business. The exchange of a home can qualify for both the §121 home sale exclusion and §1031 like-kind exchange deferral treatment. This can occur where the property was used as a principal residence and a business consecutively (e.g., use as a principal residence followed by rental of the property) or concurrently (a portion of the home used as a principal residence and a portion used as a home office). A beneficiary who inherits the residence of a decedent generally (except for decedents dying in 2010 where the executor opts to use a carryover basis regime) receives a step-up or step-down in basis based upon the value of the property at the date of death, and since it is inherited property, it is treated as held for long-term. Generally, a beneficiary will sell the residence through a broker and will have substantial sales costs. These sales costs quite often translate into a loss on the sale (sales price – sales costs – inherited basis) if the beneficiary does not use the property for personal uses. Wed, 19 Feb 2014 19:00:00 GMT Save Taxes by Shifting or Deferring Income http://www.mytrivalleytax.com/blog/save-taxes-by-shifting-or-deferring-income/437 http://www.mytrivalleytax.com/blog/save-taxes-by-shifting-or-deferring-income/437 Tri-Valley Tax & Financial Services Inc Shifting Income to Your Child - Children under the age of 19 and full-time students under the age of 24 are subject to the so-called kiddie tax. This was enacted by Congress to restrict taxpayers from shifting large amounts of income to their children by taxing the child at the parent’s marginal tax rate. However, for children without earnings from working, there is no kiddie tax on the first $1,000 for 2013 and 2014 of investment income, and the next $1,000 is taxed at 10%. Once the child is beyond the applicable age, all of their income is taxed at their own marginal rate.When the income of a child subject to this tax calculation reaches the point where it would be taxed at the parent’s rate, making investments through tax-deferred investment vehicles becomes a prudent option. Placing or moving a child's funds into tax deferred or tax free investments such as U.S. Savings Bonds, tax-deferred annuities, municipal bonds, growth stocks, etc., that produce little or no current taxable income, can help avoid the Kiddie Tax, at least in the years until the investments need to be sold or redeemed to pay for education expenses. Investing in U.S. Savings Bonds - Interest income from certain types of U.S. Savings Bonds may be deferred until the bonds mature or are cashed in, whichever occurs first. Thus, one can defer income for the life of the bonds. Investing in Deferred Annuities - Because the interest earned on a deferred annuity is tax-deferred, your earnings are not taxed until withdrawn. This also allows the investment to compound faster. Employing Your Child - Payments that you make to your child under the age of 18, who works for you in your trade or business that is a sole proprietorship or partnership in which each partner is a parent of the child, are not subject to Social Security and Medicare taxes. As long as the pay is reasonable for the necessary services to the business provided by the child, you can deduct that pay as a business expense. Assuming the child has no other income, he or she will not have any tax on the first $6,200 of wages from you in 2014. Your child may also make deductible contributions to an IRA of the lesser of earned income or $5,500. These contributions can offset income, so your child could receive $11,700 in gross income by combining the IRA deduction with the standard deduction and pay no tax. IRA Contributions - For 2013 and 2014, an individual may contribute the lesser of his or her compensation or $5,500 to their IRA accounts. The spouse can do the same even if he or she does not work, provided the joint compensation is at least $11,000 for the year. For individuals age 50 and over, the annual limit is increased by $1,000. Contributions to a Traditional IRA cannot be made once the taxpayer reaches age 70-1/2. For purposes of determining IRA deduction limits, individuals who receive taxable alimony and separate maintenance payments may treat the alimony as compensation even if it is the only income they have. This allows alimony recipients to save for their retirement by making either Traditional or Roth IRA contributions. Traditional IRA contributions are deductible if the taxpayer and spouse (if married) do not actively participate in another qualified retirement plan, or if participating in another plan, their AGI is below income phase-out levels. For married taxpayers where one spouse is an active participant in a qualified plan and the other is not, the IRA deduction is phased out when AGI is between $178,000 and $188,000 for the one who is not an active participant in 2013. For 2014 the range is $181,000 to $191,000. 2014 TRADITIONAL IRA PHASE OUT AGI Phase Out Single & Head of Household Joint* &Surviving Spouse MarriedSeparate Threshold $60,000 $96,000 $0 Complete $70,000 $116,000 $10,000 *When both spouses are active participants in qualified plans. If you cannot deduct your IRA contribution or you simply wish to generate tax-free retirement funds, you can contribute to a Roth IRA instead of the Traditional IRA, provided the owner’s AGI is below the phase-out levels shown in the table below. Roth IRA distributions are tax-free after a five-year waiting period and the owner has reached age 59-1/2 or becomes disabled. 2014 ROTH IRA PHASE OUT AGI Phase Out Single & Head of Household Joint &Surviving Spouse MarriedSeparate Threshold $114,000 $181,000 $0 Complete $129,000 $191,000 $10,000 An individual can convert all or any portion of his or her Traditional IRA to a Roth IRA. Since income tax must be paid on the conversion amount, it makes sense to convert if there are many years to go before the individual plans to withdraw the funds. This allows the IRA to accumulate tax-free earnings and appreciation. If an individual has one or more IRA accounts invested in stocks or mutual funds that have declined in value, this might be an opportune time to convert it to a Roth IRA. Another reason to convert to a Roth IRA is to pass on money to your heirs. Unlike a Regular IRA, there are no mandatory withdrawals for the Roth IRA owner, and the heirs will not be liable for income taxes when the Roth IRA is distributed to them. Roth Rollover Strategies - There are some interesting strategies a taxpayer can employ to convert nondeductible traditional IRA contributions to a Roth IRA, thereby funding the more favorable Roth IRA. Taxpayers who have employer plans and are restricted from making deductible traditional IRA contributions because of income level can make nondeductible traditional IRA contributions and then convert those nondeductible traditional IRAs to Roth IRAs with virtually no tax since they were nondeductible. Only the earnings from the time of the original contributions up to the time of conversion would be taxable. Taxpayers who are prohibited from making Roth IRA contributions because their income exceeds the limit may also benefit from this strategy. Using the same strategy, even a taxpayer who can make a deductible contribution to a traditional IRA can elect to make it nondeductible, providing the same result as above. Self-Employed Retirement Plans - The maximum deduction for a self-employed individual’s contribution on their own behalf to a profit-sharing or SEP plan for 2014 is the lesser of 20% of net self-employment earnings (after the deduction for one-half of self-employment taxes) or $52,000 (up from $51,000 in 2013). In addition, a self-employed individual who is age 50 or older can make an additional catch-up contribution of $5,500.Self-employed individuals are also allowed a 401(k)-style elective deferral of the lesser of the annual maximum ($17,500 in 2013 and 2014) or the net profit from the self-employed business less the profit-sharing or SEP contribution. Wed, 19 Feb 2014 19:00:00 GMT Planning Pension Distributions http://www.mytrivalleytax.com/blog/planning-pension-distributions/438 http://www.mytrivalleytax.com/blog/planning-pension-distributions/438 Tri-Valley Tax & Financial Services Inc An individual may begin withdrawing, without penalty, from his or her qualified pension plans at the age of 59-1/2. Generally, distributions before age 59-1/2 are subject to a federal penalty equal to 10% of the taxable amount of the distribution, but there are several exceptions that will allow earlier withdrawal without penalty. Upon reaching age 70-1/2, you are required to take distributions from your plans or face a substantial penalty for failing to do so. Impact of Your Marginal Rate - If you are able to plan your withdrawals, you can save considerable tax dollars. This is not always possible, but the basic premise is to take distributions and pay the resulting tax in years when your marginal rate is low. Also watch for years when, for a variety of reasons, your taxable income is negative and some amount of distributions could be taken tax-free if age 59-1/2 and over. The penalty only applies to those under 59-1/2. Impact on Social Security - For retired individuals receiving Social Security benefits, planning IRA distributions can also be beneficial. Social Security itself is only taxable when the total of one-half of the taxpayer’s Social Security benefits plus the taxpayer’s other income exceeds $25,000 ($32,000 for a married couple filing jointly). Once this threshold is reached, every additional dollar of other income will cause 50% to 85% of the Social Security benefits to also become taxable. Therefore, if a taxpayer’s other income is under the threshold, it is generally good practice to withdraw just enough taxable IRA funds to bring the income up to the threshold amount, even if the funds are not needed in that year. They can be set aside for a future year when they might be used for some unplanned need or large purchase. However, this strategy may not work if IRA distributions are required to be made (see next section). Minimum Distribution Requirements - The IRS does not allow taxpayers to keep funds in qualified plans indefinitely. Eventually, assets must be distributed and taxes paid. If there are no distributions, or if the distributions are not large enough, the owner may have to pay a 50% penalty of the amount not distributed as required. Generally, distributions must begin in the year the plan owner reaches the age of 70-1/2. In most cases, the required minimum distribution can be figured using the “life” factor from the following table, which is divided into the value of the account as of the end of the preceding tax year. So, for example, an individual who reaches age 73 in 2014 and whose IRA had a value on December 31, 2013 of $50,000, would be required to withdraw $2,024.29 in 2014 ($50,000/24.7). UNIFORM LIFETIME TABLE Age Life Age Life Age Life Age Life Age Life 70 27.4 80 18.7 90 11.4 100 6.3 110 3.1 71 26.5 81 17.9 91 10.8 101 5.9 111 2.9 72 25.6 82 17.1 92 10.2 102 5.5 112 2.6 73 24.7 83 16.3 93 9.6 103 5.2 113 2.4 74 23.8 84 15.5 94 9.1 104 4.9 114 2.1 75 22.9 85 14.8 95 8.6 105 4.5 115 1.9 76 22.0 86 14.1 96 8.1 106 4.2 77 21.2 87 13.4 97 7.6 107 3.9 78 20.3 88 12.7 98 7.1 108 3.7 79 19.5 89 12.0 99 6.7 109 3.4 Wed, 19 Feb 2014 19:00:00 GMT Explore Education Tax Incentives http://www.mytrivalleytax.com/blog/explore-education-tax-incentives/439 http://www.mytrivalleytax.com/blog/explore-education-tax-incentives/439 Tri-Valley Tax & Financial Services Inc Congress, through the years, has provided a variety of tax incentives to help defray the cost of education. Some require long-term planning to become beneficial, while others provide current tax deductions or credits. Section 529 Plans - Section 529 Plans (named after the section of the IRS Code that created them) are plans established to help families save and pay for college in a tax-advantaged way and are available to everyone, regardless of income. These state-sponsored plans allow you to gift large sums of money for a family member’s college education while maintaining control of the funds. The earnings from these accounts grow tax-deferred and are tax-free, if used to pay for qualified higher education expenses. They can be used as an estate-planning tool as well, providing a means to transfer large amounts of money without gift tax. With all these tax benefits, 529 Plans are an excellent vehicle for college funding. Section 529 Plans come in two types, allowing you to either save funds in a tax-free account to be used later for higher education costs, or to prepay tuition for qualified universities. For 2014, you can contribute $14,000 ($28,000 for married couples who agree to split their gift) a year without gift tax implications. The annual amount is subject to inflation-adjustment, so call for the limit for other years. There is also a special gift provision allowing the donor to prepay five years of gifts up front without gift tax. No income tax deduction is allowed for the amount contributed. Coverdell Education Savings Account - These accounts are actually education trusts that allow nondeductible contributions to be invested for a child’s education. Tax on earnings from these accounts is deferred until the funds are withdrawn, and if used for qualified education purposes, the entire withdrawal can be tax-free. Qualified use of these funds includes elementary and secondary education expenses in addition to post-secondary schools (colleges). A total of $2,000 per year can be contributed for each beneficiary under the age of 18. The ability to contribute to these plans phases out when modified adjusted gross income is between $190,000 and $220,000 for married taxpayers filing jointly and between $95,000 and $110,000 for all others. Education Tax Credits - Two tax credits, the American Opportunity Credit (partially refundable) and the Lifetime Learning Credit (nonrefundable), are available for qualified post-secondary education expenses for a taxpayer, spouse and eligible dependents. Both credits will reduce one’s tax liability dollar for dollar until the tax reaches zero. The credit is not allowed for taxpayers who file Married Separate returns. The American Opportunity Credit is a credit of up to $2,500 per student per year, covering the first four years of qualified post-secondary education. The credit is 100% of the first $2,000 of qualifying expenses plus 25% of the next $2,000 for a student attending college on at least a half-time basis. 40% of the American Opportunity credit is refundable (if the tax liability is reduced to zero). The Lifetime Learning Credit is a credit of up to 20% of the first $10,000 of qualifying higher education expenses. Unlike the American Opportunity Credit, which is on a per-student basis, this credit is per taxpayer. In addition to post-secondary education, the Lifetime Credit applies to any course of instruction at an eligible institution taken to acquire or improve job skills. Qualifying expenses for these credits is generally limited to tuition. However, student activity fees and fees for course-related books, supplies and equipment qualify if they must be paid directly to the educational institution for the enrollment or attendance of the student. You may qualify for this credit even if you did not pay the tuition. If a third party (someone other than the taxpayer or a claimed dependent) makes a payment directly to an eligible educational institution for a student’s qualified tuition and related expenses, the student would be treated as receiving the payment from the third party, and, in turn, paying the qualified tuition and related expenses. Furthermore, qualified tuition and related expenses paid by a student would be treated as paid by the taxpayer if the student is a claimed dependent of the taxpayer. Education Loan Interest - You can deduct qualified interest of $2,500 per year in computing AGI. This is not limited to government student loans and could be home equity loans, credit card debt, etc., provided the debt was incurred solely to pay qualified higher education expenses. For 2014, this deduction phases out for married taxpayers with an AGI between $130,000 and $160,000 and for unmarried taxpayers between $65,000 and $80,000. The phase out range is inflation adjusted annually, so please call for limits other than those shown for 2014. This deduction is not allowed for taxpayers who file married separate returns. Wed, 19 Feb 2014 19:00:00 GMT Make the Most of Your Deductions http://www.mytrivalleytax.com/blog/make-the-most-of-your-deductions/440 http://www.mytrivalleytax.com/blog/make-the-most-of-your-deductions/440 Tri-Valley Tax & Financial Services Inc As you plan for your tax year, keep in mind that some tax deductions are “above-the-line” and are available whether deductions are itemized or not. In addition to the educational “above-the-line” deductions, the following deductions are noteworthy. Health Savings Accounts - A Health Savings Account is a trust account into which tax-deductible contributions may be made by qualified taxpayers who have high deductible medical insurance plans. Interest earned on the HSA balance is tax-free. The funds from these accounts are then used to pay qualified medical expenses not covered by the medical insurance for an eligible individual. If these funds are not used, they roll over year to year. Once the taxpayer turns 65, the funds can be used as a retirement plan (taxable when withdrawn, but not subject to a withdrawal penalty) or saved for future medical expenses. Since the contribution is an above-the-line deduction, a taxpayer need not itemize deductions to take advantage of this tax break. High deductible plans are defined as those with the following deductible amounts for 2014: Self-only coverage with an annual deductible of $1,250 or more and limits on annual expenses, other than premiums, required to be paid by the plan during the year, up to $6,350; or Family coverage with an annual deductible of $2,500 or more and limits on annual expenses, other than premiums, required to be paid by the plan during the year, up to $12,700. The deductibles and maximum out of pocket limits are inflation adjusted annually, so please call for amounts for years other than 2014. Itemized Deductions - A taxpayer with deductible expenses exceeding the standard deduction amount will want to itemize their deductions. Itemized deductions consist of five basic categories, each with its own limitations and special considerations. If your deductions only marginally exceed the standard deduction, consider “bunching” your deductions in one year. This allows you to produce higher than normal itemized deductions that year and then take the standard deduction the other year. The following is an overview of the itemized deductions o Medical Expenses - Deductible medical expenses are limited to unreimbursed expenses for the taxpayer, his or her spouse and dependents that exceed 10% (7-1/2% if age 65 or older) of the taxpayer's AGI for the year. For AMT purposes, the medical deduction of a taxpayer who is age 65 or more will be less because only the excess of unreimbursed expenses above 10% of AGI is deductible. For younger taxpayers, their regular tax and AMT medical deduction will be the same amount. Expenses most frequently thought of as deductible medical expenses include medical and dental insurance premiums, charges by doctors and dentists and the cost of prescription medication. Medical insurance premiums and other expenses paid with pre-tax dollars (e.g., through an employer's cafeteria plan) cannot be included. Generally, travel costs (not including meals) may be a deductible expense if the trip is primarily for medical purposes. Cosmetic surgeries are generally not deductible. Some less common deductions include the following: - The cost of a weight loss program (not including food) for the treatment of a specific disease or diseases (including obesity) diagnosed by a physician. - Medicare-B premium payments and Medicare-D premiums for drug coverage. - Participation in smoking-cessation programs and for prescribed drugs (but not nonprescription items such as gum or patches) designed to alleviate nicotine withdrawal. - Elder Care, generally including the entire cost of nursing homes, homes for the aged and assisted living facilities. - Medical dependent - For medical purposes, an individual may be a dependent even if his gross income precludes a dependency exemption, thus enabling the taxpayer to deduct the individual’s medical expenses that the taxpayer paid. A child of divorced parents is considered a dependent of both parents for medical expenses purposes (so that each parent may deduct the medical expenses he or she pays for the child.) - Long-term care insurance - Amounts paid for long-term care services and certain premiums paid on long-term care insurance are includible as medical expenses. The maximum amount of long-term care premiums treated as medical expenses depends on the insured’s age and is inflation-indexed annually. For values for years other than 2014 please call this office. Deductio Limi2014 Long-Term Care Insurance Age 40 or less 41 to 50 51 to 60 61 to 70 71 & Older Limit $370 $700 $1,400 $3,720 $4,660 o Taxes - Deductible taxes primarily consist of real property taxes, state and local income taxes and personal property taxes. Planning tip: Since taxes are not deductible for AMT purposes, taxpayers should attempt to minimize the payment of taxes in a year they are subject to the AMT if they can avoid late payment penalties for the tax payments. Where property taxes were paid on unimproved and unproductive real estate, a taxpayer can annually elect to capitalize the taxes in lieu of deducting them. For 2013, taxpayers have the option of deducting on Schedule A as part of their itemized deductions the LARGER of: (1) State and local income tax paid, or (2) State and local sales tax paid during the year. This option has expired for 2014 and subsequent years. However, there is a chance the provision could be retroactively extended by Congress. Please call for possible future developments. o Interest - The only interest that is deductible as an itemized deduction is home mortgage interest and investment interest. Although this category does not have an AGI limitation, each interest type has special limitations. Home mortgage interest is limited to the interest paid on acquisition debt that does not exceed $1 million and home equity debt (not exceeding $100,000) on the taxpayer’s main home and a designated second home. In addition, the interest on most equity debt is not deductible against the AMT. Note: Home acquisition debt is the original debt (current balance) incurred to purchase or substantially improve the home and is not increased by refinanced debt. Taxpayers can elect to treat any debt secured by the home as unsecured. The election is irrevocable without IRS consent. By making the election, the interest on the loan can be allocated to use of the proceeds, except none of the interest can be allocated back to the home itself. This election is for income tax purposes only and does not change how the loan is secured with the lender. If made, the election applies for both regular tax and AMT purposes, and it applies for the year the election is made and all future years. There is no specific IRS form to use to make the election. Instead, the taxpayer should attach a statement to their return (timely filed) for the year the election is to be effective stating the election is to apply. Investment interest is interest on debts incurred to acquire investments such as securities or land. The investment interest deduction is limited to net investment income (investment income less investment expenses), and any excess not deductible in the current year is carried over to future years. Interest on debt to acquire tax-free investment income is not deductible. A taxpayer can elect to treat qualified dividends and long-term capital gains as investment income in order to increase the amount of deductible investment interest. However, the same capital gains and qualified dividends are then not eligible for the lower capital gains/qualified dividends tax rate. o Charitable Contributions - A taxpayer may, within certain limits, deduct charitable contributions of cash and property to qualified organizations to the extent he or she receives no personal benefit from the donations. All cash contributions regardless of the amount must be documented with a written verification from the charity or a bank record. Non-receipted cash contributions are not deductible. Non-cash contributions also require an acknowledgement of the contribution from the qualified charitable organization except for donations of $250 or less left at unmanned drop points. For non-cash contributions of more than $5,000 (except for publicly-traded securities), a taxpayer is generally required to have a qualified appraisal of the property that was donated. Please call this office for further details. Charitable deductions are limited by a percent of income depending upon the type of contribution. Contributions in excess of the AGI limitation may be carried forward for five years. Although there are 20% and 30% of AGI limitations, generally, contributions to qualified organizations are deductible to the extent they don’t exceed 50% of the taxpayer’s Adjusted Gross Income. One notable exception is the 30% limitation for gifts of capital gains property, where the contribution is based on the fair market value of the property. Frequently overlooked contributions include those made to governmental organizations such as schools, police and fire departments, parks and recreation, etc. Uniforms, travel expenses and out-of-pocket expenses for a charity are also deductible, but not the value of your time or the cost of equipment such as computers, phones, etc., if you retain ownership. Congress imposed some tough rules that substantially limit the deduction for the popular charitable car donation. If the claimed value of the vehicle exceeds $500, the deduction will generally be limited to the gross proceeds from the charity’s sale of the vehicle. The IRS provides Form 1098-C that incorporates all of the required acknowledgement elements for the donee (charitable organization) to complete. The donor is required to attach copy B of the 1098-C to his or her federal tax return when claiming a deduction for contribution of a motor vehicle, boat or airplane. There is an exception to the rules for donated vehicles that the charity retains for its own use “to substantially further the organization's regularly conducted activities or provides to a needy family.” Please call this office for more information. For 2013, taxpayers age 70½ and over were allowed to make direct distributions (up to $100,000 per year) from their Traditional or Roth IRA account to a charity. The distribution is tax-free, and counts toward the taxpayer’s required minimum distribution for the year, but there is no charitable deduction. This provision can be very beneficial to taxpayers who have Social Security income and/or do not itemize their deductions. This option has expired for 2014 and subsequent years. However, there is a chance the provision could be retroactively extended by Congress. Please call for possible future developments. o Miscellaneous Deductions - Miscellaneous deductions fall into two basic categories: those that are reduced by 2% of a taxpayer's AGI and those that are not. - Those Subject to the 2% Reduction - This category generally includes your investment expenses, costs of having your tax return prepared, and employee business expenses. - Those NOT Subject to the 2% Reduction - This category includes gambling losses (but cannot exceed the amount reported as gambling income), personal casualty losses (after first reducing each loss by $100 and the total loss for the year by 10% of your AGI), repayments of income (over $3,000) reported in prior years and estate tax deductions. The estate tax deduction is considered by many to be the most overlooked deduction in taxes. It is a deduction based on the additional taxes paid as a result of the same income being taxed to both the estate and to the beneficiaries of the estate. Only certain types of income are doubly taxed. As an example, if the decedent had a Traditional IRA account, the value of the IRA would be included in the decedent’s estate and also would be taxable to the beneficiary. If the estate paid any tax at all (on Form 706), the beneficiary in this example would have an estate tax deduction equal to the portion of the estate tax paid attributable to the IRA. Wed, 19 Feb 2014 19:00:00 GMT Tax Planning For Your Business http://www.mytrivalleytax.com/blog/tax-planning-for-your-business/441 http://www.mytrivalleytax.com/blog/tax-planning-for-your-business/441 Tri-Valley Tax & Financial Services Inc • Business Entity Choices - Non-tax considerations generally take precedence in selecting the appropriate structure for your business. However, tax considerations can also play an important role in your decision. Choosing the right business entity at the inception of your business is important, and all aspects should be carefully considered.Your choices of business entities include: Corporation, Sub-S Corporation, Partnership, and Limited Liability Company; if there are no co-owners, one can choose a Sole Proprietorship. HOW BUSINESS ENTITIES ARE TAXED To TheBusiness To TheOwner(s) Sole Proprietorship No Yes Partnership No Yes Corporation Yes Dividends S-Corporation No (2) Yes Limited Liability Co. Depends Upon Structure (2) Exceptions apply • Business Start-Up Costs - A frequent question is how the start-up costs of a business are handled before actually in business. Typical expenses include legal consultation, travel, surveys, establishment of suppliers, employee training, etc. Current law allows a taxpayer to deduct up to $5,000 of start-up costs in the year the business begins; a partnership or corporation may expense up to $5,000 of organizational costs. Each $5,000 amount must be reduced, but not below zero, by the amount of accumulated start-up expenses and organizational costs in excess of $50,000. If not deductible in the year the business begins, these expenses are deducted ratably over 15 years. • Purchasing an Ongoing Business - If you are considering purchasing an ongoing business that is not a stock transaction, it is important that you and the seller agree on how the purchase price is allocated among the various elements of the business. The allocation can have significant tax ramifications for both the buyer and seller, and the IRS requires the treatment between the buyer and seller to be consistent. Some elements can be depreciated or written off quicker than others, while some cannot be written off at all. For the seller, the sales prices of some elements receive capital gains treatment, while others generate ordinary income. When negotiating the sale, be sure it includes the agreed allocation.• Deducting the Cost of Business Assets - Depreciation is a way of recovering the cost of an item purchased for business use over a period of time. Some assets are depreciated over a specified life. For some assets, the depreciation is straight-line, while for others, accelerated methods that front-load the deduction may be used. Following are examples of the depreciable life for some commonly encountered business assets. Assets that are used only partially for business must be prorated for business use. SAMPLE DEPRECIABLE LIVES Asset DepreciableLife Agricultural Equipment 7 Yrs Automobiles (3) 5 Yrs Commercial Real Estate 39 Yrs Land Not Depreciable Land Improvements 15 Yrs Office Equipment 5 Yrs Office Furnishings 7 Yrs Residential Real Estate 27.5 Yrs Trucks (3) 5 Yrs (3) Vehicles under 6,000 lbs. gross unladen weight have additional deduction restrictions. (4) The Sec 179 deduction for SUVs is limited to $25,000 and applies to sport utility vehicles rated at 14,000 pounds gross vehicle weight or less. Expense Deduction - For 2014, you may also elect to expense up to $25,000 ($12,500 if filing married separate), (down from $500,000 on 2013) of the cost of certain assets (generally those with a depreciable life of seven years or less) the first year the asset is placed in business service (Sec 179 deduction). The deduction is limited to the income from all of the taxpayer’s trades and businesses. There are additional restrictions, called the investment limit, if more than $200,000 of assets are placed in service during the tax year. Note: The drastic reduction in the expense limit is the result of sun setting tax laws which Congress allowed to expire. However, there is a chance Congress could retroactively increase the limit. Please call for further updates. Excluded from this limitation is any vehicle that:- is designed for more than nine individuals in seating rearward of the driver's seat;- is equipped with an open cargo area, or a covered box not readily accessible from the passenger compartment, of at least six feet in interior length; or - has an integral enclosure, fully enclosing the driver compartment and load carrying device, does not have seating rearward of the driver’s seat, and has no body section protruding more than 30 inches ahead of the leading edge of the windshield.Bonus Depreciation - Bonus depreciation expired after 2013.• Special Breaks for Incorporated Businesses - If a business is incorporated, there are two special tax provisions that may apply. You may want to qualify the stock as “Small Business Stock.” When stock of this type is sold or exchanged, losses up to $50,000 ($100,000 if married filing jointly) per year may be deducted as an ordinary loss instead of a capital loss, which would be limited to your capital gains plus $3,000 ($1,500 if filing as married separate). If the business is a C-Corporation and you acquired the stock at original issue, you may also qualify for a 50%, 75% or 100% exclusion of gain for certain small business stock held for more than five years (the applicable exclusion percentage depends on when the stock was acquired). Or, you may choose to roll over the gain from qualified small business stock held for more than six months by buying another small business stock within six months.• Business Automobiles - When a vehicle is used for business purposes, the taxpayer can deduct the business portion of the operating expenses on the business. If the car is used for both business and personal purposes, you may deduct only the cost of its business use. One can generally determine the expense for the business use of the car in one of two ways: the standard mileage rate method or the actual expense method.- Standard Mileage Rate Method—The standard mileage rate takes the place of fuel, oil, insurance, repair, maintenance, and depreciation (or lease) expenses. Beginning in January 2014, the standard mileage rate is 56 cents per mile (down from 56.5 cents in 2013). In addition, the cost of business-related parking and tolls is deductible. Note: Because of the volatility of fuel prices, the mileage rates may vary during the year.Caution: If the standard mileage rate is not used in the first year the vehicle is placed in service, it cannot be used in future years. If, in a subsequent year, the taxpayer switches to the actual method, the straight-line method for depreciation must be used. If the car is leased, continue to use the standard mileage rate in future years. The standard mileage rate can be used for up to four vehicles that are being used simultaneously in business.- Actual Expenses Method: To use the actual expense method, determine the entire actual cost of operating the car for the year and then determine the business portion attributable to the business miles driven. Parking fees and tolls attributable to business use are also deductible.Both methods can include interest paid on the car loan when deducted on business returns. However, the interest deduction is not allowed for employees deducting job connected car expenses as part of their itemized deductions. Unfortunately, if you deduct actual expenses for the business use of your car, you will probably find your write-offs for depreciation restricted due to so-called luxury car limitations. And most all cars (including trucks or vans) fit the IRS definition of a “luxury vehicle,” regardless of their cost. If a vehicle is four-wheeled, used mostly on public roads, and has an unloaded gross weight of no more than 6,000 pounds, the car is considered a “luxury vehicle.” The auto depreciation limit for 2013 is $3,160. An additional $200 allowance is added to the above limitations for certain passenger autos built on a truck chassis, including minivans and sport utility vehicles (SUVs). In addition, if bonus depreciation is elected, the maximum will be increased by $8,000. The rates for 2014 will be similar but without the availability of the $8,000 bonus depreciation which expired after 2013. In an effort to rein in the practice of purchasing SUVs as a tax shelter, Congress has placed a limit of $25,000 on the §179 deduction for certain vehicles. The limit applies to sport utility vehicles rated at 14,000 pounds gross vehicle weight or less. Excluded from this limitation is any vehicle that: is designed for more than nine individuals in seating rearward of the driver's seat; is equipped with an open cargo area, or a covered box not readily accessible from the passenger compartment, of at least six feet in interior length; or has an integral enclosure, fully enclosing the driver compartment and load carrying device, does not have seating rearward of the driver’s seat, and has no body section protruding more than 30 inches ahead of the leading edge of the windshield.• Self-Employed Health Insurance Deduction - Self-employed individuals may deduct, as an adjustment to income, 100% of health insurance expenses paid for themselves and their families. Don’t overlook as eligible amounts for this deduction both amounts paid for long-term care insurance premiums, up to the annual age-based limits, and Medicare-B and -D premium payments. In addition, as part of the recently-enacted health care provisions, a child no longer need qualify as your dependent to be included on your self-employed health insurance plan. They need only be your child under the age of 27. This would include children that are self-supporting or married.• Home-Based Businesses Can Deduct Office-In-Home Expenses - Deducting the costs of a home office gives rise to several issues:(1) the qualifications that must be met to take that deduction;(2) expenses that can be deducted; and(3) the tax implications when the home containing the home office is sold. - Qualifications for the Deduction - Generally, a home office that is part of a residence is deductible only if used regularly and exclusively as a principal place of business, or as a place to meet or deal with customers or clients in the ordinary course of business. For home-based businesses, the home office qualifies as a principal place of business if the office is used on an exclusive and regular basis for administrative or management activities of any trade or business of the taxpayer, and there is no other fixed location of the business where the taxpayer conducts substantial administrative or management activities of the business.- Home Office Expenses - Home office expenses are divided into two categories: those that are directly related to the office, such as painting the room, installing a phone, etc., and indirect expenses that relate to both the office and personal portions of the home, such as utilities, insurance, real estate taxes, home mortgage interest, repairs benefiting the entire home and depreciation if the home is owned or rent if the home is rented. There is also a “safe harbor” allowance that can be used in lieu of actual expenses and depreciation (or rent payments) that allows a deduction of $5 per square foot up a maximum of 300 square feet. The expenses for the business use of a home cannot exceed the income from the business requiring the office. • Acquire Equipment - If you wish to reduce your profits, consider purchasing some additional equipment or machinery needed for the business. This will allow you to take advantage of the depreciation and expensing deductions. • Establish A Retirement Plan - If you don’t have a retirement plan established, this might be the time to consider one. There are a variety of plans available, including Keogh Defined Contribution and Profit Sharing Plans, which must be established before the end of the year, or a SEP Plan, which can be established after the end of the year.• Reduce Inventory - The cost of goods is a deduction against business income. However, any inventory remaining at the conclusion of the business year will be used to reduce your cost of goods sold, and thereby increase your profits for the year. You may wish to minimize the inventory before the end of the business year.• Domestic Production Deduction - For 2014 (the same as 2013), the domestic production deduction for both corporations and individual business owners is 9%. The deduction is 9% of the lesser of the individual taxpayer's:(1) Qualified production activities income for the year, or (2) Adjusted gross income* for the year determined without regard to this deduction (but limited for any year to 50% of the W-2 wages paid by the taxpayer as an employer) during the tax year. So, for example, a sole proprietor who has no employees would not be eligible for this deduction. The main beneficiaries of this deduction are businesses that produce goods, develop software or construct property in the U.S.*Substitute "taxable income" in lieu of adjusted gross income for other than individuals.Example - Computing Domestic Production Deduction: Linda actively conducts a business as a sole proprietor manufacturing and selling ceramic dishware, all in the United States. She has two employees. Linda's qualified production activities income (QPAI) for 2014 is $55,000, which is the same amount as her net earnings from self-employment. The W-2s she filed for the employees show qualifying wages of $80,000. Linda's AGI before the domestic production deduction (Sec. 199 of the Tax Code) is $45,000. Her Section 199 deduction will be $4,050. The applicable percentage for 2014 is 9%; the lesser of QPAI or AGI is AGI of $45,000. 9% x $45,000 = $4,050. Since 50% of W-2 wages (50% x $80,000 = $40,000) is greater than $4,050, the deduction is not limited by the W-2 wage element, and the deduction will be $4,050. Wed, 19 Feb 2014 19:00:00 GMT Real Estate Rental Limitations http://www.mytrivalleytax.com/blog/real-estate-rental-limitations/442 http://www.mytrivalleytax.com/blog/real-estate-rental-limitations/442 Tri-Valley Tax & Financial Services Inc Real estate rental income is business income but is not subject to Social Security taxes. Real estate rentals are also considered passive activities. Generally, passive activity losses are only deductible to the extent of passive activity income. An exception allows most individuals to annually deduct up to $25,000 ($12,500 for married filing separate taxpayers who live apart the entire tax year) of real estate rental losses. This dollar limit phases out ratably at AGI between $100,000 and $150,000 ($50,000 and $75,000 for married filing separate taxpayers who live apart the entire tax year). Any unallowed passive loss will carry over to future years. If you qualify as a real estate professional, the passive loss limitations will not apply to your real estate rental activities. Wed, 19 Feb 2014 19:00:00 GMT Avoiding Tax Penalities http://www.mytrivalleytax.com/blog/avoiding-tax-penalities/3704 http://www.mytrivalleytax.com/blog/avoiding-tax-penalities/3704 Tri-Valley Tax & Financial Services Inc Many tax penalties are substantial and can dramatically increase a tax bill. Penalties can be assessed for a variety of reasons. Some may result from a taxpayer's carelessness or inattention to tax details. Other penalties are incurred due to the overstatement of deductions, the failure to report income, missing documentation, negligence or procrastination. Taxpayers may also be penalized for intentional acts of fraud and/or filing frivolous tax returns. The following is an overview of the federal penalties that can be imposed on a taxpayer. Filing and Paying Late - These penalties will apply when a taxpayer fails to file taxes on time or does not pay the taxes he or she owes. The combined penalty is 5% of the unpaid tax for each month or part of a month that the return is late, but not for more than five months. The late-filing penalty is reduced if combined with the late payment penalty. Thus, the 5% includes a 4½% penalty for filing late and a ½% penalty for paying late. The 25% combined maximum penalty includes 22½% for filing late and 2½% for paying late. The ½% penalty for paying late is not limited to five months. This penalty will continue to increase to a maximum of 25% until the taxpayer pays the tax in full. The maximum 25% penalty for paying late is in addition to the maximum 22½% late-filing penalty, bringing the total penalty to 47½%. If a taxpayer does not file a return within 60 days of the due date, the minimum penalty is $135 or 100% of the balance of the tax due on the return—whichever is smaller. Underpayment of Estimated Tax - Our tax system is a “pay-as-you-go” system. To facilitate that concept, the government has provided several means of assisting taxpayers in meeting the “pay-as-you-go” requirement. These include: • Payroll withholding for employees; • Pension withholding for retirees; and • Estimated tax payments for self-employed individuals and those with other sources of income not covered by withholding. When a taxpayer fails to prepay the required amount, he or she can be subject to the underpayment penalty. This penalty is 3% higher than the federal short-term interest rate, and the penalty is computed on a quarterly basis. Federal tax law provides ways to avoid the underpayment penalty. If the underpayment is less than $1,000, no penalty is assessed. In addition, the law provides “safe harbor” (minimum) prepayments. There are two safe harbors, which are discussed below: 1. The first safe harbor is based on the tax owed in the current year. If a taxpayer's payments equal or exceed 90% of what is owed in the current year, he or she can escape a penalty. 2. The second safe harbor is based on the tax owed in the immediately preceding tax year. This safe harbor is generally 100% of the prior year's tax liability. However, for higher-income taxpayers whose AGI exceeds $150,000 ($75,000 for married taxpayers filing separately), the prior year's safe harbor is 110%. Dishonored Check - A penalty is charged if a taxpayer's check is returned because of insufficient funds. For checks of $1,250 or more, the penalty is 2% of the check amount. For checks of less than $1,250, the penalty is the lesser of $25 or the amount of the check. Paying Late - The penalty is ½% of the unpaid tax for each month or part of a month that the tax is unpaid. If the IRS issues a Notice of Intent to Levy, and the taxpayer does not pay the balance within 10 days, the penalty increases to 1% per month. The penalty cannot be more than 25% of the tax that was paid late. The late payment penalty is reduced to ¼% per month for those paying in installments. Missing ID Number - This penalty is $50 for each missing number. This penalty is charged when a taxpayer does not provide a social security number (SSN) for himself, a dependent, or another person or does not provide his/her SSN to another person when required. Penalty for Unreported Tips - This penalty is charged if a taxpayer does not report tips to his/her employer. It equals 50% of the social security tax on the unreported tips. Negligence - This “accuracy-related” penalty is 20% of the tax underpayment that is due to negligence or tax valuation misstatements. The “accuracy-related” penalty is imposed if any part of an underpayment of tax is due, either to negligence or a taxpayer's disregard for rules or regulations but without intent to defraud. The penalty is 20% of the portion of the underpayment attributable to the negligence. “Negligence” includes any failure to make a reasonable attempt to comply with the law or to exercise ordinary and reasonable care in preparing a tax return, as well as failure to keep adequate books and records or substantiate items properly. “Disregard” includes any careless, reckless or intentional disregard. Fraud - The civil fraud penalty is one of the most powerful tools that the IRS has. This penalty applies if any part of a tax underpayment is due to fraud, and the penalty equals 75% of that portion of the taxpayer's underpayment attributable to fraud. Although the IRS has the burden of proving fraud with clear and convincing evidence, if it shows that any portion of an underpayment is due to fraud, the entire underpayment is treated as attributable to fraud except for any portion that the taxpayer shows (by a preponderance of the evidence) not to be attributable to fraud. No time limit exists on the assessment and collection of tax if a fraudulent return is filed. Likewise, a return subject to the civil fraud penalty is treated as fraudulent for bankruptcy purposes. As a result, taxes shown on such a return are not normally discharged in a bankruptcy proceeding. Although civil fraud is not defined by statute, some courts have defined it as an actual and deliberate, or willful, wrongdoing with specific intent to evade a tax believed to be owed. Fraud-Late Filing Penalty - The law allows the IRS to increase the penalty for filing late if a taxpayer did not file on time due to fraud. The penalty is 15% of the amount of tax that should have been reported on the tax return and an additional 15% for each additional month or part of a month that the taxpayer didn't file a return. The penalty cannot exceed 75% of the unpaid tax. “Excessive” Claim Penalty - Generally, if a claim for a refund or credit for income tax is made for an “excessive amount,” the person making the claim is liable for a penalty equal to 20% of the excessive amount. The “excessive amount” is the amount by which the amount of a person's claim for a refund or credit for any tax year exceeds the amount of the claim allowable under the Internal Revenue Code for that tax year. The penalty does not apply if it is shown by the taxpayer that the claim for the excessive amount has a reasonable basis or if any portion of the excessive amount or credit is subject to an accuracy-related or fraud penalty. Frivolous Return - In addition to any other penalties, the law imposes a penalty of $5,000 for filing a frivolous return. A frivolous return is one that does not contain information needed to figure the correct tax or shows a substantially incorrect tax because the taxpayer takes a frivolous position or desires to delay or interfere with the tax laws. This includes altering or striking out the preprinted language above the space where the taxpayer signs the tax return. It is possible that some of the penalties listed above can be reduced or removed if a taxpayer can show reasonable cause. The IRS Penalty Handbook used by IRS agents defines reasonable cause as those reasons deemed administratively acceptable to the IRS: “Reasonable cause relief is generally granted when the taxpayer exercises ordinary business care and prudence in determining their tax obligations but is unable to comply with those obligations.” The Handbook also says, “Each case must be judged individually based on the facts and circumstances at hand.” Wed, 19 Feb 2014 19:00:00 GMT Bunching Your Deductions Can Provide Big Tax Benefits http://www.mytrivalleytax.com/blog/bunching-your-deductions-can-provide-big-tax-benefits/9109 http://www.mytrivalleytax.com/blog/bunching-your-deductions-can-provide-big-tax-benefits/9109 Tri-Valley Tax & Financial Services Inc If your tax deductions normally fall short of itemizing your deductions or even if you are able to itemize, but only marginally, you may benefit from using the “bunching” strategy. The tax code allows most taxpayers to utilize the standard deduction or itemize their deductions if that provides a greater benefit. As a rule, most taxpayers just wait until tax time to add everything up and then use the higher of the standard deduction or their itemized deductions. If you want to be more proactive, you can time the payments of tax-deductible items to maximize your itemized deductions in one year and take the standard deduction in the next. For the most part, itemized deductions include medical expenses, property taxes, state and local income (or sales) taxes, home mortgage and investment interest, charitable deductions, unreimbursed job-related expenses, and casualty losses. The “bunching strategy” is more commonly associated with medical expenses, tax payments and charitable deductions, although there are circumstances in which the other deductions might come into play. There are many opportunities to bunch deductions, and the following are examples of the bunching strategies most commonly used:Medical Expenses – You contract with a dentist for your child’s braces. The dentist may offer you an up-front, lump sum payment or a payment plan. By making the lump sum payment, the entire cost is credited in the year paid, thereby dramatically increasing your medical expenses for that year. If you do not have the cash available for the up-front payment, then you can pay by credit card, which is treated as a lump-sum payment for tax purposes. If you use a credit card, you must realize that the credit card interest is not deductible, and you need to determine if incurring the interest is worth the increased tax deduction. Another important issue with medical deductions is that only the amount of the total medical expenses that exceeds 10% (7.5% if age 65) of your adjusted gross income (AGI) is actually deductible. If you are caught by the Alternative Minimum Tax (AMT), then only the amount that exceeds 10% of your AGI is actually deductible. So, there is no tax benefit in bunching medical deductions if the total is less than your AGI threshold.If the current year is an abnormally high-income year, you may, where possible, wish to put off making medical expense payments until the subsequent year when the 10% (7.5%) threshold is less. Taxes – Property taxes on real estate are generally billed annually at mid-year, and most locales allow the tax bill to be paid in semi-annual or quarterly installments. Thus, you have the option of paying it all at once or paying in installments. This provides the opportunity to bunch the tax payments by paying one semi-annual installment or two quarterly installments and a full year’s tax liability in one year and only paying one semi-annual installment or two quarterly installments in the other year. In doing so, you are able to deduct 1-½ year’s taxes in one year and 50% of a year’s taxes in the other. If you are thinking of making the property tax payments late as a way to accomplish bunching, you should be cautious. The late payment penalty will probably wipe out any potential tax savings. If you reside in a state that has state income tax, the state income tax paid or withheld during the year is deductible as a federal itemized deduction. So, for instance, if you are paying state estimated tax in quarterly installments, the fourth-quarter estimate is generally due in January of the subsequent year. This gives you the opportunity to either make that payment before December 31st, and be able to deduct the payment on the current year’s return, or pay it in January before the January due date and use it as a deduction in the subsequent year. A word of caution about the itemized deduction for taxes! Taxes are only deductible for regular tax purposes. So, to the extent you are taxed by the AMT, you derive no benefits from the itemized deduction for taxes. Charitable Contributions – Charitable contributions are a nice fit for “bunching” because they are entirely payable at the taxpayer’s discretion. For example, if you normally tithe at your church, you could make your normal contributions during the year and then prepay the entire subsequent year’s tithing in a lump sum in December of the current year, thereby doubling up on the church contribution one year and having no deduction for charity in the other year. Normally, charities are very active with their solicitations during the holiday season, giving you the opportunity to make the contributions at the end of the current year or simply wait a short time and make them after the end of the year. If you think a “bunching” strategy might benefit you, please call this office to discuss the issue and set up an appointment for some in-depth strategizing. Wed, 19 Feb 2014 19:00:00 GMT Fine Tuning Capital Gains and Losses http://www.mytrivalleytax.com/blog/fine-tuning-capital-gains-and-losses/9110 http://www.mytrivalleytax.com/blog/fine-tuning-capital-gains-and-losses/9110 Tri-Valley Tax & Financial Services Inc Year-end has historically been a good time to plan tax savings by carefully structuring capital gains and losses. Conventional wisdom has always been to minimize gains by selling “losers” to offset the gains from “winners” and where possible, generate the maximum allowable $3,000 capital loss for the year. Long-term capital losses offset long-term capital gains before they offset short-term capital gains. Similarly, short-term capital losses offset short-term capital gains before they offset long-term capital gains (“long-term” means that the stock or property has been held over one year). Keep in mind that taxpayers may use up to $3,000 of total capital losses in excess of total capital gains as a deduction against ordinary income in computing adjusted gross income (AGI). Individuals are subject to federal income tax at a rate as high as 39.6% on short-term capital gains and ordinary income. But long-term capital gains are generally taxed at a maximum rate of 15% or 20%. All of this means that having long-term capital losses offset long-term capital gains should be avoided where possible, since those losses will be more valuable if they are used to offset short-term capital gains or ordinary income. Avoiding this requires ensuring that the long-term capital losses are not taken in the same year as the long-term capital gains. However, this is not just a tax issue; investment factors also need to be considered. It would be unwise to defer recognizing gain until the following year if there is too much risk that the property’s value will decline before it can be sold. Similarly, one wouldn’t want to risk increasing a loss on property that is expected to continue declining in value by deferring its sale until the following year. To the extent that taking long-term capital losses in a different year than long-term capital gains is consistent with good investment planning, a taxpayer should take steps to prevent those losses from offsetting those gains. Long-Term Capital Gains Rates - The capital gains rates are 0% to the extent that your marginal tax rate is 10% or 15%, and 15% to the extent your marginal rate is between 25% and 35%. This means that the 15% capital gains rate will apply for individuals who file the single status with taxable income in 2014 between $36,900 and $406,750. The 15% capital gains rate for married couples filing jointly will be in effect if their 2014 taxable income is between $73,800 and $457,600. For higher income taxpayers – those in the 39.6% tax bracket – the capital gains rate is 20% to the extent in the 39.6% tax bracket. The tax brackets are annually adjusted for inflation, so please call for brackets for years other than 2014. Individuals with large long-term capital gains in their investment portfolios might consider taking a profit up to the amount that would be taxed at 0%. The good news here is that the wash sale rules do not apply to assets sold at a gain. So if you like a stock, you are free to buy it back right away. If your state doesn’t have a lower tax rate on capital gains, then the additional state tax you’d pay from selling profitable capital assets will need to be weighed against the federal tax you’d potentially save when deciding whether to make tax sales before year-end. Example: You are single with an annual taxable income (income minus deductions and exemptions), before including any stock gains, of $30,000. Thus, the first $6,901 ($36,901 - $30,000) of capital gains added to your income will be in the zero capital gains tax bracket (no tax). The next $369,850 ($406,751- $36,901) of capital gains (without considering the 3.8% surtax on net investment income discussed later) would be taxed at 15%. After that, any additional capital gains are taxed at 20%. Thus when you take a gain, it can have a significant impact on the amount of tax you pay and careful planning can minimize the tax. This gives rise to the following strategies: If in any year some portion of your gain will be taxed at the zero capital gain rate, you should probably take that amount of gain since it produces no tax. If you have a substantial gain that when added to your other income will push some portion of the gain into the 20% capital gains bracket, you may be able to spread the gain over two or more years and keep more of the gain in the 15% capital gains bracket. This is done by structuring the sale as an installment sale. Unfortunately, the law doesn’t allow installment sales for publicly traded securities, so this strategy won’t work when you sell most stocks and bonds, but could be used when selling real estate. Increased Marginal Tax Rates – The marginal rates are 10, 15, 25, 28, 33, 35 and 39.6%, the highest rate being a new one. These rates apply to “ordinary” income including short-term capital gains. Conventional wisdom has always been to defer income, but depending upon your tax bracket and future anticipated income, it may be appropriate to consider accelerating your income to take advantage of a lower tax rate. Surtax on Net Investment Income - One should also be aware of the 3.8% Net Investment Income (NII) Tax taking effect in 2013. It will apply to higher-income taxpayers. This new tax, part of the healthcare reform legislation, imposes a 3.8% surtax on the lesser of net investment income (investment income less investment expenses) or the amount that the modified adjusted gross income exceeds a threshold of $200,000 ($250,000 for joint filers and $125,000 for married individuals filing separately). Taking a large gain in one year can increase your income and make you susceptible to the NII tax. However, where possible you might spread that gain over two or more years, and avoid the surtax by using the installment sale method mentioned above. Of course all of these tax-saving suggestions will go out the window if there is an overriding investment strategy or if there are investment risks to consider. It may be in your best interest to review your current year tax strategy with an eye to the future in order to maximize your benefits from gains or losses associated with capital assets. Please call this office for assistance. Wed, 19 Feb 2014 19:00:00 GMT Owner-Only Businesses Should Consider a Solo 401(k) Plan http://www.mytrivalleytax.com/blog/owner-only-businesses-should-consider-a-solo-401k-plan/9113 http://www.mytrivalleytax.com/blog/owner-only-businesses-should-consider-a-solo-401k-plan/9113 Tri-Valley Tax & Financial Services Inc It goes by many names - Solo 401(k), Mini 401(k) and single-participant 401(k). We will use Solo 401(k) in this article to describe probably the best type of pension plan for owner-only businesses. It provides for larger contributions, including a Roth option for a portion of the contribution, and the ability to borrow funds from the plan at reasonable rates. As a result, Solo 401(k) plans have become more attractive options than SEP-IRAs, Simple IRAs or profit-sharing or money purchase plans. In addition, if the plan permits and most do, assets for other retirement plans can be rolled over into the Solo 401(k) plan. Generally, Solo 401(k) plans are a natural fit for two categories of businesses. The first includes independent contractors, sole proprietors, and owner-only C or S corporations. The second is those who have dual incomes. They are W-2 wage earners as employees of a company that offers a 401(k) plan who also have consulting income from corporate directorships or freelance work that requires them to file a Schedule C as a sole proprietor. Since the 401(k) contribution limits apply to each individual for the year and not the individual plans, if the taxpayer has multiple 401(k) plans, he or she needs to make sure that not more than the annual limit is contributed to the combination of plans. The rules limit employer contribution (profit-sharing contribution) to 25% of compensation. The employee can also make salary deferral contributions up to $17,500*. Together, these contributions cannot exceed the lesser of $52,000* or 100% of compensation. In addition, if the employee is age 50 or over he or she can make an additional catch-up contribution of $5,500*. Example – Susan Lewis, age 49, is the sole employee of an incorporated business. Her earned income is $100,000 in 2014. Under the law, Susan can contribute $25,000 to a SEP-IRA ($100,000 x .25), $15,000 ( $12,000 plus 3% of $100,000) to a Simple IRA and $25,000 to a profit-sharing or money purchase plan. However, she can contribute $42,500 to a Solo 401(k) plan ($25,000 employer contribution plus $17,500 employee deferral), still under the $52,000 maximum for the year. If Susan were age 50 or over, she could also make a catch-up contribution of $5,500, increasing her 401(k) contribution total to $48,000. In some cases, 401(k) plan contributions for an unincorporated business may be slightly lower than the above amounts. For unincorporated businesses, compensation is net profit minus half of self-employment taxes minus employer contributions. Although single-participant 401(k) plans are limited to the business owner and his or her spouse, business owners should note the added benefits of having his or her spouse as the business’s only other employee. Having the spouse on the payroll gives the business owner the opportunity to shelter some or all of his or her income by having the spouse make an elective deferral to a 401(k) plan in addition to the business making a profit-sharing contribution. Although the spouse and the business would be responsible for their respective share of employment taxes on the salary, combined employer and employee contributions can be up to the lesser of $52,000* or 100% of compensation. This limit applies separately to the business-owner and spouse, thus allowing a combined total of up to $104,000*. In addition, if age 50 or over, each individual could defer an additional $5,500 each year. Potential downside - If a business grows and begins hiring employees, the single-participant 401(k) plan must become a full-blown 401(k) plan subject to other more stringent rules including discrimination testing that can serve to limit contributions by highly-paid executives. Many providers recommend that businesses with immediate expansion plans not set up one of the Solo 401(k) arrangements. Caution: If the business owner has other businesses or is part of a controlled group of corporations, partnerships, proprietorships or affiliated service groups, the employer aggregation rules may apply and the employees of those other businesses may have to be considered for purposes of meeting qualification and minimum coverage requirements for the Solo 401(k). For additional information regarding Solo 401(k) plans and how it might fit into your tax strategy and retirement planning, please give this office a call. If you are considering a Solo 401(k) plan, be aware that the plan must be set up before year’s end. * These values are inflation adjusted and are for 2014. Please call for the amounts for years other than 2014. Wed, 19 Feb 2014 19:00:00 GMT Take Advantage of a Low Income Year http://www.mytrivalleytax.com/blog/take-advantage-of-a-low-income-year/9148 http://www.mytrivalleytax.com/blog/take-advantage-of-a-low-income-year/9148 Tri-Valley Tax & Financial Services Inc If your income is abnormally low this year or your investment portfolio has taken a downturn in value, you might consider some of the following actions: Make Gifts - When values are low and expected to rise, the stage is set for making a gift. Under current law, the gift is valued at its fair market value at the date of the gift. If the value of a planned gift is depressed but the value is beginning to recover (rise), this might be the time to make the gift and minimize the gift tax ramifications while reducing your estate for any future estate tax. If you are helping a loved one weather economic hard times, you can give him or her appreciated property, which the recipient can immediately sell for cash. The result is a transfer of the gain to the person you are helping, who probably will be taxed at a lower tax rate than you are, or possibly will pay no tax at all depending on their circumstances for the year. For 2014, you can gift up to $14,000 of value ($28,000 if married and both spouses make a gift) to as many individuals as you would like without affecting your lifetime gift tax exclusion, paying any gift tax, or even having to file a gift tax return. The gift limit is periodically inflation adjusted so call this office for amounts applicable to years other than 2014. Traditional IRA to Roth IRA Conversions – When one converts a conventional IRA to a Roth IRA, the conversion is taxed at the individual’s marginal tax rate, as if the individual withdrew the funds without being subject to any penalties. Thus, if your taxable income is negative, your marginal tax rate is very low or you have tax credits that are not being fully utilized, it might be appropriate to convert some or all of your traditional IRA funds into a Roth IRA at no or a very small cost. The benefit is not immediate, but in the future at retirement time, the Roth IRA withdrawals, unlike traditional IRA withdrawals, will be tax-free. Use Up Capital Loss Carryovers – If you are one of the lucky investors who has benefited from the recent market upswing and would like to reduce your position in a security or realign your portfolio, and you have unused capital loss carryovers, you might consider selling some of your existing holdings with gains. By utilizing the unused capital loss carryovers to offset those gains, you may pay little or no tax on the profits. Relinquish Dependency Rights – If you are the custodial parent of a child, have the right to claim the child as a dependent, but have no need for the tax benefits associated with the dependency this year, you might consider relinquishing the exemption to the child’s other parent. Form 8332 is used for this purpose, but be careful to complete it correctly lest you release the exemption for more tax years than intended. Exercise Options – Employee stock options, when exercised, produce either ordinary income (non-qualified options) or alternative minimum tax preference income (qualified options) equal to the difference between the exercise price and the market value of the shares at the time of exercise (purchase). Employees who have stock options with a non-publicly-traded company, where the stock’s value is low but is expected to climb in the near future, should consider exercising their options while the stock value is low. In doing so, the employees will be able to acquire the stock at a preferential price and hold it for future appreciation with a minimum, or perhaps zero, current tax bite. Deduct IRA Losses – A traditional IRA account often contains only contributions that were previously deducted, so if the account’s value declines, no additional loss deduction can be claimed. However, if you have made nondeductible contributions to a traditional IRA and the value of all of your IRA accounts combined is less than the sum of your nondeductible contributions, you can take a loss — but to do so, you must take withdrawals from (close out) all of your IRA accounts. The result is a miscellaneous itemized deduction equal to the total of the nondeductible contributions less the sum of the withdrawn amounts. However, this loss is beneficial only if your deductions are itemized, and the loss, along with your other miscellaneous deductions, exceeds 2% of your income (AGI) for the year. Cash in Savings Bonds – Two options are available for tax reporting of interest income from certain U.S. savings bonds, such as EE Bonds and I Bonds: include the increase in redemption value each year as interest, or postpone reporting any of the interest until the return for the earlier of the year the bonds mature or are cashed in. Typically, most people choose the latter method. If you are holding savings bonds that are approaching their maturity and your taxable income for the year will be negative or lower than it normally is, and you haven’t previously reported the interest, you may want to cash in some or all of these bonds to take advantage of your lower tax bracket. If you don’t want to cash in the bonds, you can make an election to switch to the annual interest reporting method, but if you do so, on the return for the year of the change, you will have to include all of the interest accrued to date for all Series E, EE or I savings bonds that you hold, and then report the annual interest in each succeeding year for those and any bonds of these series that you may acquire in the future. Variable Annuity Losses – Variable annuities typically invest in a variety of stock funds, money market accounts, etc. Since purchase, the annuity may have declined in value, making it worth less today than its original cost. If the annuity is sold, the loss can be taken as a miscellaneous itemized deduction. The foregoing are examples of some of the many tax strategies that can be employed during depressed economic times or years of low income to provide both current and future tax benefits. Please give this office a call if you would like to review your specific circumstances for any year-end or long-range strategies that might apply to you. Wed, 19 Feb 2014 19:00:00 GMT Are You Supporting Your Parents? http://www.mytrivalleytax.com/blog/are-you-supporting-your-parents/9149 http://www.mytrivalleytax.com/blog/are-you-supporting-your-parents/9149 Tri-Valley Tax & Financial Services Inc If you are helping support your parents, you may be having difficulty showing that you provided over half of the support for both, thus failing to qualify for the dependency exemptions (and for the beneficial head of household filing status if you are an unmarried taxpayer). You may overcome this problem by designating the support to only one of the parents. This may allow you to claim at least one of the parents as your dependent and, if you are unmarried, allow you to file as head of household. To qualify for the head of household filing status, a taxpayer must maintain a household that constitutes one or both of his or her parents' principal abode, and at least one of the parents must be the taxpayer's dependent, i.e., must individually have gross taxable income for the year of less than the personal exemption amount ($3,950 for 2014) and receive over half of his or her support from the taxpayer. The taxpayer himself need not reside in the household he or she maintains for the parents. The home could even be a retirement home or facility. To accomplish this, the taxpayer must be able to provide proof that the support is for one of the parents only. Otherwise, the support will be designated as a “fund” equally allocated to both. According to the IRS, written statements contemporaneous with the expenditures of support funds setting forth the amounts and purposes of such expenditures are entitled to great weight in supporting the designation to a specific individual. Thus, a notation on a check may be an acceptable designation procedure as long it designates who it is for and the purpose of the funds. Although having no effect on filing status, when several people together provide over 50% of support, all who provide more than 10% of the support can agree about which of them will claim the dependent. Of course, the agreeing parties must also otherwise qualify to claim the dependent. Each person who is relinquishing the dependent exemption must complete an IRS-required form for attachment to the return claiming the dependent. If you are supporting both parents and would like to discuss how the foregoing might apply to your specific situation, please give this office a call. Wed, 19 Feb 2014 19:00:00 GMT Avail Yourself of Your Employer's Tax-Advantaged Plans http://www.mytrivalleytax.com/blog/avail-yourself-of-your-employers-tax-advantaged-plans/435 http://www.mytrivalleytax.com/blog/avail-yourself-of-your-employers-tax-advantaged-plans/435 Tri-Valley Tax & Financial Services Inc • Dependent Care Benefits - A taxpayer who works and incurs child care expenses, should check to see if their employer has a dependent care program. If the employer does provide dependent care benefits under a qualified plan, the taxpayer may be able to exclude up to $5,000 ($2,500 if Married Filing Separately) of child care expenses from his or her wages, which generally provides a greater tax benefit than the child care credit. • 401(k) or Similar Retirement Plans - If an employer has a 401(k) plan, the employee can elect to defer (pre-tax) a maximum of $17,500 for 2014. If age 50 or older, the maximum is increased to $23,000. These plans are especially beneficial when the employer provides a matching contribution. • Flexible Spending Accounts - Some employers provide health flexible spending accounts (FSA), which allow an employee to make contributions on a pre-tax salary reduction basis to provide coverage for medical and dental expenses. The maximum allowed for 2014 is $2,500. The participant generally must use the contributed amounts for the qualified expenses, or else forfeit any amounts remaining in the account at the end of the plan year. However, some plans allow a 2 ½ month grace period, and beginning for 2013 plan years, a plan may allow up to $500 of any year-end health FSA balance to be carried over to pay or reimburse qualified medical expenses incurred in the next year. Medical expenses paid for or reimbursed through pre-tax plans cannot be deducted as part of itemized deductions • Education Assistance Programs - If you are receiving educational assistance benefits through an educational assistance program provided by your employer, up to $5,250 of those benefits can be excluded from income each year. • Stock Purchase and Option Plans - A variety of plans available to employers are designed to allow the employees to invest in the employer’s stock. The most commonly encountered are: (1) Employee stock ownership plan (ESOP); (2) Nonqualified stock option; and (3) Incentive Stock Options (ISOs). Note: Because of the tax ramifications, it may be prudent for you to consult with this office prior to exercising a stock option, especially an ISO. • Tax-Free (Income excludable) Employee Fringe Benefits – Provided the employer provides them, the law allows an exclusion from taxable income for the following benefits: (1) The cost of up to $50,000 of group term life insurance. (2) $250 (in 2014) per month for qualified parking. (3) $130 (in 2014) per month for transit passes, and commuter transportation. (4) $20 per month for bicycle commuting expenses. Tue, 18 Feb 2014 19:00:00 GMT Maximizing Qualified Tuition Program Contributions http://www.mytrivalleytax.com/blog/maximizing-qualified-tuition-program-contributions/38627 http://www.mytrivalleytax.com/blog/maximizing-qualified-tuition-program-contributions/38627 Tri-Valley Tax & Financial Services Inc Qualified Tuition Programs, commonly referred to as Section 529 plans (named after the section of the IRS Code that created them), are plans established to help families save and pay for college in a tax-advantaged way and are available to everyone, regardless of income. These state-sponsored plans allow you to gift large sums of money for a family member’s college education, while you maintain control of the funds. The earnings from these accounts grow tax-deferred and are tax-free if used to pay for qualified higher education expenses. 529 plans can be used as an estate-planning tool as well, providing a means to transfer large amounts of money without gift tax. With all these tax benefits, 529 plans are excellent vehicles for college funding. Tax Benefits: There is no federal tax deduction for making a contribution, but taxes on the earnings within a 529 plan are not only tax-deferred while they are held in the account, but are tax-free when withdrawn to pay for qualified education expenses. This allows you to accumulate money for college at a much faster rate than you can with an account where you have to pay tax on the investment gains and earnings. How Much Can Be Contributed? Unlike the Coverdell Education Savings Accounts that limit the annual contribution to $2,000, Section 529 plans allow you to put away larger amounts of money. There are no income or age limitations for the Section 529 plans. The maximum amount that can be contributed per beneficiary is based on the projected cost of a college education and will vary between state plans. Some states base their maximums on an in-state, four-year education, while others base theirs on the costs of the most expensive schools in the U.S., including graduate studies. Most have limits in excess of $200,000. Generally, once an account reaches the plan-imposed cap, additional contributions cannot be made, but that doesn’t prevent the account from continuing to grow through investment earnings and growth. How Much Should You Contribute? Although there is no contribution limit other than the plan’s limit based on the cost of the education, there are some gift tax limitations that may influence the amount of your contribution. Contributions to Section 529 plans are considered completed gifts and are subject to the gift tax rules. Under these rules, individuals can annually give away (gift) money to another individual, only up to an annual limit (double for a married couple), without triggering gift taxes or reducing their lifetime gifts and inheritance exclusions. The gift exclusion amount is inflation adjusted. For 2014, the gift tax exclusion is $14,000 per recipient. Five-Year Option: Where contributions to a qualified tuition program exceed the annual gift exclusion amount, a donor may elect to take certain contributions to a QTP into account ratably over a five-year period in determining the amount of gifts made during the calendar year. The provision applies only for contributions of up to five times the annual exclusion amount available in the calendar year of the contribution. Any excess may not be taken into account ratably and is treated as a taxable gift in the calendar year of the contribution. Thus, for 2014 an individual could contribute up to $70,000 (five times the 2014 annual exclusion amount), while a married couple could contribute twice that amount ($140,000) to the same individual. The gift would reduce the donor’s estate by the full amount of the gift by the end of the five-year period. Should the donor die before the five-year period elapses, any amount in excess of the allowable annual exclusions would revert back to the donor’s estate. Note: A gift tax return must be filed for the year of the contribution if it exceeds the annual gift tax exclusion and to claim this special exemption. Don’t Overlook Additional Contribution Opportunities During The Five-Year Period: If in any year after the first year of the five-year period the annual exclusion amount is increased, the donor may make an additional contribution in any one or more of the four remaining years up to the difference between the exclusion amount as increased and the original exclusion amount for the year or years in which the original contribution was made. If you have previously utilized the five-year option, you may have the opportunity to make additional annual contributions since the annual exemption amount has increased in the past few years (see table below). Year 2009-12 2013-14 Annual Gift Exemption 13,000 14,000 If you need assistance evaluating the benefits of a Section 529 plan and its impact on your estate plan, please give this office a call. Tue, 18 Feb 2014 19:00:00 GMT The Earned Income Credit http://www.mytrivalleytax.com/blog/the-earned-income-credit/4560 http://www.mytrivalleytax.com/blog/the-earned-income-credit/4560 Tri-Valley Tax & Financial Services Inc The EITC is for people who work, but have lower incomes. If you qualify, it could be worth up to $6,143 for 2014. So you could pay less federal tax or even get a refund. The credit is a refundable credit, so you can receive the benefits of the credit even if you may not owe any taxes. That's money you can use to make a difference in your life. Over 23 million taxpayers receive in excess of $45 billion dollars in EITC - making the credit a great investment in the lives of those who claim it. However, the IRS estimates that 20 to 25% of people who qualify for the credit do not claim it. At the same time, there are millions of Americans who have claimed the credit in error, many of whom simply don't understand the criteria. The EITC is based on the amount of your earned income and whether or not there are qualifying children in your household. If you have children, they must meet the relationship, age, and residency requirements. Additionally, you must file a tax return to claim the credit. If you were employed for at least part of the year, you may be eligible for the EITC based on these general requirements (the rates shown are for 2014): You earned less than $14,590 ($20,020 if married filing jointly) and did not have any qualifying children. You earned less than $38,511 ($43,941 if married filing jointly) and have one qualifying child. You earned less than $43,756 ($49,186 if married filing jointly) and have two qualifying children. You earned less than $46,997 ($52,427 if married filing jointly) and have more than two qualifying children. In addition, you must meet a few basic rules: You, and any qualifying child you claim for the EITC, must have a valid Social Security Number. You must have earned income from employment or from self-employment. Your filing status cannot be married, filing separately. You must be a U.S. citizen or resident alien all year, or a nonresident alien married to a U.S. citizen or resident alien, and filing a joint return. You cannot be a qualifying child of another person. If you do not have a qualifying child, you must: o be age 25 but under 65 at the end of the year, o live in the United States for more than half the year, and o not be a qualifying child of another person. You cannot file Form 2555 or 2555-EZ (related to foreign earned income). Members of the military can elect to include their nontaxable combat pay in earned income for the earned income credit. If you make the election, you must include in earned income all nontaxable combat pay received. If you are filing a joint return and both you and your spouse received nontaxable combat pay, then each of you can make your own election. The amount of your nontaxable combat pay should be shown on your Form W-2 in box 12 with code Q. If you have any questions, please give this office a call. Fri, 14 Feb 2014 19:00:00 GMT Work Opportunity Tax Credit http://www.mytrivalleytax.com/blog/work-opportunity-tax-credit/4564 http://www.mytrivalleytax.com/blog/work-opportunity-tax-credit/4564 Tri-Valley Tax & Financial Services Inc Employers can qualify for a tax credit for qualified wages paid to members of targeted groups and qualified veterans who were hired before January 1, 2014. The credit for targeted-group employees, except for long-term family assistance recipients and summer youth employees, equals 40% (25% for employment of 400 hours or less) of qualified first-year wages ($6,000 cap) for a maximum credit of $2,400 for each eligible employee. The maximum credit available for hiring qualified veterans may be more. The Work Opportunity Tax Credit (WOTC) is available on an elective basis for employers hiring individuals from one or more specified targeted groups or certain veterans. The amount of the credit available to an employer is determined by the amount of qualified wages paid by the employer. Generally, qualified wages consist of wages for services rendered by a qualified veteran or a member of a targeted group during the one-year period beginning with the day the individual begins to work for the employer. Fri, 14 Feb 2014 19:00:00 GMT How Business Website Expenses Are Deducted http://www.mytrivalleytax.com/blog/how-business-website-expenses-are-deducted/31670 http://www.mytrivalleytax.com/blog/how-business-website-expenses-are-deducted/31670 Tri-Valley Tax & Financial Services Inc Article Highlights: Purchased websites can be amortized over the course of 3 years or expensed under Sec 179. In-house developed websites can be expensed or amortized over the course of 3 years. Non-software costs, such as graphics, must be amortized during their useful lives. Advertising content can be expensed. Costs incurred prior to business start-up can be expensed up to $5,000, if elected, and any excess must be amortized over the course of 180 months. With the explosion of online businesses, one would think that there would be a standard method of deducting the cost of your business website. But some questions still exist as to what part of a website is considered software, and to date, the IRS has not fully clarified that issue for tax purposes. Purchased Websites - If the website is purchased from a contractor who is at economic risk should the software not perform, the design costs are amortized (ratably deducted) over the 3-year period, beginning with the month in which the website is placed in service. For 2013, non-customized computer software placed in service during the year can be expensed as Sec 179 property up to the $500,000 limit of this special expense deduction. In-House Developed Websites - If, instead of being purchased, the website design is “developed” by the company or designed by an independent contractor who is not at risk should the software not perform, the company launching the website can choose among alternative treatments, one of which is deducting the costs in the year that the costs are paid or accrued, depending on the taxpayer's overall accounting method. Or, as an alternative, the costs may be amortized under the 3-year rule. Non-Software Expenses - Some website design costs, such as graphics, may not be classified as software and must be deducted over the useful life of the element. Non-software portions of the design with a useful life of no more than a year are currently deductible. Advertising Content - Advertising costs are currently generally deductible. Thus, the costs of website content that is advertising are generally deductible in the year paid or accrued, depending on the business’ accounting method. Cost Before Business Starts - Business expenses that are incurred or accrued prior to the actual activation of the business are generally not deductible until the business is terminated or sold. However, a taxpayer can elect to deduct up to $5,000 of the costs in the year that the business starts and amortize the costs in excess of $5,000 over a period of 180 months (15 years), beginning with the month that the business starts. As you can see, deducting the expenses of a website can be complicated. Please call this office if you have questions. Thu, 13 Feb 2014 19:00:00 GMT Saver's Credit Can Help You Save for Retirement http://www.mytrivalleytax.com/blog/savers-credit-can-help-you-save-for-retirement/34799 http://www.mytrivalleytax.com/blog/savers-credit-can-help-you-save-for-retirement/34799 Tri-Valley Tax & Financial Services Inc Low- and moderate-income workers can take steps to save for retirement and earn a special tax credit. The saver’s credit helps offset part of the first $2,000 workers voluntarily contribute to traditional or Roth Individual Retirement Arrangements (IRAs), SIMPLE-IRAs, SEPs, 401(k) plans, 403(b) plans for employees of public schools and certain tax-exempt organizations, 457 plans for state or local government employees, and the Thrift Savings Plan for federal employees. Also known as the retirement savings contributions credit, the saver’s credit is available in addition to any other tax savings that apply as a result of contributing to retirement plans. 2013 Credit Still Available for IRA Contributions - Unlike other workplace retirement plans, IRAs can be set up and funded after the end of the year. Thus, eligible workers still have time to make qualifying IRA contributions and get the saver’s credit on their 2013 tax return. People have until April 15, 2014, to set up a new IRA or add money to an existing IRA and still get credit for 2013. Taxpayers with 401(k), 403(b), 457 and Government Thrift plans who were unable to set aside money for 2013 may want to schedule their 2014 contributions soon so their employer can begin withholding them in January. While these contributions won’t be eligible for the saver’s credit for 2013, they will qualify for 2014 for eligible individuals. The saver’s credit can be claimed by: Married couples filing jointly with incomes up to $59,000 in 2013 or $60,000 in 2014; Heads of Household with incomes up to $44,250 in 2013 or $45,000 in 2014; and Married individuals filing separately and singles with incomes up to $29,500 in 2013 or $30,000 in 2014. Like other tax credits, the saver’s credit can increase a taxpayer’s refund or reduce the tax owed. Though the maximum saver’s credit is $1,000 ($2,000 for married couples), taxpayers are cautioned that it is often much less and, due in part to the impact of other deductions and credits, may, in fact, be zero for some taxpayers.A taxpayer’s saver’s credit amount is based on his or her filing status, adjusted gross income, tax liability, and amount contributed to qualifying retirement programs. The saver’s credit supplements other tax benefits available to people who set money aside for retirement. For example, most workers may deduct their contributions to a traditional IRA. Though Roth IRA contributions are not deductible, qualifying withdrawals, usually after retirement, are tax-free. Normally, contributions to 401(k) and similar workplace plans are not taxed until withdrawn. Other special rules that apply to the saver’s credit include the following: Eligible taxpayers must be at least 18 years of age. Anyone claimed as a dependent on someone else’s return cannot take the credit. A student cannot take the credit. A person enrolled as a full-time student during any part of five calendar months during the year is considered a student. Certain retirement plan distributions reduce the contribution amount used to figure the credit. For 2013, this rule applies to distributions received after 2010 and before the due date (including extensions) of the 2013 return. Begun in 2002 as a temporary provision, the saver’s credit has since been made a permanent part of the tax code. If you have questions about how this tax benefit might apply in your situation, please give the office a call. Tue, 11 Feb 2014 19:00:00 GMT Don’t Overlook the Credit for Small Employer Health Insurance Premiums http://www.mytrivalleytax.com/blog/don8217t-overlook-the-credit-for-small-employer-health-insurance-premiums/37621 http://www.mytrivalleytax.com/blog/don8217t-overlook-the-credit-for-small-employer-health-insurance-premiums/37621 Tri-Valley Tax & Financial Services Inc Play Video Article Highlights Small employers get a tax credit for providing a health insurance plan. Credit can be as much as 35% of the premiums paid. A small employer is one with no more than 25 full-time equivalent employees (FTE) with average wages less than $50,000. Self-employed individuals, including partners and sole proprietors, 2% shareholders of an S corporation, and 5% owners of the employer are not treated as employees for purposes of the small employer health insurance credit. Seasonal workers of an employer are not taken into account in determining the FTE employees and average annual wages of the employees unless the worker works for the employer more than 120 days during the tax year. The tax law provides a credit for small business employers who pay the health insurance premiums for their workers. This credit can be as much as 35% (25% for tax-exempt organizations) of the insurance premiums paid by the employer in 2013. Beginning in 2014, the credit percentage increases to 50% (35% for tax-exempt organizations), and claiming the credit is limited to two consecutive years, but if the credit was claimed for any of years 2010 through 2013, those years aren’t counted for the two-year limit. In addition, for 2014 and later years, the insurance must be purchased through a state exchange, and the coverage must be uniform and not less than 50% of the premium cost. To qualify for the credit, the employer can’t have more than 25 full-time equivalent employees, and the average wage of the employees cannot exceed $50,000 for the year. The 25 full-time equivalent employee limit is computed by taking into account both full-time and part-time employees for the year using a formula. To see if your firm may qualify for the credit, complete the two worksheets below. The results at lines 6 and 9 will tell you if your firm is under the maximum full-time equivalent employee and average wage limitations. Determine the Number of Full-Time Equivalent Employees: 1. Enter the number of employees who worked 2,080 hours or more during the year:2. Multiply line 1 by 2,080:3. Enter the total hours worked by all employees who worked less than 2,080 hours during the year:4. Enter the total of lines 2 and 3:5. Divide the result on line 4 by 2,080:6. Number of full-time equivalent employees (round line 5 down to the next whole number, unless the number is less than one, in which case enter 1: If line 6 is greater than 25, stop - your firm does not qualify for this credit. Determine the Average Annual Wage: 7. Enter the total of all wages paid to employees during the tax year:8. Divide line 7 by the number of full-time equivalent employees (line 6):9. Average annual wage (round amount from line 8 down to the next whole $1,000): If the amount on line 9 is $50,000 or less, you may qualify for the credit. Besides meeting the limits of lines 6 and 9, to qualify for the credit an employer has to contribute at least 50% of the premiums for the employees’ health insurance coverage on a uniform basis. The amount of the credit gradually phases out if the number of full-time equivalent employees exceeds 10 or if the average annual wage of the employees exceeds $25,000. Under the phase-out, the full amount of the credit is available only to an employer with 10 or fewer full-time equivalent employees and whose employees have average annual wages of less than $25,000. The credit is in lieu of taking a business deduction for the employer-paid premiums used in computing the credit. It is also part of the general business credit, which may exceed the amount of the business’ income tax, and any unused credit in the current year can be carried back one year and then forward until used up but no longer than 20 years. When counting employees and wages, make the following adjustments: Self-employed individuals, including partners and sole proprietors, 2% shareholders of an S corporation, and 5% owners of the employer are not treated as employees for purposes of the small-employer health insurance credit. Thus, the wages and hours of these business owners and partners, and of their family members and dependent members of their household, are disregarded in determining full-time equivalent (FTE) employees and average annual wages, and the premiums paid on their behalf are not counted in determining the amount of the credit. Leased employees are included in employee count, but insurance premiums paid for the benefit of the leased employee by the leasing company are not taken into account in determining the credit. The number of hours of service worked by, and wages paid to, an employer’s seasonal worker are not taken into account in determining the FTE employees and average annual wages of the employer unless the worker works for the employer more than 120 days during the tax year. Premiums paid on behalf of seasonal workers can be counted in determining the amount of the credit. There is no minimum number of hours of service that a worker has to work in a day before that day is taken into account for purposes of the 120-day test. Please give this office a call if you have questions related to this credit, the pros and cons of offering health insurance to employees, and determining how much your firm can benefit from claiming the credit. Thu, 06 Feb 2014 19:00:00 GMT Are You Missing a W-2? http://www.mytrivalleytax.com/blog/are-you-missing-a-w-2/38579 http://www.mytrivalleytax.com/blog/are-you-missing-a-w-2/38579 Tri-Valley Tax & Financial Services Inc Article Highlights: Employers have until Jan. 31, 2014, to provide 2013 W-2s to employees. Steps to take when W-2 has not arrived by scheduled tax appointment. Contact employer if W-2 is not received, then IRS if it is still missing after Feb. 15, 2014. How to proceed if W-2 is still missing by the return due date. Have you received all of your W-2s? These documents are essential for completing individual tax returns. You should receive a Form W-2, Wage and Tax Statement, from all of your employers each year. Employers have until January 31 to provide or send you a 2013 W-2 earnings statement, either electronically or in paper form. If you have not received your W-2, follow these steps: 1. Contact This Office - If your appointment is in the near future, you will be advised whether to keep the appointment or change it to another time. Generally, when a W-2 or 1099 are missing, it is best to keep the appointment so that everything else for the return can be completed. You can then mail the missing document to the office or drop it off at a later date. That way, your return can be finished as soon as the W-2 or 1099 is available, which will speed up your refund, if you are receiving one. 2. Contact Your Employer - 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 due to an incorrect or incomplete address. After contacting the employer, allow a reasonable amount of time for the employer to resend or re-issue the W-2. 3. Contact the IRS - If you still have not received your W-2 by February 15, you can contact the IRS for assistance at 800-829-1040. However, we recommend that you hold off from contacting the IRS until you are certain that you will not be receiving a W-2 from the employer. If you do call the IRS, have the following information on hand: Employer's name, address, city, and state, including zip code; Your name, address, city, state, zip code, and Social Security number; and An estimate of the wages you earned, the federal income tax withheld, and the period in which you worked for that employer. The estimate should be based on year-to-date information from your final pay stub, or your leave-and-earnings statement, if possible. This office can assist you with making the estimate. 4. File Your Return - Even if you don’t receive a W-2, you are still required to file your tax return or to request a filing extension by April 15. If you anticipate that you will ultimately receive the missing W-2, this office can estimate your 2013 tax liability and file extensions for you. If you have a substantial refund coming, you may opt to have this office prepare a substitute W-2, enabling you to file without the W-2. Refunds for returns that include substitute W-2s can be delayed significantly while the IRS verifies the W-2 information. If you don’t anticipate receiving the missing W-2, then this office can prepare a substitute W-2, enabling you to file your 2013 tax return. If a substitute W-2 is used and it is later determined that the information used to prepare the substitute W-2 was in error, an amended return may need to be prepared for you to file with the IRS and state tax agency, if applicable. Please call this office if you have questions or need assistance about missing W-2s, 1099s, or other tax documents. Tue, 04 Feb 2014 19:00:00 GMT It's Tax Time! Are You Ready? http://www.mytrivalleytax.com/blog/its-tax-time-are-you-ready/38558 http://www.mytrivalleytax.com/blog/its-tax-time-are-you-ready/38558 Tri-Valley Tax & Financial Services Inc Article Highlights: It is time to gather your information for your tax appointment Choosing your alternatives Tips for pulling your information together If you're like most taxpayers, you find yourself with an ominous stack of “homework” around TAX TIME! Pulling together the records for your tax appointment is never easy, but the effort usually pays off in the extra tax you save! When you arrive at your appointment fully prepared, you'll have more time to: Consider every possible legal deduction; Evaluate which income reporting and deductions are best suited to your situation; Explore current law changes that affect your tax status; Talk about tax-planning alternatives that could reduce your future tax liability. Choosing Your Best Alternatives The tax law allows a variety of methods of handling income and deductions on your return. Choices you make as you prepare your return often affect not only the current year, but future returns as well. Topics these choices relate to include: Sales of property If you're receiving payments on a sales contract over a period of years, you can sometimes choose between reporting the whole gain in the year you sell or over a period of time as you receive payments from the buyer. Depreciation You're able to deduct the cost of your investment in certain business properties. You can either depreciate the costs over a number of years; or, in certain cases, deduct them all in one. Where to Begin? Preparation for your tax appointment should begin in January. Right after the New Year, set up a safe storage location, such as a file drawer, cupboard, or safe. As you receive pertinent records, file them right away, before you forget or lose them. Make this a habit, and you'll find your job a lot easier on your appointment date. Other general suggestions to prepare for your appointment include: Segregate your records according to income and expense categories. File medical expense receipts in one envelope or folder, mortgage interest payment records in another, charitable donations in a third, etc. If you receive an organizer or questionnaire to complete before your appointment, fill out every section that applies to you. (Important: Read all explanations and follow instructions carefully. By design, organizers remind you of transactions you may otherwise miss.) Call attention to any foreign bank account, foreign financial account, or foreign trust in which you have an ownership interest, signature authority, or controlling stake. We also need to know about foreign inheritances and ownership of foreign assets. In short, bring any foreign financial dealings to our attention so we know if you have any special reporting requirements. The penalties for not making and submitting required reports can be severe. Keep your annual income statements separate from your other documents (e.g., W-2s from employers, 1099s from banks, stockbrokers, etc., and K-1s from partnerships). Be sure to take these documents to your appointment, including the instructions for K-1s! Write down questions so you don't forget to ask them at the appointment. Review last year's return. Compare your income on that return to your income in the current year. A dividend from ABC stock on your prior-year return may remind you that you sold ABC this year and need to report the sale, or that you haven't yet received the current year's 1099-DIV form. Make sure you have social security numbers for all your dependents. The IRS checks these carefully and can deny deductions and credits for returns filed without them. Compare deductions from last year with your records for this year. Did you forget anything? Collect any other documents and financial papers that you're puzzled about. Prepare to bring these to your appointment so you can ask about them. Accuracy Even for Details To ensure the greatest accuracy possible in all detail on your return, make sure you review personal data. Check name(s), address(es), social security number(s) and occupation(s) on last year's return. Note any changes for this year. Although your telephone numbers and e-mail address aren't required on your return, they are always helpful should questions occur during return preparation. Marital Status Change If your marital status changed during the year, if you lived apart from your spouse or if your spouse died during the year, list dates and details. Bring copies of prenuptial, legal separation, divorce or property settlement agreements, if any, to your appointment. If your spouse passed away during the year, you should have a copy of his or her trust agreement or will available for review. Dependents If you have qualifying dependents, you will need to provide the following for each (if you previously provided us with items 1 through 3 you will not need to supply them again): First and last name Social security number Birth date Number of months living in your home Their income amount (both taxable and nontaxable).If your dependent is your child over age 18, note how long the child was a full-time student during the year. For anyone other than your child to qualify as your dependent, they must pass five strict dependency tests. If you think another or others qualify as your dependents (but you aren't sure), tally the amounts you provided toward their support vs. the amounts they provided. This will simplify a final decision. Some Transactions Deserve Special Treatment Certain transactions require special treatment on your tax return. It's a good idea to invest a little extra preparation effort when you have had the following transactions: Sales of Stock or Other Property: All sales of stocks, bonds, securities, real estate and any other property need to be reported on your return, even if you had no profit or loss. List each sale, and have purchase and sale documents available for each transaction. Purchase date, sale date, cost and selling price must all be noted on your return. Make sure this information is contained on the documents you bring to your appointment. Gifted or Inherited Property: If you sell property that was given to you, you need to determine when and for how much the original owner purchased it. If you sell property you inherited, you need to know the original owner's death-date and the property's value at that time. You may be able to find this on estate tax returns or in probate documents; otherwise, ask the executor. Reinvested Dividends: You may have sold stock or a mutual fund in which you participated in a dividend reinvestment program. If so, you will need to have records of each stock purchase made with the reinvested dividends. Sale of Home: The tax law provides special breaks for home sale gains, and you may be able to exclude up to $500,000 of the gain from your primary home if you meet certain ownership, occupancy, and holding period requirements. The maximum exclusion is $250,000 for others. The cost of improvements made on your home can also be used reduce any gain, so it is good practice to keep a record of them. The exclusion of gain applies only to a primary residence; so keeping a record of improvement to other property, such as your second home, is important. Be sure to bring a copy of the sale documents (usually the closing escrow statement). Purchase of a Home: Be sure to bring a copy of the final closing escrow statement if you purchased a home. Vehicle Purchase: If you purchased a new plug-in electric car (or cars) this year, you may qualify for a special credit. Please bring the purchase statement to the appointment with you. Home Energy-Related Expenditures: If you installed solar, geothermal or wind-power-generating systems, please bring the details of those purchases and manufacturer's credit qualification certification to your appointment. You may qualify for a substantial energy-related tax credit. Identity Theft: Identity theft is becoming more prevalent and can impact your tax filings. If you have reason to believe that your identity has been stolen, please contact this firm as soon as possible. The IRS provides special procedures for filing if you have had your identity stolen. Car Expenses: Where you have used one or more automobiles for business, list the expenses of each separately. The government requires your total mileage, business miles, and commuting miles for each business use of your car on your return, so be prepared to have them available. If you were reimbursed for mileage through an employer, know the reimbursement amount and whether it is included in your W-2. Charitable Donations: You must substantiate cash contributions (regardless of amount) with a bank record or written communication from the charity showing the name of the charitable organization, date and amount. Unreceipted cash donations put into a “Christmas kettle,” church collection plate, etc., are not deductible. For clothing and household contributions, items donated must generally be in good or better condition, and items such as undergarments and socks are not deductible. You must keep a record of each item contributed that indicates the name and address of the charity, date and location of the contribution, and a reasonable description of the property. Contributions valued under $250 and dropped at an unattended location do not require a receipt. For contributions above $500, the record must also include when and how the property was acquired and your cost basis in the property. For contributions above $5,000 and other types of contributions, please call this office for additional requirements. If you have questions about assembling your tax data prior to your appointment, please give this office a call. Thu, 30 Jan 2014 19:00:00 GMT Family Home Loan Interest May Not Be Deductible http://www.mytrivalleytax.com/blog/family-home-loan-interest-may-not-be-deductible/38547 http://www.mytrivalleytax.com/blog/family-home-loan-interest-may-not-be-deductible/38547 Tri-Valley Tax & Financial Services Inc Article Highlights: Qualified residence interest is deductible interest paid or accrued during the tax year on acquisition indebtedness or home equity indebtedness with respect to any qualified residence of the taxpayer. Acquisition indebtedness means any indebtedness that is incurred in acquiring, constructing, or substantially improving any qualified residence of the taxpayer, and is secured by such residence. Interest on unsecured home debt is generally not deductible. It is not uncommon for individuals to loan money to relatives to help them buy a home. In these situations, it is also not uncommon for a loan to be undocumented or documented by an unsecured note, with the unintended result that the home buyer can’t claim a tax deduction for the interest paid to their helpful relative. The tax code describes qualified residence interest as interest paid or accrued during the tax year on acquisition indebtedness or home equity indebtedness with respect to any qualified residence of the taxpayer. It also provides that the term "acquisition indebtedness" means any indebtedness that is incurred in acquiring, constructing, or substantially improving any qualified residence of the taxpayer, and is secured by such residence. There are also limits on the amount of debt and number of qualified residences a taxpayer may have for purposes of claiming a home mortgage interest tax deduction, but those details are not covered in this article, which is focusing on the requirement that the debt be secured. Secured debt means a debt that is on the security of any instrument (such as a mortgage, deed of trust, or land contract): (i) that makes the interest of the debtor in the qualified residence specific security of the payment of the debt, (ii) under which, in the event of default, the residence could be subjected to the satisfaction of the debt with the same priority as a mortgage or deed of trust in the jurisdiction in which the property is situated, and (iii) that is recorded, where permitted, or is otherwise perfected in accordance with applicable state law. In other words, the home is put up as collateral to protect the interest of the lender. Thus interest paid on undocumented loans, or documented but unsecured notes, is not deductible by the borrower but is fully taxable to the lending individual. The IRS is always skeptical of family transactions. Don’t get trapped in this type of situation; take the time to have a note drawn up and recorded or perfected in accordance to state law. If you have questions related to this situation or other issues related to the deductibility of home mortgage interest, please give this office a call. Tue, 28 Jan 2014 19:00:00 GMT Start Planning Now for 2014 Income Taxes http://www.mytrivalleytax.com/blog/start-planning-now-for-2014-income-taxes/38538 http://www.mytrivalleytax.com/blog/start-planning-now-for-2014-income-taxes/38538 Tri-Valley Tax & Financial Services Inc Start Planning Now for 2014 Income Taxes You may not have even completed your 2013 taxes yet. But now is an ideal time to start getting ready for your 2014 returns. We know that you're in some stage of preparation for your 2013 income taxes. It may seem odd to start thinking about 2014 taxes just now, but actually, this is the ideal time to start planning and making business decisions with their tax implications always in the back of your mind. As you look at the data that will be entered in your 2013 tax forms, you're likely to come across some expenses that you might have handled differently, or some income that should have been deferred. If you begin your planning process for 2014 while 2013 is still in the works, you can start making smarter, more tax-advantageous business decisions now, instead of late in the year when everyone is rushing to take actions necessary to lower their tax obligation. Here's how QuickBooks can help you with this new approach. Overhaul your Chart of Accounts. The mechanics of doing this in QuickBooks are fairly uncomplicated, but changing this critical list - the backbone of your company file - requires solid knowledge of which accounts should be added, deleted or changed. You also need to know which accounts and subaccounts will have impact on your income taxes. They must be structured accordingly. Figure 1: QuickBooks' default Chart of Accounts can be easily modified to meet your company's unique needs. But let us help you with this task. For these reasons, we ask that you consult with us if you think your Chart of Accounts could use an overhaul. Our early involvement will be much more economical for you than if we have to come in down the road when your accounts have become dangerously tangled. Devise an effective system for estimated taxes. As you well know, there's no magical formula for estimating how much income tax you'll owe when all of your income and expenses have been tallied. We can make this an ongoing task by creating monthly or quarterly financial reports for your business and working from those. If you're self-employed, you might want to open a low-fee checking account that will serve solely as your tax fund. Because you have no employer to pay a portion of your Social Security and Medicare obligations, it's critical that you're putting enough away. Consider putting one-third of your taxable income into that account and see how it goes. You may get a pleasant surprise at tax prep time, or you may have to dip into other savings to be compliant. Figure 2: You may want to set up a separate bank account to park estimated tax funds, so you know they're committed. Ask us about numbering new accounts. You can submit federal payments online on the Electronic Federal Tax Payment System site. Check with us to see if your state has an electronic system. Of course, the IRS will accept a check. Run reports on everything. And keep running them. We already mentioned that we're happy to create and analyze your most critical financial reports on a regular basis. You may have tried to understand the Trial Balance, Statement of Cash Flows, etc. in QuickBooks and been puzzled. Don't feel incompetent because of that: It often takes an accountant-level individual to understand what they mean for your business. You can define and build your own reports using QuickBooks' customization tools. If you have employees who travel, consider bringing in an automated expense report application (we can help you find one and implement it). Stress the importance of adhering to IRS rules about travel. Same goes for your local salesforce, off-site technicians and other service providers, etc. Figure 3: Help your staff help you by involving them in budgeting and expense management. For employees who come into the office every day or are telecommuting, you can give them some ownership of their contribution to expenses by bringing them into the budget process and/or requesting that they submit their own monthly mini-reports on any company funds they spend. The more employees are aware of and accountable for expenses, the easier it will be for you to work toward minimizing your tax obligation. And having some information about the considerable sum you pay in taxes may help staff understand your tightening of the purse strings. Consider retraining accounting staff if necessary. You may be paying a portion of your taxes unnecessarily, simply because your company's bookkeeping is less-than-precise. Nip that in the bud. The more you micro-manage your reporting, stay aware of the consequences of every expenditure and bring employees into the process, the more prepared you'll be for 2014 taxes. Mon, 27 Jan 2014 19:00:00 GMT February 2014 Business Due Dates http://www.mytrivalleytax.com/blog/february-2014-business-due-dates/36129 http://www.mytrivalleytax.com/blog/february-2014-business-due-dates/36129 Tri-Valley Tax & Financial Services Inc February 10 - Non-Payroll Taxes File Form 945 to report income tax withheld for 2013 on all non-payroll items. This due date applies only if you deposited the tax for the year in full and on time. February 10 - Social Security, Medicare and Withheld Income Tax File Form 941 for the fourth quarter of 2013. This due date applies only if you deposited the tax for the quarter in full and on time. February 10 - Certain Small Employers File Form 944 to report Social Security and Medicare taxes and withheld income tax for 2013. This due date applies only if you deposited the tax for the year in full and on time. February 10 - Farm Employers File Form 943 to report Social Security and Medicare taxes and withheld income tax for 2013. This due date applies only if you deposited the tax for the year in full and on time. February 10 - Federal Unemployment Tax File Form 940 for 2013. This due date applies only if you deposited the tax for the year in full and on time. February 17 - Social Security, Medicare and Withheld Income Tax If the monthly deposit rule applies, deposit the tax for payments in January. February 17 - Non-Payroll Withholding If the monthly deposit rule applies, deposit the tax for payments in January.February 17 - All Employers Begin withholding income tax from the pay of any employee who claimed exemption from withholding in 2013, but did not give you a new Form W-4 to continue the exemption this year. February 28 - Payers of Gambling Winnings File Form 1096, Annual Summary and Transmittal of U.S. Information Returns, along with Copy A of all the Forms W-2G you issued for 2013. If you file Forms W-2G electronically, your due date for filing them with the IRS will be extended to March 31. The due date for giving the recipient these forms was January 31.February 28 - Informational Returns Filing Due File information returns (Form 1099) and transmittal Forms 1096 for certain payments you made during 2013. There are different forms for different types of payments. These are government filing copies for the 1099s issued to service providers and others (see January 31). If you file Forms 1098, 1099, or W-2G electronically, your due date for filing them with the IRS will be extended to March 31. The due date for giving the recipient these forms was January 31.February 28 - All Employers File Form W-3, Transmittal of Wage and Tax Statements, along with Copy A of all the Forms W-2 you issued for 2013. If you file Forms W-2 electronically, your due date for filing them with the SSA will be extended to March 31. The due date for giving the recipient these forms was January 31.February 28 - Large Food and Beverage Establishment Employers File Form 8027, Employer’s Annual Information Return of Tip Income and Allocated Tips. Use Form 8027-T, Transmittal of Employer’s Annual Information Return of Tip Income and Allocated Tips, to summarize and transmit Forms 8027 if you have more than one establishment. If you file Forms 8027 electronically, your due date for filing them with the IRS will be extended to March 31. Thu, 23 Jan 2014 19:00:00 GMT February 2014 Individual Due Dates http://www.mytrivalleytax.com/blog/february-2014-individual-due-dates/36130 http://www.mytrivalleytax.com/blog/february-2014-individual-due-dates/36130 Tri-Valley Tax & Financial Services Inc February 1 - Tax Appointment If you don’t already have an appointment scheduled with this office, you should call to make an appointment that is convenient for you. February 10 - Report Tips to Employer If you are an employee who works for tips and received more than $20 in tips during January, you are required to report them to your employer on IRS Form 4070 no later than February 10. Your employer is required to withhold FICA taxes and income tax withholding for these tips from your regular wages. If your regular wages are insufficient to cover the FICA and tax withholding, the employer will report the amount of the uncollected withholding in box 12 of your W-2 for the year. You will be required to pay the uncollected withholding when your return for the year is filed. February 17 - Last Date to Claim Exemption from Withholding If you claimed an exemption from income tax withholding last year on the Form W-4 you gave your employer, you must file a new Form W-4 by this date to continue your exemption for another year. Thu, 23 Jan 2014 19:00:00 GMT Are You Required To File A Gift Tax Return? http://www.mytrivalleytax.com/blog/are-you-required-to-file-a-gift-tax-return/38483 http://www.mytrivalleytax.com/blog/are-you-required-to-file-a-gift-tax-return/38483 Tri-Valley Tax & Financial Services Inc Article Highlights: A gift tax return must be filed if you give gifts in excess of $14,000 per recipient during the year. Directly paid medical and educational gifts are excluded Married individuals can increase the annual $14,000 exclusion to $28,000 by splitting gifts. The estate tax exemption can be used to offset gifts in excess of the annual exclusion. Frequently, taxpayers think that gifts of cash, securities, or other assets that they give to other individuals are tax-deductible and, in turn, the gift recipient sometimes thinks that income tax must be paid on the gift received. Nothing is further from the truth. To fully understand the ramifications of gifting, one needs to realize that gift tax laws are related to estate tax laws. When a taxpayer dies, the value of his or her gross estate (to the extent that it exceeds the excludable amount for the year) is subject to estate taxes. Naturally, individuals want to do whatever they can to maximize their beneficiaries’ inheritances, and limit the amount of tax the estate may owe. Because giving away one’s assets before death reduces the individual’s gross estate, the government has placed limits on gifts, and if those gifts exceed the limit, they are subject to a gift tax that must be paid by the giver. Gift Tax Exclusions – Certain gifts are excluded from the gift tax. Annual Exclusion – This is the annual amount that an individual can give to any number of recipients. This amount is adjusted for inflation, and for 2013, it is $14,000, and can be in the form of cash, property, or a combination thereof. For example, a taxpayer with five children can give $14,000 to each child in 2013 without any gift tax consequences. The taxpayer cannot deduct the gifts, and the gifts are not taxable to the recipients. Generally, for a gift to qualify for the annual exclusion, it must be a gift of a “present interest.” That is, the recipient’s enjoyment of the gift can’t be postponed to the future. For gifts to minor children, there is an exception to the “present interest” rule, where a properly worded trust is established. If the total of all of your gifts to each individual is not over $14,000, then there is no gift tax return filing requirement. Lifetime Limit – In addition to the annual amounts, taxpayers can use a portion of the federal estate tax exemption (it is actually in the form of a credit) to offset an additional amount during their lifetime without gift tax consequences. However, to the extent that this credit is used against a gift tax liability, it reduces the credit available for use against the federal estate tax at the time of the taxpayer’s death. For 2013, the credit-equivalent lifetime gift tax exemption is $5.25 million. If you made a gift to any individual in excess of $14,000 during the year, a gift tax return filing for the year is required even if there is no tax due. The filing allows the IRS to track your federal estate tax exemption reduction as a result of gifts, and includes the tax if you exceed the current lifetime limit. Education and Medical Exclusion – In addition to the amounts listed above, there are two additional types of gifts that can be excluded from the gift tax: (1) Amounts paid by one individual, and on behalf of another individual, directly to a qualifying educational organization as tuition for that other individual. (2) Amounts paid by one individual, and on behalf of another individual, directly to a provider of medical care as payment for that medical care. Payments for medical insurance qualify for this exclusion. Caution: Watch out for unintended gifts such as when an elderly parent places a child on title of the home or other assets. Gift-Splitting by Married Taxpayers – If the gift-giver is married and both spouses are in agreement, gifts to recipients made during a year can be treated as split between the husband and wife, even if the cash or property gift was made by only one of them. Thus, by using this technique, a married couple can only give $28,000 a year to each recipient under the annual limitation previously discussed. If you believe that you have a gift tax filing requirement, have additional questions, or would like this office to assist you in planning an appropriate gifting strategy, please call. Tue, 21 Jan 2014 19:00:00 GMT Revising Your W-4? Seek Professional Advice. http://www.mytrivalleytax.com/blog/revising-your-w-4-seek-professional-advice/36044 http://www.mytrivalleytax.com/blog/revising-your-w-4-seek-professional-advice/36044 Tri-Valley Tax & Financial Services Inc Article Highlights: Form W-4 is used to establish payroll-withholding amounts. Incorrectly completed W-4s can result in under-withholding and unexpected year-end tax liability. The IRS’s W-4 calculator is only suitable for simple returns. Commonly encountered problems in getting the W-4 completed to establish the proper amount of withholding. This time of year, many employers will request updated W-4 forms from their employees (and the equivalent state form for those who live in a state with income tax). The W-4 form allows you to specify your filing status and the number of dependent exemptions to be used for determining the amount of income tax to be withheld from your payroll. Although the IRS provides an online W-4 calculator, it is generally suitable only for more simple returns, and may not be appropriate in all cases, since it does not take into account all income adjustments, credits, and deductions available. Be careful when completing the W-4 form, because errors can create some significant financial problems. Let’s say that you are married and have two dependents. On your tax return, you claim four exemptions. The natural thing for you to do would be to claim “married” and four exemptions on the W-4. However, for W-4 purposes, the exemption for the taxpayer and spouse are automatically built into the married rates, and only two exemptions need to be claimed. The result, of course, is that the taxpayer ends up claiming more exemptions than he or she actually is entitled to, which can result in under-withholding, if the standard deduction is used. It is common practice and acceptable for taxpayers to claim additional exemptions when they would otherwise have excessive withholding. Over-withholding may occur because the withholding tables do not account for large itemized deductions or other situations that might reduce the worker’s taxable income. It’s also quite common for taxpayers to increase their exemptions to provide more take-home pay from their payroll checks. In doing so, they are essentially borrowing tax money from the government, which they will have to repay - along with possible penalties and interest - when they file their return the following year. That might seem like a good idea now, but it could lead to an unexpected tax liability at tax time. This is where a professional tax projection can more accurately establish appropriate withholding amounts. Determining the appropriate number of exemptions to claim on the W-4 can be tricky if you have other substantial income on which no tax is withheld or when both spouses of a married couple are employed. The guidance of a tax professional may be beneficial in these and other cases, to help determine the W-4 withholding allowances and to analyze how the withholding amount may affect the need for estimated tax installment payments. If you feel you need assistance in determining your withholding amount and completing the W-4 to produce the correct withholding, please give this office a call. Thu, 16 Jan 2014 19:00:00 GMT Are You Required to File 1099s? http://www.mytrivalleytax.com/blog/are-you-required-to-file-1099s/38424 http://www.mytrivalleytax.com/blog/are-you-required-to-file-1099s/38424 Tri-Valley Tax & Financial Services Inc Article Highlights: A business that pays an independent contractor $600 or more in a year must file Form 1099-MISC. Form W-9 is used to collect the independent contractor's data. Deadlines for issuing 2013 1099-MISCs are January 31, 2014 (to independent contractors) and February 28, 2014 (to the IRS). If you use independent contractors to perform services for your business and you pay them $600 or more for the year, you are required to issue them a Form 1099-MISC after the end of the year to avoid facing the loss of the deduction for their labor and expenses. The 1099s for 2013 must be provided to the independent contractor no later than January 31, 2014. It is not uncommon to have a repairman out early in the year, pay him less than $600, and then use his services again later, and have the total for the year exceed the $600 limit. As a result, you may overlook getting the information needed to file the 1099s for the year. Therefore, it is good practice to have individuals who are not incorporated complete and sign the IRS Form W-9 the first time that you use their services. Having properly completed, and signed, Form W-9s for all independent contractors and service providers eliminates any oversights, and protects you against IRS penalties and conflicts. IRS Form W-9, Request for Taxpayer Identification Number and Certification, is provided by the government as a means for you to obtain the data required to file the 1099s from your vendors. It also provides you with verification that you complied with the law should the vendor provide you with incorrect information. We highly recommend that you have a potential vendor complete the Form W-9 prior to engaging in business with them. The form can either be printed out, or filled out onscreen and then printed out. The W-9 is for your use only and is not submitted to the IRS. If you don't have a W-9 for a vendor you used in 2013 and paid $600 or more, you should make every attempt to obtain one. In order to avoid a penalty, copies of the 1099s need to be sent to the IRS by February 28, 2014. They must be submitted on magnetic media, or on optically scannable forms (OCR forms). This firm prepares 1099s in OCR format for submission to the IRS with the 1096 submittal form. This service provides recipient and file copies for your records. Use the worksheet to provide us with the information that we need to prepare your 1099s. Please attempt to have the information to this office by January 20, 2014, in order that the 1099s can be provided to the service providers by the January 31st due date. If you need assistance or have questions, please give this office a call. Tue, 14 Jan 2014 19:00:00 GMT What Happens When Social Security Funds Run Out? http://www.mytrivalleytax.com/blog/what-happens-when-social-security-funds-run-out/38396 http://www.mytrivalleytax.com/blog/what-happens-when-social-security-funds-run-out/38396 Tri-Valley Tax & Financial Services Inc Article Highlights:  Without Congressional action, Social Security will become insolvent in 2033. Benefits could shrink to 77% of the current levels and/or payments could be delayed. Individuals need to take proactive steps to supplement Social Security. This subject comes up over and over again and Congress keeps kicking it down the road, not wanting to deal with the political fallout that will result if taxes are increased or benefits are reduced to fund future Social Security benefits. The last change Congress made was to gradually extend the full retirement age from the age of 65 to the age of 67 between 2002 and 2025. Our Social Security system not only provides retirement benefits, but also provides disability and survivor benefits to covered workers and their families. The Social Security system receives funding from numerous sources, including the Social Security payroll tax (FICA) on wages, self-employment tax on the income of self-employed individuals, income tax on the taxable part of Social Security benefits, and interest on current trust fund assets. In the Social Security Administration's 2013 Annual Report, the Board of Trustees projected trust fund exhaustion by the year 2033. It also projected that in 2033, the first year of projected insolvency, the program would only have enough tax revenues to pay about 77% of scheduled benefits. That percentage would decline to 72% in 2087. If that happens, the monthly payment of benefits could be delayed, disrupting the predictability of the current payment schedule. A recent study by the Congressional Research Service (CRS) concluded that the sooner Congress acts, the smaller the changes to Social Security need to be. Making changes now would spread the costs over a larger number of workers, and over a longer period of time. Changes could be slowly phased in, rather than making abrupt cuts in benefits and/or increases in taxes, thus allowing workers to plan in advance for their retirements. Relying solely on government benefits for retirement is risky. Proactive retirement plans may be a better option for your golden years. The current tax code provides for numerous retirement incentives including Traditional IRAs, Roth IRAs, 401(k) plans, self-employed retirement plans, and a Saver's Tax credit for lower income individuals. A little saved each year can become a significant retirement income source in the future. If we can help you plan for your retirement, or explain the various tax-favored retirement plans available, please give this office a call. Thu, 09 Jan 2014 19:00:00 GMT You May Need to File Nominee http://www.mytrivalleytax.com/blog/you-may-need-to-file-nominee/38377 http://www.mytrivalleytax.com/blog/you-may-need-to-file-nominee/38377 Tri-Valley Tax & Financial Services Inc If you receive income in your name that actually belongs to someone else, aside from your spouse if married filing jointly, you are a nominee. This means you must file a 1099 form with the IRS appropriate to the type of income you received and give a copy of it to the income’s actual owner. One of the most common nominee situations is a joint bank account or brokerage account with all of its income reported under your Social Security (SS) number. You will need to provide the IRS and your account co-owner with a 1099 reporting the co-owner’s share of the income under his or her SS number. Then, when you file your return, you need to show all the income but back out the co-owner’s share as a “nominee amount.” The type of 1099 to file depends upon the type of income: 1099-INT for interest, 1099-DIV for dividends, and 1099-B for the proceeds from selling stocks and bonds. If the joint account is a brokerage account that has produced interest and dividend income, along with stock or bond sales, the nominee will need to prepare one of each type of 1099 for each co-owner. You should provide Forms 1099-INT and 1099-DIV as a nominee to the recipients by January 31, while the deadline for Form 1099-B is February 15. To avoid penalties, you need to send copies of the 1099s to the IRS by February 28, on magnetic media or optically scannable paper forms (OCR forms). This firm prepares 1099s in OCR format for submission to the IRS along with the required 1096 transmittal form. This service provides recipient and file copies for your records. If you have questions about filing 1099s as a nominee, please call this office. Tue, 07 Jan 2014 19:00:00 GMT Home Mortgage Interest and Unmarried Couples http://www.mytrivalleytax.com/blog/home-mortgage-interest-and-unmarried-couples/38329 http://www.mytrivalleytax.com/blog/home-mortgage-interest-and-unmarried-couples/38329 Tri-Valley Tax & Financial Services Inc Article Highlights: Home mortgage interest can generally be deducted only by a person who is legally obligated to pay the mortgage. An exception to the preceding general rule applies for interest paid on a real estate mortgage when a person is a legal or equitable owner of the real estate, but is not directly liable for the debt. If the person making the mortgage payment is not liable, or is not an equitable owner, then that individual is not allowed the interest deduction, nor is the individual who is liable on the debt. It is becoming increasingly common for couples to live together and remain unmarried, which can lead to potential tax problems when they share the expenses of a home, but only one of them is liable for the debt on that home. Home mortgage interest can generally be deducted only by a person who is legally obligated to pay the mortgage (in other words, a person who is named as an obligor on the mortgage document). However, there is an exception to the preceding general rule for interest paid on a real estate mortgage when a person is a legal or equitable owner of the real estate, but is not directly liable for the debt. For example, if the one who is not liable on the mortgage makes the payment, that individual is not allowed to deduct the interest portion of the payment, nor is the other person, because he or she did not pay it. This can lead to some complications where one of the couple earns significantly more income and would benefit tax-wise from an interest deduction, but the other person is the liable party on the loan. It is not uncommon for couples who both work to share the mortgage payments in the mistaken belief that they can each deduct their share of the mortgage interest on their individual tax returns. Although state law governs what constitutes equitable ownership, equitable ownership can generally be established if both parties are on title to the property, even if only one is liable on the loan. The premise behind equitable ownership is that an individual is protecting his or her ownership in the home by making some or all of the mortgage payments. This position was upheld in a 2011 Tax Court decision where the court denied a taxpayer's home mortgage interest deduction that she paid until she became co-owner of the property with her boyfriend and was legally obligated to make the mortgage payments. If you are in a similar situation and have questions related to sharing potentially tax-deductible expenses, please give this office a call. Tue, 31 Dec 2013 19:00:00 GMT Only 5 Days Left For 2013 Tax Deductions http://www.mytrivalleytax.com/blog/only-5-days-left-for-2013-tax-deductions/38303 http://www.mytrivalleytax.com/blog/only-5-days-left-for-2013-tax-deductions/38303 Tri-Valley Tax & Financial Services Inc Article Highlights: Actions you can still take to reduce your 2013 tax bite Actions must be completed before the end of 2013 Deductible expenses paid by credit card are deductible in the year charged We would like to remind you that the last day you may make a tax deductible purchase, pay a tax deductible expense, or make tax deductible charitable contributions for 2013, is Tuesday, Dec. 31. That is only 5 days away. However, you still have time to make charitable contributions, to pay deductible taxes, and to make business acquisitions before year-end. If you are making last minute purchases of business equipment, you also must place that equipment into service before year's end. Thus do not expect a deduction on your 2013 return if you take delivery after the end of the year, even if you paid for it in 2013. A charitable contribution to a qualified organization is considered made at the time of its unconditional delivery, which, for donations made by check, is the date you mail it. If you use a pay-by-phone account, the date the financial institution pays the amount is considered the date you made the contribution. If you are short of cash, keep in mind that purchases or contributions charged to your credit card are deemed purchased when the charge is made. Wishing you a happy New Year and looking forward to assisting you with your tax preparation needs during the coming tax season. Thu, 26 Dec 2013 19:00:00 GMT Make QuickBooks Yours in 2014: Customize http://www.mytrivalleytax.com/blog/make-quickbooks-yours-in-2014-customize/38295 http://www.mytrivalleytax.com/blog/make-quickbooks-yours-in-2014-customize/38295 Tri-Valley Tax & Financial Services Inc QuickBooks can be used as is (with some exceptions), but you can customize many elements to improve your workflow, your form output and your business insight. While many of the things you purchase and use in your daily work and professional lives don’t come with options, many do. Think about the last time you bought a car, for example. Did you request additional features for safety or convenience or aesthetic value? You can’t buy “extras” with your copy of QuickBooks. You can select from the different versions (Pro, Premier, etc.) and extend the software’s functionality by installing integrated add-ons from the Intuit App Center. But if you install QuickBooks on two machines from the same DVD or download, they’ll look and work the same. Figure 1: Need more functionality in areas like CRM or receivables? Talk to us about adding an integrated app. That is, until you start customizing the product, which you should do. The customization options in QuickBooks let you: Change the appearance of your desktop Modify forms to include only needed content and to make them look professional and uniform, and Drill down deeply on your company data to isolate only the information that you want. The benefits of customization are obvious. You’ll accelerate your workflow, polish your image and get insight that helps you make critical business decisions. Your Desktop View QuickBooks has always made your most commonly-used tools available on the home page. Intuit revamped this screen very skillfully starting with the 2013 versions, so it’s much cleaner and less cramped. But if you don’t use all of the functions represented by icons, you don’t have to even see them. Figure 2: You can remove icons from the home page, but not if related features are enabled. You can remove icons like Estimates and Time Tracking if you’re not planning to use those functions, but some icons must remain if specific features are active. For example, if sales orders and estimates are enabled, invoices are automatically turned on. Likewise, if you’re enabled Inventory, Enter Bills and Pay Bills are locked in, too. There’s an option to either limit the QuickBooks display to one window or let multiple windows open simultaneously. When you open QuickBooks, you can choose to have a specific set of windows open, the window or windows that were open when you shut down, or no windows. Your Forms QuickBooks comes with pre-defined forms for transactions like purchase orders, invoices and sales receipts. If you don’t like the look of one of these default templates, you can download one from the dozens of alternatives that QuickBooks supplies. You can alter these to better meet your needs – even creating multiple versions of the same type of form to use in different situations. Columns and fields can be added, deleted, renamed and repositioned so that your forms contain only the information that your business requires. You can add your logo and change fonts and colors. Once you’ve settled on a design, you can apply it to multiple forms to present a unified image to your customers and vendors. Figure 3: You can specify which fields will appear – both onscreen and in print -- in your templates’ headers, footers and columns. QuickBooks provides the tools to do all of this, but let us help you if you plan to do much modification. It can be challenging, especially if you have to use the Layout Designer. Your Reports You already know that you can do simple modification of your reports, like changing the date range. You may even have clicked on Customize Report and altered the column structure of a report and its sort order. But do you regularly click on the Filters tab in the Modify Report dialog box? If you’re often frustrated because your reports cover too much ground or an inadequate, unfocused level of detail, you should be exploring the options offered here regularly. Filters restrict the data in a given report to a smaller, more targeted group of records or transactions, based on your needs. For example, you might want to find out which customers in your New Construction class have outstanding balances (based on invoices) of more than $500 that are more than 60 days old. You’d set up Filters to create this screen: Figure 4: You’ll learn far more about your company’s financial status if you use Filters in reports. We can help you set up the most effective ones for your business. Why not resolve to make your copy of QuickBooks your copy of QuickBooks in 2014? Some customization processes will require some upfront time, but once you get going, you’ll wish you’d done this sooner. Tue, 24 Dec 2013 19:00:00 GMT Did You Take Your Required Minimum Distribution for 2013? http://www.mytrivalleytax.com/blog/did-you-take-your-required-minimum-distribution-for-2013/38297 http://www.mytrivalleytax.com/blog/did-you-take-your-required-minimum-distribution-for-2013/38297 Tri-Valley Tax & Financial Services Inc Article Highlights In the year you reach 70½, you become subject to the required minimum IRA distribution rules. Failure to take the required minimum distribution can result in a 50% penalty. The penalty can be waived under certain circumstances. IRA-to-charity transfers are possible in 2013. The IRS does not allow IRA owners to indefinitely keep funds in a Traditional IRA. Eventually, assets must be distributed and taxes must be paid. If there are no distributions, or if the distributions are not large enough, the IRA owner may have to pay a 50% penalty on the amount that was not distributed as required. Generally, required distributions begin in the year when the IRA owner reaches the age of 70½. IRA owners must take at least a required minimum distribution (RMD) amount from their IRA each year, which starts with the year they reach age 70½. A taxpayer who fails to take a RMD in the year when age 70½ is reached can avoid a penalty by taking that distribution no later than April 1st of the following year. However, that means the IRA owner must take two distributions in the following year, one for the year in which age 70½ is reached and one for the current year. For purposes of determining the RMD, all Traditional IRA accounts—including SEP-IRAs— owned by an individual must be taken into consideration. The minimum amount that must be withdrawn in a particular year is the value of the IRA account at the end of the business day on December 31st of the prior year, divided by the number of years the IRA owner is expected to live based on the IRS life expectancy tables and using the taxpayer's oldest age for the year. The RMD can be taken all at once, sporadically, or in a series of installments (monthly, quarterly, etc.) as long as the total distributions for the year are at least the minimum required amount. Distributions that are less than the RMD for the year are subject to a 50% excise tax penalty. The IRS may waive the penalty if the failure to withdraw the minimum amount or part of the minimum amount was due to reasonable error, and the owner has taken, or is taking, steps to remedy the insufficient distribution. For 2013, you can also directly transfer up to $100,000 from your IRA to a charity, thereby avoiding the income on your tax return. Such a transfer can count toward your RMD requirement. Although you get no charitable deduction as the contribution is excluded from income, it essentially allows taxpayers to deduct the charitable contribution without itemizing. Also, a charitable transfer effectively reduces your income, which in turn can reduce your taxable Social Security and other tax limitations based on income. If you have questions regarding your RMD for 2013 or how an IRA-to-charity transfer can benefit you, please give this office a call. Tue, 24 Dec 2013 19:00:00 GMT January 2014 Individual Due Dates http://www.mytrivalleytax.com/blog/january-2014-individual-due-dates/35713 http://www.mytrivalleytax.com/blog/january-2014-individual-due-dates/35713 Tri-Valley Tax & Financial Services Inc January 2 - Time to Call For Your Tax Appointment January is the beginning of tax season. If you have not made an appointment to have your taxes prepared, we encourage you do so before the calendar becomes too crowded. January 10 - Report Tips to Employer If you are an employee who works for tips and received more than $20 in tips during December, you are required to report them to your employer on IRS Form 4070 no later than January 10.January 15 - Individual Estimated Tax Payment Due It’s time to make your fourth quarter estimated tax installment payment for the 2013 tax year.January 15 - Farmers & Fishermen Estimated Tax Payment Due If you are a farmer or fisherman whose gross income for 2012 or 2013 is two-thirds from farming or fishing, it is time to pay your estimated tax for 2013 using Form 1040-ES. You have until April 15, 2014 to file your 2013 income tax return (Form 1040). If you do not pay your estimated tax by January 15, you must file your 2013 return and pay any tax due by March 3, 2014 to avoid an estimated tax penalty. Januar 31 - File 2013 Return to Avoid Penalty for Not Making 4th Quarter Estimated Payment If you file your prior year’s return and pay any tax due by this date, you need not make the 4th Quarter Estimated Tax Payment (January calendar). Mon, 23 Dec 2013 19:00:00 GMT January 2014 Business Due Dates http://www.mytrivalleytax.com/blog/january-2014-business-due-dates/35714 http://www.mytrivalleytax.com/blog/january-2014-business-due-dates/35714 Tri-Valley Tax & Financial Services Inc January 15 - Employer’s Monthly Deposit DueIf you are an employer and the monthly deposit rules apply, January 15 is the due date for you to make your deposit of Social Security, Medicare and withheld income tax for December 2013. This is also the due date for the nonpayroll withholding deposit for December 2013 if the monthly deposit rule applies. Employment tax deposits must be made electronically (no more paper coupons), except employers with a deposit liability under $2,500 for a return period may remit payments quarterly or annually with the return.January 31 - 1099s Due To Service Providers If you are a business or rental property owner and paid $600 or more for the services of individuals (other than employees) during a tax year, you are required to provide Form 1099 to those workers by January 31st. "Services" can mean everything from labor, professional fees and materials, to rents on property. In order to avoid a penalty, copies of the 1099s need to be sent to the IRS by February 28, 2014 (March 31, 2014 if filed electronically). They must be submitted on optically scannable (OCR) forms. This firm prepares 1099s in OCR format for submission to the IRS with the 1096 submittal form. This service provides both recipient and file copies for your records. Please call this office for preparation assistance. Payments that may be covered include the following:• Cash payments for fish (or other aquatic life) purchased from anyone engaged in the trade or business of catching fish• Compensation for workers who are not considered employees (including fishing boat proceeds to crew members)• Dividends and other corporate distributions • Interest • Amounts paid in real estate transactions• Rent• Royalties• Amounts paid in broker and barter exchange transactions• Payments to attorneys• Payments of Indian gaming profits to tribal members• Profit-sharing distributions• Retirement plan distributions• Original issue discount• Prizes and awards• Medical and health care payments• Debt cancellation (treated as payment to debtor)January 31 - W-2 Due to All Employees All employers need to give copies of the W-2 form for 2013 to their employees. If an employee agreed to receive their W-2 form electronically, post it on a website and notify the employee of the posting.January 31 - File Form 941 and Deposit Any Undeposited Tax File Form 941 for the fourth quarter of 2013. Deposit any undeposited Social Security, Medicare and withheld income tax. (If your tax liability is less than $2,500, you can pay it in full with a timely filed return.) If you deposited the tax for the quarter in full and on time, you have until February 10 to file the return.January 31 - Certain Small EmployersFile Form 944 to report Social Security and Medicare taxes and withheld income tax for 2013. Deposit or pay any undeposited tax under the accuracy of deposit rules. If your tax liability is $2,500 or more for 2013 but less than $2,500 for the fourth quarter, deposit any undeposited tax or pay it in full with a timely filed return.January 31 - File Form 943 All farm employers should file Form 943 to report Social Security, Medicare taxes and withheld income tax for 2013. Deposit any undeposited tax. (If your tax liability is less than $2,500, you can pay it in full with a timely filed return.) If you deposited the tax for the year in full and on time, you have until February 10 to file the return. January 31 - File Form 940 - Federal Unemployment Tax File Form 940 (or 940-EZ) for 2013. If your undeposited tax is $500 or less, you can either pay it with your return or deposit it. If it is more than $500, you must deposit it. However, if you deposited the tax for the year in full and on time, you have until February 10 to file the return.January 31 - File Form 945 File Form 945 to report income tax withheld for 2013 on all non-payroll items, including back-up withholding and withholding on pensions, annuities, IRAs, gambling winnings, and payments of Indian gaming profits to tribal members. Deposit any undeposited tax. (If your tax liability is less than $2,500, you can pay it in full with a timely filed return.) If you deposited the tax for the year in full and on time, you have until February 10 to file the return.January 31- W-2G Due from Payers of GamblingIf you paid either reportable gambling winnings or withheld income tax from gambling winnings, give the winners their copies of the W-2G form for 2013. Mon, 23 Dec 2013 19:00:00 GMT Did You Collect the Needed W-9s? http://www.mytrivalleytax.com/blog/did-you-collect-the-needed-w-9s/38282 http://www.mytrivalleytax.com/blog/did-you-collect-the-needed-w-9s/38282 Tri-Valley Tax & Financial Services Inc Article Highlights: The IRS Form W-9 is used to obtain independent contractors’ tax ID numbers. Tax ID numbers are required when filing 1099s. 1099-MISCs must be issued to independent contractors that are paid $600 or more during the year for performing services for a trade or business. If you used independent contractors to perform services for your business or trade, and you paid them $600 or more for the year, you must issue them a Form 1099-MISC to get the deduction for their labor and expenses and avoid potential penalties. (This requirement generally does not apply to payments made to a corporation. However, the corporation exception does not apply to payments made for attorney fees and for certain payments for medical or health care services.) It is not uncommon to have a repairman out early in the year, pay him less than $600, then use his services again later and have the total paid him for the year exceed the $600 limit. If this happens, you may overlook the information needed to file 1099s for the year. Therefore, it is good practice always to have individuals complete and sign the IRS Form W-9 the first time you use them. This eliminates oversights and protects you against IRS penalties and conflicts. Many small business owners and landlords overlook this requirement during the year, and only realize in January that they have not collected the required documentation to issue 1099s. If you have not collected W-9s throughout the year, do so as soon as possible, so you will have them available when it comes time to prepare 1099s for the year. It is sometimes difficult to acquire contractor information after the fact, especially from those contractors with no intention of reporting the income, so it’s always better to get it up front. Form W-9 provides entries for the contractor’s name, contact information and tax ID number. It also includes a signature block for the contractor, certifying the information and insulating you against penalties if he or she provides an incorrect or phony ID number. Click here to download the Form W-9. If you have questions or need copies of the Form W-9, please call this office. This office can also assist you with your 1099 filing requirements next January. Thu, 19 Dec 2013 19:00:00 GMT Maximize Your Medical Deductions http://www.mytrivalleytax.com/blog/maximize-your-medical-deductions/38280 http://www.mytrivalleytax.com/blog/maximize-your-medical-deductions/38280 Tri-Valley Tax & Financial Services Inc Article Highlights The medical deduction AGI floor has increased to 10%, up from 7.5%. For taxpayers age 65 or older and their joint-filing spouses, the AGI floor remains at 7.5% until 2017. For all taxpayers subject to the alternative minimum tax (AMT), the AGI floor is 10%. Beginning this tax year, the only medical expenses that you can deduct are those in excess of 10% of your adjusted gross income (AGI), up from the previous 7.5% AGI limitation. The limitation remains at 7.5% for taxpayers age 65 and over through 2016, unless they are subject to the alternative minimum tax, in which case it is 10% for them as well. For joint return filers not subject to the AMT, if either spouse is age 65 or older, the 7.5% of AGI limitation applies to their joint medical expenses. If you don't itemize your deductions or are nowhere near exceeding the AGI limitation, you need not concern yourself with this deduction. On the other hand, if you do itemize and think you might meet the AGI limitation, then it may be worth your time to summarize your medical expenses for the year.Use the following checklist to help you accumulate your deductible medical expenses. The list is by no means all-inclusive, and some of the deductions listed may have additional restrictions not included here. Ambulance Artificial Limb Artificial Teeth Birth Control Pills Braille Books and Magazines Abortion, Legal Acupuncture Alcoholism Treatment Chiropractor Christian Science Practitioner Contact Lenses Crutches Dental Treatment Drug Addiction Treatment Drugs (Prescription) Eyeglasses Fertility Enhancement Guide Dog Hearing Aids Hospital Services Impairment-Related Expenses Insurance Premiums Laboratory Fees Laser Eye Surgery Lead-based Paint Removal Learning Disability Treatment Medicare B & D Premiums Medical Services Medicines, Prescribed Mentally Retarded, Special Home for Nursing Home Nursing Services Operations Optometrist Organ Donors Osteopath Oxygen Prosthesis Psychiatric Care Psychoanalysis Psychologist Special Schools and Education Sterilization Stop Smoking Programs Surgery Therapy Vasectomy Weight-loss Program Wig (Cancer Patient) If you have questions related to your medical tax deductions please give this office a call. Tue, 17 Dec 2013 19:00:00 GMT Last Minute Tax Moves http://www.mytrivalleytax.com/blog/last-minute-tax-moves/38259 http://www.mytrivalleytax.com/blog/last-minute-tax-moves/38259 Tri-Valley Tax & Financial Services Inc Article Highlights: Year-end Tax Strategies Prepay Taxes if Not Subject to the AMT Pay Off Medical Installment Payments Advance Charitable Deductions Be Cautious of Overall Itemized Deductions Phase Out Prepay Tuition Expenses Fast Write-Offs For Business Purchases Year's end is rapidly approaching, but there are still some tax-advantaged moves you can make before the New Year. If you itemize deductions, you might prepay the next installment of your property taxes, pay off medical bills, and pay the fourth quarter state-estimated tax payment in advance. You might prepay college tuition to maximize education credits, and purchase business equipment to take advantage of the more beneficial write-offs available in 2013. Prepay Next Installment of Property Taxes - Usually, property taxes are billed in a fiscal year and can be paid all at once or in multiple installments. If you have been paying the current tax bill in installments and one of those installments is due in 2014, you can pay it before year's end and take the deduction on your 2013 return instead of on 2014's return. Pay State-Estimated Taxes in Advance - If your state has a state income tax, the state income tax paid during the year is deductible as an itemized deduction on your federal tax return. The fourth quarter estimated installment for 2013 is due on January 15, 2014 for most states. If additional state income tax payments in 2013 can benefit you as an itemized deduction, paying that January installment before year's end would allow it to be deducted in 2013. Caution: Taxes are not deductible if you are subject to the alternative minimum tax, and prepaying state income and property taxes might not provide any benefit. Pay Off Medical Bills - If you are paying medical expenses on an installment plan, you itemize your deductions, and your medical expenses for 2013 will exceed 10% of your adjusted gross income (AGI), or 7.5% for tax filers aged 65 and over, it could be beneficial to pay off the balance you owe. You can pay off those medical expenses, even with borrowed funds, before year's end and increase your deductions for 2013. Make Charitable Contributions - The holiday season is historically a time for making charitable contributions to qualified organizations, and if you are itemizing your deductions, the donations you make before the end of 2013 can help to reduce your 2013 tax bite. If you regularly tithe to a house of worship, you might even prepay part of your 2014 commitment and deduct it in 2013. This can be beneficial for those who only marginally itemize their deductions. Caution: Beginning in 2013, higher income taxpayers will have their itemized deductions phased out, so if you are subject to the phase-out, these planning suggestions may not provide the benefits expected. The income threshold for the phase-out is $300,000 for joint filers, $250,000 for singles, $275,000 for heads of household, and $150,000 for married individuals filing separately. Prepay College Tuition - If qualified tuition is paid during 2013 for an academic period that begins during the first three months of 2014, the education credit is allowed for those expenses in 2013. Thus, if your higher-education tuition expenses for yourself, your spouse, or your dependents to date for 2013 have not been enough to maximize your education credit for 2013, you might consider prepaying the tuition for the first quarter of 2014. Purchase Business Equipment - If you have a business, and you anticipate purchasing additional equipment for the business, it may be appropriate to make the purchase(s) before the end of the year to take advantage of the bonus depreciation deduction and/or the Sec 179 expensing deduction. Equipment includes machinery, computer systems, communication systems, office furnishings, etc. Unless extended by Congress, the bonus depreciation will end after 2013, and the maximum Sec 179 deduction will decrease to $25,000 from the current $500,000. If you have questions related to any of the suggested strategies, please give the office a call. Thu, 12 Dec 2013 19:00:00 GMT 16 Tax Issues Facing Small Business Owners in 2014 http://www.mytrivalleytax.com/blog/16-tax-issues-facing-small-business-owners-in-2014/38260 http://www.mytrivalleytax.com/blog/16-tax-issues-facing-small-business-owners-in-2014/38260 Tri-Valley Tax & Financial Services Inc 2014 will be a challenging tax year for businesses and higher-income taxpayers. The following issues are concerns that may impact you and your company’s tax liability in the new year. Small Business Health Insurance Credit – The tax credit to small employers (25 or fewer equivalent full-time employees) that provide an affordable health insurance plan for their employees and supplement at least half the premiums, will increase to 50% of the employer’s contribution in 2014, up from 35% in 2013. For non-profit employers, the credit will be 35% in 2014. Net Investment Income Tax – As part of the Patient Protection & Affordable Care Act (the new health care legislation sometimes referred to as “Obamacare”), a new tax kicked in for 2013 and will continue in 2014 and beyond. It is a surtax levied on the net investment income of taxpayers in the higher-income brackets. And although it is perceived as an additional tax on higher-income taxpayers, it can affect even those who normally don’t have higher income if they have a large income from the sale of real estate, certain business assets, stocks, or other investments. This is on top of the 20% long-term capital gain tax rate now in effect for higher-income taxpayers. Higher Tax Rates – Prior to the increase in 2013, there were six tax brackets: 10, 15, 25, 28, 33, and 35%. Beginning in 2013 and continuing for future years, a new top rate of 39.6% has been added for higher-income taxpayers. Higher Capital Gains Rates – Beginning in 2013 and continuing for future years, the tax rate for long-term capital gains and qualified dividends has been increased to 20% (up from 15%) for taxpayers with incomes exceeding the threshold for their filing status. Medical AGI Phase-out – Beginning in 2013 and continuing for future years, a taxpayer’s medical deductions will be reduced by 10% of their adjusted gross income, up from the previous 7.5% (but the 7.5% continues to apply to seniors through 2016). Possibility of Lower Expensing Deductions – The Sec 179 business expensing allowance for business equipment drops from $500,000 per year to $25,000 in 2014 unless Congress extends the more liberal amount.(1) Bonus Depreciation Expires – Beginning in 2014, the 50% bonus depreciation for tangible business assets will expire unless Congress extends it.(1) This also reduces the first-year maximum depreciation deduction for business autos and small trucks. Individual Insurance Mandate – Beginning in 2014, the Patient Protection & Affordable Care Act will impose the new requirement that U.S. persons, with certain exceptions, have minimum essential health care insurance, or face a penalty. Large Employer Mandatory Insurance Requirement – Originally scheduled to begin in 2014 but delayed until 2015 because the government did not have the reporting mechanisms in place, large employers, generally those with 50 or more full-time equivalent employees in the prior calendar year, that: o Do not offer health coverage for all its full-time employees, o Offer minimum essential coverage that is unaffordable (employee contribution being more than 9.5% of the employee’s household income), or o Offer minimum essential coverage where the plan’s share of the total allowed cost of benefits is less than 60% (i.e., less than the bronze plan coverage), will be required to pay a penalty if any of its full-time employees were certified to the employer as having purchased health insurance through a state or federal exchange and qualified for either tax credits or a cost-sharing subsidy. Simplified Home Office Deduction – Effective for tax years beginning in 2013 and continuing for 2014 and beyond, taxpayers can elect a simplified deduction for the business use of the taxpayer’s home. The deduction is $5 per square foot with a maximum square footage of 300. Thus, the maximum deduction is $1,500 per year. Eligibility qualifications are the same whether the simplified or regular deduction is claimed. Increased Payroll and Self-Employment Tax – As part of the new health care legislation, higher-income taxpayers are faced with an additional 0.9% health insurance (HI) tax. Starting in 2013, and continuing for future years, this surtax is imposed upon wage earners and self-employed taxpayers whose wage and self-employment income exceeds $250,000 for married taxpayers filing jointly ($125,000 if filing separately) and $200,000 for all others. Pease Limitations – The Pease limitation on itemized deductions that was reinstated in 2013 will continue for 2014. The Pease limitation phases out certain itemized deductions for higher-income taxpayers. Phase-out of Exemptions - The phase-out of exemptions for higher-income taxpayers that was reinstated in 2013 continues for 2014. Longer Depreciation Life for Leasehold and Restaurant Property – The current 15-year depreciable life will increase to 39 years in 2014.(1) Qualified Small Business Stock Gain Exclusion – Beginning for qualified small business stock issued in 2014, the gain exclusion drops from 100% to 50%. Qualified Real Property Expensing – Congress temporarily permitted the use of the Sec 179 expensing deduction to write off certain leasehold improvements, and restaurant and retail property improvements. Without Congressional intervention, this provision will no longer be available in 2014. (1) Congress, a few years back, engaged in brinkmanship with last-minute tax changes. Normally, they have managed to finalize tax law by year’s end. However, for 2013, they adjourned without addressing the issue of extending many tax breaks that were set to expire at the end of 2013. It is not known if these tax provisions will be extended or not. Thu, 12 Dec 2013 19:00:00 GMT Small Firm Health Insurance Marketplace Postponed http://www.mytrivalleytax.com/blog/small-firm-health-insurance-marketplace-postponed/38246 http://www.mytrivalleytax.com/blog/small-firm-health-insurance-marketplace-postponed/38246 Tri-Valley Tax & Financial Services Inc Article Highlights: Small Employer Health Insurance Credit Credit Qualifications Administration Delays Availability from Government Marketplace until 2015 Beginning in 2010, the federal government offered small employers a tax credit as an incentive to provide health insurance to their employees. This credit was up to 35% of the employer's contribution toward the cost of the employees' health insurance for 2010 through 2013, with an increase to 50% starting in 2014, and then available only for two consecutive years after 2013. For non-profit employers, the credit percentages are 25% and 35%, respectively. A small employer is one that employs 25 or fewer equivalent full-time employees with average full-time wages of $50,000 or less. That definition is misleading, since the maximum credit is only available to employers with 10 or fewer employees with average full-time wages of $25,000 or less; the credit begins to phase out as the number of employees and average full-time wages increase. Prior to the startup of health insurance marketplaces, a small employer would qualify for the credit by purchasing group insurance on the open market and paying at least 50% of the employees' premiums. Beginning in 2014, the credit was only supposed to be available if the insurance was purchased through the federal or state government-run marketplaces. However, because of the problems with making the federal marketplace website functional, the Administration has announced a one-year delay to 2015 for the requirement that the insurance be acquired through a government-run insurance marketplace. This will allow small businesses to continue with their existing plans for another year, and still qualify for the credit if the insurance otherwise meets the required criteria. If you have questions related to the small employer health insurance credit or any of the tax provisions of the Affordable Care Act being implemented in 2013 and 2014, please give this office a call. Tue, 10 Dec 2013 19:00:00 GMT 2013 TAX DEDUCTION FINDER & PROBLEM SOLVER http://www.mytrivalleytax.com/blog/2013-tax-deduction-finder--problem-solver/18218 http://www.mytrivalleytax.com/blog/2013-tax-deduction-finder--problem-solver/18218 Tri-Valley Tax & Financial Services Inc Our Tax Organizer is designed to help you maximize your deductions and minimize your problems in preparing and filing your tax return. The organizer is revised annually to be compatible with the ever-changing tax laws. The organizer currently posted below is primarily for the 2013 tax year, although it can be used for other years. The 2013 organizer is provided in three configurations to assist you in collecting relevant tax information needed to properly prepare your tax return. Access any of the three versions by double clicking on the underlined part version description. The organizers can be downloaded to your computer where you can fill and save the information until you have completed collecting all of your information. After you have completed it, please forward the organizer (printed or digitally) to our office for immediate service. If you have an office appointment, you can print it out and bring it with you to the meeting. A word of caution: you can fill the organizers online and print them out. However, if you close the file, your data will not be saved unless the form is saved to your computer.Once the completed organizer has been received, you will be contacted by phone, fax or e-mail with any questions, comments, or suggestions. If you e-mail our office advising us that you have sent your tax materials, we will notify you of their receipt.Basic Organizer – This organizer is suitable for clients that are not itemizing their deductions and DO NOT have rental property or self-employment expenses.Basic Organizer plus Itemized Deductions – This organizer is suitable for clients that are itemizing their deductions and DO NOT have rental property or self-employment expenses.Full Organizer – This organizer includes the information included in the basic organizer, plus entries for itemized deductions, rental properties and self-employment expenses.Business Organizer – Use this organizer for partnerships and incorporated business entities.Prior Year Individual Organizer – If you are filing your 2012 return late, please use this organizer. Thu, 05 Dec 2013 19:00:00 GMT Maximize Your American Opportunity for Education Tax Benefits http://www.mytrivalleytax.com/blog/maximize-your-american-opportunity-for-education-tax-benefits/38212 http://www.mytrivalleytax.com/blog/maximize-your-american-opportunity-for-education-tax-benefits/38212 Tri-Valley Tax & Financial Services Inc Article Highlights: American Opportunity Credit provides up to $2,500 of tax credit for the cost of post-secondary tuition in each of the first four years of attendance. The credit may be partially refundable. Credit is claimed on the tax return of the individual claiming the student’s tax exemption. The $2,500 credit is a per-student limitation, so the credit can be higher for multiple students in a family. Credit phases out for higher-income taxpayers. The tax code provides tax credits for post-secondary (college) education tuition paid during the year for a taxpayer, spouse, or dependents. Taxpayers should make every attempt to take advantage of these benefits. The most lucrative of the credits is the American Opportunity Credit (AOTC) that provides a partially refundable tax credit for the first four years of post-secondary education. The credit is 100% of the first $2,000 spent on post-secondary education, not including room and board, during the year and 25% of the next $2,000 for a maximum credit of $2,500. The credit does phase-out for joint filers with incomes between $160,000 and $180,000. For single taxpayers, the phase-out is between $80,000 and $90,000. There are some interesting quirks to this credit that give rise to some tax planning options. For starters, the credit is claimed on the tax return where the student’s exemption is claimed. For example, suppose parents are divorced, the mother claims the child as a dependent on her return, and the father pays the child’s college tuition. The mother would actually be the one who gets the credit. However, don’t forget the credit phases out at higher incomes, and should the higher-income parent be claiming the student’s dependency exemption, there may not be any credit at all. Any planning strategy must take into consideration the income of the one who is qualified to claim the exemption. Another example is grandparents paying the tuition for a grandchild. They would have no gift tax issues if the tuition is paid directly to the school, since educational gifts are exempt from the gift tax. In addition, the one who claims the child, generally the grandchild’s parents, gets the credit also free of any gift tax liability. If you have multiple students in the family, the AOTC is a per-student credit so you can claim up to $2,500 for each student who meets the requirements, including the half-time enrollment requirement. Up to 40% of the credit may be refundable, but the balance can only be used to offset the current year’s tax and any excess is lost. There is also another less beneficial credit - the Lifetime Learning credit - that can be claimed when the AOTC no longer applies; rather than a per-student limitation, it has a per-family limitation and lower income levels at which phase-out of the credit starts. If you would like to learn more about the American Opportunity Credit and other education tax benefits that can help you defray the cost of post-secondary education for yourself or your family, please give this office a call. Education tax planning is also available. Thu, 05 Dec 2013 19:00:00 GMT Mandatory Health Insurance Starts Next Month—Are You Ready? http://www.mytrivalleytax.com/blog/mandatory-health-insurance-starts-next-monthare-you-ready/38204 http://www.mytrivalleytax.com/blog/mandatory-health-insurance-starts-next-monthare-you-ready/38204 Tri-Valley Tax & Financial Services Inc Beginning in January, everyone, with certain exceptions, is required to have minimum, essential health care insurance. This issue has received a significant amount of press coverage recently, both negative and positive. Regardless of your opinion related to the issue, the mandatory insurance requirement, together with the accompanying penalties for not being insured, premium assistance credits, and insurance subsidies, all begin in 2014. The new marketplace, also called exchanges, where insurance policies can be purchased, have debuted already, but with mixed success. These new provisions are all part of the Affordable Care Act (sometimes referred to as Obamacare) that are being phased in over a number of years. How this will affect you and your family will depend upon a number of issues: Already insured - If you are already be insured through an employer plan, Medicare, Medicaid, the Veterans Administration, or a private plan that provides minimal, essential health care, then you will not be subject to any penalties under this new law. Those exempt from the mandatory insurance requirement - The following individuals are exempt from the insurance mandate, and will not be subject to a penalty for being uninsured: Individuals who have a religious exemption Those not lawfully present in the United States Incarcerated individuals Those who cannot afford coverage based on formulas contained in the law Those who have an income below the federal income tax filing threshold Those who are members  of Indian tribes Those who were uninsured for short coverage gaps of less than three months Those who have received a hardship waiver from the Secretary of Health and Human Services, who are residing outside of the United States, or who are bona fide residents of any possession of the United States. Help for those who can't afford coverage - Individuals and families whose household income is between 100% and 400% of the federal poverty level will qualify for a varying amount of subsidies to help pay for the insurance in the form of a Premium Assistance Credit. The lower the income, the more substantial the credit, which slowly phases out as the income increases, and is totally eliminated when the income reaches 400% of the poverty level. For those in the lower income levels, the subsidy will usually cover the bulk of the insurance costs. To qualify for that credit, the insurance must be acquired from an insurance exchange operated by the individual's or family's resident state, or by the federal government when the state does not have an exchange. These exchanges have been up and running (more or less) since October 1, 2013, allowing individuals and families to apply for coverage which will become effective as of January 1, 2014. There has been considerable negative press related to the federal exchange. The federal Internet site has not been functioning efficiently, but the administration says the problems will be corrected so everyone who needs to, can apply. Individuals who reside in states with their own exchange will use their state's exchange and should not be concerned with the federal exchange. In general, the state-run exchanges seem to be operating smoother than the federal exchange, but some of the state exchanges have also had their problems. Some insurance companies offering insurance through an exchange also offer assistance in signing up through the exchange without going through the website. But be cautious - to be eligible for a subsidy, the insurance must be purchased through an exchange. If you purchase a policy directly from an insurance company without going through an exchange, you won't be qualified for a subsidy, regardless of your income level. It is important to note that the subsidy is really a tax credit based upon family income. It can be estimated in advance, and used to reduce the monthly insurance premiums; it can be claimed as a refundable credit on the tax return for the year; or it can be some combination of both. However, it is based upon the current year's income and must be reconciled on the tax return for the year. If too much was used as a premium subsidy, some portion may need to be repaid. If there is an excess, it is refundable. If household income is below 100% of the poverty level, the individual or family qualifies for Medicaid. Penalty for noncompliance - The penalty for noncompliance will be the greater of either a flat dollar amount or a percentage of income: For 2014, $95 per uninsured adult ($47.50 for a child), or 1 percent of household income over the income tax filing threshold For 2015, $325 per uninsured adult ($162.50 for a child), or 2 percent of household income over the income tax filing threshold For 2016 and beyond, $695 per uninsured adult ($347.50 for a child), or 2.5 percent of household income over the income tax filing threshold Flat dollar amounts - The flat dollar amount for a family will be capped at 300% of the adult amount. For example, in 2014, the first year for the penalty, the maximum penalty for a family will be $285 (300% of $95). But for 2016, the maximum penalty jumps to $2,085 (300% of $695). The child rate will apply to family members under the age of 18. Overall penalty cap - The overall penalty will be capped at the national average premium for a minimal, essential coverage plan purchased through an exchange. This amount won't be known until a later date. If you have any questions as to how this new insurance requirement will affect you, please call. Tue, 03 Dec 2013 19:00:00 GMT Should You Be Converting Your Traditional IRA Into a Roth IRA before Year’s End? http://www.mytrivalleytax.com/blog/should-you-be-converting-your-traditional-ira-into-a-roth-ira-before-year8217s-end/38175 http://www.mytrivalleytax.com/blog/should-you-be-converting-your-traditional-ira-into-a-roth-ira-before-year8217s-end/38175 Tri-Valley Tax & Financial Services Inc Article Highlights: Roth IRAs provide tax-free earnings’ accumulation Traditional IRA to Roth IRA conversions can be made If this year is a low or negative income year, you will pay little or no conversion tax There are two types of IRA accounts, traditional and Roth. With traditional IRAs, your contributions are generally tax-deductible when you make the contribution, and tax is not paid on earnings as they accumulate. When it is time to start withdrawing the funds, however, the subsequent distributions, including earnings, are taxable. On the other hand, while contributions to Roth IRAs are not tax deductible, earnings accumulate tax-free, and when the time comes to take distributions, all amounts distributed, including the earnings, are 100% free of tax. The biggest advantage to Roth IRAs is the tax-free accumulation of earnings. Funds in IRA accounts can have significant earnings over the life of the account. And if those earnings end up being tax-free, as they do in a Roth IRA account, that is a huge tax advantage at retirement. If you have a traditional IRA, you are allowed to convert all, or a portion, of the traditional IRA to a Roth IRA at any time, provided you are willing to pay taxes on the amount converted. If your income for 2013 is low or negative, you may be able to convert some portion of your traditional IRA to a Roth IRA with little or no resulting tax. One of the best times to project your income for the year is close to year’s end. At the same time, any IRA conversion must be completed by year’s end. So, if you anticipate a low or negative income this year, and have a traditional IRA, don’t miss this unique tax-saving opportunity. Please call this office for assistance with projecting your 2013 income and determining what amount you might convert to minimize the tax, if any. Remember, the conversion must be made before year’s end, so call early. Tue, 26 Nov 2013 19:00:00 GMT You and the New Medicare Tax http://www.mytrivalleytax.com/blog/you-and-the-new-medicare-tax/38129 http://www.mytrivalleytax.com/blog/you-and-the-new-medicare-tax/38129 Tri-Valley Tax & Financial Services Inc Article Highlights: New additional 0.9% Medicare tax for higher-income taxpayers. Threshold for paying the tax is combined wages and net self-employment income of over $250,000 for married individuals and $200,000 for others. Certain combinations of income and marital status could result in unexpected tax liabilities and penalties. There is a new additional Medicare tax in effect for 2013 that may require year-end actions. The new tax, which is part of the Affordable Care Act, imposes an additional 0.9% Medicare (HI) tax on some higher-income taxpayers. The threshold for paying the tax is combined wages and net self-employment income of over $250,000 for married individuals and $200,000 for others. (Taxpayers who do not have wage or self-employment income - for example, retirees or those with only investment income - are not subject to this new tax, regardless of the amount of their income.) Employers are required to begin withholding the additional tax from an employee's wages when the employee's wage income exceeds $200,000. There are situations in which this will generate an additional refund and situations in which the withholding will be insufficient, creating an unexpected year-end tax liability and possibly penalties. Here are some situations that may need your attention: A married couple, both working for wages, and neither has wages in excess of $200,000, but the combination of wages exceeds $250,000. They will be liable for the full additional 0.9% tax on their combined wages that exceed $250,000 because neither of their employers withheld any of the additional Medicare tax. A single individual has two separate jobs, neither producing wages in excess of $200,000, but the combination of wages exceeds $200,000. The individual will be liable for the full additional 0.9% tax on his or her combined wages that exceed $200,000 because neither of the employers will have withheld any of the additional Medicare tax. A single individual has both wages and self-employment income, and the combination exceeds the $200,000 threshold. The individual will need to pay the extra Medicare tax on the combination of the wages and net self-employment income in excess of $200,000. These and similar situations can lead to unexpected tax liability and can cause an underpayment penalty to be assessed. Also, in determining whether taxpayers may need to make adjustments to avoid a penalty for underpayment of the estimated tax, individuals should also be mindful that the additional Medicare tax might be over-withheld. This could occur, for example, in a situation in which only one spouse of a married couple works and reaches the threshold for the employer to withhold, but the couple's income won't exceed the $250,000 threshold to actually cause the tax to be owed. In all of these (and other) situations, a new form in the taxpayers' 2013 returns will be used to reconcile the Medicare tax that was withheld, if any, and the actual additional Medicare tax liability. If you think you might be subject to this new tax and have questions or need assistance projecting your 1040 results and potential for unexpected tax liabilities and penalties, please give this office a call. Thu, 21 Nov 2013 19:00:00 GMT Receiving Payments from Customers in QuickBooks http://www.mytrivalleytax.com/blog/receiving-payments-from-customers-in-quickbooks/38130 http://www.mytrivalleytax.com/blog/receiving-payments-from-customers-in-quickbooks/38130 Tri-Valley Tax & Financial Services Inc Depending on the situation, there's more than one way to record a payment in QuickBooks. Here are your options. There are undoubtedly some QuickBooks tasks that are more enjoyable than others. It's no fun paying bills, for example, and making collection calls on unpaid invoices can be downright unpleasant. But you probably don't mind recording payments after all of your hard work creating products or providing services, sending invoices or statements, and generating reports to make sure you're on top of it all. QuickBooks offers more than one way to document customer remittances, and it's important that you use the right one for the right situation. Defining the destination Figure 1: Uncheck the box on the farthest right if you think you may want to direct payments to other accounts sometimes. Before you begin receiving payments, you need to make sure they'll end up in the correct account. The default is an account called Undeposited Funds. To make sure that this setting is correct, open the Edit menu and select Preferences, and click the Company Preferences tab. Use Undeposited Funds as a default deposit to account should have a check mark in the box next to it. If you think you'll sometimes want to deposit to a different account, leave the box unchecked. Then every time you record a payment, there'll be a Deposit to field on the form. Talk to us if you're planning to use any account other than Undeposited Funds, as you can run into serious problems down the road if payments are earmarked for the wrong account. The right tool for the job Probably the most common type of payment that you'll process will come in to pay all or part of an invoice or statement that you sent previously. Figure 2: You'll record payments on invoices you've sent in this window. To do this, open the Customers menu and select Receive Payments. In the window that opens, click on the arrow in the field next to RECEIVED FROM to display the drop-down list, and choose the correct customer. You'll see the outstanding balance. Enter the amount of the payment you received in the AMOUNT field and change the date if necessary. Click the arrow in the field next to PMT. METHOD, and then select the type of payment. If you established a credit card as the default payment method in the customer record, the card number and expiration date will be filled in. If not, or if a check was submitted, enter the information requested. Any outstanding invoices will appear in a table. Make sure that there's a check mark in front of the correct one(s). If the customer only made a partial payment, you'll have to indicate how you want to handle the underpayment. Here are your options: Figure 3: You can select how to handle partially-paid invoices here. When you're done, save the payment. Instant income There may be times when you receive payment immediately, at the time your products or services change hands. In these cases, you'll want to use a sales receipt. Open the Customers menu again and click Enter Sales Receipts. Select a customer from the drop-down list or add a new one, then fill out the rest of the form like you would an invoice, selecting the items and quantities sold, and indicating the type of payment made (cash, check, credit). Figure 4: Fill out a sales receipt when payment is received simultaneously with the sale. Other scenarios These are the most common methods of receiving payments from customers, and you may never have to do anything other than simple payment-recording and sales receipts. But unusual situations may arise that leave you stumped. For example, a customer may want to make a partial, advance payment before you've created an invoice or at the same time you're entering it. In a case like this, you'll have to create a payment item so that the money you've just received is reflected on the invoice. Or you may get a down payment on a product or service, or even an overpayment. Let us help you when such situations occur. It's much easier -and more economical for you - to spend some time with us before you record a puzzling payment than to have us track it down later on. We'll help ensure that your money makes it to the right destination. Thu, 21 Nov 2013 19:00:00 GMT Your 2013 Tax Bill May Give You A Shocker http://www.mytrivalleytax.com/blog/your-2013-tax-bill-may-give-you-a-shocker/38124 http://www.mytrivalleytax.com/blog/your-2013-tax-bill-may-give-you-a-shocker/38124 Tri-Valley Tax & Financial Services Inc Article Highlights Regular and capital gains tax rates increase for higher income taxpayers New 3.8% net investment income tax Additional 0.9% health insurance payroll and self-employment tax Phase-out of exemption deduction Phase-out of itemized deductions Many higher-income taxpayers are in for a shock when their 2013 income tax returns are prepared. In 2013, a significant number of tax increases, and new limitations on deductions, will impact higher income taxpayers. Before you decide that you are not a higher income taxpayer, keep in mind that your income does not just include your earnings from work—it also includes gains from the sale of property, investments, business assets, and other capital items. So if you have a significant gain from a sale, even though the gain can be attributed to many years of appreciation, it is all taxable in the year of sale, and could place you in the higher income category. It is important that you are aware of these changes, plan for them in advance, are prepared for the higher taxes, avoid underpayment penalties, and when appropriate, do some tax planning in advance to mitigate the bite of these new taxes. This article highlights many of the tax changes that take effect in 2013. Higher individual income tax rates for some. Generally, the regular income tax rates remain the same at 10%, 15%, 25%, 28%, 33%, and 35%. But to the extent a single individual’s income exceeds $400,000 it will be subject to a new, 39.6% tax rate. The 39.6% threshold for joint filers and surviving spouses will be $450,000, and $425,000 for those filing as the head of household. New Hospital Insurance tax. For higher income workers and self-employed individuals, an additional 0.9% hospital insurance (Medicare) tax is added to the FICA payroll tax (for employees), and self-employment tax (for self-employed individuals). This additional tax applies to wages and net self-employment income in excess of $250,000 for joint filers, $125,000 for married filing separately, and $200,000 for all others. For employees, this tax is automatically withheld from their payroll checks. Surtax on unearned income. As part of the Affordable Care Act, a new tax is imposed upon the net investment income of individuals, estates, and trusts. For single individuals, the tax is 3.8% of the lesser of: (1) net investment income; or (2) the excess of modified adjusted gross income over the threshold amount of $200,000. For joint filers and surviving spouses, the threshold is $250,000, and for married taxpayers filing separately, the threshold is $125,000. Net investment income is investment income less investment expenses. Investment income includes income from interest, dividends, non-qualified annuities, royalties, rents (other than derived from a trade or business), capital gains (other than derived from a trade or business), trade or business income that is a passive activity with respect to the taxpayer, and trade or business income with respect to trading financial instruments or commodities. Increased Capital Gains. Generally the long-term capital gains and qualified dividends tax rates remain at 0% and 15%, except for the fact that a 20% rate has been added for single taxpayers with incomes exceeding $400,000. For joint filers, the threshold for the 20% rate is $450,000, and $225,000 for married individuals filing separately. Personal exemption phase-out. The personal exemption allowance for the taxpayer, a spouse, and each claimed dependent for 2013 is $3,900. For example a married couple claiming their two children as dependents would be able to deduct $15,600 (4 x $3,900) in personal exemptions when determining their taxable income. However, beginning in 2013, the exemption allowance begins to phase out for single taxpayers when their adjusted gross income exceeds the threshold amount of $250,000. The starting threshold of joint filers and surviving spouses is $300,000, $275,000 for heads of household, and $150,000 for married taxpayers filing separately. The exemption allowances are reduced by 2% for each $2,500 (or a portion thereof), by which the taxpayer’s adjusted gross income exceeds the thresholds. Itemized deductions limitations. As with the exemption phase-out explained above, the itemized deductions are also phased out for 2013. The phase-out thresholds are the same as those for exemptions, and the itemized deductions are reduced by 3% of the amount by which the taxpayer’s adjusted gross income exceeds the threshold amount, with the reduction not to exceed 80% of the otherwise allowable itemized deductions. The reduction does not apply to the following deductions: medical and dental expenses, investment interest expense, casualty losses, and gambling losses. As you can see, for some taxpayers the impact can be quite significant. However, it may not be too late to improve your situation with some year-end planning, and the sooner the better. Options include taking advantage of unrealized losses, business expensing, tax credits, delaying certain deductions and tax prepayments, income deferral, and other techniques. Please call this office for assistance. Tue, 19 Nov 2013 19:00:00 GMT Underpayment Penalties Going to Get You? http://www.mytrivalleytax.com/blog/underpayment-penalties-going-to-get-you/38112 http://www.mytrivalleytax.com/blog/underpayment-penalties-going-to-get-you/38112 Tri-Valley Tax & Financial Services Inc Article Highlights Taxpayers can be hit with underpayment penalties if their withholding and estimated payments are too low. Underpayment penalties can be avoided by prepaying a safe-harbor amount of 90% of the current tax liability or 100% of the prior year’s tax liability. The safe harbor for taxpayers with an AGI greater than $150,000 in the prior year is 90% of the current tax liability or 110% of the prior year’s tax liability. Prepayment adjustments can still be made to minimize the underpayment penalty. Prepayments must generally be made evenly during the year to avoid the penalty. Withholding is treated as paid evenly throughout the year and can be used as a tool to avoid underpayment penalties. Our “pay-as-you-go” tax system requires that you make payments of your tax liability evenly throughout the year. If you don’t, it’s possible that you owe an underpayment penalty. Some taxpayers meet the “pay-as-you-go” requirements by making quarterly estimated payments. Typically this is how self-employed individuals and those with other non-tax-withheld sources of income satisfy their prepayment obligation. When your income is primarily from wages, however, you meet the requirements through wage withholding and likely rely on your employer’s payroll department to take out the right amount of tax, assuming that you have given them accurate Form W-4 data and that this information has not changed through marital changes, a second job, or your spouse working. Unfortunately, what payroll withholds may not be enough! You may also be underpaid if you: Have a gain from the sale of property, e.g., stocks, bonds, or real estate; Have other income from which there is no withholding (for example, a pension, alimony, IRA, interest, or dividends); Are subject to the new surtax on net investment income for higher-income taxpayers; and/or Are married or self-employed and subject to the new additional Medicare (hospital insurance) taxes. To avoid underpayment penalties, you generally must prepay more than 90% of your current year tax liability or 100% of your prior year tax liability. For taxpayers with incomes in excess of $150,000 in the prior year, pre-paying either 90% of the current year tax liability or 110% of the prior year tax liability will generally avoid underpayment penalties. In addition, the penalties are quarterly-based, so the withholding and estimated taxes need to be paid evenly throughout the year. Please note that state prepayment rules may be different from the federal rules explained in this article. Even though it is late in the year, withholding is treated as paid evenly throughout the year, so you may still have time to adjust your withholding to make up for underpayments in prior quarters. In addition, underpayments are based on when the income was received during the year, and late-year increased estimated tax payments can help offset underpayment penalties for income received later in the year. Think you may have underpaid? Why not give this office a call to be on the safe side? If you have questions related to the underpayment penalty or need assistance in determining if there are any late-year moves you can make to avoid the penalty, please give this office a call. Thu, 14 Nov 2013 19:00:00 GMT Basis Is An Important Tax Term! http://www.mytrivalleytax.com/blog/basis-is-an-important-tax-term/38108 http://www.mytrivalleytax.com/blog/basis-is-an-important-tax-term/38108 Tri-Valley Tax & Financial Services Inc Article Highlights: Basis is the point from which taxable gain or loss is measured Good basis records are required to minimize taxable gains Improvements, casualty losses, business depreciation, legal expenses, title costs, etc., can all affect basis. An important tax term that everyone should know is “basis.” The odds are very high that you will encounter the term sometime during your lifetime, and it can have a profound impact on your tax liability. Simply stated, “basis” is the monetary value from which a taxable gain or loss is calculated when an asset is sold. For example, you purchase 100 shares of ABC stock for $10 a share. Your basis for those shares of stock is $1,000 (100 x $10). Then, if the stock were sold for $1,500, you'd have a gain of $500, which is determined by subtracting your basis from the sale price. However this is a very simplistic example of basis. Determining basis, as you will see from the following explanation, can be complicated. Cost Basis - This is the simplest form of basis and is what you originally pay when you purchase stock, other financial securities, a house, rental property, cars, business assets, land, and other assets. However, even cost can be a little tricky as it includes the asset acquisition costs such as: brokerage costs, escrow closing costs, acquisition travel, legal services, title charges, sales tax, etc. So in our earlier example, let's say you paid a broker $50 to purchase the ABC stock; then your cost basis would have been $1,550. Adjusted Basis - After purchasing an asset your basis will change, either up or down, if you make improvements to the asset, suffer damage due to casualty losses, or claim business depreciation or amortization. One example of how your basis increases would be purchasing your home and then adding a pool, family room or other improvements; the cost of the improvements would increase your basis. Keep in mind that routine maintenance is not considered an improvement and does not increase your basis in an asset. Depreciated Basis - An example of when your basis decreases would be a business asset that you are depreciating (deducting as a business expense the cost of the asset over its useful life). In this case, the basis is reduced by the amount of the depreciation you have deducted against your rental or business income. Examples of assets where basis is typically adjusted downward due to depreciation include rental property, business vehicles, tools, business machinery, etc. In some cases, business assets can actually be 100% deducted (expensed) in the year they are acquired, in which case the asset's basis is reduced to zero. Inherited Basis - When you inherit an asset, you inherit it at its fair market value (FMV) at the decedent's date of death. This is because the FMV is included in the value of the estate of the decedent and taxed if the estate's value exceeds the exemption credit. This is not necessarily the basis for a future sale because there may be subsequent improvements, casualty losses, and perhaps depreciation taken after the inheritance. If the inherited asset was used in business before the inheritance, all prior depreciation is disregarded in the hands of the beneficiary. Gift Basis - If someone gifts an asset to you, your gift basis generally is the same as the giver's basis; however, the gift comes with some potential tax strings attached since you'll also be receiving the giver's built-in gains at the time of the gift. Thus, unlike inherited basis, you assume the tax liability for built-in gains. For example, say your aunt gave you 100 shares of stock for which her basis was $1,000. Thus, your basis is $1,000. At the date of the gift, the stock was worth $2,500. You sell the stock for $5,000 a couple of years after receiving it. Your tax gain is $4,000 ($5,000 - $1,000), which includes the $1,500 ($2,500 - $1,000) gain your aunt would have had if she had sold the stock on the date she gave it to you, plus the $2,500 ($5,000 - $2,500) gain from the date you received the stock. The rules are a bit more complex, and not covered in this article, if the asset's value at the date of the gift is less than the giver's adjusted basis. Determining your basis and the resulting gain or loss when an asset is sold can be complicated, and of course, good records are needed to verify the basis, including improvements and other adjustments in case of an audit or the sale of that asset. You are encouraged to consult with this office with any questions relating to basis and the potential gain from the sale of a personal or business asset. Tue, 12 Nov 2013 19:00:00 GMT Take Advantage of the IRA-to-Charity Transfer http://www.mytrivalleytax.com/blog/take-advantage-of-the-ira-to-charity-transfer/38081 http://www.mytrivalleytax.com/blog/take-advantage-of-the-ira-to-charity-transfer/38081 Tri-Valley Tax & Financial Services Inc Article Highlights Direct IRA-to-charity transfers are allowed in 2013 for taxpayers age 70½ and over. Maximum transfer allowed is $100,000. Transfer counts towards the required minimum distribution. Beneficial for taxpayers with Social Security income and those who do not itemize their deductions. For 2013, if you are age 70½ and over, you are allowed to make direct distributions (up to $100,000) from your Traditional or Roth IRA account to a charity. The distribution is tax free, but there is no charitable deduction, and the distribution can count toward your required minimum distribution (RMD). This provision can be very beneficial for a taxpayer who is inclined to make substantial charitable contributions for the year and: Receives Social Security (SS) benefits, and the taxpayer’s required minimum distribution for the year causes an increase in the tax on the SS benefits; or Is unable or is marginally able to itemize deductions for the year. Example: A 75-year-old married taxpayer’s adjusted gross income (AGI) before taking his RMD is $28,000. His RMD for the year is $10,000, and he wishes to contribute $8,000 to the building fund for his house of worship. If he takes his RMD and then contributes the $8,000 to the building fund, his AGI will be $38,000; it will be more, if his income includes SS benefits. On the other hand, if he makes a direct transfer of the $8,000 to his house of worship, his AGI would only be $30,000; some or all of his SS benefits would be tax free, depending how much he receives in SS benefits. Arranging a direct transfer may require some extra time, so if you want to donate some of your IRA to a charity, don’t wait until the last minute to make arrangements with your IRA trustee to do so. The higher a taxpayer’s income tax bracket, the greater the tax benefits when making a direct IRA-to-charity distribution. Please contact this office if you have questions related to the tax benefits derived from this strategy. Thu, 07 Nov 2013 19:00:00 GMT Avoid Home Cancellation of Debt Income http://www.mytrivalleytax.com/blog/avoid-home-cancellation-of-debt-income/38036 http://www.mytrivalleytax.com/blog/avoid-home-cancellation-of-debt-income/38036 Tri-Valley Tax & Financial Services Inc Article Highlights Forgiven debt is taxable. Forgiven home mortgage acquisition debt is excludable. Without a last-minute congressional extension, the home mortgage acquisition debt exclusion expires at the end of 2013. When a taxpayer settles a debt for less than its full amount, the forgiven amount of the debt is taxable, unless the taxpayer qualifies for one of two currently available exclusions. With the downturn in the economy and the accompanying drop in home prices that occurred in recent years, many taxpayers are unable to keep up the mortgage payments on their home, and unable to sell their homes because they owe more than the market price. As a result, a large number of homeowners have let their homes go back to the lender. Congress offered help for those in this situation by providing an exclusion from income of the forgiven acquisition debt from a taxpayer’s principal residence. If a taxpayer’s home is upside down, and they are considering letting it go back to the lender, they should be aware that unless Congress provides a last-minute extension, this Principal Residence Acquisition Debt Relief Exclusion will expire at the end of 2013. The only other exclusion available is the insolvent taxpayer exclusion, which limits the amount that can be excluded to the excess of the taxpayer’s total debts over the taxpayer’s total assets. An individual not able to exclude the forgiven debt on their home using the insolvent taxpayer exclusion may wish to act before year’s end. The tax implications of forgiven debt are very complicated and not all the details are covered in this article. You are strongly urged to contact this office if you are contemplating letting your home go back to the bank. Tue, 05 Nov 2013 19:00:00 GMT 2013 May Be Your Last Chance to Deduct Sales and Use Tax http://www.mytrivalleytax.com/blog/2013-may-be-your-last-chance-to-deduct-sales-and-use-tax/37984 http://www.mytrivalleytax.com/blog/2013-may-be-your-last-chance-to-deduct-sales-and-use-tax/37984 Tri-Valley Tax & Financial Services Inc Article Highlights Taxpayers can choose to deduct sales tax or state income tax. Sales tax deduction includes IRS table amount plus big-ticket items, or actual sales tax paid. Primarily benefits taxpayers in states with no income tax. Can also benefit taxpayers with low state income tax. Generally will not benefit taxpayers subject to the alternative minimum tax. Without congressional extension, the sales tax deduction expires after 2013. Purchasing big-ticket items before year-end could increase tax deductions. The 2013 tax year may be the last chance for taxpayers who itemize deductions to deduct state and local sales taxes. That is because the option to deduct state and local sales taxes in lieu of state and local income taxes expires after the year's end unless Congress extends it. If you are considering the purchase of a big-ticket item on which you'll pay sales tax, you may want to make that purchase this year in order to achieve a higher itemized deduction for sales taxes. Here is how it works: If you itemize your deductions you can choose to deduct state and local: General sales and use taxes, or Income taxes. You will obviously want to deduct the higher of the two options. When determining the deduction for sales tax you may either: Deduct the actual amount of sales and use taxes you paid during the year, or Use the amount from the IRS-published tables based on your income, family size, and the sales and use tax rates in your locale. To the table amount you may add the actual amount of sales to the table amount and use tax for certain "big-ticket" items purchased during the year, such as motor vehicles, boats, aircraft, homes (including mobile and prefabricated homes), and home-building materials. This provision primarily benefits taxpayers who live in states without an income tax where they have no state income tax to deduct. These states include Alaska, Florida, Nevada, South Dakota, Texas, Washington, and Wyoming. However, you may still be able to benefit, even if you reside in a state that has an income tax. This is especially true if your state tax is low, or if you are benefiting from state tax credits that reduce your tax state tax and the sales tax option produces a larger deduction. Taxes - either sales or state income tax - are not deductible at all when computing the alter-native minimum tax (AMT). So if you are subject to the AMT, the sales and use tax deduction strategy may be of no benefit to you. As you can see, whether you will benefit from accelerating any big-ticket purchases before the end of the year will depend upon a number of circumstances. If you are unsure on the appropriate course of action, please call this office for assistance. Tue, 29 Oct 2013 19:00:00 GMT Planning Pension Distributions http://www.mytrivalleytax.com/blog/planning-pension-distributions/37923 http://www.mytrivalleytax.com/blog/planning-pension-distributions/37923 Tri-Valley Tax & Financial Services Inc Article Highlights Except for distributions from Roth IRAs, pension distributions are generally taxable. Pension distributions can increase the tax on your Social Security benefits. Pension distributions can increase your marginal tax rate. IRA-to-charity transfers are allowable in 2013. An individual may begin withdrawing, without penalty, from his or her qualified pension plans and Traditional IRAs at the age of 59½. There are several exceptions that will allow earlier withdrawal without penalty. Upon reaching age 70½, you are required to take distributions from your plans or face a substantial penalty for failing to do so. An exception applies for Roth IRAs: no distributions are required while the account owner is alive (Roth distributions are generally tax-free anyway). Impact of Your Marginal Rate: If you are able to plan your withdrawals, you can save considerable tax dollars. This is not always possible, but the basic premise is to take distributions and pay the resulting tax in years when your marginal rate is low. Also watch for years when, for a variety of reasons, your taxable income is negative and some amount of distributions can be taken tax-free at ages 59½ and over. The early withdrawal penalty applies only to those under 59½. Impact on Social Security: For retired individuals receiving Social Security benefits, planning IRA distributions can also be beneficial. Social Security itself is taxable only when the total of one-half of the taxpayer’s Social Security benefits plus the taxpayer’s other income exceeds $25,000 ($32,000 for a married couple filing jointly). Once this threshold is reached, every additional dollar of other income will cause 50% to 85% of the Social Security benefits to become taxable as well. Therefore, if a taxpayer’s other income is below the threshold, it is generally good practice to withdraw just enough taxable IRA funds to bring the income up to the threshold amount, even if the funds are not needed in that year. They can be set aside for a future year when they might be used for some unplanned need or large purchase. This strategy may not work, however, if IRA distributions are required to be made (see next section). Minimum Distribution Requirements: The IRS does not allow taxpayers to keep funds in qualified plans and IRAs indefinitely. Eventually, assets must be distributed and taxes paid. If there are no distributions, or if the distributions are not large enough, the owner may have to pay a 50% penalty of the amount not distributed as required. Generally, distributions must begin in the year in which the plan owner reaches the age of 70½. In most cases, the required minimum distribution can be figured with the “life” factor from the following table, which is divided into the value of the account as of the end of the preceding tax year. So, for example, an individual who reaches age 73 in 2013 and whose IRA had a value of $50,000 on December 31, 2012, would be required to withdraw $2,024.29 in 2013 ($50,000/24.7). IRA-to-Charity Contributions: If you are at least 70.5 years old and are thinking of making a donation to a charity, you may wish to consider making the contribution from your IRA account. For 2013 (this is the last year without an extension by Congress), you can donate up to $100,000 to your favorite charity—provided it is an eligible charitable organization—tax-free from your Traditional IRA, Roth IRA, SEP, or SIMPLE IRA. To be considered valid, the distribution from the IRA to the charity must be made directly. It cannot pass through your hands or through other accounts. Note: These distributions are not permitted from ongoing SEP or SIMPLE plans—that is, plans to which a contribution has been made for the year. Here are the pertinent facts about making a donation using this provision of the law: The distribution is not taxable and does not add to your income for the year. The advantage is that it keeps your income low and helps minimize your taxable Social Security income and tax disadvantages associated with higher income. There is no charitable donation, since the distribution was tax-free. This can be a considerable benefit, however, to taxpayers who take the standard deduction and do not itemize anyway. If you have not already taken your required minimum distribution (RMD) for the year, the charitable distribution can count toward this year’s RMD. If you need assistance planning your pension distributions, please give this office a call. Thu, 24 Oct 2013 19:00:00 GMT QuickBooks 2014 Simplifies, Accelerates Common Tasks http://www.mytrivalleytax.com/blog/quickbooks-2014-simplifies-accelerates-common-tasks/37933 http://www.mytrivalleytax.com/blog/quickbooks-2014-simplifies-accelerates-common-tasks/37933 Tri-Valley Tax & Financial Services Inc New version of desktop QuickBooks accomplishes goal of speeding up, refining your workflow. If Intuit named its desktop versions of QuickBooks by the version number rather than the year, we'd be in version 20-something by now. QuickBooks, still the preferred software for small businesses, keeps getting smarter in its annual upgrades. Rather than pile on tons of new features in its upgrades, Intuit - for many years - has concentrated on making it easier for you to access the tools and data that are already there. QuickBooks 2014 is no exception. Its combination of small-but-effective changes makes it easier to get in and do what needs to be done quickly, and then get out and move on to activities that will help build your business. A Superior View If you do upgrade to QuickBooks 2014, head first to the new Income Tracker (Customers | Income Tracker). QuickBooks offers numerous reports and other tools for following the progress of your incoming revenue, but this new feature provides the best we've seen in the software. Figure 1: QuickBooks 2014's new Income Tracker gives you real-time access to the status of your receivables. You may find yourself spending a lot of time on this screen because it gives you a birds-eye view of your receivables that isn't available anywhere else in the program. You can click on any of the four colored bars that run across the top of the screen - Estimates, Open Invoices, Overdue and Paid Last 30 Days -- to change the data that appears below. Within each bar is the number of related transactions and their total dollar amount. You'll use the drop-down lists directly below these navigational bars to set filters that define a subset of transactions. These are CUSTOMER:JOB, TYPE, STATUS and DATE. The last column in the table is labeled ACTION. Once you've earmarked a transaction or transactions that you want to work with by checking the box in front of each name, you can select an action you want to take. If OPEN INVOICES is active, for example, you can receive payment for the transaction(s), print or email them. Where applicable, you can open a drop-down menu in the lower left of the screen and batch-produce invoices, sales receipts and credit memos/refunds. More Descriptive Email If you regularly send invoices through email, you may have wondered how many of them actually get opened by your customers in a timely fashion. QuickBooks 2014 contains a new tool that makes the details of each invoice available within the body of the email itself. Figure 2: You can modify this template or leave it as is: QuickBooks 2014 will fill in the relevant details for each customer. To access this template, open the Edit menu and select Preferences. Click on the Send Forms tab, then Company Preferences. Open the drop-down list to select the type of form you want to view or modify (pay stub, sales receipt, credit memo, etc.). Click the Edit button to see the actual template, and open the Insert Field drop-down menu to see your options. When you email a form, QuickBooks will replace the text and numbers in brackets with the correct details for each recipient. This is what's called a mail merge. They're fairly simple to use, but one error will throw your message off. We can help you get set up with these. Smaller Changes Intuit has made many small-but-useful features to QuickBooks 2014, all designed to help you work faster and smarter, and simply to support more convenient operations. For example, the Ribbon toolbars on transactions now include a tab or menu that lets you open related reports. Figure 3: You can now access reports directly from the Ribbon toolbar on transaction screens. In addition: QuickBooks' color scheme has been changed. The program runs faster. You can now copy and paste lines within forms. We can communicate with you (and vice versa) via an email window that's been embedded into the software. This tool even auto-pastes the transaction in question into the email window. There's been some retooling of online banking (now called “Bank Feeds”), making it more accessible and understandable. Upgrading to a new version of QuickBooks can be challenging, so we encourage you to let us know if you'd like to explore the process. New functionality and usability that improves your workflow and your understanding of your finances can be worth the time and trouble. Thu, 24 Oct 2013 19:00:00 GMT What's Best, Tax-Free or Taxable Interest Income? http://www.mytrivalleytax.com/blog/whats-best-tax-free-or-taxable-interest-income/33734 http://www.mytrivalleytax.com/blog/whats-best-tax-free-or-taxable-interest-income/33734 Tri-Valley Tax & Financial Services Inc Article Highlights Interest earned from states’ and local governments’ general purpose obligations that are generally tax-exempt for federal purposes. Earning tax-exempt interest may not put the most after-tax dollars into your pocket. Tax-exempt interest is not subject to the new 3.8% surtax on net investment income. Tax-exempt interest is still treated as income for the purposes of taxing Social Security benefits or the Earned Income Tax Credit. Some certain kinds of exempt interest are taxable for alternative minimum tax (AMT) purposes. A frequent tax strategy question is whether investing for tax-free or taxable interest is better. Generally, taxable interest will provide the greater return, but this may not hold true after taking into account taxes on the income. This is especially true for higher-income individuals now that we have the healthcare legislation’s new 3.8% surtax on the net investment income of higher- income taxpayers, which is discussed below. Therefore, the question is really: Which provides the greater "after-tax" return? Generally, interest derived from “municipal bonds” is tax-free for federal purposes and also is tax-free for a particular state if that state or its local governments issue the bonds. In addition, no state can tax interest from United States (U.S.) Government bonds. The following are issues related to making a decision about taxable or tax-free income: Municipal Bond Interest – Interest earned from states’ and local governments’ general purpose obligations, which are issued to finance their operations, are generally tax-exempt for federal purposes. However, the various states usually only exempt interest from bonds issued from the state itself and from local governments within the state. Hence, two categories of municipal bonds exist, namely the tax-free federal and state ones and the tax-free federal-only ones. Individuals can invest in municipal bonds by directly purchasing bonds or through funds that invest in municipal bonds. Some funds invest in bonds issued in a particular state only, providing residents of that state with income that is excludible on their state returns. In general, tax-free bonds are likely to be more attractive to taxpayers in higher brackets, as they receive a greater benefit from excluding interest from income. For lower-bracket taxpayers, on the other hand, the tax benefit of excluding interest from income may not be enough to make up for the lower interest rate generally paid on this type of bond. Even though municipal bond interest isn't taxable, it must be shown on the return. This is because tax-exempt interest is taken into account when determining the amount of Social Security benefits that is taxable, and it may affect the alternative minimum tax computation as well as the earned income credit, investment interest deduction and sales tax deduction. Tax-Deferred Retirement Accounts – It generally doesn't make sense to buy and to hold municipal bonds in your regular individual retirement account (IRA), Keogh or 401(k) plan account. The income in these accounts is not taxed currently, but once you start making withdrawals, the entire amount withdrawn is likely to be taxed even though it includes income from tax-free sources. Thus, if you want to invest your retirement funds in fixed-income obligations, it generally is advisable to invest in higher-yielding taxable securities. Alternative Minimum Tax (AMT) Consequences – Even though interest on municipal bonds is generally excluded from income for purposes of the regular federal income tax, interest on certain “private activity bonds” is included in income for purposes of the alternative minimum tax. Your broker can tell you whether the particular bond you are considering is a private activity bond subject to this rule. The alternative minimum tax is a separate tax system that applies if the tax determined under that system exceeds your regular income tax. Whether or not the alternative minimum tax applies will depend on your overall tax picture; however, in general, the alternative minimum tax’s effect would be to prevent you from achieving too low of an effective tax rate by means of tax-favored techniques, such as investing in municipal bonds. This office can help you to determine how the alternative minimum tax would apply to your situation and how it would affect the after-tax yield if you were to invest in municipal bonds. Effect of Exempt Interest on Taxation of Social Security Benefits – In general, a portion of Social Security benefits is taxable if your adjusted gross income, subject to certain modifications, exceeds specified amounts. For this purpose, the modifications to adjusted gross income include adding in tax-exempt interest. The effect of this rule is that if you receive Social Security benefits, investing in municipal bonds could increase the amount of tax you have to pay with respect to the Social Security benefit. While the municipal bond interest technically remains exempt from tax, the effect is the same as if a portion of that interest were taxable. One technique to solve this problem is to invest in tax-deferred, rather than tax-free, investments. For instance, income earned via an annuity is not taxable until the annuity is cashed in and thus would not impact the Social Security taxation except in the year cashed in. This office can assist you in determining the impact of tax-free income on the taxability of your Social Security benefits. Effect of Exempt Interest on Earned Income Credit – If you are otherwise eligible to take an earned income credit, you will lose the credit completely for 2013 if you have more than $3,300 of “disqualified income,” generally, interest, dividend, non-business rental, passive, and capital gain net income. Disqualified income includes tax-exempt income. Thus, municipal bond income could cause the loss of the credit. However, in most cases, an individual who is eligible for the earned income credit will be in a low tax bracket, thus making municipal bonds an unattractive investment in view of their lower yields. Disqualifying income can be avoided by using tax-deferred investments, as discussed under Effect of Exempt Interest on Taxation of Social Security Benefits above. Effect of the Net Investment Income Tax – Beginning in 2013, high-income taxpayers will be subject to a 3.8% surtax on net investment income. Tax-exempt interest is not subject to that tax, which is a significant issue for higher income taxpayers. For individuals, the tax is 3.8% of the lesser of: 1. The taxpayer’s net investment income or 2. The excess of modified adjusted gross income over the threshold amount ($250,000 for a joint return or surviving spouse, $125,000 for a married individual filing a separate return, and $200,000 for all others). No Deduction for Interest on Obligations Incurred in Connection with Tax-exempt Investments – If you borrow money for the purpose of investing in municipal bonds, you can't deduct the interest expense with respect to that borrowing. Moreover, even if the proceeds of borrowing are not directly traceable to tax-exempt investments, interest deductions could be disallowed if the Internal Revenue Service (IRS) could establish that you continued the borrowing in effect (that is, you didn't pay it off) for the purpose of acquiring or carrying the municipal bonds. If you have otherwise deductible interest and invest in municipal bonds, the result of this rule, by denying a deduction for interest paid, could be effectively to tax the municipal bond interest. • No Deduction for Investment Expenses Related to Tax-exempt Investments – If you itemize your deductions, you may deduct the costs of investment advisory, custodial or agency fees if your total miscellaneous deductions exceed 2% of your income. However, if the investment management services for which you paid are connected to the account from which you receive tax-exempt income from municipal bonds or bond funds, the related expenses are not deductible. Sale, Call or Redemption of Bond – Normally, the sale, call before maturity or redemption of a municipal bond is treated in the same way that a taxable bond is. If you held the bond long enough, any gain is taxed at favorable rates. Capital losses can be used to offset other capital gains. Up to $3,000 of any remaining losses can generally be applied against other income, with a carryover of any excess to later years. U.S. Government Bond Interest – By federal law, the states cannot tax the interest income of direct obligations of the U.S. Government (but it is federally taxed). This includes interest from U.S. Savings Bonds, U.S. Treasury bills, notes, bonds or other U.S. obligations. Interest earned from the Federal National Mortgage Association (Fannie Mae), Government National Mortgage Association (Ginnie Mae) and the Federal Home Loan Mortgage (FHLMC) Corporations are not direct obligations of the U.S. Government and therefore are not excludable from state taxation unless specifically allowed by state law (generally not the case). If you reside in a state with no state income tax, U.S. Government Bond Interest provides no tax benefit. Itemized Deductions – If you do have a state tax and the investment is tax-free in your state, then whether or not you itemize your deductions on your federal return also makes a difference. When you do itemize deductions, the state income tax you pay is included as a deduction on your federal return. Because having state tax-free income reduces your state tax, the reduced state tax lowers your itemized deductions and increases your federal tax. (If, instead of deducting state income tax, you deduct state sales tax because the sales tax amount is more, then whether or not you itemize deductions should not affect your decision to purchase a taxable or non-taxable investment). Municipal Bond Funds – If you are looking for diversity and professional management for your municipal bond holdings, you may want to consider buying shares of a fund that invests in tax-exempt municipal bonds. These funds may be broadly based or targeted to a particular state’s bonds. Dividend municipal bond funds are essentially treated in the same way as municipal bond interest is. To preclude a potential tax loophole, if an investor buys fund shares, receives an exempt-interest dividend and sells the shares at a loss within six months after the purchase, the loss is disallowed to the extent of the exempt-interest dividend. Use the worksheet below to determine the tax-exempt interest equivalents for your particular tax bracket, state tax (if applicable) and type of tax-exempt in investment. Enter all rates in decimal format, and carry all calculated values to at least four places after the decimal. For example, 5.75% would be entered as .0575. CAUTION, because the 3.8% surtax on net investment is only based on investment income or AGI in excess of certain levels, it is not accounted for separately in the worksheet below. Taxpayers below the high-income thresholds would not add the 3.8% to their marginal tax brackets when entering their federal tax brackets on line two of the form, while those who have incomes that are substantially greater than the thresholds would. Please call this office if you would like assistance with deciding whether to make a taxable or tax-free investment. Making the right decision for your particular circumstances can have a significant effect over long periods of time. Thu, 17 Oct 2013 19:00:00 GMT Tax Credits for Small Employers Offering Health Coverage http://www.mytrivalleytax.com/blog/tax-credits-for-small-employers-offering-health-coverage/15085 http://www.mytrivalleytax.com/blog/tax-credits-for-small-employers-offering-health-coverage/15085 Tri-Valley Tax & Financial Services Inc The Patient Protection and Affordable Care Act provides a tax credit for an eligible small employer (ESE) for nonelective contributions to purchase health insurance for its employees. The term "nonelective contribution" means an employer contribution other than an employer contribution pursuant to a salary reduction arrangement.o 2010 through 2013 – For tax years 2010 through 2013, qualified small employers, generally those with no more than 25 full-time employees with an average annual full-time equivalent wage of no more than $50,000 will be eligible for a tax credit of up to 35% of the cost of nonelective contributions to purchase health insurance for its employees. (Note, however, that the phase-out of the credit operates in such a way that an employer with exactly 25 full-time equivalent employees or with average annual wages exactly equal to $50,000 is not eligible for the credit. The maximum credit is available to employers with no more than 10 full-time equivalent employees with annual full-time equivalent wages from the employer of less than $25,000.o 2014 and Later - In 2014 and later, eligible small employers who purchase coverage through the Insurance Exchange would be eligible for a tax credit for two years of up to 50% of their contribution.An eligible small employer generally is an employer with no more than 25 full-time equivalent employees employed during its tax year, and whose employees have annual full-time equivalent wages that average no more than $50,000.The credit percentage that can be claimed varies with the number of employees and average wages. The full amount of the credit is available only to an employer with 10 or fewer full-time equivalent employees and whose employees have average annual full-time equivalent wages (AAEW) from the employer of less than $25,000.Calculating the credit amount - The credit is equal to the lesser of the following two amounts multiplied by an applicable tax credit percentage (shown in the table below) and subject to the phase-outs discussed later:(1) The amount of contributions the eligible small employer made on behalf of the employees during the tax year for the qualifying health coverage.(2) The amount of contributions that the employer would have made during the tax year if each employee had enrolled in coverage with a small business benchmark premium. Contributions under this method are determined by multiplying the benchmark premium by the number of employees enrolled in coverage and then multiplied by the uniform percentage that applies for calculating the level of coverage selected by the employer. (See table below) *For years after 2013, only available for a maximum coverage period of two consecutive tax years Computing the Credit Phase-Out – The full credit is only available to eligible small employers with 10 or less full-time equivalent employees with an average annual full-time equivalent wage (AAEW) of $25,000 or less. If either or both of these thresholds are exceeded, then the credit is reduced. There is no credit reduction if there are 10 or less full-time equivalent employees FTEs with an AAEW of $25,000 or less. There is no credit if the full-time equivalent employees exceed 25 or the AAEW exceeds $50,000. To figure the reduction of credit when the limits are exceeded, the number of the employer’s full-time equivalent employees and average annual full-time equivalent wages (AAEW) for the year must be determined.Figuring the number of full-time equivalent employees - An employer's full-time equivalent employees (FTEs) is determined by dividing the total hours the employer pays wages during the year (but not more than 2,080 hours per employee) by 2,080. The result, if not a whole number, is then rounded down to the next lowest whole number if any.Calculating average annual wages (AAEW) - Average annual equivalent wages is determined by dividing the employer’s total FICA wages (without regard to the wage base limitation) for the tax year by the number of the employer's full-time equivalent employees for the year (rounded down to the nearest $1,000 if need be). Credit reduction - If the number of full-time equivalent employees exceeds 10 or if AAEW exceed $25,000, the amount of the credit is reduced (but not below zero). Both reductions can apply at the same time!Example – Joe owns a small California wood working business and has 12 employees, not counting himself or family members. The total FICA wages (without regard for wage base limitations) for the year were $297,500 and total hours worked by his employees during the year were 24,400. None of his employees worked more than 2,080 hours during the year. Joe made nonelective contributions to purchase health insurance for his employees in the amount of $49,800 for the year. Joe’s credit is determined as follows:• Small Business Benchmark Premium (from Table Below) = 12 x 4,628 = $55,536• Smaller of actual premium paid or Benchmark premium = $49,800• Tentative credit = $49,800 x 0.35 = $17,430• Full-time equivalent employees (FTEs) = 24,400/2080= 11.7 rounded down = 11• Average annual full-time equivalent wages (AAEW) = $297,500/11 = $27,045 rounded down = $27,000 • FTE Reduction = ((11-10)/15) x $17,430 = $1,162• AAEW Reduction = ((27,000-25,000)/25,000) x $17,430 = $1,394• Joe’s health insurance tax credit = $17,430 - $1,162- $1,394 = $14,874 Small Business Benchmark Premium 2012* Taxable year State Empl Only Family Coverage State Empl Only Family Coverage AlaskaArkansasCaliforniaConnecticutDelawareGeorgiaIowaIllinoisKansasLouisianaMarylandMichiganMissouriMontanaN DakotaNew HampshireNew MexicoNew YorkOklahomaPennsylvaniaS CarolinaTennesseeUtahVermontWisconsinWyoming 7,3214,4604,9995,9556,2725,4814,8185,7604,9595,3005,2895,3345,0895,1484,8066,0305,5275,8495,0425,4005,2445,1134,7445,6785,5755,657 15,77410,24412,16115,27314,35412,20611,53114,12512,16312,44613,18812,93611,97511,19711,93915,02612,90914,68811,83613,35712,24311,52012,07213,09914,38713,688 AlabamaArizonaColorado DCFloridaHawaiiIdahoIndianaKentuckyMassMaineMinnesotaMississippiN CarolinaNebraskaNew JerseyNevadaOhioOregonRhode IslandS DakotaTexasVirginiaWashingtonW. Virginia- 5,0844,8645,3086,0175,4624,9384,6905,4144,6606,1105,4135,3604,9975,3525,3256,0635,0284,9875,1306,1515,0375,2225,2634,9045,679- 12,72711,86413,01415,14013,01312,27010,42712,38611,38716,26912,83713,58911,66712,25112,51114,47011,79312,14312,19714,95912,13612,80312,88411,70313,112- * The values for 2013 were not available at press time but they will be included in the 2013 Form 8941 instructions when they are released. Other Issues:o The credit reduces the employer's deduction for employee health insurance. o Aggregation rules apply in determining the employer. o Self-employed individuals, including partners and sole proprietors, 2% shareholders of an S Corporation, and 5% owners of the employer are not treated as employees for purposes of this credit. o The credit is not available for a domestic employee of a sole proprietor of a business, and there's a special rule to prevent sole proprietorships from receiving the credit for the owner and their family members. o The credit is a general business credit and can be carried back one year and forward for 20 years. However, because an unused credit amount cannot be carried back to a year before the effective date of the credit, any unused credit amounts for taxable years beginning in 2010 can only be carried forward. o The credit is available for tax liability under the alternative minimum tax. o The credit is initially available for any tax year beginning in 2010, 2011, 2012 or 2013. Qualifying health insurance for claiming the credit for this first phase of the credit is generally health insurance coverage purchased from an insurance company licensed under State law. o For tax years beginning in years after 2013, the credit is only available to an eligible small employer that purchases health insurance coverage for its employees through a State exchange and is only available for a maximum coverage period of two consecutive tax years beginning with the first year in which the employer or any predecessor first offers one or more qualified plans to its employees through an exchange.Please call this office if you have questions related to Tax Credits for Small Employers Offering Health Coverage. Tue, 15 Oct 2013 19:00:00 GMT Penalty for Not Being Insured http://www.mytrivalleytax.com/blog/penalty-for-not-being-insured/15116 http://www.mytrivalleytax.com/blog/penalty-for-not-being-insured/15116 Tri-Valley Tax & Financial Services Inc Non-exempt U.S. citizens and legal resident taxpayers will be penalized for failing to maintain at the least the minimum essential health coverage, which includes: Government-sponsored programs (e.g., Medicare, Medicaid, Children's Health Insurance Program), Eligible employer-sponsored plans, Plans in the individual market, and Certain grandfathered group health plans and other coverage as recognized by Health and Human Services (HHS) in coordination with IRS. The penalty will be phased in beginning in 2014 and fully implemented in 2016.Penalty - The penalty for noncompliance is the greater of:(A) The sum of the monthly penalty amounts for months in the taxable year during which 1 or more such failures occurred, or (B)  An amount equal to the national average premium for qualified health plans which have a bronze level of coverage, provide coverage for the applicable family size involved, and are offered through Exchanges for plan years beginning in the calendar year with or within which the taxable year ends.Monthly Penalty Amounts - The monthly penalty amount is an amount equal to 1/12 of the greater of the following amounts:(A) Flat dollar amount - (See computation of the flat dollar amount below)(B) Percentage of income - An amount equal to the applicable percentage for the year (see table below) multiplied by the amount the taxpayer's household income for the year exceeds the taxpayer's income tax filing threshold. Year    2014 2015 2016 Flat Dollar Amounts (Annual)   Adult $95.00 $325.00 $695.00   Individual Under 18 $47.50 $162.50 $347.50 Percentage of Income Rates: 1.0% 2.0% 2.5% After 2016 the values will be inflation adjusted Flat Dollar Amount - The flat dollar amount is the lesser of:1. The sum of the applicable dollar amounts (see table below) for all individuals who were not covered for the month or2. 300% of the per adult penalty (maximum $2,085 in 2016).Example - Unmarried taxpayer without minimum essential coverage - In 2016, Gil is an unmarried individual with no dependents who doesn't have minimum essential coverage for any month in 2016. Gil's household income is $120,000 and his applicable filing threshold is $12,000*. The annual national average bronze plan premium for Gil is $5,000*. For each month in 2016, from the table, Gil's applicable dollar amount is $695. Gil's flat dollar amount is $695 (the lesser of $695 and $2,085 ($695 x 3)). Gil's percentage of excess household income amount is $2,700 (($120,000-$12,000) x 0.025). The monthly penalty is 1/12 of the greater of foregoing amounts.  Therefore, the monthly penalty amount is $225 ($2,700/12)).  Of course the sum of the monthly penalty amounts is $2,700, unless Gil qualifies for the short coverage gap grace period (explained later in this chapter). The penalty is the lesser of the sum of the monthly penalty amounts ($2,700) and the cost of the bronze coverage ($5,000).  Thus the penalty is $2,700. *These amounts are estimates for purposes of the example. Why Are Monthly Amounts & Annual Amounts Determined?As you went through the example above you probably asked yourself, why do I compute an annual amount and then divide it by 12 and then turn around and multiply it by 12 again to get the annual amount?  There is a logical reason.  Even though the percentage of income calculation is based upon annual household income less the filing threshold amount times a fixed percentage, the flat dollar amount could change during the year due to marriage, death, children, etc.  Thus if the dollar amount turns out to be the greater amount, the sum of those dollar amounts will be used and each month may be different. If an applicable individual has not attained the age of 18 as of the beginning of a month, the “applicable dollar amount” for the month will be equal to one-half of the amount shown in the table.Definition of a Month for Coverage - For any calendar month, an individual is treated as having minimum essential coverage if the individual is enrolled in and entitled to receive benefits under a qualifying program or plan for at least one day. (Reg. § 1.5000A-1(b))Liability for Dependent Coverage - Under Code Sec 5000A, nonexempt individuals are subject to the penalty for any dependent that may be claimed on their tax return not just those that they actually claim. The penalty applies regardless if they claim them (Reg Sec 1.5000A-1(c)).   This will prove to be a problem in divorce situations where one parent has custody of a child and claims the child as a dependent, but the noncustodial parent is required by the divorce decree to pay for medical insurance, and has not done so or has purchased coverage that does not meet the minimum essential coverage requirement. The final IRS regulations make no exception for these circumstances and the custodial parent is liable for the penalty. However, Health and Human Services (HHS) has addressed this situation in guidance that permits Exchanges to grant a hardship exemption under 45 CFR 155.605(g)(1) to the custodial parent for a child in this situation if the child is ineligible for coverage under Medicaid or the Children's Health Insurance Program (CHIP). See HHS Center for Consumer Information & Insurance Oversight, Guidance on Hardship Exemption Criteria and Special Enrollment Periods (June 26, 2013). (T.D. 9632, Summary of Comments and Explanation of Revisions)If an individual may be claimed as a dependent by more than one taxpayer in the same year, the taxpayer who properly claims the individual as a dependent is liable for the shared responsibility payment attributable to the individual. If more than one taxpayer may claim an individual as a dependent in the same year but no one claims the individual as a dependent, the taxpayer with priority under the dependency tie-breaker rules to claim the individual as a dependent is liable for the individual's shared responsibility payment. (Reg 1.5000A-1(c)(2))Family Size - For computing a taxpayer's shared responsibility payment with respect to any nonexempt individual included in the taxpayer's shared responsibility family, the final regs clarify that the applicable family size involved for purposes of identifying the appropriate bronze level plan includes only the nonexempt members of the taxpayer's shared responsibility family who do not have minimum essential coverage. (Reg. § 1.5000A-4)Household Income - Household income is the sum of the modified adjusted gross incomes (MAGIs) of the taxpayer and all individuals accounted for in the family size required to file a tax return for that year. Modified AGI means AGI increased by all tax-exempt interest and foreign earned income.Penalty Enforcement - For a joint return, the individual and spouse are jointly liable for any penalty payment.  The penalty is not subject to the enforcement provisions of subtitle F of the Code and the use of liens and seizures otherwise authorized for collection of taxes does not apply to the collection of this penalty. Noncompliance with the personal responsibility requirement to have health coverage is not subject to criminal or civil penalties under the Code and interest does not accrue for failure to pay such assessments in a timely manner. Therefore, enforcement is generally limited to seizing a refund.Three-Month Grace Period - No penalty is assessed for individuals who do not maintain health insurance for a period of three months or less during the tax year. If an individual exceeds the three-month maximum during the taxable year, the penalty for the full duration of the gap during the year is applied. If there are multiple gaps in coverage during a calendar year, the exemption from penalty applies only to the first such gap in coverage. IRS is to provide rules when a coverage gap includes months in multiple calendar years.Taxpayers Exempt from the Penalty -The coverage requirement does not apply to: Individuals who cannot afford coverage because their required contribution for employer-sponsored coverage or the lowest cost “bronze plan” in the local Insurance Exchange exceeds 8% of household income for the year. After 2014, the 8% exemption is increased by the amount by which premium growth exceeds income growth. If self-only coverage is affordable to an employee, but family coverage is unaffordable, the employee is subject to the penalty if he does not maintain minimum essential coverage. However, any individual eligible for employer coverage due to a relationship with an employee (e.g. spouse or child of employee) is exempt from the penalty if that individual does not maintain minimum essential coverage because family coverage is not affordable (i.e., exceeds 8% of household income). Taxpayers with income below the income tax filing threshold (which for 2013 generally is $10,000 for a single person or a married person filing separately and is $20,000 for married filing jointly). Those exempted for religious reasons (who must be members of a recognized religious sect exempting them from self-employment taxes). Individuals residing outside of the U.S. (who are deemed to maintain minimum essential coverage). Individuals who are incarcerated or are not legally present in the U.S. All members of Indian tribes. Tue, 15 Oct 2013 19:00:00 GMT Avail Yourself of Your Employer's Tax-Advantaged Benefits http://www.mytrivalleytax.com/blog/avail-yourself-of-your-employers-tax-advantaged-benefits/37882 http://www.mytrivalleytax.com/blog/avail-yourself-of-your-employers-tax-advantaged-benefits/37882 Tri-Valley Tax & Financial Services Inc Article Highlights Employer dependent care benefits allow you to exclude up to $5,000 in childcare expenses from your wages. Employer health care plans allow you to exclude the cost of insurance for you and your family from your wages. Employer 401(k) plans allow you to set aside $17,500 ($23,000 if you are 50 years or over) per year, tax deferred for your retirement. Employer flexible spending arrangements allow you to pay up to $2,500 of medical and dental expenses with pre-tax dollars. Employer's education assistance plans allow the employer to reimburse you by up to $5,250 tax-free for education expenses. Employer stock purchase or option plans allow you to acquire the employer's stock at favorable prices. Employers can provide certain transportation, commuting, and parking costs free of tax. Employers have the option of providing a number of tax-advantaged benefits to their employees. The following is a rundown of those benefits. You may wish to check with your employer to see if the company provides any that interest you. Generally, larger employers provide these benefits. Dependent Care Benefits - If you incur childcare expenses so that you can work, you should check to see if your employer has a dependent care program. If dependent care benefits are provided by your employer under a qualified plan, you may be able to exclude up to $5,000 ($2,500 if Married Filing Separately) of child care expenses from your wages, which generally provides a greater tax benefit than the child care credit. Health Care Insurance - Many employers offer income-excludable group medical and even dental plans. Generally, everyone, under the Patient Protection Act, will be required to have basic affordable health insurance in 2014 or face penalties on their tax return. If you are currently uninsured, utilizing your employer's plan may be your best option to avoid a penalty. Adult Children's Health Care Insurance - Employers are allowed, but not required, to provide insurance coverage for your children under the age of 27. If allowed under your employer's plan, enrolling your young adult children in your employer's medical insurance is an option to get them covered, and at the same time, avoid their penalties for being uninsured in 2014. 401(k) or Similar Retirement Plans - If your employer has a 401(k) plan, you can elect to defer (pre-tax) a maximum of $17,500 for 2013. If you are 50 years or older, the maximum is increased to $23,000. These plans are especially beneficial when the employer provides a matching contribution. Flexible Spending Accounts - Some employers provide flexible spending accounts, which allow an employee to make contributions on a pre-tax salary reduction basis to provide coverage for up to $2,500 of medical and dental expenses. However, the participant must use the contributed amounts for qualified expenses, or else forfeit any amounts remaining in the account at the end of the plan year. Medical expenses paid for or reimbursed through pre-tax plans cannot be deducted as part of itemized deductions on your tax return. Educational Assistance Programs - An educational assistance program provided by your employer can provide up to $5,250 per year of educational assistance benefits that can be excluded from your income. If you have been thinking about continuing your education and your employer offers an educational assistance program, taking advantage of it is a great way to make going back to school more affordable. Stock Purchase and Option Plans - A variety of plans available to employers are designed to allow the employees to invest in the employer's stock at favorable prices. The most commonly encountered are: (1) Employee stock ownership plan (ESOP); (2) Nonqualified stock option; and (3) Incentive Stock Options (ISOs). Note: Because of the tax ramifications, it may be prudent for you to consult with this office prior to exercising a stock option, especially an ISO. Tax-Free (income excludable) Employee Fringe Benefits - If the employer provides them, the law allows an exclusion from the employee's taxable income for the following benefits: (1) The cost of up to $50,000 of group-term life insurance. (2) $245 (in 2013) per month for qualified parking. (3) $245 (in 2013) per month for transit passes and commuter transportation. (4) $20 per month for bicycle commuting expenses. If you have any questions related to these employer-provided benefits, please give this office a call. Tue, 15 Oct 2013 19:00:00 GMT Fee on self-insured health plans -Patient-centered Outcomes Research Fee http://www.mytrivalleytax.com/blog/fee-on-self-insured-health-plans-patient-centered-outcomes-research-fee/37883 http://www.mytrivalleytax.com/blog/fee-on-self-insured-health-plans-patient-centered-outcomes-research-fee/37883 Tri-Valley Tax & Financial Services Inc Section 4376 imposes a fee equal to $2 ($1 for plan years ending during physical year 2013) multiplied by the average number of lives covered under the plan. The plan sponsor is liable for the fee. The fees qre required to be reported annually on the 2nd quarter. Use Form 720 (IRS #133) and pay by its due date, July 31st. Fees are based on the average number of lives covered under the policy or plan. Generally, plan sponsors of applicable self-insured health plans must use one of the following three alternative methods to determine the average number of lives covered under a plan for the plan year. Actual count method. Snapshot method. Form 5500 method. However, for plan years beginning before July 11, 2012, and ending on or after October 1, 2012, plan sponsors may determine the average number of lives covered under the plan for the plan year using any reasonable method. This excise tax (fee) is due 2013 through 2019. Tue, 15 Oct 2013 19:00:00 GMT Employee Notices http://www.mytrivalleytax.com/blog/employee-notices/37884 http://www.mytrivalleytax.com/blog/employee-notices/37884 Tri-Valley Tax & Financial Services Inc Beginning January 1, 2014 (October 1, 2013 for existing employees), certain employers must provide written notice to employees about health insurance coverage options available through the Marketplace (insurance exchanges). Notices must be provided by employers to whom the Fair Labor Standards Act applies. Generally, means an employer that employs one or more employees who are engaged in, or produce goods for, interstate commerce. For most firms, this rule doesn't apply if they have less than $500,000 in annual dollar volume of business. Employers must provide a notice to each employee, regardless of plan enrollment status (if applicable), or of part-time or full-time status. Employers do not have to provide a separate notice to dependents or other individuals who are, or may become, eligible for coverage under any available plan, but who are not employees. The notice must be provided in writing in a manner calculated to be understood by the average employee. The notice must include information regarding the existence of a new Marketplace, inform the employee that the employee may be eligible for a premium tax credit if the employee purchases a qualified health plan (QHP) through the Marketplace, and (2) include a statement informing the employee that if the employee purchases a QHP, the employee may lose the employer contribution (if any) to any health benefits plan offered by the employer, and that all or a portion of such contribution may be excludable from income for federal income tax purposes. Model language notices are available on the Department of labor's EBSA's website. There is one model for employers who do not offer a health plan, and another model for employers who offer a health plan to some or all employees. Timing and delivery of notice. Employers must provide the notice to each new employee at the time of hiring beginning Oct. 1, 2013. For 2014, a notice is considered to be provided at the time of hiring if it is provided within 14 days of an employee's start date. For employees who are current employees before Oct. 1, 2013, employers must provide the notice no later than Oct 1, 2013. Tue, 15 Oct 2013 19:00:00 GMT Understanding Tax Terminology http://www.mytrivalleytax.com/blog/understanding-tax-terminology/37873 http://www.mytrivalleytax.com/blog/understanding-tax-terminology/37873 Tri-Valley Tax & Financial Services Inc Article Highlights Filing status can be single, married filing jointly, married filing separately, head of household, or surviving spouse with dependent child. Adjusted gross income (AGI) is the sum of a taxpayer’s income minus specific subtractions called adjustments. Modified AGI is the regular AGI with certain adjustments and exclusions added back. Taxable income is AGI less deductions and exemption. Marginal tax rate is the tax percentage at which the top dollar of your income is taxed. Also referred to as your tax bracket. Alternative minimum tax (AMT) is a tax that you pay if it is higher than tax computed the regular way. Certain deductions, credits and tax benefits are not allowed when computing the AMT. Credits reduce your tax dollar-for-dollar and some are refundable. Failing to prepay enough tax through withholding or estimated payments can result in an underpayment of estimated tax penalty. No matter what the season or your unique circumstances, when it comes to your taxes, planning usually pays off in a lower tax bill. It can be difficult to understand tax strategies if you are not familiar with the terminologies used in taxation. The following provides you with the basic details associated with the most frequently encountered tax terms. Filing Status - Generally, if you are married at the end of the tax year, you have three possible filing status options: married filing jointly, married filing separately, or, if you qualify, head of household. If you were unmarried at the end of the year, you would file as single, unless you qualify for the more beneficial head-of-household status. A special status applies for some widows and widowers. Head of household is the most complicated filing status to qualify for and is frequently overlooked as well as incorrectly claimed. Generally, the taxpayer must be unmarried AND: o pay more than one half of the cost of maintaining his or her home, a household that was the principal place of abode for more than one half of the year of a qualifying child or an individual for whom the taxpayer may claim a dependency exemption, or o pay more than half the cost of maintaining a separate household that was the main home for a dependent parent for the entire year. A married taxpayer may be considered unmarried for the purpose of qualifying for head-of-household status if the spouses were separated for at least the last six months of the year, provided the taxpayer maintained a home for a dependent child for over half the year. Surviving spouse (also referred to as qualifying widow or widower) is a rarely used status for a taxpayer whose spouse died in one of the prior two years and who has a dependent child at home. Joint rates are used, but no exemption is claimed for the deceased spouse. In the year the spouse passed away, the surviving spouse may file jointly with the deceased spouse if not remarried by the end of the year. In rare circumstances, for the year of a spouse’s death, the executor of the decedent’s estate may determine that it is better to use the married separate status on the decedent’s final return, which would then also require the surviving spouse to use the married separate status for that year. Adjusted Gross Income (AGI) - AGI is the acronym for adjusted gross income. AGI is generally the sum of a taxpayer’s income less specific subtractions called adjustments (but before the standard or itemized deductions and exemptions). The most common adjustments are job-related moving expenses, penalties paid for early withdrawal from a savings account, and deductions for contributing to an IRA or self-employment retirement plan. Many tax benefits and allowances, such as credits, certain adjustments, and some deductions are limited by a taxpayer’s AGI. Modified AGI (MAGI) - Modified AGI is AGI (described above) adjusted (generally up) by tax-exempt and tax-excludable income. MAGI is a significant term when income thresholds apply to limit various deductions, adjustments, and credits. The definition of MAGI will vary depending on the item that is being limited. Taxable Income - Taxable income is AGI less deductions (either standard or itemized) and exemptions. Your taxable income is what your regular tax is based upon using the tax rate schedule. The IRS publishes tax tables that are based on the tax rate schedules and that simplify tax calculation, but the tables can only be used to look up the tax on taxable income up to $99,999. Marginal Tax Rate (Tax Bracket) - Not all of your income is taxed at the same rate. The amount equal to the sum of your deductions and exemptions is not taxed at all. The next increment is taxed at 10%, then 15%, etc., until you reach the maximum tax rate. When you hear people discussing tax brackets, they are referring to the marginal tax rate. Knowing your marginal rate is important because any increase or decrease in your taxable income will affect your tax at the marginal rate. For example, suppose your marginal rate is 25% and you are able to reduce your income $1,000 by contributing to a deductible retirement plan. You would save $250 in federal tax ($1,000 x 25%). Your marginal tax bracket depends upon your filing status and taxable income. You can find your marginal tax rate using the table below. Keep in mind when using this table that the marginal rates are step functions and that the taxable incomes shown in the filing-status column are the top value for that marginal rate range. 2013 MARGINAL TAX RATES TAXABLE INCOME BY FILING STATUS Marginal Tax Rate Single Head of Household Joint* Married Filed Separately 10.0% 8,925 12,750 17,850 8,925 15.0% 36,250 48,600 72,500 36,250 25.0% 87,850 125,450 146,400 73,200 28.0% 183,250 203,150 223,050 111,525 33.0% 398,350 398,350 398,350 199,175 35.0% 400,000 425,000 450,000 225,000 39.6% Over 400,000 Over 425,000 Over 450,000 Over 225,000 * Also used by taxpayers filing as surviving spouse Taxpayer & Dependent Exemptions - You are allowed to claim a personal exemption for yourself, your spouse (if filing jointly), and each individual who qualifies as your dependent. The amount you are allowed to deduct is adjusted for inflation annually; the amount for 2013 is $3,900. Dependents - To qualify as a dependent, an individual must be the taxpayer’s qualified child or pass all five dependency qualifications: the (1) member of the household or relationship test, (2) gross income test, (3) joint return test, (4) citizenship or residency test, and (5) support test. The gross income test limits the amount a dependent can make if he or she is over 18 and does not qualify for an exception for certain full-time students. The support test generally requires that you pay over half of the dependent’s support, although there are special rules for divorced parents and situations where several individuals together provide over half of the support. Qualified Child - A qualified child is one who meets the following tests: (1) has the same principal place of abode as the taxpayer for more than half of the tax year except for temporary absences (2) is the taxpayer’s son, daughter, stepson, stepdaughter, brother, sister, stepbrother, stepsister, or a descendant of any such individual (3) is younger than the taxpayer (4) did not provide over half of his or her own support for the tax year (5) is under age 19, or under age 24 in the case of a full-time student, or is permanently and totally disabled (at any age) (6) was unmarried (or if married, either did not file a joint return or filed jointly only as a claim for refund) Deductions - Taxpayers can choose to itemize deductions or use the standard deductions. The standard deductions, which are adjusted for inflation annually, are illustrated below for 2013. Filing Status Standard Deduction Single $6,100 Head of Household $8,950 Married Filing Jointly $12,200 Married Filing Separately $6,100 The standard deduction is increased by multiples of $1,500 for unmarried taxpayers who are over age 64 and/or blind. For married taxpayers, the additional amount is $1,200. The extra standard deduction amount is not allowed for elderly or blind dependents. Those with large deductible expenses can itemize their deductions in lieu of claiming the standard deduction. Itemized deductions include: (1) Medical expenses, limited to those that exceed 10% of your AGI for the year (Note: The limitation is 7.5% of AGI for seniors age 65 and older through 2016.) (2) Taxes consisting primarily of real property taxes, state income (or sales) tax, and personal property taxes (3) Interest on qualified home debt and investments; the latter is limited to net investment income (i.e., the deductible interest cannot exceed your investment income after deducting investment expenses) (4) Charitable contributions, generally limited to 50% of your AGI, but in certain circumstances the limit can be as little as 20% or 30% of AGI (5) Miscellaneous employee business expenses and investment expenses, but only to the extent that they exceed 2% of your AGI (6) Casualty losses in excess of 10% of your AGI plus $100 per occurrence (7) Gambling losses to the extent of gambling income, and certain other rarely encountered deductions Alternative Minimum Tax (AMT) - The Alternative Minimum Tax is another way of being taxed that taxpayers frequently overlook. An increasing number of taxpayers are being hit with AMT. The Alternative Minimum Tax (AMT) is a tax that was originally intended to ensure that wealthier taxpayers with large write-offs and tax-sheltered investments pay at least a minimum tax. However, even taxpayers whose only “tax shelter” is having a large number of dependents or paying high state income or property taxes may be affected by the AMT. Your tax must be computed by the regular method and also by the alternative method. The tax that is higher must be paid. The following are some of the more frequently encountered factors and differences that contribute to making the AMT greater than the regular tax. o Personal and dependent exemptions are not allowed for the AMT. Therefore, separated or divorced parents should be careful not to claim the exemption if they are subject to the AMT and instead allow the other parent to claim the exemption. This strategy can also be applied to taxpayers who are claiming an exemption under a multiple support agreement. o The standard deduction is not allowed for the AMT, and a person subject to the AMT cannot itemize for AMT purposes unless he or she also itemizes for regular tax purposes. Therefore, it is important to make every effort to itemize if subject to the AMT. o Itemized deductions: - Medical deductions are allowed in excess of 10% of AGI from 2013 through 2016. The amount of deductible medical expenses for regular tax and AMT will be different for seniors, who are allowed to claim medical deductions in excess of 7.5% of AGI for regular tax during this period. For other taxpayers, the medical deductions allowed for regular tax and AMT will be the same. - Taxes are not allowed at all for the AMT. - Interest in the form of home equity debt interest and interest on debt for non-conventional homes such as motor homes and boats are not allowed as AMT deductions. - Miscellaneous deductions subject to the 2% of AGI reduction are not allowed against the AMT. o Nontaxable interest from private activity bonds is tax free for regular tax purposes, but some is taxable for the AMT. o Statutory stock options (incentive stock options) when exercised produce no income for regular tax purposes. However, the bargain element (difference between grant price and exercise price) is income for AMT purposes in the year the option is exercised. o Depletion allowance in excess of a taxpayer’s basis in the property is not allowed for AMT purposes.A certain amount of income is exempt from the AMT, but the AMT exemptions are phased out for higher-income taxpayers. The amounts shown are for 2013. AMT EXEMPTIONS & PHASE OUT Filing Status Exemption Amount Income Where Exemption Is Totally Phased Out Married Filing Jointly $80,800 $477,100 Married Filing Separate $40,400 $238,550 Unmarried $51,900 $323,000 AMT TAX RATES - 2013 AMT Taxable Income Tax Rate 0 – $179,500 (1) 26% Over $179,500 (1) 28% (1) $89,750 for married taxpayers filing separately Your tax will be whichever is higher of the tax computed the regular way and the Alternative Minimum Tax. Anticipating when the AMT will affect you is difficult, because it is usually the result of a combination of circumstances. In addition to those items listed above, watch out for transactions involving limited partnerships, depreciation, and business tax credits only allowed against the regular tax. All of these can strongly impact your bottom-line tax and raise a question of possible AMT. Tax Tip: If you were subject to the AMT in the prior year, itemized your deductions on your federal return for the prior year, and had a state tax refund for that year, part or all of your state income tax refund from that year may not be eligible for inclusion in the regular tax computation. To the extent that you received no tax benefit from the state tax deduction because of the AMT, that portion of the refund is not eligible for inclusion in the subsequent year’s income. Tax Credits - Once your tax is computed, tax credits can reduce the tax further. Credits reduce your tax dollar for dollar and are divided into two categories: those that are nonrefundable and can only offset the tax, and those that are refundable. In addition, some credits are not deductible against the AMT, and some credits, when not fully used in a specific tax year, can carry over to succeeding years. Although most credits are a result of some action taken by the taxpayer, there are two commonly encountered credits that are based simply on the number of your dependents or your income. These and a third popular credit are outlined below. o Child Tax Credit - The child tax credit is $1,000 per child. If the credit is not entirely used to offset tax, the excess portion of the credit, up to the amount that the taxpayer’s earned income exceeds a threshold ($3,000 for 2011–2017) is refundable. Taxpayers with three or more qualifying dependent children may use an alternate method for figuring the refundable portion of their credit. The credit is allowed against both the regular tax and the AMT for each dependent under age 17. The credit begins to phase out at incomes (MAGI) of $110,000 for married joint filers, $75,000 for single taxpayers, and $55,000 for married individuals filing separate returns. The credit is reduced by $50 for each $1,000 (or fraction of $1,000) of modified AGI over the threshold. o Earned Income Credit - This is a refundable credit for a low-income taxpayer with income from working either as an employee or a self-employed individual. The credit is based on earned income, the taxpayer’s AGI, and the number of qualifying children. A taxpayer who has investment income such as interest and dividends in excess of $3,300 (for 2013) is ineligible for this credit. The credit was established as an incentive for individuals to obtain employment. It increases with the amount of earned income until the maximum credit is achieved and then begins to phase out at higher incomes. The table below illustrates the phase-out ranges for the various combinations of filing status and earned income and the maximum credit available. 2013 EIC PHASE-OUT RANGE Number of Children Joint Return Others Maximum Credit None $13,310 – $19,680 $7,970 – $14,340 $487 1 $22,870 – $43,210 $17,530 – $37,870 $3,250 2 $22,870 – $48,378 $17,530 – $43,038 $5,372 3 $22,870 – $51,567 $17,530 – $46,227 $6,044 o Residential Energy-Efficient Property Credit - This credit is generally for energy-producing systems that harness solar, wind, or geothermal energy, including solar-electric, solar water-heating, fuel-cell, small wind-energy, and geothermal heat-pump systems. These items qualify for a 30% credit with no annual credit limit. Unused residential energy-efficient property credit is generally carried over through 2016. Withholding and Estimated Taxes - Our “pay-as-you-go” tax system requires that you make payments of your tax liability evenly throughout the year. If you don’t, it’s possible that you could owe an underpayment penalty. Some taxpayers meet the “pay-as-you-go” requirements by making quarterly estimated payments. However, when your income is primarily from wages, you usually meet the requirements through wage withholding and rely on your employer’s payroll department to take out the right amount of tax, based on the withholding allowances shown on the Form W-4 that you filed with your employer. To avoid potential underpayment penalties, you are required to deposit by payroll withholding or estimated tax payments an amount equal to the lesser of: 1) 90% of the current year’s tax liability; or 2) 100% of the prior year’s tax liability or, if your AGI exceeds $150,000 ($75,000 for taxpayers filing as married separate), 110% of the prior year’s tax liability. If you had a significant change in income during the year, we can assist you in projecting your tax liability to maximize the tax benefit and delay paying as much tax as possible before the filing due date. Please call if this office can be of assistance with your tax planning needs. Thu, 10 Oct 2013 19:00:00 GMT Medical Itemized Deductions Limited http://www.mytrivalleytax.com/blog/medical-itemized-deductions-limited/15111 http://www.mytrivalleytax.com/blog/medical-itemized-deductions-limited/15111 Tri-Valley Tax & Financial Services Inc The itemized deduction for medical expenses will be limited in the following manner:AGI Threshold - The AGI threshold percentage for claiming medical expenses on a taxpayer’s Schedule A is increased from 7.5% to 10%, which is the same as the current threshold percentage for alternative minimum tax (AMT) purposes. Delayed Implementation for Seniors - Individuals (and their spouses) age 65 (before close of year) and older will continue to use the 7.5% rate though 2016. AMT & Regular Tax AGI Limit Become the Same The Medical AGI Threshold for AMT is also 10%. Thus, with the implementation of the 10% threshold for regular tax, there will no longer be a medical adjustment for AMT. Tue, 08 Oct 2013 19:00:00 GMT Premium Assistance Credit http://www.mytrivalleytax.com/blog/premium-assistance-credit/15117 http://www.mytrivalleytax.com/blog/premium-assistance-credit/15117 Tri-Valley Tax & Financial Services Inc Tax credits will be available for low-income individuals who obtain health insurance coverage with a qualified health plan (QHP) through an “Exchange”. "Exchange" The Health Care Act requires each state to establish an “American Health Benefit Exchange” (“Exchange”) by Jan. 1, 2014, and requires insurers to provide QHPs to be sold on these Exchanges. The Premium Assistance Credit applies to QHPs purchased on an Exchange. The Federal Exchange will be used by individuals who reside in states that have not set up exchanges. Applicable Taxpayers – Generally, these are individuals whose household income is at least 100%, but not more than 400% of the federal poverty line and who don't receive health insurance under an employer plan, Medicaid or other acceptable coverage. Based upon the current poverty levels, the credit would phase-out at $45,960 for individuals and $94,200 for a family of four.Enrollment - Eligible individuals will enroll in a plan offered through an Exchange and report his or her income to the Exchange. Based on the information provided to the Exchange, the individual will receive a premium assistance credit based on income.Premium Subsidy or 1040 Credit – The credit can be used to: Reduce the monthly insurance premiums, Claim a credit on the 1040 tax return, or Some combination of both. The credit is based upon income and family size. Thus changes in those two items can increase or lower the amount of the credit. Immediately reporting changes ensures the correct credit being used as a subsidy for the insurance premiums. Failure to notify, as no doubt will happen frequently, could cause too large of a subsidy to be applied, with the result being the taxpayer will have to repay a portion of credit when they file their tax return. Either way, the credit for the year must be reconciled on the tax return for the year. Failure to Pay the Difference - Individuals who fail to pay all or part of the remaining premium amount will be given a mandatory three-month grace period before an involuntary termination of their participation in the plan.Eligibility - Eligibility for the premium assistance credit will be based on the individual's income for the tax year ending two years before the enrollment period. (Committee Report) The Secretary of Health and Human Services (HHS Secretary) must establish procedures for determining whether an individual who is applying for coverage in the individual market by a QHP offered through an Exchange, or who is claiming a premium assistance credit or reduced cost-sharing, meets the necessary eligibility requirements.Amount of Premium Assistance Credit - The credit is based on the taxpayer's household income level relative to the federal poverty line. The calculation is computed on a sliding scale starting at 2.0% of income for taxpayers at or above 100% of the poverty line and phasing out to 9.5% of income for those at 400% of the poverty line. The reference premium will be the second lowest cost silver plan available in the individual market in the rating area in which the taxpayer resides.Deductibles & Co-payments - The standard out-of-pocket maximum limits will be reduced by: Two-thirds for individuals with household incomes of more than 100% but not more than 200% of the poverty line, One-half for individuals between 201% and 300% of the poverty line, and One-third for individuals between 301% and 400% of the poverty line. The cost-sharing subsidy is available only for those months in which an individual receives the Premium Assistance Credit. Tue, 08 Oct 2013 19:00:00 GMT Make the Most of Your Deductions http://www.mytrivalleytax.com/blog/make-the-most-of-your-deductions/37855 http://www.mytrivalleytax.com/blog/make-the-most-of-your-deductions/37855 Tri-Valley Tax & Financial Services Inc Article Highlights Bunching allows you to maximize your itemized deductions in one year and take the standard deduction in the next. The medical expense threshold for deductibility has been increased to 10% of AGI for individuals under the age 65. You have the option of deducting the larger of: (1) State and local income tax paid, or (2) state and local sales tax paid during the year. Charitable contributions generally require substantiation (no more deduction for unsubstantiated cash in the kettle or the collection plate). Documented gambling losses are deductible to the extent of gambling winnings. Home (and second home) mortgage interest is deductible up to the acquisition debt and equity debt limits. Overall itemized deduction limitation applies in 2013 and later years for higher-income filers. As you plan for your tax year, keep in mind that you benefit from itemizing your tax deductions if they exceed the standard deduction, and sometimes when you are subject to the alternative minimum tax (AMT), it is beneficial to itemize even if the result is less than the standard deduction. The following is a run-down on itemizing your deductions. Bunching Deductions - If your itemized deductions exceed the standard deduction, you will want to itemize tem. Itemized deductions consist of five basic categories, each with its own limitations and special considerations. If your deductions only marginally exceed the standard deduction, consider “bunching” your deductions in one year. You can bunch your deductions by pre-paying some of your expenses in one year, such as your church contribution. This allows you to produce higher than normal itemized deductions that year and then take the standard deduction the other year. Also consider pre-paying your state’s January estimated tax payment in December, or paying your property tax in full rather than in installments carrying over to the next year. Medical Expenses - Deductible medical expenses are limited to unreimbursed expenses for you, your spouse if married, and dependents that exceed 10% (7½% if age 65 or older) of your adjusted gross income (AGI) for the year. If you are 65 or older, for AMT purposes, your medical deduction will be less because only the excess of unreimbursed expenses above 10% of your AGI is deductible. Expenses most frequently thought of as deductible medical expenses include medical and dental insurance premiums, charges by doctors and dentists, and the cost of prescription medication. Medical insurance premiums and other expenses paid with pre-tax dollars (e.g., through an employer's cafeteria plan) cannot be included. Some less common deductions include the following: - The cost of a weight-loss program (not including food) for the treatment of a specific disease or diseases (including obesity) diagnosed by a physician. - Medicare-B premium payments and Medicare-D premiums for drug coverage. - Participation in smoking-cessation programs and for prescribed drugs (but not non-prescription items such as gum or patches) designed to alleviate nicotine withdrawal. - Elder Care, generally including the entire cost of nursing homes, homes for the aged and assisted living facilities. Long-term care insurance premiums are deductible, but with an additional limitation on the allowed amount based on the insured’s age. See the table below for the annual limit per insured individual. 2013 Long - Term Care Insurance Age 40 or Less 41 to 50 51 to 60 61 to 70 71 & Older Limit $360 $680 $1,360 $3,640 $4,550 DLimi2013 Long-Term Care Insurance Age 40 or less 41 to 50 51 to 60 61 to 70 71 & Older Limit $360 $680 $1,360 $3,640 $4,550 - Medical dependent: For medical purposes, an individual may be a dependent even if his gross income precludes a dependency exemption, thus enabling you to deduct the individual’s medical expenses that you paid. - A child of divorced parents is considered a dependent of both parents for medical expenses purposes (so that each parent may deduct the medical expenses he or she pays for the child.) Generally, travel costs (not including meals) may be a deductible expense if the trip is primarily for medical purposes. Cosmetic surgeries are generally not deductible. Taxes - Deductible taxes primarily consist of real property taxes, state and local income taxes, and personal property taxes. Planning tip: Since taxes are not deductible for AMT purposes, you should attempt to minimize the payment of taxes in a year you are subject to the AMT if you can avoid late payment penalties for the tax payments. Where property taxes were paid on unimproved and unproductive real estate, you can annually elect to capitalize the taxes in lieu of deducting them (add the amount paid to your cost basis for the property). For 2013, you have the option of deducting on Schedule A as part of your itemized deductions the LARGER of: (1) State and local income tax paid, or (2) State and local sales tax you paid during the year. Interest - The only interest that is deductible as an itemized deduction is home mortgage interest and investment interest. Although this category does not have an AGI limitation, each interest type has special limitations. Home mortgage interest is limited to the interest paid on acquisition debt that does not exceed $1 million and home equity debt (not exceeding $100,000) on your main home and a designated second home. In addition, the interest on most equity debt is not deductible against the AMT. Note: Home acquisition debt is the original debt (current balance) incurred to purchase or substantially improve the home and is not increased by refinanced debt. Taxpayers can elect to treat any debt secured by the home as unsecured. The election is irrevocable without IRS consent. By making the election, the interest on the loan can be allocated to use of the proceeds, except none of the interest can be allocated back to the home itself. This election is for income tax purposes only and does not change how the loan is secured with the lender. If made, the election applies for both regular tax and AMT purposes, and it applies for the year the election is made and all future years. There is no specific IRS form to use to make the election. Instead, attach a statement to your return (timely filed) for the year the election is to be effective, stating the election is to apply. Investment interest is interest on debts incurred to acquire investments such as securities or land. The investment interest deduction is limited to net investment income (investment income less investment expenses), and any excess not deductible in the current year is carried over to future years. Interest on debt to acquire tax-free investment income is not deductible. You can elect to treat capital gains as investment income in order to increase the amount of deductible investment interest. However, the same capital gains are then not eligible for the lower capital gains tax rate. Qualified dividends taxed at the reduced capital gains tax rates are not treated as investment income for the investment interest deduction calculation. Charitable Contributions - You may, within certain limits, deduct charitable contributions of cash and property to qualified organizations to the extent you receive no personal benefit from the donations. All cash contributions regardless of the amount must be documented with a written verification from the charity or a bank record. Non-receipted cash contributions are not deductible. Non-cash contributions also require an acknowledgement of the contribution from the qualified charitable organization except for donations of $250 or less left at unmanned drop points. For non-cash contributions of more than $5,000 (except for publicly-traded securities), you are generally required to have a qualified appraisal of the property donated. Please call this office for further details. Charitable deductions are limited by a percent of income depending upon the type of contribution. Contributions in excess of the AGI limitation may be carried forward for five years. Although there are 20% and 30% of AGI limitations, generally, contributions to qualified organizations are deductible to the extent they don’t exceed 50% of your AGI. One notable exception is the 30% limitation for gifts of capital gains property, where the contribution is based on the fair market value of the property. Frequently overlooked contributions include those made to governmental organizations such as schools, police and fire departments, parks and recreation, etc. Uniforms, travel expenses, and out-of-pocket expenses for a charity are also deductible, but not the value of your time or the cost of equipment such as computers, phones, etc., if you retain ownership. Congress imposed some tough rules that substantially limit the deduction for the popular charitable car donation. If the claimed value of the vehicle exceeds $500, the deduction will generally be limited to the gross proceeds from the charity’s sale of the vehicle. The IRS provides Form 1098-C that incorporates all of the required acknowledgement elements for the donee (charitable organization) to complete. The donor is required to attach copy B of the 1098-C to his or her federal tax return when claiming a deduction for contribution of a motor vehicle, boat, or airplane. There is an exception to the rules for donated vehicles that the charity retains for its own use “to substantially further the organization's regularly conducted activities or provides to a needy family.” Please call this office for more information. For 2013, if you are age 70½ and over you are allowed to make direct distributions (up to $100,000 per year) from your Traditional or Roth IRA account to a charity. The distribution is tax-free, but there is no charitable deduction. The distribution counts toward your required minimum distribution. This provision can be very beneficial if you have Social Security income and/or do not itemize your deductions. Miscellaneous Deductions - Miscellaneous deductions fall into two basic categories: those that are reduced by 2% of your AGI and those that are not. - Those Subject to the 2% Reduction - This category generally includes your investment expenses, costs of having your tax return prepared, and employee business expenses. - Those NOT Subject to the 2% Reduction - This category includes gambling losses (but cannot exceed the amount reported as gambling income), personal casualty losses (after first reducing each loss by $100 and the total loss for the year by 10% of your AGI), repayments of income (over $3,000) reported in prior years, and estate tax deductions. The estate tax deduction is considered by many to be the most overlooked deduction in taxes. It is a deduction based on the additional taxes paid as a result of the same income being taxed to both the estate and to the beneficiaries of the estate. Only certain types of income are doubly taxed. As an example, if the decedent had a Traditional IRA account, the value of the IRA would be included in the decedent’s estate and also would be taxable to the beneficiary. If the estate paid any tax at all (on Form 706), the beneficiary in this example would have an estate tax deduction equal to the portion of the estate tax paid attributable to the IRA. Overall Itemized Deduction Limitation - If your 2013 adjusted gross income exceeds $300,000 for joint filers and a surviving spouse, $275,000 for heads of household, $250,000 for single filers, and $150,000 for married taxpayers filing separately, your total itemized deductions will be limited, adding another factor to consider for planning purposes. This overall limitation had been reduced or suspended for the last few years. If the limitation applies to you, the total amount of your itemized deductions is reduced by 3% of the amount by which your AGI exceeds the threshold amounts listed above, with the reduction not to exceed 80% of your otherwise allowable itemized deductions. The threshold amounts are inflation-adjusted for tax years after 2013. If you have questions related to maximizing your itemized deductions, please give this office a call. Tue, 08 Oct 2013 19:00:00 GMT Don't Overlook the Portability of a Deceased Spouse's Unused Estate Tax Exemption http://www.mytrivalleytax.com/blog/dont-overlook-the-portability-of-a-deceased-spouses-unused-estate-tax-exemption/37835 http://www.mytrivalleytax.com/blog/dont-overlook-the-portability-of-a-deceased-spouses-unused-estate-tax-exemption/37835 Tri-Valley Tax & Financial Services Inc Article Highlights Estates may elect to transfer the unused estate tax exclusion to the surviving spouse. Election must be made on an estate tax return for the decedent. The estate tax return must be timely filed. Estates of decedents who die after December 31, 2010 may elect to transfer any unused exclusion to the surviving spouse. The amount received by the surviving spouse is called the deceased spousal unused exclusion (DSUE) amount. Making this election can have a profound effect on the taxation of the estate of the surviving spouse. Example: Bob and Jane are married and Bob passes away in 2012. Bob's estate is valued at $3,700,000. Since Bob's estate plan passed his entire estate to his wife Jane, the Federal estate tax would be zero due to the unlimited marital deduction afforded under the Internal Revenue Code. Since Bob's estate did not utilize any of his federal estate tax exemption ($5,120,000 for individuals who died in 2012), the exemption is “wasted.” However, under the portability provisions of the federal estate tax, Bob's estate can elect to pass that unused exemption to Jane by filing a Federal Form 706 and making the “Portability Election” on Bob's estate tax return. If this “Portability Election” is made on Bob's estate tax return, Bob's unused estate tax exemption of $5,120,000 is transferred to Jane and increases her future estate tax exemption by this unused amount. The highest marginal estate tax rate is currently 40%; therefore, the unused exemption passed from a decedent to his or her spouse via the “Portability Election” amount can result in significant estate tax savings. Example: Suppose Jane in our prior example passes away in 2013. Assuming that Jane's estate is valued at $6,000,000, if the “Portability Election” had not been made on Bob's estate tax return, Jane's taxable estate would be $750,000 ($6,000,000 less the $5,250,000 exemption for someone who dies in 2013). However, if the election had been made on Bob's return, Jane's taxable estate would be zero, as her total exclusion would be $10,370,000 (her $5,250,000 plus the portability from Bob's estate of $5,120,000). Making this election would thus result in a sizable reduction in estate taxes. A surviving spouse can apply the unused exclusion amount received from the estate of his or her last deceased spouse against any tax liability arising from subsequent lifetime gifts and transfers at death. Making the Election - To make the portability election, an estate tax return must be filed on time, even if the estate would not otherwise be required to file an estate tax return. Failure to file the estate tax return will result in the loss of the portability of the spouse's unused exclusion amount. A timely filed return is one that is filed on or before the due date of the return, including extensions. When a surviving spouse's estate is expected to be valued at less than the estate tax exclusion amount when he or she passes, it may seem to be a waste of time and money to file a 706 Estate Tax Return for the pre-deceased spouse. However, in making that decision, one should consider the possibilities of the surviving spouse receiving inheritances or winning the lottery, or of Congress reducing the estate tax exemption at some time in the future. Any of these potential events could result in substantial estate tax considering the current tax rate on taxable estates is 40%. If you believe that the election to transfer any unused exclusion to a surviving spouse applies to you, family members, or friends and would like additional information, please give this office a call. Thu, 03 Oct 2013 19:00:00 GMT How Will the Health Care Legislation Affect You and Your Taxes? http://www.mytrivalleytax.com/blog/how-will-the-health-care-legislation-affect-you-and-your-taxes/15045 http://www.mytrivalleytax.com/blog/how-will-the-health-care-legislation-affect-you-and-your-taxes/15045 Tri-Valley Tax & Financial Services Inc In late March 2010, President Obama signed into law the new health care legislation. The legislation will affect virtually every individual in one way or another and will significantly impact the preparation of tax returns in the future. The provisions take effect over a period of years and are categorized by the year they become effective. Some of the provisions include additional taxes to offset the cost of the health care benefits included in the legislation for lower-income individuals. The following is an overview of the provisions that apply to individual taxpayers and small businesses. 2009 Student Loan Forgiveness for Health Professionals - Excludes student loan debt forgiveness from income for certain medical professionals who work in health professional shortage areas. 2010 Tanning Services Excise Tax - A new 10% excise tax is imposed on the amount paid for any indoor tanning service. Excludable Medical Reimbursements for Older Children - An income exclusion for reimbursements of medical care expenses by an employer-provided accident or health plan is extended to any child of an employee who hasn't attained age 27. Self-Employed Health Insurance Deduction - Self-employed individuals may include in their tax-deductible health insurance children who have not attained age 27. Tax Credits for Small Employers Offering Health Coverage - Provides a tax credit for an eligible small employer for non-elective contributions to purchase health insurance for its employees. 2011 Employer W-2 Reporting Responsibilities - Employers will be required to disclose the aggregate cost of employer-sponsored health coverage to their employees on Form W-2. Increased Tax on Nonqualifying HSA or Archer MSA Distributions - The additional tax for making non-medical withdrawals from Health Savings Plans and Archer MSA plans is increased to 20%. Over-the-Counter Medication Restriction for Employer Plans - Over-the-counter medications will no longer qualify for reimbursement. Small Employer Simple Cafeteria Plans - Small employers may provide employees with a "simple cafeteria plan." 2012 Employer W-2 Reporting Responsibilities - Employers will be required to disclose the aggregate cost of employer-sponsored health coverage to their employees on Form W-2. 2013 Additional Hospital Insurance Tax for High-Income Taxpayers - The Hospital Insurance (HI) tax rate (currently at 1.45%) would be increased by 0.9 percentage points on incomes over a threshold. Surtax on Unearned Income for High-Income Taxpayers - A 3.8% surtax is imposed on net investment income of high-income individuals, estates, and trusts. Employer Health FLEX-Spending Plan Contributions Limited - Medical reimbursements from flexible spending plans is limited to $2,500. Medical Itemized Deductions Limited - The AGI threshold percentage for claiming itemized medical expenses is increased from 7.5% to 10%. Compensation Deduction Limit for Health Insurance Issuers - Limits companies' deduction for certain employees' compensation. Fee On Self-Insured Health Plans (Patient-Centered Outcomes Research Fee) - a fee equal to $2 ($1 for plan years ending during physical year 2013) multiplied by the average number of lives covered under the plan. Employee Notices - Beginning January 1, 2014 (October 1, 2013 for existing employees), certain employers must provide written notice to employees about health insurance coverage options available through the Marketplace (insurance exchanges). 2014 Mandatory Heath Insurance Overview - Many of the provisions of the Health Care Legislation are linked to the mandate that everyone becomes insured. The chart provides an overview of how these provisions interact to achieve that goal. American Health Benefit Exchanges - By 2014, each state must establish an exchange to help individuals and small employers obtain coverage. Penalty For Not Being Insured - Non-exempt U.S. citizens and legal resident taxpayers will be penalized for failing to maintain at the least the minimum essential health coverage. Premium Assistance Credit - Tax credits will be available for low-income individuals who obtain health insurance coverage with a qualified health plan (QHP) through an “Exchange”. 2015 Large Employer Health Coverage Excise Tax - This penalty was originally scheduled to become effective in 2014 but was delayed until 2015 Large employers would be required to pay a penalty if any of its full-time employees were certified to the employer as having purchased health insurance through a state exchange and qualified for either tax credits or a cost-sharing subsidy. 2018 Excise Tax on High-Cost Employer-Sponsored Health Coverage - There will be a 40% nondeductible excise tax on insurance companies and plan administrators for any health coverage plan where the premiums exceed certain limits. Wed, 02 Oct 2013 19:00:00 GMT Student Loan Forgiveness for Health Professionals http://www.mytrivalleytax.com/blog/student-loan-forgiveness-for-health-professionals/15047 http://www.mytrivalleytax.com/blog/student-loan-forgiveness-for-health-professionals/15047 Tri-Valley Tax & Financial Services Inc Previously, an individual's gross income didn't include cancellation of debt income that was attributable to the discharge of all or part of any student loan if the discharge was made under a provision of the loan - that all or part of the indebtedness would be discharged if the individual worked for a certain period of time in certain professions for any of a broad class of employers.New Law: The law has been amended to include amounts received by an individual in tax years beginning after Dec. 31, 2008; the gross income exclusion for amounts received under the National Health Service Corps loan repayment program or certain State loan repayment programs is modified to include any amount received by an individual under any State loan repayment or loan forgiveness program that is intended to provide for the increased availability of health care services in underserved or health professional shortage areas as determined by the State. Wed, 02 Oct 2013 19:00:00 GMT Selling Your Home http://www.mytrivalleytax.com/blog/selling-your-home/37818 http://www.mytrivalleytax.com/blog/selling-your-home/37818 Tri-Valley Tax & Financial Services Inc Article Highlights Individuals can exclude up to $250,000 ($500,000 for a married couple filing jointly) of gain from the sale of their primary residence. Generally, to qualify for the exclusion, the home must have been owned and used as a primary residence for two of the prior five years. Reduced exclusions apply in certain circumstances where the home was owned and used less than the required two years. Special rules apply to a home acquired via a tax-deferred exchange that was formerly used as a rental or when a portion of the home was used for business. Un-excluded gain is subject to more favorable capital gains tax rates. During the summer months, many people sell their homes and move to a new location. Many of those individuals will make a profit on the sale and still will not have to pay a single dime of additional income tax to the IRS. If you are in this position, you may find the following information useful. Generally, a profit is made if the selling price of a home is greater than the price that was paid to purchase the home. That profit, considered a capital gain, is usually subject to income tax. If there is loss, the loss is generally not deductible since the home is personal use property. However, under certain circumstances, the law allows you to exclude all or part of that gain from your income - that is, tax may not have to be paid on the profit. Individuals may be able to exclude up to $250,000 of home sale capital gain, and married taxpayers filing joint returns may be able to exclude up to $500,000. The exclusion may be claimed each time the main home is sold, but generally not more than once every two years. An unmarried surviving spouse may be able exclude $500,000 if the sale occurs no later than two years after the date of the other spouse's death. To qualify, you must meet both the ownership and use tests. Ownership Test: During the five-year period ending on the date of the sale, you must have owned the home for at least two years. Use Test: During the five-year period ending on the date of the sale, you must have lived in the home as your main home for at least two years. If you file a joint return with your spouse and both of you meet the use test, you normally will be able to claim the exclusion for married couples even if only one of you meets the ownership test. If these tests are not met, a reduced amount of the home sale gain may still be excluded. But the home must have been sold for other specific reasons, such as serious health issues, a change in the place of employment, or certain unforeseen circumstances (such as a divorce or legal separation), natural or man-made disasters resulting in a casualty to the home, or an involuntary conversion of the home. For individuals on qualified official extended duty in the U.S. Armed Services, the Foreign Service, or the intelligence community, the five-year test period may be suspended for up to ten years. Military service is considered qualified extended duty when, for more than 90 days or for an indefinite period, that individual is: At a duty station that is at least 50 miles from his or her main home, or Residing under government orders in government housing. If you have more than one home, you can exclude a gain only from the sale of your main home. You must pay tax on the gain from selling any other home. If you have two homes and live in both of them, your main home is ordinarily the one you live in most of the time. Additional complications may apply if the home was acquired via a tax-deferred exchange, was previously a rental, or was used partially for business. If you have a gain after applying the allowable exclusion, that gain will be reported on Form 8949 and the gain taxed similar to gain from selling stocks and bonds. If held a year or less, it will be a short-term capital gain taxed at ordinary income tax rates. If held for more than a year, it will be taxed at the more favorable long-term capital gain rate, which varies from zero to 20% (the higher your income for the year, the higher the capital gain rate). If you have capital losses from sales of other property during the year or capital loss carryovers from prior years, they can be used to offset the home gain that exceeds the exclusion amount. If your modified adjusted gross income for the year exceeds $200,000 ($250,000 for joint filers and $125,000 married individuals filing separately), some portion of the gain will also be subject to the new 3.8% surtax on net investment income that is imposed as part of the Affordable Care Act (the new health care reform law). Finally, if you purchased your home in 2008, claimed the first-time homebuyer's credit, and have a gain from selling the home, you may be required to recapture the balance of the un-repaid credit. Issues connected to selling a home can be complicated. If you have questions related to your specific circumstances, please give this office a call. Tue, 01 Oct 2013 19:00:00 GMT Owner-Only Businesses Should Consider a Solo 401(k) Plan http://www.mytrivalleytax.com/blog/owner-only-businesses-should-consider-a-solo-401k-plan/37779 http://www.mytrivalleytax.com/blog/owner-only-businesses-should-consider-a-solo-401k-plan/37779 Tri-Valley Tax & Financial Services Inc Article Highlights Solo 401(k) plans allow greater income deferral than most other retirement plans. A Solo 401(k) plan suits self-employed and owner-only corporations. The plan needs to be established prior to year's end. The plan is generally not beneficial if company has employees other than a spouse. It goes by many names: Solo 401(k), Mini 401(k), and single-participant 401(k). We will use Solo 401(k) in this article to describe probably the best type of pension plan for owner-only businesses. It provides for larger contributions, including a Roth option for a portion of the contribution, and the ability to borrow funds from the plan at reasonable rates. Consequently, Solo 401(k) plans have become more attractive options than SEP-IRAs, SIMPLE IRAs, or profit-sharing or money purchase plans. In addition, if the plan permits-and most do-assets from other retirement plans can be rolled over into the Solo 401(k) plan. Generally, Solo 401(k) plans are a natural fit for two categories of people. The first are those who operate a business as an independent contractor, sole proprietor, or owner-only C or S corporation. The second are those who have dual incomes: they are W-2 wage earners as employees of a company that offers a 401(k) plan, but also have consulting income from corporate directorships or freelance work that requires them to file a Schedule C as a sole proprietor. Since the 401(k) contribution limits apply to each individual for the year and not to the individual plans, the taxpayer who has multiple 401(k) plans needs to make sure that no more than the annual limit is contributed to the total combination of plans. For 2013, the rules limit employer contribution (profit-sharing contribution) to 25% of compensation. The employee can also make salary deferral contributions up to $17,500. Together, these contributions cannot exceed the lesser of $51,000 or 100% of compensation. In addition, if the employee is aged 50 or over, he or she can make an additional catch-up contribution of $5,500. The business owner in these arrangements is considered to be both an employee and an employer. Example: Susan Lewis, 49, is the sole employee of an incorporated business. Her earned income is $100,000 in 2013. Under the law, Susan can contribute $25,000 to a SEP-IRA ($100,000 × .25), $14,500 ($11,500 plus 3% of $100,000) to a Simple IRA, or $25,000 to a profit-sharing or money purchase plan. On the other hand, she can contribute $42,500 to a Solo 401(k) plan ($25,000 employer contribution plus $17,500 employee deferral), which is still under the $51,000 maximum for the year. If Susan is 50 or over, she can also make a catch-up contribution of $5,500, increasing her 401(k) contribution total to $48,000. In some cases, 401(k) plan contributions for an unincorporated business may be slightly lower than the above amounts. For unincorporated businesses, compensation is net profit minus half of self-employment taxes minus employer contributions. Although single-participant 401(k) plans are limited to the business owner and his or her spouse, business owners should note the added benefits of having his or her spouse as the business's only other employee. Having the spouse on the payroll allows the business owner to shelter some or all of his or her income by having his or her spouse make an elective deferral to a 401(k) plan in addition to the business making a profit-sharing contribution. Although the spouse and the business would be responsible for their respective shares of employment taxes on the salary, combined employer and employee contributions could be up to the lesser of $51,000 (for 2013) or 100% of compensation. This limit applies separately to the business-owner and the spouse, thus allowing a combined total of up to $102,000 (for 2013). In addition, if aged 50 or over, each individual could defer an additional $5,500 each year. Potential downside: If a business grows and begins to hire employees, the single-participant 401(k) plan must become a full-blown 401(k) plan subject to other, more stringent rules, including discrimination testing, that can serve to limit contributions by highly paid executives. Many providers recommend that businesses with immediate expansion plans not set up one of the Solo 401(k) arrangements. Caution: If the business owner has other businesses or is part of a controlled group of corporations, partnerships, proprietorships, or affiliated service groups, the employer aggregation rules may apply and the employees of those other businesses may have to be considered for purposes of meeting qualification and minimum coverage requirements for the Solo 401(k). For additional information about Solo 401(k) plans and how they might fit into your tax strategy and retirement-planning, please give this office a call. If you are considering a Solo 401(k) plan, be aware that the plan must be set up before year's end. Tue, 24 Sep 2013 19:00:00 GMT Do You Need a More Robust Version of QuickBooks? http://www.mytrivalleytax.com/blog/do-you-need-a-more-robust-version-of-quickbooks/37767 http://www.mytrivalleytax.com/blog/do-you-need-a-more-robust-version-of-quickbooks/37767 Tri-Valley Tax & Financial Services Inc Do You Need a More Robust Version of QuickBooks? Maybe you just need to study your current version thoroughly. But it might be time to move up. If QuickBooks were just one product, its appeal would be more limited than it is. Because there's an entire family of Windows desktop software applications (as well as five online versions and a Mac edition), the QuickBooks family has found a home in millions of small businesses, and it remains the market leader. Though QuickBooks versions themselves are not scalable (able to expand as your business grows), you can move up to a more sophisticated edition when you outgrow your current version. But how do you know whether it's time to upgrade or whether you're just not stretching your current version to its fullest capabilities? We can help you determine that, and we'll help you move into a more appropriate edition when/if that occurs. Desktop Differences There are three Windows-based versions of QuickBooks: Pro, Premier and Enterprise Solutions. They all let you: Import and export data  Figure 1: All desktop versions of QuickBooks let you import and export data. Track income and expenses Build and maintain records for customers, vendors, employees and items Create and send transaction forms like invoices, estimates and purchase orders Download bank and credit card transactions, and pay bills online Customize and run dozens of reports Keep track of your inventory of items, and Add a payroll-processing service. All three versions share a similar user interface and navigational scheme, so when you move up to the next level, you only need to learn the new features. The 2013 offerings make it even easier to learn and use QuickBooks, since Intuit completely revamped the look and feel for those most current editions. QuickBooks Pro is the base desktop product, offering everything in the above list and more. But would you rather have access to 150+ reports instead of 100, including some that are industry-specific? QuickBooks Premier can provide that, in addition to charts of accounts, sample files and menus tailored to your company's industry. It also offers a business plan builder and the ability to forecast sales and expenses. Figure 2: QuickBooks Premier helps you create a business plan. The biggest jump in functionality, though, occurs when you move up to QuickBooks Enterprise Solutions. You may want to consider this upgrade when you find that, for example: Your system keeps slowing down and experiencing errors because your customer, vendor, item and employee databases have grown too large You need to have more than five people accessing QuickBooks simultaneously You've launched a second company, and/or Your item catalog has grown to the point where you're having trouble managing your multi-location inventory. Robust Accounting QuickBooks Enterprise Solutions is well-suited to complex small businesses, and sometimes even larger companies, depending on their structure and needs. It solves the data management problems that Pro and Premier users can experience, thanks to its 100,000+ record and account capacity. Up to 30 individuals can use the software at the same time, and they have more flexibility than is offered in Pro and Premier. Multiple users can be on the system and still complete tasks like adjusting inventory and changing sales tax rates. You can manage more than one business using QuickBooks Enterprise Solutions, even working in two company files at the same time and combining reports. Reporting capabilities themselves are much more sophisticated: The Intuit Statement Writer helps you create professional financial statements, and you have much more control over customization of your output. Figure 3: QuickBooks Enterprise Solutions offers more sophisticated inventory management tools than Pro or Premier. Inventory management goes many steps further in this sophisticated software. It supports management of multiple warehouse and trucks, and allows transfers among them. Finding specific items is much easier because you can track down to the bin level. FIFO costing is offered as an alternative to average costing, and you can scan items and serial numbers directly into QuickBooks Enterprise Solutions, which tracks both serial and lot numbers. More Power, More Support There are many smaller features that make this application far more powerful than QuickBooks Pro and Premier - and also a little more difficult to master. When you think the time is right, we can help you move your current data file into QuickBooks Enterprise Solutions and provide training. It's important that you have the right fit when it comes to your accounting software. So consider your current setup carefully before you decide to move up. Mon, 23 Sep 2013 19:00:00 GMT Premium Assistance Credit - The Health Insurance Subsidy For Lower Income Individuals and Families http://www.mytrivalleytax.com/blog/premium-assistance-credit-the-health-insurance-subsidy-for-lower-income-individuals-and-families/37272 http://www.mytrivalleytax.com/blog/premium-assistance-credit-the-health-insurance-subsidy-for-lower-income-individuals-and-families/37272 Tri-Valley Tax & Financial Services Inc Beginning in 2014, as part of the Patient Protection and Affordable Health Care Acts, all U.S. persons, with certain exceptions, must have minimal essential health care coverage or face a tax penalty.Recognizing this requirement could present a serious financial problem for lower-income individuals and families who do not have employer-provided coverage or other forms of insurance, Congress included a tax credit in the law to help them pay for their insurance. The amount of the tax credit, known as the Premium Assistance Credit, is based on the individual or family's income as it compares to the Federal poverty guidelines. Those with household income at 100% of the poverty level get the largest credit, and the credit is reduced for higher incomes and completely phased out when the income reaches 400% of the poverty level. You might be wondering why those with income under 100% of the poverty level do not qualify for the credit; they qualify for Medicaid. The credit is refundable and computed on the tax return for the year. However, that means the credit will not be available until the tax return is filed in the following year. Understanding this problem, Congress allows an advanced insurance premium subsidy to reduce the insurance premiums. Then, the advanced subsidy and premium assistance credit are reconciled on the tax return and any excess credit is refunded (if other taxes aren't owed), or some portion of the subsidy in excess of the credit is repaid. To qualify for the premium assistance credit, the insurance must be purchased through the state's American Health Benefit Exchange or, if the state does not have an insurance exchange, the federal exchange. In addition, to qualify for the credit the taxpayer: Cannot be claimed as a dependent by another person; Cannot be eligible for Medicaid, Medicare, employer-sponsored insurance, or other acceptable types of coverage; If married, must file a joint tax return; and Cannot be offered minimum essential coverage under an employer-sponsored plan. An individual is eligible for employer-sponsored minimum essential coverage only if the employee's share of premiums is “affordable” and the coverage provides “minimum value.” When determining family size for computing this credit, the family size is the same as the number of individuals for whom the taxpayer is allowed an exemption deduction for the tax year. The term household income includes the modified adjusted gross income (MAGI) of the taxpayer plus the sum of MAGIs of all individuals who were taken into account when determining the taxpayer's family size and who were required to file a tax return. The term MAGI for purposes of this credit means adjusted gross income increased by any foreign earned income exclusion, the excluded portion of Social Security and Railroad Retirement benefits, and tax-exempt interest income. Insurance through the exchanges will be effective January 1, 2014. Exchanges will be accepting applications in the fall in preparation for the January 2014 effective date. It is not too early to begin planning for 2014 and these new requirements. Please call this office with questions. Fri, 20 Sep 2013 19:00:00 GMT Give Withholding and Payments a Check-up to Avoid a Tax Surprise http://www.mytrivalleytax.com/blog/give-withholding-and-payments-a-check-up-to-avoid-a-tax-surprise/37736 http://www.mytrivalleytax.com/blog/give-withholding-and-payments-a-check-up-to-avoid-a-tax-surprise/37736 Tri-Valley Tax & Financial Services Inc Article Highlights 2013 could hold some unpleasant tax surprises because of : o Increased long-term capital gains rates. o Increased ordinary tax rates.o A new 3.8% tax on net investment income.o The new additional 0.9% HI (Medicare) payroll and self-employment tax.o Life-changing events such as marriage, birth of a child, or new job.o One-time increase in income from sales of stock or real estate. Under-withholding and underpaid estimates could cause penalties, but corrective actions before year-end may mitigate the penalties. 2013 will hold some unpleasant tax surprises for many taxpayers simply because of the increased long-term capital gains tax rates, the ordinary income tax rates, and the imposition of two new taxes as part of the Affordable Care Act, including a new 3.8% surtax on net investment income and an additional 0.9% payroll and self-employed health insurance tax. Other factors can also have an impact on the results of your tax return. These include life events such as marriage, birth, or adoption of a child; divorce or separation; the death of a spouse; a new job; a bonus; or a spouse going to work. You may have sold a business, real estate, stocks, or other assets that will produce a one-time increase in income. So, if you have a substantial increase in tax as the result of any of the above or other events, it may be wise to review your withholding and/or estimated tax payments to ensure you have set aside funds for the increase in taxes and have paid in enough in advance to avoid or minimize an underpayment penalty. Generally if you have not paid evenly throughout the year withholding and estimated taxes, so that they will equal 90% of your tax liability for the year or 100% of the prior year’s liability (110% if your income is over $150,000), you may be subject to an underpayment penalty for the year. This office can project your 2013 tax liability to prepare you for your tax liability and so you can either adjust your withholding or make estimated tax payments to minimize penalties. If you are already set up to pay estimated tax, revising the remaining payment vouchers may be appropriate. If a potential large tax liability is discovered early enough, your withholding for the rest of the year can be adjusted. Withholding is treated as deposited ratably over the course of the year even if paid towards the end of the year, which helps mitigate underpayment penalties where you are underpaid in the earlier quarters. If this office can be of assistance with tax planning, tax projections, or in modifying your withholding and estimated payments, please call for an appointment. Thu, 19 Sep 2013 19:00:00 GMT Affordable Care Act Employer Letter Requirement http://www.mytrivalleytax.com/blog/affordable-care-act-employer-letter-requirement/37730 http://www.mytrivalleytax.com/blog/affordable-care-act-employer-letter-requirement/37730 Tri-Valley Tax & Financial Services Inc Article Highlights Employers must give employees health care notification. Affects employers with one or more employees and a gross income of $500,000 or more. Notices due October 1, 2013. New Employees must be notified within 14 days. Beginning Oct. 1, any business with at least one employee and $500,000 in annual revenue must notify all employees by letter about the Affordable Care Act’s health care exchanges. The requirement applies to any business regulated under the Fair Labor Standards Act (FLSA), regardless of size. Going forward, letters are to be distributed to any new hires within 14 days of their starting date, according to the Department of Labor. The Patient Protection and Affordable Care Act has a general $100-per-day penalty for non-compliance. Since this requirement is in the FLSA, concerns were raised in the business community that the $100-per-day penalty would apply to businesses that did not comply with the notification requirements. On September 12, 2013, the Small Business Administration (sba.gov) posted a blog called “Myth #3: Business Owners Will Be Fined if They Don’t Notify Their Employees about the New Health Insurance Marketplace.” The article clarifies the policy, stating: “If your company is covered by the FLSA, you must provide a written notice to your employees about the Health Insurance Marketplace by October 1, 2013. However, there is no fine or penalty under the law for failing to provide the notice.” The Department of Labor provides model notices for employers: Employers with plans: http://www.dol.gov/ebsa/pdf/FLSAwithplans.pdf Employers without plans: http://www.dol.gov/ebsa/pdf/FLSAwithoutplans.pdf If you have questions, please give this office a call. Tue, 17 Sep 2013 19:00:00 GMT Back-to-School Tax Tips for Students and Parents http://www.mytrivalleytax.com/blog/back-to-school-tax-tips-for-students-and-parents/37713 http://www.mytrivalleytax.com/blog/back-to-school-tax-tips-for-students-and-parents/37713 Tri-Valley Tax & Financial Services Inc Article Highlights Sec. 529 plans allow very large sums of money to be put away for a child's college education with the earnings accumulating as tax-deferred and tax-free, if used for qualified college education expenses. Coverdell Education Savings Accounts allow $2,000 a year to be set aside for a child's education. Earnings are tax-deferred and tax-free if used for qualified education expenses. Coverdell funds can be used for kindergarten through college education Expenses. The American Opportunity education credit provides a credit of up to $2,500 per student per year, covering the first four years of qualified post-secondary education. The Lifetime Learning credit provides up to 20% of the first $10,000 of qualifying higher education expenses per family per year. A deduction from gross income of up to $2,000 or $4,000, depending on income, for qualifying tuition and fees may be claimed for 2013, but the same expenses cannot be used for this deduction and education credits. Up to $2,500 can be deducted per year for qualified education loan interest.  Going to college can be a stressful time for students and parents. In recent years, Congress has provided a variety of tax incentives to help defray the cost of education. Some require long-term planning to become beneficial, while others provide current tax deductions or credits. The benefits may even cover vocational schools. If your child is below college age, there are tax-advantaged plans that allow you to save for the cost of college. Although providing no tax benefit for contributions to the plans, they do provide tax-free accumulation; so the earlier they are established, the more you benefit from them. Section 529 Plans - Section 529 Plans (named after the section of the IRS Code that created them) are plans established to help families save and pay for college in a tax-advantaged way and are available to everyone, regardless of income. These state-sponsored plans allow you to gift large sums of money for a family member's college education while maintaining control of the funds. The earnings from these accounts grow tax-deferred and are tax-free, if used to pay for qualified higher education expenses. They can be used as an estate-planning tool as well, providing a means to transfer large amounts of money without gift tax. With all these tax benefits, 529 Plans are an excellent vehicle for college funding. Section 529 Plans come in two types, allowing you to either save funds in a tax-free account to be used later for higher education costs, or to prepay tuition for qualified universities. For 2013, you can contribute $14,000 without gift tax implications (or $28,000 for married couples who agree to split their gift). The annual amount is subject to inflation-adjustment. There is also a special gift provision allowing the donor to prepay five years of gifts up front without gift tax. Coverdell Education Savings Account - These accounts are actually education trusts that allow nondeductible contributions to be invested for a child's education. Tax on earnings from these accounts is deferred until the funds are withdrawn, and if used for qualified education purposes, the entire withdrawal can be tax-free. Qualified use of these funds includes elementary and secondary education expenses in addition to post-secondary schools (colleges). This is the only one of the educational tax benefits that allows tax-free use of the funds for below college-level expenses. A total of $2,000 per year can be contributed for each beneficiary under the age of 18. The ability to contribute to these plans phases out when the modified adjusted gross income is between $190,000 and $220,000 for married taxpayers filing jointly, and between $95,000 and $110,000 for all others. Education Tax Credits - Two tax credits, the American Opportunity Credit (partially refundable) and the Lifetime Learning Credit (nonrefundable), are available for qualified post-secondary education expenses for a taxpayer, spouse, and eligible dependents. Both credits will reduce one's tax liability dollar for dollar until the tax reaches zero. The credit is not allowed for taxpayers who file Married Separate returns. o The American Opportunity Credit - is a credit of up to $2,500 per student per year, covering the first four years of qualified post-secondary education. The credit is 100% of the first $2,000 of qualifying expenses plus 25% of the next $2,000 for a student attending college on at least a half-time basis. Forty percent of the American Opportunity credit is refundable (if the tax liability is reduced to zero.) This credit phases out for joint filing taxpayers with modified adjusted gross income between $160,000 and $180,000, and between $80,000 and $90,000 for others. o The Lifetime Learning Credit - is a credit of up to 20% of the first $10,000 of qualifying higher education expenses. Unlike the American Opportunity Credit, which is on a per-student basis, this credit is per taxpayer. In addition to post-secondary education, the Lifetime Credit applies to any course of instruction at an eligible institution taken to acquire or improve job skills. This credit phases out for joint filing taxpayers with modified adjusted gross income between $107,000 and $127,000, and between $53,000 and $63,000 for others. The credit is not allowed for taxpayers who file Married Separate returns. Qualifying expenses for these credits are generally limited to tuition. However, student activity fees and fees for course-related books, supplies, and equipment qualify if they must be paid directly to the educational institution for the enrollment or attendance of the student. You may qualify for this credit even if you did not pay the tuition. If a third party (someone other than the taxpayer or a claimed dependent) makes a payment directly to an eligible educational institution for a student's qualified tuition and related expenses, the student would be treated as having received the payment from the third party, and, in turn, pay the qualified tuition and related expenses. Furthermore, qualified tuition and related expenses paid by a student would be treated as paid by the taxpayer if the student is a claimed dependent of the taxpayer. Tuition and Fees Deduction - Up to $4,000 of qualified tuition and related expenses for higher education may be deducted as a direct reduction of income without having to itemize deductions. If your modified adjusted gross income (MAGI) is $65,000 or less ($130,000 or less if filing a joint return), the deduction is capped at $4,000, but if MAGI exceeds these amounts and is no more than $80,000 ($160,000 joint), the deduction is limited to a maximum of $2,000. If your MAGI is above $80,000 ($160,000 joint), or you file as Married Separate, no deduction is allowed. The same expenses cannot be used to qualify for one of the education credits and the tuition and fees deduction, and no deduction is allowed if the tuition and related expenses were paid with tax-free distributions of earnings from a Sec. 529 plan or a Coverdell education savings account. Unless extended by Congress, 2013 will be the last year that this deduction may be claimed. Education Loan Interest - You can deduct qualified interest of $2,500 per year in computing AGI. This is not limited to government student loans and this could include home equity loans, credit card debt, etc., if the debt was incurred solely to pay for qualified higher education expenses. For 2013, this deduction phases out for married taxpayers with an AGI between $125,000 and $155,000 and for unmarried taxpayers between $60,000 and $75,000. This deduction is not allowed for taxpayers who file married separate returns. We all know that a child's success in life has a great deal to do with the education they receive. You cannot start the planning process too early. Please call this office if you would like assistance in planning for your children's future education. Thu, 12 Sep 2013 19:00:00 GMT Preparing for the New Surtax http://www.mytrivalleytax.com/blog/preparing-for-the-new-surtax/37696 http://www.mytrivalleytax.com/blog/preparing-for-the-new-surtax/37696 Tri-Valley Tax & Financial Services Inc As part of the Affordable Care Act (the new health care legislation), a new tax kicks in this year. The official name of this tax is the Unearned Income Medicare Contribution Tax, and even though the name implies it is a contribution, don’t get the idea that it is voluntary or that you can deduct it as a charitable contribution. It is actually a surtax levied on the net investment income of taxpayers in the higher income brackets. And although it is perceived as an additional tax on higher-income taxpayers, it can affect even those who normally don’t have higher income if they have a large income from the sale of real estate, stocks, or other investments. The surtax is 3.8% on whichever is less: your net investment income or the excess of your modified adjusted gross income (MAGI) over a threshold based on your filing status. Net investment income is your investment income reduced by investment expenses; MAGI is your regular AGI increased by income excluded for working out of the country. The filing status threshold amounts are: $250,000 for married taxpayers filing jointly and surviving spouses. $125,000 for married taxpayers filing separately. $200,000 for single and head-of-household filers. Example: A single taxpayer has net investment income of $100,000 and MAGI of $220,000. The taxpayer would pay a Medicare contribution tax only on the $20,000 amount by which his MAGI exceeds his threshold amount of $200,000, because that is less than his net investment income of $100,000. Thus, the taxpayer’s Medicare contribution tax would be $760 ($20,000 × 3.8%). Investment income includes: Interest, dividends, annuities (but not distributions from IRAs or qualified retirement plans), and royalties, Rents (other than derived from a trade or business), Capital gains (other than derived from a trade or business), Home-sale gain in excess of the allowable home-gain exclusion, A child’s investment income in excess of the excludable threshold if, when eligible, the parent elects to include the child’s investment income on the parent’s return, Trade or business income that is a passive activity with respect to the taxpayer, and Trade or business income with respect to trading financial instruments or commodities. Planning Note: For surtax purposes, gross income doesn’t include interest on tax-exempt bonds. Thus, one can avoid or reduce the net investment income surtax by investing in tax-exempt bonds. Investment expenses include: Investment interest expense, Investment advisory and brokerage fees, Expenses related to rental and royalty income, and State and local income taxes properly allocable to items included in Net Investment Income. Do you think you will never get hit with this tax because your income is way under the threshold amounts? Don’t be so sure. When you sell your home, the gain is a capital gain, and to the extent that the gain is not excludable using the home-gain exclusion, it will add to your income and possibly push you above the taxation thresholds. And, since capital gains are investment income, you might be in for a surprise. The same holds true for gains from selling stock, a second home, or a rental. So when planning to sell a capital asset, be sure to consider the impact of this new surtax. The surtax also applies to the undistributed net investment income of trusts and estates, and there are special rules applying to the sale of partnership and Sub-S Corporation interests. Example: A taxpayer has owned a residential rental property for a number of years, planning to use the rental’s increased value to help fund his retirement. The taxpayer normally has income well below the threshold for this new tax. The taxpayer sells the rental and has a substantial gain. The gain from the rental sale gives the taxpayer a one-time windfall that pushes his income above the threshold for the new tax, and he ends up having to pay the regular capital gains tax plus an additional 3.8% tax on the appreciation that is attributable to the increase in value that occurred over several years. If this surtax will apply to you in 2013, you may need to increase your income tax withholding or estimated tax payments to cover the additional tax so you can avoid or minimize an underpayment of estimated tax penalty when you file your 2013 return. Example: A taxpayer has owned a residential rental property for a number of years, planning to use the rental’s increased value to help fund his retirement. The taxpayer normally has income well below the threshold for this new tax. The taxpayer sells the rental and has a substantial gain. The gain from the rental sale gives the taxpayer a one-time windfall that pushes his income above the threshold for the new tax, and he ends up having to pay the regular capital gains tax plus an additional 3.8% tax on the appreciation that is attributable to the increase in value that occurred over several years. If your income normally exceeds the threshold for this new tax, or you have or are contemplating a large capital gain and would like to explore options to mitigate the impact of the tax, please give this office a call. Tue, 10 Sep 2013 19:00:00 GMT So You Want To Deduct Your Gambling Losses? http://www.mytrivalleytax.com/blog/so-you-want-to-deduct-your-gambling-losses/37648 http://www.mytrivalleytax.com/blog/so-you-want-to-deduct-your-gambling-losses/37648 Tri-Valley Tax & Financial Services Inc Article Highlights Gambling winnings must be reported as taxable income. Gambling losses may be deducted as an itemized deduction. Losses cannot exceed winnings. Losses must be documented. Winnings must include all winnings not just those shown on a W-2G. Good news...You can! However, the bad news is that gambling losses are only deductible up to the amount of your winnings. This means that you can use your losses to offset your winnings, but you can never show a net gambling loss on your tax return. Gambling losses are only deductible as a miscellaneous itemized deduction, so you must itemize your deductions in order to claim the deduction. Even better news is that gambling losses are not subject to either the 2% of AGI reduction of miscellaneous deductions or the phase out of itemized deductions for high-income taxpayers. Form W-2G is issued by a casino or other payer to some lucky winners with a copy going to the IRS. Generally, only winners of the following types of gambling activities will be issued a W-2G: bingo or slot machine players who win $1,200 or more, keno winners of $1,500 or more, gamblers in other activities who win $600 or more when the payout is 300 times or more of the wager amount, and poker tournament players winning $5,000 or more. Sometimes federal income tax is withheld on the winnings; in that case a W-2G is issued regardless of the type of gambling activity. Many casual gamblers have the belief that they need only count as winnings those reported on a Form W-2G. Unfortunately that is not true; tax law requires all winnings to be reported whether or not included in a W-2G. This is a frequent issue when the IRS chooses to audit a return where the losses offset the winnings but only winnings included in the W-2G are being reported. The next logical question is how are gambling losses documented? Don’t rush down to the track and start collecting discarded tickets, since they generally aren’t acceptable documentation because of their ready availability. The IRS has published guidelines on what is acceptable documentation to verify losses. They indicate that an accurate diary or similar record regularly maintained by the taxpayer, supplemented by verifiable documentation, will usually be acceptable evidence for substantiation of wagering winnings and losses. In general, that diary should contain at least the following information: Date and type of specific wager or wagering activity, Name of gambling establishment, Address or location of gambling establishment, Names of other persons (if any) present with taxpayer at the gambling establishment, and Amounts won or lost. Save all available documentation including such items as losing tickets, canceled checks, and casino credit slips. You should also save any related documentation such as hotel bills, plane tickets, entry tickets and other items that would document your presence at a gambling location. (Sorry, but the costs for lodging and meals while gambling, even for winners, aren’t deductible.) If you are a member of a slot club, the casino may be able to provide a record of your play. You might also obtain affidavits from responsible gambling officials at the gambling facility. If you are a meticulous record keeper, the IRS recognizes the concept of gambling sessions that allows you to net the gains and losses during a particular gambling session. However, a gambling session is very limited in scope. It must be the same type of uninterrupted wagering during a specific uninterrupted period of time at a specific location. Thus if a taxpayer entered a casino and played slots for an hour and then switched to craps for the next hour, that would be two separate gambling sessions. If a taxpayer entered Casino #1 and played slots for an hour and then went to Casino #2 and continued to play slots, that would be two separate gambling activities since two locations were involved. The following are two examples using the gambling sessions concept: Example - A casual gambler who enters a casino with $100 and redeems his or her tokens for $300 after playing the slot machines has a wagering gain of $200 ($300 - $100). This is true even though the taxpayer may have had $1,000 in winning spins and $700 in losing spins during the course of play. Example - A casual gambler who enters a casino with $100 and loses the entire amount after playing the slot machines has a wagering loss of $100, even though he may have had winning spins of $1,000 and losing spins of $1,100 during the course of play. With regard to specific wagering transactions, winnings and losses might be further supported by: Keno - Copies of keno tickets purchased by the taxpayer and validated by the gambling establishment. Slot Machines - A record of all winnings by date and time that the machine was played. Table Games -The number of the table at which the taxpayer was playing. Casino credit card data indicating whether credit was issued in the pit or at the cashier's cage. Bingo - A record of the number of games played, cost of tickets purchased and amounts collected on winning tickets. Racing - A record of the races, entries, amounts of wagers, and amounts collected on winning tickets and lost on losing tickets. Supplemental records include unredeemed tickets and payment records from the racetrack. Lotteries - A record of ticket purchase dates, winnings and losses. Supplemental records include unredeemed tickets, payment slips and winning statements. One final tip: the deductions you claim for gambling losses do not have to be for the same type of wagering activity for which you have gambling winnings. For example, say for the year you won $800, all from a slot machine jackpot, and you have documentation to support $300 of slot machine losses. You also spent $50 per month buying lottery tickets, but had no winners, and have the records to substantiate your lottery ticket purchases. You would be able to deduct $800 of gambling losses, which includes $300 of slot losses plus $500 of the $600 of lottery losses. Your total gambling deduction is limited to $800, the amount of your winnings. If you had a big win, are concerned about your tax liability, or have any questions related to gambling winnings or losses, please give this office a call. Thu, 05 Sep 2013 19:00:00 GMT Who Gets Your IRA http://www.mytrivalleytax.com/blog/who-gets-your-ira/37563 http://www.mytrivalleytax.com/blog/who-gets-your-ira/37563 Tri-Valley Tax & Financial Services Inc The designated beneficiary listed on your IRA account beneficiary form determines who gets your IRA. This is true even if your will or trust names different beneficiaries. You may have filled out that beneficiary form long ago and no longer remember who you designated as your beneficiary. Perhaps your family circumstances or marital status have changed. Whenever your family circumstances change, you need to review your beneficiary designations. You may have named an ex-spouse as your beneficiary and now may not want him or her to receive your IRA. If you are recently remarried and want your IRA account to go to your children, your new spouse may have to sign a waiver of rights to your retirement benefits. Otherwise, the IRA might go automatically to your new spouse. This is also generally true for employer plan benefits. If you have a trust and want the IRA proceeds to go to the trust, then you need to name the trust as the beneficiary. There is no tax advantage to naming a trust as the beneficiary of an IRA. Of course, there may be a non-tax-related reason, such as controlling a beneficiary’s access to the money; thus, naming a trust rather than one or more individuals to inherit the IRA could achieve that goal. However, that is not typically the case. Naming a trust as the beneficiary of an IRA eliminates the ability for multiple beneficiaries to maximize the opportunity to stretch the required minimum distributions (RMDs) over their individual life expectancies. Worse yet is if your IRA does not have a designated beneficiary. When there is no beneficiary form on file, you are really rolling the dice. Your retirement assets will go to whomever the IRA trustee has named for you in the default language in the documents for the account. When you fill out the beneficiary designation form, you have the opportunity to also designate one or more contingent beneficiaries who will inherit the IRA if the primary beneficiary has passed away before you do. For example, you could name your spouse as the primary beneficiary and your child and brother as next in line if your spouse pre-deceases you. This is a safety net of sorts in case you don’t get around to changing the primary beneficiary after that person passes away. Don’t take chances; make sure your IRA beneficiary designations are up to date and correctly specify who you want to get your IRA in the event of your death. Call this office if you have any questions. Fri, 23 Aug 2013 19:00:00 GMT Partnership, S-Corp and Trust Extensions End September 16 http://www.mytrivalleytax.com/blog/partnership-s-corp-and-trust-extensions-end-september-16/37564 http://www.mytrivalleytax.com/blog/partnership-s-corp-and-trust-extensions-end-september-16/37564 Tri-Valley Tax & Financial Services Inc Article Highlights September 16 is the extended due date for partnership, S-corporation, and trust tax returns. Late-filing penalty for partnerships and S-corporations is $195 times the number of partners or shareholders during any part of the taxable year, for each month or fraction of a month. Late-filing penalty for trust returns is 5% of the tax due for each month, or part of a month, for which a return is not filed up to a maximum of 25% of the tax due. If you have a calendar year 2012 partnership, S-corporation, or trust return on extension, don't forget the extension for filing those returns ends on September 16, 2013. Pass-through entities such as Partnerships, S-corporations, and fiduciaries (trusts, estates) pass their income, deductions, credits, etc., through to their investors, partners, or beneficiaries, who in turn report the various items on their individual tax returns. Partnerships file Form 1065, S-corps file Form 1120-S, and Fiduciaries file Form 1041, with each partner, shareholder, or beneficiary receiving a Schedule K-1 from the entity that shows their share of the reportable items. If all of the aforementioned entities could obtain an automatic extension to file their returns on the same extended date as allowed to individuals, it would be difficult for individuals to meet the filing deadline without estimating the pass-through information and then later filing an amended return when the actual data was received. To overcome this problem, the automatic extension period for partnerships and trusts is set at 5 months, thus providing individual taxpayers with a month's grace period to complete their individual 1040 returns. The original due date for calendar year S-corporation returns was March 15, and they are allowed a 6-month extension period, making the due date for these returns also September 16. Thus, individual S-corp shareholders also have a month to finish up their individual returns. An S-corporation or partnership which fails to file on time is liable for a monthly penalty equal to $195 times the number of persons who were partners, or shareholders for S corps, during any part of the taxable year, for each month or fraction of a month for which the failure continues. These penalties can be substantial. Trusts are subject to a penalty of 5% of the tax due for each month, or part of a month, for which a return is not filed up to a maximum of 25% of the tax due. If this office is waiting for some missing information to complete your pass-through return, we will need that information at least a week before the September 16 due date. The late-filing penalties are substantial, so please call this office immediately if there are anticipated complications related to providing the needed information so a course of action can be determined to avoid the potential penalties. Fri, 23 Aug 2013 19:00:00 GMT 25 Accounting Terms You Should Know http://www.mytrivalleytax.com/blog/25-accounting-terms-you-should-know/37565 http://www.mytrivalleytax.com/blog/25-accounting-terms-you-should-know/37565 Tri-Valley Tax & Financial Services Inc It's back-to-school time. Why not take a page from the kids' books and do some learning of your own? QuickBooks is easy to use, intuitive and flexible. But it is not an accounting manual or class or tutorial. If your business is exceptionally uncomplicated, you might get by without knowing a lot about the principles of bookkeeping. Still, it helps to understand the basics. Here's a look at some terms and phrases you should understand. Account. You'll set up financial accounts like checking and savings in QuickBooks, but in accounting terms, this refers to the accounts in your Chart of Accounts: asset, liability, owners' equity, income and expense. Figure 1: A QuickBooks Chart of Accounts Accounts Payable (A/P). Everything that you owe to vendors, contractors, consultants, etc. is tracked in this account. Accounts Receivable (A/R). This account tracks income that hasn't been realized yet, like outstanding invoices. Accrual Basis. This is one of two basic accounting methods. Using it, you record income as it is invoiced, not when it's actually received, and you records expenses like bills when you receive them. Using the other method, Cash Basis, you would report income when you receive it and expenses when you pay the bills. Asset. What physical items do you own that have value? This could be cash, office equipment and real estate. In QuickBooks you'll be managing two types. Current Assets are generally used within 12 months (or you could convert them to cash in that length of time). Fixed Assets refers to belongings like vehicles, furniture and land, property that you probably won't use up in a year and which usually depreciates in value. Depreciation is very complex; you may need our help with that. Average Cost. This is the inventory costing method that programs like QuickBooks Pro and Premier use to calculate the value of your stock. Figure 2: QuickBooks provides a Statement of Cash Flows report. Cash Flow. This refers to the relationship between incoming and outgoing funds during a specific time period. Double-Entry Accounting. This is the system that QuickBooks uses - that all legitimate small business accounting software uses. Every transaction must show where the funds came from and where they went. Each has a Credit (decreases asset and expense accounts) and Debit (decreases liability and income accounts) which must balance out (other types of accounts can be affected).Equity. This refers to your company's net worth. It's the difference between your assets and liabilities. General Journal. QuickBooks handles this in the background, so it's unlikely you'll ever be exposed to it. We sometimes have to create General Journal Entries, transactions required for various reasons (errors, depreciation, etc.) that contain debits and credits. Please leave that to us. Item Receipt. You'll create these when you receive inventory from a vendor without a bill. Job. QuickBooks often associates customers with multi-part projects that you've taken on, like a kitchen remodel. Net income. This is your revenue minus expenses. Non-Inventory Part. When you purchase an item but don't sell it or you buy something and resell it immediately to a customer, this is what it's called. It's merchandise that isn't stored by you for future sales. Payroll Liabilities Account. QuickBooks tracks federal, state and local withholding taxes, as well as Social Security and Medicare obligations, that you've deducted from employees' paychecks and will remit to the appropriate agencies. Figure 3: QuickBooks helps you track and remit Payroll Liabilities. Post. You won't run into this term in QuickBooks. It simply refers to recording a transaction within one of your accounts. Reconcile. QuickBooks helps you with this. It's the process of making sure your records and those of your financial institutions agree. Sales Receipt. This is how you record a sale when payment is made in full during the transaction. Statement. You'll generally use invoices to bill customers in QuickBooks, but you can also send statements, which contain transaction information for a given date range. Trial Balance. This standard financial report tells you whether your debits and credits are in balance. Should you run this report and find a problem, let us know right away. Vendor. With the exception of employees, QuickBooks uses this term to refer to anyone who you pay as a part of your business operations. These are just a few of the terms you should recognize and understand. We hope you'll contact us when you need help understanding how the accounting process fits into your workflow. Fri, 23 Aug 2013 19:00:00 GMT Tips for Employers Who Outsource Payroll Duties http://www.mytrivalleytax.com/blog/tips-for-employers-who-outsource-payroll-duties/37547 http://www.mytrivalleytax.com/blog/tips-for-employers-who-outsource-payroll-duties/37547 Tri-Valley Tax & Financial Services Inc Many employers outsource their payroll and related tax duties to third-party payers such as payroll service providers and reporting agents. Reputable third-party payers can help employers streamline their business operations by collecting and timely depositing payroll taxes on the employer's behalf and filing required payroll tax returns with state and federal authorities. Though most of these businesses provide very good service, there are, unfortunately, some who do not have their clients' best interests at heart. Over the past few months, a number of these individuals and companies around the country have been prosecuted for stealing funds intended for the payment of payroll taxes. Examples of these successful prosecutions can be found on IRS.gov. Like employers who handle their own payroll duties, employers who outsource this function are still legally responsible for any and all payroll taxes due. This includes any federal income taxes withheld as well as both the employer and employee's share of social security and Medicare taxes. This is true even if the employer forwards tax amounts to a PSP or RA to make the required deposits or payments. For an overview of how the duties and obligations of agents, reporting agents and payroll service providers differ from one another, see the Third Party Arrangement Chart on IRS.gov. Here are some steps employers can take to protect themselves from unscrupulous third-party payers. Enroll in the Electronic Federal Tax Payment System and make sure the PSP or RA uses EFTPS to make tax deposits. Available free from the Treasury Department, EFTPS gives employers safe and easy online access to their payment history when deposits are made under their Employer Identification Number, enabling them to monitor whether their third-party payer is properly carrying out their tax deposit responsibilities. It also gives them the option of making any missed deposits themselves, as well as paying other individual and business taxes electronically, either online or by phone. To enroll or for more information, call toll-free 800-555-4477or visit www.eftps.gov. Refrain from substituting the third-party's address for the employer's address. Though employers are allowed to and have the option of making or agreeing to such a change, the IRS recommends that employer's continue to use their own address as the address on record with the tax agency. Doing so ensures that the employer will continue to receive bills, notices and other account-related correspondence from the IRS. It also gives employers a way to monitor the third-party payer and easily spot any improper diversion of funds. Contact the IRS about any bills or notices and do so as soon as possible. This is especially important if it involves a payment that the employer believes was made or should have been made by a third-party payer. Call the number on the bill, write to the IRS office that sent the bill, contact the IRS business tax hotline at 800-829-4933 or visit a local IRS office. See Receiving a Bill from the IRS on IRS.gov for more information. For employers who choose to use a reporting agent, be aware of the special rules that apply to RAs. Among other things, reporting agents are generally required to use EFTPS and file payroll tax returns electronically. They are also required to provide employers with a written statement detailing the employer's responsibilities including a reminder that the employer, not the reporting agent, is still legally required to timely file returns and pay any tax due. This statement must be provided upon entering into a contract with the employer and at least quarterly after that. See Reporting Agents File on IRS.gov for more information. Become familiar with the tax due dates that apply to employers, and use the Small Business Tax Calendar to keep track of these key dates. The key issue here is that you, the employer, are ultimately responsible for the payments even if the third party agent misappropriates the funds. Please call this office if you have any questions. Thu, 22 Aug 2013 19:00:00 GMT Tax Benefits for Military Personnel http://www.mytrivalleytax.com/blog/tax-benefits-for-military-personnel/37523 http://www.mytrivalleytax.com/blog/tax-benefits-for-military-personnel/37523 Tri-Valley Tax & Financial Services Inc If you're a member of the U.S. Armed Forces, there are many tax benefits that may apply to you. Special tax rules apply to military members on active duty, including those serving in combat zones. These rules can help lower your federal taxes and make it easier to file your tax return. Here are some of the more prominent of those benefits: Combat Pay Exclusion - If you are an enlisted member of the military serving in a combat zone you can exclude from taxation your pay for any month (one day of a month counts as a full month) you serve in a combat zone. An officer's exclusion is limited to the highest rate for enlisted personnel. This exclusion is automatically computed by the military and the excludable amounts will not appear on your W-2 form. If you qualify for an Earned Income Tax Credit (EITC) you may elect to include or not include the excluded combat pay in the EITC computation, thus allowing you the benefit of maximizing the credit with or without the exclusion while the excluded income remains tax free. Moving Expenses - To deduct moving expenses, a military taxpayer usually must meet the general time and distance tests that apply to all taxpayers. However, if you are on active duty and move because of a permanent change of station, you do not need to meet those tests. A permanent change of station includes: a move from the military member's home to his or her first post of active duty, a move from one permanent post of duty to another, and a move from the last post of duty to the member's home or to a nearer point in the United States. The move must generally occur within one year of ending active duty service.Reservists' Travel Deduction - If you are an Armed Forces reservist who travels more than 100 miles away from home and stays overnight in connection with service as a member of a reserve component, you can deduct travel expenses as an adjustment to gross income. This is in lieu of deducting those expenses as a miscellaneous itemized deduction (subject to the 2% of AGI limitation). Thus, you can take this deduction even if you do not itemize your deductions. The deduction includes unreimbursed expenses for transportation, meals (subject to the 50% limit), and lodging, but the deduction is limited to the amount the federal government pays its employees for travel expenses. Combat Zone and Qualified Hazardous Duty Area Extensions - For military taxpayers in a combat zone or qualified hazardous duty area, the deadlines for taking actions with the IRS are extended. The extension is for 180 consecutive days after the last day the military taxpayer was in a combat zone or qualified hazardous duty area or the last day of any continuous qualified hospitalization for injury from service in the combat zone or qualified hazardous duty area. In addition, the 180 days is also extended by the number of days that were left for the individual to take an action with the IRS when they entered a combat zone or qualified hazardous duty area. Extension To Pay Tax When Not In a Combat Zone - A member of the Armed Forces may delay payment of income tax (but not the employee's share of Social Security and Medicare taxes) that becomes due before or during military service. To qualify, the service member must be performing “military service” AND notify the IRS in writing that his or her ability to pay the income tax is materially affected by the military service. If the IRS approves the request, the service member will be allowed up to 180 days after termination or release from military service to pay the tax. If the tax is paid in full by the end of the deferral period, no interest or penalty will be charged for that period. Home Mortgage Interest & Taxes - You can deduct qualified mortgage interest and real estate taxes as an itemized deduction, even if they are paid with nontaxable military housing allowance pay. The home mortgage interest is, however, still subject to the general rules for deducting home mortgage interest. Home Sale Gain Exclusion - Taxpayers are allowed to exclude $250,000 ($500,000 if filing a joint return with a spouse and both qualify) of gain from a home sale if it was owned and used as a principal residence for two of the five years prior to the sale. The following special rules apply to military personnel: Reduced exclusion - If you sell your primary residence and do not meet the two-out-of-five-years ownership and use tests due to a move to a new permanent duty station, you may qualify for a reduced maximum exclusion amount. Extended test period - You may choose to suspend the 5-year test period for ownership and use during any period you serve on qualified official extended duty. The period of suspension cannot last more than 10 years and cannot be suspended for more than one property at a time. Uniform Deduction - If you itemize your deductions you can deduct the costs and upkeep of certain uniforms that regulations prohibit you from wearing while off duty. However, you must reduce your deduction by any reimbursement you receive for these costs. Signing Joint Returns - Both spouses normally must sign joint income tax returns. However, when one spouse is unavailable due to certain military duties or conditions, the other may, in some cases, sign for both spouses, or will need a power of attorney to file a joint return. If you have questions related to these and other benefits provided to members of the military, please give this office a call. Tue, 20 Aug 2013 19:00:00 GMT Claiming the Child and Dependent Care Tax Credit http://www.mytrivalleytax.com/blog/claiming-the-child-and-dependent-care-tax-credit/37494 http://www.mytrivalleytax.com/blog/claiming-the-child-and-dependent-care-tax-credit/37494 Tri-Valley Tax & Financial Services Inc The Child and Dependent Care Credit can help offset some of the costs you pay for the care of your child, a dependent, or disabled spouse. Here are some facts you may need to know about this tax credit. If you pay someone to care for one or more “qualifying individuals,” you may qualify for the Child and Dependent Care Credit. A qualifying individual includes your child under age 13. It also includes your spouse or a dependent who lived with you for more than half the year and was physically or mentally incapable of self-care. The care must be provided so that you can work or look for work. If you are married and filing jointly, the care must be provided so that both of you can work or look for work. In addition, you must have both earned income (both must have earned income if married and filing jointly, but see the exception below), such as income from a job or profits from self-employment. An exception applies if a spouse is a student or is unable to care for him- or herself. In that case a monthly imputed amount is used for earned income. That amount is $250 for one qualifying person and $500 for two or more. Example: Bob and Jerry, who are married and filing jointly, have two children under the age of 13. Jerry worked all year while Bob attended school all year finishing up his college education. For purposes of computing the credit, Bob would use $6,000 as his income. The payments for care cannot go to your spouse, the parent of your qualifying person, or to someone you can claim as a dependent on your return. Payments also cannot go to your child who is under age 19, even if the child is not your dependent. This credit is a percentage, ranging from 20% to 35%, of your qualifying costs for care, depending upon your income. When figuring the amount of your credit, you can claim up to $3,000 of your total costs if you have one qualifying individual. If you have two or more qualifying individuals, you can claim up to $6,000 of your costs. Taxpayers with an AGI of $15,000 or less use the 35% credit rate, while those with an AGI over $43,000 use the 20% rate. The credit rate declines between AGIs of $15,000 and $43,000. If your employer provides dependent care benefits, those benefits are pre-tax and will reduce the $3,000 and $6,000 cap on expenses for computing the credit. If you and your spouse have dependent care benefits at work and your employer contributes more than the $3,000 expense limit for one qualifying individual or $6,000 for two, then the amounts contributed in excess of the $3,000/$6,000 limits will be taxable on your return. You must include the name, address, and Social Security number (individuals) or Employer Identification Number (businesses) of your care providers on your tax return. Where the care is provided in your home, the caregiver will generally be considered your employee. Unless you are using a caregiver service that handles the employee's payroll, you may need to pay unemployment tax, your share of the employee's FICA, and file state payroll returns, depending on the amount you paid the caregiver(s). The IRS will usually check on this if auditing the credit. Of course, the payroll taxes you pay will count as childcare expenses. The credit is a non-refundable credit that can be used to offset both your regular tax and your alternative minimum tax; but if the amount of the credit is greater than your tax, you cannot get a refund of the difference.  If you have questions related to how this credit applies to your specific situation, please give this office a call. Thu, 15 Aug 2013 19:00:00 GMT Who Claims The Child? http://www.mytrivalleytax.com/blog/who-claims-the-child/37461 http://www.mytrivalleytax.com/blog/who-claims-the-child/37461 Tri-Valley Tax & Financial Services Inc Claiming a child can provide significant tax benefits. When couples divorce or separate, or even if the parents were never married, the question arises: who gets to claim the kids? This sometimes presents a nightmare for tax preparers. This is because often both parents will claim the same child, and in this modern era of e-filing, the first one to file and claim the child will be accepted for e-file and the second to file will be rejected regardless of who is rightfully entitled to claim the child. If the second parent to file is legally eligible to claim the child, then that parent must file a paper return and provide proof of eligibility to claim the child's exemption. This sometimes requires an elaborate array of documentation and can be quite a pain. Another leading cause of problems are family court judges who will award the child's tax exemption to the parent who is not qualified to claim the child under federal tax law. Rulings by family court judges cannot trump federal tax laws. So, who legally, according to federal tax law, is entitled to claim the child? Well, the Internal Revenue Code says the parent with whom the child resided for the longer period of time during the tax year gets to claim the child's exemption. This seems simple enough, but some parents have joint custody and they begin counting time by the hour and minute. However, when it comes to determining with whom the child resided the longest, the IRS looks at the number of nights the child sleeps in each parent's home. If that turns out to be an equal number of nights, the tax rules include a tiebreaker that gives the child's exemption to the parent with the higher adjusted gross income (AGI). However, a child is treated as the qualifying child of the noncustodial parent if the custodial parent releases a claim to the exemption to the non-custodial parent. The custodial parent can do this on an annual basis or for multiple years. However, the custodial parent should be cautious about releasing the exemption for multiple years. The release can be revoked but the revocation does not become effective until the tax year following the year the non-custodial parent was provided a copy of the revocation. The IRS provides Form 8332, Release/Revocation of Release of Claim to Exemption for Child by Custodial Parent, for this purpose. A number of tax benefits are at stake by claiming the child, including: The child's exemption that produces a $3,900 tax deduction in 2013. A potential $1,000 child credit for children under the age of 17. For children attending college, the education credit (up to as much as $2,500) goes to the parent who claims the child's exemption regardless of who pays the tuition. For children under age 13 the parent that claims the child's exemption is the one that gets to claim a tax credit for childcare expenses while working. Claiming a child under the age of 19 can substantially increase the earned income tax credit if the taxpayer otherwise qualifies. Claiming a child can also help a single individual qualify for the more beneficial head of household filing status. Caution: Some of the benefits phase out for higher income taxpayers. Where possible, parents should seek professional assistance to determine what makes sense financially for both parents. Please contact this office for additional information. Tue, 13 Aug 2013 19:00:00 GMT Tax Tips for Newlyweds http://www.mytrivalleytax.com/blog/tax-tips-for-newlyweds/37394 http://www.mytrivalleytax.com/blog/tax-tips-for-newlyweds/37394 Tri-Valley Tax & Financial Services Inc This time year is popular for weddings. So if you are a newlywed there are some important issues that need be taken care of - after the honeymoon. Now that you are married, your tax filing status has changed, and there are a number of steps you’ll need to take, to make a smooth transition into married life, such as… Notify the Social Security Administration - It’s important that your name and Social Security number match on your next tax return, so if you’ve taken on a new name, report the change to the Social Security Administration. File Form SS-5 is the Application for a Social Security Card. This form is available on SSA’s website at www.ssa.gov, by calling 800-772-1213, or by visiting a local SSA office. Failure to complete this simple step could lead to delays in processing your tax return for 2013 and, assuming you have a refund coming, delay the refund. Notify the IRS if you move - It is important for the IRS to have your current address since they may send you some correspondence, and if the correspondence is not dealt with promptly, it can make it significantly more difficult to deal with the matter. Plus, the IRS will meet its legal responsibilities of notifying you by sending the correspondence to your last known address. That’s why it is so important to keep your address current with the agency. Use IRS Form 8822, the Change of Address form, to update the IRS of your address change. Notify your employer of any change of address - If one or both of you are using a new address, it is important that your employer have the updated address information. This will help to ensure that you receive your Form W-2, the Wage and Tax Statement, after the end of the year. It also ensures that you receive important pension plan and health care notices from your employer which will affect your benefits. Both working? If you and your spouse both work, you should check the amount of federal income tax withheld from your pay, and revise one or both of your Forms W-4, Employees Withholding Allowance Certificate, if necessary. Your combined incomes may move you into a higher tax bracket and your expected refund could be substantially reduced; or even worse, you could end up owing tax when you were expecting a refund. Adjusting your withholding now could prevent an unwanted surprise when you file your 2013 tax return next year. Filing status has changed - Even if you were married on the last day of the year, you must either file a joint return or file as married separately for the entire year. There are many situations in taxes where the benefits afforded to joint filers are less than those of two single filers, and that could increase your tax liability. It may be appropriate, especially for higher income individuals, to project their taxes for 2013 so withholding adjustments can be made and there are not any shocks at tax time. Please call if you need assistance. Itemized or Standard Deductions - If you didn’t qualify to itemize deductions before you were married, that may have changed. You and your spouse may save money by itemizing rather than taking the standard deduction on your tax return. The standard deduction for a married couple filing jointly in 2013 is $12,200. So if you anticipate your deductions will exceed that amount you should begin keeping receipts for items such as medical expenses, charitable contributions, and job-related expenses. If you need assistance in determining your projected tax liability for 2013 and your refund or tax due, please give this office a call. Also, call if you need assistance preparing new W-4s for your employer(s). Incorrectly prepared W-4s can lead to problems down the road. Thu, 08 Aug 2013 19:00:00 GMT Renting Your Home or Vacation Home http://www.mytrivalleytax.com/blog/renting-your-home-or-vacation-home/37374 http://www.mytrivalleytax.com/blog/renting-your-home-or-vacation-home/37374 Tri-Valley Tax & Financial Services Inc If you own a home in a vacation locale – whether it is your primary residence or a vacation home – and are considering renting it out to others, there are complicated tax rules referred to as the “vacation home rental rules” that you need to be aware of. Generally, the tax code breaks a “vacation rental” into three categories, each with a different treatment for income and expenses: Rented Fewer than 15 Days – If you rent your home for fewer than 15 days during the tax year, the tax code says that you do not need to report the income and that you can still deduct 100% of the property taxes and qualified mortgage interest as an itemized deduction. Yes, you heard me correctly: the government is actually allowing you to ignore the income, regardless of the amount, if you rent the home for fewer than 15 days during the year. This rule offers some opportunities for substantial tax-free income, especially for more expensive homes. Here are some examples: o Rental as a film location - Typically, film production companies will pay substantial amounts (thousands per day) for the short-term use of homes as movie sets. Individuals with unique properties can register with a local film location company. o Home in a vacation locale - Individuals with homes in popular tourist or vacation locales can rent their homes out to vacationers in their area while they are on vacation themselves. o Home in the area of a special event - When a one-time or special event such as a major sports event (think the Super Bowl) or convention comes to town, hotel rooms may be scarce or even fill up. Homeowners in these locations may want to rent their homes short-term during the activity while getting out of town to avoid the crowds. However, be careful - if the rental goes over 14 days, the income is no longer tax-free. When calculating the number of days, the definition of a day is generally “the 24-hour period” for which a day’s rental would be paid. Thus, a person using a dwelling unit from Saturday afternoon through the following Saturday morning would generally be treated as having used the unit for seven days even though the person was on the premises on eight calendar days. Even though the income is tax-free, the property tax and interest for the period is still deductible, directly related rental expenses such as agent fees, utilities, post-rental cleaning, etc. are not deductible. Rented 15 Days or More - When the home is rented 15 days or more, the income must be reported. However, the tax treatment depends upon how many days you used the home personally: o Personal Use More Than 10% of the Rental Days - In this scenario, no rental tax loss is allowed. Let’s assume that the personal use of the home is 20%. As for the remaining 80%, it is used as a rental. The rental income is first reduced by 80% of the taxes and interest; if, after deducting the interest and taxes, there is still a profit, the direct rental expenses (such as the rental portion of the utilities, insurance and any other direct rental expenses) are deducted, but not more than will offset the remaining income. If there is still a profit, you can take depreciation, but it is again limited to the remaining profit. End result: No loss is allowed, but any remaining profit is taxable. The other personal 20% of the interest and taxes is deducted as an itemized deduction subject to mortgage interest and Alternative Minimum Tax (AMT) limitations. Take note that if the rental income becomes less than the business portion of the interest and taxes, the balance of the interest and taxes is still deductible as home mortgage interest and taxes. o Personal Use 10% or Fewer of the Rental Days - In this scenario, the home’s use would be allocated into two separate activities, a rental and a second home. Let’s say that the home is used 5% for personal use: 5% of the interest and taxes are treated as home interest and taxes that can be deducted as an itemized deduction. The other 95% of the interest and taxes are rental expenses, combined with 95% of the insurance, utilities, and allowable depreciation and 100% of the direct rental expenses. The result is a deductible tax loss, which is combined with all other rental activities and limited to a $25,000 loss per year for taxpayers with adjusted gross incomes (AGI) of $100,000 or less. This loss allowance is ratably phased out between $100,000 and $150,000 of AGI. Thus, if your income exceeds $150,000, the loss cannot be deducted; it is carried forward until the home is sold or there are gains from other activities that can be used to offset the loss. When figuring the personal use days, include days used by an owner, co-owner, or family member of the owner/co-owner as well as days used under a reciprocal arrangement. However, you can exclude “fix-up” days, which are days spent repairing and maintaining the property. Word of Caution - Beginning in 2013, passive rental income is subject to the new 3.8% tax on net investment income that is part of the Affordable Care Act (“Obamacare”). So if the net result from renting the home is a profit, in addition to being subject to regular tax, the profit will also be subject to the net investment income tax. The gain from the sale of your primary home (in excess of the allowable home gain exclusion) and the gain from the sale of your second home (even if you never had rental income from it) are also subject to the 3.8% tax on net investment income in addition to the capital gains tax. A number of other rules apply to special situations not covered here. If you have questions about how the vacation rental rules will apply to your unique circumstances, please give this office a call. Tue, 06 Aug 2013 19:00:00 GMT Caring for an Elderly or Incapacitated Individual http://www.mytrivalleytax.com/blog/caring-for-an-elderly-or-incapacitated-individual/37347 http://www.mytrivalleytax.com/blog/caring-for-an-elderly-or-incapacitated-individual/37347 Tri-Valley Tax & Financial Services Inc With individuals living longer, we frequently find ourselves in the position of caregiver for elderly or incapacitated individuals. Whether you’re caring for an incapacitated or elderly spouse, an elderly parent, or even a child, understanding potential tax advantages can relieve some of the financial burden associated with being a caregiver. The following are some tax aspects of taking on the care of an elderly or incapacitated individual. Dependency exemption - You may be able to claim the cared-for individual as your dependent, thus qualifying for an exemption deduction. To qualify: You(1) must provide more than 50% of the individual's support costs, The individual must either live with you or be related, The individual must not have gross income in excess of the exemption amount ($3,900 for 2013), The individual must not file a joint return for the year (unless neither spouse would have a tax liability if separate returns were filed and the joint return is filed only to claim a refund), and The individual must be a U.S. citizen or a resident of the U.S., Canada, or Mexico. (1) If the support test can only be met by a group (several children, for example, combining to support a parent), a “multiple support agreement” form can be filed to grant one of the group members the exemption, subject to certain conditions. Medical expenses - If the cared-for individual qualifies as your dependent or medical dependent (2), you can include any medical expenses you incur for the individual along with your own when determining your medical deduction. Amounts paid to a nursing home are fully deductible as a medical expense if the principal reason that a person stays at the nursing home is medical in nature, as opposed to custodial or other care. If a person is not in the nursing home principally to receive medical care, only the portion of the fee that is allocable to actual medical care qualifies as a deductible medical expense. However, if the individual is chronically ill(3), all of the individual’s qualified long-term care services, including maintenance or personal care services, are deductible. (2) A medical dependent is an individual who doesn't qualify as your dependent only because of the gross income or joint return test; you can still include these medical costs with your own. (3) A chronically ill individual is one certified by a physician or other licensed healthcare practitioner (e.g., nurse or social worker) as unable to perform, without substantial assistance, at least two activities of daily living for at least 90 days due to a loss of functional capacity, or as requiring substantial supervision for protection due to severe cognitive impairment (e.g., memory loss or disorientation). Of course, a person with Alzheimer's disease qualifies. Filing status - If you aren't married, you may qualify for “head of household” status by virtue of the cared-for individual. If the cared-for individual: (a) lives in your household, (b) you pay more than half of the household costs, (c) the individual qualifies as your dependent, and (d) the individual is a relative, you can claim head of household filing status. If the person you’re caring for is your parent, he or she does not need to live with you as long as you provide more than half of your parent’s household costs and he or she qualifies as your dependent. For example, if a parent is confined to a nursing home and you pay more than half of the cost, you are considered as maintaining the principal home for your parent. Household employee issues - If you hire individuals to help you care for an elderly or incapacitated individual in your home, you must treat them as employees, issue them a W-2 form, and withhold and remit certain payroll taxes to the IRS and your state. If you use a service company that sends its employees to provide care services, the service company will handle the payroll issue for these employees, relieving you of that responsibility. If you plan to hire help, please call this office to discuss your options in more detail. Dependent care credit - If the cared-for individual qualifies as your dependent, lives with you, and physically or mentally cannot take care of him or herself, you may qualify for the dependent care credit for costs you incur for this individual’s care to enable you and your spouse to go to work. However, the same expense cannot be used as both a medical expense deduction and for the dependent care credit. If you experience financial difficulties in funding the care, the tax code provides some specialized relief as described below. Generally, these forms of relief should be considered only when no other reasonable alternatives exist. Reverse mortgage as alternative to nursing home - It is often desirable for an elderly person to remain in his or her own home with proper in-home care rather than entering a nursing home. A reverse mortgage loan may make this a feasible alternative to a nursing home. If this approach is taken, don’t forget that household help is deductible in the same manner as nursing home expenses. In addition, household employees must be paid by payroll. Exclusion for payments under life insurance contracts - Any lifetime payments received under a life insurance contract on the life of a person who is either terminally or chronically ill are excluded from gross income. A similar exclusion applies to the sale or assignment of a life insurance contract to a person who regularly buys or takes assignments of such contracts and meets other qualifying standards. The tax benefits and regulations related to caring for someone are complicated. If you are a caregiver and would like to discuss your situation and options further, please call our office. Thu, 01 Aug 2013 19:00:00 GMT Mandatory Health Insurance Will Begin in 2014 http://www.mytrivalleytax.com/blog/mandatory-health-insurance-will-begin-in-2014/37271 http://www.mytrivalleytax.com/blog/mandatory-health-insurance-will-begin-in-2014/37271 Tri-Valley Tax & Financial Services Inc Beginning in 2014 the Patient Protection & Affordable Care Act (the health care legislation sometimes known as Obama Care) will impose the new requirement that U.S. persons, with certain exceptions, have minimal, essential health care insurance. A minimum essential health care policy is one in which the insurer pays 60% of the average medical expenses incurred by an average person over the course of one year. How this will affect your family will depend upon a number of issues: Already insured - If you will already be insured through an employer plan, Medicare, Medicaid, the Veterans Administration, or a private plan that provides minimal, essential care, then you will not be subject to any penalties under this new law. Exempt from the mandatory insurance requirement - The following individuals will be exempt from the insurance mandate and will not be subject to a penalty for being uninsured: Individuals who have a religious exemption Those not lawfully present in the United States Incarcerated individuals Those who cannot afford coverage based on formulas contained in the law Those who have income below the federal income tax filing threshold Those who are members of Indian tribes Those who were uninsured for short coverage gaps of less than three months Those who have received a hardship waiver from the Secretary of Health and Human Services, who are residing outside of the United States, or who are bona fide residents of any possession of the United States. Cannot afford coverage - Individuals and families whose household income is between 100% and 400% of the federal poverty level will qualify for a varying amount of subsidy to help pay for the insurance in the form of a Premium Assistance Credit. To qualify for that credit, the insurance must be acquired from an American Health Benefit Exchange operated by the individual or family’s state, or by the Federal Government. These exchanges are scheduled to be up and running as of October 1, 2013, and the policies purchased through them will be effective as of January 1, 2014. It is important to note that the subsidy is really just a tax credit based upon family income. It can be estimated in advance and used to reduce the monthly insurance premiums; it can be claimed as a refundable credit on the tax return for the year; or it can be some combination of both. However, it is based upon the current year’s income and must be reconciled on the tax return for the year. If too much was used as a premium subsidy, it must be repaid. If there is excess, it is refundable. If household income is below 100% of the poverty level, the individual or family qualifies for Medicaid. Penalty for noncompliance - The penalty for noncompliance will be the greater of either a flat dollar amount or a percentage of income: For 2014, $95 per uninsured adult ($47.50 for a child) or 1 percent of household income over the income tax filing threshold For 2015, $325 per uninsured adult ($162.50 for a child) or 2 percent of household income over the income tax filing threshold For 2016 and beyond, $695 per uninsured adult ($347.50 for a child) or 2.5 percent of household income over the income tax filing threshold. Flat dollar amounts - The flat dollar amount for a family will be capped at 300% of the adult amount. For example, the maximum in 2016 for a family will be $2,085 (300% of $695). The child rate will apply to family members under the age of 18. Overall penalty cap - The overall penalty will be capped at the national average premium for a minimal, essential coverage plan purchased through an exchange. This amount won’t be known until a later date. If you have any questions as to how this new insurance requirement will affect you, please call. Wed, 24 Jul 2013 19:00:00 GMT QuickBooks' Custom Fields: An Overview http://www.mytrivalleytax.com/blog/quickbooks-custom-fields-an-overview/37273 http://www.mytrivalleytax.com/blog/quickbooks-custom-fields-an-overview/37273 Tri-Valley Tax & Financial Services Inc Part of QuickBooks' popularity comes from its flexibility. Here's a look at how custom fields contribute to that element. The beauty of QuickBooks is that it can be used for so many different kinds of businesses. Its smart design lets realtors and retail shops, plumbers and plastic surgeons use it to track income and expenses, pay bills and invoice customers, and to run those all-important reports. But Intuit knows that QuickBooks can't - and shouldn't - tailor itself to individual business types (except in the industry-specific versions). So its structure and tools are somewhat generic and as universal as possible. That's where custom fields come in. You can simply use them for your own informational purposes, but QuickBooks also lets you create and add fields to your existing customer, vendor, employee and item records and forms, and use them as filters in reports. A Common Application Let's say you want to search for your best customers to create a targeted marketing mailing. Start by opening the Customer Center and opening any customer's record there. Click on the Additional Info tab. In the lower right corner of this dialog box, click on Define Fields. This box (with some fields already defined in this example) opens: Figure 1: You can create custom fields for your lists of names in this dialog box. You want to send mailings to customers who order frequently, or who regularly purchase big-ticket items. You can call them your “High-Value Customers.” Click in the first field that's available in the Label column and type that phrase, then tab over to the Cust column and click in it to enter a checkmark. Click OK. The Edit Customer dialog box opens with the new custom field included. This field will now appear in all of your existing customer records as well as any new ones you create. You'll need to open the record for each High-Value Customer, click on the Additional Info tab and enter “Yes” on the corresponding line. Figure 2: Custom fields appear in this box in your customer records. Using Custom Fields in Items If you sell physical inventory, custom fields will probably be needed in your item records. You might want to use them for t-shirt colors or sizes, for example, or to store serial or model numbers. They can be employed for all items types except subtotals, sales tax items and sales tax group items. The process is similar to the one you used to define custom fields in your contact records. Open the Lists menu and select Item List (or Fixed Asset Item List where appropriate). Click Custom Fields in the dialog box that opens. Tip: The Custom Fields tool is also available in the New Item dialog box. So you can move directly to that step as you create an item record if you'd like. Click Define Fields and add your field(s). Be sure to put a checkmark in the Use column, and click OK. Figure 3: QuickBooks also lets you define and use custom fields in your item records. Reports and Forms Custom fields can be invaluable when it comes to using them in forms and reports. Your fields will automatically appear at the bottom of the Filter list within your reports' customization tools, but you'll have to add them manually to any forms where they should appear. Warning: You should probably enlist our help before you customize forms. QuickBooks provides tools to help you through this process, but you will encounter some potentially confusing messages as you add fields to forms, and you may have to use the Layout Designer, which can present quite a challenge. Let's say you wanted to find out how many blue coffee mugs Suzanne Jenkins sold in November. You'd proceed like you normally do when you're customizing a report, but you'd have to scroll down to the end of the Filter list to find the Color custom field that you created. You'd enter the word “Blue” in the field supplied. Your Sales by Item Summary report setup would look something like this: Figure 4: Filtering a report using a custom field. This report will only run properly if you've added your Color field to your sales forms. Again, we'd be happy to help you with this, and to explore other uses for QuickBooks custom fields. Wed, 24 Jul 2013 19:00:00 GMT Eight Tips to Help You Determine if Your Gift Is Taxable http://www.mytrivalleytax.com/blog/eight-tips-to-help-you-determine-if-your-gift-is-taxable/37263 http://www.mytrivalleytax.com/blog/eight-tips-to-help-you-determine-if-your-gift-is-taxable/37263 Tri-Valley Tax & Financial Services Inc If you give someone money or property during your lifetime, you may be subject to the federal gift tax. The following tips will help you determine if your gift is taxable or if you are required to file a gift tax return. Most gifts are not subject to the gift tax. For example, there is usually no tax if you give a gift to your spouse or to a charity. If you give a gift to someone else, the gift tax usually does not apply until the value of the gifts you give to that person during the year exceeds the annual exclusion for the year. For 2013, the annual exclusion is $14,000. Gift tax returns do not need to be filed unless you give someone other than your spouse money or property worth more than the annual exclusion for that year. Generally, the person who receives your gift will not have to pay any federal gift tax. Also, that person will not have to pay income tax on the value of the gift received. Giving a gift does not ordinarily affect your federal income tax. You cannot deduct the value of gifts you give (other than gifts that are considered deductible charitable contributions). The general rule is that any gift is a taxable gift. However, there are many exceptions to this rule. The following gifts are not taxable gifts: • Gifts that are not more than the annual exclusion for the calendar year; • Tuition or medical expenses that you pay directly to a medical or educational institution for someone (this person does not have to be your dependent); • Gifts to your spouse; • Gifts to a political organization for its use; and • Gifts to charities. Gift splitting - you and your spouse can give a gift valued up to $28,000 to a third party without it being a taxable gift. The gift is considered as two halves: one half from you and one half from your spouse. If you split a gift that you give, you and your spouse must each file a gift tax return to show that you both agree to split the gift. You must file a Form 709, United States Gift (and Generation-Skipping Transfer) Tax Return, even if half of the split gift is less than the annual exclusion. Gift Tax Returns - you must file a gift tax return (Form 709) if any of the following apply: • You gave gifts to at least one person (other than your spouse) that were more than the annual exclusion for the year; • You and your spouse are splitting a gift. In this case, each spouse files a gift tax return—joint gift tax returns are not allowed; • You gave someone (other than your spouse) a gift of a future interest that he or she cannot actually possess, enjoy, or receive income from until sometime in the future; or • You gave your spouse an interest in property that will terminate due to a future event. You do not have to file a gift tax return to report gifts given to political organizations, most gifts to qualified charitable organizations, and gifts through which you pay someone's tuition or medical expenses. If you have questions related to gifts and the gift tax, please give this office a call. Tue, 23 Jul 2013 19:00:00 GMT Congress Puts Lid On Health Flexible Spending Arrangements http://www.mytrivalleytax.com/blog/congress-puts-lid-on-health-flexible-spending-arrangements/37229 http://www.mytrivalleytax.com/blog/congress-puts-lid-on-health-flexible-spending-arrangements/37229 Tri-Valley Tax & Financial Services Inc As part of the Patient Protection and Affordable Care Act (new health care law), employee contributions to health flexible spending arrangements (health FSA) are now being limited to a maximum pre-tax contribution of $2,500. Employers are able to establish what is referred to as cafeteria plans for their employees. These arrangements allow employees to allocate a portion of their otherwise taxable compensation to nontaxable benefits. Thus, the amounts paid by both the employer and employee to fund the cafeteria plan are excluded from the employee's gross income. Cafeteria plans are used to pay a variety of employee expenses, including group-term life insurance on an employee's life (up to the excludable $50,000 amount), employer-provided accident and health plans, accidental death and dismemberment policies, dependent care assistance program, adoption assistance program, contributions to a 401(k) plan, health savings account (HSA) contributions, long- and short-term disability coverage and health flexible spending arrangements (FSAs). Health FSAs are benefit plans established by employers to reimburse employees for health care expenses, such as deductibles and co-payments. They are usually funded by employees through salary reduction agreements (and termed “pre-tax contributions”), although employers may contribute as well. Qualifying contributions to and withdrawals from FSAs are tax-exempt. Prior to 2013, an employer could establish its own FSA plan's contribution limits. That continued to be true until the beginning of 2013, when Congress, as a way to partially pay for provisions in the new health care law, put a cap of $2,500 on FSA contributions. The $2,500 cap is inflation adjusted for future years. This new $2,500 FSA limitation does not impact dependent care FSAs, health savings accounts, Archer medical savings accounts, or employee contributions toward health insurance premiums. The limitation is on an employee-by-employee basis. That is, $2,500 is the maximum amount that an employee may contribute in 2013, regardless of the number of individuals (e.g., spouse or dependents) whose medical expenses may be reimbursed under the plan. However, if two people are married, and each has the opportunity to participate in a health FSA, whether through the same employer or through different employers, each may contribute up to $2,500. The new health care law has many complicated elements. If you have questions regarding FSAs or other tax provisions in this law, please give this office a call. Thu, 18 Jul 2013 19:00:00 GMT Patient Protection and Affordable Care Act - Large Employer Mandatory Health Coverage http://www.mytrivalleytax.com/blog/patient-protection-and-affordable-care-act-large-employer-mandatory-health-coverage/37223 http://www.mytrivalleytax.com/blog/patient-protection-and-affordable-care-act-large-employer-mandatory-health-coverage/37223 Tri-Valley Tax & Financial Services Inc Beginning in 2015, large employers, generally those with 50 full-time employees in the prior calendar year, that Do not offer coverage for all their full-time employees, Offer minimum essential coverage that is unaffordable (employee contribution being more than 9.5% of the employee’s household income), or Offer minimum essential coverage where the plan’s share of the total allowed cost of benefits is less than 60% (i.e. less than the bronze coverage), will be required to pay a penalty if any of its full-time employees were certified to the employer as having purchased health insurance through a state or federal exchange and qualified for either tax credits or a cost-sharing subsidy previously discussed. Implementation Delayed: This provision of the new health care legislation was meant to have taken effect by 2014. Intense lobbying from the business community, however, which cited lack of time to prepare for the new requirement, has prompted the Obama Administration to delay implementation by one year, to 2015. Interaction with Premium Credit: Generally, if an employee is offered affordable minimum essential coverage under an employer-sponsored plan, he is ineligible for a premium tax credit and for cost-sharing reductions for health insurance purchased through a state or federal exchange. If the coverage is unaffordable (see above), however, or the plan’s share of benefits is less than 60%, then he is eligible, but only if he declines to enroll in the coverage and purchases coverage through the exchange instead. Penalty for Employer Not Offering a Health Care Plan: An applicable large employer would be liable for the penalty (figured monthly) if: (1) The employer has failed to offer to its full-time employees (and their dependents) the opportunity to enroll for that month in “minimum essential coverage” under an “eligible employer-sponsored plan”; and (2) At least one full-time employee has been certified to the employer as having enrolled for that month in a qualified health plan for which a premium tax credit or cost-sharing reduction is allowed or paid with respect to the employee. The excise tax penalty for any month would be $167 ($2,000/12) times the number of full-time employees in excess of 30. Example: No Health Care Plan. In January of 2015, an applicable large employer with 120 employees does not offer a health care plan to its employees. The penalty is $167 times the number of full-time employees in excess of 30. Thus, the penalty for the month of January is $15,030 ((120-30) x $167.00). Penalty - Employees Qualify for Premium Tax Credits or Cost-Sharing Assistance – An applicable large employer would be liable for the penalty (figured monthly) if: (1) The employer offers to its full-time employees (and their dependents) the opportunity to enroll for that month in “minimum essential coverage” under an “eligible employer-sponsored plan”; and (2) At least one full-time employee has been certified to the employer as having enrolled for that month in a qualified health plan for which a premium tax credit or cost-sharing reduction is allowed or paid with respect to the employee. The excise tax penalty for any month would be $250 ($3,000/12) times the number of full-time employees that received premium tax credit or cost-sharing reductions through an exchange, but would not exceed the penalty imposed had the employer not offered health care insurance. Example: Health Care Plan, but with Employees Qualifying for Premium Tax Credit or Cost Sharing Reductions. In January of 2015, an applicable large employer with 120 employees offers its employees a health care plan, but the plan’s cost does not meet the affordable criteria—that employee contribution be more than 9.5% of the employee’s household income, or that the plan’s share of the total allowed cost of benefits be less than 60%—and 20 of the employees sign up for the insurance through an exchange and receive premium tax credit or cost-sharing reductions. The employer’s excise tax penalty is $250 times 20. Thus, the penalty for the month of January is $5,000. Penalty Decision Tree The flow chart below provides an overview of the large employer health care excise tax. Large Employer Health Coverage Excise Tax Decision Tree Applicable Large Employer An “applicable large employer” is one that employed an average of at least 50 full-time employees on business days during the preceding calendar year (for an employer that was not in existence throughout the preceding calendar year, the determination is based on the average number of employees reasonably expected to be employed on business days in the current calendar year). Seasonal Workers But, under an exemption, an employer will not be considered to employ more than 50 full-time employees if: (a) the employer’s workforce exceeds 50 full-time employees for 120 days or fewer during the calendar year; and (b) the employees in excess of 50 employed during that 120-day (or fewer) period are seasonal workers, e.g., retail workers employed exclusively during the holiday season. Special rules apply to construction industry employers. Full-time-employee: For purpose of complying with the 50 full-time-employee requirement, count those working 30 hours or more per week. Part-Time Employees Solely for determining whether an employer is an applicable large employer, an employer will also have to include for that month the number of full-time employees determined by dividing (a) the aggregate number of hours of service of employees who are not full-time employees for the month by (b) 120. Example – Equivalent Full-Time Employees. John has, for his business, 45 full-time employees plus 20 part-time employees. His part-time employees for the month of January have worked 960 hours. This is equivalent to 8 (960/120) full-time employees. Thus, the number of John’s full-time employees for the month of January is 53 (45 + 8). Penalty Deductibility This excise tax penalty is nondeductible under the general rules for excise taxes. Tue, 16 Jul 2013 19:00:00 GMT Supreme Court Strikes Down DOMA http://www.mytrivalleytax.com/blog/supreme-court-strikes-down-doma/37200 http://www.mytrivalleytax.com/blog/supreme-court-strikes-down-doma/37200 Tri-Valley Tax & Financial Services Inc The Supreme Court recently struck down Section 3 of the Defense of Marriage Act (DOMA), making it clear that same-sex married couples who reside in a state where same-sex marriages are legal, and in the state in which they were married, can be treated as married for federal tax purposes. This ruling was the result of a situation faced by a same-sex married couple who originally registered as domestic partners in 1993 and then married in Canada in 2007. One of the partners passed away in 2009, leaving her estate to her spouse. For married couples there is an unlimited estate tax deduction, and, therefore, no estate tax on the passing of the first spouse. However, because of DOMA, the federal government did not recognize the couple as married and denied the unlimited marital deduction. As a result, the estate ended up paying $363,053 in federal estate taxes. The survivor sued and prevailed in Federal District Court and in the Second Circuit Court of Appeals. The government appealed the decision to the Supreme Court, which found in the taxpayer’s favor, so the federal government must refund the estate tax. (Windsor, (Sup Ct 6/2013)) But how does this case impact the tax filings of other same-sex couples that were married in states that permit such unions? It seems pretty clear that same-sex married couples who reside in a state where same-sex marriages are legal, and in the state in which they were married, can file a joint return for federal purposes. (Prior to this ruling, these couples had to file their federal returns as if they were not married, generally with each spouse using the “single” filing status.) What is unclear is the Supreme Court’s wording in the ruling: “those persons joined in same-sex marriages made lawful by the state.” This leaves the waters muddy for same-sex married couples who were wed in one state and then relocated to another, particularly a state that does not currently recognize same-sex marriages. Those couples will have to wait for further clarification. Also still up in the air is whether registered domestic partners who are not married will fall under the Supreme Court’s ruling. Whether same-sex married couples can or must file amended returns for prior years is also unknown at this time. The Supreme Court ruling was retroactive in the Windsor case, so one would assume prior returns can be amended, but we must wait to see if they must be amended, which is very doubtful. Also at issue are a host of other governmental and legal rights afforded to married couples. The IRS is expected to provide guidance on the tax-related issues in the near future. This office will continue to monitor these issues and provide updates as further information becomes available. Thu, 11 Jul 2013 19:00:00 GMT Get Credit for Generating Your Own Home Power http://www.mytrivalleytax.com/blog/get-credit-for-generating-your-own-home-power/37190 http://www.mytrivalleytax.com/blog/get-credit-for-generating-your-own-home-power/37190 Tri-Valley Tax & Financial Services Inc Through 2016, taxpayers can get a 30% tax credit on their federal tax returns for installing certain power-generating systems in their homes. The credit is non-refundable, which means it can only be used to offset a taxpayer's current tax liability, but any excess can be carried forward to offset tax through 2016. Systems that qualify for the credit include: Solar water-heating system - Qualifies if used in a dwelling unit used by the taxpayer as a main or second residence where at least half of the energy used by the property for such purposes is derived from the sun. Heating water for swimming pools or hot tubs does not qualify for the credit. The property must be certified for performance by the Solar Rating Certification Corporation or a comparable entity endorsed by the state government where the property is installed. Solar electric system - Qualified system that uses solar energy to generate electricity for use in a dwelling unit located in the U.S. and used as a main or second residence by the taxpayer. Fuel cell plant - This is a fuel cell power plant installed in the taxpayer's principal residence that converts a fuel into electricity using electrochemical means. It must have an electricity-only generation efficiency of greater than 30% and generate at least 0.5 kilowatt of electricity. The credit is 30% of qualified fuel cell expenditures but limited to $500 for each 0.5 kilowatt of the fuel cell property's capacity to produce electricity. Qualified small wind energy - A wind turbine used to generate electricity for use in connection with a dwelling unit used as a main or second residence by the taxpayer. Qualified geothermal heat pump - Must use the ground or ground water as a thermal energy source to heat the dwelling unit or as a thermal energy sink to cool the dwelling unit, and must meet the Energy Star program requirements in effect when the expenditure is made. The dwelling unit must be used as a main or second residence by the taxpayer. Other aspects of the credit: Limited carryover - The credit is a non-refundable personal credit, which limits the credit to the taxpayer's tax liability for the year. However, the portion of the credit that is not allowed because of this limitation may be carried to the next tax year and added to the credit allowable for that year. Thus, the credit carryover is available through 2016 (the final year for the credit). Installation costs - Expenditures for labor costs allocable to onsite preparation, assembly, or original installation of property eligible for the credit, as well as for piping or wiring connecting the property to the residence, are expenditures that qualify for the credit. Swimming pool - Expenditures that are for heating a swimming pool or hot tub are not taken into account for purposes of the credit. Newly constructed homes - The credit can be taken for newly constructed homes if the costs of the residential energy-efficient property can be separated from the home construction and the required certification documents are available. Certification - A taxpayer may rely on a manufacturer's certification that a product is a Qualified Energy Property. A taxpayer is not required to attach the certification statement to the return on which the credit is claimed. However, taxpayers are required to retain the certification statement as part of their records. The certification statement provided by the manufacturer may be a written copy of the statement that is posted on the manufacturer's website with the product packaging details in printable form or in any other manner that will permit the taxpayer to retain the certification statement for tax recordkeeping purposes. Installation costs - Costs for labor allocable to onsite preparation, assembly, or original installation of the residential energy-efficient property are includible. If you have questions about how you can benefit from this credit, please give this office a call. Tue, 09 Jul 2013 19:00:00 GMT Did Your 2012 Roth-Converted Account Decline in 2013? http://www.mytrivalleytax.com/blog/did-your-2012-roth-converted-account-decline-in-2013/37137 http://www.mytrivalleytax.com/blog/did-your-2012-roth-converted-account-decline-in-2013/37137 Tri-Valley Tax & Financial Services Inc If you converted your traditional IRA to a Roth IRA during 2012 and paid (or will pay) the tax on the conversion and then watched the value of the account decrease in 2013, you still have an opportunity to do something about it. If you filed your return on time or are on extension, you automatically receive a 6-month extension from the return's original due date to recharacterize the Roth account back to a Traditional account, thereby avoiding paying taxes on IRA values that have evaporated. Once you make the recharacterization, you must wait 30 days before reconverting the IRA back to a Roth. However, the deadline for both completing your recharacterization and filing or amending your 2012 return is October 15. So if you have questions or wish to implement this strategy, you will need to call this office right away. Thu, 27 Jun 2013 19:00:00 GMT Mid-Year Tax Planning Checklist http://www.mytrivalleytax.com/blog/mid-year-tax-planning-checklist/37103 http://www.mytrivalleytax.com/blog/mid-year-tax-planning-checklist/37103 Tri-Valley Tax & Financial Services Inc All too often, taxpayers wait until after the close of the tax year to worry about their taxes, missing opportunities that could reduce their tax liability or help them financially. Fall is the perfect time for tax planning. The following are some events that can affect your tax return; you may need to take steps to mitigate their impact and thus avoid unpleasant surprises after it is too late to address them. Did you get married, divorced, or become widowed? Did you change jobs or has your spouse started working? Did you have a substantial increase or decrease in income? Did you have a substantial gain from the sale of stocks or bonds? Did you buy or sell a rental? Did you start, acquire, or sell a business? Did you buy or sell a home? Did you retire this year? Are you on track to withdraw the required amount from your IRA (age 70.5 or older)? Did you refinance your home or take out a second home mortgage this year? Were you the beneficiary of an inheritance this year? Did you have a child? Time to start a tax-advantaged savings plan! Are you taking advantage of tax-advantaged retirement savings? Have you made any significant equipment purchases for your business? Are your cash and non-cash charitable contributions adequately documented? Are you keeping up with your estimated tax payments or do they need adjusting? Are you aware of and prepared for the new 3.8% surtax on net investment income? Did you make any unplanned withdrawals from an IRA or pension plan? Have you stayed abreast of every new tax law change? If you anticipate or have already encountered any of the above events, it may be appropriate to consult with this office, preferably before the event, and definitely before the end of the year. Mon, 24 Jun 2013 19:00:00 GMT Turning 70 1/2 This Year? http://www.mytrivalleytax.com/blog/turning-70-12-this-year/37106 http://www.mytrivalleytax.com/blog/turning-70-12-this-year/37106 Tri-Valley Tax & Financial Services Inc If you are turning 70 1/2 this year, you may face a number of special tax issues. Not addressing these issues properly could result in significant penalties and filing hassles. Traditional IRA Contributions - You cannot make a traditional IRA contribution in the year you reach the age of 70 1/2 Contributions made in the year you turn 70 1/2 (and later years) are treated as excess contributions and are subject to a nondeductible 6% excise tax penalty for every year in which the excess contribution remains in the account. The penalty, which cannot exceed the value of the IRA account, is calculated on the excess contributed and on any interest it may have earned. You can avoid the penalty by removing the excess and the interest earned on the excess from the IRA prior to April 15 of the subsequent year and including the interest earned on the excess in your taxable income. Even though you can no longer make contributions to a traditional IRA in the year you reach age 70 1/2 you can continue to make contributions to a Roth IRA, not to exceed the annual IRA contribution limits, provided you still have earned income, such as wages or self-employment income, at least equal to the amount of the contribution. Required Minimum Distributions (RMD) - You must begin taking required minimum distributions from your qualified retirement plans and IRA accounts in the year you turn 70 1/2 The distribution for the year in which you turned 70 1/2 can be delayed to the subsequent year without penalty, if the distribution is made before April 1 of the subsequent year. That means in the subsequent year two distributions must be made, the delayed distribution and the distribution for that year. Still Working Exception - If you participate in a qualified employer plan, generally you need to start taking required minimum distributions (RMDs) by April 1 of the year following the year you turn 70½. This is your required beginning date (RBD) for retirement distributions. However, if your plan includes the "still working exception," your RBD is postponed to April 1 of the year following the year you retire. Example: You reached age 70 1/2 in 2011, but chose to continue working and did not retire until June of 2013. Provided your employer’s plan includes the option, you can make the “still working election” and delay your RBD until no later than April 1, 2014. Caution: This exception does not apply to an employee who owns more than 5% of the company. There is no "still working exception" for IRAs, Simple IRAs, or SEP IRAs. Excess Accumulation Penalty - When you fail to take a RMD, you are subject to a draconian penalty called the excess accumulation penalty. This penalty is a 50% excise tax of the amount (RMD) that should have been distributed for the year. Example: Your RMD for the year is $35,000 but you only take $10,000. Your excess accumulation penalty for failing to take the full amount of the distribution for the year would be $12,500 (50% of $25,000). The IRS will generally wave the penalty for non-willful failures to take your RMD, provided you have a valid excuse and the under-distribution is corrected. As you can see, turning 70 1/2 can complicate your tax situation. If you need assistance with any of the issues discussed here, or need assistance computing your RMD for the year, please give this office a call. Mon, 24 Jun 2013 19:00:00 GMT Documenting Charitable Contributions http://www.mytrivalleytax.com/blog/documenting-charitable-contributions/37107 http://www.mytrivalleytax.com/blog/documenting-charitable-contributions/37107 Tri-Valley Tax & Financial Services Inc A frequently asked question is, “What records are required for charitable contributions?” In recent years, Congress has passed stringent recordkeeping rules for charitable contributions as well as harsh penalties for understating taxable income. The following is a summary of the recordkeeping rules currently in effect for a variety of contribution types. This list is not all-inclusive, so if you don’t see rules that apply to your particular situation, please give our office a call. Cash Contributions - Cash contributions include those paid by cash, check, electronic funds transfer, or credit card (see special requirements for payroll cash contributions). You cannot deduct a cash contribution, regardless of the amount, unless you can document the contribution in one of the following ways. 1. A bank record that shows the name of the qualified organization, the date of the contribution, and the amount of the contribution. Bank records may include: a. A canceled check, b. A bank or credit union statement, or c. A credit card statement. 2. A receipt (or a letter or other written communication) from the qualified organization showing the name of the organization, the date of the contribution, and the amount of the contribution. As a result, if you drop cash into a church collection plate each week at a worship service, you cannot legally deduct that donation on your tax return. The same goes for dropping a cash donation into the Christmas kettle. Instead, you should write a check to the charitable organization of your choice and put the check into the collection plate, or make other arrangements with the organization for giving your tax-deductible contribution to ensure that a bank record, receipt, or letter is provided. Payroll Contributions - For contributions made by payroll deduction, you must keep: 1. A pay stub, W-2 form, or other document provided by your employer that shows the date and amount of the contribution, and 2. A pledge card or other document prepared by or for the organization to which you are donating that shows the name of this organization. If the employer withheld $250 or more from a single paycheck, the pledge card or other document must state that the organization does not provide goods or services in return for any contribution made to it by payroll deduction. A single pledge card may be kept for all contributions made by payroll deduction, regardless of the amount, as long as it contains all of the required information. If the pay stub, W-2 form, pledge card, or other document does not show the date of the contribution, you must also have another document that does show the date of the contribution. If the pay stub, W-2 form, pledge card, or other document does show the date of the contribution, you need not keep any other records except those described in (A) and (B). Non-Cash Contributions - Non-cash contributions include the donation of property, such as used clothing or furniture, to a qualified charitable organization. Deductions of Less than $250 - If you claim a non-cash contribution of less than $250, you must get and keep a receipt from the charitable organization showing: 1. The name of the charitable organization, 2. The date and location of the charitable contribution, and 3. A reasonably detailed description of the property that was donated.You are not required to have a receipt if it is impractical to get one (for example, if the property was left at a charity’s unattended drop site). However, you still must document the contribution as described above. Deductions of at Least $250 but Not More than $500 - If you claim a deduction of at least $250 but not more than $500 for a non-cash charitable contribution, you must have and keep an acknowledgment of the contribution from the qualified organization. If the contributions were made in more than one donation of $250 or more, you must have either a separate acknowledgment for each or one acknowledgment that shows the total contribution. The acknowledgment(s) must be written and should include the following: 1. The name of the charitable organization, 2. The date and location of the charitable contribution, 3. A reasonably detailed description (but not necessarily the value) of any property contributed, 4. Whether or not the qualified organization gave you any goods or services as a result of the contribution (other than certain token items and membership benefits), and 5. If goods and/or services were provided to you, the acknowledgement must include a description and good faith estimate of the value of those goods or services. If the only benefit received was an intangible religious benefit (such as admission to a religious ceremony) that generally is not sold in a commercial transaction outside the donative context, the acknowledgment must say so and does not need to describe or estimate the value of the benefit. Deductions of over $500 but Not over $5,000 - If you claim a deduction of over $500 but not over $5,000 for a non-cash charitable contribution, you must get and keep the same acknowledgement and written records as for contributions of at least $250 but not more than $500 (as described above). In addition, the records must also include: 1. How the property was obtained (for example, by purchase, gift, bequest, inheritance, or exchange). 2. The approximate date the property was obtained or, if you created, produced, or manufactured the item, the approximate date the property was substantially completed. 3. The cost or other basis, and any adjustments to the basis, of property held for less than 12 months and, if available, the cost or other basis of property held for 12 months or more. This requirement, however, does not apply to publicly-traded securities. If you are not able to provide information on either the date the property was obtained or the cost basis of the property, and there is reasonable cause for not being able to provide this information, a statement of explanation must be attached to the return. Deductions over $5,000 - Because of special rules related to contributions over $5,000, please call this office for documentation requirements of the particular contribution before making the contribution. Out-of-Pocket Expenses - If you render services to a qualified organization and have unreimbursed out-of-pocket expenses related to those services, the following three rules apply. 1. You must have adequate records to prove the amount of the expenses. 2. You must get an acknowledgment from the qualified organization that contains: a. A description of the services provided, b. A statement of whether or not the organization provided you with any goods or services to reimburse you for the expenses incurred, c. A description and good faith estimate of the value of any goods or services (other than intangible religious benefits) provided as reimbursement, and d. A statement that the only benefit received was an intangible religious benefit, if that was the case. The acknowledgment does not need to describe or estimate the value of an intangible religious benefit. 3. The acknowledgement must be obtained before the earlier of the following: a. The date of filing the return for the year in which the contribution was made, or b. The due date, including extensions, for the return. Car Expenses - When you claim expenses directly related to the use of your car to provide services to a qualified organization, you must keep reliable written records. Whether the records are considered reliable depends on the facts and circumstances. Generally, your records will likely be considered reliable if made regularly and/or near the time the expense was incurred. The records must show the name of the organization being served and the date each time the car was used for a charitable purpose. If the standard mileage rate of 14 cents per mile is used, the records must show the miles driven for the charitable purpose. If you deduct actual expenses, the records must show the costs of operating the car that are directly related to a charitable purpose. General repairs and maintenance expenses, depreciation, registration fees, or the costs of tires or insurance cannot be deducted. Vehicle Donations - When the deduction claimed for a donated vehicle exceeds $500, IRS Form 1098-C (or another statement containing the same information as Form 1098-C) furnished by the charitable organization must be attached to your filed tax return. Without the 1098-C or other statement, no deduction is allowed. When the charity sells the vehicle, Form 1098-C (or other statement) must be obtained within 30 days of the sale of the vehicle. CAUTION: With the exception of vehicle contributions, charitable gift acknowledgements must be obtained before the earlier of the following: 1. The date on which your return was filed for the year in which you made the contribution, or 2. The due date, including extensions, for filing the return. If you have questions regarding charitable recordkeeping or what is deductible as a charitable contribution, please give our office a call. Mon, 24 Jun 2013 19:00:00 GMT Installment Sale - a Useful Tool to Minimize Taxes http://www.mytrivalleytax.com/blog/installment-sale-a-useful-tool-to-minimize-taxes/37108 http://www.mytrivalleytax.com/blog/installment-sale-a-useful-tool-to-minimize-taxes/37108 Tri-Valley Tax & Financial Services Inc Two new laws that take effect in 2013 can significantly impact the taxes owed from the sale of property that results in capital gains. They include: Higher Capital Gains Rates - Starting in 2013, capital gains can be taxed at 0%, 15%, or 20% depending upon the taxpayer’s regular tax bracket for the year. Therefore, if your regular tax bracket is 15% or less, the capital gains rate is zero. If your regular tax bracket is 25% to 35%, then the top capital gains rate is 15%. However, if your regular tax bracket is 39.6%, the capital gains rate is 20%. Unearned Income Medicare Contribution Tax - This new tax is sometimes referred to as the “surtax on net investment income,” which more aptly describes this 3.8% tax on net investment income. Capital gains (other than those derived from a trade or business) are considered investment income for purposes of this tax. For individuals, the surtax is 3.8% of the lesser of (1) the taxpayer’s net investment income, or (2) the excess of the taxpayer’s modified adjusted gross income (MAGI) over the threshold amount for his or her filing status. The threshold amounts are: $125,000 for married taxpayers filing separately. $200,000 for taxpayers filing as single or head of household. $250,000 for married taxpayers filing jointly or as a surviving spouse. Selling a property one has owned for a long period of time will frequently result in a large capital gain, and reporting all of the gain in one year will generally push the taxpayer’s income within the reach of these two new taxes. This is where an installment sale could fend off these additional taxes by spreading the income over multiple years. Here is how it works. If you sell your property for a reasonable down payment and carry the note on the property yourself, you only pay income taxes on the portion of the down payment (and any other principal payments received in the year of sale) that represents taxable gain. You can then collect interest on the note balance at rates near what a bank charges. To qualify as an installment sale, at least one payment must be received after the year in which the sale occurs. Example: You own a lot for which you originally paid $10,000. You paid it off some time ago, leaving you with no outstanding mortgage on the lot. You sell the property for $300,000 with 20% down and carry a $240,000 first trust deed at 3% interest using the installment sale method. No additional payment is received in the year of sale. The sales costs are $9,000. Computation of Gain Sale Price $300,000 Cost Sales costs Net Profit $281,000 Profit % = $281,000/$300,000 = 93.67% Of your $60,000 down payment, $9,000 went to pay the selling costs, leaving you with $51,000 cash. The 20% down payment is 93.67% taxable, making $56,202 ($60,000 x .9367) taxable the first year. The amount of principal received and reported each subsequent year will be based upon the terms of the installment agreement. In addition, the interest payments on the note are taxable and also subject to the investment surtax. Here are some additional considerations when contemplating an installment sale. Existing mortgages - If the property you are considering selling is currently mortgaged, that mortgage would need to be paid off during the sale. Even if you do not have the financial resources available to pay off the existing loan, there might be ways to work out an installment sale by taking a secondary lending position or wrapping the existing loan into the new loan. Tying up your funds - Tying up your funds into a mortgage may not fit your long-term financial plans, even though you might receive a higher return on your investment and potentially avoid a higher tax rate and the net investment income surtax. Shorter periods can be obtained by establishing a note due date that is shorter than the amortization period. For example, the note may be amortized over 30 years, which produces a lower payment for the buyer but becomes due and payable in five years. However, a large lump sum payment at the end of the 5 years could cause the higher tax rate and surtax to apply to the seller in that year – so close attention to the tax consequences needs to be considered in structuring the installment agreement. Early payoff of the note - The buyer of your property may decide to pay off the installment note early, or sell the property, in which case your installment plan would be defeated and the balance of the taxable portion would be taxable in the year the note is paid off early or the property is sold, unless the new buyer assumes the note. Tax law changes - Income from an installment sale is taxable under the laws in effect when the installment payments are received. If the tax laws are changed, the tax on the installment income could increase or decrease. Based on recent history, it would probably increase. Installment sales do not always work in all situations. To determine if an installment sale will fit your particular needs and set of circumstances, please contact this office for assistance. Mon, 24 Jun 2013 19:00:00 GMT Receiving Inventory With or Without Bills in QuickBooks http://www.mytrivalleytax.com/blog/receiving-inventory-with-or-without-bills-in-quickbooks/37109 http://www.mytrivalleytax.com/blog/receiving-inventory-with-or-without-bills-in-quickbooks/37109 Tri-Valley Tax & Financial Services Inc When your goods come rolling in, be sure to document them correctly. You’re probably happy to see couriers delivering inventory items you’ve ordered since it means you can ship to customers, but recording the new stock means yet another repetitive task. QuickBooks’ tools can help with this, but you need to be sure you’re using the right forms. There are two different ones that you’ll use, depending on whether or not you’ve received a bill. Bill in Hand Either way, you’ll get started by opening the Vendors menu (or clicking the arrow next to Receive Inventory on the home page). If you do have a bill, select Receive Items and Enter Bill (Receive Inventory with Bill on the home page). The Enter Bills screen opens; select your vendor from the drop-down list. If you had entered a purchase order, you’ll see something like this: Figure 1: If any purchase orders exist for that vendor in QuickBooks, you’ll see this message. Click Yes. The Open Purchase Orders window will open displaying a list. Select the PO(s) for the items received by placing a checkmark in front of it/them and click OK. Tip: If you accidentally click No, the vendor’s information will be filled in on the Enter Bills screen, and you can click the Select PO icon in the toolbar. Now the PO item information has been entered in the window. Check the form for accuracy, then save it. Of course, if there was no purchase order, you’ll enter the information about the items you received (descriptions, prices, etc.) in the Enter Bills screen. Delayed Billing If you receive items without a bill, you still need to document the shipment. Open the Vendors menu and select Receive Items (or click the arrow next to the Receive Inventory icon on the home page and select Receive Inventory without Bill). The Create Item Receipts window opens. Select the vendor by clicking the down arrow next to that field. If a message about existing purchase orders for that vendor appears, click Yes or No, and either select the appropriate POs or enter the information about what you received. If the items were already earmarked for a specific customer on the purchase order, the Customer column will have an entry in it, and there will be a check mark in the Billable column. If there was no purchase order and you’re entering the information, you can complete those two fields manually. Figure 2: If a purchase order was already assigned to a customer and is billable, that information should appear in this window. Enter a reference number if you’d like. The Memo field should already be filled in with Received items (bill to follow), and the Bill Received box should not be checked. Warning: Be sure that the Items tab is highlighted when you’re recording physical inventory. If there are related costs like freight charges or sales tax, click the Expenses tab and enter them there. Paying Up When the bill comes in for merchandise that you’ve already recorded on an Item Receipt, you’ll use this procedure to pay it: Click Vendors | Enter Bill for Received Items, which opens the Select Item Receipt window. Select the vendor, then the correct Item Receipt. Note: If the bill corresponds to more than one Item Receipt, you’ll need to convert each into a bill separately. You can create a new bill if some items received were not accounted for on Item Receipts. Click the box next to Use the item receipt date for the bill date if you want to match it to the inventory availability date. Figure 3: You’ll select purchase orders that you want to create bills for in this window. Click OK. The Enter Bills screen opens, which can be processed like you’d handle any bill. Though it may seem like extra work, this last procedure is important, since it prevents you from recording the same inventory items twice. It’s easy to get tangled up on these procedures. We hope you’ll consult us when you begin implementing inventory management in QuickBooks, or when you’re taking on a new task there. It’s a lot easier to prevent errors than to go back and fix them. Mon, 24 Jun 2013 19:00:00 GMT Fast Write Off of Business Assets http://www.mytrivalleytax.com/blog/fast-write-off-of-business-assets/37072 http://www.mytrivalleytax.com/blog/fast-write-off-of-business-assets/37072 Tri-Valley Tax & Financial Services Inc Normally, when a business acquires an asset, it must be capitalized and depreciated over its useful life. However, tax law includes some provisions that allow the entire asset or some portion of it to be written in the first year it is placed in service, providing the opportunity for very large first-year write-offs. The following is a summary of those provisions. Section 179 Expensing - Code Section 179 allows taxpayers to elect to treat the cost of Section 179 property as an expense deduction for the tax year in which the Section 179 property is placed in service, instead of having to capitalize the expense and recover the cost over several years. Generally, Section 179 property is acquired by purchase for use in the active conduct of a trade or business, and is generally tangible property to which accelerated cost recovery applies. The property must be used more than 50% for business. The Sec 179 expense deduction was increased for tax years 2010 through 2013 so that a taxpayer can expense up to $500,000 of qualifying property, which includes machinery and equipment. For 2010 through 2013, the annual expensing limit is reduced by the cost of qualifying property that is placed into service during the year that exceeds a $2 million investment limit. The maximum Sec 179 deduction is scheduled to revert to $25,000 for qualifying property placed in service after 2013, and the investment limit cap will be $200,000. Off-the-Shelf Computer Software - Off-the-shelf computer software placed in service 2003 through 2013 is property eligible for Sec 179 expensing. Certain Real Property Can Also Be Expensed - Certain real property is also eligible for Sec 179 expensing. For property placed in service in any tax year beginning in 2010 through 2013, the up-to-$500,000 deduction of property expensed can include up to $250,000 of qualified real property (qualified leasehold improvement property, qualified restaurant property, and qualified retail improvement property). Bonus Depreciation - For qualifying assets purchased and placed in service in 2012 and 2013, trades or businesses are allowed to depreciate an additional 50% of the cost of the assets. Please call if you would like to discuss how these tax benefits apply to your business situation. Thu, 20 Jun 2013 19:00:00 GMT Flipping Homes - A Reviving Trend in Real Estate http://www.mytrivalleytax.com/blog/flipping-homes-a-reviving-trend-in-real-estate/37065 http://www.mytrivalleytax.com/blog/flipping-homes-a-reviving-trend-in-real-estate/37065 Tri-Valley Tax & Financial Services Inc Prior to the recent economic downturn, flipping real estate was popular. With mortgage interest rates low and home prices at historical lows, flipping appears to be on the rise again. House flipping is, essentially, purchasing a house or property, improving it, and then selling it (presumably for a profit) in a short period of time. The key is to find a suitable fixer-upper that is priced under market for its location, fix it up, and resell it for more than it cost to buy, hold, fix up and resell it. If you are contemplating trying your hand at flipping, keep in mind that you will have a silent partner, Uncle Sam, who will be waiting to take his share of any profits in taxes. (And most likely, Sam's cousin in your state capitol will also expect a share, too.) Taxes play a significant role in the overall transaction, and tax treatment can be quite different depending upon whether you are a dealer, an investor or a homeowner. The following is the tax treatment for each in years after 2012. Dealer in Real Estate - Gains received by a non-corporate taxpayer from business operations as a real estate dealer are taxed as ordinary income (10% to 39.6% ), and in addition, individual sole proprietors are subject to self-employment tax of 15.3% of their net profit (the equivalent of the FICA taxes for a self-employed person). Higher-income sole proprietors are also subject to an additional 0.9% Medicare surtax on their earnings. Thus, a dealer will generally pay significantly more tax on the profit than an investor. On the other hand, if the flip results in a loss, the dealer would be able to deduct the entire loss in the year of sale, which would generally reduce his tax at the same rates. Investor - Gains as an investor are subject to capital gains rates (maximum of 20%) if the property is held for more than a year (long-term). If held short-term, ordinary income rates (10% to 39.6%) will apply. An investor is not subject to the self-employment tax, but could be subject to the 3.8% surtax on net investment income for higher income taxpayers. A downside for the investor who has a loss from the transaction is that, after combining all long- and short-term capital gains and losses for the year, his deductible loss is limited to $3,000, with carryover to the next year of any excess capital loss. The rules get a bit more complicated if the investor rents out the property while trying to sell it, and are beyond the scope of this article. Homeowner - If the individual occupies the property as his primary residence while it is being fixed up, he would be treated as an investor with three major differences: (1) if he owns and occupies the property for two years and has not used a homeowner gain exclusion in the two years prior to closing the sale, he can exclude gain of up to $250,000 ($500,000 for a married couple), (2) if the transaction results in a loss, he will not be able to deduct the loss or even use it to offset gains from other sales, and (3) some fix-up costs may be deemed to be repairs rather than improvements, and repairs on one's primary residence are not deductible nor includible as part of the cost basis of the home. Being a homeowner is easily identifiable, but distinguishing between a dealer and an investor is not clearly defined by the tax code. A real estate dealer is a person who buys and sells real property with a view to the trading profits to be derived and whose operations are so extensive as to constitute a separate business. A person acquiring property strictly for investment, though disposing of investment assets at intermittent intervals, is generally not regularly engaged in dealing in real estate. This issue has been debated in the tax courts frequently, and both the IRS and the courts have taken the following into consideration: whether the individual is already a dealer in real estate, such as a real estate sales person or broker; the number and frequency of sales (flips); whether the individual is more committed to another profession as opposed to fixing and selling real estate; and how much personal time is spent making improvements to the 'flips' as opposed to another profession or employment. The distinction between a dealer and an investor is truly based on the facts and circumstances of each case. Clearly, an individual who is not already in the real estate profession and flips one house is not a dealer. But one who flips five or more houses and/or property and has substantial profits would probably be considered a dealer. Everything in between becomes various shades of grey and the facts and circumstances of each case must be considered. If you have additional questions or need assistance with your specific situation, please give this office a call. Tue, 18 Jun 2013 19:00:00 GMT Employing a Family Member http://www.mytrivalleytax.com/blog/employing-a-family-member/37056 http://www.mytrivalleytax.com/blog/employing-a-family-member/37056 Tri-Valley Tax & Financial Services Inc A way to reduce the overall family tax bill is by employing family members through your business, which allows you to shift income to them and provide them with employment benefits. Employing your Spouse. Reasonable wages paid to your spouse entitle you to a business deduction. Although the wages are subject to income and FICA taxes, your spouse may qualify for Social Security benefits to which he or she might not otherwise be entitled. In addition, your spouse may also be entitled to receive coverage under the qualified retirement and health plans of your business, allowing you to obtain business deductions for contributions to your spouse's retirement nest egg and health insurance premium payments made on behalf of your employed spouse. While maintaining the same family medical care coverage, you increase your business deductions by providing your spouse with family health insurance coverage as an employee. Employing your child. By employing your child, the income tax advantages include obtaining a business deduction for a reasonable salary paid to that child, thus reducing your self-employment income and tax by shifting income to the child. Since the salary paid to your child is considered earned income, it is not subject to the “Kiddie Tax” rules that apply to children under the age of 19, as well as some older children. The maximum standard deduction available to your child in 2013 is $6,100 (up from $5,950 in 2012) if he or she has at least that amount of earned income. Therefore, the standard deduction eliminates all tax on this income if you pay your child $6,100 (2013) in compensation. If your business is unincorporated, wages paid to your child under age 18 are not subject to social security taxes. Not only are there significant income tax advantages to employing your child, you may also provide him or her with fringe benefits such as group-term life insurance and qualified pension plan contributions. Your child may also make deductible contributions to an IRA of the lesser of earned income or the annual limitation. These contributions can offset earned and unearned income. As example, in 2013 your child could receive $11,600 gross income ($6,100 earned and $5,500 unearned) by combining the IRA deduction ($5,500) with the standard deduction ($6,100) and pay no tax. You should consider giving him or her part or all of the money needed to fund the IRA (as part of your $14,000/$28,000 annual exclusion for gifts) if your child does not want to use his or her earned income to fund an IRA contribution. Please keep in mind that, when you employ a family member through your business, the wages should be reasonable for the work performed and that the services performed are necessary to the business. Please call this office for additional information. Thu, 13 Jun 2013 19:00:00 GMT Higher Income Taxpayers Hit with Exemption & Itemized Deductions Phase-out http://www.mytrivalleytax.com/blog/higher-income-taxpayers-hit-with-exemption--itemized-deductions-phase-out/37025 http://www.mytrivalleytax.com/blog/higher-income-taxpayers-hit-with-exemption--itemized-deductions-phase-out/37025 Tri-Valley Tax & Financial Services Inc Generally, taxpayers are allowed to deduct personal exemptions of $3,900 for themselves, their spouses and their dependents. In addition, taxpayers are allowed a standard deduction or, if their deductions are large, they can itemize their deductions. The American Taxpayer Relief Act of 2012 included a provision to phase out, beginning in 2013, both the personal exemptions and itemized deductions for higher income taxpayers. The phase-out will begin when a taxpayer’s adjusted gross income (AGI) reaches a phase-out threshold amount. The threshold amounts are based on the taxpayers’ filing statuses and are: $250,000 for single filers, $275,000 for individuals filing as heads of households, $300,000 for married couples filing jointly and $150,000 for married individuals filing separately. Here is how the phase-out will work: Personal Exemption - The otherwise allowable exemption amounts are reduced by 2% for each $2,500 or part of $2,500 ($1,250 for a married taxpayer filing separately) that the taxpayer’s AGI exceeds the threshold amount for the taxpayer’s filing status. Example: Ralph and Louise have an AGI of $412,500 for 2013 and two children for a total of four exemptions totaling $15,600 (4 × $3,900). The threshold for a married couple is $300,000; thus, their income exceeds the threshold by $112,500. Dividing $112,500 by $2,500 equals 45. So 90% (45 × 2%) of their $15,600 exemption allowance is phased out, leaving them with a reduced exemption deduction of $1,560 ((100–90) × $15,600). Assuming Ralph and Louise are in the 33% federal tax bracket, the phase-out costs them an additional $4,633 ($15,600 × 90% × 33%). Divorced or separated parents subject to the phase-out should consider relinquishing the exemption of a dependent child to the other parent. Where a taxpayer is a party to a multiple support agreement, the taxpayer may want to allow another contributing member of the agreement who is not hit by the phase-out to claim the dependent’s exemption. Itemized Deductions - The total amount of itemized deductions is reduced by 3% of the amount by which the taxpayer’s AGI exceeds the threshold amount, with the reduction not to exceed 80% of the otherwise allowable itemized deductions. Not all itemized deductions are subject to phase-out. The following deductions are not subject to the phase-out: o Medical and dental expenses o Investment interest expenses o Casualty and theft losses from personal-use property o Casualty and theft losses from income-producing property o Gambling losses Thus, a taxpayer who is subject to the full phase-out still gets to deduct 20% of the deductions subject to the phase-out and 100% of the deductions listed above. Example: Ralph and Louise from the previous example, who had an AGI of $412,500 for 2013, exceed the threshold for a married couple by $112,500. Thus, they must reduce their itemized deductions subject to the phase-out by $3,375 (3% of $112,500), but the reduction must not exceed 80% of the deductions subject to the phase-out. For 2013, Ralph and Louise had the following itemized deductions: Subject to Phase-out Not Subject to Phase-out Home mortgage interest $10,000 Taxes $8,000 Charitable contributions $6,000 Casualty Loss $12,000 Total $24,000 $12,000 Subject to Phase-out Not Subject to Phase-out Home mortgage interest: $10,000 Taxes: $8,000 Charitable contributions: $6,000 Casualty loss: $12,000 Total: $24,000 $12,000 The phase-out is the lesser of $3,375 or 80% of $24,000. Thus Ralph and Louise’s itemized deductions for 2013 will be $32,625 ($24,000 - $3,375 + $12,000). Assuming Ralph and Louise are in the 33% federal tax bracket, the phase-out will cost them an additional $1,114 ($3,375 × 33%). Conventional thinking is to maximize deductions. However, where taxpayers normally are not subject to a phase-out and have a high-income year because of unusual income, it may be appropriate, where possible, to defer paying deductible expenses to the year following the high-income year or perhaps pay and deduct the expenses in the preceding year. If you have questions about how these phase-outs will impact your specific situation, you want to adjust your withholding or estimated taxes, or you want to make a tax planning appointment, please give this office a call. Tue, 11 Jun 2013 19:00:00 GMT Tax Tips for Students with a Summer Job http://www.mytrivalleytax.com/blog/tax-tips-for-students-with-a-summer-job/36915 http://www.mytrivalleytax.com/blog/tax-tips-for-students-with-a-summer-job/36915 Tri-Valley Tax & Financial Services Inc Many students hold a summer job during their time off from school. Here are some tax issues that should be considered when working a summer job. Completing Form W-4 When Starting a New Job - This form is used by employers to determine the taxes that will be withheld from your paycheck. Taxpayers with multiple summer jobs will want to make sure all of their employers are withholding an adequate amount of taxes to cover their total income tax liability. Generally, a student who is claimed as a dependent of another with income only from summer and part-time employment can earn as much as $6,100 (the standard deduction amount) without being liable for income tax. However, if the student is a dependent and has other investment income, the tax determination becomes more complicated and subject to special rules. Tips - If the student works as a waiter, camp counselor, or some other common summer jobs, the student may receive tips as part of the summer income. All tip income received is taxable income and is therefore subject to federal income tax. Employees are required to report tips of $20 or more received while working with any one employer in any given month. The reporting should be made in writing to the employer by the tenth day of the month following the receipt of tips. The IRS provides publication 1244 [http://www.irs.gov/pub/irs-pdf/p1244.pdf] that can be used to record tips for a month on a daily basis. The employer withholds FICA (Social Security and health insurance) and income taxes on these reported tips and then includes the tips and wages on the employee's W-2. Cash Jobs - Many students do odd jobs over the summer and are paid in cash. Just because the job is paid in cash does not mean that it is tax-free. Unfortunately, the income is taxable and may be subject to self-employment taxes (see below). These earnings include income from odd jobs like babysitting and lawn mowing. Self-Employment Tax - When an individual works for an employer, the employer withholds FICA (Social Security taxes) and Medicare taxes from the employee's pay, matches the amount dollar for dollar, and remits the combined amount to the government. Self-employed workers are required to pay the combined employee and employer amounts themselves (referred to as self-employment tax) if their net earnings are $400 or more. This tax pays for their benefits under the Social Security system. Even if a worker is not liable for income tax, this 15.3% tax may apply. ROTC Students - Subsistence allowances paid to ROTC students participating in advanced training are not taxable. However, active duty pay—such as pay received during summer advanced camp—is taxable. Newspaper Carrier or Distributor - Special rules apply to services performed as a newspaper carrier or distributor. An individual is a direct seller and treated as self-employed for federal tax purposes under the following conditions: The person is in the business of delivering newspapers; All of the pay for these services directly relates to sales rather than to the number of hours worked; and A written contract controls the delivery services and states that the distributor will not be treated as an employee for federal tax purposes. Newspaper Carriers or Distributors Under Age 18 - Generally, newspaper carriers or distributors under age 18 are not subject to self-employment tax. Please call this office if you have additional questions. Fri, 24 May 2013 19:00:00 GMT Tips for Students and Parents Paying College Expenses http://www.mytrivalleytax.com/blog/tips-for-students-and-parents-paying-college-expenses/36916 http://www.mytrivalleytax.com/blog/tips-for-students-and-parents-paying-college-expenses/36916 Tri-Valley Tax & Financial Services Inc Whether you're a recent high school graduate going to college for the first time or a returning student, paying for college can be a daunting financial task. The following are some tips about education tax benefits that can help offset some college costs for students and parents. American Opportunity Credit - In many cases, this credit offers greater tax savings than other existing education tax breaks. Here are some key features of the credit: Tuition, related fees, books, and other required course materials generally qualify. The credit is equal to 100 percent of the first $2,000 spent and 25 percent of the next $2,000, which means that the full $2,500 credit may be available to a taxpayer who pays $4,000 or more in qualified expenses for an eligible student. You may qualify for this credit even if you have previously taken the Hope or Lifetime Learning credit. The full credit is available for taxpayers whose modified adjusted gross income (MAGI) is $80,000 or less (for married couples filing a joint return, the limit is $160,000). The credit is phased out for taxpayers with incomes above these levels. These income limits are higher than those under the Lifetime Learning credit. Forty percent of the American Opportunity Credit is refundable, which means that even people who owe no tax can receive an annual payment of up to $1,000 for each eligible student. Other existing education-related credits and deductions do not provide a benefit to people who owe no tax. The refundable portion of the credit is not available to any student whose investment income is taxed at the parents' rate, which is commonly referred to as the kiddie tax. Although most taxpayers who pay for post-secondary education qualify for the American Opportunity Credit, some do not. Limitations include a married person filing a separate return, regardless of income; joint filers whose MAGI is $180,000 or more; and, finally, single taxpayers, heads of household, and certain widows and widowers whose MAGI is $90,000 or more. Some post-secondary education expenses do not qualify for the American Opportunity Credit. These include the expenses of a student who, as of the beginning of the tax year, has already completed the first four years of college, as this credit is only granted for the first four years of post-secondary education. Lifetime Learning Credit - If a student does not qualify for the American Opportunity Credit, he or she may still qualify for the Lifetime Learning Credit. Key features of the credit include the following: The credit is available for all years of post-secondary education and for courses taken to acquire or improve job skills. There is no limit on the number of years that the Lifetime Learning Credit can be claimed for an eligible student. The credit amounts to $2,000 maximum per eligible student. The credit is non-refundable; thus, the maximum amount credited is limited to the amount of tax that must be paid on your return. The student does not need to be pursuing a degree or other recognized education credential to qualify for this credit. Qualified expenses include tuition and fees, course-related books, supplies, and equipment. The full credit is generally available to eligible taxpayers, in 2013, whose MAGI is less than $53,000, or $107,000 for married couples filing a joint return. Above these amounts, the credit quickly begins to phase out. Only one type of education credit can be claimed per student in the same tax year. However, if you're the parent of two children attending college, you can claim the American Opportunity Credit for one student and the Lifetime Learning Credit for the other. Note, however, that the Lifetime Learning Credit's $2,000 cap applies on a per tax return basis. The credit is claimed on the return of the individual who claims the student's exemption. For example, if a student's parents are divorced and the father pays the tuition but the mother claims the student's exemption, the mother would receive the credit, even though the father made the payments. Student loan interest deduction - Other than certain home mortgage interest, personal interest that you pay is generally not deductible. However, you may be able to deduct interest paid on a qualified student loan during the year. It can reduce the amount of your income subject to tax by up to $2,500, even without itemizing deductions. However, if your MAGI exceeds $75,000 ($155,000 if married filing a joint return), the student loan interest deduction is not allowed. If you're married and filing separately, the deduction is not permitted, regardless of income level. Determining the most beneficial education tax credit and applying other education expense strategies can be complicated and requires planning in advance. For assistance with these and other tax planning issues, please give this office a call. Fri, 24 May 2013 19:00:00 GMT How to Create a Progress Invoice from an Estimate http://www.mytrivalleytax.com/blog/how-to-create-a-progress-invoice-from-an-estimate/36918 http://www.mytrivalleytax.com/blog/how-to-create-a-progress-invoice-from-an-estimate/36918 Tri-Valley Tax & Financial Services Inc Not using progress invoices? Maybe you should be. The U.S. economy may be picking up, but your customers are probably still being very careful with expenditures. If your company’s finances will allow it, you can help them out on sizable jobs by using progress invoicing, also known as partial billing or progress billing. You could, of course, simply create invoices for smaller chunks of the job as they come. A smarter way is to build estimates for the entire job or sequential phases so your customer can see the big picture. You can still use progress invoicing to start collecting funds one segment at a time. How to ProceedFirst, be sure you have progress invoicing turned on. Go to Edit | Preferences | Jobs & Estimates | Company Preferences and make sure the Yes button is filled in next to the questions about estimates and progress invoicing. Now create your estimate (these instructions are for QuickBooks Premier 2013; your steps may vary slightly). Go to Customers | Create Estimates. When you’ve entered all of the items you want to include in this phase of your project, click the Create Invoice button. This window will open: Figure 1: You can decide how many of your estimate items will be included on your progress invoice. By clicking one of these buttons, you can bill the customer 100 percent of what’s due on the invoice or just a percentage. But let’s say you and your customer have agreed that payment will be due in pre-defined stages, so click the third button and select one or more of the line items. Click OK. QuickBooks will display a new window that lets you select items and/or percentages of amounts due. In our example here, we’re going to invoice the customer for two items, the blueprints and floor plans. So we selected the button next to Show Quantity and Rate and entered the full estimated quantity for each item in the QTY columns (if you chose Show Percentage, new columns would appear). It would look like this: Figure 2: You can select specific items or percentages for your progress invoice. Click OK. QuickBooks will return to your progress invoice, which you can save and print or email to your customer. Your original estimate will remain unchanged. Tip: If you don’t want any of the zero amounts to appear on the progress invoice, go to Edit | Preferences | Jobs & Estimates | Company Preferences and make sure there’s a check mark in the box next to Don’t print items that have zero amount. Following Up When you want to bill for another set of items on this estimate, simply repeat these steps. Here’s an easy way to determine how much (if any) of the estimate has been invoiced. Go to the Customer Center and select the customer. Click the arrow next to the Show field and select Estimates. Any estimate that has a zero in the OPEN BALANCE column has been completely billed. QuickBooks provides a report that tells you where you are with all of your progress invoices. Go to Reports | Jobs, Time & Mileage | Job Progress Invoices vs. Estimates. Your report will include the progress invoice you just created: Figure 3: You can see what percentage of each estimate has been included on a progress invoice in this report. More Options What if you determine that you won’t have one or more of the items on the estimate? QuickBooks lets you quickly generate a purchase order. With your estimate open, click Create Purchase Order to select the item(s) needed and generate the form. You can also click Create Sales Order if one is necessary. Estimates provide a useful way to fine-tune your bookkeeping and inform your customers about impending costs. They can also be confusing if you don’t keep up with them. We can help you determine when they’re a good idea and how to keep them organized. QuickBooks provides good tools here, but they require some administrative control. Fri, 24 May 2013 19:00:00 GMT Behind on Your Taxes - Want a Fresh Start? http://www.mytrivalleytax.com/blog/behind-on-your-taxes-want-a-fresh-start/36908 http://www.mytrivalleytax.com/blog/behind-on-your-taxes-want-a-fresh-start/36908 Tri-Valley Tax & Financial Services Inc If you are unfortunate enough to have an unpaid tax liability and wish to put end the constant stream of correspondence from the IRS, there are several possible solutions to help you deal with the circumstances and take advantage of the IRS’s Fresh Start initiative. Establish An Installment Agreement - If you are unable to pay your tax liability immediately, a payment plan can be arranged, allowing you to pay the liability over a number of years. Under the new “Fresh Start” program, the IRS recently expanded access to streamlined installment agreements. Now, individual taxpayers who owe up to $50,000 can pay via monthly direct debit payments for up to 72 months (six years). While the IRS generally will not need a financial statement, they may request certain financial information from the taxpayer. Conditions that must be met in order to qualify for an installment agreement include the following: Installment payments must be made in full and on time. All future tax returns must be filed on time. Enough withholding or estimated tax payments must be made so that no tax is due with timely filed future returns. Owe more than $50,000 - If the amount you owe is in excess of $50,000 or it is impossible for you to pay off the debt within six years, you can still apply for an installment agreement, but you will be required to supply the IRS with a financial statement. User Fees - The IRS charges a user fee of $105 ($52 if the taxpayer makes the payment by electronic payment withdrawal) for setting up the installment agreement. A reduced fee of $43 applies to lower income taxpayers. Interest & Penalties - Taxpayers will also be charged interest at the current rate (which recently has been 3% annually), compounded daily, and a late payment penalty, usually 0.5% of the balance due per month. However, the penalty is reduced to 0.25% when the IRS approves the agreement for an individual taxpayer who timely filed the return and did not receive a levy notice. Offers in Compromise - If it is reasonably clear that you are unable to pay the entire liability, you can apply for an Offer in Compromise. An Offer in Compromise is an agreement that allows taxpayers to settle their tax debt for less than the full amount. The IRS Fresh Start program expanded and streamlined the OIC program. The IRS now has greater flexibility when analyzing a taxpayer’s ability to pay, making the offer program available to a larger group of taxpayers. Generally, the IRS will accept an offer if it represents the most that the agency can expect to collect within a reasonable period of time. The IRS will not accept an offer if it believes that the taxpayer can pay the amount owed in full as a lump sum or through a payment agreement. The IRS considers several factors, including the taxpayer’s income and assets, when making a decision regarding the taxpayer’s ability to pay. Tax Liens - The IRS Fresh Start program increased the amount that taxpayers can owe before the IRS generally will file a Notice of Federal Tax Lien. That amount is now $10,000. However, in certain cases, the IRS may still file a lien notice on amounts less than $10,000. When a taxpayer meets certain requirements and pays off his or her tax debt, the IRS may withdraw a filed Notice of Federal Tax Lien. Taxpayers must request that this withdrawal in writing using the appropriate IRS form. Some taxpayers may qualify to have their lien notice withdrawn if they are paying their tax debt through a Direct Debit installment agreement. Taxpayers need to request the withdrawal in writing using the appropriate IRS form. If a taxpayer defaults on the Direct Debit Installment Agreement, the IRS may file a new Notice of Federal Tax Lien and resume collection actions. If you would like assistance with getting your IRS back tax liabilities in order, please call this office for an appointment so that we can explore options for which you may qualify based on your situation. Thu, 23 May 2013 19:00:00 GMT Tax Rates Increase in 2013 http://www.mytrivalleytax.com/blog/tax-rates-increase-in-2013/36866 http://www.mytrivalleytax.com/blog/tax-rates-increase-in-2013/36866 Tri-Valley Tax & Financial Services Inc As part of the 2012 American Taxpayer Relief Act (ATRA), tax rates, both ordinary and capital gains, increased in 2013 for higher income taxpayers whose taxable income exceeds the income threshold for their filing status. The thresholds at which taxpayers are subject to the top ordinary and long-term capital gains tax rates are $450,000 for joint filers and surviving spouses, $425,000 for heads of household, $400,000 for single filers, and $225,000 for married couples filing separately. These increases will have the following impact on ordinary income and long-term capital gains rates: Ordinary Income Rates - Prior to the law change, there were six tax brackets: 10, 15, 25, 28, 33 and 35%. The ATRA added a new top rate of 39.6%. Thus, higher-income taxpayers, to the extent their taxable income exceeds the income threshold for their filing status, will be subject to the new 39.6% rate (up 4.6% from previous 35% top rate). Example: Jack and Sally, who are filing jointly, have an ordinary taxable income of $600,000. Their income above $450,000 will be subject to the 39.6% tax rate. Thus, they will see a tax increase of $6,900 (($600,000  $450,000) x 4.6%) as a result of the new tax bracket. Capital Gains and Dividends - Prior to the law change, the long-term capital gain was zero for taxpayers in the 10 and 15% ordinary income tax bracket and 15% for taxpayers with taxable income above the 15% bracket. The ATRA increased the top rate for long-term capital gains and qualified dividends to 20% (up from 15%) for taxpayers with incomes exceeding the threshold for their filing status. Thus, for years beginning in 2013, there will be three long-term capital gains rates: 0, 15, and 20%, with the 20% applying to higher-income taxpayers. Example: Howard, a single individual, retired this year and sold his rental property, which he had owned for a long time, for a profit of $700,000. Even though his income is generally in a lower-income tax bracket, the profit from the sale itself pushed his income above the $400,000 threshold for single taxpayers, and to the extent his income exceeds the $400,000 threshold, he will be subject to the increased capital gains rate. Had Howard's other taxable income been $50,000, he would have had a total income of $750,000, of which $350,000 exceeds the 20% long-term CG rate threshold. As a result, Howard pays the 20% rate on $350,000, resulting in an increase of $17,500 ($350,000 x 5%) over what he would have paid in 2012. Generally, sales that are subject to long-term capital gains rates are also investment income subject to the 3.8% unearned income Medicare contribution tax that is part of the Affordable Care Act, which is discussed later in this article. If Howard had utilized an installment sale, he could have spread the gain over multiple years and possibly avoided the higher CG rate. He might have also utilized a tax-deferred exchange to defer the gain into another real estate property. If you have any questions about how these new tax rates will impact you, please give this office a call. Thu, 16 May 2013 19:00:00 GMT Convert Unused Property Into a Tax Deduction http://www.mytrivalleytax.com/blog/convert-unused-property-into-a-tax-deduction/36850 http://www.mytrivalleytax.com/blog/convert-unused-property-into-a-tax-deduction/36850 Tri-Valley Tax & Financial Services Inc When you give away items like clothing, appliances, vehicles, and other goods to a qualified charity, your generosity can add up to a tax write-off if you itemize your deductions. The amount of your deduction is generally the donated property's “fair market value.” The IRS definition of fair market value (FMV) is “the price a willing buyer would pay and a willing seller would accept for an item, when neither party is compelled to buy or sell and both parties have reasonable knowledge of the relevant facts.” Below are guidelines to help determine FMV for the most common types of noncash donations (miscellaneous personal items) that have decreased in value since they were acquired: Used Clothing: The IRS provides no set formula for valuing clothing items. However, keep in mind that the FMV of used clothing and other personal items is usually much less than what you paid for them. Household Goods: The value of used household goods (e.g., furniture and appliances) is also much less than their original cost. If the property is worn, inoperable, or out of style, it may have little or no market value. However, photographs, purchase receipts, and newspaper ads describing similar property should help support a valuation. Cars and Other Vehicles: The deduction is limited for motor vehicles (as well as for boats and airplanes) contributed to a charity for which the claimed value exceeds $500 by making it dependent upon the charity's use of the vehicle and imposing higher substantiation requirements. If the charity sells the vehicle without any “significant intervening use” (actual, significant use of the vehicle to substantially further the organization's regularly conducted activities) or “material improvement” (e.g., major repairs), the donor's charitable deduction cannot exceed the gross proceeds from the charity's sale. The charity will issue form 1098-C which includes details of the sale. Where significant intervening use occurs, the deductible amount is the FMV of the vehicle. The “Blue Book” value is a good place to start in determining the vehicle's FMV. However, Blue Book values generally assume the car to be in good condition and allowances must be made for the actual condition of the vehicle. Noncash contributions must be properly documented with a contemporaneous written acknowledgment from the charity if the total deduction claimed for a donation is valued at $250 or more. The acknowledgment must be obtained on or before the earlier of the date the tax return is filed, or the extended due date for the return. It must include the name of the charity, a description (but not value) of the donation, and one of the following: A statement that no goods or services were provided by the charity in return for the contribution, if that is the case; A description and good faith estimate of the value of goods or services, if any, that the charity provided in return for the contribution; or A statement that goods or services that the charity provided in return for the contribution consisted entirely of intangible religious benefits, if that is the case. If the FMV of the donation claimed is greater than $5,000, a written appraisal must be made by a qualified appraiser no more than 60 days before a vehicle or other similar property is contributed. The appraisal must be received before the extended due date of the return on which the deduction is claimed. In addition, Section B of IRS Form 8283 must be completed, including the signature of an authorized official of the charity. If you have questions about how this tax provision might apply to your specific tax situation, please give this office a call. Tue, 14 May 2013 19:00:00 GMT Are You Collecting the Needed W-9s? http://www.mytrivalleytax.com/blog/are-you-collecting-the-needed-w-9s/36797 http://www.mytrivalleytax.com/blog/are-you-collecting-the-needed-w-9s/36797 Tri-Valley Tax & Financial Services Inc If you use independent contractors to perform services for your business or rental that is a trade or business, and you pay them $600 or more for the year, you are required to issue them a Form 1099 after the end of the year to avoid facing the loss of the deduction for their labor and expenses. (This requirement generally does not apply for payments made to a corporation. However, the exception does not apply to payments made for attorney fees and for certain payments for medical or health care services.) It is not uncommon to have a repairman out early in the year, pay him less than $600, then use his services again later and have the total for the year exceed the $600 limit. As a result, you overlook getting the information needed to file the 1099s for the year. Therefore, it is good practice to always have individuals who are not incorporated complete and sign the IRS Form W-9 the first time you use their services. Having a properly completed and signed Form W-9 for all independent contractors and service providers eliminates any oversights and protects you against IRS penalties and conflicts. Many small business owners and landlords overlook this requirement during the year, and when the end of the year arrives and it is time to issue 1099s to contractors, they realize they have not collected the required documentation. Often it is difficult to acquire the contractor's information after the fact, especially from those contractors with no intention of reporting the income. IRS Form W-9, “Request for Taxpayer Identification Number and Certification” is provided by the government as a means for you to obtain the data required from your vendors in order to file the 1099s. It also provides you with verification that you complied with the law should the vendor provide you with incorrect information. We highly recommend that you have a potential vendor or independent contractor complete the Form W-9 prior to engaging in business with him or her. If you have questions or need copies of the Form W-9, please call this office. This office can also assist you with your 1099 filing requirements next January. Tue, 07 May 2013 19:00:00 GMT Miss the April 15 Deadline? http://www.mytrivalleytax.com/blog/miss-the-april-15-deadline/36772 http://www.mytrivalleytax.com/blog/miss-the-april-15-deadline/36772 Tri-Valley Tax & Financial Services Inc Did you miss filing your 1040 tax return by the April 15 due date? If you did, you may be accruing late filing penalties, late payment penalties, and interest. Late filers can mitigate those penalties by filing as soon as possible. There are no late filing penalties or late payment penalties if you had no tax liability (i.e., did not owe or would have gotten a refund) on April 15. The combined penalty is 5% of the unpaid tax for each month or part of the month that the return is late, but not for more than 5 months. The late filing penalty is reduced by the late payment penalty. Thus, the 5% includes a 4.5% penalty for filing late and a 0.5% penalty for paying late. The 25% combined maximum penalty includes 22.5% for filing late and 2.5% for paying late. The 0.5% penalty for paying late is not limited to 5 months. This penalty will continue until you pay the tax in full or until it reaches a maximum of 25%, whichever occurs first. The maximum 25% penalty for paying late is in addition to the maximum 22.5% late filing penalty for a potential total penalty of 47.5%. If a taxpayer doesn't file a return within 60 days of the due date, there is a minimum penalty of $135 or 100% of the balance of the tax due on the return, whichever is smaller. Of course, if you filed an extension, you are only subject to the late payment penalty, and even that won't apply if you had pre-paid at least 90% of your tax liability through withholding, making estimated tax payments, or making a payment that was included with the extension. The extension gives you until October 15, 2013 to file your 2012 return. If you were living abroad on April 15, your filing due date is June 15, 2013, and late filing and late payment penalties do not begin to accrue until after that date. The law allows the IRS to remove, reduce, or not assess penalties for late filing and/or late payment if the taxpayer is able to show “reasonable” cause for not filing and paying on time. However, the IRS determines the merits of each case based on the events or parties involved, as well as whether or not the taxpayer exercised ordinary business care and prudence, but due to circumstances or events beyond the taxpayer's control, he/she was unable to meet the tax requirement. Because the failure-to-file penalty is generally more than the failure-to-pay penalty, you should file your tax return on time each year, even if you're not able to pay all of the taxes that you owe by the due date. You can reduce additional interest and penalties by paying as much as you can with your tax return. Special penalty relief is available to some victims of the recent severe storms in parts of the South and Midwest, as well as for those affected by the Boston explosions tragedy. If you didn't timely file your return or pay the tax that was due by the April 15 deadline, you are encouraged to contact one of our professionals as soon as possible in order to review your options to minimize your penalties and interest. Together, we can explore other payment options, such as loans and installment agreements, or even offers in compromise, if you are unable to pay the tax. Thu, 02 May 2013 19:00:00 GMT Leave Your Business to Your Family - Not the Government http://www.mytrivalleytax.com/blog/leave-your-business-to-your-family-not-the-government/36730 http://www.mytrivalleytax.com/blog/leave-your-business-to-your-family-not-the-government/36730 Tri-Valley Tax & Financial Services Inc Successfully passing a family business to the family upon death of the owner is not an easy task. Most business owners fail to realize the importance of a sound business succession plan. As a result, only about half of all family businesses are transferred to the next generation. A significant number are forced to look elsewhere for capital and management expertise. Without the benefits of a succession plan, grieving loved ones are forced into a business they know little about, which can adversely affect the financial stability of the business and the financial security of your family. Not only should management succession be addressed in the business succession plan, but transfer of ownership and estate planning issues should also be taken care of as well. Choosing the successor is one of the biggest challenges in business succession planning. Appraise the individual's strengths and weaknesses and ensure that the individual has the leadership skills and drive to meet the goals of the business. The needs of the business - not the desires of family members - should be your foremost consideration. It is imperative that a plan is developed in the early stages so that whomever you choose can benefit from your experience and knowledge. Other crucial elements of a sound business succession plan include transfer of ownership and estate planning. Buy-sell agreements, stock gifting, trusts and wills are some of the ways to transfer ownership. Each of these means of transfer has specific legal and tax ramifications and should be considered in conjunction with proper estate planning. If this office can provide assistance with your business succession plan, please call. Thu, 25 Apr 2013 19:00:00 GMT Did You Overlook Something on a Prior Tax Return? http://www.mytrivalleytax.com/blog/did-you-overlook-something-on-a-prior-tax-return/36707 http://www.mytrivalleytax.com/blog/did-you-overlook-something-on-a-prior-tax-return/36707 Tri-Valley Tax & Financial Services Inc Occasionally, clients will realize that an item of income was overlooked, a deduction was not claimed, or that an amended tax document was received after the tax return was already filed. Regardless of whether the oversight will result in more tax due or a refund, it should not be dismissed. Failing to report an item of income will most certainly generate an IRS inquiry, which typically happens a year after the original return was filed and after the interest and penalties have built up. On the other hand, if you have a refund coming, you certainly don't want that to go by the wayside. The solution is to file an amended return as soon as the error or omission is discovered. Amended returns can also be used to claim an overlooked credit, correct the filing status or the number of dependents, report an omitted investment transaction, submit delayed K-1s, or anything else that should have been reported on the original return. If the overlooked item will result in a tax increase, penalties and interest can be mitigated by filing an amended return as soon as possible. Procrastination leads to further complication once the IRS determines something is missing, so it is best to take care of the issues right away. Generally, to claim a refund, an amended return must be filed within three years from the date the original return was filed or within two years from the date the tax was paid, whichever is later. If any of the above applies to your situation, please give this office a call so we can prepare an amended tax return for you.     Tue, 23 Apr 2013 19:00:00 GMT Tax Facts about Summertime Child Care Expenses http://www.mytrivalleytax.com/blog/tax-facts-about-summertime-child-care-expenses/36710 http://www.mytrivalleytax.com/blog/tax-facts-about-summertime-child-care-expenses/36710 Tri-Valley Tax & Financial Services Inc Many parents who w