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Doing 2012 tax returns, and now talking about 2013?

April 24, 2013 By

submitted by Martin H. Abo, CPA/ABV/CVA/CFF, Abo and Company, LLC

In general, estimated taxes must be paid on income which is not subject to withholding, including taxable income from self-employment, interest, dividends, alimony, gambling winnings, unemployment compensation, social security, rent, and gains from the sale of assets.

You also may have to pay estimates if the amount of tax being withheld from your salary, Social Security, pension or other income is not enough. Estimated tax is used to pay income tax and self-employment tax, as well as other taxes and amounts reported on your personal tax return.

If you do not pay enough tax, either through withholding or estimated tax, or a combination of both, you may have to pay a penalty.

You may be charged a penalty even if you are due a refund when you file your return. Here are tips even the IRS agrees are worth considering about estimated taxes and how to pay them:

  1. As a general rule, you must pay estimated taxes if 1) You expect to owe at least $1,000 in tax after subtracting your tax withholding (if you have any) and credits, and 2) You expect your withholding and credits to be less than the smaller of 90% of your 2013 taxes or 100% of the tax on your 2012 return.
  2. For Sole Proprietors, LLC Members, Partners and S Corporation shareholders, you generally have to make estimated tax payments if you expect to owe $1,000 or more in tax when you file your return.
  3. To figure your estimated tax, include your expected gross income, taxable income, taxes, deductions and credits for the year. Consider changes in your situation and recent tax law changes.
  4. The year is divided into four payment periods, or due dates, for estimated tax purposes. Those dates generally are April 15th, June 15th (17th in 2013), September 15th (16th in 2013) and January 15th.
  5. The 0.9% new Additional Medicare Tax applies to Medicare wages and self-employment income over threshold amounts. You may need to include this amount when figuring your estimated tax.
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Warning against taking distributions from inherited IRAs

March 20, 2013 By

submitted by Martin H. Abo, CPA/ABV/CVA/CFF

We have been seeing some interesting financial scenarios presenting themselves as we hunker down into tax season. Here’s one such item that came upon us that we thought we’d share with other clients and friends.

As you probably know, these days it’s increasingly common for individuals to inherit IRAs. By inheriting an IRA, we mean when you become entitled to some or all of the balance in a deceased account owner’s traditional IRA or Roth IRA by virtue of being designated as an account beneficiary.

In this scenario, you may think your share of the inherited IRA balance can be distributed to you and then rolled over tax-free into your own IRA before the familiar 60-day deadline for rollovers has passed. While this seems like a very reasonable assumption, we just learned IT’S WRONG – unless you are the deceased IRA owner’s surviving spouse. In other words, only a surviving spouse is allowed to roll over a distribution from an inherited IRA into his or her own IRA. Nobody else can.

Fortunately, there are apparently ways to finesse the “no-rollover-allowed rule” so that you can take control of your share of an inherited IRA without adverse tax consequences. However, to make this work, we just learned that you must follow some important rules, one of which is that you cannot receive a distribution check payable to you personally from the inherited IRA.

If you do so and are not the deceased IRA owner’s surviving spouse, you can’t put the money back into an IRA and continue earning tax-deferred income (or possibly tax-free income in the case of an inherited Roth IRA).

Furthermore, if you know the distribution is from an inherited traditional IRA and you are not the deceased IRA owner’s surviving spouse, you must include it in your taxable income. Depending on the circumstances, a distribution from a Roth IRA may result in taxable income to you as well.

To avoid adverse tax outcomes, we suggest you contact a pension/IRA/retirement specialist before taking any distributions from an inherited traditional or Roth IRA. That way, they can work with you to achieve the most favorable tax consequences for your inherited IRA money.

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Consumer Troubleshooter

March 4, 2013 By

submitted by Bucks County Consumer Protection Agency

Q. These last few years have been very difficult for me financially.  To make matters worse I now find myself in trouble with the IRS over my back taxes and unfiled returns. I cannot allow any more time to pass; I am being penalized and the amount is becoming outrageously high.

I have read and, also have heard on the radio, advertisements by companies offering tax relief and that these companies could help me to get the penalties I have incurred reduced. I was hopeful until my friend told me to be careful with these types of companies, because what they advertise may be a scam.

What can you tell me?  D.D., Telford

A. These tax relief companies do claim that they can reduce or eliminate your tax debt and back-tax collection by applying for IRS hardship programs on your behalf. They will ask that you pay up front for their service, which could be thousands of dollars.

The fact is that most taxpayers don’t even qualify for the programs these fraudsters promise. The truth is that many of these companies do not settle your tax debt and, in most cases, do not file the paperwork required by the IRS requesting your participation in the IRS hardship programs, even if you do qualify. Doing business with one of these companies could actually leave you even further in debt.

There have been complaints reported that, after signing up with one of these companies, the companies took even more of a consumer’s money by making unauthorized charges to their credit cards or withdrawals from consumer’s bank accounts.

Our first word of advice; don’t panic but, instead, consider your options.

When you are having difficulty paying your bills it is often a better idea to try and work out a payment plan with the company/creditor yourself. You don’t necessarily need to pay someone else to negotiate this for you. It is the same when you owe money to the IRS.

The IRS’s help for taxpayers includes an “Installment Agreement” program that is generally available to people who cannot afford to pay their debt in full, thus offering people the option of making smaller, monthly payments. There are a few other programs that might be better suited for your situation.

You can call the IRS at 1-877-777-4778 to speak to an independent Taxpayer Advocate Service representative or visit irs.gov/advocate. There are similar programs for state tax relief. State by state information can be found at nasact.org.

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Consumer Troubleshooter

March 1, 2013 By

submitted by Bucks County Consumer Protection Agency

Q. It is that time of year and I am getting ready to have my taxes done.  My husband, who usually did our taxes online, is recently deceased and I do not know how to use a computer.  I will need to have someone else prepare them for me.

I have heard though that some of these tax preparation companies offer to advance you more of a refund than you will actually get back.  This is done with the understanding that you will have to repay the additional money with interest set at a high rate.  I have a very limited budget and would not be able to pay back the extra money they are offering me.

Can you give me any advice?  T.T., Fairless Hills

A. The “instant refund” is what you are referring to and that was called a “refund anticipation” loan.

As of this year that type of loan is no longer legally available.  No one should be offering you this type of loan.

There were really high interests rates attached to this type of loan and did not really benefit the consumers.

The good news is that, because of what your annual income is, you are eligible to have your taxes prepared with a program called “Buck$ Back.”  This is a special program operated by a partnership of the U.S. Internal Revenue Service and the Bucks County Opportunity Council for Bucks County residents with earnings less than $50,000 annually.

In its ninth year of operation it is funded by several sources, including the Bucks County Commissioners.

If interested, visit www.bcoc.org and click Buck$Back, or call the Opportunity Council at 215-345-8175, ext. 221 for more details.

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IRS is watching you and your credit cards

February 19, 2013 By

submitted by Martin H. Abo, CPA/ABV/CVA/CFF

The IRS has recently beefed up its program of seeking out those taxpayers underreporting income who also receive a significant amount of receipts from credit cards. IRS Form 1099-K is an information return that reports payment from credit card and other third party network reportable transactions.

If you receive an IRS letter or notice, the inference is that gross receipts may have been underreported. The letter or notice will explain the reasons for the correspondence and provide instructions.

Generally, the IRS will send a notice if it believes you owe additional tax or are due a larger refund, or if there is a question about your tax return. Again, the Form 1099-K notice is generally issued under the belief that you may have underreported your gross receipts.

This is based on your tax return and Form(s) 1099-K that show an unusually high portion of receipts from card payments and other Form 1099-K reportable transactions.

They couldn’t be clearer in stating their mission: the IRS uses the information reported from third parties to ensure individuals and businesses meet their tax obligations. The IRS is integrating the new information supplied on the Form 1099-K into a variety of areas, including its compliance efforts, to ensure fairness and address non-compliance.

In order to enforce compliance, the IRS requires the credit card processor to withhold 28% of all credit card sales of any merchant with discrepancies until all information is updated and accurate. To prevent this backup withholding, businesses should ensure that they provide their card payment services provider with the correct name, address, and ID# for the business.

Even the IRS has given guidance to help in addressing the inquiry:

  • Read the notice thoroughly and complete any worksheets.
  • Gather your tax records including the 1099-Ks that you received and determine if you agree with the notice about the underreporting of gross receipts.
  • If you have questions, use the contact information provided on the notice.
  • If appropriate, consult your tax professional for assistance.
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Filed Under: Business Notebook, Morrisville Times Columnists Tagged With: , , , , ,

2013 standard mileage rates up one cent per mile 
for business, medical and moving

December 11, 2012 By

submitted by Martin H. Abo, CPA/ABV/CVA/CFF

Most of us are aware that car expenses, if the auto is used in a trade or business, are deductible. The deduction is allowed only for that part of the expenses that is attributable to business use (sorry, commuting is considered personal use).

Yep, an employee using it for business so qualifies. The taxpayer can substantiate such auto expenses by keeping an exact record of such costs paid. These expenses might include gas, oil, insurance, licenses, repairs, tires, tolls, parking, lease payments, depreciation, and other such maintenance.

Alternatively, the standard mileage rate method is a simplified approach available to employees and self-employed persons in computing deductions in lieu of calculating the costs allocable to business use. Here the taxpayer computes the allowable deduction by multiplying all the business miles driven during the year by the standard mileage rate.

Parking and tolls, at least the business portion, are in addition to the standard mileage rate.

The IRS standard mileage rate for 2012 is 55.5¢ per mile. Effective January 1st, 2013, the standard mileage rates for the use of a car (also vans, pickups or panel trucks) is 56.5 cents per mile for business miles driven (also 24 cents per mile driven for medical or moving purposes and 14 cents per mile driven in service of charitable organizations).

This business standard mileage rate can be used for leased or owned autos.

However, for owned autos for which the standard mileage rate is used, depreciation is deemed to occur and is included in that rate (i.e. 22¢ per mile for 2011 but differing rates for other years. We do not have 2012 as of the writing of this tip).

We, as tax preparers, need to know that since the depreciation so described reduces the basis of the car in determining gain or loss when it is disposed of later on.

A taxpayer may not use the business standard mileage rate for a vehicle after using any depreciation method under the Modified Accelerated Cost Recovery System (MACRS) or after claiming a Section 179 deduction for that vehicle. 

In addition, the business standard mileage rate cannot be used for more than four vehicles used simultaneously.

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Letting the IRS do it their way

September 7, 2012 By

submitted by Martin H. Abo, CPA/ABV/CVA/CFF

How does the IRS reconstruct income if the taxpayer won’t or can’t produce records?

It actually has a variety of approaches.

They include the:
 

  • Net worth method in which the agency determines income based on the change in a taxpayer’s net worth (assets less liabilities) over the period covered by an examination by accounting for all non-deductible expenditures paid by the taxpayer and deducting all non-taxable sources of funds. The reported net income is then compared with the change in net worth, and any shortfall is deemed unreported income.
  • Sources and application of funds method which is based on the assumption that the amount by which a taxpayer’s known sources of income is taxable income unless the taxpayer can show that it came from a non-taxable source.
  • Bank deposit method rests on the theory that a taxpayer’s bank deposits most frequently represent the taxpayer’s income, with the taxpayer being asked to prove that the excess deposits represent non-taxable sources of income.
  • Mark-up method determines income as a percentage by applying a mark-up percentage pertinent for a particular industry or business to gross sales to obtain the gross profit.

As you can see, there are a variety of indirect and direct approaches the IRS can use to reconstruct income in the absence of a taxpayer’s books and records.

Often the results can be a determination that far exceeds what the income actually was, and, frequently, fraud is alleged.

Failing to keep records is about the worst strategy for avoiding taxes or hiding income, since it will often result in charges of tax evasion. 

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The entity of choice

July 31, 2012 By

submitted by Martin H. Abo, CPA/ABV/CVA/CFF

Many people who are already in business and those starting up new ventures are turning to limited liability company status as the preferred form of business organization.

There are many reasons for this, including:

  • Pass through of profits and taxes to the owners, to avoid double taxation applicable to regular corporations.
  • Limited liability for the owner(s) which is not available with proprietorships and partnerships.
  • Absence of the restrictions applicable to S corporations. These relate to the number of shareholders, types of shareholders, and limits on passive income that can be passed-through without prior tax.
  • Ability to make special allocations of income, losses and deductions among the partners, whereas an S corporation must pass these through on a pro rata basis.
  • Ease of formation. IRS check-the-box rules enable a single owner to obtain the benefits of limited liability for legal purposes, yet be treated like a proprietorship for tax purposes, and avoid the cost of forming a corporation. 
  • Utilization of the tax advantages of operating losses.
  • Many states will still have a franchise tax to pay even if the corporation has elected S corporation status and otherwise would be a flow-through entity.
  • An LLC (sole-member) reports his or her income on Form Schedule C of their individual tax return. A separate business return (form 1065) is only required if the LLC has two or more members.
  • A business owner, if actively working in his/her corporation, will need to take a reasonable salary, subjecting him/her to state unemployment taxation where a member of an LLC will not be subjected to such a payroll tax. 
  • An LLC has no loss of power to a board of directors (although an operating agreement may provide for centralization of management authority in a board or similar body).

If you’re expecting to have a high-growth business and would possibly seek potential investors in the future, a corporation may be more suitable.

Also, corporations can live forever, whereas a LLC is dissolved when a member dies or undergoes bankruptcy. Otherwise, an LLC would appear to give you the flexibility, similar protection and tax savings you might desire.

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Tax tips of the month

March 28, 2012 By

submitted by Martin H. Abo, CPA/ABV/CVA/CFF, Abo and Company, LLC

Here are some federal tax credits to help increase your 2011 refund:  

  • The Earned Income Tax Credit is for people earning less than $49,078 from wages, self-employment or farming. Millions of workers who saw their earnings drop in 2011 may qualify for the first time. Income, age and the number of qualifying children determine the amount of the credit, which can be up to $5,751. Workers without children also may qualify.  
  • The Child and Dependent Care Credit is for expenses paid for the care of your qualifying children under age 13, or for a disabled spouse or dependent, while you work or look for work.
  • The Child Tax Credit is for people who have a qualifying child. The maximum credit is $1,000 for each qualifying child. You can claim this credit in addition to the Child and Dependent Care Credit.  
  • The Retirement Savings Contributions Credit is designed to help low-to-moderate income workers save for retirement. You may qualify if your income is below a certain limit and you contribute to an IRA or workplace retirement plan, such as a 401(k) plan. The Saver’s Credit is available in addition to any other tax savings that apply.  
  • The Nonbusiness Energy Property Credit is available to individuals for the installation of nonbusiness energy property, such as residential exterior doors and windows, insulation, heat pumps, furnaces, central air conditioners, and water heaters. There is a $500 maximum lifetime credit but it is available for qualifying expenditures made before 1/1/2012 so why not take advantage of it.

Please appreciate that a tax credit is a dollar-for-dollar reduction of taxes owed. Some tax credits are actually refundable meaning if you are eligible and claim one, you can get the rest of it in the form of a tax refund even after your tax liability has been reduced to zero.

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Income tax preparation assistance provided by AARP

February 21, 2012 By

The Township Library of Lower Southampton, located at 1983 Bridgetown Pike in Feasterville, will be a tax preparation this year.

This free tax service will be provided by AARP for senior citizens and low- to moderate-income individuals. The service will take place every Monday now through April 16th, between noon and 4:00pm.

You must make an appointment in order to receive this tax guidance. You can make your appointment at the Library Information Desk or by calling the library at 215-355-1133 x104.

Walk-ins will not be accommodated.

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