Posted on by Jan Roberg

Married and Gay: Should You Amend Your Tax Returns?

Photo by Guillaume Paumier at Flickr.com

 

First the Supreme Court overturned DOMA.  Now the IRS has announced that no matter what state you live in, if you are married and gay, you should file as married filing jointly on your federal income tax return.  Now the big question for everyone is:  Should you amend your old tax returns?

 

The answer, in my best professional opinion, is MAYBE.  If you read my blog posts very often, you saw that one coming didn’t you?

 

For some couples, filing jointly is going to help them out and get them a refund.  If you’re a couple that’s entitled to a refund—AMEND! For some couples, filing jointly is going to have them paying more in taxes.  To those couples I say—DON’T AMEND.  You really do have a choice here because you filed your original return using the law of the land at the time of the filing.  You are not required to amend your return because DOMA was overturned.   You are allowed to amend your return.  There’s a big difference.

 

An accountant friend of mine in Iowa has been working with some of his gay married clients and he’s finding that about 75% of his clients would lose money or stay close to the same amending their returns.  Only about 25% of them would profit from it.

 

So how do you tell which category you fit into?  Generally, a couple with a big difference is incomes—for example, one spouse stays home to care for the household while the other is the primary breadwinner—that couple is more likely to benefit from filing jointly.  On the other hand, a couple where both spouses work and their incomes are close together could find themselves kicked into a higher tax bracket.  They could really lose out filing together.   Tax returns for families with children can go either way.   I’m an accountant geek, so I say just run the numbers.

 

It makes a lot of sense to run the numbers because the new tax ruling is going to affect all of your future tax returns as well.  If filing jointly is not to your advantage, it’s better to learn that now so you can adjust your withholding.  Here’s a link to my Tax Tips for Newlyweds:  http://robergtaxsolutions.com/?s=tax+tips+for+newlyweds.  You may have been married for a couple of years, but never gotten to file a federal return as being married before so you might not have needed these tips before.

 

One more thing—if you’re in a state that doesn’t recognize gay marriage, you still might not be able to file a joint state return.  Couples in gay marriage states have been dealing with the opposite problem for a few years now.  They file joint state returns but then file a separate federal return.  I suspect we’ll be seeing a lot of separate state returns for awhile.   It’s going to take some time for lawmakers to make up their minds on that.

 

So, do you wait to see how your state legislature is going to handle the issue before amending?  I say no.  Go ahead and file your federal amendments.  If the state changes, you can fix those later.  I worry about people waiting too long and then missing out on their refund because they didn’t file the amended return on time.  Unless the IRS grants some type of special extension, you only have until April 15th of 2015 to amend your 2010 income tax return.

 

If you need help determining if you should file an amended return or not, please contact our office.   We can help you figure out if it’s worth your while or not.

Posted on by Jan Roberg

How to Check Your Social Security Annual Statement (And Why You Want To, Even if You’re Only 18)

Photo by 401(K) 2012 at Flickr.com

 

“Social Security, that’s for old people.  Social Security won’t even be around when I retire.”

 

Let’s look at that second statement first.  Social Security won’t be around when you retire.  That’s what I was told back in college thirty years ago.  “There will be no more Social Security by the time you retire, you’re just paying in and you’ll get none of it back.”  That was Gospel when I was 20 but Social Security is still here.  We’re still being told doom and gloom stories and granted Social Security is not perfect.  I wouldn’t plan on it being my only source of retirement income—but I suspect that it’s going to be around for a long time so you need to make sure your Social Security records are right.

 

Now I agree that Social Security is mostly for old people, but it also affects your payments should you become disabled and your spouse’s and children’s survivor benefits should you die.  We don’t want those things to happen, but Social Security is there for those situations.

 

The reason you want to check your Social Security statement every year is to make sure that the wages you earned are listed correctly.  Most of the time they’re right but not always.    Usually if there’s a mistake, it happens in a year when you received two or more W2s.  Sometimes they’ll report one or the other but not add them together.  Other mistakes are possible, but that’s the most common one.

 

Here’s why it’s important—Did you know that Social Security uses your top 35 years of wages and self employment to figure your Social Security benefits?  Thirty-five years!  That’s fine if you graduated from college, got a good job, and worked steadily until you retired.  That will give you 35 years and then some, easy.

 

For the rest of us, life happens.  We get laid off, we have babies, and maybe we start our own businesses and have negative income for awhile.  We get some zeroes on our Social Security statement.   Never in a million years would I have dreamed that the $2.50 an hour job I had back in 1976 would affect how much money I’d get for my Social Security retirement benefit.  But it will—because that $2.50 an hour job is better than some of the zeroes that will be affecting my Social Security statement.

 

So how do you go about checking your Social Security statement?  First you’ll need to set up an account with the Social Security Administration.  Go to the website:  www.ssa.gov .  On the left hand side of the screen, you’ll see a picture of a lock and it will say “My Social Security”.  That’s where you’ll create your account, or log in if you already have an account.

 

When you set up your account you’ll need your name (as it appears on your social security card), your social security number, and mailing address.  You have to have a valid email address to set up the account.  You also have to be at least 18 years old, so if you’re only 16 and working, you won’t be able to verify your employment yet.

 

One thing the Social Security website is really good at is security.  They’re going to ask you questions to identify yourself.  Be prepared to freak out a little by how much they know.   The SSA gets the information off of your credit report to generate the questions.

 

Once you’ve got your account set up, you can go in and look at your Social Security Statement.  Here’s a sample one that you can see:  http://www.socialsecurity.gov/myaccount/SSA-7005-OL.pdf

 

Page 2 shows how much your payments would be at retirement, assuming that you continue working at your current income.  It also shows what your disability payments would be if you became disabled today and benefits your spouse or children could receive if you die.  If you haven’t worked long enough to qualify for benefits yet (generally 10 years) it will tell you that too.

 

Page 3 will give you a breakdown of the wages that have been reported over the years.  2012 wages should be posted now.  It’s a slow process; the annual wages that you report on your tax return in April don’t show up on the Social Security Statement until September.  So now’s a good time to check.  If you find a mistake, you’ll need to contact the SSA and notify them.  Usually you’ll need to prove the error by providing them with copies of your W2s.

 

See why it’s a good idea to do this once a year?  Who keeps W2s for 35 years?  (No, I don’t.  You were thinking geeky accountants weren’t you?)

 

Make sure you keep your Social Security user name and password in a safe place.  You’re going to want to access the account once a year and just check the information to make sure it’s accurate.  Labor Day is a good time to check—it’s a celebration of workers, and your Social Security statement is your documentation of your years of working.  (Okay, it’s because the information gets posted in September, but that’s not as easy to remember.)

 

For Labor Day, check your wage history at www.ssa.gov.

Posted on by Jan Roberg

Growing Entrepreneurs

Photo by Janice E. Roberg

I was driving home the other day and it was hot and I was thirsty. As I turned into my subdivision I found my favorite lemonade stand. I’m probably their best customer, I always stop. For one thing, I figure I owe for all the neighbors who have bought lemonade or Girl Scout cookies or whatever from my kids. And the other reason is they make pretty good lemonade.

 

I do all sorts of blog posts about small business taxes and rules and regulations. The beauty of a lemonade stand is kids don’t think like that. They don’t let things like a business license or taxes get in the way. (And shame on any city official who closes down a kid’s lemonade stand: http://www.forbes.com/sites/erikkain/2011/08/03/the-inexplicable-war-on-lemonade-stands/) Kids decide they want to open a business and (to borrow the tag line from Nike) they just do it!

 

What’s really cool about a lemonade stand is what it teaches kids about business.

 

1. Location, location, location: you won’t sell any lemonade if your stand isn’t where people can get to it–if the street is too busy the cars won’t stop, too quiet and you have no customers. This lemonade stand is just off the busy street near the sub-division entrance.

2. Quality: no one will buy your lemonade if it tastes nasty. Like I said earlier, they make good lemonade.

3. Price: if it’s too expensive no one will buy it. If it’s too cheap, you won’t cover your costs. (Okay, with most lemonade stands, Mom paid for the lemonade already. My Mom used to charge me for the Kool-aid I used. I did not appreciate the lesson she was trying to teach at the time but now I understand.) My favorite stand charges 50 cents.

4. Advertising: A good sign and word of mouth are pretty much the standard in the lemonade stand industry. No one will buy your product if they don’t know you have something to sell though. I’m not sure the photo does the sign justice, but you know it’s a lemonade stand when you drive by.

 

As adults, we have quite a bit more to focus on to get our businesses off the ground. But without those top four lemonade stand basics: location, quality, price and advertising; our grown-up businesses won’t succeed either.

 

If you’re looking to start a business in Missouri, a really good resource is the Missouri Small Business & Technology Development Centers, it’s a University of Missouri Extension Partner. They have wonderful resources for business start ups; reading materials, templates for business plans and financial worksheets, seminars, counseling, and all sorts of programs. Here’s a link to their booklet about starting a business in Missouri: http://www.missouribusiness.net/sbtdc/docs/starting_new_business_missouri.pdf Even if you’re not in Missouri they have a lot of good information for start ups.

 

One piece of advice that you’ll find in the booklet is to talk with an accountant. I know a small tax company that has a nice location at Westport Plaza, provides quality service, is priced fairly and if you’re reading this, their advertising is working. Give us a call and we’ll be happy to talk to you. Helping small business start ups is the fun part of our day.

Posted on by Jan Roberg

Your Job Search and Your Taxes

Photo by kate at Flickr.com

 

People often ask me about deducting job search expenses on their tax returns.  Every year I hear stories on the news, “Don’t forget, your job search expenses are tax deductible!”  While this is true that job search expenses can be deductible—many times, they really aren’t.

 

For one thing, if you’re job hunting, you can only deduct your job search expenses if you’re looking for a job in your current occupation.   I do taxes; I’m in the accounting field.  If I decide to chuck it all and become a belly dancer—I couldn’t deduct those job search costs since belly dancing is not related to accounting.  (Tap dancing—maybe: http://www.youtube.com/watch?v=fNKRm6H-qOU)

 

But say you truly are looking for a new job in your field, what can you deduct?  Here’s a pretty good list:

     

  • Employment and job placement agency fees
  • Cost of preparing and mailing copies of your resume
  • Travel expenses to look for a new job, but only if the trip is primarily to look for a job.  (If you’re a professional snow remover and you’re job hunting in Honolulu it’s really not going to fly with the IRS.)
  • You can deduct your job search expenses even if you do not find a new job

 

After you figure out what your qualified job search expenses are, it goes as a miscellaneous itemized deduction on your Schedule A.  That means that your job hunt expenses will have to be more than 2% of your adjusted gross income before they even start to count.  And remember that even then, you’ll need enough other items on your Schedule A form to make it worth your while—also known as itemizing deductions.

 

Here’s an example:  Christie is an office manager for a small law firm and makes $50,000 a year.  She paid $500 to a professional resume service, and $2,000 to a placement agency to help her find a new job.   Although most of the out of state companies that interviewed her paid for her travel, she did have $100 of out of pocket travel expenses.  In this case, Christies total job search expenses were $2,600.

 

Now 2% of Christies adjusted gross income is $1,000 ($50,000 times .02 = $1,000.)  So in this case, Christie would have a miscellaneous deduction of $1,600.  ($2,600 expenses – $1,000 threshold = $1,600.)   So if Christie had other deductions to go along with it, great, then she could benefit from claiming her job search expenses.  If she didn’t have any other deductions, then she’d still be better of claiming her standard deduction.

 

You cannot deduct your job search expenses if you are looking for a job for the first time.  This rule keeps most recent grads from claiming job search expenses.

 

Don’t let not being able to claim a deduction keep you from spending money that you need to spend to look for a job.   If your resume needs help, hire a resume writer.  If a placement agency can help you, use one.   Be sure to put your best foot forward.

 

For some good free advice about job hunting, check out this website from BestCollegesOnline.com.   Although the article is written specifically for online students, there’s so much good and basic job hunt information in there it’s worth checking out.    Face it, when you don’t have a job, free is a pretty good price.  Here’s a link:  http://www.bestcollegesonline.com/career-skills-learn-school/

Posted on by Jan Roberg

Top 5 Reasons Your Tiny Business May Not Be Doing As Well As It Could Be

Take care of your business

                                         If you don’t take care of your tiny business, it’s like flushing money down the toilet.

The government defines small businesses as companies making less than $7 million a year or having fewer than 500 employees.  The companies I work with generally have three or fewer employees and only dream about seven million dollar revenues.  I call these “tiny” businesses.

 

As tiny businesses, we’re generally ignored by the government.  When you hear something in the news about Congress passing legislation to “help” small business owners—they don’t mean us.  That’s okay with me.  We tiny businesses can get into enough trouble all by ourselves.  Here are my top 5 picks for tiny business problems.

 

1.  Not working around Roadblocks.   Every tiny business has roadblocks; you need a license, or special training or there’s a law change.  No matter what type of business you have, there will be roadblocks.   The successful tiny business finds a way to work through or around them.

 

True story:  There was a small business owner who was basically ready with her business; the only thing left was to get her web-site up.   She had asked me for some help.   Mind you, the only thing stopping her business from getting off the ground (at least as she explained it to me) was her website.  I gave her names of people who could make her website for a fee and  I also gave her free website resources as budget was an issue for her.

 

Six months later we met again.  She still didn’t have a website.  The work was stalled because she couldn’t find the “right” art for it.  She wanted a picture of a compass.   She had hired a high school kid to draw it for her for free.  He wasn’t done yet.  Okay—go to Google images, type in compass and you get hundreds of pictures.  Granted, she’d probably have to pay to use one of those pictures but her “free artist” hadn’t gotten the work done in six months.

 

And letting a high school kid that you’re not even paying be the reason your business hasn’t gotten off the ground?  That’s ridiculous.  Now in fairness, the compass idea was a cool idea and it tied to her business theme.  But—it wasn’t necessary to her business.  She could have already been up and running for 6 months while waiting for this art that she wanted so badly.

 

Sometimes, we’re our own worst enemies.  If you’ve got a roadblock that’s holding your business back get a second opinion.  There’s usually more than one way to skin a cat.

 

2.  Not knowing who your customers are. If you own a business you’re selling something.   The tough question is who’s going to buy it?

 

I once knew a woman who had started a business making bows.  She had made hundreds of bows, invested in a bow making machine and lots of expensive ribbons.  She hadn’t sold a single one.  She really liked making bows so that was what she was doing with her time, but she hadn’t figured out who would buy them.  At that point, that wasn’t really a business it was just a hobby. You have to have customers, someone willing to pay for what you’re selling to be a real business.

 

3.  Partner problems.  Recently I was asked, “Why do you hate partnerships?”  It was a fair question, I was being pretty negative.  The truth is, I don’t hate partnerships, I’ve just had to dissolve too many of them.  Partnerships get started because two or more friends decide they want to go into business together.  Good friends (or spouses) do not always make good business partners.  If there is a disagreement—how do you settle it?

 

I recently sat down with a couple that had a pretty good business plan and they seemed to be a good choice for a partnership.  But I was asking a lot of questions and I’m glad I did.  It seemed that Adam and Eve each had two income streams that they were thinking about for the partnership—sales of widgets and sales of thingamajigs.  Adam was going to cut back on his widget sales to pursue the thingamajig sales full time in the partnership.  Eve couldn’t sell thingamajigs she was just going to help Adam with that and in the meantime she would still sell widgets.  It all sounded like a good plan.

 

Except:  Widget sales was technically another job.  The money Eve earned selling widgets was outside the partnership—just as Adam’s widget sales were outside the partnership.  Adam was counting on Eve’s widget income to help support him because he knew that the thingamajig income wouldn’t be enough to support him during the first year.  Eve was hoping the thingamajig income would supplement her widget income; she wasn’t planning on turning over half of her widget income to Adam.

 

The bright side to this scenario is that they were thinking and talking before they made the partnership.  They hit a roadblock, yes, but they’re smart and will work around it somehow.  Too often I see partners who went into business together and later wind up fighting because they didn’t spell out their expectations up front.

 

4.  You gotta work at your business—I can’t tell you how many times people have come to me because they bought a business or invested in a business that required no work—and they lost their money.  If it sounds too good to be true, it probably is.  And if you’re picking a business, do something you love to do—because you’re going to be at it a lot.

 

5.  Not planning for your taxes—This wouldn’t really be a tax blog if I didn’t mention taxes now would it?  The whole idea about owning a business is that you want to be profitable.  If you’re making a profit, then there are going to be taxes.  If your small business is making enough money to support you and your family then you know you’ve got self-employment taxes to pay.

 

Screwing up one year—that happens.  Screwing up two years—you need to be more careful.  But if you screw up and don’t make your estimated tax payments after you’ve been profitable and owed tax money for three years in a row—you’re asking for trouble.  Our business cards say, “If you don’t have a strategy for your taxes, you’re probably paying too much.”  Taxes take a huge chunk out of your earnings.  Don’t let IRS penalties and interest make matters worse.

Posted on by Jan Roberg

The Petty Cash Account

Bank Bag Lock

Photo by Laura Gilmore at Flickr.com - Some companies use a bank bag with a lock to keep their petty cash in.

 

Petty Cash Expenses Template – This is a free download to keep track of your petty cash.  Please feel free to share it or alter it to suit your needs.

 

A while back I did a post about taking cash for your business out of the ATM machine.  I said you should never do it.  I’ve gotten a lot of push back from readers who need to use cash for their businesses on a regular basis.  Here’s an example from Tracy who writes:

 

“What options do I have when I need to pay for cash transactions like Mass Transit & Taxi’s (I don’t drive) which total over 250/mo.(expendable as fringe benefits per IRS 15-B), or even office & software supplies?

Credit Cards don’t issue without corporate credit (which will take a year +), so can only use Prepaid Cash cards – which have to be paid by cash.

There are very few places where I can use my corporation check.  So using checks as a paper record is out.

What do I do?”


Tracy has a good point.  What do you do when you’ve got to use cash?  You need to set up a petty cash account.  In Tracy’s case, I’d say her petty cash account needs to be $250—but it’s really up to her as to how much cash she needs to keep around for her business.  I have one client who regularly keeps $1000 cash available; it all depends upon your type of business and what works for best for you.

 

With a petty cash account, you have your base amount-we’ll use $250 for Tracy’s example.  The first step is to write a check (or take out the cash) to Petty Cash.  Establish a place to keep the petty cash money separate from your regular spending money.  As Tracy spends down the money—on Taxis and subway fares and other business expenses, she keeps receipts for everything.  Or at least a log of things like subway fares.  Technically, what she should do is make a report like what I’m showing below:

 

7/24       Subway                  1.20

7/25       Taxi                       18.00

7/25       Office supplies   24.76

7/25       luncheo n             12.16

7/26       taxi                       23.45

7/27       office supplies    88.22

7/29       Subway                  4.20

Total                                   171.99

 

At the end of the week, or month, or whenever it makes sense to replenish the cash supply, Tracy would write another check for $171.99 to bring the petty cash account back up to $250.

 

That’s the technically correct way to maintaining your petty cash account.  Basically you have a base amount and there are receipts for whatever cash is no longer in the bag.

 

But what about real life?  I say that because 80% of the people who use cash for their businesses aren’t going to be so disciplined.  But I don’t want you getting into audit trouble for your cash withdrawals from the ATM.

 

Let’s use John as an example.  If you look at John’s business bank statements for the past year, he’s got about 100 ATM transactions over the course of the year, usually taking out $40 at a time.  If John were to be audited by the IRS, the IRS would count that $4000 business profit which is taxable to John, even though he spent that entire amount on business.

 

I can tell John to do the Petty Cash account the way I explained above, but being realistic it’s never going to happen.  He’s going to keep going to the ATM and grabbing cash whenever he needs it.  So how does John cover his behind?  Keep receipts!  If you don’t get receipts, write everything down.

 

For example:  John has a property management company that takes care of several single family homes and some small apartment buildings around town.  One of the homes is currently vacant but he needs to keep it looking good so it can rent.  Although a tenant would be responsible for mowing his own lawn, John hires a neighbor kid to mow the grass a few times while to house is still vacant.  It costs him $40 a pop.  He’s paying a kid, not a business.  No 1099MISCs, (he won’t get close to paying him $600).  The kid might not even have a checking account so he can’t accept a check or credit card.  The kid is not issuing receipts-he’s a kid.

 

John goes to the ATM, gets $40 to pay the kid and he writes down on the ATM slip a few notes about the expense.  (Paid Walter $40 to mow 541 Mockingbird St. house.)  John keeps that ATM slip with his business records to act as his business receipt.  As long as John spends less than $75 on something—that will be acceptable.  If John spends more than $75, he needs a receipt from the vendor.  (Even if the vendor is a 16 year old kid.)

 

I still recommend not using the ATM for your business expenses whenever possible, but if you must, you can protect yourself from having the IRS count your cash transactions as income to yourself—and paying more taxes by keeping good records of the transactions.

Posted on by Michael Siebert

Time Value of Money and Taxes

Photo by Brian Mooney at Flickr.com

“Compound interest is the eighth wonder of the world. He who understands it, earns it … he who doesn’t … pays it.”

-Albert Einstein

_______________________________________________________________________

You probably have come across time value of money in one your finance classes or at least have a basic understanding of the idea.  Time value of money, as defined by Investopedia.com, is “the idea that money available at the present time is worth more than the same amount in the future due to its potential earning capacity.”  Basically, money is worth more now than it is later.  This idea would not exist however, if there was no concept of “interest”.

 

There are two types of interest – simple and compound.  Simple interest is interest paid on a beginning principal balance only.  If you are receiving monies, the interest earned in a given period is not added back to the principal and then applied the interest rate again and appears perfectly linear on a graph.  Compound interest is interest paid on a beginning balance and any interest that has accumulated in given a period of time.  On a graph compound interest appears with a geometric (or exponential) growth pattern.

 

The present value of a future sum is the core formula for the time value of money.  All time value of money equations are based off this formula so it is extremely important to review.  It is expressed as such:

 

PV = FV / (1 + i)^n

Where

PV = Present Value
FV = Future Value
i = interest rate
n = number of periods

 

The future value of a present sum is expressed as FV = PV * (1 + i) ^n.  We won’t discuss perpetuities or annuities in this post nor will we execute any actual calculations with the TMV formulas.

 

So how can we use this time value of money concept for tax optimization and more importantly, individual wealth?

 

Retirement Planning:  We have all seen the example where Johnny starts an IRA at age 35 while Susie starts one at 21 and the amazing difference of the account values when they both reach age 59 and a half.  This is because Susie’s IRA endured 14 more years of compounding.  The choice between a roth and a traditional IRA has important tax implications and time value of money has some influence in the decision.  With a Roth IRA for example, the taxpayer can receive tax free distributions of earnings at age 59 and a half while with a traditional IRA, the taxpayer receives an above the line deduction on IRA contributions – given that AGI thresholds are not crossed – and is taxed on the distributions.  If your income is expected to increase as you get older and your marginal tax rate is also expected to increase, then a Roth IRA makes more sense – naturally.  Do the immediate tax savings of traditional IRA contributions outweigh Roth IRA tax free distributions?

 

Tax Planning: Accelerate deductions, postponing income recognition.  This concept goes hand in hand with the time value of money concept – money today is worth more than money tomorrow.  By accelerating deductions you essentially reduce your taxable income and end up with a bigger refund or smaller balance due.   Some examples include prepaying your home mortgage interest in a given year, making an alimony payment in December as opposed to January, and writing off an asset using section 179 expensing or bonus depreciation as opposed to depreciating it over several years.  The amount of tax savings probably doesn’t have enough compounding power for individuals to make a huge substantial presence but for well established businesses it most definitely does.  Examples of postponing income are increasing your retirement plan contributions to a 401(k) plan, legally deferring compensation, and delaying the collection of any debts you are owed.

 

Investment Planning:  Younger people can be more aggressive because they have more time to make up for their losses.  A younger person’s portfolio can afford more risky securities such as stocks.  As one gets older, the switch to dividend producing stocks and bonds usually happens because the “interest rate” is more stable.

 

With time value of money, the uncertainty of the interest variable is the most difficult to tame.  Those who can predict its patterns the best, tend to make the most money.

Posted on by Jan Roberg

What is a Progressive Tax? What is a Flat Tax?

Income Tax

Photo by Images Money at Flickr.com

I see a lot of internet questions about flat taxes and progressive taxes.  It seemed that since I do a tax blog, it was time to tackle those basic questions.

 

A flat tax is a tax that is the same for everyone, under all circumstances.  A good example of a flat tax is the sales tax rate.  It doesn’t matter whether you are rich or poor; everyone pays the same sales tax percentage.  Some cities have a flat income tax.  For example:  The City of St Louis, Missouri has a 1% income tax on wages of people who live or work within the city limits.  It doesn’t matter whether you make $15,000 a year or $150,000 a year; you still pay the 1% city tax.

 

A progressive tax increases as your income goes up.  This is what our current federal tax code is like.  For a single person, the first $9,750 isn’t even taxed.  Then the next $8,700 is taxed at 10%, the next  $26,650 is taxed at 15%,  the next $50,300 at 25%, the next 93,300 at 28%, the next $209,699 at 33% and anything over $388,351 is taxed at 35%.

 

Those rates change if you’re married or filing as head of household.  I’m not going to post all the tax rates here.  If you want to look, check out the tax rate tables at the IRS website:   http://www.irs.gov/pub/irs-pdf/i1040tt.pdf The tax rates are all listed on page 14.

 

Tax Incentives are tax rules that are intended to influence behavior.  Things like the mortgage interest deduction which is designed to help people buy homes, or the charitable donation deduction which is designed to get people to donate to charity are examples of what would be considered tax incentives.

 

There’s been a lot of talk about changing the tax code.  Right now, we have a progressive tax code with lots of tax incentives.   Major changes to the tax code will be difficult to pass; there are many lobbyists and interest groups that all have their own agendas.  There will be lots of pressure on our representatives to keep the tax loopholes.   The whole concept of changing the code is so controversial that the Senate Finance Committee leaders have offered to keep Senator’s ideas secret for 50 years.  http://www.businessweek.com/articles/2013-07-25/congress-will-keep-senators-tax-reform-wishes-secret-for-50-years

 

The tax code has nearly doubled in length over the past two years.  If I had any say in the voting, I’d like to see the tax code made easier.   Yes, a difficult tax code keeps me employed, but I can live with the consequences.  I think a simplified tax code is good for the country.

 

What changes would you make?  What deductions do we really need, if any?  What needs to go?  Post your answers, I’m curious.  Your post won’t show up immediately.  My site has a delay to screen for spam.  You wouldn’t believe what kind of weird comments there’d be without it.   But if you make a post, it will show up within a day or two.  Thanks.

 

Update:  I posted this blog on Tuesday morning, August 6.  Tuesday evening I saw this segment on The Daily Show.  I’m pretty sure that John Oliver doesn’t read my blog, but he’s at least on the same wave length.  http://www.thedailyshow.com/watch/tue-august-6-2013/don-t-mess-with-taxes

Posted on by Jan Roberg

Why Am I Being Audited By the IRS?

file cabinets

Photo by redjar at Flickr.com

 

The first question I’m always asked when someone receives an audit notice is, “Why me?  What’s wrong with my tax return?”

 

If you received an audit notice, that’s a perfectly legitimate question, and you have the right to ask.  It’s a very important question too.  The answer you get from the IRS can help you to limit the scope of the audit—that‘s really important.  If you know what the audit is about, you know where to focus your energies.

 

Often times, an IRS agent may respond with, “Oh, I don’t know why your return was pulled, it’s just a random audit.”  However, sometimes they don’t seem so “random”.  Actual random audits (and yes, they do occur) involve reviewing every single line item on the tax return.  They’re used to help determine how future audits are handled.    Most audits, are not random, and if you’re being audited you have the right to know why.

 

So what does trigger an audit?  The most common type of audit is called a correspondence audit.  Usually what happens there is that the IRS received a notice saying you received income from a source and it doesn’t match anything on your tax return.  They call it “document matching.”  (Hey, it’s the IRS; creative names are not their forte.)

 

Document matching audits are usually pretty simple.  For example, the IRS gets a W2 from a job you had for 2 weeks in January but you completely forgot about it at tax time.  You never got the W2 so you didn’t include it on your return.  That’s a fairly typical correspondence audit.  In a case like that you just sign the form and pay the tax.  That’s a simple “oopsies.”   You’re not a criminal, you just made a mistake.

 

Sometimes, document matching is kind of screwed up.  For example:  I just handled one where the document matching showed three interest statements for “First National Bank”;  one for $21, one for $16, and the third for $54.  The tax return showed interest for “First National Bank” as $91 ($21 + $16 + $54 = $91).  We just handled that with a phone call.  Document matching is done by computer.  Normally, a human would have caught the numbers added together and the audit letter would never have gone out, but the computer isn’t that sophisticated.

 

One of the best ways to prevent document matching audits is to make sure that you report everything on the correct line.   If you have a 1099 with an amount in box 7 and you don’t have a Schedule C with your tax return—that will generate a correspondence audit.  Another common correspondence audit involves capital gains.  If you’ve bought or sold stocks or had stock options through your job—there should be a Schedule D with your tax return.

 

If you’re dealing with something new in your taxes, even if you’re very good at preparing your own, I recommend at least having a second look done before you file.

 

In-person audits are more often based on statistical data.  The IRS uses something called a “DIF” score.   To put it in simple terms, a DIF score basically highlights when things on your tax return are out of the “normal” range.  Basically, a computer algorithm kicks out something like:   “Joe Schmoe’s charitable contributions are out of line with his income.  So Joe will be audited for his charity donations.

 

So how do you know what’s normal?  That’s the magic question isn’t it?  The IRS does not release its DIF score formulas.  Even if they did—if you have a legitimate deduction, you shouldn’t let DIF scores (or the threat of DIF scores) keep you from claiming what’s legitimately yours.

 

I once worked on an audit for a fellow whose return was being looked at for the mileage he claimed.  In truth, his actual mileage was much higher than what he reported, but his co-workers had convinced him that he shouldn’t claim all his mileage because he’d get audited.   Claiming the lower mileage didn’t protect him from an audit—and—it cost him money for all those years that he didn’t claim what was rightfully his.

 

Your best defense against an audit is always going to be doing your taxes right in the first place and having the documentation to back up your claims.

 

If you’re a W2 wage earner, the most likely audit area will be your charitable contributions and employee business expenses, because most everything else can be determined through document matching.

 

Small business owners (Schedule C) are much more likely to be audited—mostly because there’s so much more to audit.   In every Schedule C audit I’ve ever worked on, the IRS has requested the mileage log.  Every audit—mileage log.  Every single one.

 

In addition to the mileage log, they’ll often want to examine the expenses or the revenues, sometimes both.  If you own your own business, I can’t stress enough the importance of keeping good records.

 

If you’re being audited, the IRS agent should be able to tell you why.  If you honestly don’t know why you’ve been selected, and you’re not getting clear answers from the IRS, hire someone to represent you.  A professional can usually find the audit trigger (or triggers) within a matter of minutes.

Posted on by Jan Roberg

How Much is Obamacare Going to Cost Me?

Doctor's Office

Photo by Tom Hart at Flickr.com

 

Recently Congress delayed the requirement of businesses with over 50 employees to provide health insurance to their workers.  They were supposed to start in 2014, but now that’s been extended to 2015. Congress did not extend the requirement of individuals to have insurance in 2014 though.

 

If you don’t already have health insurance coverage, what are you supposed to do?  Good question.  This isn’t something you’re just going to figure out in two minutes.  I don’t have any easy answers for you.  But I can help you get some of the answers you need to make your decisions.

 

What’s better, buying insurance or paying the penalty?  Let’s be real, having insurance is better than not having insurance–but what’s it going to cost?  You can’t buy insurance if you can’t pay for it.

 

First, let’s figure the cost of the insurance.  Right now, the exchanges aren’t ready yet, but if you’re reading this after October 1, 2013, you should be able to go straight to the exchange and get solid dollar figures:  https://www.healthcare.gov/

 

But in the meantime, I’ve found that the subsidy calculator from the Kaiser Family Foundation to be really helpful.  Using their tool, you plug in your family income, ages, whether you smoke or not, and it will spit out what your insurance premium would be if you paid the full premium, and also how much of a subsidy you’d qualify for.  Now remember, this calculator is based on averages from around the country.  You may live in a more expensive or less expensive area.  But at least this will give you some kind of clue as to what kind of money we’re talking about.

 

For example:  let’s say we have a young couple with a baby.  They don’t make very much, just $30,000 together for the year.  They don’t smoke.  According to the calculator–if they had to pay full price for their insurance, they’d pay $8,792 for a “silver plan” health insurance per year.  Yowza!  On a $30,000 a year income, there’s no way a family could afford that.  But, because their income is low, they’d qualify for a subsidy.  With the subsidy, they’d only pay $1,250 a year for that health insurance.   That’s still kind of high when you only make $30,000 a year though.  But if they chose the “bronze plan” their subsidy would completely cover their insurance and they’d be paying zero dollars to have health insurance.   Zero’s a price I think they can live with.

 

What’s this “bronze” and “silver” stuff?  The health plans are coded, bronze, silver, gold, and platinum.  Bronze is the least comprehensive, platinum being the most.  With a bronze plan, you pay 40% of your own costs, silver; 30%, gold 20% and platinum 10%.  Basically, the more you pay for the premium, the lower your co-pay is.

 

In our earlier example, the couple wound up qualifying for free health insurance.  What would happen if our couple made $50,000 a year instead?   Same circumstances so the full premium would stay the same at $8,792.  But, their subsidy would go down to $4,679 and their out of pocket would be $4,112.  Or they could enroll in a bronze plan which would have them paying $2,607 after subsidies.

 

So the question becomes, do you buy the health insurance or do you pay the penalty for not having it?  If they can’t afford the $2,607 how much is the penalty?  For a married couple, (I’m using 2012 numbers because I don’t have 2014 yet), to compute the penalty for not having health insurance you would take their income (which is $50,000 in this example) and subtract the filing threshold (which for a married couple is $19,500) and then multiply by 1%.  Like this:

 

$50,000 – $19,500 = $30,500 (they call this excess household income)

 

Then take 1% times the excess household income:  $30,500 x .01 = $305

 

So for this couple, paying the penalty for not having insurance in 2014 will cost less than the insurance premium.  I’m not saying they shouldn’t buy the insurance–I think insurance is a good thing.  But you need to know what the options are.  What it costs to have insurance, and what it costs to go without.

 

Take a look at the numbers for your family.  Go to the Henry J Kaiser Family foundation website and check out their subsidy calculator.  Here’s the link:  http://kff.org/interactive/subsidy-calculator/

 

If you want to read more about penalties for not having insurance, check out my other blog post:  http://robergtaxsolutions.com/2012/07/obamacare-what-you-need-to-know-part-1/

 

For more information about the Affordable Care Act, here’s a good, easy to understand video:  http://www.youtube.com/watch?v=JZkk6ueZt-U