Advanced Financial Tax, LLC Blog http://www.advancedfinancialtax.com/blog/ Read the latest articles from Advanced Financial Tax, LLC en-us Now That Same-Sex Marriage Is Legal In All States, What Are The Tax Implications? http://www.advancedfinancialtax.com/blog/now-that-same-sex-marriage-is-legal-in-all-states-what-are-the-tax-implications/40642 http://www.advancedfinancialtax.com/blog/now-that-same-sex-marriage-is-legal-in-all-states-what-are-the-tax-implications/40642 Advanced Financial Tax, LLC Article Highlights: All states are required to recognize and allow same-sex marriage  Married tax filing requirements  Potential tax benefits  Negative tax aspects  On June 26, the Supreme Court ruled that the Fourteenth Amendment to the Constitution requires all states to license marriages between two people of the same sex and to recognize same-sex marriages performed in other states. This comes approximately two years after the Supreme Court overturned the Defense of Marriage Act (DOMA) enacted by Congress and signed by then President Bill Clinton. DOMA defined marriage as "legal union between one man and one woman as husband and wife." This has wide-ranging implications for married individuals who reside in states that until now have not recognized same-sex marriage and for those who can now marry in their state, including employer-provided employee and spousal benefits, retirement issues, Social Security benefits, and of course tax issues. Since DOMA was overturned, legally married same-sex couples have been required to file their federal returns as “married,” but they have had to file their state returns as single or head of household status if their state did not recognize their marriage as legal. That will now change, and they will be filing using the married status for their state returns as well. Being married for tax purposes is not always beneficial, depending on a number of circumstances. The following are some of the tax breaks available to legally married same-sex couples: The right to file a joint return, which can produce a lower combined tax than the total tax paid by same-sex spouses filing as single persons (but this can also produce a higher tax, especially if both spouses are relatively high earners or one or both previously qualified to file as head of household);   The opportunity to get tax-free employer-paid health coverage for the same-sex spouse;   The opportunity for either spouse to utilize the marital deduction to transfer unlimited amounts during life to the other spouse, free of gift tax;   The opportunity for the estate of the spouse who dies first to receive a marital deduction for amounts transferred to the surviving spouse;   The opportunity for the estate of the spouse who dies first to transfer the deceased spouse's unused exclusion amount to the surviving spouse;   The opportunity to consent to make "split" gifts (i.e., gifts to others treated as if made one-half by each); and   The opportunity for a surviving spouse to stretch out distributions from a qualified retirement plan or IRA after the death of the first spouse under more favorable rules than apply for nonspousal beneficiaries.  There is a negative side as well. Many same-sex married couples, especially higher-income ones, may find that filing as married has unpleasant income tax ramifications. Divorcing before the end of the year can rectify that. However, before employing that strategy, a couple needs to consider the other financial benefits of being married. The following issues are commonly encountered by same-sex married couples. A taxpayer who is married and living with his or her spouse cannot file using head of household filing status. So a same-sex spouse (or both) who previously qualified for and filed a federal return using the head of household status will no longer file as head of household. Instead, the same-sex couple will file as married using the joint or separate status, which will generally result in higher taxes.   When filing as unmarried, one individual can take the standard deduction and the other can itemize. As married individuals, they must choose between the two, which could substantially reduce their overall deductions. If a same-sex couple files married separate returns and one spouse claims itemized deductions, the other spouse cannot use the standard deduction.   As unmarried individuals, same-sex partners were able to adopt each other's children and claim the adoption credit. As married individuals they can no longer do that.  For those who are registered domestic partners (RDPs) in California, the Supreme Court's recent ruling does not address the IRS's position that these individuals are not legally married and therefore not eligible to file as married. Unless IRS changes its interpretation, RDPs will still not be able to file as married for federal purposes. If you are contemplating a same-sex union or live in a state that previously did not recognize same-sex marriages and wish to explore the tax consequences of now filing as married individuals, please give this office a call. Thu, 02 Jul 2015 19:00:00 GMT Planning Your RMD and IRA Distributions For 2015 http://www.advancedfinancialtax.com/blog/planning-your-rmd-and-ira-distributions-for-2015/33622 http://www.advancedfinancialtax.com/blog/planning-your-rmd-and-ira-distributions-for-2015/33622 Advanced Financial Tax, LLC Article Highlights: Under Age 59.5 Penalty Age 70.5 Mandatory Distribution Age Impact on Social Security Income Required Minimum Distributions Under-Distribution Penalty Penalty Waiver Other Pension Plans We spend most of our lives saving for retirement by putting funds away in tax-advantaged ways. But many of us forget about planning the withdrawals so that they are tax advantaged as well. Although there are exceptions, retirement funds generally cannot be withdrawn until we are age 59.5. If taken out sooner there is a 10% penalty that applies in most cases (in addition there may be a state penalty). A large number of taxpayers do not take distributions until they are forced to at age 70.5, not realizing they might benefit tax wise by taking money out sooner. For example, if you are in a low or zero tax-bracket this year, you can take a certain amount out with no or minimal tax cost. That is where planning your distributions can save a significant amount of tax dollars. Even if you are under 59.5, if your income for the year is such that it is below the taxable income limit, you can withdraw an amount that brings you up just short of the taxable income threshold and only pay the penalty. If you receive Social Security benefits, keep in mind that Social Security income is tax-free for lower income retirees but becomes taxable as their income increases. IRA distributions can sometimes be planned in order to minimize the taxability of the Social Security income. Once you reach age 70.5 you are required to begin taking the prescribed minimum distributions from your Traditional IRA and other qualified pension plans. But that does not mean you can’t withdraw more than the required amount. If your income is low, it may be appropriate to take more than the minimum to save taxes in the future. Unfortunately all too many people simply take the IRS specified minimum amount without considering the tax planning aspects of the distribution. The penalty for not taking the required minimum distribution (RMD) after reaching age 70.5 is an additional tax of 50% of the amount that should have been taken that year, based upon the RMD rules. The good news is that the IRS will generally, upon request, waive the penalty, provided that you show a corrective distribution was made in the subsequent year. So if you have missed an RMD for the prior year you should seek professional assistance right away with regard to taking corrective action. The RMD is determined by taking the IRA balance on December 31 of the prior year and dividing that total by your remaining life expectancy from the IRS table. If you have more than one IRA, figure the RMD for each one and then combine them to get the total required distribution for the year. (An owner of a Roth IRA is not required to take distributions at any age.) For purposes of determining the minimum distribution, all Traditional IRA accounts, including SEP-IRAs, owned by an individual are treated as one, but the actual minimum distribution can be taken from any combination of the accounts. If the owner chooses not to take the minimum distribution from each account, it is not uncommon for IRA trustees to require written certification that the owner took the minimum distribution from other accounts. If you have other qualified plans besides Traditional IRA accounts, the RMD for those must be figured separately for each type and withdrawn from those plans and cannot be combined with the distributions from IRAs or other qualified plans to reach the RMD. A taxpayer who fails to take a distribution in the year age 70.5 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 70.5 is attained and one for the current year. If an IRA owner dies after reaching age 70.5, but before April 1st of the next year, no minimum distribution is required because death occurred before the required beginning date. Special Note: The provision allowing a direct transfer from an IRA to a qualified charity to be counted towards the RMD for the year and to be excluded from income expired at the end of 2014. However, it has been previously extended twice late in the year. Taxpayers age 70.5 and older with IRA accounts making a sizable charity donation may wish to make the donation via a direct transfer to the charity from their IRA account in case Congress extends this provision for yet another year. As you can see, there is more to the required minimum distribution than meets the eye, and there are some significant planning opportunities. Give this office a call if you have questions or would like to schedule a planning appointment. Tue, 30 Jun 2015 19:00:00 GMT Supreme Court, in a 6-3 decision, upholds Affordable Care Act (Obamacare) subsidies. http://www.advancedfinancialtax.com/blog/supreme-court-in-a-6-3-decision-upholds-affordable-care-act-obamacare-subsidies/40616 http://www.advancedfinancialtax.com/blog/supreme-court-in-a-6-3-decision-upholds-affordable-care-act-obamacare-subsidies/40616 Advanced Financial Tax, LLC Breaking: Supreme Court, in a 6-3 decision, upholds Affordable Care Act (Obamacare) subsidies. The ruling allows federal tax credits to be issued to people who buy health plans through a federally run ACA exchange. Thu, 25 Jun 2015 19:00:00 GMT Mid-Year Tax Planning Checklist http://www.advancedfinancialtax.com/blog/mid-year-tax-planning-checklist/33529 http://www.advancedfinancialtax.com/blog/mid-year-tax-planning-checklist/33529 Advanced Financial Tax, LLC Article Highlights: Fall tax planning Changes that can impact your tax liability 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 rental property? 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 3.8% surtax on net investment income? Did you make any unplanned withdrawals from an IRA or pension plan? Have you updated your income and other information with your Health Marketplace? 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. Wed, 24 Jun 2015 19:00:00 GMT Tax Tips for Students with a Summer Job http://www.advancedfinancialtax.com/blog/tax-tips-for-students-with-a-summer-job/39106 http://www.advancedfinancialtax.com/blog/tax-tips-for-students-with-a-summer-job/39106 Advanced Financial Tax, LLC Article Highlights: W-4 Tips Working For Cash Self-employment Tax Working in a Family Business ROTC Members Newspaper Carriers 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 income 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 $6,300 (the standard deduction amount) without being liable for income tax. However, if the student is a dependent and has 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 that can be used to record tips for a month on a daily basis. The employer withholds FICA (Social Security and Medicare) 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 Social Security 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 future benefits under the Social Security system. Even if a worker is not liable for income tax, this 15.3% tax may apply. Even though skirting the law, some employers prefer to treat their workers as “independent contractors” who receive their pay with no taxes withheld, because the employers avoid paying their share of the employment taxes. While the employees may like getting a larger check each pay day, they may find themselves owing income tax and possibly the self-employment tax on their earnings when they file their tax returns for the year. If the worker is offered a job on an independent contractor basis, and that job would normally be filled by an employee, the worker should seriously consider if this arrangement is suitable under the circumstances. Employed in a Family business - If the family business is unincorporated, and pays wages to a child under age 18, the child is not subject to payroll taxes (FICA) since they do not apply to 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 parent’s business will not have to pay its half either. In addition, paying the child, and thus reducing the business’s net income, can reduce the parent’s self-employment tax. However, the wages must be reasonable for the services performed. 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 related to a child’s employment. Tue, 23 Jun 2015 19:00:00 GMT July 2015 Individual Due Dates http://www.advancedfinancialtax.com/blog/july-2015-individual-due-dates/32760 http://www.advancedfinancialtax.com/blog/july-2015-individual-due-dates/32760 Advanced Financial Tax, LLC July 1 - Time for a Mid-Year Tax Check Up Time to review your 2015 year-to-date income and expenses to ensure estimated tax payments and withholding are adequate to avoid underpayment penalties.July 10 - Report Tips to EmployerIf 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, 21 Jun 2015 19:00:00 GMT July 2015 Business Due Dates http://www.advancedfinancialtax.com/blog/july-2015-business-due-dates/32762 http://www.advancedfinancialtax.com/blog/july-2015-business-due-dates/32762 Advanced Financial Tax, LLC 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 2014. 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 2014. July 31 - Social Security, Medicare and Withheld Income Tax File Form 941 for the second quarter of 2015. 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 10 to file the return.July 31 - Certain Small Employers Deposit any undeposited tax if your tax liability is $2,500 or more for 2015 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 2014. 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, 21 Jun 2015 19:00:00 GMT Tax Tips for Recently Married Taxpayers http://www.advancedfinancialtax.com/blog/tax-tips-for-recently-married-taxpayers/38516 http://www.advancedfinancialtax.com/blog/tax-tips-for-recently-married-taxpayers/38516 Advanced Financial Tax, LLC Article Summary: Social Security Administration Internal Revenue Service U.S. Postal Service Withholding & Estimated Tax Payments Health Insurance Marketplace This is the time of year for many couples to tie the knot. If you marry during 2015, 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. The form is available 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 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 2015. 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 2015 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. Notify the Marketplace - If you or your spouse has health insurance through a government Marketplace (Exchange), you must notify the Marketplace of your change in marital status. If you were included on a parent’s health insurance policy through a Marketplace, then the parent must notify the Marketplace. Failure to notify the Marketplace can create tax filing problems. Blog: If you have any questions about the impact of your new marital status on your taxes, please give this office a call. If you have any questions about the impact of your new marital status on your taxes, please give this office a call. Thu, 18 Jun 2015 19:00:00 GMT Forgot Something on Your Tax Return? It’s Not Too Late to Amend the Return http://www.advancedfinancialtax.com/blog/forgot-something-on-your-tax-return-it8217s-not-too-late-to-amend-the-return/31733 http://www.advancedfinancialtax.com/blog/forgot-something-on-your-tax-return-it8217s-not-too-late-to-amend-the-return/31733 Advanced Financial Tax, LLC Article Highlights: Frequently Overlooked Income and Deductions Three-Year Refund Statute of Limitations State returns Interest & Penalties Filing Instructions and Suggestions If you discover that you forgot something on your tax return, you can amend that return after it has been filed. The need to amend can be because of: Receiving an unexpected or amended K-1 from a trust, estate, partnership, or S-corporation. Overlooking an item of income or receiving a corrected 1099. Failing to claim the correct advanced premium credit because of an incorrect 1095-A. Forgetting about a deducible expense. Forgetting about an expense that would qualify for a tax credit. These are among the many reasons individuals need to amend their returns, whether it is for the just-filed 2014 return or prior year returns. Here are some key points when considering whether to file an amended federal (Form 1040X) or state income tax return. If you are amending for a refund, you should be aware that refunds generally won’t be paid for returns if the three-year statute of limitations from the filing due date has expired. Thus, with the exception of amending a return to carry back a business net operating loss (NOL), the IRS will pay refunds only on returns from 2012 through 2014. Some states have a longer statute. The last day to file an amended 2012 return for a refund is April 15, 2016. Generally, you do not need to file an amended return to correct math errors you made on the return. The IRS or state agency will automatically make those corrections. Also, do not file an amended return because you forgot to attach tax forms such as W-2s or schedules. The IRS or state agency will send a request asking for the missing forms. If you are filing to claim an additional refund, wait until you have received your original refund before filing Form 1040X. You may cash that check while waiting for any additional refund. If you amend returns and owe additional tax, you will be subject interest and penalty charges. Interest is charged on any tax not paid by the due date of the original return, without regard to extensions. When amending multiple returns, send them in separate envelopes. Sometimes when filed together, they are mistaken for a single return, and the additional returns filed in the same envelope are not processed. If the changes involve another schedule or form, it must be completed and included with the amended return. In addition, it may be appropriate to include documentation to avoid subsequent correspondence from the IRS or state agency. A detailed explanation of the changes must also be attached. This is required to explain to the processing staff the reason for the amendment. An insufficient explanation can lead to additional correspondence and delays. 8. Depending on why you file an amended federal return, you may be required to amend your state return. However, if the federal amendment is filed to claim or correct a tax credit that the state does not have, no state amended return will likely need to be filed. In most other circumstances, you will need to amend the state return as well as the federal. An amended return can be more complicated than the original, so please contact this office for assistance in preparing your amended returns. Tue, 16 Jun 2015 19:00:00 GMT Don’t Panic if You Receive an IRS Notice http://www.advancedfinancialtax.com/blog/don8217t-panic-if-you-receive-an-irs-notice/38969 http://www.advancedfinancialtax.com/blog/don8217t-panic-if-you-receive-an-irs-notice/38969 Advanced Financial Tax, LLC 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, 11 Jun 2015 19:00:00 GMT Five-Year Anniversary of Healthcare Reform: 5 Things You Should Know in '15 About the ACA http://www.advancedfinancialtax.com/blog/five-year-anniversary-of-healthcare-reform-5-things-you-should-know-in-15-about-the-aca/40579 http://www.advancedfinancialtax.com/blog/five-year-anniversary-of-healthcare-reform-5-things-you-should-know-in-15-about-the-aca/40579 Advanced Financial Tax, LLC It has been five years since the Patient Protection and Affordable Care Act (the ACA) was signed into law. Healthcare reform has certainly been controversial, but this controversy does not absolve some businesses of certain responsibilities when it comes to offering minimum essential healthcare coverage to their employees. In recognition of the five-year anniversary of healthcare reform, here are 5 things you should know about some of the key ACA requirements for businesses in 2015: The shared responsibility provision of healthcare reform is effective either this year or next year, depending on how many employees you have. Also known as the employer mandate or “play or pay,” this provision requires companies with at least 50 full-time equivalent employees to offer minimum essential healthcare coverage to their full-time employees and their dependents. Or, such businesses - which are referred to by the law as applicable large employers (ALEs) - can pay a substantial non-deductible penalty if they prefer. Companies with 100 or more full-time employees (or full-time equivalents) must begin complying with the shared responsibility provision this year. Specifically, they must offer qualifying healthcare coverage to 70 percent or more of their full-time employees and their dependents this year and 95 percent of them in 2016. Meanwhile, companies with between 50 and 99 full-time employees or equivalents must begin complying with the shared responsibility provision next year.   Depending on the size of your business, you might not be subject to the shared responsibility provision at all. There's good news in the ACA for many small businesses. Companies with fewer than 50 full-time employees or equivalents are not subject to the shared responsibility this year or next year. However, if these businesses want to offer healthcare coverage to their employees, they can buy coverage on the Small Business Health Options Marketplace, or SHOP. This marketplace could lower small firms' health insurance costs by giving them more buying power.   The healthcare coverage your business provides employees under the ACA must meet certain criteria. Specifically, this coverage must be affordable and it must provide minimum value. Healthcare reform considers coverage to be “affordable” if employees' share of their premiums doesn't exceed 9.56 percent of their annual household income in 2015. And it considers “minimum value” to be a policy that covers at least 60 percent of the cost of healthcare services.   Your business might qualify for a tax credit for contributions you make toward employees' premiums. Small businesses with up to 25 full-time equivalent employees could receive a tax credit of up to 50 percent toward their contributions to employees' healthcare premiums. To qualify, your business must pay at least half of the premiums and employees' average annual wages in 2015 cannot be more than $51,600 (adjusted each year for inflation going forward). Also, this tax credit will be reduced if you had more than 10 full-time equivalent employees last year and/or employees' average annual wages last year were more than $25,400 (also adjusted each year for inflation going forward).   The ACA includes requirements to report coverage information to the IRS. ALEs are required to certify that they offered full-time employees and their dependents the opportunity to enroll in minimum essential healthcare coverage by filing Form 1094-C with the IRS. In addition, they must also issue a Form 1095-C employee statement to each full-time employee. These information-reporting requirements were voluntary this year for coverage provided in 2014, but they will be required next year for coverage provided in 2015.  Be sure to contact us with any questions about your company's specific responsibilities under the ACA this year. Wed, 10 Jun 2015 19:00:00 GMT Have a Financial Interest in or Signature Authority over a Foreign Financial Account? Better Read This! http://www.advancedfinancialtax.com/blog/have-a-financial-interest-in-or-signature-authority-over-a-foreign-financial-account-better-read-this/36946 http://www.advancedfinancialtax.com/blog/have-a-financial-interest-in-or-signature-authority-over-a-foreign-financial-account-better-read-this/36946 Advanced Financial Tax, LLC Article Highlights: Reporting Threshold FBAR Filing Due Date Penalties Overlooked Accounts 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 to the U.S. government each calendar 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 accomplished by electronically filing Form FinCEN 114 commonly referred to as FBAR (for Foreign Bank Account Report), which is due on or before June 30 of the succeeding year. No extensions are available for filing this form. 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 and inherited accounts 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. If you have questions regarding this reporting requirement or need assistance with the reporting, please contact this office. Tue, 09 Jun 2015 19:00:00 GMT Higher-Income Taxpayers Subject to Exemption & Itemized Deductions Phase-outs http://www.advancedfinancialtax.com/blog/higher-income-taxpayers-subject-to-exemption--itemized-deductions-phase-outs/40562 http://www.advancedfinancialtax.com/blog/higher-income-taxpayers-subject-to-exemption--itemized-deductions-phase-outs/40562 Advanced Financial Tax, LLC Article Highlights: Phase-out Thresholds  Personal Exemption Phase-outs  Itemized Deduction Phase-outs  Generally, taxpayers are allowed to deduct personal exemption allowances of $4,000 (2015) each for themselves, their spouses and their dependents. In addition, taxpayers are allowed a standard deduction or, if their deductions are large enough, itemized deductions. However, both the personal exemption allowances and itemized deductions are being phased out for higher-income taxpayers. The phase-out begins when a taxpayer's adjusted gross income (AGI) reaches a phase-out threshold amount that is annually adjusted for inflation. The phase-out threshold amounts for 2015 are based on taxpayers' filing statuses, and they are: $258,250 for single filers, $284,050 for individuals filing as heads of households, $309,900 for married couples filing jointly and $154,950 for married individuals filing separately. Here is how the phase-outs work: Personal and Dependent Exemptions - 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 $422,400 for 2015 and two children, for a total of four exemptions worth $16,000 (4 × $4,000). The threshold for a married couple is $309,900; thus, their income exceeds the threshold by $112,500. Each $2,500 part of this amount reduces the exemption by 2%; there are 45 parts of this amount ($112,500 ÷ $2,500 = 45). Thus, 90% (45 × 2%) of their $16,000 exemption allowance is phased out, leaving them with a reduced exemption deduction of $1,600 ([100%-90%] × $16,000). Assuming Ralph and Louise are in the 33% federal tax bracket, the phase-out costs them an additional $5,643 ($16,000 × 90% × 33%). Divorced or separated parents subject to the phase-out should consider relinquishing the exemption of a dependent child to the other parent. When 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 affected 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. The reduction is not to exceed 80% of the otherwise allowable itemized deductions. Not all itemized deductions are subject to the phase-out. The following deductions escape 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 $422,400 for 2015, 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 2015, 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  The phase-out is the lesser of $3,375 or $19,200 (80% of $24,000) which is $19,200. Thus, Ralph and Louise's itemized deductions for 2015 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, taxpayers who normally are not subject to a phase-out may have a high-income year because of unusual income. In these cases, it may be appropriate, if possible, to defer paying deductible expenses to the year following the high-income year or perhaps to deduct the expenses in the preceding year. The standard deduction is not subject to the phase-out. If you have questions about how these phase-outs will impact your specific situation, if you want to adjust your withholding or estimated taxes, or if you want to make a tax planning appointment, please give this office a call. Thu, 04 Jun 2015 19:00:00 GMT Parents Can Get Credit for Sending Kids to Day Camp http://www.advancedfinancialtax.com/blog/parents-can-get-credit-for-sending-kids-to-day-camp/22357 http://www.advancedfinancialtax.com/blog/parents-can-get-credit-for-sending-kids-to-day-camp/22357 Advanced Financial Tax, LLC Article Highlights: Child Age Limits  Employment-related Expense  Married Taxpayer Earnings Limits  Disabled or Full-time Student Spouse  Expense Limits  With summer just around the corner, there is a tax break that working parents should know about. Many working parents must arrange for care of their children under 13 years of age (or any age if handicapped) during the school vacation period. A popular solution - with a tax benefit - is a day camp program. The cost of day camp can count as an expense towards the child and dependent care credit. But be careful; expenses for overnight camps do not qualify. For an expense to qualify for the credit, it must be an “employment-related” expense; i.e., it must enable you and your spouse, if married, to work, and it must be for the care of your child, stepchild, or foster child, or your brother or sister or stepsibling (or a descendant of any of these) who is under 13, lives in your home for more than half the year and does not provide more than half of his or her own support for the year. Married couples must file jointly and both spouses must work (or one spouse must be a full-time student or disabled) to claim the credit. The qualifying expenses are limited to the income you or your spouse, if married, earns from work, using the figure for whomever of you earns less. However, under certain conditions, when one spouse has no actual earned income and that spouse is a full-time student or disabled, that spouse is considered to have a monthly income of $250 (if the couple has one qualifying child) or $500 (two or more qualifying children). This means the income limitation is essentially removed for a spouse who is a student or disabled. The qualifying expenses can't exceed $3,000 per year if you have one qualifying child, while the limit is $6,000 per year for two or more qualifying persons. This limit does not need to be divided equally. For example, if you paid and incurred $2,500 of qualified expenses for the care of one child and $3,500 for the care of another child, you can use the total, $6,000, to figure the credit. The credit is computed as a percentage of your qualifying expenses; in most cases, 20%. (If your joint adjusted gross income [AGI] is $43,000 or less, the percentage will be higher, but will not exceed 35%.) Example: Al and Janice both work, each with earned income in excess of $40,000 per year. Janice's job is a part-time job, which coincides with their 11-year-old daughter, Susan's, school hours. However, during the school summer vacation period, they place Susan in a day camp program that costs $4,000. Since the expense limitation for one child is $3,000, their child credit would be $600 (20% of $3,000). The credit reduces a taxpayer's tax bill dollar for dollar. Thus, in the above example, Al and Janice pay $600 less in taxes by virtue of the credit. However, the credit can only offset income tax and alternative minimum tax liability and any excess is not refundable. The credit cannot be used to reduce self-employment tax or the taxes imposed by the Affordable Care Act. If you have questions about how the childcare credit applies to your particular tax situation, please give this office a call. Tue, 02 Jun 2015 19:00:00 GMT 7 Ways to Boost AR Collections and Improve Cash Flow http://www.advancedfinancialtax.com/blog/7-ways-to-boost-ar-collections-and-improve-cash-flow/40556 http://www.advancedfinancialtax.com/blog/7-ways-to-boost-ar-collections-and-improve-cash-flow/40556 Advanced Financial Tax, LLC “A sale isn’t a sale until you’ve collected payment - it’s just a loan,” a wise businessman once said. If you’ve been in business for any length of time, you know how true this is. Many small businesses that were profitable on paper have gone bankrupt waiting for payment from their customers to arrive. This makes accounts receivable (AR) collections one of the most important tasks for small business owners. Unfortunately, it’s also one of the most neglected. Here are 7 strategies you can implement to help boost your AR collections and improve your cash flow: Make sure your invoices are clear and accurate. If invoices are vague, ambiguous or flat-out wrong, this is sure to delay customer payments as they call to try to get things straightened out. In short, you don’t want to give customers a reason not to pay your invoices quickly. Create an AR aging report. This report will track and list the current payment status of all your client accounts (e.g., 0-30 days, 30-60 days, 60-90 days, 90+ days). This will tell you which clients are current in their payments and which clients are past due so you know where to focus your collection efforts. Give a bookkeeping employee responsibility for AR collections. If collecting accounts receivable isn’t the main responsibility of one specific employee, it will probably fall by the wayside as other tasks crowd it out. Therefore, make one of your bookkeeping employees primarily responsible for this task. Move quickly on past-due accounts. Don’t delay taking action once a client’s account reaches the past-due stage. Studies have revealed that the likelihood of collecting past-due receivables drops drastically the longer they go uncollected. Your designated bookkeeping employee should start making collections efforts the day after an account becomes past due. Plan your collections strategy carefully. Decide ahead of time how you will approach late-paying clients. For example, a friendly reminder call and/or email from your designated bookkeeping employee is probably a good first collection step. If this doesn’t get results, you can proceed to more aggressive steps such as sending past due notices and dunning letters. Consider offering a payment plan. Sometimes, customers have legitimate reasons why they can’t pay their invoices on time. Maybe the customer is having temporary cash flow problems and wants to pay you but simply can’t right now. In this scenario, you might consider working out a payment plan that allows the customer to pay the balance due over a period of time. The agreement should be made in writing and signed by both parties. Hire a collection agency. If all of these steps fail to resolve a collection problem, you might have to turn to a collection agency as a last resort. However, this is a serious step that should not be taken lightly, since it will probably jeopardize your relationship with the customer. Decide whether or not collecting the past-due amount is worth possibly losing the customer. Also keep in mind that the collection agency will keep a large percentage of the amount collected. Very few small businesses can afford not to make AR collections a top priority. Following these 7 steps will help you improve your collections - and these improvements will boost both your cash flow and your bottom line. Tue, 02 Jun 2015 19:00:00 GMT Planning Your IRA Withdrawal? http://www.advancedfinancialtax.com/blog/planning-your-ira-withdrawal/40537 http://www.advancedfinancialtax.com/blog/planning-your-ira-withdrawal/40537 Advanced Financial Tax, LLC Article Highlights: Early Distributions  Distributions After Age 59.5  Minimum Required Distributions After Age 70.5  Excess Accumulation Penalty  Estate Tax Issues  Advance planning can, in many cases, minimize or even avoid taxes on IRA distributions and other qualified plan distributions. When contemplating future retirement and when to begin tapping taxable IRA and other qualified retirement accounts, taxpayers need to consider a number of important issues. Early Distributions (before 59.5) - If funds are withdrawn before reaching age 59 ½, the taxpayer is also subject to a 10% early withdrawal penalty (and state penalties if applicable) in addition to the income tax on the IRA distribution, unless what is referred to as the substantially equal payment exemption is utilized. Under this exception, an early retiree can begin taking substantially equal payments at least once a year over the owner's life or joint lives of the owner and designated beneficiary. The payments must not cease before the end of the five-year period beginning with the date of the first payment, BUT after the taxpayer reaches age 59.5. Age 59.5 to age 70.5 Distributions - After attaining age 59.5, an individual can take out of their IRA as much or as little as he or she wishes in any year until reaching age 70.5. This withdrawal liberty leaves the retiree to plan his or her distributions to minimize taxes. Techniques involve matching distributions with no- or low-income years. Age 70 ½ and Older - Once a taxpayer reaches age 70 ½, he or she must withdraw at least a minimum amount from their Traditional IRA each year. A taxpayer who fails to take a distribution in the year age 70 ½ 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 they reached age 70 ½ and one for the current year. Distributions that are less than the required minimum distribution for the year are subject to a 50% excise tax (excess accumulation penalty) for that year on the amount not distributed as required. The excess accumulation penalty can generally be abated by following IRS abatement procedures. Quite frequently, taxpayers have multiple IRA accounts in addition to one or more types of other retirement plans. This gives rise to a commonly asked question, "Must I take a distribution from each individual account?" For purposes of the annual required minimum distribution, a separate distribution must be taken from each type of plan. However, a taxpayer may have multiple accounts for each type of plan, which for tax purposes are treated as one plan. For example, if you have three IRA accounts, the three separate accounts are treated as one for tax purposes, and the distribution can be taken from any combination of the accounts. Generally, the minimum amount that must be withdrawn in a particular year, after reaching age 70 ½, is the total value of all IRA accounts (as determined on December 31st of the prior year) divided by a factor based on the owner's age from the table below, illustrated for ages 70 - 87 only (the complete table goes to age 115 and over). Minimum Distribution Table Age Factor Age Factor 70 27.4 80 18.7 71 26.5 81 17.9 72 25.6 82 17.1 73 24.7 83 16.3 74 23.8 84 15.5 75 22.9 85 14.8 76 22.0 86 14.1 77 21.2 87 13.4 78 20.3 79 19.5 Estate and Beneficiary Considerations - When planning your distributions, keep in mind that the value of your undistributed IRA account will be included in your gross estate when you pass on, and depending upon the size of your estate, it may be subject to inheritance taxes. In addition, the inherited IRA distributions will be taxable to the individual who inherits the IRA. Therefore, it could be appropriate to utilize the IRA funds first and then dip into other assets after the IRA funds have been depleted. On the other hand, funds left in an IRA do continue to accumulate tax-free which might be better in certain circumstances. If you would like assistance with your tax planning needs or to develop an IRA distribution plan, please call this office for an appointment. Thu, 28 May 2015 19:00:00 GMT Will the IRS Tax Return Data Breach Impact You? http://www.advancedfinancialtax.com/blog/will-the-irs-tax-return-data-breach-impact-you/40539 http://www.advancedfinancialtax.com/blog/will-the-irs-tax-return-data-breach-impact-you/40539 Advanced Financial Tax, LLC As you no doubt have heard on the news, the IRS recently announced that cyber thieves have gained access to over 100,000 taxpayers’ tax return information. According to a number of news sources, that breach has been traced to Russia. The criminals did not actually gain access to IRS secure databases by hacking into the IRS computer system. Instead, they simply used an online tool provided by the IRS through which taxpayers are able to obtain transcripts of their previously filed tax returns. That service, called “Get Transcript,” is available to anyone who, with the correct information, can access an individual’s transcripts. The problem is this: the information needed to access “Get Transcript” is readily available from other online sources, which made it easy for the criminals to access a large number of taxpayer accounts. More than 100,000 taxpayer accounts were breached, while another 100,000 attempts failed, compared to 23 million legitimate taxpayers who were able to successfully download their tax history. It is assumed the criminals’ purpose is to obtain taxpayer information needed to file fraudulent tax returns and thus obtain illegitimate refunds. The IRS has already taken steps to mitigate the damage. The “Get Transcript” service provides two ways to receive a transcript, one online and the other by mail. The online version has been shut down for now and transcripts can only be acquired by mail, which takes up to 10 days. All taxpayers whose accounts were accessed, and the additional 100,000 accounts to which access was attempted but failed, will be notified very soon. The IRS is offering free credit monitoring and repair services to those who were affected. All 200,000+ accounts will also be flagged so that fraudulent tax returns cannot be filed. Meanwhile, according to several news services, the Treasury Inspector General, Homeland Security and the FBI have all launched investigations. Moreover, the Senate Finance Committee, which oversees the IRS, will hold a hearing on the data theft. Is there a lesson to be learned here? Absolutely: limit what information you make available on the Internet and to whom you provide it. Once personal data is online, it is very difficult to remove it. Question everyone’s need for any personal information. This is especially true for your SSN, date of birth, bank account numbers, passwords, credit card numbers, etc. Even such things as your mother’s maiden name, where you were born and what high school you attended are frequently used to identify you when accessing accounts. Don’t post any sensitive data on social media sites and educate your children about the information they post on their social profiles. If you believe you are at risk due to a lost or stolen purse or wallet, questionable credit card activity or credit report, you should contact the IRS Identity Protection Specialized Unit at 800-908-4490, extension 245 (Monday - Friday, 7 a.m. - 7 p.m. local time; Alaska and Hawaii follow Pacific time). You should also complete and file Form 14039 – IRS Identity Theft Affidavit. In addition to reporting a theft or possible theft to the IRS, the following actions are recommended: Report incidents of identity theft to the Federal Trade Commission at www.consumer.ftc.gov or the FTC Identity Theft hotline at 877-438-4338. File a report with the local police. Contact the fraud departments of the three major credit bureaus: Equifax – www.equifax.com, 800-525-6285 Experian – www.experian.com, 888-397-3742 TransUnion – www.transunion.com, 800-680-7289 Close any accounts that have been tampered with or opened fraudulently. If you believe your tax information has been compromised, call this office immediately for assistance. Thu, 28 May 2015 19:00:00 GMT Saver’s Credit Can Help You Save for Retirement http://www.advancedfinancialtax.com/blog/saver8217s-credit-can-help-you-save-for-retirement/36602 http://www.advancedfinancialtax.com/blog/saver8217s-credit-can-help-you-save-for-retirement/36602 Advanced Financial Tax, LLC Low- and moderate-income workers can take steps to save for retirement and earn a special tax credit.The saver’s credit, also called the retirement savings 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. The credit for 2015 is determined from the table illustrated below and is based upon both filing status and income (AGI). * Modified AGI - Is determined without regard to the foreign or possessions earned income exclusion and foreign housing exclusion or deduction. 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 if both spouses contribute to a plan), 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.The amount of a taxpayer’s saver’s credit is based on his or her filing status, adjusted gross income, tax liability, and amount contributed to qualifying retirement programs. 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 $37,000. 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 return with AGI of $37,000 from the table X.20 Saver’s credit $500 This example illustrates how the credit phases out for higher-AGI taxpayers. In this example, the couple’s AGI of $37,000 only allowed them a credit of 20% times their qualifying contributions. Had their AGI been $36,500 or less, their credit percentage would have been 50% of their qualified contributions, for a credit of $1,250. The saver’s credit supplements other tax benefits available to people who set money aside for retirement. Generally, except for Roth IRA contributions, workers’ contributions to retirement plans are tax deductible, either in the form of a deduction on their tax return (traditional IRAs and certain self-employed retirement plans) or through a reduction of wages that would otherwise be taxable (such as pre-tax contributions to a 401(k), 403(b), etc.). So in addition to the saver’s credit, contributions to retirement plans provide a tax deduction for traditional IRAs or income reductions for certain other plans, which will lower an individual’s tax before the credit is applied. The credit itself can only be used to reduce the tax (income and alternative minimum taxes only) to zero, and any amount in excess of a taxpayer’s tax liability is lost. 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 full-time 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 full-time student. The credit is provided to encourage taxpayers to save for their retirement. To prevent taxpayers from taking distributions from existing retirement savings and re-depositing them to claim the credit, the qualifying retirement contributions used to figure the credit are reduced by any retirement plan distributions taken during a “testing period.” The testing period includes the prior two tax years, the current year, and the subsequent tax year before the due date (including extensions) for filing the taxpayer's return for the tax year of the credit. As you can see, qualifying for and being able to use this credit involves a complicated set of rules. If you have questions about how this tax benefit might apply in your situation, please give this office a call. Tue, 26 May 2015 19:00:00 GMT Important Date For Taxpayers Living Abroad http://www.advancedfinancialtax.com/blog/important-date-for-taxpayers-living-abroad/39040 http://www.advancedfinancialtax.com/blog/important-date-for-taxpayers-living-abroad/39040 Advanced Financial Tax, LLC Article Highlights: June 15th filing due date Additional extension to October 15 available Extension does not relieve late payment penalties Combat zone 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 15, 2015 is the filing due date for your 2014 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, 2015. 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, 21 May 2015 19:00:00 GMT June 2015 Individual Due Dates http://www.advancedfinancialtax.com/blog/june-2015-individual-due-dates/32072 http://www.advancedfinancialtax.com/blog/june-2015-individual-due-dates/32072 Advanced Financial Tax, LLC June 1 - Final Due Date for IRA Trustees to Issue Form 5498Final 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, 2014. The FMV of an IRA on the last day of the prior year (Dec 31, 2014) is used to determine the required minimum distribution (RMD) that must be taken from the IRA if you are age 70½ or older during 2015. If you are age 70½ or older during 2015 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 15 - Estimated Tax Payment Due It’s time to make your second quarter estimated tax installment payment for the 2015 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 $1,000 (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 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 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 15 - 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 15 is the filing due date for your 2014 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, 2015 for 2014. No extension of time to file is permitted. The form must be filed electronically; paper forms are not allowed. This filing requirement applies only if the aggregate value of these financial accounts exceeds $10,000 at any time during 2014. Contact our office for additional information and assistance filing the form. Tue, 19 May 2015 19:00:00 GMT June 2015 Business Due Dates http://www.advancedfinancialtax.com/blog/june-2015-business-due-dates/32073 http://www.advancedfinancialtax.com/blog/june-2015-business-due-dates/32073 Advanced Financial Tax, LLC June 15 - Employer’s Monthly Deposit Due If you are an employer and the monthly deposit rules apply, June 15 is the due date for you to make your deposit of Social Security, Medicare and withheld income tax for May 2015. This is also the due date for the non-payroll withholding deposit for May 2015 if the monthly deposit rule applies.June 15 - Corporations Deposit the second installment of estimated income tax for 2015 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, 2015 for 2014. No extension of time to file is permitted. The form must be filed electronically; paper forms are not allowed. This filing requirement applies only if the aggregate value of these financial accounts exceeds $10,000 at any time during 2014. Contact our office for additional information and assistance filing the form. Tue, 19 May 2015 19:00:00 GMT Are You Missing Out On The Earned Income Tax Credit? http://www.advancedfinancialtax.com/blog/are-you-missing-out-on-the-earned-income-tax-credit/40516 http://www.advancedfinancialtax.com/blog/are-you-missing-out-on-the-earned-income-tax-credit/40516 Advanced Financial Tax, LLC Article Highlights: Earned Income Tax Credit  Refundable Tax Credit  Qualifications  Special Rule for Military  The EITC is for people who work but have lower incomes. If you qualify, it could be worth up to $6,242 in 2015. 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 do not owe any taxes. That's money you can use to make a difference in your life. Even though this credit can be worth thousands of dollars to a low-income family, the IRS estimates as many as 25 percent of people who qualify for the credit do not claim it simply because they don't understand the criteria. If you qualify for but failed to claim the credit on your return for 2012, 2013 and/or 2014, you can still claim it for those years by filing an amended return or an original return if you have not previously filed. The EITC is based on the amount of your earned income and whether there are qualifying children in your household. If you have children, they must meet relationship, age and residency requirements. Additionally, you must file a tax return to claim the credit. The EITC income qualifications are annually inflation adjusted. The qualifications shown below are for 2015. Please call for those that apply for prior years. If you were employed for at least part of 2015, you may be eligible for the EITC based on these general requirements: You earned less than $14,820 ($20,330 if married filing jointly) and did not have any qualifying children.   You earned less than $39,131 ($44,651 if married filing jointly) and have one qualifying child.   You earned less than $44,454 ($49,974 if married filing jointly) and have two qualifying children.   You earned less than $47,747 ($53,267 if married filing jointly) and have more than two qualifying children.  In addition you must meet a few basic rules:  You 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 have been 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.   Your investment income for the year cannot exceed $3,400 (call for other years).   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 (excluding foreign earned income)  Members of the military can elect to include their nontaxable combat pay in earned income for the earned income credit. If that election is made, the military member must include in earned income all nontaxable combat pay received. If spouses are filing a joint return and both spouses received nontaxable combat pay, then each one can make a separate election. If you have questions about your qualifications for this credit or need help amending or filing a prior year return to claim the credit, please give this office a call. Tue, 19 May 2015 19:00:00 GMT 5 Accounting Tips That Will Make Managing Your Small Business a Breeze http://www.advancedfinancialtax.com/blog/5-accounting-tips-that-will-make-managing-your-small-business-a-breeze/40517 http://www.advancedfinancialtax.com/blog/5-accounting-tips-that-will-make-managing-your-small-business-a-breeze/40517 Advanced Financial Tax, LLC If you are the owner of a small business, you are endlessly busy. Between keeping track of the day-to-day requirements and monitoring growth and profit, it's easy to get overwhelmed and that means you might neglect important recordkeeping that will help you in the long term. Here are five helpful hints that will make accounting easier and make sure that you don't miss any milestones or deadlines. 1. Business and personal expenses should be kept separate. It's easy to make the mistake of using your business credit card for personal expenses and vice versa, and those errors can always be amended through reimbursements and revised record-keeping, but you'll save yourself a lot of time, trouble and aggravation if you keep the two types of expenses completely segregated from the start. 2. Don't underestimate the difficulty of your taxes - hire a tax professional. If you're smart enough to run your own business, it's natural to assume that you can save yourself the expense of hiring a tax professional to file your taxes. The truth is that there's a lot more to accounting then filling in forms, and a tax professional will be familiar with deductions you don't realize you're entitled to take, or inform you of an underpayment that might lead to trouble down the road. 3. Be realistic about upcoming expenses. When things are moving along swimmingly, it's natural to assume that the status quo will remain, but you need to be realistic and anticipate that office equipment will wear down or need to be upgraded, staffing needs will change, and overhead costs are unlikely to remain the same. By planning for future major expenses and setting aside funding for those eventualities, you will save yourselves many headaches in the future. 4. Don't forget your employees when calculating expenses. A lot of business owners will sit down to forecast their expenses or try to figure out where their money is going, but forget to give proper weight to the amount that they are spending on staffing expenses such as insurance, health care and payroll taxes. Your employees are generally one of your biggest assets, so it's important that when you're calculating costs, you make sure that you haven't forgotten about all of the expenses involved with keeping them, as well as with expanding. 5. Don't lose sight of your Accounts Receivables. If you were an employee of a business that failed to give you a paycheck, you'd be more than just upset - you'd take action to make sure that you get paid. Yet many owners of small businesses get so enmeshed in the minutia and big decisions of their day-to-day operations that they lose track of whether clients are paying promptly and what percentage of invoices remain open. Getting behind on your record keeping regarding accounts receivables lets things get so far behind that it becomes costly and difficult to collect, and you may end up not getting paid or creating negative feelings. Track payments as they come in, note how far behind payments due are, and take note of which clients are presenting you with collection problems. These tips are straightforward and simple, and following them can make a significant difference in your ability to keep your business on track, to keep your forecasts accurate, and to allow you to take action when it's needed. For more information on other steps you can take, contact this firm to make an appointment for a consultation. Tue, 19 May 2015 19:00:00 GMT Using the Home Sale Gain Exclusion for More than Just Your Home http://www.advancedfinancialtax.com/blog/using-the-home-sale-gain-exclusion-for-more-than-just-your-home/40512 http://www.advancedfinancialtax.com/blog/using-the-home-sale-gain-exclusion-for-more-than-just-your-home/40512 Advanced Financial Tax, LLC Article Summary: Home Sale Exclusion Primary Residence Second Home Fixer-upper Rental With careful planning, and provided the rules are followed, the tax code allows the home sale gain exclusion every two years. Let’s assume you own a home, perhaps a second (vacation) home, or maybe are even thinking about buying a fixer-upper and flipping it. With careful planning, it is possible to apply the full home sale exclusion to all three of the properties. Here is how it works. The tax code allows you to exclude up to $250,000 ($500,000 for married couples) of gain from the sale of your primary residence if you have lived in it and owned it for two of the five years immediately preceding the sale and you have not previously taken a home sale exclusion within the two years immediately preceding the sale. In addition, there is no limit on the number of times you can use the exclusion, as long as the requirements are met. It makes sense to start off by selling the home you currently live in because you probably already meet the two-out-of-five-years ownership and use tests. The next step, if you have a second home, would be to move into it and make it your primary residence. After you have lived there for two full years and it has been more than two years since the previous home was sold, you can sell the property and take the home sale exclusion again. If you are handy, and find the right property, the next possible step would be to purchase and occupy a fixer-upper while you make repairs and improvements in preparation for its eventual sale after the two-year ownership and occupancy rules have been met. When that time is up, you can sell the fixer-upper and take the third exclusion. This makes it possible for a married couple to exclude as much as $1,500,000 of home sale profit in just over four years if they follow the rules carefully and time the sales correctly. If you own a rental property, and you occupy the rental for two years prior to its sale, you will be able to exclude a portion of the gain for that property as well. Because so many rental owners were occupying their rentals before selling them and taking a home sale exclusion, Congress enacted a law barring the exclusion of gain attributable to rental periods after 2008. Thus, the home sale exclusion can only be used to exclude gain attributable to periods before 2009 and periods after 2008 in which the home was used as a primary residence. Example: You purchased and began renting a residence on July 1, 2005. On July 1, 2013, you occupied the property as your primary residence; and, on August 1, 2015, you sell the property for a gain of $230,000. You had owned the property for a total of 121 months, of which 67 were before 2009 or during which you occupied the property as your primary residence after 2008. Thus .5537 (67/121) of the gain is subject to the exclusion. As a result, $127,351 (.5537 x $230,000) of the gain qualifies for the exclusion. In the preceding example, had the gain exceeded the exclusion limits, $250,000 for single taxpayers and $500,000 married taxpayers, the exclusion would have been capped at the exclusion limits. There is one final issue to consider. If any of the residences were acquired though a tax-deferred (Sec 1031) exchange from another property, then the residence must be owned for a period of five years prior to its sale to qualify for the exclusion. Since situations may differ, we highly recommend that you consult with this office prior to initiating such a plan. Thu, 14 May 2015 19:00:00 GMT Home Mortgage Interest and Unmarried Couples http://www.advancedfinancialtax.com/blog/home-mortgage-interest-and-unmarried-couples/40497 http://www.advancedfinancialtax.com/blog/home-mortgage-interest-and-unmarried-couples/40497 Advanced Financial Tax, LLC 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 when one person in a 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 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 Tax Court decision when 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, 12 May 2015 19:00:00 GMT Safe-Harbor Home Office Deduction Is It Better For You? http://www.advancedfinancialtax.com/blog/safe-harbor-home-office-deduction-is-it-better-for-you/40446 http://www.advancedfinancialtax.com/blog/safe-harbor-home-office-deduction-is-it-better-for-you/40446 Advanced Financial Tax, LLC Article Highlights: Annual Election  Depreciation  Additional Office Expenses  Limitations & Carryover  Qualifications  Employee Issues  Usage Issues  Taxpayers can elect to take 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. Here are the details of this simplified method: Annual Election - A taxpayer may elect to take the safe-harbor method or the regular method on an annual basis. Thus, a taxpayer may freely switch between the methods each year. The election is made by choosing the method on a timely filed original return and is irrevocable for that year.   Depreciation - When the taxpayer elects the safe-harbor method, no depreciation deduction for the home is allowed, and the depreciation for the year is deemed to be zero.   Additional Office Expenses - Additional office expenses such as utilities, insurance, office maintenance, etc., are not allowed when the safe-harbor method is used.   Home Interest and Taxes - Prorated home interest and taxes are not allowed as an office expense when using the safe-harbor method. Instead, 100% of the home interest and taxes are deductible as usual on Schedule A.   Deduction Limited by Business Income - As is the case with the regular method, under the safe-harbor method the home office deduction is limited by the business income. For the safe harbor, the deduction cannot exceed the gross income derived from the qualified business use of the home for the taxable year reduced by the business deductions (deductions unrelated to the qualified business use of a home). However, unlike the regular method, any amount in excess of this gross income limitation is disallowed and may not be carried over and claimed as a deduction in any other taxable year.   Home Office Carryover - This cannot be used in a year in which the safe-harbor method is used. The carryover continues to future years and can only be used when the regular method is used.   Qualifications - A taxpayer must still meet the regular qualifications to use the safe-harbor method.   Reimbursed Employee - The safe-harbor method cannot be used by an employee who receives advances, allowances, or reimbursements for expenses related to qualified business use of his or her home under a reimbursement or other expense allowance arrangement with the employer.   Determining Square Footage - To determine the average square footage of the business, use these guidelines: o Square Feet Maximum - Never use more than 300 square feet for any month, even if the taxpayer has multiple businesses. Where there are multiple businesses, use a reasonable method to allocate between businesses. o Determining Average Square Feet for the Year - Use zero for months when there was no business use or when the business was not for a full year. o 15-Day Minimum - Don't count any month in which the business use is less than 15 days. As an example, a taxpayer begins using 400 square feet of her home for business on July 20, 2015, and continues using the space as a home office through the end of the year. Her average monthly allowable square footage for 2015 is 125 square feet (300 x 5 months = 1500/12 = 125).   Multiple Businesses - Where there are multiple businesses, only one method may be used for the year—either the regular or safe harbor.   Mixed-Use Property - A taxpayer who has a qualified business use of a home and a rental use for purposes of § 280A(c)(3) of the same home cannot use the safe-harbor method for the rental use.   Taxpayers Sharing a Home - Taxpayers sharing a home (for example, roommates or spouses, regardless of filing status), if otherwise eligible, may each use the safe-harbor method but not for a qualified business use of the same portion of the home. As an example, a husband and wife, if otherwise eligible and regardless of filing status, may each use the safe-harbor method for a qualified business use of the same home for up to 300 square feet of different portions of the home.    Depreciation Rate When Switching Methods - When the safe-harbor method is used and the taxpayer subsequently switches back to the regular method, use the depreciation factor from the appropriate optional depreciation table as if the property had been depreciated all along. When choosing between the methods, the following factors should be considered: o There is no reduction in basis for depreciation or depreciation recapture when using the safe-harbor method. o When using the regular method, the income limitation takes into account home interest, taxes, and other expenses before allowing the depreciation portion of the deduction. That is not true for the safe-harbor method as the interest, taxes, and other business-use-area expenses are not considered.  If you have questions related to this simplified method of claiming a deduction for the business use of your home, please give this office a call. Thu, 07 May 2015 19:00:00 GMT Tips for Taxpayers Starting a New Business http://www.advancedfinancialtax.com/blog/tips-for-taxpayers-starting-a-new-business/40429 http://www.advancedfinancialtax.com/blog/tips-for-taxpayers-starting-a-new-business/40429 Advanced Financial Tax, LLC Article Highlights: Business Entity Type  Types of Business Taxes  Keeping Good Records  Accounting Methods  Anyone starting a new business should be aware of his or her federal tax responsibilities. Here are several things you should know if you plan on opening a new business this year. First, you must decide what type of business entity you are going to establish. The type of business you open will determine which tax form has to be filed. The most common types of business are the sole proprietorship, partnership, corporation, and S corporation.   The type of business you operate will determine what taxes must be paid and how you pay them. The four general types of business tax are income tax, self-employment tax, employment tax, and sales or excise tax.   An employer identification number is used to identify a business entity. Most businesses need an EIN, and your business will definitely need one if you hire employees, regardless of the type of business entity selected. Please call this office to determine whether your business needs an EIN and get assistance in obtaining one if it does.   Good records will help ensure the successful operation of your new business. You may choose any record-keeping system suited to your business that clearly shows your income and expenses. Except in a few cases, the law does not require any special kinds of records. However, the business you are in will affect the types of records that will have to be kept for federal tax purposes. If you need assistance or guidance in setting up your business records, please give this office a call.   Every business taxpayer must figure taxable income on an annual accounting period called a tax year. The calendar year and the fiscal year are the most common tax years used.   Each taxpayer must also use a consistent accounting method, which is a set of rules for determining when to report income and expenses. The most commonly used accounting methods are the cash method and accrual method. Under the cash method, income is generally reported in the tax year it is received, and expenses are deducted in the tax year they are paid. Under an accrual method, income is generally reported in the tax year it was earned, if not yet received, and expenses are deducted in the tax year they are incurred, even though they are not yet paid.  If you are contemplating starting a business or if you already have one, please call this office if you need assistance with your accounting, bookkeeping, payroll or sales tax reporting, or other federal or state compliance issues. Tue, 05 May 2015 19:00:00 GMT How Long Are You on the Hook for a Tax Assessment? http://www.advancedfinancialtax.com/blog/how-long-are-you-on-the-hook-for-a-tax-assessment/40404 http://www.advancedfinancialtax.com/blog/how-long-are-you-on-the-hook-for-a-tax-assessment/40404 Advanced Financial Tax, LLC Article Highlights: Statute of Limitations  Filing Before April Due Date  Filing After April Due Date  Extension  Amended Returns  Three-year Statute Understatement Exceeds 25%  Ten-year Collection Period  Tax Records  A frequent question from taxpayers is: how long does the IRS have to question and assess additional tax on my tax returns? For most taxpayers who reported all their income, the IRS has three years from the date of filing the returns to examine them. This period is termed the statute of limitations. But wait - as in all things taxes, it is not that clean cut. Here are some complications: You file before the April due date - If you file before the April due date, the three-year statute of limitations still begins on the April due date. So filing early does not start an earlier running of the statute of limitations. For example, whether you filed your 2014 return on February 15, 2015 or April 15, 2015, the statute did not start running until April 15, 2015. You file after the April due date - The assessment period for a late-filed return starts on the day after the actual filing, whether the lateness is due to a taxpayer's delinquency, or under a filing extension granted by IRS. For example, say your 2014 return is on extension until October 15, 2015, and you actually file on September 1, 2015. The statute of limitations for further assessments by the IRS will end on September 2, 2018. So the earlier you file those extension returns, the sooner you start the running of the statute of limitations. If you want to be cautious you may wish to retain verification of when the return was filed. For electronically filed returns, you can retain the confirmation from the IRS accepting the electronically filed return. If you file a paper return, proof of mailing can be obtained from the post office at the time you mail the return. You file an amended tax return - If after filing an original tax return you subsequently discover you made an error, an amended return is used to make the correction to the original. The filing of the amended tax return does not extend the statute of limitation unless the amended return is filed within 60 days before the limitations period expires. If that occurs, the IRS generally has 60 days from the receipt of the return to assess additional tax. You understated your income by more that 25% - When a taxpayer underreports his or her gross income by more than 25%, the three-year statute of limitations is increased to six years. In determining if more than 25% has been omitted, capital gains and losses aren't netted; only gains are taken into account. These “omissions” don't include amounts for which adequate information is given on the return or attached statements. For this purpose, gross income, as it relates to a trade or business, means the total of the amounts received or accrued from the sale of goods or services, without reduction for the cost of those goods or services. You file three years late - Suppose you procrastinate and you file your return three years or more after the April due date for that return. If you owe money, you will have to pay what you owe plus interest and late filing and late payment penalties. If you have a refund due, you will forfeit that refund and perhaps get stuck with a $135 minimum late filing penalty. No refunds are issued three years after the filing due date. 10-year collection period - Once an assessment of tax has been made within the statutory period, the IRS may collect the tax by levy or court proceeding started within 10 years after the assessment or within any period for collection agreed upon by the taxpayer and the IRS before the expiration of the 10-year period. Remember not to discard your tax records until after the statute has run its course. When disposing of old tax records, be careful not to discard records that prove the cost of items that have not been sold. For example, you may have placed home improvement records in with your annual receipts for the year the improvement was made. You don't want to discard those records until the statute runs out for the year you sold the home. The same applies to purchase records for stocks, bonds, reinvested dividends, business assets, or anything you will sell in the future and need to prove the cost. If you are behind on filing your returns and would like to get caught up, please give this office a call. If you discovered you omitted something from your original return and would like to file an amended return, we can help with that as well. Thu, 30 Apr 2015 19:00:00 GMT Read This Before Tossing Old Tax Records http://www.advancedfinancialtax.com/blog/read-this-before-tossing-old-tax-records/36706 http://www.advancedfinancialtax.com/blog/read-this-before-tossing-old-tax-records/36706 Advanced Financial Tax, LLC Article Highlights: Reasons to Keep Records Statute of Limitations Maintaining Record of Asset Basis Now that your taxes have been completed for 2014, you are probably wondering what old records can be discarded. If you are like most taxpayers, you have records from years ago that you are afraid to throw away. It would be helpful to understand why the records must 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 dispose of them. With certain exceptions, the statute for assessing additional taxes 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 law. 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 from gross income an amount that is more than 25 percent of the income reported on a tax return. And, of course, the statutes don’t begin running until a return has been filed. There is no limit where a taxpayer files a false or fraudulent return to evade taxes. 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; add a year or so to that if you live in a state with a longer statute. Examples - Sue filed her 2011 tax return before the due date of April 15, 2012. She will be able to dispose of most of the 2011 records safely after April 15, 2015. On the other hand, Don files his 2011 return on June 2, 2012. He needs to keep his records at least until June 2, 2015. 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 the carte blanche discarding of records for a particular year because 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. These 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 that 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 to prove the amount of profit (or loss) you had on the sale. Stock and mutual fund statements (If you reinvest dividends) - Many taxpayers use the dividends they receive from stocks or mutual funds to buy more shares of the same stock or fund. The reinvested amounts add to the basis in the property and reduce gain when it is finally sold. Keep statements 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. For example, when the large $250,000 and $500,000 home exclusion was passed into law several years back, homeowners became lax in maintaining home improvement records, thinking the large exclusions would cover any potential appreciation in the home’s value. Now that exclusion may not always be enough to cover sale gains, particularly in markets where property values have steadily risen, so records of home improvements are vital. Records can be important, so please use caution when discarding them. What about the tax returns themselves? While disposing of the back-up documents used to prepare the returns can usually be done after the statutory period has expired, you may want to consider keeping a copy of your tax returns (the 1040 and attached schedules/statements plus your state return) indefinitely. If you just don’t have room to keep a copy of the paper returns, digitizing them is an option. If you have questions about whether or not to retain certain records, give this office a call first; it is better to make sure, before discarding something that might be needed down the road. Tue, 28 Apr 2015 19:00:00 GMT Tax Penalty For Not Having Insurance Ratchets Up In 2015 http://www.advancedfinancialtax.com/blog/tax-penalty-for-not-having-insurance-ratchets-up-in-2015/40367 http://www.advancedfinancialtax.com/blog/tax-penalty-for-not-having-insurance-ratchets-up-in-2015/40367 Advanced Financial Tax, LLC Article Highlights: Flat dollar amount penalty Percentage of income penalty Household income Modified adjusted gross income Tax filing threshold The penalty for not having minimum essential health insurance for yourself and other members of your tax family takes a substantial jump in 2015. For 2014, the penalty was the greater of the flat dollar amount ($95 for each adult plus $47.50 for each child under age 18, but no more than $285) or 1% of your household income minus your tax-filing threshold amount. For 2015, those amounts take a substantial jump to $325 for each adult and $162.50 for each child (but no more than $975) or 2% of household income minus the amount of your tax-filing threshold. Household income - Estimating the penalty requires you to project your household income for 2015. Household income includes the modified adjusted gross income (MAGI) for all members of your household for whom you claim a dependent exemption and who are required to file a tax return. As an example, say a parent has a teenage child who has a part-time job and earns $7,000 for the year. This $7,000 exceeds the child’s filing threshold (standard deduction for a single individual plus exemption allowance, but since the parents are claiming the child as a dependent, the child cannot claim his or her own exemption). So the child would be required to file a tax return, and the parents would be required to include the child’s MAGI when computing household income. Modified adjusted gross income – MAGI is your regular adjusted gross income with untaxed Social Security benefits, non-taxable interest and dividends, and the foreign earned income exclusion added back. Tax Filing Threshold – A taxpayer’s tax-filing threshold is the sum of the standard deduction and personal exemptions for the filer and spouse. Figuring the penalty – Take for example a family of three, including Dad, Mom and their teenage child. The household income for the family is $65,000, including the child’s earnings of $7,000, and they are subject to the penalty for the entire year of 2015. The flat dollar amount (per person) penalty is: $812.50 ($325 + $325 + $162.50) The percentage of income amount is household income less their filing threshold times 2%. In this example the tax-filing threshold for 2015 would be $20,600, which is the total of $12,600 (standard deduction for married joint) plus $4,000 each for the filer and spouse (personal exemptions). Note that although the dependent child’s income is included in household income (because the child is required to file a return), the child’s standard deduction and exemption allowance are not included in the filing threshold amount used in the calculation of the penalty. The percentage of income amount is $888 (($65,000 - $20,600) x 2%) Thus, in this example, the annual penalty for not being insured for the entire year is $888, the greater of the flat dollar amount or the percentage of income. When a family is uninsured for less than a full year, the penalty would be applied on a monthly basis, which for the example would be $74 per month. If you have questions related to how the penalty might apply to your family, please give this office a call. Thu, 23 Apr 2015 19:00:00 GMT Accounting Terms: Understanding the accounting term EBITDA and how to use it. http://www.advancedfinancialtax.com/blog/accounting-terms-understanding-the-accounting-term-ebitda-and-how-to-use-it/40369 http://www.advancedfinancialtax.com/blog/accounting-terms-understanding-the-accounting-term-ebitda-and-how-to-use-it/40369 Advanced Financial Tax, LLC Article Highlights Definition of EBITDA  Use EBITDA to compare businesses  One gauge of a business's financial health  The accounting term EBITDA is an acronym that is widely used. It stands for Earnings Before Interest, Taxation, Depreciation, and Amortization, and it is an extremely helpful tool for understanding how one business or industry is faring based on comparing it to others that are doing the same thing. EBITDA's value lies in the fact that it gives a very quick assessment of a business's earnings potential; but, because it is not part of generally accepted accounting principles, or GAAP, it is frequently excluded from a business's official financial statement. Still, when a business owner is looking to attract additional investment or a potential buyer, EBITDA is often what is provided because it gives an easily understandable glimpse at earnings potential using existing information. With EBITDA, those who are assessing different businesses for possible investment are able to get an at-a-glance look at how the company is performing and use it to compare the business against companies that may be capitalized or accounting differently. The calculation is a simple formula, but requires access to the following information about a business: Income  Expenses (excluding tax, interest, depreciation and amortization)  Interest  Taxes  Depreciation of operational assets, such as equipment  Amortization of intangible assets, such as patents  With those numbers in hand, the formula is: EBITDA = Revenue - Expenses (excluding tax, interest, depreciation and amortization) Or, more simply, EBITDA equals net income plus interest, taxes, depreciation and amortization. Whichever way you approach it, it is important to know that, as useful as EBITDA can be, it is only one way to gauge an organization's financial health and potential. Making the decision to invest in or purchase a business requires a comprehensive view that ensures that you are well informed. If you need additional assistance calculating a small business EBITDA or other accounting ratios, contact this office today to set up a consultation. Wed, 22 Apr 2015 19:00:00 GMT May 2015 Individual Due Dates http://www.advancedfinancialtax.com/blog/may-2015-individual-due-dates/31256 http://www.advancedfinancialtax.com/blog/may-2015-individual-due-dates/31256 Advanced Financial Tax, LLC May 11 - 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 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. Tue, 21 Apr 2015 19:00:00 GMT May 2015 Business Due Dates http://www.advancedfinancialtax.com/blog/may-2015-business-due-dates/31257 http://www.advancedfinancialtax.com/blog/may-2015-business-due-dates/31257 Advanced Financial Tax, LLC May 11 - Social Security, Medicare and Withheld Income Tax File Form 941 for the first quarter of 2015. 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 2015. This is also the due date for the non-payroll withholding deposit for April 2015 if the monthly deposit rule applies. Tue, 21 Apr 2015 19:00:00 GMT Is Your Refund Too High or Do You Owe Taxes? You Probably Need to Adjust Your W-4 http://www.advancedfinancialtax.com/blog/is-your-refund-too-high-or-do-you-owe-taxes-you-probably-need-to-adjust-your-w-4/40359 http://www.advancedfinancialtax.com/blog/is-your-refund-too-high-or-do-you-owe-taxes-you-probably-need-to-adjust-your-w-4/40359 Advanced Financial Tax, LLC Article Highlights: Large Refund or Tax Due Employers Withhold Based on W-4 IRS Online Withholding Calculator Self-employed Taxpayers If your income is primarily from wages and you received a very large refund—or worse, if you owed money—then your employer is not withholding the correct amount of tax (but it probably isn’t your employer’s fault). Sure, you like a big refund, but you have to remember you are only getting your own money back that was over-withheld in the first place. Why not bank it and have access to it all year long instead of providing Uncle Sam with an interest-free loan? Employers withhold tax based upon the information you provide them on Form W-4, and to adjust your withholding you will need to provide your employer with an updated W-4. Although the W-4 appears to be an easy form to fill out, this is where many taxpayers go wrong because they have other income, itemize their deductions or qualify for various tax credits. You can solve this problem by using the IRS’s online W-4 calculator that helps taxpayers determine the correct amount of allowances to claim on their W-4. It takes into account a multitude of issues, including itemized deductions, other income, tax credits, and tax already withheld. You will need the following available before using the IRS calculator: Your (and your spouse’s if you file jointly) most recent pay stub A copy of your most recent income tax return You will be required to estimate some values, so remember the results are only going to be as accurate as the input you provide. Click Here To Access The IRS Withholding Calculator Once you have determined the filing status and allowances to claim using the IRS calculator, download a copy of Form W-4, Employee's Withholding Allowance Certificate, fill it in and give it to your employer. Caution: If you are uncomfortable using the IRS’s online calculator, don’t understand some of the terminology, or have multiple jobs or a working spouse, you may need professional help to determine the correct number of W-4 allowances. Also the federal W-4 allowances may not translate properly for your state withholding. Tip: Once your employer has implemented the new W-4 allowance, double-check the withholding to make sure it is approximately what you had intended. It is not uncommon for errors to occur in an employer’s payroll department that could lead to unpleasant surprises at tax time. If you are self-employed, you generally pay estimated taxes instead of having payroll withholding. You may be self-employed and also have salaried employment, or your spouse may have payroll income or be self-employed. There are a multitude of possible combinations. If so, the IRS withholding calculator is not suitable for your needs, and you will probably need professional assistance in determining a combination of estimated taxes and payroll withholding. Please call this office for assistance in preparing your W-4s and determining your estimated tax payments. Tue, 21 Apr 2015 19:00:00 GMT Should You Keep Home Improvement Records? http://www.advancedfinancialtax.com/blog/should-you-keep-home-improvement-records/40355 http://www.advancedfinancialtax.com/blog/should-you-keep-home-improvement-records/40355 Advanced Financial Tax, LLC Article Highlights: Keeping home improvement records Home gain exclusion amounts Records may be required to avoid tax Many taxpayers don’t feel the need to keep home improvement records, thinking the potential gain will never exceed the amount of the exclusion for home gains ($250,000 or $500,000 if both filer and spouse qualify) if they meet the 2-out-of-5-year use and ownership tests. Here are some situations when having home improvement records could save taxes: (1) The home is owned for a long period of time, and the combination of appreciation in value due to inflation and improvements exceeds the exclusion amount. (2) The home is converted to a rental property, and the cost and improvements of the home are needed to establish the depreciable basis of the property. (3) The home is converted to a second residence, and the exclusion might not apply to the sale. (4) You suffer a casualty loss and retain the home after making repairs. (5) The home is sold before meeting the 2-year use and ownership requirements. (6) The home only qualifies for a reduced exclusion because the home is sold before meeting the 2-year use and ownership requirements. (7) One spouse retains the home after a divorce and is only entitled to a $250,000 exclusion instead of the $500,000 exclusion available to married couples. (8) There are future tax law changes that could affect the exclusion amounts. Everyone hates to keep records, but consider the consequences if you have a gain and a portion of it cannot be excluded. You will be hit with capital gains (CG), and there is a good chance the CG tax rate will be higher than normal simply because the gain pushed you into a higher CG tax bracket. Before deciding not to keep records, carefully consider the potential of having a gain in excess of the exclusion amount. If you have questions related to the home gain exclusion or questions about how keeping home improvement records might directly affect you, please give this office a call. Thu, 16 Apr 2015 19:00:00 GMT Is Your Hobby a For-Profit Endeavor? http://www.advancedfinancialtax.com/blog/is-your-hobby-a-for-profit-endeavor/34881 http://www.advancedfinancialtax.com/blog/is-your-hobby-a-for-profit-endeavor/34881 Advanced Financial Tax, LLC Article Highlights: Hobby Versus For-Profit Endeavor Factors Used To Determine For-Profit Three out of Five Rule Hobby Deductions Whether an activity is a hobby or a business may not be apparent to the customers of the endeavor, but distinguishing the difference is necessary for tax purposes because the tax treatments are substantially different. The IRS provides appropriate guidelines when determining whether an activity is engaged in for profit, such as a business or investment activity, or if it is engaged in as a hobby. Internal Revenue Code Section 183 (Activities Not Engaged in for Profit) limits deductions that can be claimed when an activity is not engaged in for profit. IRC 183 is sometimes referred to as the “hobby loss rule.” This article provides information that is helpful in determining if an activity qualifies as an activity engaged in for profit and what limitations apply if the activity was not engaged in for profit. Is your hobby really an activity engaged in for profit? In general, taxpayers may deduct ordinary and necessary expenses for conducting a trade or business or for the production of income. Trade or business activities and activities engaged in for the production of income are activities engaged in for profit. The following factors, although not all-inclusive, may help you determine whether your activity is an activity engaged in for profit or a hobby: Does the time and effort put into the activity indicate an intention to make a profit? Do you depend on income from the activity? If there are losses, are they due to circumstances beyond your control or did they occur in the start-up phase of the business? Have you changed methods of operation to improve profitability? Do you have the knowledge needed to carry on the activity as a successful business? Have you made a profit in similar activities in the past? Does the activity make a profit in some years? Do you expect to make a profit in the future from the appreciation of assets used in the activity? An activity is presumed to be engaged in for profit if it makes a profit in at least three of the last five tax years, including the current year (or at least two of the last seven years for activities that consist primarily of breeding, showing, training, or racing horses). If an activity is not for profit, losses from that activity may not be used to offset other income. An activity produces a loss when related expenses exceed income. The limit on not-for-profit losses applies to individuals, partnerships, estates, trusts, and S corporations. It does not apply to corporations other than S corporations. Hobby deductions If it is determined that your activity is not for profit, allowable deductions cannot exceed the gross receipts for the activity. Deductions for hobby activities are claimed as itemized deductions on Schedule A and must be taken in the following order and only to the extent stated in each of the three categories: Expenses that a taxpayer would otherwise be allowed to deduct, such as home mortgage interest and taxes, may be taken in full. Deductions that don’t result in an adjustment to the basis of property, such as advertising, insurance premiums, and wages, may be taken next, to the extent that gross income for the activity is more than the deductions from the first category. Deductions that reduce the basis of property, such as depreciation and amortization, are taken last, but only to the extent that gross income for the activity is more than the deductions taken in the first two categories. If you have questions related to your specific business or hobby circumstances, please give this office a call. Tue, 14 Apr 2015 19:00:00 GMT Do I Have to File a Tax Return? http://www.advancedfinancialtax.com/blog/do-i-have-to-file-a-tax-return/40338 http://www.advancedfinancialtax.com/blog/do-i-have-to-file-a-tax-return/40338 Advanced Financial Tax, LLC Article Highlights: When You Are Required to File Self-Employed Taxpayers Filing Thresholds Benefits of Filing Even When Not Required to File Refundable Tax Credits This is a question many taxpayers ask during this time of year, and the question is far more complicated than people believe. To fully understand, we need to consider that there are times when individuals are REQUIRED to file a tax return, and then there are times when it is to individuals’ BENEFIT to file a return even if they are not required to file. When individuals are required to file: Generally, individuals are required to file a return if their income exceeds their filing threshold, as shown in the table below. The filing thresholds are the sum of the standard deduction for individual(s) and the personal exemption for the taxpayer and spouse (if any). Taxpayers are required to file if they have net self-employed income in excess of $400, since they are required to file self-employment taxes (the equivalent to payroll taxes for an employee) when their net self-employed income exceeds $400. Taxpayers are also required to file when they are required to repay a credit or benefit. For example, taxpayers who underestimated their income when signing up for insurance on the marketplace and received a higher advanced premium tax credit than they were entitled to are required to repay part of it. Filing is also required when a taxpayer owes a penalty, even though the taxpayer’s income is below the filing threshold. This can occur, for example, when a taxpayer has an IRA 6% early withdrawal penalty or the 50% penalty for not taking a required IRA distribution. 2014 – Filing Thresholds Filing Status Age Threshold Single Under Age 65 Age 65 or Older $10,15011,700 Married Filing Jointly Both Spouses Under 65One Spouse 65 or OlderBoth Spouses 65 or Older $20,30021,500 22,700 Married Filing Separately Any Age 3,950 Head of Household Under 6565 or Older $13,05014,600 Qualifying Widow(er)with Dependent Child Under 6565 or Older $16,35017,550 When it is beneficial for individuals to file: There are a number of benefits available when filing a tax return that can produce refunds even for a taxpayer who is not required to file: Withholding refund – A substantial number of taxpayers fail to file their return even when the tax they owe is less than their prepayments, such as payroll withholding, estimates, or a prior overpayment. The only way to recover the excess is to file a return. Earned Income Tax Credit (EITC) – If you worked and did not make a lot of money, you may qualify for the EITC. The EITC is a refundable tax credit, which means you could qualify for a tax refund. The refund could be as high as several thousand dollars even when you are not required to file. Additional Child Tax Credit – This refundable credit may be available to you if you have at least one qualifying child. American Opportunity Credit – The maximum credit per student is $2,500, and the first four years of postsecondary education qualify. Up to 40% of that credit is refundable when you have no tax liability and are not required to file. Premium Tax Credit – Lower-income families are entitled to a refundable tax credit to supplement the cost of health insurance purchased through a marketplace. To extent the credit is greater than the supplement provided by the marketplace, it is refundable even if there is no other reason to file. DON’T PROCRASTINATE! There is a three-year statute of limitations on refunds, and after it runs out, any refund due is forfeited. The statute is three years from the due date of the tax return. So the refund period expires for 2014 returns, which were due in April of 2015, on April 16, 2018.For more information about filing requirements and your eligibility to receive tax credits, please contact this office. Thu, 09 Apr 2015 19:00:00 GMT Individual Estimated Tax Payments for 2015 Start Soon http://www.advancedfinancialtax.com/blog/individual-estimated-tax-payments-for-2015-start-soon/38793 http://www.advancedfinancialtax.com/blog/individual-estimated-tax-payments-for-2015-start-soon/38793 Advanced Financial Tax, LLC 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, 07 Apr 2015 19:00:00 GMT Are You Leaving Tax Money On The Table? http://www.advancedfinancialtax.com/blog/are-you-leaving-tax-money-on-the-table/40330 http://www.advancedfinancialtax.com/blog/are-you-leaving-tax-money-on-the-table/40330 Advanced Financial Tax, LLC Article Highlights: Unclaimed Refunds Over-Withholding Earned Income Tax Credit Child Tax Credit American Opportunity Credit (AOTC) Premium Tax Credit (PTC) Refund Statute of Limitations Each year the IRS reports about $1 billion in unclaimed refunds for individuals who did not file a tax return. The IRS estimates that approximately half of the unclaimed refunds are for amounts greater than $600. You may not have filed, thinking that because you don’t itemize and your employer is withholding tax that you don’t need to file. But there is a good chance you are leaving money on the table by not filing. Consider the following: Over-Withholding - Your employer may have withheld more than you owe, as withholding is not an exact science. But you have to file to get the excess back. Earned Income Tax Credit (EITC) – An EITC is a credit for lower-income taxpayers. If you worked and earned less than $52,427 last year, you could receive the EITC as a refund if you qualify with or without a child. The credit can be as much $6,143 and is fully refundable. This is a very lucrative credit, but you have to file to benefit from it. Child Tax Credit – If you have at least one child under the age of 17 you probably qualify for the Child Tax Credit. Generally this credit is non-refundable (can only be used to reduce taxes owed). However, if you work, your income is low to moderate and you don’t use the full credit amount to offset taxes, a portion of the $1,000 per child credit may be refundable. American Opportunity Tax Credit (AOTC) - The AOTC is available for four years of post-secondary education expenses and can result in a credit of up to $2,500 per eligible student enrolled at least half time for at least one academic period during the year. Up to 40% of the credit is refundable, so even if you don’t owe any taxes, you may still qualify for the credit. But to claim the credit you must file a return. Premium Tax Credit (PTC) – If you acquired your health insurance last year through a government marketplace, you probably qualify for an insurance subsidy in the form of the PTC. But you have to file to get the credit. If you received the PTC in advance to reduce your premiums, as did most individuals who used a health insurance marketplace, you must file a tax return and reconcile the advance PTC against the actual PTC. If you have not filed in the past, the statute of limitations for a refund is 3 years from the unextended due date of the return, so if you have a refund coming for past years you should file before the statute expires. For example, to claim a refund for a 2012 return you will need to file the 2012 return no later than Wednesday, April 15, 2016, or the refund is gone forever. This firm has expertise in preparing tax returns for all years, including past years, so please contact this office for assistance so you can get the refunds you are entitled to. Thu, 02 Apr 2015 19:00:00 GMT Refund Statute Expiring http://www.advancedfinancialtax.com/blog/refund-statute-expiring/38758 http://www.advancedfinancialtax.com/blog/refund-statute-expiring/38758 Advanced Financial Tax, LLC Article Highlights: 2011 refunds are in jeopardy Filing deadline Lost benefits Mailing instructions If you have not yet filed your 2011 federal tax return and have a refund coming, time is running out! The IRS estimates that there are in excess of 1.1 million taxpayers who have not filed their 2011 tax returns and that there is in excess of $1.1 billion dollars 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, 2015 to claim a refund for 2011. Otherwise, the money becomes the property of the U.S. Treasury. By failing to file a return, people stand to lose more than a refund of taxes withheld or paid during 2011. Many low- and moderate-income workers may not have claimed the Earned Income Tax Credit (EITC). The EITC helps individuals and families with incomes below certain thresholds, which for unmarried individuals in 2011 were $40,964 for those with two or more children, $36,052 for people with one child, and $13,660 for those with no children. Each amount is $5,080 more for married joint filers. In addition, parents eligible to claim the refundable portion of the child tax credit will forfeit that benefit if they don’t file a return. When filing a 2011 return, the law requires that the return be properly addressed, mailed and postmarked by the April 15th date. There is no penalty for filing a late return qualifying for a refund. As a reminder, taxpayers seeking a 2011 refund should know that their checks will be held if they have not filed tax returns for 2009 and 2010. 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. If this office can be of assistance in bringing you current with your tax filing obligations, please call. Tue, 31 Mar 2015 19:00:00 GMT Can't Pay Your Taxes by the April Due Date? http://www.advancedfinancialtax.com/blog/cant-pay-your-taxes-by-the-april-due-date/40276 http://www.advancedfinancialtax.com/blog/cant-pay-your-taxes-by-the-april-due-date/40276 Advanced Financial Tax, LLC Article Highlights: If you can't pay  Loans  Credit card payments  IRS Installment agreement  Retirement funds  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 tax 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 the 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, since 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 need for an installment agreement by providing the IRS with a Collection Information Statement (financial statements). Taxpayers may also pay down their balance due 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 age 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, 26 Mar 2015 19:00:00 GMT Writing Off Your Start-Up Expenses http://www.advancedfinancialtax.com/blog/writing-off-your-start-up-expenses/39785 http://www.advancedfinancialtax.com/blog/writing-off-your-start-up-expenses/39785 Advanced Financial Tax, LLC Article Highlights: $5,000 first-year start-up expense write-off Start-up expense write-off limitations Timely filing requirements Qualifying start-up expenses Business owners – especially those operating small businesses – may be helped by a tax law allowing them to deduct up to $5,000 of the 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 must also 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 start-up expenses that can be claimed as a deduction under this special election. Here’s how to determine the deduction: 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 in start-up expenses that 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. 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, and 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 attempting to buy a specific business are capital expenses that aren’t treated as start-up costs. If you have a question related to start-up expenses, please give this office a call. Tue, 24 Mar 2015 19:00:00 GMT How QuickBooks' Custom Fields Can Provide Better Business Insight http://www.advancedfinancialtax.com/blog/how-quickbooks-custom-fields-can-provide-better-business-insight/40253 http://www.advancedfinancialtax.com/blog/how-quickbooks-custom-fields-can-provide-better-business-insight/40253 Advanced Financial Tax, LLC QuickBooks' customizability makes it flexible enough for countless business types. Custom fields are a big part of that. QuickBooks makes it possible for your business to create very detailed records for customers, vendors, employees, and items. In fact, you may find that you rarely make use of every field each contains. But you may also find that there are additional fields that you'd like to see in your predefined record formats. That's where custom fields come in. QuickBooks lets you add extra fields and specify what their labels should be. You can define up to 12 total fields for use in customer, vendor, and/or employee records. QuickBooks treats these just as it treats your built-in fields. They appear in the records themselves, of course, and are included when you export a file containing them. You can also search for them in reports. People RecordsThere are separate processes for defining fields for your individual and company contacts and your items. Let's look at how you can set up custom fields for customers, vendors, and employees first. Go to your Customer Center and open a blank Customer record (in newer versions of QuickBooks, you'll click on New Customer & Job in the upper left corner, and then click New Customer). Then click the Additional Info tab in the left vertical pane of the New Customer window, then click on the Define Fields button in the lower right. This window will open (with blank fields): Figure1: You can create up to 12 total custom fields that will be shared by customers, vendors, and employees. It's easy to create your custom field labels. Simply type a word or short phrase on a line under Label, and then click in the box(es) on the same line in the appropriate column(s). While it's possible that you would want to include the same field in multiple record types, you'll most likely have separate labels for each. Consider carefully before creating custom field labels. Ask yourself questions like: What do I want to know about customers/vendors/employees that isn't already covered in the pre-built record formats?  What kinds of information will I want to make available in report filters?  How will I want to separate out individuals for communications like emails, memos, special sale invitations, etc.  Remember that you'll have to go back into existing records and fill in these blanks in order to be consistent. You're not required to complete them, but your searches, reports, etc. will not be comprehensive if you don't. As always, you can consult with us if you want some suggestions. Item Records The custom fields we just created are generally only used internally. That is, they won't automatically appear on sales forms, purchase orders, etc. You may decide that some custom fields in item records, on the other hand, do need to be available on some forms. For example, you might sell shirts in multiple sizes, colors, and styles. To start creating them, open the Lists menu and select Item List. Click the down arrow on the Item menu in the lower left, then click New. Since you will be selling similar items that you'll be keeping in stock, select Inventory Part under TYPE. Then click on the Custom Fields button over on the right and then Define Fields. Figure 2: If you sell similar items that are available with different characteristics, you'll want to create custom fields. As you did with the earlier custom fields, enter a word or phrase under Label and then click in the Use column. After you've entered up to five fields, click OK. A Complicated Process This is where the simplicity of creating and using custom fields for items in reports and transaction forms ends. If you sell t-shirts in various sizes and colors, you're going to need our help in order to see true inventory levels in reports and add those custom fields to sales and purchase transaction forms. Figure 3: Adding custom fields to QuickBooks' standard transaction forms is possible, but you'll need our assistance to make sure inventory tracking is set up right. It may be that you need more inventory-tracking tools than are offered in your version of QuickBooks. If that's the case, we can help you either add an application that will meet your needs or suggest an upgrade. Mon, 23 Mar 2015 19:00:00 GMT April 2015 Individual Due Dates http://www.advancedfinancialtax.com/blog/april-2015-individual-due-dates/36567 http://www.advancedfinancialtax.com/blog/april-2015-individual-due-dates/36567 Advanced Financial Tax, LLC April 1 - Last Day to Withdraw Required Minimum DistributionLast day to withdraw 2014’s required minimum distribution from Traditional or SEP IRAs for taxpayers who turned 70½ in 2014. 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 2014 were required to make their 2014 IRA withdrawal by December 31, 2014.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 2014 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, 2015 to file your 2014 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 $1,900 or more in 2014 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 2013 or 2014 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 2015 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 $1,000 (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 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 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 2014. Sun, 22 Mar 2015 19:00:00 GMT April 2015 Business Due Dates http://www.advancedfinancialtax.com/blog/april-2015-business-due-dates/36568 http://www.advancedfinancialtax.com/blog/april-2015-business-due-dates/36568 Advanced Financial Tax, LLC April 15 - Social Security, Medicare and Withheld Income Tax If the monthly deposit rule applies, deposit the tax for payments in March. April 15 - Corporations The first installment of 2015 estimated tax of a calendar year corporation is due. April 15 - Partnerships File a 2014-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 2015. 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 11 to file the return.April 30 - Federal Unemployment Tax Deposit the tax owed through March if it is more than $500. Sun, 22 Mar 2015 19:00:00 GMT Tax Break for Sales of Inherited Homes http://www.advancedfinancialtax.com/blog/tax-break-for-sales-of-inherited-homes/40246 http://www.advancedfinancialtax.com/blog/tax-break-for-sales-of-inherited-homes/40246 Advanced Financial Tax, LLC Article Highlights: Inherited Basis  Certified Appraisals  Loss On Sale  Potential Law Change  People who inherit property are often concerned about the taxes they will owe on any gain from that property's sale. After all, the property may have been purchased years ago at a low cost by a deceased relative but may now have vastly appreciated in value. The usual question is: “Won't the taxes at sale be horrendous?” Clients are usually pleasantly surprised by the answer—that special rules apply to figuring the tax on the sale of any inherited property. Instead of having to start with the decedent's original purchase price to determine gain or loss, the law allows taxpayers to use the value at the date of the decedent's death as a starting point (sometimes an alternate date is chosen). This often means that the selling price and the inherited basis of the property are practically identical, and there is little, if any, gain to report. In fact, the computation frequently results in a loss, particularly when it comes to real property on which large selling expenses (realtor commissions, etc.) must be paid. This also highlights the importance of having a certified appraisal of the home to establish the home's tax basis. If an estate tax return or probate is required, a certified appraisal will be completed as part of those processes. If not, one must be obtained to establish the basis. It is generally not acceptable just to refer to a real estate agent's estimation of value or comparable sale prices if the IRS questions the date of death value. The few hundred dollars it may cost for a certified appraisal will be worth it if the IRS asks for proof of the basis. Another issue is whether a loss on an inherited home is deductible. Normally, losses on the sale of personal use property such as one's home are not deductible. However, unless the beneficiary is living in the home, the home becomes investment property in the hands of the beneficiary, and a loss is deductible but subject to a $3,000 ($1,500 if married and filing separately) per year limitation for all capital losses with any unused losses carried forward to a future year. In some cases, courts have allowed deductions for losses on an inherited home if the beneficiary also lives in the home. In order to deduct such a loss, a beneficiary must try to sell or rent the property immediately following the decedent's death. In one case, where a beneficiary was also living in the house with the decedent at the time of death, loss on a sale was still deductible, when the heir moved out of the home within a “reasonable time” and immediately attempted to sell or rent it. This treatment could change in the future, however. The President's Fiscal Year 2016 Budget Proposal includes a proposal that would eliminate any step up in basis at the time of death and would require payment of capital gains tax on the increase in the value of the home at the time it is inherited. If you have questions related to inheritances or home sales, please give this office a call. Thu, 19 Mar 2015 19:00:00 GMT Tax Filing Deadline Rapidly Approaching http://www.advancedfinancialtax.com/blog/tax-filing-deadline-rapidly-approaching/38777 http://www.advancedfinancialtax.com/blog/tax-filing-deadline-rapidly-approaching/38777 Advanced Financial Tax, LLC Article Highlights: Balance due payments Contributions to a Roth or traditional IRA Estimated tax payments for the first quarter of 2015 Individual refund claims for tax year 2011 Just a reminder to those who have not yet filed their 2014 tax return that April 15, 2015 is the due date to either file your return and pay any taxes owed, or file for the automatic six-month extension and pay the tax you estimate to be due. In addition, the April 15, 2015 deadline also applies to the following: Tax year 2014 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 2014 contributions to a Roth or traditional IRA – April 15 is the last day contributions for 2014 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 2015 – Taxpayers, especially those who have filed for an extension, are cautioned that the first installment of the 2015 estimated taxes are 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. If the refund won’t be enough to fully cover the April 15 installment, you may need to make a payment with the April 15 voucher. Please call this office for any questions. Individual refund claims for tax year 2011 – The regular three-year statute of limitations expires on April 15 for the 2011 tax return. Thus, no refund will be granted for a 2011 original or amended return that is filed after April 15. Caution: The statute does not apply to balances due for unfiled 2011 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 2015 estimated tax vouchers if needed, may be prepared. 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. Tue, 17 Mar 2015 19:00:00 GMT Family Home Loan Interest May Not Be Deductible http://www.advancedfinancialtax.com/blog/family-home-loan-interest-may-not-be-deductible/38547 http://www.advancedfinancialtax.com/blog/family-home-loan-interest-may-not-be-deductible/38547 Advanced Financial Tax, LLC Article Highlights: Qualified residence interest is deductible interest that is 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 that any indebtedness that is incurred in acquiring, constructing, or substantially improving any qualified residence of the taxpayer 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 those situations, it is also not uncommon for a loan to be undocumented or documented with an unsecured note, and the unintended result that the homebuyer 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 that a taxpayer may have for purposes of claiming a home mortgage interest tax deduction, but those details are not covered in this article, which focuses 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 with 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. Thu, 12 Mar 2015 19:00:00 GMT Local Lodging May Be Deductible http://www.advancedfinancialtax.com/blog/local-lodging-may-be-deductible/40242 http://www.advancedfinancialtax.com/blog/local-lodging-may-be-deductible/40242 Advanced Financial Tax, LLC Article Highlights: Away-from-home lodging  Non-away-from-home lodging  Requirements to be deductible  Substantiation requirements  A business deduction is allowed for lodging when a taxpayer travels away from his or her “tax home.” A taxpayer's tax home is generally the location (such as a city or metropolitan area) of a taxpayer's main place of business (not necessarily the place where he/she lives). The traveling away from his or her tax home condition creates problems for individuals attending conferences and training sessions within their tax homes that include extended-hour events that preclude traveling back home between the days of the events. To alleviate this problem, IRS proposed regulations, upon which taxpayers may rely, permit certain non-away-from-home lodging expenses to be treated as deductible business expenses by employers and tax-free working condition fringe benefits or accountable-plan reimbursements to employees. Under the proposed regulations, local lodging expenses are treated as ordinary and necessary business expenses if all of these conditions are met: (1) The lodging is necessary for the individual to participate fully in or be available for a bona fide business meeting, conference, training activity, or other business function. (2) The lodging is for a period that does not exceed five calendar days and does not recur more frequently than once per calendar quarter. (3) If the individual is an employee, his or her employer requires him or her to remain at the activity or function overnight. (4) The lodging is not lavish or extravagant under the circumstances and does not provide any significant element of personal pleasure, recreation, or benefit. Example: A business conducts business-related sales training sessions at a hotel and conference center near its main office. The employer requires both its field and in-house sales force to attend the training and stay at the hotel overnight for the bona fide purpose of facilitating the training. If the company pays the lodging costs directly to the hotel, the stay is a working condition fringe benefit to all attendees (even to employees who live in the area who are not on travel status) and the company may deduct the cost as an ordinary and necessary business expense. If the employees pay for the lodging costs and are reimbursed by the company, the reimbursement is of the accountable plan variety and is tax-free to the employees and deductible by the company as an ordinary and necessary business expense. Example: If Warren, a locally based, self-employed consultant, were required by a company to attend the sessions and stay at the hotel, he could deduct the expense if he paid for it himself or exclude the expense if he were reimbursed by the company after accounting for it in full for his costs. Substantiation requirements - Generally lodging expenses are deductible only if they are substantiated in full (record of time, place, amount, and business purpose, plus paid bills or receipts). The expenses can't be substantiated using the lodging component of the federal per-diem rate. If you have questions about the deduction and substantiation of business-related lodging expenses, please give this office a call. Tue, 10 Mar 2015 19:00:00 GMT Installment Sale - a Useful Tool to Minimize Taxes http://www.advancedfinancialtax.com/blog/installment-sale--a-useful-tool-to-minimize-taxes/40233 http://www.advancedfinancialtax.com/blog/installment-sale--a-useful-tool-to-minimize-taxes/40233 Advanced Financial Tax, LLC 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 expose the gain to higher than normal capital gains rates and subject the gain to the 3.8% surtax on net investment income added by Obamacare. Capital gains rates: Long-term capital gains can be taxed at 0%, 15%, or 20% depending upon the taxpayer's regular tax bracket for the year. At the low end, 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%. As you can see, larger gains push the taxpayer into higher capital gains rates. Surtax on net investment income - Tax law treats capital gains (other than those derived from a trade or business) as investment income upon which higher-income taxpayers are subject to a 3.8% surtax on net investment income. A large gain generally pushes a taxpayer's income over the threshold for 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.  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. For a sale to qualify as an installment sale, at least one payment must be received after the year in which the sale occurs. Installment sales are most frequently used when the property that is sold is real estate, and cannot be used to report the sale of publicly traded stock or securities. 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. Thus in the example, by using the installment method the income for the year was reduced by $224,798 ($281,000 - $56,202). How that helps the taxpayer's overall tax liability depends on the taxpayer's other income and circumstances. 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 5 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 needs to be paid to the tax consequences when 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 whether an installment sale will fit your particular needs and set of circumstances, please contact this office for assistance. Thu, 05 Mar 2015 19:00:00 GMT Checking the Status of Your Federal Tax Refund is Easy http://www.advancedfinancialtax.com/blog/checking-the-status-of-your-federal-tax-refund-is-easy/40221 http://www.advancedfinancialtax.com/blog/checking-the-status-of-your-federal-tax-refund-is-easy/40221 Advanced Financial Tax, LLC Article Highlights 24/7 access  How quickly posted  Direct deposit  Information needed to use  If you already filed your federal tax return and are due a refund, you can check the status of your refund online. Where's My Refund? is an interactive tool on the IRS web site. Whether you split your refund among several accounts, opted for direct deposit into one account, or asked the IRS to mail you a check, Where's My Refund? will give you online access to your refund information nearly 24 hours a day, 7 days a week. If you e-file, you can get refund information 24 hours after the IRS acknowledges receipt of your return. Nine out of 10 taxpayers typically receive refunds in less than 21 days when they use e-file with direct deposit. If you file a paper return, refund information will be available starting four weeks after mailing your return. When checking the status of your refund, have a copy of your federal tax return handy. To access your personalized refund information, you must enter: Your Social Security Number (or Individual Taxpayer Identification Number);  Your Filing Status (Single, Married Filing Joint Return, Married Filing Separate Return, Head of Household, or Qualifying Widow(er)); and  The exact refund amount shown on your tax return.  Once your personal information has been entered, one of several personalized responses may come up, including the following:  Acknowledgement that your return was received and is in processing.  The mailing date or direct deposit date of your refund.  Notice that the IRS could not deliver your refund due to an incorrect address. You can update your address online using the Where's My Refund? feature.  Where's My Refund? also includes links to customized information based on your specific situation. The links guide you through the steps to resolve any issues affecting your refund. For example, if you do not get the refund within 28 days from the original IRS mailing date shown on Where's My Refund?, you can start a refund trace online. Where's My Refund? is also accessible to visually impaired taxpayers who use the Job Access with Speech screen reader used with a Braille display and is compatible with different JAWS modes. IRS2Go is the IRS' first smartphone application that lets taxpayers check on the status of their tax refund. Apple users can download the free IRS2Go application by visiting the Apple App Store. Android users can visit the Google Play Store to download the free IRS2Go app. Where's My Refund? provides the most up-to-date information the IRS has. There's no need to call the IRS unless Where's My Refund? tells you to do so. Where's My Refund? is updated every 24 hours - usually overnight - so you only need to check once a day. Please call this office if you encounter problems. Tue, 03 Mar 2015 19:00:00 GMT Turning 70 1/2 This Year? http://www.advancedfinancialtax.com/blog/turning-70-12-this-year/40202 http://www.advancedfinancialtax.com/blog/turning-70-12-this-year/40202 Advanced Financial Tax, LLC Article Highlights: Turning 70 1/2  Traditional IRA Contributions  Excess Contributions Penalty Required Minimum Distributions  Still Working Exception  Excess Accumulation Penalty  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 from then on) 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. If you are married to a non-working or low-earning spouse who has not yet reached age 70 1/2 and you have earned income, your earnings can still be used to qualify your spouse for a contribution to a spousal IRA, even if you are 70 1/2 or older and can't contribute to your traditional IRA.   Required Minimum Distributions (RMDs) - 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 by April 1 of the subsequent year. That means two distributions must be made in the subsequent year: the delayed distribution and the distribution for that year. In the following years, your annual RMD must be taken by December 31 of each 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 70 1/2. 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 2015, but chose to continue working and did not retire until June of 2017. 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, 2018. 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 an 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 waive 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. Thu, 26 Feb 2015 19:00:00 GMT UNDERSTANDING THE LANGUAGE OF TAXES http://www.advancedfinancialtax.com/blog/understanding-the-language-of-taxes/824 http://www.advancedfinancialtax.com/blog/understanding-the-language-of-taxes/824 Advanced Financial Tax, LLC Part of our increasingly complicated Federal income tax structure is a myriad of acronyms and abbreviations. Understanding the meaning of the more frequently encountered terminology can lead to a better comprehension of the complex tax situations that a taxpayer might encounter. This section explains some common terminology and provides an overview of their application. Wed, 25 Feb 2015 19:00:00 GMT Will the Interest on Your Vehicle Loan be Deductible? http://www.advancedfinancialtax.com/blog/will-the-interest-on-your-vehicle-loan-be-deductible/40198 http://www.advancedfinancialtax.com/blog/will-the-interest-on-your-vehicle-loan-be-deductible/40198 Advanced Financial Tax, LLC Article Highlights: Vehicle loan interest  Consumer loans secured by the vehicle  Using home equity loans to create deductibility  Exercising restraint when using home equity  Whether or not the interest you pay on a loan to acquire a vehicle is deductible for tax purposes depends how the vehicle is being used (for business or personal purposes), the tax form on which the expenses are being deducted, and the type of loan. If the loan were a consumer loan secured by the vehicle, then the following rules would apply: If the vehicle is being used partially for business and the expenses are being deducted on your self-employed business schedule, then the business portion of the interest will be deductible as business interest, but the personal portion will not.   If the vehicle is being used partially for business as an employee and the expenses are being deducted as an itemized deduction, then neither the business portion nor the personal portion of the interest will be deductible.   If the vehicle is entirely for personal use, then none of the interest will be deductible, because the only interest that is still deductible as an itemized deduction is home mortgage interest and investment interest.  As an alternative to a nondeductible consumer loan, you might consider acquiring that vehicle with a home equity line of credit. Generally, current law allows individual taxpayers to borrow up to $100,000 of home equity and deduct the interest on that loan as home mortgage interest. This would also apply to the purchase of a vehicle or motor home. Using a home equity line will generally make the interest deductible. Before borrowing against the home, you should consider the following: Treat the home equity loan like a consumer loan and pay it off over the same period of time you would have had to pay the consumer loan. Otherwise, you may reach retirement age without having the home paid for.   When buying a car, you can sometimes get very favorable interest rates or a rebate.  To determine which is best, compare the difference in total loan payments over the life of the loans to the rebate amount. It is also good practice to make sure the benefit of making the interest deductible is greater by using the home equity line of credit than the benefit of the low interest consumer loan or the rebate.   If there is any chance of defaulting on the loan, the repercussions from defaulting on a home loan are far more serious than on consumer debt.  If you need assistance in deciding on a course of action, please call our office.  Tue, 24 Feb 2015 19:00:00 GMT Above-the-Line Deduction http://www.advancedfinancialtax.com/blog/above-the-line-deduction/17 http://www.advancedfinancialtax.com/blog/above-the-line-deduction/17 Advanced Financial Tax, LLC The “line” in this term refers to the line drawn when totaling the items that make up the taxpayer's adjusted gross income (AGI). The term “deduction” is usually associated with itemized deductions, but an above-the-line deduction is one that can be taken in addition to the standard deduction or itemized deductions, whichever is used. This type of deduction is taken before determining the taxpayer's AGI; hence, the term “above-the-line.” Mon, 23 Feb 2015 19:00:00 GMT Acquisition Indebtedness http://www.advancedfinancialtax.com/blog/acquisition-indebtedness/18 http://www.advancedfinancialtax.com/blog/acquisition-indebtedness/18 Advanced Financial Tax, LLC This is the debt used to acquire, build, or substantially improve a taxpayer's principal residence or a second home, and it is debt that is secured by the principal residence or second home. The interest on up to $1 million of acquisition indebtedness is deductible as an itemized deduction. Sun, 22 Feb 2015 19:00:00 GMT Adjusted Gross Income (AGI) http://www.advancedfinancialtax.com/blog/adjusted-gross-income-agi/19 http://www.advancedfinancialtax.com/blog/adjusted-gross-income-agi/19 Advanced Financial Tax, LLC This may be the most important tax term since the tax code uses the AGI to limit a vast number of tax benefits. AGI is basically a taxpayer's gross taxable income from all sources (gross income) reduced by certain allowable adjustments, sometimes referred to as above-the-line deductions, which are deductible whether or not the taxpayer itemizes their deductions. The more frequently encountered adjustments include deductions for deductible IRA contributions, moving, alimony payments, higher education interest, forfeited interest and deductions for health insurance premiums, pension plan contributions and 50% of SE tax for self-employed individuals. Sat, 21 Feb 2015 19:00:00 GMT Memorizing Transactions in QuickBooks: Why? How? http://www.advancedfinancialtax.com/blog/memorizing-transactions-in-quickbooks-why-how/40190 http://www.advancedfinancialtax.com/blog/memorizing-transactions-in-quickbooks-why-how/40190 Advanced Financial Tax, LLC QuickBooks saves time in countless ways, one of which is its ability to memorize transactions. Are you taking advantage of this feature? One of the reasons you started using accounting software, among many others, was to save time. And QuickBooks has complied. Once you create a record for a customer, vendor, item, etc., you rarely – if ever – have to enter that information again; you simply choose it from a list. You no longer waste time searching through endless piles of papers to find the one you need; you just do a search. And when you need a report on your monthly sales or inventory purchases or your payroll liabilities, you don’t have to wrestle with Excel or locate the right paper records; you just click a few times. Memorized transactions can be another major time saver. You might use them when you, for example: Provide the same service for a customer on a regular basis, Charge a monthly fee for rentals, maintenance, membership, etc., Pay a bill to the same company regularly, or Have a standing order with a vendor for a similar set of items. It’s easy to create memorized transactions. QuickBooks provides an icon for them in the toolbar of every transaction form that’s supported, like invoices, bills, and purchase orders. Figure 1: When you see the Memorize icon in the toolbar of a transaction form, you know that you can create a template to use over and over. To get started, create a transaction that you know will be repeated – even if the amount will be different every time (you’ll still save time because you won’t have to fill in or select absolutely every detail). Let’s say you’re doing some social media consulting for a customer, and you’ve contracted for eight hours every month. Create the invoice for that billing. Then click the Memorize icon. This window opens: Figure 2: In the Memorize Transaction window, you’ll tell QuickBooks how often the transaction will be created, in addition to providing other information. Your customer will already appear in the Name field. You’ll have to choose from among three options so that QuickBooks knows how to handle this recurring form: Add to my Reminders List. If you choose this by clicking on the button in front of the option, QuickBooks will add this transaction to your existing Reminders List. Note: Confused about how you get QuickBooks to remind you about actions you have to take? We can walk you through the setup process. Do Not Remind Me. We don’t recommend this option unless you have an exceptionally good memory, few memorized transactions, or a tickler file in another application. Even then, reminders are a good idea. Automatic Transaction Entry. This absolutely saves the most time. It’s also the riskiest option. If you select this, QuickBooks will send the transaction through at the intervals you’ve defined. You’ll have to enter a number that indicates how many times you want the form sent and how many days in advance it should be entered. Please consult with us if you are planning to automate transactions. We don’t want you to have unhappy customers or vendors or an unpredictable cash flow. Next, you’ll tell QuickBooks how often this transaction needs to be created by clicking on the down arrow to the right of How Often. Click on the calendar icon in the Next Date field to select the exact day this should occur next (you’ll have an opportunity when you work with the Reminders List to specify how much advance warning you want). When you’re done, click OK. Once you start memorizing transactions, QuickBooks will store them in a list. When you get a reminder that one is due soon, open the Lists menu and select Memorized Transaction List. You'll see this screen, populated with your own work: Figure 3: You’ll open the Memorized Transaction List to enter one or to work with one you’ve already created. Highlight a transaction in the list and click the down arrow next to Memorized Transaction in the lower left corner to see your options here. You can also click Enter Transaction, and your original form will appear. If you’ve saved it with a permanent amount, you can just save and dispatch it. Otherwise, enter the correct amount before you proceed. If you’re fairly new to QuickBooks and don’t feel like you’re well acquainted with its time-saving features, give us a call and we’ll set up some training. Better to do that upbfront than to have to untangle a jumbled company file. We’re always happy to help. Sat, 21 Feb 2015 19:00:00 GMT Alternative Minimum Tax (AMT) http://www.advancedfinancialtax.com/blog/alternative-minimum-tax-amt/20 http://www.advancedfinancialtax.com/blog/alternative-minimum-tax-amt/20 Advanced Financial Tax, LLC A different way of computing one’s tax liability; it MUST be used if the resulting tax is higher than the tax computed by the regular method. This alternate way of computing the tax was introduced over three decades ago to prevent higher income taxpayers from reducing or escaping income tax. The AMT is structured to ignore the use of certain tax breaks and deductions and to apply special rates - 26% and 28%. Inflation over the years has slowly increased the number of taxpayers who are subject to the AMT. Although the factors affecting the AMT are too numerous to delineate here, the ones most frequently encountered by the average taxpayer include: Taxes, including property taxes and state income tax, are not allowed as an AMT itemized deduction. Miscellaneous itemized deductions, including job-related and investment expenses, are not deductible for AMT purposes. The difference between the current market value and the exercise price of stock acquired through an Incentive Stock Option (ISOs) is added to income even though the stock has not been sold. Interest on home equity debt is not allowed as an AMT itemized deduction. Fri, 20 Feb 2015 19:00:00 GMT March 2015 Individual Due Dates http://www.advancedfinancialtax.com/blog/march-2015-individual-due-dates/30367 http://www.advancedfinancialtax.com/blog/march-2015-individual-due-dates/30367 Advanced Financial Tax, LLC March 2 - Farmers and Fishermen File your 2014 income tax return (Form 1040) and pay any tax due. However, you have until April 15 to file if you paid your 2014 estimated tax by January 15, 2015. 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 16 - 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. Fri, 20 Feb 2015 19:00:00 GMT March 2015 Business Due Dates http://www.advancedfinancialtax.com/blog/march-2015-business-due-dates/30368 http://www.advancedfinancialtax.com/blog/march-2015-business-due-dates/30368 Advanced Financial Tax, LLC March 2 - 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 2014. 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 February 2.March 2 - Informational Returns Filing Due File information returns (Form 1099) and transmittal Forms 1096 for certain payments you made during 2014. There are different forms for different types of payments. These are government filing copies for the 1099s issued to service providers and others.March 2 - 2 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 2014. 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 February 2.March 2 - 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. March 16 - 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 2015. If Form 2553 is filed late, S treatment will begin with calendar year 2016.March 16 - 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 applies even if the partnership requests an extension of time to file the Form 1065-B by filing Form 7004.March 16 - Social Security, Medicare and Withheld Income Tax If the monthly deposit rule applies, deposit the tax for payments in February. March 16 - Non-Payroll Withholding If the monthly deposit rule applies, deposit the tax for payments in February. March 16 - Corporations File a 2014 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. March 31 - 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, March 2 was the due date. The due date for giving the recipient these forms was February 2.March 31 - Electronic Filing of Forms W-2 If you file forms W-2 for 2014 electronically with the IRS, this is the final due date. This due date applies only if you electronically file. Otherwise, the due date was March 2. The due date for giving the recipient these forms was February 2.March 31 - Large Food and Beverage Establishment Employers If you file forms 8027 for 2014 electronically with the IRS, this is the final due date. This due date applies only if you file electronically. Otherwise, March 2 was the due date. Fri, 20 Feb 2015 19:00:00 GMT Basis http://www.advancedfinancialtax.com/blog/basis/21 http://www.advancedfinancialtax.com/blog/basis/21 Advanced Financial Tax, LLC Basis is the dollar value from which a taxpayer measures any gain or loss from an asset for income tax purposes. Generally, your basis begins with what you paid for the asset, including purchase costs (cost basis) and then is adjusted up for improvement and sales costs and down for any depreciation or casualty losses claimed on the asset during the period of ownership. As an example, a rental property is purchased for $200,000. $50,000 is made in improvements to the property, $15,000 is deducted in depreciation during the period of ownership and $12,000 is incurred in sales expenses. The basis for that property, referred to as the adjusted basis, is $247,000 ($200,000 + $50,000 - $15,000 + $12,000). Special rules apply in determining a taxpayer's basis in property that is acquired by gift or inheritance. For gifts, the starting basis is generally the adjusted basis of the giver; for inherited assets, the basis generally begins with the value of the property on the date of the decedent's death. Please note that the word “generally” is frequently used in this explanation since it cannot be relied upon in all situations. Please contact this office for assistance. Thu, 19 Feb 2015 19:00:00 GMT Receive Your Refund Faster With Direct Deposit http://www.advancedfinancialtax.com/blog/receive-your-refund-faster-with-direct-deposit/40166 http://www.advancedfinancialtax.com/blog/receive-your-refund-faster-with-direct-deposit/40166 Advanced Financial Tax, LLC Article Summary: Speed Security Convenience Options Funding an IRA Don’t wait around for a paper check. Have your federal (and state, if applicable) tax refund deposited directly into your bank account. Selecting Direct Deposit is a secure and convenient way to get your money into your pocket more rapidly. Speed - When combining e-file with direct deposit, the IRS will likely issue your refund in no more than 21 days. Security - Direct deposit offers the most secure method of obtaining your refund. There is no check to lose. Each year, the U.S. Post Office returns thousands of refund checks to the IRS as undeliverable mail. Direct deposit eliminates undeliverable mail and is also the best way to guard against having a tax refund check stolen. Easy - Simply provide this office with your bank routing number and account number when we prepare your return and you’ll receive your refund far more quickly than you would by check. Convenience - The money goes directly into your bank account. You won’t have to make a special trip to the bank to deposit the money yourself. Eligible Financial Accounts - You can direct your refund to any of your checking or savings accounts with a U.S. financial institution as long as your financial institution accepts direct deposits for that type of account and you provide valid routing and account numbers. Examples of savings accounts include: passbook savings, individual development accounts, individual retirement arrangements, health savings accounts, Archer MSAs, and Coverdell education savings accounts. Multiple Options - You can deposit your refund into up to three financial accounts that are in the your name or your spouse’s name if it is a joint account. You can’t have part of the refund paid by paper check and part by direct deposit. With the split refund option, taxpayers can divide their refunds among as many as three checking or savings accounts at up to three different U.S. financial institutions. Check with your bank or other financial institution to make sure your direct deposit will be accepted. Deposit Can’t Be to a Third Party’s Bank Account - To protect taxpayers from scammers, direct deposit tax refunds can only be deposited into an account or accounts owned by the taxpayer. Therefore, only provide your own account information and not account information belonging to a third party. Fund Your IRA - You can even direct a refund into your IRA account. To set up a direct deposit, you will need to provide the bank routing number (9 digits) and your account number for each account into which you wish to make a deposit. Please have these numbers available at your appointment. For more information regarding direct deposit of your tax refund and the split refund option, we would be happy to discuss your options with you at your tax appointment. Thu, 19 Feb 2015 19:00:00 GMT Business Gifts http://www.advancedfinancialtax.com/blog/business-gifts/22 http://www.advancedfinancialtax.com/blog/business-gifts/22 Advanced Financial Tax, LLC Gifts to customers, business contacts, clients, etc., are deductible if they are otherwise ordinary and necessary business expenses. However, business gifts are subject to a $25 limit to each donee per year. Wed, 18 Feb 2015 19:00:00 GMT Capital Gain http://www.advancedfinancialtax.com/blog/capital-gain/23 http://www.advancedfinancialtax.com/blog/capital-gain/23 Advanced Financial Tax, LLC Gains from the sale of certain assets owned for more than one year and inherited assets such as stocks, bonds and real estate enjoy a special tax treatment referred to as a long-term capital gain. Gains from assets held for a shorter period are called short-term capital gains and are not eligible for special tax treatment. Long-term capital gains do benefit from special tax rates and are generally taxed at 0% to the extent a taxpayer is in the 15% or lower tax bracket and 15% for the balance through the 35% tax bracket. To the extent a taxpayer is in the 39.6% tax bracket, the capital gain rate is 20%. There are some exceptions; to the extent that gain results from depreciation on real property claimed since May 1997, the tax rate is 25%, except to the extent the taxpayer is in the 10% or 15% bracket, in which case those rates would then apply. Also, long-term capital gains from the sale of collectibles such as artwork, coins, stamps, etc., are taxed at 28%. Tue, 17 Feb 2015 19:00:00 GMT Don’t Overlook the Spousal IRA http://www.advancedfinancialtax.com/blog/don8217t-overlook-the-spousal-ira/38696 http://www.advancedfinancialtax.com/blog/don8217t-overlook-the-spousal-ira/38696 Advanced Financial Tax, LLC Article Highlights: Spousal IRA Compensation requirements Maximum Contribution Traditional or Roth IRA 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 or low-earning spouse to contribute to his or her own IRA, otherwise known as a spousal IRA, as long as the spouse has adequate compensation. The maximum amount that a non-working or low-earning spouse can contribute is the same as the limit for a working spouse, which is $5,500 for years 2013 through 2015. If the non-working spouse is age 50 or older, the spouse can also make “catch-up” contributions (limited to $1,000 for 2013 through 2015), raising the overall contribution limit to $6,500. These limits apply provided the couple together has compensation equal to or greater than their combined IRA contributions. Example: Tony is employed and his W-2 for 2015 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 2015. 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 $183,000 in 2015 (up from $181,000 in 2014). This limit is phased out in 2015 for AGI between $183,000 and $193,000 (up from $181,000 and $191,000 in 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 $183,000 in 2015 (up from $181,000 in 2014). The contribution is ratably phased out for AGI between $183,000 and $193,000 (up from $181,000 and $191,000 in 2014). Thus, no contribution is allowed to a Roth IRA once the AGI exceeds $193,000. Example: Rosa, in the previous example, can designate her IRA contribution to be either a deductible Traditional IRA or a nondeductible Roth IRA because the couple’s AGI is under $183,000. Had the couple’s AGI been $188,000, 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. Please give this office a call if you would like to discuss IRAs or need assistance with your retirement planning. Tue, 17 Feb 2015 19:00:00 GMT Capital Loss http://www.advancedfinancialtax.com/blog/capital-loss/24 http://www.advancedfinancialtax.com/blog/capital-loss/24 Advanced Financial Tax, LLC This is generally a loss from the sale of investment property such as stocks, bonds and land. Losses must first offset other sales in the same year that resulted in capital gains. Then, up to $3,000 ($1,500 for married individuals filing separately) can be deducted against other types of income. Any excess (referred to as capital loss carryover) can be carried over to future years until used up. It should be noted that losses from the sale of personal use property are not allowed for tax purposes; although, gains must be reported. This rule would apply to the taxpayer's home, second home, cars, etc. Mon, 16 Feb 2015 19:00:00 GMT Constructive Receipt http://www.advancedfinancialtax.com/blog/constructive-receipt/25 http://www.advancedfinancialtax.com/blog/constructive-receipt/25 Advanced Financial Tax, LLC Generally, most individual taxpayers are considered cash basis taxpayers. That means they pay taxes on income in the year they receive it. At the end and beginning of a tax year, questions sometimes arise as to when the income was received. The tax concept of constructive receipt treats the income as taxable in the year the taxpayer could have received it, even if it was not received until a later date. An example would be a check for an income item received in December of Year 1 that was not cashed until January of Year 2. Since the income was available when the check was received, the income would be reportable on Year 1's return and not on the return for Year 2 when the check was cashed. Another example would be if the taxpayer earned dividends on stocks but chose to reinvest them. Since the taxpayer has a right to the dividends but chooses to reinvest, it becomes income to the taxpayer on the date the dividends are credited to the account. Sun, 15 Feb 2015 19:00:00 GMT Consumer Debt http://www.advancedfinancialtax.com/blog/consumer-debt/26 http://www.advancedfinancialtax.com/blog/consumer-debt/26 Advanced Financial Tax, LLC This term is used to describe debt incurred to purchase consumer products and includes debt such as motor vehicle loans and credit card debt. Interest paid on consumer debt is not deductible as an itemized deduction on a tax return. However, see the section on Home Equity Debt. Sat, 14 Feb 2015 19:00:00 GMT Dependent http://www.advancedfinancialtax.com/blog/dependent/27 http://www.advancedfinancialtax.com/blog/dependent/27 Advanced Financial Tax, LLC Typically, an individual's minor child is thought of when the word dependent is used, but a dependent could be another relative, or in some cases, even an unrelated person. Generally, a dependent is someone who is reliant upon a taxpayer for support. Five specific qualifications must be met for an individual to be treated as a dependent for tax purposes: the relationship or member of the household test, gross income test, joint return test, citizenship or residence test and support test. For each dependent claimed in 2015, a taxpayer can deduct $4,000 (up from $3,950 in 2014) from their income. For higher income taxpayers, 2% of this deduction is disallowed for each $2,500 of AGI in excess of a threshold amount. The 2015 threshold amounts are $258,250 (up from $254,200 in 2014) for single taxpayers, $309,900 (up from $305,050 in 2014) for married taxpayers filing jointly, $284,050 (up from $279,650 in 2014) for taxpayers filing as Head of Household and one half the Joint amount for married taxpayers filing separately. The tax rules related to dependents can be complicated. Please call this office if you need assistance. Fri, 13 Feb 2015 19:00:00 GMT Depreciation http://www.advancedfinancialtax.com/blog/depreciation/28 http://www.advancedfinancialtax.com/blog/depreciation/28 Advanced Financial Tax, LLC This is a tax deduction that is taken to reflect the wear and tear and gradual decline in value of an asset used in business. Although there are some options for depreciation, the tax law requires that the depreciation deduction be taken even if a taxpayer prefers not to (this is sometimes called the “allowed or allowable” rule). If a taxpayer fails to take the deduction, he/she will still be required to account for the depreciation as if it were taken when the property is sold and pay taxes on the depreciation to the extent of any gain. For purposes of the deduction, tax law assigns a life to various types of business assets and the asset is depreciated over that period of time. Generally, business assets placed in service would be depreciated over 3, 5, or 7 years, except for real estate which would be 27.5 or 39 years. Thu, 12 Feb 2015 19:00:00 GMT Important Times to Seek Assistance http://www.advancedfinancialtax.com/blog/important-times-to-seek-assistance/40159 http://www.advancedfinancialtax.com/blog/important-times-to-seek-assistance/40159 Advanced Financial Tax, LLC Article Highlights When to seek professional assistance  Examples of times where tax saving moves can be made  Waiting for your regular appointment to discuss current tax-related issues can create problems or cause you to miss out on beneficial options that need to be timely exercised before year-end. Generally, you should call this office any time you have a substantial change in taxable income or deductions. By doing so, we can advise you about how to optimize your tax liability, avoid or minimize penalties, estimate and pre-pay required taxes, document deductions, and examine and explore tax options. You should call this office if you or your spouse: Receive a large employee bonus or award  Become unemployed  Change employment  Take an unplanned withdrawal from an IRA or other pension plan  Retire or are contemplating retirement  Move or otherwise change your address  Exercise an employee stock option  Have significant stock gains or losses  Get married  Separate from or divorce your spouse  Sell or exchange a property or business  Experience the death of a spouse during the year  Turn 70½ during the year  Increase your family size through birth or adoption of a child  Start a business or acquire a rental property  Receive a substantial lawsuit settlement or award  Get lucky at a casino, lotto, or game show and receive a W-2G  Plan to donate property worth $5,000 ($500 if a vehicle) or more to a charity  Plan to gift more than $14,000 to any one individual during the year  In addition, you should call whenever you receive a notice from the government related to your tax return. You should never respond to a notice without first checking with this office. Thu, 12 Feb 2015 19:00:00 GMT Direct Transfer http://www.advancedfinancialtax.com/blog/direct-transfer/29 http://www.advancedfinancialtax.com/blog/direct-transfer/29 Advanced Financial Tax, LLC Is a method of moving retirement and IRA funds directly from one account to another without the taxpayer taking possession of the funds and avoiding the potential problems associated with a rollover. Another term for this type of transaction is trustee-to-trustee transfer. Wed, 11 Feb 2015 19:00:00 GMT Early Distributions http://www.advancedfinancialtax.com/blog/early-distributions/30 http://www.advancedfinancialtax.com/blog/early-distributions/30 Advanced Financial Tax, LLC Generally, when a taxpayer withdraws funds from a qualified plan or Traditional IRA before reaching the age of 59-1/2, the withdrawal is considered an early distribution and is subject to a penalty equal to 10% of the taxable amount withdrawn. This penalty is in addition to any income tax due on the distribution. There are a number of exceptions that might avoid the penalty, depending upon if a distribution is from an IRA or a qualified plan. Taxpayers should consult with this office prior to taking a distribution before reaching age 59-1/2. Tue, 10 Feb 2015 19:00:00 GMT The Affordable Care Act Can Bring Surprises at Tax Time http://www.advancedfinancialtax.com/blog/the-affordable-care-act-can-bring-surprises-at-tax-time/40155 http://www.advancedfinancialtax.com/blog/the-affordable-care-act-can-bring-surprises-at-tax-time/40155 Advanced Financial Tax, LLC Article Highlights: New Tax Return Complications  Shared Responsibility Payment  Premium Tax Credit  The Affordable Care Act, the federal health care law, will bring some surprises at tax time for many. This year there are two new issues that can complicate the preparation of almost anyone's tax return. First, there is the shared responsibility payment, a nice name the government gave to the penalty for not being insured. So everyone who is uninsured is subject to a monthly penalty, assessed on the individual 1040 tax return, unless they meet one or more of the many exceptions to the penalty. Many of the exceptions are complicated and difficult to understand by a layman. Second, there is a premium tax credit that helps low- to middle-income families pay for their health insurance if it is acquired through a government marketplace. Although it would seem quite simple to just give a family a credit on their 1040 tax return, the credit is generally paid in advance based on the family's projected income. If the advance credit that was used to pay part of the monthly health plan premiums is more than the family's actual income warrants, then some portion of the advance credit must be repaid on the 1040 of the responsible individual (or couple if married filing a joint return). On the other hand, if the advance credit is less than the actual credit, the difference is refundable on the individual's income tax return. But as with all things tax, determining the income upon which the credit is based is complicated, frequently requires adjustments and can even include the income of dependents. But that is just the tip of the iceberg. If you purchased your health insurance through the marketplace and your family circumstances changed during the year, such as through divorce, marriage, or separation, or you included someone on your marketplace policy who is not part of your tax family (filer, spouse and dependents), very complicated allocations can be required between the various individuals' tax returns. Please contact this office if you have questions related to the Affordable Care Act tax compliance rules or have family or friends who need assistance dealing with this tax complication. Tue, 10 Feb 2015 19:00:00 GMT Earned Income http://www.advancedfinancialtax.com/blog/earned-income/31 http://www.advancedfinancialtax.com/blog/earned-income/31 Advanced Financial Tax, LLC This refers to income that is earned from providing your personal services as distinguished from unearned income such as interest, dividends, pensions, capital gains and passive income. Examples of earned income would include W-2 wage income, commissions, net self-employment income and tips. Generally, earned income is subject to FICA withholding or self-employment tax and is the type of income that is required to qualify for IRA and self-employment pension plan contributions and the earned income credit. Mon, 09 Feb 2015 19:00:00 GMT Estimated Tax http://www.advancedfinancialtax.com/blog/estimated-tax/32 http://www.advancedfinancialtax.com/blog/estimated-tax/32 Advanced Financial Tax, LLC If a taxpayer does not have sufficient withholding from wages and pensions to cover the tax liability for the year, he/she could be subject to underpayment penalties. Self-employed taxpayers and those with substantial investment or other income frequently find themselves in this position. Quarterly estimated tax payments provide a means of prepaying the anticipated tax liability as a way to avoid the penalties. Generally, penalties can be assessed if a taxpayer fails to prepay a safe harbor (minimum) amount. Safe Harbor Payments - Federal law and most states have safe harbor rules. There are two Federal safe harbor amounts that apply when the payments are made evenly throughout the year: The first safe harbor is based on the tax owed in the current year. If your payments equal or exceed 90% of your current year's tax liability, you can escape a penalty.   The second safe harbor - and the one taxpayers rely on most often - is based on your tax in the immediately preceding tax year. If your current year's payments equal or exceed 100% of the amount of your prior year's tax, you can escape a penalty. However, if your prior year's adjusted gross income was more than $150,000 ($75,000 if you file married separate status), then your payments for the current year must be 110% of the prior year's tax to meet the safe harbor amount. Sun, 08 Feb 2015 19:00:00 GMT Exemptions http://www.advancedfinancialtax.com/blog/exemptions/33 http://www.advancedfinancialtax.com/blog/exemptions/33 Advanced Financial Tax, LLC An exemption is an amount, $4,000 for 2015 (up from $3,950 for 2014) that can be deducted for the taxpayer and spouse (if applicable) and each dependent claimed on the tax return. The exemptions are phased out for higher income taxpayers. See the term “Dependent.” The exemption deduction is disallowed for an individual who files a return and is also claimed, or could be claimed, as a dependent by another taxpayer. Sat, 07 Feb 2015 19:00:00 GMT Fair Market Value http://www.advancedfinancialtax.com/blog/fair-market-value/34 http://www.advancedfinancialtax.com/blog/fair-market-value/34 Advanced Financial Tax, LLC This is the price at which a property would change hands between a willing buyer and a willing seller, neither being compelled to buy or sell, and both having reasonable knowledge of all the necessary facts. Fri, 06 Feb 2015 19:00:00 GMT FICA http://www.advancedfinancialtax.com/blog/fica/35 http://www.advancedfinancialtax.com/blog/fica/35 Advanced Financial Tax, LLC These initials stand for Federal Insurance Contributions Act, which is the law that covers Social Security and Medicare tax payroll withholding rules. Amounts are withheld from the wages of employees for their contribution to the Social Security and Medicare programs. The withholding rate for Social Security contributions is 6.2% and for Medicare 1.45%. The maximum wage amount on which Social Security tax is paid for 2015 is $118,500 (up from $117,000 in 2014); there is no maximum for the Medicare portion. The employer also pays an amount equal to the employee's contribution. If an employee works for 2 or more employers and has tax withheld for Social Security contributions on more than the annual wage maximum, the excess withholding is refundable as a tax credit on the employee's income tax return. Additional 0.9% Medicare Rate - If an individual's wages exceed $200,000 ($250,000 if filing a married joint return; $125,000 if filing a married separate return), the employee's Medicare rate on the excess earnings increases to 2.35%. The employer starts withholding the higher rate when wages exceed $200,000 regardless of marital or filing status. A taxpayer's additional Medicare tax that was withheld and his/her actual additional Medicare tax for the year is reconciled on his/her tax return, and if either too much or too little was withheld, the difference will be either a refundable credit or additional tax on the return. Fri, 06 Feb 2015 19:00:00 GMT Filing Status http://www.advancedfinancialtax.com/blog/filing-status/36 http://www.advancedfinancialtax.com/blog/filing-status/36 Advanced Financial Tax, LLC A taxpayer's filing status (except Head of Household) is based on their marital status as of the last day of the year and in the case of married individuals whether they wish to file jointly or separately. Thus, if not married on the last day of the tax year, the taxpayer would generally file as “single” status. If married on the last day of the year, he/she would file as married filing jointly or as married filing separately. A taxpayer's filing status determines the amount of their standard deduction for the year and income levels where tax rates change. In addition to the filing statuses discussed above and the Head of Household discussed separately, there is one additional rarely used status called qualified widow(er) with a dependent child. It is for a surviving spouse who is allowed to use the married filing joint rates for the two years after the year of death of a spouse if certain requirements are met. Thu, 05 Feb 2015 19:00:00 GMT President's Budget Proposal http://www.advancedfinancialtax.com/blog/presidents-budget-proposal/40138 http://www.advancedfinancialtax.com/blog/presidents-budget-proposal/40138 Advanced Financial Tax, LLC Article Highlights: Small Business Provisions  Individual Provisions  Gift & Inheritance Provisions  The President's Fiscal Year 2016 Budget Proposal was just released and includes a number of tax proposals that would increase the taxes on higher-income taxpayers and provide more tax breaks for low- to middle-income taxpayers. The following are some highlights of the budget proposal that would impact individuals and small businesses, but remember these are proposals only. Business Provisions Section 179 Expensing - Would make the Sec. 179 expense cap $500,000 for 2015 (it is currently at $25,000, down from $500,000 in 2014). Would raise the expense cap to $1 million in 2016 and make the $1 million permanent with inflation adjustment for future years.  Cash Basis Accounting - Would expand use of the cash method of accounting to small businesses with less than $25 million in average annual gross receipts, estimated to apply to 99% of all businesses.   Qualified Small Business Stock - Would permanently extend the 100% exclusion on capital gains from sales of tax-qualified small business stock held by individuals for more than five years, and would eliminate the inclusion of excluded gain from the Alternative Minimum Tax.   Start-Up & Organizational Expenses - Would increase and consolidate the deduction for start-up and organizational expenditures.   Small Employer Health Insurance Credit - Would expand the credit for small employers to provide health insurance to apply to up to 50 (rather than 25) full-time equivalent employees, with phaseout between 20 and 50 employees (rather than between 10 and 25).   Mandatory Employer IRA Payroll Deductions - Would require employers with 10 or more employees who don't have a 401(k) plan to automatically enroll full-time and part-time employees in an optional IRA payroll deduction plan.  Individual Provisions  Child Care - Would allow a credit of up to $3,000 (50% credit for up to $6,000 of expenses per child) for each child under the age of 5 to enable gainful employment of the parent(s) or other qualified taxpayer. The regular credit for those ages 5 through 12 would also begin to phase out at $120,000 (instead of $15,000 under current law). Flexible spending accounts for child care would be eliminated.   Second Earner Tax Credit - Would provide a new tax credit up to $500 (5% of the first $10,000 of earnings for the lower-earning spouse) for joint filers with two wage earners. The credit would begin to phase out at income of $120,000 and would be fully phased out when family income reaches $210,000. It is estimated that this new credit would benefit 24 million joint filers.  Earned Income Tax Credit (EITC) - Would double the EITC for workers without a child and increase the credit applicability for childless workers with earnings up to 150% of the federal poverty level (currently about 125%). Would expand the applicability of the EITC to workers age 21 to 66 (currently 24 to 64).   Education Tax Benefits - The American Opportunity Tax Credit (AOTC) would be expanded to cover five years of post-secondary education, and the current $2,500 tax credit would be adjusted for inflation. The refundable portion of the AOTC would be increased to $1,500. Part-time students would be eligible for a $1,250 AOTC (up to $750 refundable). Duplicative and less effective provisions, including the Lifetime Learning Credit, the tuition and fees deduction, the student loan interest deduction (for new borrowers), and Coverdell accounts (for new contributions) would be repealed or allowed to expire. The credit would also be better coordinated with Pell Grants.   Top Capital Gains Rate - Would raise the top effective capital gains and qualified dividends tax rate to 28% (24.2% plus the 3.8% net investment income tax). For couples, the 28% rate would apply where income is more than $500,000 annually.   Itemized Deductions - Would limit to 28% the value of itemized deductions and other tax preferences for married taxpayers with incomes over $250,000 and individual taxpayers with income over $200,000. The limit would apply to all itemized deductions as well as other tax benefits, such as tax-exempt interest and tax exclusions for retirement contributions and employer-sponsored health insurance.   Limit Retirement Account Contributions - Would prohibit contributions to and accruals of additional benefits in tax-preferred retirement plans and IRAs once balances are about $3.4 million, which is about enough to provide an annual income of $210,000 in retirement.   Buffett Rule - Would implement the “Buffett Rule.” This rule, which is a carryover from prior year budget proposals, would require the wealthy to pay at least a 30% effective tax rate.  Gift & Inheritance Tax Provisions Inheritances and Gifts - Would eliminate the current step-up in tax basis at death and require payment of capital gains tax on the increase in value of securities at the time they are inherited. Generally, a $100,000-per-person, portable-between-spouses exclusion would apply for inherited appreciated assets, along with exceptions for surviving spouses, small businesses, charities, and residences, among others. For couples, no tax would be due until the death of the second spouse. No tax would be due on inherited small, family-owned-and-operated businesses unless and until the business was sold, and any closely held business would have the option to pay tax on gains over 15 years. Couples would have an additional $500,000 exemption for personal residences ($250,000 per individual), with this exemption also automatically portable between spouses. Tangible personal property other than expensive art and similar collectibles - e.g., bequests or gifts of clothing, furniture, and small family heirlooms - would be tax-exempt.   Inheritance and Gift Tax - Would reinstate the prior, 2009, estate and gift tax rates with lower exclusions (generally at 45% at $3.5 million for estates and $1 million for gifts).  These are all proposals by the Obama administration and must be approved by Congress. The information is being passed along so you will have an idea of what might happen in the future. Thu, 05 Feb 2015 19:00:00 GMT Gift Tax http://www.advancedfinancialtax.com/blog/gift-tax/37 http://www.advancedfinancialtax.com/blog/gift-tax/37 Advanced Financial Tax, LLC Many taxpayers believe they can deduct gifts they give to other individuals. That is not true! To prevent people from giving their assets away prior to their death and thereby avoid taxes on their estate, our tax system includes a gift tax, which is paid by the giver and must be reported on a gift tax return if the amount given to any one individual for the year exceeds the annual gift exemption ($14,000 for 2014 and 2015). Gifts of larger amounts are taxable but each individual giver can offset the gift tax with a tax credit that is based on a lifetime exemption of taxable gifts. Caution - credit used to offset gift tax will not be available to offset estate taxes when the giver passes away. Wed, 04 Feb 2015 19:00:00 GMT Head of Household http://www.advancedfinancialtax.com/blog/head-of-household/39784 http://www.advancedfinancialtax.com/blog/head-of-household/39784 Advanced Financial Tax, LLC This is a special filing status for unmarried individuals, and, in certain special situations, married taxpayers, who pay more than half the cost of maintaining a home for themselves and a qualifying person, for more than half the tax year. The special filing status affords qualifying taxpayers with a higher standard deduction and more beneficial tax brackets than are available to taxpayers who file using the single status. Tue, 03 Feb 2015 19:00:00 GMT Retirement Savings: the Earlier, the Better http://www.advancedfinancialtax.com/blog/retirement-savings-the-earlier-the-better/40129 http://www.advancedfinancialtax.com/blog/retirement-savings-the-earlier-the-better/40129 Advanced Financial Tax, LLC Article Summary: Teenagers and young adults  Tax-free accumulation  Earned income requirement  Roth IRA  Generally, teenagers and young adults do not consider the long-term benefits of retirement savings. Their priorities for their earnings are more for today than that distant and rarely considered retirement. Yet contributions to a retirement plan early in life can enjoy years of growth and provide a substantial nest egg at retirement. Due to its long-term benefits of tax-free accumulation, a nondeductible Roth IRA may be the best option. During most individuals' early working years, their income is usually at its lowest, allowing them to qualify for a Roth IRA at a time where the need for a tax deduction offered by other retirement plans is not important. Because retirement will not be their focus at that age, young adults may balk at having to give up their earnings. Parents, grandparents, or other individuals might consider funding all or part of the child's Roth contribution. It could even be in the form of a birthday or holiday gift. Take, for example, a 17-year-old who has a summer job and earns $1,500. Although the child is not likely to make the contribution from his or her earnings, a parent could contribute any amount up to $1,500 to a Roth IRA for the child.* But keep in mind that young adults, like anyone else, must have earned income to establish a Roth IRA. Generally, earned income is income received from working, not through an investment vehicle. It can include income from full-time employment, income from a part-time job while attending school, summer employment, or even babysitting or yard work. The amount that can be contributed annually to an IRA is limited to the lesser of earned income or the current maximum of $5,500. Parents or other individuals who contribute the funds need to keep in mind that once the funds are in the child's IRA account, the funds belong to the child. The child will be free to withdraw part or all of the funds at any time. If the child withdraws funds from the Roth IRA, the child will be liable for any early withdrawal tax liability. Consider what the value of a Roth IRA at age 65 would be for a 17-year-old who has funds contributed to his or her IRA every year through age 26 (a period of 10 years). The table below shows what the value will be at age 65 at various investment rates of return. Value of a Roth IRA—Annual Contributions of $1,000 for 10 years beginning at age 17  Investment Rate of Return 2% 4% 6% 8% Value at Age 65 $23,703 $55,449 $127,900 $291,401 What may seem insignificant now can mean a lot at retirement. Individuals who are financially able to do so should consider making a gift that will last a lifetime. It could mean a comfortable retirement for your child, grandchild, favorite niece or nephew, or even an unrelated person who deserves the kind gesture. *Amounts contributed to an IRA on behalf of another person are nondeductible gifts by the donor and are counted toward the donor's annual $14,000 (2014 and 2015 gift exclusion per done).If you would like more information about Roth IRAs or gifting contributions to a Roth on behalf of someone else, please contact this office. Tue, 03 Feb 2015 19:00:00 GMT Home Equity Debt http://www.advancedfinancialtax.com/blog/home-equity-debt/38 http://www.advancedfinancialtax.com/blog/home-equity-debt/38 Advanced Financial Tax, LLC This term refers to debt incurred on a principal residence or second home that is not used to buy, build, or substantially improve that residence or home. An example is a home equity loan used to acquire consumer products or pay off consumer debt. The portion of refinanced debt that exceeds the acquisition debt is also considered home equity debt. Interest on the first $100,000 of home equity debt is deductible as an itemized deduction for regular tax purposes but not for alternative minimum tax (AMT). Mon, 02 Feb 2015 19:00:00 GMT Holding Period http://www.advancedfinancialtax.com/blog/holding-period/39 http://www.advancedfinancialtax.com/blog/holding-period/39 Advanced Financial Tax, LLC Generally, the length of time an asset is owned will determine if it qualifies for long-term capital gains rates when it is sold. To qualify for long-term capital gains rates, an asset must be owned more than 12 months or be inherited property. The holding period of an asset usually begins the day after an asset is acquired and ends on the date of sale or other disposition. For stock, the trade dates, not the settlement dates, are the acquisition and disposition dates to use. Mon, 02 Feb 2015 19:00:00 GMT Independent Contractor http://www.advancedfinancialtax.com/blog/independent-contractor/40 http://www.advancedfinancialtax.com/blog/independent-contractor/40 Advanced Financial Tax, LLC Is someone who performs services for others. The recipients of the services do not control the means or methods the independent contractor uses to accomplish the work. Independent contractors are self-employed. Sun, 01 Feb 2015 19:00:00 GMT Investment Interest http://www.advancedfinancialtax.com/blog/investment-interest/41 http://www.advancedfinancialtax.com/blog/investment-interest/41 Advanced Financial Tax, LLC Is interest paid on debt used for investment purposes. Typical examples are interest paid on vacant land held for investment and margin account interest. Investment interest is deductible as an itemized deduction but only to the extent the taxpayer has net investment income and any excess is carried over to future years. Generally, net investment income means investment income less investment expenses. As an example, suppose a taxpayer's only investment income is $1,000 of taxable interest and dividend income. He also paid property taxes of $400 and interest of $1,300 on some vacant investment land. His net investment income is $600 ($1,000 - $400). Therefore, his investment interest deduction is limited to $600 and the excess $700 is carried over to future years. If the taxpayer had capital gains, he could elect to forgo the special capital gains rates and treat the capital gains as investment income and thereby increase the amount of investment interest he could deduct. Sat, 31 Jan 2015 19:00:00 GMT Itemized Deductions http://www.advancedfinancialtax.com/blog/itemized-deductions/42 http://www.advancedfinancialtax.com/blog/itemized-deductions/42 Advanced Financial Tax, LLC Taxpayers are permitted to deduct either a standard deduction or itemized deductions in determining their taxable income. Itemized deductions are in five basic categories: Medical expenses that exceed 10% (7.5% if age 65 or older through 2016) of the AGI.  Taxes - state income tax, property taxes, personal property taxes.  Interest - generally limited to home mortgage interest and investment interest.  Charitable contributions not exceeding an AGI limitation. That limitation is 50% for most contributions but there are contributions limited to 20% and 30% of the AGI.  Miscellaneous expenses - only miscellaneous expenses that exceed 2% of the AGI are generally allowed. However, there is a second category that includes gambling losses (cannot exceed reported gambling winnings) and several other rarely encountered deductions that are allowed without an AGI reduction.  In 2015, for higher income taxpayers, some of the itemized deductions may be further reduced by 3% of the amount that the AGI exceeds a phase-out threshold but not more than 80% of the total of those deductions affected by this limitation. The 2015 phase-out thresholds are $258,250 (up from $254,200 in 2014) for single taxpayers, $284,050 (up from $279,650 in 2014) for taxpayers filing as head of household, $309,900 (up from $305,050 in 2014) for married taxpayers filing jointly, and $154,950 (up from $152,525 in 2014) for married taxpayers filing separately. Fri, 30 Jan 2015 19:00:00 GMT Keogh Plans http://www.advancedfinancialtax.com/blog/keogh-plans/43 http://www.advancedfinancialtax.com/blog/keogh-plans/43 Advanced Financial Tax, LLC Sole proprietors, partnerships (but not individual partners) and corporations may establish qualified retirement plans. A qualified retirement plan set up by a self-employed individual is frequently called a Keogh plan. The Keogh name comes from the Congressman who sponsored the legislation allowing these types of plans for individuals. They are also sometimes referred to as H.R. 10 plans (H.R. 10 was the number of the House bill enacting these plans). A Keogh plan can cover both the self-employed person who establishes the plan and his or her employees. Thu, 29 Jan 2015 19:00:00 GMT Tuition for School to Treat Learning Disabilities is Deductible http://www.advancedfinancialtax.com/blog/tuition-for-school-to-treat-learning-disabilities-is-deductible/40119 http://www.advancedfinancialtax.com/blog/tuition-for-school-to-treat-learning-disabilities-is-deductible/40119 Advanced Financial Tax, LLC Article Highlights: Tuition To Treat Learning Disabilities is Deductible Medical Deduction Special Teaching Techniques IRS has privately ruled that for a child diagnosed with multiple learning disabilities, tuition paid to attend a school designed to assist students in overcoming their disabilities and developing appropriate social and educational skills was a deductible medical expense. Treating a child's learning disabilities can place a heavy financial burden on parents. As the ruling illustrates, the tax law may help by allowing a deduction for the cost of educating such a child. However, like other deductible medical expenses, this cost is deductible only to the extent that medical expenses for the year cumulatively exceed 10% (7.5% through 2016 if the taxpayer is age 65 or over) of the taxpayer's adjusted gross income. Medical care includes the cost of attending a special school designed to compensate for or overcome a physical handicap, in order to qualify the individual for future normal education or for normal living. This includes a school for the teaching of Braille or lip reading. The principal reason for attending must be the special resources for alleviating the handicap. The cost of tuition for ordinary education that is incidental to the special services provided at the school, and the cost of meals and lodging supplied by the school also is included as a medical expense. The distinguishing characteristic of a special school is the substantive content of its curriculum, which may include some ordinary education, but only if the ordinary education is incidental to the school's primary purpose of enabling students to compensate for or overcome a handicap. IRS ruled that where the school uses special teaching techniques to assist its students in overcoming their condition and that these techniques along with the care of other staff professionals are the principal reasons for the child’s enrollment at the school then the school is a “special school”. Thus the child’s tuition at the school in those years he is diagnosed as having a medical condition that handicaps his ability to learn are deductible. The Tax Court has also held and IRS has privately ruled that, where a school attended by a student with a medical problem doesn't qualify as a special school because the ordinary education isn't incidental to the special services provided, the costs of the special program or special treatment (but not the entire tuition) may still be a deductible medical expense. If you have questions related to this or other medical deductions please give this office a call. Thu, 29 Jan 2015 19:00:00 GMT Kiddie Tax http://www.advancedfinancialtax.com/blog/kiddie-tax/44 http://www.advancedfinancialtax.com/blog/kiddie-tax/44 Advanced Financial Tax, LLC To prevent parents from using their children's tax return to avoid taxes on investment income, Congress established what is now referred to as the kiddie tax on the unearned income of children. This applies to children under the age of 18, those age 18 who did not provide over half of their own support from earned income, and full-time students over age 18 and under the age of 24. The child's age is determined as of the end of the tax year. Under the kiddie tax rules, a child's unearned income in excess of $2,100 for 2015 (up from $2,000 in 2014) is taxed at the parent's tax rate. The child's earned income continues to be taxed at the child's rate. Wed, 28 Jan 2015 19:00:00 GMT Life Insurance Dividends http://www.advancedfinancialtax.com/blog/life-insurance-dividends/45 http://www.advancedfinancialtax.com/blog/life-insurance-dividends/45 Advanced Financial Tax, LLC Insurance policy dividends that the insurer keeps and uses to pay the taxpayer's premiums are not taxable. However, interest paid on dividends left to accumulate with the insurer is taxable as interest income. This term shouldn't be confused with dividends paid on stock owned in an insurance company, which are taxable. Tue, 27 Jan 2015 19:00:00 GMT It’s Tax Time! Are You Ready? http://www.advancedfinancialtax.com/blog/it8217s-tax-time-are-you-ready/38558 http://www.advancedfinancialtax.com/blog/it8217s-tax-time-are-you-ready/38558 Advanced Financial Tax, LLC 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 year. 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. New this year is the Affordable Care Act reporting requirements. If you acquired your health insurance through a government Marketplace you will receive a new form, 1095-A, issued by the Marketplace that will include information needed to complete your return. In addition, all taxpayers will need to provide proof of insurance to avoid a penalty or qualify for one of the many exemptions from the penalty. If you received a hardship penalty exemption from the Marketplace you will have been issued an exemption certificate number (ECN). That number must be included on your tax return. The 1095-A and ECN documentation need to be included with the other material you bring to your appointment. If your insurance coverage was through an employer, and the employer issued Form 1095-B, 1095-C or a substitute form detailing your coverage, bring it to the appointment. 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 one or more other individuals 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 file a married joint return and meet certain ownership, occupancy, and holding period requirements. The maximum exclusion is $250,000 for others. Since the cost of improvements made on your home can also be used to reduce any gain, 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 to be reported on your return, so be prepared to have those numbers 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. Tue, 27 Jan 2015 19:00:00 GMT Listed Property http://www.advancedfinancialtax.com/blog/listed-property/46 http://www.advancedfinancialtax.com/blog/listed-property/46 Advanced Financial Tax, LLC Certain assets such as cars, computers, cameras and video equipment, boats and airplanes purchased for business also may be used for personal purposes. To limit a taxpayer's ability to deduct the personal use of these items as business use, Congress established a list of these assets (thus the term “listed property”) for the IRS to monitor more closely and apply certain restrictions and recordkeeping requirements. Mon, 26 Jan 2015 19:00:00 GMT Like-Kind Exchange http://www.advancedfinancialtax.com/blog/like-kind-exchange/47 http://www.advancedfinancialtax.com/blog/like-kind-exchange/47 Advanced Financial Tax, LLC Section 1031 of the tax code allows a taxpayer to exchange like-kind business and investment assets. This type of transaction is frequently referred to as a tax-free exchange, which is misleading since the tax is not “free” but instead is deferred to a later date when the replacement property is sold. Tax-free exchanges have special timing rules and this office should be consulted before proceeding with one. Sun, 25 Jan 2015 19:00:00 GMT Limited Partner http://www.advancedfinancialtax.com/blog/limited-partner/48 http://www.advancedfinancialtax.com/blog/limited-partner/48 Advanced Financial Tax, LLC Is a partner whose participation in partnership activities is restricted, and whose personal liability for partnership debts is limited to the amount of money or other property that he or she contributed or may have to contribute. Sat, 24 Jan 2015 19:00:00 GMT Make Your Preferences Known in QuickBooks http://www.advancedfinancialtax.com/blog/make-your-preferences-known-in-quickbooks/40073 http://www.advancedfinancialtax.com/blog/make-your-preferences-known-in-quickbooks/40073 Advanced Financial Tax, LLC QuickBooks is ready to use when you install it. But you can change its settings to make it work the way your company needs it to. There are some features that all small businesses need in their accounting software. Everyone needs a Chart of Accounts and a good set of report templates. There must be tools to bill customers and to document income and expenses. Some companies need payroll management, and some need the ability to create purchase orders. These days, many businesses want to accept payments online. But what does your company need? It’s unlikely that you would use absolutely every feature that QuickBooks offers, but you need to make sure that every tool you want to use is set up properly. If you’ve been using QuickBooks for a while, you may have been directed to the Preferences window already (accessible by clicking on Edit | Preferences). If you’re just starting out with the software, it’s a good idea to acquaint yourself with the most important elements contained there. Here are some of them. Figure 1: QuickBooks’ Preferences window. Some features are already turned on or off by default, but you can change their status. Accounting Click on the Accounting tab in the left vertical pane, then on the Company Preferences tab. Here, QuickBooks wants to know whether you plan to use account numbers. It also offers the option to turn on class tracking, which lets you define classes like company locations or divisions, or salespeople. Not sure what you should do here? Please ask us. Desktop View Options here involve usability and visibility issues. Getting them right can save you time and frustration. For example, under the My Preferences tab, you can choose between a VIEW that displays only One Window, or one that keeps Multiple Windows open. Click on the Company Preferences tab to turn specific features – like Payroll and Sales Tax -- on and off. Finance Charge Should you decide to apply Finance Charges to late payments, for example, please let us go over this feature with you. We’ll explain how it is set up and how it works in day-to-day accounting. Items & Inventory This is critical: you must visit this screen if you will be buying and selling products. First, you need to make sure that the box in front of Inventory and purchase orders are active has a check mark in it. If not, click in the box. Also important here: QuickBooks can maintain a real-time inventory level for each item you sell so that you neither run short nor waste money by stockpiling. Check the box in front of Quantity on Sales Orders if you want the software to include items that appear on sales orders in the count. Also, do you want a warning when you don’t have enough inventory to sell (as you’re filling out an invoice, for example)? We can explain the difference between Quantity on Hand and Quantity Available; it’s rather complex. Figure 2: Some inventory concepts may be unfamiliar to you. If you’ll be buying and selling items, let us walk you through this section. Payroll & Employees Payroll is integrated with QuickBooks, but it’s so complex that it almost acts as another application. If you’re planning to take this on yourself, some training will be necessary. Reminders Unless you have a very simple business or an extraordinarily good memory, you’ll probably want Quickbooks to remind you when you need to complete certain tasks. Click Reminders | Company Preferences to see the lengthy list of events that QuickBooks supports, like Paychecks to Print, Inventory to Reorder, and Bills to Pay. You can have the software display either a summary or a list of what needs to be done, and you can specify how many days in advance you want to be alerted. Sales & Customers, Sales Tax, and Time & Expenses If your accounting workflow includes tasks in any of these areas, you’ll need to visit them to turn features on and make other preferences known. You probably won’t need to have absolutely every feature turned on from the start. But as your business grows and changes – and we hope it does – you can always revisit the Preferences window to let QuickBooks know about your new needs. We hope you’ll let us know, too. Sat, 24 Jan 2015 19:00:00 GMT Marginal Tax Rate http://www.advancedfinancialtax.com/blog/marginal-tax-rate/49 http://www.advancedfinancialtax.com/blog/marginal-tax-rate/49 Advanced Financial Tax, LLC Most think that marginal tax rate is synonymous with tax bracket. This may generally be true but as the tax brackets advance to higher rates so does the taxpayer's income; as incomes increase, tax breaks begin to be reduced, phased out and in some cases totally eliminated. This effectively increases the marginal tax rate above the tax bracket. Knowing your marginal rate tells how much of each additional dollar will go to taxes or how much each additional dollar of deductions will reduce taxes. Also see “tax bracket.” Fri, 23 Jan 2015 19:00:00 GMT Modified Adjusted Gross Income http://www.advancedfinancialtax.com/blog/modified-adjusted-gross-income/50 http://www.advancedfinancialtax.com/blog/modified-adjusted-gross-income/50 Advanced Financial Tax, LLC Many tax deductions, adjustments and credits are phased out or disallowed once a taxpayer's adjusted gross income (AGI) reaches a certain level that varies depending on the particular tax benefit. However, the AGI for these purposes is usually not the regular AGI, but is instead AGI without certain other benefits being allowed and is called modified AGI. For example, when testing to see if the income phase-out threshold has been reached for claiming an education credit, the AGI must be figured without claiming the exclusions that are available for certain foreign earned income. Thu, 22 Jan 2015 19:00:00 GMT Municipal Bond Interest http://www.advancedfinancialtax.com/blog/municipal-bond-interest/51 http://www.advancedfinancialtax.com/blog/municipal-bond-interest/51 Advanced Financial Tax, LLC A term used for interest received on an obligation issued by a state or local government. Generally, this type of interest is not taxable (but see Private Activity Bonds) for Federal tax purposes. Most states, on the other hand, will treat municipal bond interest from other states as taxable. Thu, 22 Jan 2015 19:00:00 GMT February 2015 Business Due Dates http://www.advancedfinancialtax.com/blog/february-2015-business-due-dates/36129 http://www.advancedfinancialtax.com/blog/february-2015-business-due-dates/36129 Advanced Financial Tax, LLC February 2 - 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 February 2nd. "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 March 2, 2015 (March 31, 2015 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) Cash payments over $10, February 2 - W-2 Due to All Employees All employers need to give copies of the W-2 form for 2014 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.February 2 - File Form 941 and Deposit Any Undeposited Tax File Form 941 for the fourth quarter of 2014. 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.February 2 - File Form 943 All farm employers should file Form 943 to report Social Security, Medicare taxes and withheld income tax for 2014. 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.February 2 - W-2G Due from Payers of Gambling Winnings If you paid either reportable gambling winnings or withheld income tax from gambling winnings, give the winners their copies of the W-2G form for 2014.February 2 - File Form 940 - Federal Unemployment Tax File Form 940 (or 940-EZ) for 2014. 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.February 2 - File Form 945 File Form 945 to report income tax withheld for 2014 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. February 10 - Non-Payroll Taxes File Form 945 to report income tax withheld for 2014 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 2014. 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 2014. 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 2014. 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 2014, but did not give you a new Form W-4 to continue the exemption this year. Thu, 22 Jan 2015 19:00:00 GMT February 2015 Individual Due Dates http://www.advancedfinancialtax.com/blog/february-2015-individual-due-dates/36130 http://www.advancedfinancialtax.com/blog/february-2015-individual-due-dates/36130 Advanced Financial Tax, LLC February 2 - 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 2 - File 2014 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). 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, 22 Jan 2015 19:00:00 GMT Are You Required to File 1099s? http://www.advancedfinancialtax.com/blog/are-you-required-to-file-1099s/38424 http://www.advancedfinancialtax.com/blog/are-you-required-to-file-1099s/38424 Advanced Financial Tax, LLC Article Highlights: 1099-MISC Filing Requirements Independent Contractor Filing Threshold Form W-9 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 2014 must be provided to the independent contractor no later than February 2, 2015. It is not uncommon to, say, 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 overlook getting the information, such as their complete name and tax identification number (TIN), 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 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 is provided by the government as a means for you to obtain the data required to file the 1099s for your vendors. This data includes the vendor’s name, address, type of business entity and TIN (usually a Social Security number or an Employer Identification Number), plus certifications as to the ID number and citizenship status, among others. 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 onscreen and then printed out. A Spanish-language version is also available. The W-9 is for your use only and is not submitted to the IRS. The W-9 was last revised by the IRS in December 2014, so if you previously printed out blank W-9s to give to your vendors, you may want to print copies of the latest version (including the instructions) and discard the older unused forms. To avoid a penalty, the government’s copies of the 1099s must to be sent to the IRS by March 2, 2015, along with transmittal Form 1096. They must be submitted on magnetic media or on optically scannable forms. This firm provides 1099 preparation services. Click here to download a form to list those for whom you must file a 1099. If you need assistance or have questions, please give this office a call. Thu, 22 Jan 2015 19:00:00 GMT Original Issue Discount (OID) http://www.advancedfinancialtax.com/blog/original-issue-discount-oid/52 http://www.advancedfinancialtax.com/blog/original-issue-discount-oid/52 Advanced Financial Tax, LLC Sometimes bonds are issued (sold) at a discount (thus the term “original issue discount”) and then some years later mature at face value. The difference between the issue price and the face value represents the interest paid by the bond issuer. A portion of that interest, referred to as “OID,” must be reported annually even though the bond owner doesn't actually receive any of the interest until the bond matures. Information about the amount to report is provided to the bond owner on Form 1099-OID. Wed, 21 Jan 2015 19:00:00 GMT Passive Activity Loss http://www.advancedfinancialtax.com/blog/passive-activity-loss/53 http://www.advancedfinancialtax.com/blog/passive-activity-loss/53 Advanced Financial Tax, LLC In order to limit the tax benefits of tax shelters, the tax code imposes loss limitations on entities that Congress defined as passive activities. Generally, passive activities are investments in which a taxpayer does not materially participate, and losses from such investments can be used only to offset income from other passive investments and cannot be deducted against other kinds of income such as wages, pensions, interest, dividends, capital gains, etc. Most real estate and limited partnership investments are classified as passive activities. There is an exception for rentals that taxpayers actively participate in and manage which allows up to $25,000 of loss to be deducted. However, this special exception phases out for AGIs between $100,000 and $150,000. Wed, 21 Jan 2015 19:00:00 GMT Points http://www.advancedfinancialtax.com/blog/points/54 http://www.advancedfinancialtax.com/blog/points/54 Advanced Financial Tax, LLC In financing lingo, one point is equivalent to 1% of the loan value. Because they constitute prepaid interest, points are usually deducted ratably over the loan term. This rule would apply, for example, when a taxpayer purchases a rental real estate property--the points paid in such a transaction are amortized over the life of the loan. However, tax law provides a break for points paid on a mortgage to buy or improve a taxpayer's principal residence, allowing them to be deducted in full in the year paid. Tue, 20 Jan 2015 19:00:00 GMT Working Abroad Can Yield Tax-Free Income http://www.advancedfinancialtax.com/blog/working-abroad-can-yield-tax-free-income/40054 http://www.advancedfinancialtax.com/blog/working-abroad-can-yield-tax-free-income/40054 Advanced Financial Tax, LLC Article Highlights: Tax-Free Income from Working Abroad Foreign Earned Income & Housing Exclusions  Foreign Self-Employment Income  Claiming or Revoking the Exclusion  U.S. citizens and resident aliens are taxed on their worldwide income, whether the person lives inside or outside of the U.S. However, qualifying U.S. citizens and resident aliens who live and work abroad may be able to exclude from their income all or part of their foreign salary or wages, or amounts received as compensation for their personal services. In addition, they may also qualify to exclude or deduct certain foreign housing costs. To qualify for the foreign earned income exclusion, a U.S. citizen or resident alien must: o Have foreign earned income (income received for working in a foreign country); Have a tax home in a foreign country; and  Meet either the bona fide residence test or the physical presence test.  The foreign earned income exclusion amount is adjusted annually for inflation. For 2015, the maximum foreign earned income exclusion is up to $100,800 per qualifying person. If taxpayers are married and both spouses (1) work abroad and (2) meet either the bona fide residence test or the physical presence test, each one can choose the foreign earned income exclusion. Together, they can exclude as much as $201,600 for the 2015 tax year, but if one spouse uses less than 100% of his or her exclusion, the unused amount cannot be transferred to the other spouse. In addition to the foreign earned income exclusion, qualifying individuals may also choose to exclude or deduct from their foreign earned income a foreign housing amount. The amount of qualified housing expenses eligible for the housing exclusion and housing deduction is limited, generally, to 30% of the maximum foreign earned income exclusion. For 2015, the housing amount limitation is $30,240 for the tax year. However, the limit will vary depending on where the qualifying individual's foreign tax home is located and the number of qualifying days in the tax year. The foreign earned income exclusion is limited to the actual foreign earned income minus the foreign housing exclusion. Therefore, to exclude a foreign housing amount, the qualifying individual must first figure the foreign housing exclusion before determining the amount for the foreign earned income exclusion. Before you become overly excited, foreign earned income does not include the following amounts: Pay received as a military or civilian employee of the U.S. Government or any of its agencies.  Pay for services conducted in international waters (not a foreign country).  Pay in specific combat zones, as designated by a Presidential Executive Order, that is excludable from income.  Payments received after the end of the tax year following the year in which the services that earned the income were performed.  The value of meals and lodging that are excluded from income because it was furnished for the convenience of the employer.  Pension or annuity payments, including social security benefits.  A qualifying individual may also claim the foreign earned income exclusion on foreign earned self-employment income. The excluded amount will reduce his regular income tax, but will not reduce his self-employment tax. Also, the foreign housing deduction - instead of a foreign housing exclusion - may be claimed. A qualifying individual claiming the foreign earned income exclusion, the housing exclusion, or both, must figure the tax on the remaining non-excluded income using the tax rates that would have applied had the individual not claimed the exclusions. In other words, the exclusion is off-the-bottom, not off-the-top. Once the foreign earned income exclusion is chosen, a foreign tax credit, or deduction for taxes, cannot be claimed on the income that can be excluded. If a foreign tax credit or tax deduction is claimed for any of the foreign taxes on the excluded income, the foreign earned income exclusion may be considered revoked. Other issues: Earned income credit - Once the foreign earned income exclusion is claimed, the earned income credit cannot be claimed for that year. Timing of election - Generally, a qualifying individual's initial choice of the foreign earned income exclusion must be made with one of the following income tax returns: A return filed by the due date (including any extensions);  A return amending a timely-filed return;  Amended returns generally must be filed by the later of 3 years after the filing date of the original return or 2 years after the tax is paid; or  A return filed within 1 year from the original due date of the return (determined without regard to any extensions).  A qualifying individual can revoke an election to claim the foreign earned income exclusion for any year. This is done by attaching a statement to the tax return revoking one or more previously made choices. The statement must specify which choice(s) are being revoked, as the election to exclude foreign earned income and the election to exclude foreign housing amounts must be revoked separately. If an election is revoked, and within 5 years the qualifying individual wishes to again choose the same exclusion, he must apply for approval by requesting a ruling from the IRS. Are you looking for foreign employment or has an opportunity already presented itself to you? Before you make your final decision, please call our office to learn more about the foreign earned income and housing allowance exclusions, or how to meet the bona fide residence or physical presence tests. Tue, 20 Jan 2015 19:00:00 GMT Principal Residence http://www.advancedfinancialtax.com/blog/principal-residence/55 http://www.advancedfinancialtax.com/blog/principal-residence/55 Advanced Financial Tax, LLC A taxpayer can exclude up to $250,000 ($500,000 for married taxpayers) of gain from the sale of the taxpayers' principal residence if they meet the ownership and residence tests. If a taxpayer alternates between two properties, using each as a residence for successive periods of time, the property that the taxpayer uses a majority of the time during the year is ordinarily considered the taxpayer's principal residence. Mon, 19 Jan 2015 19:00:00 GMT Private Activity Bond http://www.advancedfinancialtax.com/blog/private-activity-bond/56 http://www.advancedfinancialtax.com/blog/private-activity-bond/56 Advanced Financial Tax, LLC Generally, interest from municipal bonds issued by a state or local government is federally tax-exempt for both regular and alternative minimum tax (AMT) purposes. However, some municipal bonds whose proceeds are used to support private businesses are classified as private activity bonds and the interest from them - whether paid directly to the bondholder or through a mutual fund - is taxable for AMT purposes. Taxpayers subject to the AMT may wish to utilize alternate investment vehicles. Sun, 18 Jan 2015 19:00:00 GMT Qualified Plan http://www.advancedfinancialtax.com/blog/qualified-plan/57 http://www.advancedfinancialtax.com/blog/qualified-plan/57 Advanced Financial Tax, LLC This term refers to retirement and employment benefit plans that conform to IRS requirements and are designed to protect the interests of employees or retirees. Sat, 17 Jan 2015 19:00:00 GMT Recapture http://www.advancedfinancialtax.com/blog/recapture/58 http://www.advancedfinancialtax.com/blog/recapture/58 Advanced Financial Tax, LLC Is to include as income or as additional tax in the return an amount allowed or allowable as a deduction or a credit in a prior year. In some cases, the tax law requires that a tax benefit taken in an earlier year be paid back if the property on which the benefit was claimed isn't held for a specific time period. This payback is termed “recapture”. Fri, 16 Jan 2015 19:00:00 GMT Rollover http://www.advancedfinancialtax.com/blog/rollover/59 http://www.advancedfinancialtax.com/blog/rollover/59 Advanced Financial Tax, LLC A rollover is a tax-free withdrawal of cash or other assets from one retirement plan and its reinvestment in another retirement program. The amount rolled over is excluded from gross income in the year of the transfer. Generally, a rollover must be completed within 60 days after a distribution is received in order to ensure non-taxability. The 60-day rule can be waived by the IRS if a delay is caused by a financial institution and certain conditions are met or caused by an event out of the control of the taxpayer and the IRS issues a waiver. Only one rollover from a Traditional IRA to another Traditional IRA is permitted within a 12-month period. However, there is no limit on the number of direct transfers from one financial institution to another. If a distribution is taken from an employee pension plan, the company will withhold 20% of the distribution even if the taxpayer plans a rollover. In that case, the taxpayer would need to make up the difference from other funds in order to have a fully tax-free rollover. This problem can be avoided by having the funds transferred directly to other retirement programs. Thu, 15 Jan 2015 19:00:00 GMT Take Advantage of Education Tax Benefits http://www.advancedfinancialtax.com/blog/take-advantage-of-education-tax-benefits/40040 http://www.advancedfinancialtax.com/blog/take-advantage-of-education-tax-benefits/40040 Advanced Financial Tax, LLC Article Highlights: Student loans   Gifting low basis assets  Education credits  Education savings programs  Educational savings bond interest  The tax code includes a number of incentives that, with proper planning, can provide tax benefits while you, your spouse, or children are being educated. Which of these options will provide the greatest tax benefit depends on each individual's particular circumstances. The following is an overview of the various possibilities. Student Loans - A major planning issue is how to finance your children's education. Those with substantial savings simply pay the expenses as they go while others begin setting aside money far in advance of the education need, perhaps utilizing a Coverdell account or Sec. 529 plan. Others 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 debt loan, which can also provide a longer repayment term and lower payments. When choosing between a home equity loan or 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 that you are taxed by the alternative minimum tax; and (2) student loans must be single-purpose loans—the interest deduction is available even if you do not itemize but is limited to $2,500 per year, and the deduction phases out for joint filers with income (AGI) between $130,000 and $160,000 ($65,000 to $80,000 for unmarried taxpayers). Gifting Low Basis Assets - Another frequently used tax strategy to finance education is to gift appreciated assets (typically stock) to a child and then allow the child to sell the stock to pay for the education. This results in transferring any gain on the stock to the child at a time when the child has little or no other income; tax on the gain is avoided or is at the child's low rate. With the lowest of the long-term capital gains rates currently being zero, Congress curtailed income shifting to children by making most full-time students under the age of 24 subject to the “kiddie tax.” This effectively taxes their unearned income at their parents' tax rates and makes the gifting of appreciated assets to a child less appealing as a way to finance college expenses. Education Credits - The tax code provides tax credits for post-secondary education tuition paid during the year for the taxpayer and dependents. Currently, there are two types of credits: the American Opportunity Credit, which is limited to any four tax years for the first four years of post-secondary education and provides up to $2,500 of credit for each student (some of which may be refundable), and the Lifetime Learning Credit, which provides up to $2,000 of credit for each family each year. The American Opportunity Credit is phased out for joint filers with incomes between $160,000 and $180,000 ($80,000 to $90,000 for single filers). The 2015 phaseout ranges for the Lifetime Learning Credit are $110,000-$130,000 for married joint and $55,000-$65,000 for others. Neither credit is allowed for married individuals who file separately. Careful planning for the timing of tuition payments can provide substantial tax benefits. Education Savings Programs - For those who wish to establish a formalized long-term savings program 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 nondeductible contributions generally limited to the gift tax exemption for the year ($14,000 in 2015). Both plans provide tax-free earnings if 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 age of majority, and contributions are phased out for joint filers between $190,000 and $220,000 ($95,000 and $110,000 for others) of income (AGI); and (2) Sec. 529 plans are only for post-secondary education, but the contributor retains control of the funds and there is no phase out of the contribution based on income. Educational Savings Bond Interest - There is also an exclusion of savings bond interest for Series EE or I Bonds that were issued after 1989 and 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 that the bonds are redeemed. As with other benefits, this one also has a phase-out limitation for joint filers with income between $115,750 and $145,750 ($77,200 and $92,200 for unmarried taxpayers, but those using the married filing separately status do not qualify for the exclusion). The exclusion is computed on IRS Form 8815, Exclusion of Interest from Series EE and I U.S. Savings Bonds Issued After 1989. If you would like to learn more about these benefits, or to work out a comprehensive plan to take advantage of them, please give this office a call.  Thu, 15 Jan 2015 19:00:00 GMT Section 179 Deduction http://www.advancedfinancialtax.com/blog/section-179-deduction/60 http://www.advancedfinancialtax.com/blog/section-179-deduction/60 Advanced Financial Tax, LLC This refers to a section of the Internal Revenue Code that permits taxpayers to expense (write off in one year) up to $25,000 (2014, adjusted for inflation annually) of business equipment expenditures that would normally have to be depreciated over their useful lives. The $25,000 allowance is gradually reduced for businesses that place into service more than $200,000 (2014, adjusted for inflation annually) of business equipment during the year. Caution: at the time this article was updated Congress was still considering reinstating previous higher limits for 2014. Wed, 14 Jan 2015 19:00:00 GMT Section 529 Plan http://www.advancedfinancialtax.com/blog/section-529-plan/61 http://www.advancedfinancialtax.com/blog/section-529-plan/61 Advanced Financial Tax, LLC Qualified Tuition Plans (also known as Section 529 Plans) 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 plans, also known as qualified tuition programs, allow taxpayers to gift large sums of money for a family member's college education, while continuing to maintain control of the funds. The earnings from these accounts grow tax-deferred and distributions 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. Tue, 13 Jan 2015 19:00:00 GMT Beware Of the One-per-12-Month IRA Rollover Limitation Beginning In 2015 http://www.advancedfinancialtax.com/blog/beware-of-the-one-per-12-month-ira-rollover-limitation-beginning-in-2015/40030 http://www.advancedfinancialtax.com/blog/beware-of-the-one-per-12-month-ira-rollover-limitation-beginning-in-2015/40030 Advanced Financial Tax, LLC Article Highlights: 60-Day limit  New interpretation  New one-per-12-month-period rollover rule  Types of plans included  The tax code allows an individual to take a distribution from his or her IRA account and avoid the tax and early distribution penalties if the distribution is redeposited to an IRA account owned by the taxpayer within 60 days of receiving the distribution. Early in 2014, in a tax court case, the court ruled that taxpayers could only have one IRA rollover per 12-month period. This was contrary to the IRS's long-standing one rollover per every IRA account every 12 months. This far more liberal position was also included in published IRS guidance. However, contrary to general public opinion, guidance provided by the IRS in their publications is not citable, carries no weight in audit or court, and only represents the IRS' interpretation of tax law. As a result, the IRS has adopted the Court's more restrictive position, but will not apply the new interpretation until 2015, giving taxpayers time to become aware of the new restrictions. The IRS is modifying its published 2015 guidance to reflect this new position. The IRS announced in November that the one-per-12-month-period rollover rule also applies to Simplified Employer Pension Plans (SEPs) and SIMPLE plans. Included in the November announcement, the IRS indicated it would not count a distribution taken in 2014 and rolled over in 2015 (within the 60-day limit) as a 2015 rollover. Not counted towards the one-per-12-month rule are traditional to Roth IRA conversions or trustee-to-trustee IRA transfers where the funds are directly transferred from one IRA trustee to another. Please call this office if you are planning an IRA distribution and subsequent rollover and are not positive it falls within the one-per-12-month limit.  Tue, 13 Jan 2015 19:00:00 GMT Self-Employment Tax http://www.advancedfinancialtax.com/blog/self-employment-tax/62 http://www.advancedfinancialtax.com/blog/self-employment-tax/62 Advanced Financial Tax, LLC Employees pay Social Security and Medicare taxes (collectively often referred to as FICA tax) through payroll withholding and the employer contributes a like amount for the employee. Since self-employed taxpayers do not have withholding, they pay an equivalent through what is called self-employment tax (SE tax). The tax is based upon the net profits from self-employment. For 2015, the rate is 15.3% of the first $118,500 (up from $117,000 in 2014) of earnings and 2.9% on all earnings over that amount. The SE tax is included as “other” tax on Form 1040 and can be paid as part of the estimated tax installments the taxpayer makes. An additional 0.9% rate applies to the Medicare portion of the SE tax when earned income exceeds certain thresholds - see the tax term “FICA.” Mon, 12 Jan 2015 19:00:00 GMT Shared Equity Arrangement http://www.advancedfinancialtax.com/blog/shared-equity-arrangement/63 http://www.advancedfinancialtax.com/blog/shared-equity-arrangement/63 Advanced Financial Tax, LLC A shared equity arrangement is a method of financing the purchase of a residence where two or more individuals acquire an ownership interest in a dwelling unit and one or more of the co-owners occupies the property and pays fair rent to the non-occupying co-owner(s). The agreement must be in writing. Before entering into this type of arrangement, be sure to contact this office. Sun, 11 Jan 2015 19:00:00 GMT Standard Deduction http://www.advancedfinancialtax.com/blog/standard-deduction/64 http://www.advancedfinancialtax.com/blog/standard-deduction/64 Advanced Financial Tax, LLC Most taxpayers are permitted to deduct either a standard deduction or itemized deductions in determining their taxable income. The standard deductions are based on filing status. For 2015, the amounts are: Single and Married Taxpayers Filing Separately $6,300 (up from $6,200 in 2014), Head of Household $9,250 (up from $9,100 in 2014), Married Filing Jointly and Surviving Spouse $12,600 (up from $12,400 in 2014), In addition, elderly and blind taxpayers are allowed an “add-on” to the standard deduction for their filing status. The add-on amount in 2015 for single taxpayers is $1,550 (same as in 2014) and $1,250 (up from $1,200 in 2014) for married taxpayers. As an example, in 2015, a married couple filing jointly and both over age 65 would have a standard deduction of $15,100 ($12,600+ $1,250 + $1,250). For 2015, the standard deduction of an individual who is, or could be, a dependent of someone else is limited to the greater of $1,050 or the individual's earned income plus $350 (but not exceeding $6,300). Note: When filing using the married separate status, both spouses either must itemize their deductions or use the standard deduction. Sat, 10 Jan 2015 19:00:00 GMT Standard Mileage Rate http://www.advancedfinancialtax.com/blog/standard-mileage-rate/65 http://www.advancedfinancialtax.com/blog/standard-mileage-rate/65 Advanced Financial Tax, LLC This is the per mile rate that can be used in lieu of actual expenses when using a vehicle for a deductible purpose. For 2014, the cents per mile rates are: 56.0 for business use and 23.5 for moving and medical use. For charity travel the cents per mile rate is 14.0. Parking expenses can be taken in addition to the standard mileage rate. Self-employed individuals can also add the business portion of the interest expense to acquire the vehicle. The standard rate can be used for up to four vehicles being used simultaneously. At the time this article was updated, the 2015 mileage rates had not been published, but will be similar to the 2014 rates. Fri, 09 Jan 2015 19:00:00 GMT Stepped-Up Basis http://www.advancedfinancialtax.com/blog/stepped-up-basis/66 http://www.advancedfinancialtax.com/blog/stepped-up-basis/66 Advanced Financial Tax, LLC When property is inherited, the basis for the beneficiaries is the value assigned to that property in the estate. Generally, that basis is the value of the property on the date of death of the decedent or on an alternate date selected by the executor of the estate. Thus, any appreciation up to the date of death is forgiven for regular tax purposes and the beneficiary starts with a stepped-up basis. This also applies to property inherited from a spouse. Caution - though infrequent, there is a potential for a step-down in basis as well. Thu, 08 Jan 2015 19:00:00 GMT Don’t Forget Those Nominee 1099s http://www.advancedfinancialtax.com/blog/don8217t-forget-those-nominee-1099s/36087 http://www.advancedfinancialtax.com/blog/don8217t-forget-those-nominee-1099s/36087 Advanced Financial Tax, LLC Article Highlights: Who is a nominee? What a nominee must do Allocating reported income Series 1099 forms For tax purposes, if you receive, in your name, income that actually belongs to someone else, you are also a nominee. Being a nominee means you must file with the IRS a 1099 form appropriate to the type of income you received that reports the other individual’s share of the income and give a copy of the 1099 to the actual owner of the income. However, if the other person is your spouse, no 1099 filing is required. The most commonly encountered nominee situations include when you have a joint bank account or brokerage account with someone other than your spouse and all the income from those accounts is reported under your Social Security number (SSN). You will need to issue the IRS and your joint account owner a 1099 reporting the co-owner’s share of the income under his or her SSN. Then, when you file your return, you show all of the income but back out the co-owner’s share as “nominee amount.” Thus only your portion of the income is included in your taxable income. The type of 1099 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. Forms 1099-INT and 1099-DIV that you issue as a nominee are supposed to be given to the recipients by January 31, while the deadline for giving Forms 1099-B to the other owner(s) is February 15. In order to avoid a penalty, copies of the 1099s need to be sent to the IRS by February 28. (When these due dates are a Saturday, Sunday or legal holiday, as they are in 2015, the forms become due on the next business day.) The 1099s 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 along with the required 1096 transmittal form. This service provides recipient and file copies for your records. If you have questions about filing 1099s, please call this office. Thu, 08 Jan 2015 19:00:00 GMT Tax Credits http://www.advancedfinancialtax.com/blog/tax-credits/67 http://www.advancedfinancialtax.com/blog/tax-credits/67 Advanced Financial Tax, LLC A tax credit is a tax benefit that offsets the tax dollar for dollar. Most credits are nonrefundable and can only be used to reduce the tax to zero. A refundable credit, like the earned income credit, offsets the tax and any balance not used to offset the tax is refundable and included in the year's refund. Unused credit from some nonrefundable credits can be carried over and some cannot. Wed, 07 Jan 2015 19:00:00 GMT Tax Identification (ID) Number http://www.advancedfinancialtax.com/blog/tax-identification-id-number/68 http://www.advancedfinancialtax.com/blog/tax-identification-id-number/68 Advanced Financial Tax, LLC For most individuals, their tax identification number is their Social Security number (SSN). It is used when filing tax returns and must be given to financial institutions, employers and other income payers so that appropriate information reporting forms can be completed. Failing to do so can result in a penalty or mandatory back-up withholding. A SSN is also required for a dependent, regardless of age, in order to claim the dependent's exemption allowance and certain tax credits, such as the earned income credit. Nonresident or resident aliens may apply to the IRS for an “individual taxpayer identification number” (ITIN) if they are not eligible for a SSN. A special “adoption taxpayer identification number” (ATIN) may be obtained when a taxpayer is in the process of adopting a U.S. citizen or resident child and a SSN cannot be obtained; the ATIN cannot be used once the adoption is final - a SSN must be obtained for the child. Individuals who have household employees or who are self-employed with employees are required to obtain and use a Federal employer identification number (FEIN) as well. A self-employed taxpayer who has a Keogh plan must have an FEIN, even if no other person is employed in the business. Tue, 06 Jan 2015 19:00:00 GMT 2015 Standard Mileage Rates Announced http://www.advancedfinancialtax.com/blog/2015-standard-mileage-rates-announced/40012 http://www.advancedfinancialtax.com/blog/2015-standard-mileage-rates-announced/40012 Advanced Financial Tax, LLC Article Highlights: 2015 standard mileage rates Business, charitable, medical and moving rates Possible mid-year adjustments The Internal Revenue Service recently issued the 2015 optional standard mileage rates used to calculate the deductible costs of operating an automobile for business, charitable, medical or moving purposes. Beginning on Jan. 1, 2015, the standard mileage rates for the use of a car (also vans, pickups or panel trucks) will be: 57.5 cents per mile for business miles driven (includes a 24 cent per mile allocation for depreciation) 23 cents per mile driven for medical or moving purposes; and 14 cents per mile driven in service of charitable organizations. CAUTION: With the recent substantial drop in gas prices there is a very good chance the IRS will adjust the standard mileage rates mid-year to reflect the lower gas prices as they have done in prior years when gas prices spiked during the year. The standard mileage rate for business is based on an annual study of the fixed and variable costs of operating an automobile. The rate for medical and moving purposes is based on the variable costs as determined by the same study. The rate for using an automobile while performing services for a charitable organization is statutorily set and has been 14 cents for over 15 years. 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 any vehicle used for hire or for more than four vehicles used simultaneously. Taxpayers always have the option of calculating the actual costs of using their vehicle rather than using the standard mileage rates. If you have questions related to best methods of deducting the business use of your vehicle or the documentation required, please give this office a call. Tue, 06 Jan 2015 19:00:00 GMT Taxable Income http://www.advancedfinancialtax.com/blog/taxable-income/69 http://www.advancedfinancialtax.com/blog/taxable-income/69 Advanced Financial Tax, LLC This can mean income that is taxable as opposed to income that is not, such as tax-exempt interest from municipal bonds. Or, it can refer to taxable income on a tax return, which is income less adjustments, deductions and exemptions (the final income upon which tax is computed). Mon, 05 Jan 2015 19:00:00 GMT Tax Bracket http://www.advancedfinancialtax.com/blog/tax-bracket/70 http://www.advancedfinancialtax.com/blog/tax-bracket/70 Advanced Financial Tax, LLC Try to envision income that is included on a tax return as blocks of income stacked one upon the other. The first block represents the taxpayer's standard or itemized deductions on which there is no tax. Following that is another block representing the total of the return's personal exemptions, which is also tax-free. The next block of income would represent the income subject to a 10% rate. If there were additional income, each subsequent block of income is taxed at progressively higher rates. Currently, the rates are 10%, 15%, 25%, 28%, 33%, 35% and the maximum at 39.6%. The tax rate on the last block of a taxpayer's income represents the taxpayer's tax bracket. The reasoning is that generally any increase or decrease in income would be affected at the top tax rate, also known as the tax bracket. Sun, 04 Jan 2015 19:00:00 GMT Unearned Income http://www.advancedfinancialtax.com/blog/unearned-income/71 http://www.advancedfinancialtax.com/blog/unearned-income/71 Advanced Financial Tax, LLC Is income not earned from personal services. Examples are income from investments, pensions, capital gains and passive activities. Sat, 03 Jan 2015 19:00:00 GMT Wash Sale http://www.advancedfinancialtax.com/blog/wash-sale/72 http://www.advancedfinancialtax.com/blog/wash-sale/72 Advanced Financial Tax, LLC The wash sale rules prevent taxpayers from realizing a loss from the sale of a security and then in a short period of time reacquiring that security. This rule only applies to sales resulting in a loss. A wash sale is defined as a sale that results in a loss and substantially the same security is purchased within 30 days before or after the date of the sale. When a loss is limited by the wash sale rule, the basis of the acquired shares is adjusted (increased) by the loss that wasn't allowed. The wash sale rule also applies to mutual funds. For example, if a mutual fund is sold at a loss and within the test period dividends from the fund were reinvested to buy more shares of the same fund, some or all of the loss may not be allowed. Fri, 02 Jan 2015 19:00:00 GMT Withholding http://www.advancedfinancialtax.com/blog/withholding/73 http://www.advancedfinancialtax.com/blog/withholding/73 Advanced Financial Tax, LLC This term is applied to amounts that are withheld from income for Federal and State taxes, Social Security and Medicare taxes. Withholding is most commonly associated with wages but can also occur on social security income, pension income, gambling income, unemployment payments, and in some cases, backup withholding on interest and dividend income where the taxpayer has failed to provide a Tax ID number to the payer. Fri, 02 Jan 2015 19:00:00 GMT Occupation Brochures http://www.advancedfinancialtax.com/blog/occupation-brochures/455 http://www.advancedfinancialtax.com/blog/occupation-brochures/455 Advanced Financial Tax, LLC Virtually all taxpayers incur deductible expenses related to their occupations. Although certain expenses may be deductible to a variety of occupations, most occupations will have a combination of expenses that are unique to that occupation alone. The following is information pertaining to deductible expenses as they apply to a variety of occupations. This includes both text discussions of key expenses and a deduction organizer for each occupation. Both the text discussions and the organizers are in pdf format for viewing and printing. Wed, 31 Dec 2014 19:00:00 GMT Family, Income, and Residence Changes Can Affect Your Premium Tax Credit http://www.advancedfinancialtax.com/blog/family-income-and-residence-changes-can-affect-your-premium-tax-credit/39987 http://www.advancedfinancialtax.com/blog/family-income-and-residence-changes-can-affect-your-premium-tax-credit/39987 Advanced Financial Tax, LLC Article Highlights: Advance premium tax credit (APTC)  Repayment avoidance  Things you should report  Special enrollment period  If you get health insurance coverage through a government Health Insurance Marketplace, it is very important that you keep the Marketplace aware of any changes in household income, marital status, and family size. If you are receiving advance payments of the premium tax credit, it is particularly important that you report changes in circumstances, including moving, to the Marketplace. There's a simple reason: reporting these income and life changes lets the Marketplace update the information used to determine your eligibility for a Marketplace plan, which may affect the appropriate amount of advance payments of the premium tax credit that the government sends to your health insurer on your behalf. Reporting the changes will help you avoid having too much or not enough premium assistance paid to reduce your monthly health insurance premiums. Getting too much premium assistance means you may owe additional money or get a smaller refund when you file your taxes. On the other hand, getting too little premium assistance could mean missing out on monthly premium assistance that you deserve. Changes in circumstances that you should report to the Marketplace include, but are not limited to: An increase or decrease in your estimated household income  Marriage or divorce  The birth or adoption of a child Moving  Starting a job that offers health insurance  Gaining or losing your eligibility for other health care coverage  Many of these changes in circumstances - including moving out of the area served by your current Marketplace plan - qualify you for a special enrollment period to change or get insurance through the Marketplace. In most cases, if you qualify for the special enrollment period, you will have sixty days to enroll following the change in circumstances. If you have questions about the premium tax credit or the advance payment of the credit, please give this office a call. Wed, 31 Dec 2014 19:00:00 GMT What to Do if You Receive a Dreaded IRS Letter http://www.advancedfinancialtax.com/blog/what-to-do-if-you-receive-a-dreaded-irs-letter/39975 http://www.advancedfinancialtax.com/blog/what-to-do-if-you-receive-a-dreaded-irs-letter/39975 Advanced Financial Tax, LLC Article Highlights: CP2000 Series Notices  Automated  Frequently Issued In Error  What You Should Do  When the IRS thinks it has found an issue with your tax return, it will contact you via mail with a CP series notice (most commonly CP2000). Please note that the IRS will never call or e-mail you initially about a tax delinquency. This is a trick used by scammers that has become quite prevalent. Most commonly, these notices will include a proposed tax due and any interest or penalties. The notice will include an explanation of the examination process and how you can respond. These automated notices are sent out year-round and are quite common. As the IRS tries to close the tax gap, it has become more aggressive in its collection efforts. In addition, with some taxpayers using low-quality tax mills or do-it-yourself software, there has been an increase in the number of notices sent over the years because of preparer error. A missed check box here, a misunderstanding of a credit there, overlooked income—it all adds up. One of the largest tax software providers for self-preparers even needed to hire a huge new workforce to help its users deal with the increase in notices caused by novice taxpayers trying to do their own tax returns. This automated process starts when the IRS matches what you reported on your tax return to data reported by third parties. When this information does not agree, the automated collection effort begins. But don't panic - These notices often include errors. But you do need to realize that not responding by the 30-day deadline can have significant repercussions. The first thing to determine is which type of notice you have received. A CP2000 notice is quite different than many of the other CP notices that deal with identify theft, audit correspondence, earned income credit and much more. Also realize that a CP2000 notice includes a proposed, and almost always unfavorable, change to your tax return, and it is giving you an opportunity to dispute the proposed change. Procrastinating or ignoring the notice will only cause the IRS to ratchet up its collection efforts and make it increasingly difficult to dispute the proposed adjustment. Sometimes the IRS will be correct. You may have overlooked a capital gain, income from a second job, etc. Quite frequently, the IRS is incorrect simply because its software isn't sophisticated enough to pick up all the information on your attached schedules. The first thing you should do is contact this office as quickly as possible so we can review the notice to determine whether it is correct and quickly respond to it.   Mon, 29 Dec 2014 19:00:00 GMT Only 8 Days Left For 2014 Tax Deductions http://www.advancedfinancialtax.com/blog/only-8-days-left-for-2014-tax-deductions/39944 http://www.advancedfinancialtax.com/blog/only-8-days-left-for-2014-tax-deductions/39944 Advanced Financial Tax, LLC Article Highlights: Actions you can still take to reduce your 2014 tax bite  Actions must be completed before the end of 2014  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 2014, is Wednesday, Dec. 31. That is only 8 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 2014 return if you take delivery after the end of the year, even if you paid for the item in 2014. 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. Tue, 23 Dec 2014 19:00:00 GMT Creating Item Records in QuickBooks http://www.advancedfinancialtax.com/blog/creating-item-records-in-quickbooks/39953 http://www.advancedfinancialtax.com/blog/creating-item-records-in-quickbooks/39953 Advanced Financial Tax, LLC Accurate, thorough item records inform your customers and help you track inventory levels correctly. Whether you're selling one-of-a-kind items or stocking dozens of the same kinds of products, you need to create records for each. When it comes time to create invoices or sales receipts, your careful work defining each type of item will: Ensure that your customers receive correct descriptions and pricing,  Provide the information you must know about your inventory levels, and,  Help you make smart decisions about reordering.  You'll start this process by making sure that your QuickBooks file is set up to track inventory. Open the Edit menu and select Preferences, then Items & Inventory. Click the Company Preferences tab and click in the box in front of Inventory and purchase orders are activated if there isn't a check in the box already. Here, too, you can ask that QuickBooks warn you when there isn't enough inventory to sell. Click OK when you're finished. Figure 1: You need to be sure that QuickBooks knows you'll be tracking inventory before you start making sales. To create your first item, open the Lists menu and select Item List. Click the down arrow next to Item in the lower left corner of the window that opens and select New. The New Item window opens. Warning: You must be very precise when you're creating item records in order to avoid confusing your customers and creating problems with your accounting down the road. Please call us if you want us to walk you through the first few items. QuickBooks should display the list of options below TYPE. Since you're going to be tracking inventory that you buy and sell, select Inventory Part. Enter a name and/or item number in the next field. This is not the text that will appear on transactions; it's simply for you to be able to recognize each item in your own bookkeeping. Figure 2: Let us work with you if you have any doubts about the data that needs to be entered in the New Item window. It must be 100 percent accurate. In the example above, the box next to Subitem of has a check mark in it because “Light Pine” is only one of the cabinet types you sell (you can check this box and select Add New> if you want to create a new “parent” item on the fly). Leave the next field blank if your item doesn't have a Part Number, and disregard UNIT OF MEASURE unless you're using QuickBooks Premier or above. Fill in the PURCHASE INFORMATION and SALES INFORMATION fields (or select from the lists of options). Keep in mind that the descriptive text you enter here will appear on transaction forms, though customers will never see what you've actually paid for items, of course (your Cost, as opposed to the Sales Price). QuickBooks should have automatically selected the COGS Account (Cost of Goods Sold), but you'll need to specify an Income Account. Please ask us if you're not sure, as this is a critical designation. The Preferred Vendor and Tax Code fields will display lists if you've already set these up. QuickBooks should have pre-selected your Asset Account. If you want to be alerted when your inventory level for this item has fallen to a specific number (Min) so you can reorder up to the point you specify in the Max field, enter those numbers there (the Inventory to Reorder option must be turned on in Edit | Preferences | Reminders). If you already have this item in stock, enter the number under On Hand. QuickBooks will automatically calculate Average Cost and On P.O. (Purchase Order). Click OK when you've completed all of the fields. This item will now appear in your Item List, and will be available to use in transactions. When you want to create, edit, delete, etc. any of your items, simply open the same menu you opened in the first step here (Lists | Item List | Item). Figure 3: The Item menu, found in the lower left corner of the Item List. Precisely created Inventory Part records are critical to accurate sales and purchase transactions. So use exceptional care in building them. Tue, 23 Dec 2014 19:00:00 GMT January 2015 Individual Due Dates http://www.advancedfinancialtax.com/blog/january-2015-individual-due-dates/35713 http://www.advancedfinancialtax.com/blog/january-2015-individual-due-dates/35713 Advanced Financial Tax, LLC 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 12 - 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 12.January 15 - Individual Estimated Tax Payment Due - It’s time to make your fourth quarter estimated tax installment payment for the 2014 tax year.January 15 - Farmers & Fishermen Estimated Tax Payment Due - If you are a farmer or fisherman whose gross income for 2013 or 2014 is two-thirds from farming or fishing, it is time to pay your estimated tax for 2014 using Form 1040-ES. You have until April 15, 2015 to file your 2014 income tax return (Form 1040). If you do not pay your estimated tax by January 15, you must file your 2014 return and pay any tax due by March 2, 2015 to avoid an estimated tax penalty. Mon, 22 Dec 2014 19:00:00 GMT January 2015 Business Due Dates http://www.advancedfinancialtax.com/blog/january-2015-business-due-dates/35714 http://www.advancedfinancialtax.com/blog/january-2015-business-due-dates/35714 Advanced Financial Tax, LLC January 15 - Employer’s Monthly Deposit Due - If 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 2014. This is also the due date for the nonpayroll withholding deposit for December 2014 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. Mon, 22 Dec 2014 19:00:00 GMT Last-Minute Congressional Action May Require Some Year-End Tax Moves http://www.advancedfinancialtax.com/blog/last-minute-congressional-action-may-require-some-year-end-tax-moves/39941 http://www.advancedfinancialtax.com/blog/last-minute-congressional-action-may-require-some-year-end-tax-moves/39941 Advanced Financial Tax, LLC Article Highlights: Congress passes extender bill  IRA to Charity Transfers for Older Taxpayers  Bonus Depreciation for Businesses  Sales Tax Deduction  Above-the-Line Tuition Deduction  Home Energy Saving Improvements  Recent legislation passed just before adjournment by Congress provides some last-minute opportunities for taxpayers. These include tax provisions that had expired in 2013 but because of this bill have been extended through 2014. However, to take advantage of these extended laws you must qualify for them based on actions taken earlier in the year or you will need to take action before the end of the year, which does not give you a lot of time. The following are five extender provisions for which there is enough time to take last-minute action that could produce substantial tax benefits for 2014. IRA to Charity Transfers for Older Taxpayers - This is the provision of the law that allows taxpayers who are age 70.5 and older during the tax year to have up to $100,000 of IRA funds transferred directly to a qualified charity. The distribution is non-taxable up to the $100,000 limit for each spouse and can be counted as the required minimum distribution for the year. No charitable deduction is allowed for the transfer, but since the distribution is non-taxable, it reduces the taxpayer's AGI. Many tax benefits are phased out or totally eliminated when AGI-based thresholds are exceeded. Thus, a lower AGI may protect some or all of those benefits. Also keep in mind that Social Security income is tax-free for lower-income retirees but becomes taxable as income increases, and by having the IRA distribution be non-taxable, the tax on the Social Security income may be reduced or eliminated. However, to benefit from any of the foregoing, the transfer of the IRA funds to a qualifying charity must be completed by December 31. Please contact the office if you need assistance in planning or if you previously made a transfer and have additional questions.   Bonus Depreciation for Businesses - The extender bill also extended the 50 percent first-year bonus depreciation deduction for personal tangible equipment purchased during 2014. This allows businesses to write off 50 percent of the cost of new business assets purchased during the year. Although it is probably too late to acquire and place into service very large items, this extender also increased the first-year deprecation limit on cars from $3,160 to $11,160 ($3,460 to $11,460 for trucks and vans). These amounts must be factored by the percentage of business use, which must be more than 50 percent to qualify for the bonus depreciation. There is still time to purchase and place into service a business vehicle, should that be a prudent business acquisition.   Sales Tax Deduction - Another extended item is the sales tax deduction, in lieu of deducting state income tax for those who itemize their deductions. This is especially beneficial for taxpayers in states with no state income tax. It can also benefit those in states with state income tax where the sales tax for the year exceeds the state income tax they've paid. If you are contemplating purchasing a big-ticket item such as a new car, purchasing it before year's end may be beneficial.   Above-the-Line Tuition Deductions - Among the extenders was the ability to deduct, above-the-line (without itemizing), tuition paid for higher education, subject to reductions for higher income taxpayers. The tuition that can be deducted is the tuition paid during 2014, including the tuition for an academic period beginning in the first three months of 2015. But to take the deduction the tuition must be paid before the close of the year. It is recommended that you contact this office prior to taking action since the deduction is limited to $2,000 or $4,000 depending on income, and it may be better to take an education credit if otherwise qualified to do so.   Home Energy Saving Improvements - Also extended was the provision to take a tax credit, up to a lifetime limit of $500, for making certain home improvements that conserve energy. Although it would be hard to get such an improvement initiated and completed before year's end, if you have qualifying improvements in progress, you might be able to complete them by December 31. To qualify, the improvements must reasonably be expected to have a useful life of at least 5 years. Improvements that qualify include energy efficient exterior windows and skylights, exterior doors, certain metal roofs, certain asphalt roofing, heating systems, air conditioning systems and certain insulation materials or systems designed to reduce heat loss or gain.  Please call this office if you have questions about how any of the above items might benefit you.  Mon, 22 Dec 2014 19:00:00 GMT Deducting Auto Expenses & Luxury Auto Limits http://www.advancedfinancialtax.com/blog/deducting-auto-expenses--luxury-auto-limits/123 http://www.advancedfinancialtax.com/blog/deducting-auto-expenses--luxury-auto-limits/123 Advanced Financial Tax, LLC When you use a vehicle for business purposes, you can deduct the business portion of the operating expenses as a business expense. If you use the car for both business and personal purposes, you may deduct only the cost of its business use. You can generally determine the expense for the business use of your 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. The rate varies from year to year and for 2014, the standard mileage rate is 56.0 cents per mile (down from 56.5 in 2013). In addition, the cost of business-related parking and tolls is deductible. At the time this article was updated (12/14) the IRS had not yet released the 2015 rate.Caution: If you don’t use the standard mileage rate in the first year the vehicle is placed in service, you cannot use it in future years for that vehicle. If, in a subsequent year, you switch to the actual method, you must use the straight-line method for depreciation. If the car is leased, you must continue to use the standard mileage rate in future years.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 depreciation deduction for luxury vehicles has an annual limit, which is $3,160 for 2014. Caution: At the time this article was updated, Congress was considering extending certain tax breaks, and if they choose to extend the bonus depreciation, the first year luxury vehicle limit will increase to $11,160. The first-year limit is $300 more for vans and trucks purchased in 2014. At the time this article was updated (12/14) the IRS had not yet released the 2015 rate. 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. The following is a representative example of a heavy SUV write-off (assuming 100% business use) using the maximum Sec 179 exclusion. Heavy SUV Total Cost $50,000 Sec 179 Deduction Balance $25,000 Regular 1st Year Depreciation (20%) $5,000Total First Year Write-Off $30,000 If you are planning to buy an SUV based on this big write-off, be sure to call first to find out the status of any current legislation on this issue and how the tax benefits apply to your particular situation. Sat, 20 Dec 2014 19:00:00 GMT Looking for Business Tax Deductions? Look No Further Than Your Business Vehicle! http://www.advancedfinancialtax.com/blog/looking-for-business-tax-deductions-look-no-further-than-your-business-vehicle/337 http://www.advancedfinancialtax.com/blog/looking-for-business-tax-deductions-look-no-further-than-your-business-vehicle/337 Advanced Financial Tax, LLC The options for deducting the business use of a vehicle are both numerous and generous. In fact, there are so many options that some can easily be overlooked. Note: When a vehicle is used both for personal and business use, the expenses must be prorated based on miles driven for each purpose.Listed below are some of the current options: Lease or Purchase – Your first option deals with the manner in which you acquire the vehicle. Whether you decide to lease the vehicle or purchase it, you may choose to deduct the business use of the vehicle using either the actual expense method or the standard cents-per-mile method. Note: If you choose the actual expense method the first year, then the standard cents-per-mile method cannot be used in any future year for that vehicle. Trade-In or Sell Old Vehicle – If you are replacing an existing vehicle, you have the option either to trade in the old vehicle or to sell it. Without considering other economic factors, if the sale of the old vehicle would result in a gain, then you may wish to consider trading it in and avoid the need of reporting the gain and instead reduce the cost basis of the replacement vehicle. On the other hand, if the sale will result in a loss, then it would probably be better to sell the vehicle and take the loss on your return. Cents-Per-Mile Method – This method requires the least amount of bookkeeping. You need only record the business miles and total miles driven on the vehicle each year, and the business deduction is the business miles multiplied by the rate for the year. Note: This method cannot be used to compute the deductible expenses of five or more autos owned or leased by a taxpayer and used simultaneously, such as in fleet operations. Actual Expense Method – As the name implies, this method involves deducting the actual expenses of operating the vehicle. This requires keeping track of the operating costs, including fuel, oil, maintenance, repairs and insurance. In addition, either the annual lease expense or, depending on the class of vehicle, an allowance for wear and tear on the vehicle is added to the annual expenses. A record of the business and total miles must also be maintained to determine the business portion of the expenses. Class of Vehicle – The class of vehicle affects the limitations that are applied to the allowances for wear and tear available for a particular vehicle. A. Vehicles With No Limitations: The following vehicles qualify for the Sec 179 deduction, regular depreciation and for years when permitted by law, first-year bonus depreciation. Depending on the methods selected, virtually any amount of the cost of this type of vehicle can be deducted in the year of purchase. - Heavy Vehicle – A vehicle exceeding 6,000 pounds gross unladen weight such as many of today’s sport-utility vehicles. - Qualifying Nonpersonal Use Vehicle – A vehicle that has been specially modified with the result that it is not likely to be used more than a de minimis amount for personal purposes. - Exempt Vehicles – A vehicle used directly in a taxpayer’s trade or business of transporting persons or property for compensation or hire, such as an ambulance, hearse, taxi, clean fuel vehicles, bus or commuter highway vehicles. B. Those With Limitations: The following vehicles are limited by the luxury auto rules:- Luxury Vehicle – Generally, a vehicle costing more than an annually inflation-adjusted threshold ($15,800 to $17,300 for 2014) and not falling into one of the other previous categories. This threshold and the annual limits are not determined until part way through the year. - Special Trucks & Vans – Defined as passenger autos that are built on a truck chassis, including minivans and sport-utility vehicles (SUVs). These vehicles are subject to the annual luxury vehicle limitations, but are allowed an additional amount (usually $200 or $300, depending on the year purchased) added on to those limitations.C. Vehicles with Other Limitations: In addition to those described above, there are certain other seldom encountered vehicles, such as electric vehicles and certified clean fuel vehicles, with other special allowances. Interest and Taxes – In addition to the other deductions discussed above, the business portion of personal property taxes, license and interest on the debt to purchase the vehicle are also deductible when the vehicle expenses are being deducted on a business schedule. NOTE: Limitation for Employees - An employee who uses a personal vehicle for business and who qualifies to claim unreimbursed vehicle-related costs must include those expenses as part of the miscellaneous itemized deductions category on Schedule A, and that entire category of expenses is deductible only to the extent the total exceeds 2% of the taxpayer’s adjusted gross income. However, employees are allowed to claim all of the personal property tax portion of their vehicle registration fees as a Schedule A tax expense rather than as part of their employee business expenses. Sat, 20 Dec 2014 19:00:00 GMT Divorce Issues http://www.advancedfinancialtax.com/blog/divorce-issues/5441 http://www.advancedfinancialtax.com/blog/divorce-issues/5441 Advanced Financial Tax, LLC Divorce can be one of life’s most traumatic events and is seldom amicable. A couple must divide up their assets and establish separate households which, except for the wealthy, will bring about financial hardship and stress. Added to this financial burden are the legal costs and, where children are involved, custody and visitation issues. Not to be overlooked are the long-term financial issues of alimony and child support. Substantial tax laws have evolved to deal with these issues and are detailed below.• Attorney Fees & Court Costs• Property Settlements • Children • Primary Residence• Filing Status • AlimonyAttorney Fees & Court Costs – The general rule for legal expenses (including attorney fees, court costs, etc.) is that they are tax deductible if incurred in the production or collection of taxable income and there must be a reasonably close connection between the legal expense and the production or collection of taxable income.Thus, the legal costs connected with divorce, separation or support is considered nondeductible personal expenses.Nondeductibility extends to legal fees incurred in disputes over money claims. An exception to the nondeductibility rule is that the part of legal fees attributable to producing taxable alimony is deductible by the recipient of the alimony. The attorney should stipulate what part of the fee relates to alimony to ensure a deduction for the alimony recipient.When related to the production of taxable alimony, the legal fees are deducted as a miscellaneous itemized deduction subject to the 2% of adjusted gross income (AGI) limits, which means the taxpayer deducting the expense must itemize his or her deductions and can only deduct the amount of total miscellaneous expenses that exceeds 2% of his or her income (AGI). These expenses are not deductible at all for the alternative minimum tax (AMT) computation.Children – The tax code provides a number of tax benefits related to children. When couples with children become divorced, the tax code specifies who benefits from those tax advantages.Child Support - The financial responsibility to support their children lies with divorced parents in the same manner as when the child’s parents were married. Thus, if one parent is required to make child support payments to the other parent, those payments are not deductible by the parent making the payments, nor are they taxable income to the parent receiving the payments.Tax Exemption – Each qualified child (generally those under the age of 19 or full-time students under the age of 24) represents a tax deduction in the form of a personal exemption to the parent with custody of the child. The exemption amount for 2015 is $4,000 (up from $3,950 in 2014) and, for example, creates a tax savings of $600 ($4,000 x .15) for taxpayers in the 15% tax bracket.Custodial Parent – Often, divorcing parents will be awarded joint custody. However, tax law generally does not allow the tax benefits to be shared by both parents and instead allows only one parent to qualify for the benefits; that parent is the one with physical custody more than 50% of the year. For years, this was a difficult area with some parents who were literally clocking the amount of time day and night the child was with them in order to claim the exemption for the year.This, in many cases, got so far out of hand that the IRS adopted regulations to deal with the issue. The IRS defines a “custodial parent” to be the parent with whom the child resides for the greater number of nights during the year. A child resides with a parent for a night if the child sleeps at the residence of that parent (whether or not the parent is present) or in the company of the parent when the child doesn’t sleep at the parent’s residence, such as when the parent and child are on vacation together. The time that the child goes to sleep is irrelevant. Provisions for special circumstances include:• Absences of Child - If a child is temporarily absent from a parent’s home for a night, the child is treated as residing with the parent with whom the child would have resided for the night. A night is not counted for either parent if the child would not have resided with either parent for the night (for example, because a court awarded custody of the child to a third party for the period of absence) or it cannot be determined with which parent the child would have resided for the night.• Equal Number of Nights - If a child resides with each parent for the same number of nights, then the parent with the higher AGI for the year is treated as the custodial parent.• Night Spans Two Years – A night that extends over two tax years is allocated to the tax year in which the night begins. Thus, for example, a night that begins on December 31, 2014 is counted for taxable year 2014.• Parent Works at Night – If, due to a parent’s nighttime work schedule, a child resides for a great number of days but not nights with the parent who works at night, that parent is treated as the custodial parent. On a school day, the child is treated as residing at the primary residence registered with the school.Divorce Agreements & Decrees Don’t Trump Federal Tax Law – It is not uncommon for divorce attorneys, and sometimes the divorce courts, to specify in the divorce agreement or decree who is to claim a child’s exemption. It is important to understand that “exemption” is part of Federal tax law, and a divorce proceeding cannot trump Federal tax laws. Thus, regardless of what the divorce agreement reads, the exemption can only be claimed by the parent with custody the greater part of the year unless the custodial parent releases (in writing) the exemption to the other parent. The release can be for a single or multiple years and a custodial parent should exercise caution in executing a release, especially for more than one year. The release must be a written declaration and it must be unconditional (no strings attached such as requiring the non-custodial parent to meet support payment obligations). It must name the non-custodial parent and specify the year or years for which it is effective. If it specifies “all future years,” it is treated as specifying the first taxable year after the year in which it is executed and all subsequent years.If the release is not made on the official IRS form, it must conform to the substance of that form, and it must be executed for the sole purpose of serving as a written declaration under this section. A court order or decree or separation agreement may not serve as a written declaration (because it has other purposes than releasing the exemption to the non-custodial parent). The IRS also will not accept a state court’s allocation of exemptions because the Internal Revenue Code, not state law, determines who may claim a child’s exemption for federal income tax purposes.The non-custodial parent must attach a copy of the written declaration to his or her return for each year in which the child is claimed as a dependent. Dependents and the Affordable Care Act (ACA) – The ACA imposes a penalty on a taxpayer if anyone in the taxpayer’s tax family does not have health insurance. A taxpayer’s tax family includes the taxpayer, the taxpayer’s spouse, if married and filing jointly, and anyone for whom the taxpayer claims, or could claim, a dependency exemption. Thus, in the case of divorced parents, the parent that claims the dependency exemption for their child is the one subject to the penalty. The penalty for 2015 is the greater of $325 for each uninsured adult plus $162.50 per uninsured child under 18 (not to exceed $975) or 2.0% of the family’s household income. In 2016 these amounts increase to the greater of $695 for each uninsured adult plus $347.50 per uninsured child (not to exceed $2,085) or 2.5% of the family’s household income. The parent who claims the dependent exemption is also the one who would be able to claim the premium tax credit for the the dependent’s health care coverage, if otherwise eligible, even if the other parent pays the premiums.Last to File – Occasionally, both parents will attempt to claim the same child. This will not go unnoticed by the IRS, since they match tax ID numbers and will always discover when both parents have claimed the same child and issue a notice of tax change to the parent that filed last. Although not necessarily fair, the IRS will deny the child’s exemption for the parent who filed last and require that parent to prove entitlement to the exemption before reversing their decision.Effect on Filing Status – For income tax purposes, a taxpayer’s marital status for the entire year is determined on the last day of the tax year. Thus, unless remarried, a divorced couple will be treated as unmarried individuals beginning in the year their divorce is final. Where there are no children or other qualified dependents, this means that starting with the year the divorce is final, the former spouses will each file a return using the “Single” status. However, if the couple has a child or children, the custodial parent, if not remarried, will qualify and benefit from the Head of Household filing status. Eligible Head of Household filers are allowed increased tax benefits. For example, the 2015 federal standard deduction, which is claimed in lieu of itemizing deductions, is $9,250 (up from $9,100 in 2014) for Head of Household vs. $6,300 (up from $6,200 in 2014) for Single status. Many phase-outs of various deductions and credits have higher-income thresholds for Head of Household filers than Single filers, which could result in the Head of Household filer claiming a bigger deduction or credit than a Single filer with the same income. Additionally, the ranges of income are wider for most federal tax rates for Heads of Households than for Singles. Education Credits – Tax regulations provide that solely for education credit purposes, if a third party 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. Thus, in the case of divorced parents, the custodial parent will be able to claim the education credit even if the non-custodial parent is the one that actually pays the expense.Example: If one divorced parent pays qualified tuition to a college for a child, but the other parent has custody of the child (and is eligible to claim the child as a dependent), the custodial parent is treated as having paid the tuition directly to the college and would be the one to claim the credit.The regulations also provide that if a taxpayer is eligible to but does not claim a student as a dependent, only the student can claim the education credit for the student’s qualified tuition and related expenses.Medical Expenses – Solely for the purpose of deducting medical expenses, a child of divorced parents is considered to be a dependent of both parents (so that each parent may deduct the medical expenses he or she pays for the child.)Example – Bob and Jan are divorced and have two minor children. Jan claims the children as dependents and Bob pays their medical insurance and other medical expenses. Under the exception, because Jan claims them as dependents, Bob can claim the medical expenses that he pays.Kiddie Tax - To prevent parents from placing investments in their children’s names to take advantage of the child’s lower tax rate, Congress many years back created what is referred to as the “Kiddie Tax.” Under the Kiddie Tax, a child’s investment income in excess of an annual floor amount, $2,100 in 2015 (up from $2,000 in 2014), ($1,900 for 2011) is taxed at the parent’s tax rate rather than the child’s. These rules generally apply to children under the age of 19 or those that are full-time students under the age of 24. For divorced or separated parents, the tax code provides the following rules to determine which parent’s return will be used to determine the tax rates used:• Parents are married: If the child's parents file separate returns, the return of the parent with the greater taxable income is used.• Parents not living together: If a child's parents are married to each other but not living together, and the parent with whom the child lives (the custodial parent) is considered unmarried (i.e.; lived apart for the last 6 months of the tax year and qualifies for the head of household filing status), the custodial parent’s return is used. If the custodial parent is not considered unmarried, the return of the parent with the greater taxable income is used.• Parents divorced: If a child's parents are divorced or legally separated, and the parent who had custody of the child for the greater part of the year (the custodial parent) has not remarried, the return of the custodial parent is used.• Custodial parent remarried: If the custodial parent has remarried, the stepparent (rather than the noncustodial parent) is treated as the child's other parent. Therefore, if the custodial parent and the stepparent file a joint return, that joint return – and not the return of the noncustodial parent – is used.Filing Status – The marital status of a husband and wife is terminated when the couple is legally separated under a decree of divorce or of separate maintenance. An interlocutory (temporary) decree of divorce doesn't end a marriage until the decree becomes final. A couple living under a legal separation agreement but without any court decree isn't legally separated for tax purposes, because such an agreement could be terminated by the parties upon reconciliation and resumption of cohabitation.The following are filing options for the various stages of divorce:Divorce is Final - Once divorced and assuming that they do not remarry, taxpayers will file their returns individually. That generally means they will file as single taxpayers, or if they are the custodial parent of a child, they may qualify to file as Head of Household (see below).Separated but Divorce Not Final - Taxpayers who are in the process of a divorce but the divorce is not final by the end of the year have the following filing options:• File Jointly – When taxpayers file jointly, they become jointly and separately liable for the tax on the return. This may not be an appropriate filing status where there is an adversarial divorce action, since the refund or tax liability will be a joint one. The IRS will issue a refund check in the joint names and will generally go after the taxpayer with the ability to pay where there is an unpaid tax liability on the original return or a subsequent audit or adjustment. In addition, once the joint return is filed, it cannot be amended to another filing status after the due date of the original return.• File Separately – Taxpayers have the option to file individually using the Married Separate filing status (or possibly the Head of Household status – see below), in which case they would file using their own separate income and deductions. However, determining one’s separate income and deductions can quickly become complicated for a number of reasons, such as the couple has children where one only parent can claim the deduction or the taxpayers reside in a community property state and they must split their income earned prior to separation and include their own income after separation. If one spouse itemizes, both must itemize, possibly creating a hardship for the one who would otherwise benefit from using the standard deduction. Unlike filing a joint return, where the taxpayers generally are locked into the married joint status, they can later change their filing status by amending the two married separate status returns to one return filing as Married Joint, if the change is made within three years from the unextended due date of the original return.A number of tax benefits and provisions are not allowed to be claimed when the Married Separate status is used and the spouses have lived together at any time during the year. These unavailable items include education credits, deducting student loan interest, the adoption credit and exclusion of employer-provided adoption benefits, and deducting qualified higher education expenses (if available for that tax year). Certain income floors and calculations of phase-outs also discriminate against Married Separate filers, including the computation of the amount of Social Security benefits that are taxable.• Head of Household – Generally, only unmarried individuals may qualify to use the Head of Household filing status. However, a married taxpayer is considered to be unmarried and may use the more beneficial Head of Household status as an alternative to filing Married Separate. To qualify, the taxpayer must live apart from their spouse at least the last six months of the year 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 child, stepchild or eligible foster child for whom the taxpayer may claim a dependency exemption. A nondependent child will qualify a taxpayer for Head of Household only if the taxpayer gave written consent to allow the dependency to the non-custodial parent.Marriage Annulled – If a marriage is legally annulled, taxpayers will file as if never married. Returns that were jointly filed prior to the annulment and still open by the statute of limitations should be amended.Allocation of Jointly Paid Estimated Tax Payments – When filing separate tax returns after making joint estimated tax payments the IRS provides the following rules:• Spouses Agree Upon Allocation of Payments: One spouse can claim all of the estimated tax paid and the other none, or they can divide it in any other way they agree on.• Spouses Cannot Agree Upon Allocation of payments: They must divide the payments in proportion to each spouse's individual tax as shown on their separate returns for the year.Example - James and Evelyn Brown made joint estimated tax payments totaling $3,000. They file separate returns and cannot agree on how to divide estimates. James' tax is $4,000 and Evelyn's is $1,000.James’ share = 4,000/5,000 x 3,000 = $2,400Evelyn’s share = 1,000/5000 x 3,000 =$ 600Property Settlements – When married couples divorce, they must divide up their property between themselves. Many mistakenly think that this results in a sale or purchase of jointly-owned property, which is not the case. No gain or loss is recognized when property is transferred between spouses during marriage. This rule applies also to transfers between former spouses if “incident to a divorce.” A transfer is considered incident to a divorce if it occurs within one year after a marriage ends, or is related to the ending of a marriage (i.e., occurs within 6 years after a marriage ends and the transfer is made under a divorce or separation agreement). A transfer which occurs later than 6 years after a marriage ends can be considered incident to a divorce if the taxpayer can show that legal factors prevented earlier transfer of the property.Tax Basis of Transferred Property – Knowing the basis of assets such as stock and real estate is necessary to determine gain or loss when the property is sold, as well as for other tax issues, such as computing depreciation of business property. In its simplest form, basis is the price paid to acquire the property, but it can be more complicated when events have occurred that may have increased or decreased the basis. Examples of such events are stock splits or mergers and improvements made to real property. This modified basis is termed the adjusted basis. The basis of the property received in a transfer between spouses or former spouses is the adjusted basis the transferring spouse had in the property. In effect, the recipient spouse has received a gift of the transferred property. The bottom line is that the spouse who retains an item of property in a divorce assumes the same tax basis as the couple had when the property was jointly or separately owned, and therefore assumes the responsibility for any subsequent taxable gain or loss associated with the property when it is later disposed of. This can best be understood by the following example:Example: Incident to a divorce, Don and Shirley are dividing up their property which consists of a home in which they have $300,000 of equity (value of $550,000 less a $250,000 mortgage). They originally paid $170,000 with $20,000 down and a $150,000 mortgage. After the home appreciated in value, they subsequently took a $100,000 equity loan on the home to purchase a car, pay off credit card debt and go on vacation. They also have a bank account worth $350,000. Shirley wants to keep the home and Don agrees. They decide that Shirley, will take the home ($300,000 equity) along with $25,000 of the cash. Don will take the remaining $325,000 of the bank account cash. On the surface, this would seem like an even division of jointly-owned property. However, two important issues have been overlooked.(1) If the home was to be sold and the couple was to split the proceeds, both would have shared in the expense of the sale. Assuming a conservative sales expense of 6%, the cost of selling the home would be $33,000 ($550,000 x .06). Thus, by taking the title to the home, Shirley is assuming Don’s $16,500 (50% of $33,000) share of the sales cost based upon the value of the home at the time of the divorce.(2) When Shirley assumes the ownership of the home, she is also assuming the tax liability for the built-in gain on the property attributed to the period of joint ownership. At the time of the divorce, the property that the couple had originally purchased for $170,000 was worth $550,000. This equates to a built-in gain, after an assumed sales cost of $33,000 of $347,000 ($550,000 - $170,000 – $33,000). Thus, even if Shirley subsequently qualifies for the home gain exclusion, she would be single and only allowed to exclude $250,000 and would end up with a $97,000 ($347,000 -$250,000) taxable gain if she sold the home.Thus, where Don would have $325,000 of tax-free cash, Shirley’s after-tax and sales cost value of the home is significantly less.The foregoing example demonstrates the need to consider the tax ramifications carefully to determine an equitable division of property. This can be far more complicated where the taxpayers own businesses, investments, second homes, rental property, etc. Divorce counsel will sometimes overlook the tax issues related to splitting up assets, so taxpayers should consult with a tax professional before proceeding with the allocation of jointly-owned assets.Qualified Domestic Relations Order (QDRO) – A qualified domestic relations order is a judgment, decree, or order relating to payment of child support, alimony, or marital property rights to a spouse, former spouse, child or other dependent. The order has to contain certain specific information like the amount of the participant’s benefits to be paid to each alternate payee.If a spouse or former spouse receives retirement benefits from a participant’s plan under a QDRO, the former spouse must report the payments just as though he/she were the plan participant. If the distribution is from a qualified plan (not including an IRA) the early distribution penalty does not apply, regardless of the alternate payee’s age. The taxability is computed by allocating the spouse/former spouse a share of the investment in the contract and figuring the taxable portion accordingly.If the QDRO distribution is in the form of a lump sum from a pension plan, the alternate spouse payee recipient has the option of immediately paying the tax (but no 10% early withdrawal penalty if it is a qualified plan) on the distribution or deferring the tax into the future by rolling that distribution into his or her IRA or qualified plan. CAUTION: If the distribution is rolled over, then any subsequent distribution will be treated as if they were distributions from the spouse’s own IRA or qualified plan and will be subject to the pre-age 59-½ 10% early withdrawal penalty, unless other exceptions apply. Thus, the recipient of a QDRO distribution who is under age 59-½ and considering rolling the distribution over should carefully consider their pre-59-½ cash needs before executing a rollover. Under such circumstances, you are strongly urged to contact this office to determine in advance the tax implications of both options; also keep in mind that rollovers must be executed within 60 days of receiving the distribution.If one spouse’s IRA is transferred to the other spouse under the terms of a divorce or separation agreement (not a QDRO), the transfer is not taxable to either spouse. Since the transfer isn’t taxable, the 10% early distribution penalty won’t apply. However, when the receiving spouse takes a distribution from the transferred IRA, it will be taxable and may be subject to the 10% early withdrawal penalty, depending on that spouse’s age and whether any exceptions to the early distribution penalty apply.Primary Residence – Although the taxpayers’ primary residence will generally be included as part of the divorce property settlement discussed above, there are a number of special tax issues relating to a home:Home Gain Exclusion – The tax code permits a taxpayer to exclude up to $250,000 of gain from the sale of the taxpayer’s primary residence provided the taxpayer owned and used the home as their primary residence for two of the prior five years, counting back from the sale date. Married taxpayers can exclude up to $500,000 if either meets the two-out-of-five year ownership requirement and both meet the two-out-of-five year use requirement. Under current rules, the gain that is excludable may be less than $250,000/$500,000 if the home has been used after 2008 as other than a principal residence, such as a vacation home, rental or for other non-qualified use. The exclusion will be limited to the amount of gain not allocated to the non-qualified use period. If your home falls into this category, please contact this office for additional information.Sold After Division of Property - Divorcing taxpayers should take caution; since their marital status is determined on the last day of the tax year and the home has been transferred to single ownership, the $500,000 exclusion would no longer apply and the exclusion would be limited to $250,000 if sold by a spouse after the division of property. If the home is used as other than a personal residence, the reduced exclusion available to the seller should be taken into account when property divisions are negotiated.Sold After Divorce But Still Owned By Both - If the home continues to be jointly owned and is sold after the divorce each spouse, provided that spouse separately meets the two-out-of-five year use and ownership requirement, would be qualified for the $250,000 gain exclusion. Thus, if both met the ownership and use requirement, they could exclude up to $500,000 of gain. But see above if the residence has not always been used solely as a principal residence since 2009.Sold Before Meeting the Two-Out-of-Five Year Requirements – Tax law provides that taxpayers may qualify for prorated gain exclusion where they do not meet the two-out-of-five year use and ownership requirements and the sale was the result of “unforeseen” circumstances. As an example of a prorated exclusion, a taxpayer has a qualified unforeseen circumstance and only owned and used the home for 18 months. The single taxpayer would be qualified for a gain exclusion of $187,500 (18/24 x $250,000). The tax regulations include a number of safe harbor events that qualify as unforeseen circumstances and among them is a qualified individual's divorce or legal separation under a decree of divorce or separate maintenance.Transfers Related to Divorce – Where an individual holds property transferred between spouses incident to divorce, the period the individual owns the property includes the period the transferor owned the property. However, the period that the transferor spouse or former spouse used the property is not included in the period that the individual used the property. Thus, a transferee spouse would still have to satisfy the use requirement in order to qualify for the exclusion.Sale After Ex-spouse Retains Property for Some Period of Time – Frequently, as part of the divorce, a wife or husband (we’ll call them the “in-spouse”) will be granted the use of the home for a specific period of time, usually until children reach maturity. Under these circumstances, the other spouse (we’ll call them the out-spouse) is denied the ability to sell the home and avail themselves of the home gain exclusion. When the home is finally sold, usually some years later, the “out-spouse” would no longer meet the two-out-of-the-last-five years use requirement. A special provision of the tax regulations allows the “out-spouse” to treat the in-spouse’s use of the home as their own, making the home sale exclusion available to the “out-spouse” when the “in-spouse” finally sells the home, provided the “out-spouse” has not taken an exclusion on another home in the prior two years.First-Time Homebuyer Credit Repayment – For a home purchased after April 8, 2008 and before January 1, 2009 by a qualified first-time homebuyer, the homebuyer may have claimed a refundable tax credit of the lesser of 10% of the purchase price or $7,500. This credit was, in reality, an interest-free loan that had to be paid back to the federal government over 15 years. Taxpayers who took the credit should be aware that in the case of a transfer of the residence to a spouse or to a former spouse incident to a divorce, the credit is not paid back at the time of transfer. Instead, the liability to repay the credit accompanies the home and the transferee spouse (and not the transferor spouse) will be responsible for any future repayments. This future liability should be taken into consideration when the couple’s property division is being negotiated.Spousal Buy-Out Debt – Generally a taxpayer can only deduct the interest paid on up to $1,000,000 of home acquisition debt and $100,000 of equity debt. To the extent a taxpayer is subject to the alternative minimum tax (AMT) the equity debt interest provides no tax benefit. Generally taxpayers gain the most tax advantage from having acquisition debt interest. Acquisition debt is defined as debt used to acquire or substantially improve the taxpayer’s primary or second residence. There is a special rule that allows the spouse who retains the couple’s home, and incurs debt secured by the home to buy out the former spouse’s interest in the home, to treat that debt as acquisition debt (up to the $1 million limit) and retain the tax benefits of acquisition debt.Alimony - Alimony is the term used for payments to a separated or ex-spouse as part of a divorce or separation agreement. The payments are generally taxable to the recipient and tax-deductible by the payer, but are not treated as alimony if the spouses file a joint return with each other. However, because of taxpayer attempts to disguise property settlements and child support as alimony, the tax code includes a stringent definition of alimony. There is one set of rules for defining alimony under decrees and agreements made before 1985 and another set of rules currently in effect. Since this article is dealing with current divorce issues only, the current rules are discussed. For information regarding pre-1985 alimony, please call this office.Definition of Alimony – To be classified as alimony, payments must meet six conditions. Thus, the payments:1. Must be in cash, paid to the spouse, ex-spouse or a third party on behalf of a spouse or ex-spouse.2. Must be required by a decree or instrument incident to divorce, a written separation agreement, or a support decree. Thus, voluntary payments are not treated as alimony.3. Cannot be designated as child support.4. Are valid alimony only if the taxpayers live apart after the decree. Spouses who share the same household can’t qualify for alimony deductions. This is true even if the spouses live separately within a dwelling unit.5. Must end on the death of the payee.6. 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 May Be Designated as Not Alimony - Divorcing spouses can designate that otherwise qualifying payments are not alimony. This is done by including a provision in the divorce or separation instrument that states the payments are not deductible as alimony by the payer and are excludable from the recipient spouse's income. Both spouses must sign the written statement that makes this designation, and the spouse who receives the alimony and excludes it from income must attach a copy of the instrument designating the payments as not alimony to his or her return. The copy must be attached each year the designation applies.Alimony Recapture- To further prevent property settlements from being disguised as alimony, the tax code also includes what is referred to as alimony recapture, which prevents excess front-loading of alimony payments. Under these rules, which are in effect for the first three post-separation years, alimony recapture may apply when the payments made in the first two post-separation years exceed $15,000. The excess amounts are determined in the third post-separation year, and any excess becomes taxable to the payer. The computation of the excess amount is rather complicated and this office should be contacted if front-loading of alimony is being considered. The recapture rules do not apply if: either spouse dies, the alimony recipient remarries within certain time limits, the payments made are “temporary support payments,” or the payments fluctuate due to conditions beyond the payer’s control because of a continuing liability to pay, for at least 3 years, a fixed part of business income. Both spouses should exercise care in reporting the correct amounts of alimony received and the amounts of alimony paid. The IRS requires the payer to include both the amount paid and the recipient’s taxpayer ID number on his or her tax return and will match that to the alimony reported as income by the recipient. This matching generally occurs one or two years after the tax returns are filed and, in addition to underpaid tax, substantial penalties and interest can accrue where incorrect amounts are reported.Alimony & IRA Contributions – Contributions to IRA accounts is limited to the extent a taxpayer has received compensation. Most consider compensation to only include wages, commissions and income from personal services. However, in addition to those, alimony is treated as compensation for purposes of making an IRA contribution (either Traditional or Roth) if the taxpayer otherwise qualifies for an IRA contribution.Child Support – Child support is not alimony and is not a deductible expense. To keep taxpayers from disguising child support payments as alimony, the definition of alimony specifically states that alimony cannot be designated as child support 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). Sat, 20 Dec 2014 19:00:00 GMT Large Employers Must Offer Affordable Health Coverage Beginning In 2015 http://www.advancedfinancialtax.com/blog/large-employers-must-offer-affordable-health-coverage-beginning-in-2015/39928 http://www.advancedfinancialtax.com/blog/large-employers-must-offer-affordable-health-coverage-beginning-in-2015/39928 Advanced Financial Tax, LLC Article Highlights: Employers subject to the insurance mandate  Full-time employees  Seasonal employees  Part-time employees  Minimum essential coverage  Employers with 50 but fewer than 100 full-time employees  In general, beginning January 1, 2015, employers with at least 100 full-time and full-time-equivalent employees must offer affordable health coverage that provides minimum value to at least 95% of their full-time employees and their dependents or they may be subject to an employer shared responsibility payment. This payment applies only if at least one of the employer's full-time employees qualifies for a premium tax credit through enrollment in a government Health Insurance Marketplace. Generally, an employer is subject to the requirement to provide affordable health coverage in 2015 if the employer has 100 or more full-time employees. When determining the number of full-time employees, there are certain classes of employees that are excluded from the count—the most notable being certain seasonal employees. Although an employee is considered full-time if he or she works 30 or more hours per week, to determine if the employer has reached the 100 full-time employee threshold, part-time employee hours for a month are totaled and divided by 120, and the result is added to the full-time count. Thus, an employer with fewer than 100 full-time employees may be required to provide an insurance plan to the employer's full-time employees if the combination of full-time employees and the hours of part-time employees equal the equivalent of 100 full-time employees. Each year, employers will determine, based on their current number of employees, whether they will be considered an applicable large employer for the next year. For example, if an employer has at least 100 full-time employees (including full-time equivalents) for 2014, it will be considered an applicable large employer for 2015. Employers average their number of employees across the months of the year to see whether they will be an applicable large employer for the next year. This averaging can take into account fluctuations that many employers may experience in their work force across the year. Even though an employer determines whether it is subject to the mandate based upon the number of employees during the prior year, the penalty is based upon the current year's employees and is determined on a monthly basis. Example: John has 90 full-time employees, plus he has 40 part-time employees. His part-time employees for the month of January worked 1,920 hours. That is the equivalent of 16 (1,920 / 120) full-time employees. Thus, the number of John's full-time employees for the month of January is 106 (90 + 16). As a result, John will have to provide his 90 full-time employees and their dependents with affordable health coverage for January or be subject to the shared responsibility payment (penalty) for that month, but only if at least one full-time employee receives a premium tax credit. The penalty is determined on a monthly basis. Affordable health care coverage is minimum essential coverage where the employee's share of the cost is no more than 9.5% of the employee's household income. Employers with 50 or more full-time employees are also subject to the shared responsibility payment (penalty), but not until 2016, and again only if one or more full-time employees claim a premium tax credit. The foregoing is an abbreviated overview of the employer insurance mandate. The rules are complex. If you are unsure whether or not your business is subject to the penalty for 2015, please give this office a call. Don't delay: the penalties are substantial and in some cases may be higher than the cost of the insurance. Thu, 18 Dec 2014 19:00:00 GMT Is a 1031 Exchange Right for You? http://www.advancedfinancialtax.com/blog/is-a-1031-exchange-right-for-you/39922 http://www.advancedfinancialtax.com/blog/is-a-1031-exchange-right-for-you/39922 Advanced Financial Tax, LLC Article Summary: Basic rules of 1031 exchanges Advantages of exchanges o Tax deferral o Leveraging the tax savings o Asset accumulation o Potential management relief  Disadvantages of exchanges o Added complexity and expense o Low tax basis o No property flipping o Unknown future law changes  If you own real property that you could sell for a substantial profit, you may have wondered whether there's a way to avoid or minimize the taxes that would result from such a sale. The answer is yes, if the property is business or investment related. Normally, the gain from a sale of a capital asset is taxable income, but Section 1031 of the Internal Revenue Code provides a way to postpone the tax on the gain if the property is exchanged for a like-kind property that is also used in business or held for investment. These transactions are often referred to as 1031 exchanges and may apply to other types of property besides real estate, but the information in this article is geared toward real property. It is important to note that these exchanges are not “tax-free” but are “tax deferred.” The gain that would otherwise be currently taxable will eventually be paid when the replacement property is sold in the future in a regular sale. As with all things tax, there are rules and regulations to be followed to ensure that the transaction qualifies, such as: The property must be given up and its replacement must be actively used in a trade or business or held for investment, so a personal residence or a vacation home won't qualify. However, under some circumstances a vacation home that has been rented out may qualify.   The properties must be of like kind. For instance, this means you can't exchange real estate for an airplane. But the definition is quite broad for real property - for example, it is OK to exchange raw land for an office building, a single-family residential rental for an apartment building, or land in the city for farmland. Typically, the owner of a residential rental who participates in an exchange will trade for another residential rental. Both real estate properties must be located in the United States. Caution: Stocks, bonds, inventory, partnership interests and business goodwill are excluded from Sec 1031 exchanges.   It is unusual for two taxpayers to each have a property that the other wants where they can enter into a simultaneous exchange. Most likely, if you wanted to exchange your property, you may need to do a “deferred exchange,” which means you effectively sell your property and then find a suitable replacement property. In this case, the law is very strict. You must identify, in writing, the replacement property within 45 days of the date your property was transferred and complete the acquisition of the replacement property within 180 days of the transfer or, if earlier, by the due date, including extensions, of your tax return for the tax year in which your property was transferred. During this period you aren't allowed to receive the proceeds from the sale of your property.   The property acquired in an exchange must be of equal or greater value to the one you gave up, and all of the net proceeds from the disposition of the relinquished property must be used to acquire the replacement property. Otherwise, any unused proceeds are taxable.  With this basic information about 1031 exchanges, you may still be wondering whether an exchange is right in your situation. So let's consider some of the advantages and disadvantages of exchanges. ADVANTAGES: Tax deferral - The main reason most people choose to do a 1031 exchange is so taxes don't have to be paid currently on the gain that would result from selling the property. The maximum federal tax rate paid on capital gains for most taxpayers is 15% (20% if you would otherwise be in the highest tax bracket of 39.6%). However, the part of the gain that is equal to the depreciation deduction you've claimed while you've owned the property is taxable at a maximum of 25%. Leveraging the tax savings - When an exchange is used, the money that doesn't have to be spent to pay the taxes that would have been owed on the gain from a sale can be used to acquire other property or higher-value property. Asset accumulation - The money saved from not paying tax on the sale gain can be retained as part of your estate to be passed to your heirs, who would also get a new basis on the replacement property that is equal to its fair market value at your date of death. In this case, none of the postponed gain from the original property is ever subject to income tax. However, depending on the overall size of your estate, there could be estate tax considerations. Potential management relief - Taxpayers sometimes decide to sell their property to get out from under the burden of managing and maintaining the property. An exchange may still accomplish this without an outright sale by allowing the taxpayer to acquire replacement property that has fewer maintenance requirements and associated costs or has on-site management. DISADVANTAGES: Added complexity and expense - An exchange transaction involves more complexity than a straight sale. The timing requirements noted above must be strictly met or the transaction will be taxable. To avoid tainting the transaction when there's a deferred exchange, the proceeds from the original property must not be received by the seller, and a qualified intermediary, also called an accommodator, must be hired to handle the money and acquire the replacement property. The intermediary's fees will be in addition to the usual selling and purchase expenses incurred. Low tax basis - The tax basis on the property acquired reflects the deferred gain, so the basis for depreciation will be low. Thus, the annual depreciation deduction will often be much less than it would be if the property were purchased outright. Upon sale of the property, the accumulated tax deferrals will catch up, and the result will then be a large tax bill. No property flipping - The intent of the law permitting exchanges is for the taxpayer to continue to use the replacement property in his trade or business or as an investment. An immediate sale of the replacement property would not satisfy that requirement. How long must the replacement property be held? In most situations there is no specific guideline, but generally 2 years would probably suffice. “Intent” at the time of the exchange plays a major role according to the IRS. Unknown future law changes - When weighing whether to do a 1031 exchange, consider the known tax liability if you sold your property versus the unknown tax that will be owed on the deferred gain when you eventually sell the replacement property in the future. If you think tax rates may be higher in the future, you may decide to pay the tax when you sell your original property and be done with it. Recent proposals by various members of Congress and President Obama would severely curtail or even eliminate 1031 exchanges and increase the depreciation period of real property from 27.5 years for residential property and 39 years for commercial property to 43 years for both. These proposals may never pass, but they are an indicator of how 1031 exchanges are currently viewed in Washington, D.C. 1031 exchanges are very complex transactions, and the information provided is very basic. Before you commit to an exchange, please call this office so that we can review your particular situation with you. Tue, 16 Dec 2014 19:00:00 GMT Tax Deductions for Waiters & Waitresses http://www.advancedfinancialtax.com/blog/tax-deductions-for-waiters--waitresses/401 http://www.advancedfinancialtax.com/blog/tax-deductions-for-waiters--waitresses/401 Advanced Financial Tax, LLC Keeping A Good Tip Record:If you are a waiter or waitress, the IRS requires you to keep a record of your tips. The record needs to include tips you receive from: your customers in cash; other tipped employees because of a "tip-sharing" arrangement; and your customers who pay by credit card. When you receive a tip but pay part of it to someone else (for example, a bartender), you should note the name of that person in your tip record along with the amount you paid him/her. You should keep your record updated on a day-to-day basis to make sure of its accuracy.Reporting Tips To Your Employer: In order to comply with IRS rules, you need to let your employer know the total amount of tips you receive. This reporting should be done in writing within the 10-day period following the end of the month in which you receive the tips (sometimes the due date is extended a day or so if the last day of the 10-day period is on a weekend or legal holiday).Once you make the report to your employer, he/she adds the amount to your regular wages and uses the total to figure how much income tax, Social Security tax and Medicare tax to withhold from your regular paycheck.Tips Not Reported To Your Employer:Special rules apply to tips you received but didn't, for one reason or another, report to your employer. If such tips total $20 or more in any given month while working for one employer, you will need to figure your own Social Security and Medicare taxes for them. These taxes are computed and paid with your tax return. Keep in mind that the IRS can also charge a penalty for tips that aren't reported to an employer. Keeping Tip Records:According to the rules, your tip records need to clearly establish the tips you received. That's why a timely, day-to-day record is so important. The form (click on the link) contains all the information you will need and has room for an entire month's entries. You may make as many copies of the form as you need so that you will have a permanent record of your tips for the entire year.CLICK HERE FOR THE FORM Sun, 14 Dec 2014 19:00:00 GMT Tax Deductions for Airline Flight Crew Personnel http://www.advancedfinancialtax.com/blog/tax-deductions-for-airline-flight-crew-personnel/402 http://www.advancedfinancialtax.com/blog/tax-deductions-for-airline-flight-crew-personnel/402 Advanced Financial Tax, LLC Professional Fees & Dues:Dues paid to professional societies related to your occupation are deductible. Deductions are allowed for payments made to a union as a condition of initial or continued membership. Such payments include dues, but not those that go toward defraying expenses of a personal nature. However, the portion of union dues that goes into a strike fund is deductible.Educational expenses are deductible under either of two conditions: (1) your employer requires the education in order for you to keep your job or rate of pay; or (2) the education maintains or improves your job skills. Costs of courses that are taken to meet the minimum requirements of a job, or that qualify you for a new trade or business, are NOT deductible.Uniforms & Upkeep Expenses:Generally, the costs of your uniforms are fully deductible. IRS rules specify that work clothing cost and the cost of maintenance are deductible if: (1) the uniforms are required by your employer (if you’re an employee); and (2) the clothes are not adaptable to ordinary street wear. Normally, the employer’s emblem attached to the clothing indicates it is not for street wear.Auto Travel:Your auto expenses are based on the number of qualified business miles you drive. Expenses for travel between business locations or daily transportation expenses between your residence and temporary work locations are deductible; include them as business miles. Expenses for your trips between home and work each day, or between home and one or more regular places of work, are COMMUTING expenses and are NOT deductible.Document business miles in a record book as follows: (1) give the date and business purpose of each trip; (2) note the place to which you traveled; (3) record the number of business miles; and (4) record your car’s odometer reading at both the beginning and end of the tax year. Keep receipts for all car operating expenses – gas, oil, repairs, insurance, etc. – and of any reimbursement you received for your expenses.Out-of-Town Travel:Expenses incurred when traveling away from “home” overnight on job-related or continuing-education trips that were not reimbursed or reimbursable by your employer are deductible. Your “home” is generally considered to be the entire city or general area where your principal place of employment is located. Out-of-town expenses include transportation, meals, lodging, tips and miscellaneous items like laundry, valet, etc.Document away-from-home expenses by noting the date, destination and business purpose of your trip. Record business miles if you drove to the out-of-town location. In addition, keep a detailed record of your expenses - lodging, public transportation, meals etc. Always list meals and lodging separately in your records. Receipts must be retained for each lodging expense. However, if any other business expense is less than $75, a receipt is not necessary if you record all of the information timely in a diary. You must keep track of the full amount of meal and entertainment expenses even though only a portion of the amount may be deductible.Telephone Expenses:The basic local telephone service costs of the first telephone line provided in your residence are not deductible. However, toll calls from that line are deductible if the calls are business-related. The costs (basic fee and toll calls) of a second line in your home are also deductible if the line is used exclusively for business. When communication equipment, such as a cell phone, is used part for business and part personally the cost of the equipment must be allocated to deductible business use and non-deductible personal use. Keep your bills for cellular phone use and mark all business calls.Equipment, Supplies & Repair:Generally, to be deductible, items must be ordinary and necessary to your job as airline flight crew personnel and not reimbursable by your employer. Record separately from other supplies, the costs of business assets that are expected to last longer than one year and cost more than $200. Normally, the costs of such assets are recovered differently on your tax return than are other recurring, everyday business expenses such as flashlights, batteries and other supplies.Miscellaneous Expenses:Expenses of looking for new employment in your present line of work are deductible – you do not have to actually obtain a new job in order to deduct the expenses. Out-of-town job-seeking expenses are deductible only if the primary purpose of the trip is job seeking, not pursuing personal activities.CLICK HERE FOR THE FORM Sun, 14 Dec 2014 19:00:00 GMT Tax Deductions for Telecommuting Employees http://www.advancedfinancialtax.com/blog/tax-deductions-for-telecommuting-employees/403 http://www.advancedfinancialtax.com/blog/tax-deductions-for-telecommuting-employees/403 Advanced Financial Tax, LLC Equipment Purchases:Record separately from other supplies the costs of business assets that are expected to last longer than one year and cost more than $200. Normally, the costs of such assets are recovered differently on your tax return than are other recurring, everyday business expenses like business cards, office supplies etc.Telephone Expenses:The basic local telephone service costs of the first telephone line provided in your residence are not deductible. However, toll calls from that line are deductible if the calls are business-related. The costs (basic fee and toll calls) of a second line in your home are also deductible if the line is used exclusively for business. When communication equipment, such as a cell phone, is used part for business and part personally the cost of the equipment must be allocated to deductible business use and non-deductible personal use. Keep your bills for cellular phone use and mark all business calls.Professional Fees & Dues:Dues paid to professional societies related to your profession are deductible. Supplies & Expenses:Generally, to be deductible, items must be ordinary and necessary costs in your profession and not reimbursable by your employer.Continuing Education:Educational expenses are deductible under either of two conditions: (1) your employer requires the education in order for you to keep your job or rate of pay; or (2) the education maintains or improves your skills in your profession. Costs of courses that are taken to meet the minimum requirements of a job, or that qualify you for a new trade or business, are NOT deductible.Auto Travel:Your auto expense is based on the number of qualified business miles you drive. If you qualify for the home office deduction, your home becomes your primary business location, and you will not have any nondeductible commuting travel. Therefore, generally all of your business travel from home to other business locations and meetings will be deductible.Document business miles in a record book as follows: (1) give the date and business purpose of each trip; (2) note the place to which you traveled; (3) record the number of business miles; and (4) record your car’s odometer reading at both the beginning and end of the tax year. Keep receipts for all car operating expenses – gas, oil, repairs, insurance, etc. – and of any reimbursement you received for your expenses.Home Office Deduction: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. Generally, telecommuting employees would meet the “principal place of business” test, i.e., the location where you spend the majority of your time performing your work activities. Additionally, telecommuting employees must meet the “convenience of the employer” test. That test is met if your employer asks you to work out of your home.Out-of-Town Travel:Expenses incurred when traveling away from “home” overnight on job-related and continuing education trips that were not reimbursed or reimbursable by your employer are deductible. Your “home” is generally considered to be the entire city or general area where your principal place of employment is located. Out-of-town expenses include transportation, meals, lodging, tips and miscellaneous items like laundry, valet, etc.Document away-from-home expenses by noting the date, destination and business purpose of your trip. Record business miles if you drove to the out-of-town location. In addition, keep a detailed record of your expenses – lodging, public transportation, meals, etc. Always list meals and lodging separately in your records. Receipts must be retained for each lodging expense. However, if any other business expense is less than $75, a receipt is not necessary if you record all of the information timely diary. You must keep track of the full amount of meal and entertainment expenses, even though only a portion of the amount may be deductible.CLICK HERE FOR THE FORM Sun, 14 Dec 2014 19:00:00 GMT Caring for an Elderly or Incapacitated Individual http://www.advancedfinancialtax.com/blog/caring-for-an-elderly-or-incapacitated-individual/181 http://www.advancedfinancialtax.com/blog/caring-for-an-elderly-or-incapacitated-individual/181 Advanced Financial Tax, LLC With people generally living longer, we frequently find ourselves in the position of a caregiver for elderly or incapacitated individuals. Whether the individual is an incapacitated or elderly spouse, an elderly parent or even a child, there are tax implications that need to be considered that 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. To qualify: o You individually or through a multiple support agreement must provide more than 50% of the individual's support costs, o The individual must either live with you for the entire year or be related, o For 2015, the individual must not have gross income in excess of the exemption amount of $4,000 (up from $3,950 in 2014, call for exemption rates for other years), o The individual must not himself file a joint return for the year, and o The individual must be a U.S. citizen or a resident of the U.S., Canada or Mexico.    Medical expenses - If the cared-for individual qualifies as your dependent or medical dependent, you can include any medical expenses you incur for the individual along with your own when determining your medical deduction for itemized deduction purposes. 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 for medical, as opposed to custodial, etc., care. If a person isn't in the nursing home principally to receive medical care, then only the portion of the fee that is allocable to actual medical care qualifies as a deductible medical expense. But if the individual is chronically ill (as defined below), all of the individual's qualified long-term care services, including maintenance or personal care services, are counted as medical expenses. A "Chronically ill person" is one who has been certified by a licensed healthcare practitioner within the previous 12 months as: (1) unable to perform at least two activities of daily living (eating, toileting, transferring, bathing, dressing, continence) without substantial assistance for a period of 90 days due to loss of functional capacity, (2) having a similar level of disability as determined in regulations, or (3) requiring substantial supervision to protect from threats to health and safety due to severe cognitive impairment. The requirement that a qualified long-term care insurance contract must base its determination of whether an individual is chronically ill by taking into account five activities of daily living applies only to (1) above (being unable to perform at least two activities of daily living).   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 the household help is deductible in the same manner as the nursing home. In addition, household employees must be paid by payroll.   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 for over half the year, (b) you pay more than half the household costs, (c) the individual qualifies as your dependent, and (d) 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 the 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 the cost, you are considered as maintaining a principal home for your parent.   Dependent care credit - If the cared-for individual qualifies as your dependent, lives with you, and physically or mentally cannot take care of themselves, you may qualify for the dependent care credit for costs you incur for their care to enable you (and your spouse, if married and filing a joint return) to go to work.   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.  If you are a caregiver and would like to discuss your situation further, please call this office. Thu, 11 Dec 2014 19:00:00 GMT Care for the Elderly http://www.advancedfinancialtax.com/blog/care-for-the-elderly/182 http://www.advancedfinancialtax.com/blog/care-for-the-elderly/182 Advanced Financial Tax, LLC When the elderly reach the point that they can no longer care for themselves, there are generally two courses of action available to the caregiver: (1) Provide for in-home care, or (2) place the individual in a care facility. Each has its own distinct tax ramifications: In-home Care - If the elderly person has the option to remain in their home and provide in-home care, that care is deductible as a medical deduction, provided the expenses are directly related to the individual's medical care. If the individual or individuals providing that care also provide household services, the cost must be allocated between deductible medical expenses and nondeductible personal expenses. The care provider need not be a nurse, even though they are providing services normally administered by a nurse. In-home care is subject to the rules for household employees that require the employer (the elderly individual) to withhold FICA and Medicare taxes and issue a W-2 at the end of the year. There are generally state filing requirements as well, so please call this office for assistance in setting up a household payroll. Care Facility - If the option is to place the elderly individual in a care facility such as a convalescent hospital, nursing home or a home for the elderly, then the cost of that care is deductible, provided the primary reason for being there is to receive medical care. If medical care is the primary reason, then the deduction will include the cost of lodging and meals (at 100%). In either case, the care-related expenses are added to the cost of other medical expenses for the year and the total is reduced by 10% (7.5% through 2016 for a taxpayer, or spouses if married filing jointly, age 65 or older) of adjusted gross income to determine the medical deduction allowed as part of itemized deductions. Thu, 11 Dec 2014 19:00:00 GMT Getting the Most Out of Employee Business Expense Deductions http://www.advancedfinancialtax.com/blog/getting-the-most-out-of-employee-business-expense-deductions/39910 http://www.advancedfinancialtax.com/blog/getting-the-most-out-of-employee-business-expense-deductions/39910 Advanced Financial Tax, LLC Article Highlights: 2% of income deduction floor Alternative minimum tax Employer accountable plan Bunch deductions Educational assistance plan Sec 179 Expensing Individuals can deduct as miscellaneous itemized deductions certain expenses that they incur in the course of their employment. Generally, qualified business expenses are un-reimbursed expenses that are both ordinary (common and accepted in your industry) and necessary and do not include personal expenses. There are two major barriers to deducting employee business expenses. The most commonly encountered is the 2%-of-income (AGI) deduction floor that applies to most (Tier II) miscellaneous deductions, which besides employee business expenses also includes investment expenses, certain legal expenses, home office and other expenses. The amount deductible as miscellaneous expenses is the total of those expenses reduced by 2% of the taxpayer’s adjusted gross income for the year. Depending upon the taxpayer’s income, this reduction can substantially lessen or eliminate the deductible amount. The second major barrier is the alternative minimum tax (AMT), in which the Tier II miscellaneous expenses are not deductible at all. Thus, to the extent that the taxpayer is affected by the AMT, there is no benefit derived from these deductions. There are, however, some planning strategies that can be applied to overcome these barriers, such as the following: Employer Accountable Plan – This is a plan under which your employer reimburses you for your employment-related expenses, but requires you to “adequately account” for the expenses. Expenses reimbursed by the employer under an “accountable plan” are excluded from income, thus essentially allowing 100% of the expenses to be deducted, while avoiding the 2%-of-income and AMT limitations. If the employer does not wish to add a reimbursement plan on top of the employee’s existing income, a salary reduction replaced with an accountable plan might be negotiated. Bunch Deductions – With proper planning, employee business expenses for more than one year can be deferred or accelerated into one year, thus producing a larger deduction in that one year to overcome the 2% floor for miscellaneous deductions. Education Expenses – Although certain employment-related education expenses can be taken as an employee business expense, there are other ways to gain a tax benefit and avoid the 2%-of-AGI and AMT limitations. These include income-limited education tax credits, and if your employer has an educational assistance plan, your employer can reimburse you up to $5,250 for most education expenses other than those associated with education travel. Utilize the Section 179 Deduction – Generally, business assets with a useful life of more than one year must be deducted (depreciated) over several years. However, most business assets, other than real estate, qualify for the Code Section 179 expense deduction that allows the entire cost (up to $25,000 for 2015) to be deducted in one year. While vehicles used for business are eligible for Section 179 expensing, other limitations cap the deduction at lower amounts. The depreciation or Section 179 deduction of an employee’s business assets is part of employee business expenses subject to the 2%-of-AGI floor. However, by claiming the Section 179 deduction in the year the asset is purchased rather than deducting a lower depreciation amount over several years, there is a greater chance that the total miscellaneous deductions will be more than the 2%-of-AGI floor, thus allowing part of the expense to be deducted. If you would like to explore any of these techniques, please give this office a call. Thu, 11 Dec 2014 19:00:00 GMT Eldercare Can Be a Medical Deduction http://www.advancedfinancialtax.com/blog/eldercare-can-be-a-medical-deduction/186 http://www.advancedfinancialtax.com/blog/eldercare-can-be-a-medical-deduction/186 Advanced Financial Tax, LLC With people living longer, many find themselves becoming the care provider for elderly parents, spouses and others who can no longer live independently. When this happens, questions always come up regarding the tax ramifications associated with the cost of nursing homes or in-home care. Generally, the entire cost of nursing homes, homes for the aged, and assisted living facilities are deductible as a medical expense, if the primary reason for the individual being there is for medical care or the individual is incapable of self-care. This would include the entire cost of meals and lodging at the facility. On the other hand, if the individual is in the facility primarily for personal reasons, then only the expenses directly related to medical care would be deductible and the meals and lodging would not be a deductible medical expense. As an alternative to nursing homes, many elderly individuals or their care providers are hiring day help or live-in employees to provide the needed care at home. When this is the case, the cost of services provided by the employees must be allocated between non-deductible household chores and deductible nursing services. To be deductible, the nursing services need not be provided by a nurse so long as the services are the same services that would normally be provided by a nurse, such as administering medication, bathing, feeding, dressing, etc. If the employee also provides general housekeeping services, then the portion of the employee's pay attributable to household chores would not be a deductible medical expense. Household employees, like other employees, are subject to Social Security and Medicare taxes, and it is the responsibility of the employer to withhold the employee's share of these taxes and to pay the employer's payroll taxes. Special rules for household employees greatly simplify these payroll withholding and reporting requirements and allow the Federal payroll taxes to be paid annually in conjunction with the employer's individual 1040 tax return. Federal income tax withholding is not required unless both the employer and the employee agree to withhold income tax. However, the employer is still required to issue a W-2 to the employee and file the form with the Federal government. A Federal Employer ID Number and a state ID number must be obtained for reporting purposes. Most states have special provisions for reporting and paying state payroll taxes on an annual basis that are similar to the Federal reporting requirements. If you need assistance in setting up a household payroll, please contact this office for additional details and filing requirements.  Wed, 10 Dec 2014 19:00:00 GMT Tax Deductions for Educators http://www.advancedfinancialtax.com/blog/tax-deductions-for-educators/390 http://www.advancedfinancialtax.com/blog/tax-deductions-for-educators/390 Advanced Financial Tax, LLC Professional Fees and Dues: Dues paid to professional societies related to your educational profession are deductible. These could include professional organizations, business leagues, trade associations, chambers of commerce, boards of trade and civic organizations. However, dues paid for memberships in clubs organized for business, pleasure, recreation or other social purpose are not deductible. These could include country clubs, golf and athletic clubs, airline clubs, hotel clubs and luncheon clubs. Deductions are allowed for payments made to a union as a condition of initial or continued membership. Such payments include regular dues, but not those that go toward defraying expenses of a personal nature. The portion of union dues that goes into a strike fund is deductible, however. Continuing Education: Educational expenses are deductible under either two conditions: (1) your employer requires the education in order for you to keep your job or rate of pay; or (2) the education maintains or improves your skills in the education profession. The cost of courses that are taken to meet the minimum requirements of a job or that qualify you for a new trade or business are not deductible. NOTE: Education undertaken to qualify a classroom teacher as a school administrator or guidance counselor generally meets the criteria for educational expense deductions. Communication Expenses: The basic local telephone service costs of the first telephone line provided in your residence are not deductible. However, toll calls from that line are deductible if the calls are business related. The costs of a second line (basic service and toll calls) in your home are also deductible if that line is used exclusively for business. When communication equipment, such as a cell phone, is used part for business and part personally the cost of the equipment must be allocated to deductible business use and non-deductible personal use. Keep your bills for cellular phone use and mark all business calls. Auto Travel: Your auto expenses are based on the number of qualified business miles you drive. Expenses for travel between business locations or daily transportation expenses between your residence and temporary work locations are deductible; include them as business miles. Expenses for your trips between home and work each day or between home and one or more regular places of work are COMMUTING expenses and are NOT deductible. Document business miles in a record book by the following: (1) give the date and business purpose of each trip; (2) note the place to which you traveled; (3) record the number of business miles; and (4) record your car’s odometer reading at both the beginning and end of the tax year. Keep receipts for all car operating expenses – gas, oil, repairs, insurance, etc. – and of any reimbursement you received for your expenses. Out-of-Town Travel: Expenses incurred when traveling away from “home” overnight on job-related and continuing education trips that were not reimbursed or reimbursable by your employer are deductible. Your “home” is generally considered to be the entire city or general area where your principal place of employment is located. Out-of-town expenses include transportation, meals, lodging, tips and miscellaneous items like laundry, valet, etc. Document away-from-home expenses by noting the date, destination and business purpose of your trip. Record business miles if you drove to the out-of-town location. In addition, keep a detailed record of your expenses – lodging, public transportation, meals, etc. Always list meals and lodging separately in your records. Receipts must be retained for each lodging expense. However, if any other business expense is less than $75, a receipt is not necessary if you record all of the information timely in a diary. You must keep track of the full amount of meal and entertainment expenses even though only a portion of the amount may be deductible. If you travel away from home primarily to obtain education (for example, to attend a university extension course overseas) that is related to your job and is an allowed education expense, your expenses for travel, meals and lodging while away from home are deductible. But traveling away from home is not itself a form of education, and therefore is not deductible. For example, if you are a French teacher, taking a tour of France to help improve your command of the French language would not be deductible. Classroom Supplies: Generally to be deductible, items must be ordinary and necessary to your profession as an educator and not reimbursable by your employer. Record separately from other supplies items costing more than $200 and having a useful life of more than one year. The cost of these items must be recovered differently on your tax return than other recurring, everyday business expenses like photocopies or books. Miscellaneous Expenses: Expenses of looking for new employment in the same line of work in which you are already working are deductible – you do not have to actually obtain a new job in order to deduct the expenses. Out-of-town job-seeking expenses are deductible only if the primary purpose of the trip is job seeking, not pursuing personal activities. CLICK HERE FOR THE FORM Tue, 09 Dec 2014 19:00:00 GMT Tax Deductions for Firefighters http://www.advancedfinancialtax.com/blog/tax-deductions-for-firefighters/391 http://www.advancedfinancialtax.com/blog/tax-deductions-for-firefighters/391 Advanced Financial Tax, LLC Professional Fees and Dues: Dues paid to professional societies related to your profession are deductible. These could include professional organizations, business leagues, trade associations, chambers of commerce, boards of trade and civic organizations. However, dues paid for memberships in clubs organized for business, pleasure, recreation or other social purpose are not deductible. These could include country clubs, golf and athletic clubs, airline clubs, hotel clubs and luncheon clubs.Uniforms and Upkeep Expenses:Generally, the costs of your firefighter uniforms are fully deductible if they aren’t provided to you without charge by your employer. IRS rules specify that work clothing costs and the cost of maintenance are deductible if: (1) the uniforms are required by your employer (if you’re an employee); and (2) the clothes are not adaptable to ordinary street wear. Normally, the employer’s emblem attached to the clothing indicates it is not for street wear. The cost of protective clothing (e.g. safety shoes or goggles) is also deductible.Telephone Expenses:The basic local telephone service costs of the first telephone line in your residence are not deductible. However, toll calls from that line are deductible if the calls are business-related. The costs (basic fee and toll calls) of a second line in your home are also deductible if the line is used exclusively for business. When communication equipment, such as a cell phone, is used part for business and part personally the cost of the equipment must be allocated to deductible business use and non-deductible personal use. Keep your bills for cellular phone use and mark all business calls.Continuing Education:Educational expenses are deductible under either of two conditions: (1) your employer requires the education in order for you to keep your job or rate of pay; or (2) the education maintains or improves your skills as a firefighter. Costs of courses that are taken to meet the minimum requirements of a job, or that qualify you for a new trade or business, are NOT deductible.Miscellaneous:House dues and meal expenses may be deductible. Firefighters are often required to eat their meals at the station house. One court case (Sibla) said that the costs of such meals are nondeductible unless the firefighters: (1) are required to make payments to a common mess fund as a condition of employment, and (2) must pay whether or not they are at the station house to eat the meals. Contact this office for further details on this deduction.Expenses of looking for new employment in your present line of work are deductible – you do not have to actually obtain a new job in order to deduct the expenses. Out-of-town job-seeking expenses are deductible only if the primary purpose of the trip is job seeking, not pursuing personal activities.Equipment & Repairs:Generally, to be deductible, items must be ordinary and necessary to your job as a firefighter and not reimbursable by your employer. Record separately from other supplies the costs of business assets that are expected to last longer than one year and cost more than $200. Normally, the costs of such assets are recovered differently on your tax return than are other recurring, everyday business expenses such as flashlights, batteries and other supplies.Auto Travel:Your auto expenses are based on the number of qualified business miles you drive. Expenses for travel between business locations or daily transportation expenses between your residence and temporary work locations are deductible; include them as business miles. Expenses for your trips between home and work each day, or between home and one or more regular places of work, are COMMUTING expenses and are NOT deductible.Document business miles in a record book as follows: (1) give the date and business purpose of each trip; (2) note the place to which you traveled; (3) record the number of business miles; and (4) record your car’s odometer reading at both the beginning and end of the tax year. Keep receipts for all car operating expenses - gas, oil, repairs, insurance etc. - and of any reimbursement you received for your expenses.Out-of-Town Travel:Expenses incurred when traveling away from “home” overnight on job-related and continuing education trips that were not reimbursed or reimbursable by your employer are deductible. Your “home” is generally considered to be the entire city or general area where your principal place of employment is located. Out-of-town expenses include transportation, meals, lodging, tips and miscellaneous items like laundry, valet etc.Document away-from-home expenses by noting the date, destination and business purpose of your trip. Record business miles if you drove to the out-of-town location. In addition, keep a detailed record of your expenses – lodging, public transportation, meals, etc. Always list meals and lodging separately in your records. Receipts must be retained for each lodging expense. However, if any other business expense is less than $75, a receipt is not necessary if you record all of the information timely in a diary. You must keep track of the full amount of meal and entertainment expenses even though only a portion of the amount may be deductible.CLICK HERE FOR THE FORM Tue, 09 Dec 2014 19:00:00 GMT Tax Deductions for Peace Officers http://www.advancedfinancialtax.com/blog/tax-deductions-for-peace-officers/392 http://www.advancedfinancialtax.com/blog/tax-deductions-for-peace-officers/392 Advanced Financial Tax, LLC Professional Fees and Dues:Dues paid to professional societies related to your profession are deductible. These could include professional organizations, business leagues, trade associations, chambers of commerce, boards of trade and civic organizations. However, dues paid for memberships in clubs organized for business, pleasure, recreation or other social purpose are not deductible. These could include country clubs, golf and athletic clubs, airline clubs, hotel clubs and luncheon clubs.Uniforms and Upkeep Expenses:Generally, the costs of your uniforms are fully deductible if they aren’t provided to you without charge by your employer. IRS rules specify that work clothing costs and the cost of its maintenance are deductible if: (1) the uniforms are required by your employer (if you’re an employee); and (2) the clothes are not adaptable to ordinary street wear. Normally, the employer’s emblem attached to the clothing indicates it is not for street wear. The cost of protective clothing (e.g., safety shoes or goggles) is also deductible.Auto Travel:Your auto expense is based on the number of qualified business miles you drive. Expenses for travel between business locations or daily transportation expenses between your residence and temporary work locations are deductible; include them as business miles. Expenses for your trips between home and work each day, or between home and one or more regular places of work, are COMMUTING expenses and are NOT deductible.Document business miles in a record book as follows: (1) give the date and business purpose of each trip; (2) note the place to which you traveled; (3) record the number of business miles; and (4) record your car’s odometer reading at both the beginning and end of the tax year. Keep receipts for all car operating expenses – gas, oil, repairs, insurance, etc. – and of any reimbursement you received for your expenses.Out-of-Town Travel:Expenses incurred when traveling away from “home” overnight on job related and continuing-education trips that were not reimbursed or reimbursable by your employer are deductible. Your “home” is generally considered to be the entire city or general area where your principal place of employment is located. Out-of-town expenses include transportation, meals, lodging, tips and miscellaneous items like laundry, valet, etc.Document away-from-home expenses by noting the date, destination and business purpose of your trip. Record business miles if you drove to the out-of-town location. In addition, keep a detailed record of your expenses – lodging, public transportation, meals, etc. Always list meals and lodging separately in your records. Receipts must be retained for each lodging expense. However, if any other business expense is less than $75, a receipt is not necessary if you record all of the information timely in a diary. You must keep track of the full amount of meal and entertainment expenses even though only a portion of the amount may be deductible.Equipment & Repairs:Generally, to be deductible, items must be ordinary and necessary to your job as a peace officer and not reimbursable by your employer. Record separately from other supplies the cost of business assets that are expected to last longer than one year and cost more than $200. Normally, the cost of such assets are recovered differently on your tax return than are other recurring, everyday business expenses such as flashlights, batteries and other supplies.Communication Expenses:The basic local telephone service costs of the first telephone line provided in your residence are not deductible. However, toll calls from that line are deductible if the calls are business-related. The costs (basic fee and toll calls) of a second line in your home are also deductible if the line is used exclusively for business. When communication equipment, such as a cell phone, is used part for business and part personally the cost of the equipment must be allocated to deductible business use and non-deductible personal use. Keep your bills for cellular phone use and mark all business calls.Continuing Education:Educational expenses are deductible under either of two conditions: (1) your employer requires the education in order for you to keep your job or rate of pay; or (2) the education maintains or improves your skills as a peace officer. Costs of courses that are taken to meet the minimum requirements of a job, or that qualify you for a new trade or business, are NOT deductible.Miscellaneous Expenses:Generally, meals consumed during hours of duty by peace officers are nondeductible. Expenses of looking for new employment in your present line of work are deductible – you do not have to actually obtain a new job in order to deduct the expenses. Out-of-town job-seeking expenses are deductible only if the primary purpose of the trip is job seeking, not pursuing personal activities.CLICK HERE FOR THE FORM Tue, 09 Dec 2014 19:00:00 GMT No Health Insurance? Qualify for Hardship Waiver? http://www.advancedfinancialtax.com/blog/no-health-insurance-qualify-for-hardship-waiver/39908 http://www.advancedfinancialtax.com/blog/no-health-insurance-qualify-for-hardship-waiver/39908 Advanced Financial Tax, LLC Article Summary Uninsured penalty exemptions Applications for penalty exemptions Figuring the penalty Marketplace open enrollment starts November 15 If you didn’t get health insurance coverage this year, you may be subject to a penalty unless you qualify for one of the many general or hardship exemptions. There are in excess of 30 possible exemptions from the penalty and some of the exemptions require you to complete and file an application for approval. If approved for an exemption that requires specific approval, you will be issued an exemption certificate number (ECN) that must be included on your tax return to claim the exemption. The approval form instructions cover several types of exemptions, will take some time to complete; and, once the application is submitted, the approval/denial process presently takes more than two weeks. Once others realize they need approval for certain hardship exemptions, however, you can expect the approval process to take considerably longer. While application forms are available online, each application must be printed, filled out manually, and then snail-mailed to the government for processing. With tax season just around the corner, you don’t want your refund held up while you are applying for an exemption; so, start the process early. Not all exemptions require approval, so make sure your reason for an exemption requires advance approval before going to the trouble of completing and submitting the form. If you qualify for an exemption that doesn’t require prior approval, you can claim it on a new IRS form that will need to be included with your 2014 tax return. If you didn’t have insurance for some period of time during the year (the penalty is computed by the month) and you don’t qualify for one or more of the exemptions, then you will be subject to the penalty for not being insured (the official name for the penalty is the “shared responsibility payment”). The penalty is generally the larger of a flat dollar amount per individual or a percentage of your income, whichever is greater. For 2014, the full-year penalty, based upon the flat dollar amount, is $95 per adult and $47.50 per child, capped at $285 regardless of family size. The full-year penalty determined by income is 1% of the amount that your household income exceeds your tax filing income threshold. Example: For 2014, Kevin and Brenda are married filing jointly with two minor children. Their household income is $55,000 and their filing threshold is $20,300 (their standard deduction of $12,400 plus the exemption amount of $3,950 each for both of them). So, their flat dollar amount for a full year would be $285, and their percentage of income amount would be $347.00 (($55,000 - $20,300) x 1%). Thus their penalty would be $347.00 for a full year without insurance or $28.92 per month for the family. For the first year of the shared responsibility payment, 2014, the penalties are low. In 2015, the flat dollar amounts jump to $325 per adult and $162.50 per child (capped at $975), while the percentage of income jumps to 2%. Then, in 2016, the per-adult flat dollar amount goes to $695 and the child amount to $347.50 (maximum $2,085), while the percentage of income increases to 2.5%. If our prior example had taken place in 2016, Kevin’s and Brenda’s penalty would be $2,085 (2 x $695 plus 2 x $347.50) since the flat dollar amount is larger than their percentage of income amount. Kevin and Brenda, based upon their income, would qualify for some amount of premium assistance credit that will help them pay the cost of their health insurance if they purchase coverage through a government marketplace. With the severe increase in penalties over the next two years, Kevin and Brenda will need to consider whether the cost of health insurance (and the benefits that come with coverage) is a better option than paying the penalty. Open enrollment for 2015 marketplace insurance begins November 15, 2014. If you have questions about the shared responsibility payment or penalty exemptions you may qualify for, please give this office a call. Tue, 09 Dec 2014 19:00:00 GMT Impairment-Related Medical Expenses http://www.advancedfinancialtax.com/blog/impairment-related-medical-expenses/183 http://www.advancedfinancialtax.com/blog/impairment-related-medical-expenses/183 Advanced Financial Tax, LLC Amounts paid for special equipment installed in the home or for improvements may be included in medical expenses, if their main purpose is medical care for the taxpayer, the spouse, or a dependent. The cost of permanent improvements that increase the value of the property may be partly included as a medical expense. The cost of the improvement is reduced by the increase in the value of the property. The difference is a medical expense. If the value of the property is not increased by the improvement, the entire cost is included as a medical expense.Certain improvements made to accommodate a home to a taxpayer's disabled condition, or that of the spouse or dependents who live with the taxpayer, 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, and Grading the ground to provide access to the residence. Only reasonable costs to accommodate a home to a disabled condition are considered medical care. Additional costs for personal motives, such as for architectural or aesthetic reasons, are not medical expenses. Keep in mind that taxpayers can only deduct medical expenses if they itemize their deductions. Medical expenses are only deductible if they exceed 10% (was 7.5% prior to 2013) of a taxpayer’s income (AGI), and then only the amount that exceeds that income limit is actually deductible. For seniors (age 65 or older and their spouses) the limitation remains at 7.5% through 2016. The table below reflects the AGI limitation for various years: 2012 & Before 2013-2016 After '16 Individuals Under the age of 65 7.5% 10% 10% Individuals (and their spouses)age 65 before close of year 7.5% 7.5% 10% Alternative Minimum Tax Threshold 10% 10% 10% Mon, 08 Dec 2014 19:00:00 GMT Household Employee Wage Reporting – Are You Liable? http://www.advancedfinancialtax.com/blog/household-employee-wage-reporting-8211-are-you-liable/190 http://www.advancedfinancialtax.com/blog/household-employee-wage-reporting-8211-are-you-liable/190 Advanced Financial Tax, LLC If you employ someone who works in your home, you may be subject to household employment taxes. This tax is sometimes referred to as the “Nanny Tax,” which is misleading because it also applies to a nurse, caregiver, maid, gardener, etc. This is the same tax that you may have read about where some politicians and people in high places have been brought to task for avoiding. Not all those hired to work in a taxpayer’s home are considered household employees. For example, an individual may hire a self-employed gardener who handles the yard work for a taxpayer and other residents in the neighborhood. The gardener supplies all the tools and brings in other helpers needed to do the job. Under these circumstances, the gardener isn’t an employee, and the person hiring him/her isn’t responsible for paying employment taxes. Another example of a worker who is not considered a taxpayer’s employee is one who comes from an agency (if the agency is responsible for the work and how it is done). It depends greatly on the circumstances, and the amount of control that the hiring person has over the job and the hired person, on whether or not a household worker is considered an employee. Ordinarily, when someone has the authority to tell a worker what needs to be done and how the job should be done, that worker is considered an employee. Having a right to discharge the worker, supplying tools and providing the place to perform a job are primary factors that show control. Contrast the following example to the self-employed gardener described earlier. The Smith family hired Lynn to clean their home and care for their three-year old daughter, Lori, while they are at work. Mrs. Smith gave Lynn instructions about the job to be done and how to do the various tasks; she, rather than Lynn, had control over the job. Under these circumstances, Lynn is a household employee, and the Smiths are responsible for withholding and paying certain employment taxes for her. It would not matter whether Lynn worked full- or part-time, nor whether the job was paid on an hourly, daily, weekly or per-job basis. Lynn would still be the Smiths’ employee. You are not required to withhold federal income taxes if you employ someone who is subject to the “Nanny Tax.” However, income taxes can be withheld if your employee asks you to do so and you are willing to do the additional paperwork and make the required payroll deposits. You are required to withhold and pay FICA (social security and Medicare) taxes if your household worker earns cash wages of $1,900 or more (excluding the value of food and lodging) during the calendar year (amount is for 2015; call for threshold amount for other years). If you reach the threshold, the entire wages (not just the excess) will be subject to FICA. However, if your employee is under age 18 and the services are not the employee’s principal occupation, you don't have to withhold FICA taxes. For example, there is no FICA tax liability for the services of an employee, who is a student younger than 18 years old and babysits or mows the lawn on a part-time basis. On the other hand, if the employee is under age 18, and the job is the employee’s principal occupation, you must withhold and pay FICA taxes when the threshold is exceeded. If there is some uncertainty as to whether your household employee’s earnings will be under the withholding threshold, you should withhold the FICA from the beginning of the employment. If it turns out that the threshold is not met, then the withholding can later be refunded to the employee. On the other hand, if you did not withhold initially and the employee’s wages do reach the threshold, make up amounts can be withheld from the pay later on. This may create a problem in that the employee won’t appreciate large unexpected withholding amounts from his or her subsequent pay. You have the option of paying the FICA withholding yourself, but it must be imputed as part of the employee’s payroll. In addition to withholding the employee’s share of the FICA, you, as an employer, are responsible for paying a matching amount. The FICA tax is divided between social security and Medicare. The social security tax rate is 6.2%, and the Medicare tax rate is 1.45%. These rates apply to both the employee and employer for a total tax rate of 15.3%. Example for 2015: You pay your employee $500 a week and do not withhold income tax. You must withhold a total of $38.25 ($500 x 6.2% plus $500 x 1.45%) for your employee’s share of FICA. Thus, your employee’s net paycheck would be $461.75 ($500 - $38.25). In addition, you must match the $38.25 for a total FICA tax of $76.50. While unlikely that the annual compensation of any one of your household employees would exceed $200,000, you should be aware that in the event that it does, the employee’s share of the Medicare tax rate increases to 2.35% of the income over $200,000 for that year. The employer’s Medicare tax rate is not increased. As an employer, you are also required to pay FUTA (federal unemployment) taxes if a total of $1,000 or more in cash wages (excluding the value of food and lodging) is paid to your employees in any calendar quarter of the year. This tax (maximum rate is 6.2%) applies to the first $7,000 of wages paid. As a household employer, you generally are not required to file any of the usual employment tax returns that a business must file. Instead, obtain an employer identification number (EIN) from the IRS and include payment with your individual tax return (1040) using a Schedule H. However, if you own a business as a sole proprietor in which you have employees, you may include the taxes for your household worker(s) on the FICA and FUTA forms (Forms 940 and 941) that are filed for your business. In that case, the EIN from your sole proprietorship is used to report the taxes for your household employee(s). You are also required to provide your employee with a Form W-2, if the employee’s wages are subject to FICA or income tax withholding, and file the W-2 with the Social Security Administration. It is also your responsibility to file the appropriate employment-related forms for your state of residence. And while not a tax matter, those individuals hiring a household worker must verify that the employee can legally work in the U.S., and then complete and retain the U.S. Citizenship and Immigration Services’ Form I-9. Generally, a deduction is not allowed on your income tax return for the household employment taxes paid. However, if the wages paid to a household worker are for qualifying medical care of yourself, your spouse or dependents, or if the payments are eligible for the credit for child and dependent care expenses, you may include your portion of the employment taxes (in addition to the wages) when figuring the medical deduction or child/dependent care credit. The reporting requirements for the “Nanny Tax” can be complicated. Please contact us if you need assistance or have questions. Mon, 08 Dec 2014 19:00:00 GMT Long-Term Care http://www.advancedfinancialtax.com/blog/long-term-care/184 http://www.advancedfinancialtax.com/blog/long-term-care/184 Advanced Financial Tax, LLC Amounts paid for long-term care services and certain premiums paid on long-term care insurance are deductible as medical expenses on Schedule A. Costs of care provided by a relative who is not a licensed professional or by a related corporation or partnership don't qualify. The maximum amount of long-term care premiums treated as medical depends on the insured's age and is inflation-indexed annually. The following are the deductible amounts for the past few years. If the taxpayer paid long-term care premiums and qualifies for a medical deduction on Schedule A of their tax return, and did not include the long-term care premiums in their medical deduction, the return can be amended to include the deduction. Please call this office to see if the deduction will make a difference and to have us prepare the amended returns. Deduction Limitations Age 2012 2013 2014 2015 40 or less 350 360 370 380 41 to 50 660 680 700 710 51 to 60 1,310 1,360 1,400 1,430 61 to 70 3,500 3,640 3,720 3,800 71 & older 4,370 4,550 4,660 4750 Per Diem  310 320 330 330 Employees generally won't be taxed on the value of coverage under employer-provided long-term care plans. However, the exclusion doesn't apply if coverage is provided through a cafeteria plan. In addition, long-term care services can't be reimbursed tax-free under a flexible spending account. The "long-term care contract" is an insurance contract that provides only coverage of long-term care and meets certain other requirements. Some long-term care riders to life insurance will also qualify. Benefits under a long-term care policy (other than dividends or premium refunds) are generally tax-free. For per-diem contracts that pay a flat-rate benefit without regard to actual long-term care expenses incurred, the inflation adjusted exclusion is limited to $330 a day in 2015 ( the same as in 2014), except when long-term care costs incurred are more than the flat rate and are not otherwise compensated by some other means.A contract isn't treated as a qualified long-term care contract unless the determination of being chronically ill takes into account at least five activities of daily living: eating,, toileting, transferring, bathing, dressing and continence."Long-term care services" include necessary diagnostic, preventive, therapeutic, curing, treating, mitigating, and rehabilitative services, maintenance or personal care services prescribed by a licensed practitioner for the chronically ill.A "Chronically ill person" is one who has been certified by a licensed healthcare practitioner within the previous 12 months as: (1) unable to perform at least two activities of daily living (eating, toileting, transferring, bathing, dressing, continence) without substantial assistance for a period of 90 days due to loss of functional capacity, (2) having a similar level of disability as determined in regulations, or (3) requiring substantial supervision to protect from threats to health and safety due to severe cognitive impairment. The requirement that a qualified long-term care insurance contract must base its determination of whether an individual is chronically ill by taking into account five activities of daily living applies only to (1) above (being unable to perform at least two activities of daily living).  Sat, 06 Dec 2014 19:00:00 GMT Medicaid and Eldercare http://www.advancedfinancialtax.com/blog/medicaid-and-eldercare/185 http://www.advancedfinancialtax.com/blog/medicaid-and-eldercare/185 Advanced Financial Tax, LLC Generally, after an individual has used up all of their resources, Medicaid will step in to provide the ongoing care of the individual. Medicaid is usually a combined Federal and state program that pays for health and long-term care for eligible low-income citizens and legal residents of the United States. It is not practical to explain all of the various states' programs. However, since they are generally combined Federal and state programs, there are similarities among the various programs. This article provides a brief overview of one state's program. A Directory of State sites allows you to review the rules for any particular state. California's version of Medicaid is referred to as Medi-Cal and the following is an overview of the program's qualifications: QUALIFYING FOR NURSING HOME STAY - In order for Medi-Cal to pay for a nursing home stay, the patient: Must be admitted on a doctor's order, The stay must be medically necessary, and With incomes from any source are allowed to keep only $35 per month for personal needs. Patients with no income receive an SSI grant of $40 per month for their Personal Needs Allowance (PNA). Patients who own their own home - Medi-Cal recipients in nursing homes who own their own homes (which may be multiple dwelling units) remain eligible for Medi-Cal as long as: a. They intend to return home; or b. The residence is used by a spouse and/or dependent relatives; or c. The residence is used by a sibling or adult child who lived there at least one year before the owner entered the nursing home; or d. They make a good faith effort to sell the home. Persons not capable of making a good faith effort to sell (for instance, those who need conservatorships) remain eligible for Medi-Cal. In that case, bona fide steps have to be taken so that someone else can sell the home. Married Couples - Couples do not have to spend all their resources in order for one spouse to be eligible for Medi-Cal coverage in a nursing facility. The person going into the nursing facility can transfer his or her interest in the home to the spouse remaining at home without affecting Medi-Cal eligibility. A couple also may divide its non-exempt property, so that the spouse at home may keep up to $2,931* a month of the couple's income and up to $117,240* of the other assets for his/her needs. The spouse at home may also keep any independent income. A couple may divide their property however they wish. In determining eligibility under the spousal impoverishment provisions, Medi-Cal counts the property held in the name of either or both spouses. As soon as the countable non-exempt property is below $117,240* ($2,000 which can be retained by the institutionalized spouse), the county can establish initial eligibility. The couple then has at least 90 days to transfer everything but $2,000 into the name of the non-institutionalized spouse. The non-institutionalized spouse may retain all of the income that he or she receives in his or her own name. Consult legal services or a private attorney familiar with Medi-Cal law if either you or your spouse may need nursing facility care. FINANCING NURSING HOME CARE - Generally, a nursing facility's administration will help determine if the patient is eligible for Medi-Cal to pay the costs of the nursing home. If not, they can explain under what conditions the patient may become eligible in the future. The law requires that nursing home residents receive identical treatment regarding transfer, discharge, and provision of services regardless of the source of payment. A Medi-Cal resident can stay in any bed in a nursing facility. Spousal Impoverishment Provision - Couples looking at nursing home placement for a spouse need to be aware of the special laws enacted that allow the spouse remaining at home to keep a certain amount of income and resources when the other spouse enters a nursing home. This is intended to prevent impoverishment of the spouse at home. Community spouse's monthly maintenance needs allowance: The spouse at home may keep all of the couple's income up to $2,931* per month. This is called the community spouse's "monthly maintenance needs allowance". Note: This amount is adjusted annually by a cost of living increase. The spouse at home may obtain additional income or resources through a "fair hearing", or by court order. If the spouse at home receives income above the limit in his/her name only, he/she can keep it all (this is called the "name on the instrument rule"); however, he/she will not be allowed to keep any of the nursing facility spouse's income. Income received by the nursing facility spouse will go to his/her share of cost. The spouse in the nursing home is allowed to keep $35 monthly for personal needs ("personal needs allowance"). Resources: The spouse at home can keep up to $117,240* in resources, and the institutionalized spouse may keep up to $2,000. (Different laws apply to spouses who entered a nursing facility before September 30, 1989. If this is the case, the individual should contact a lawyer/advocate knowledgeable about this area of the law.) Both separate property (i.e., from a previous marriage or inheritance) and community property that is not exempt are combined and counted at the time of application for Medi-Cal. Once the resource limit has been reached, all ownership interest should be transferred to the spouse at home. The institutionalized spouse's $2,000 resource limit should be kept separately and accounted for separately. *The values are periodically adjusted for inflation. The amounts listed were effective 1/1/2014. TRANSFER OF ASSETS - Institutionalized Medi-Cal recipients or applicants who transfer non-exempt assets for less than fair market value during a 30-month "look back" period may be subject to a period of ineligibility. The length of the ineligibility period depends on the value of the transferred asset or resource and date of transfer period. The period of ineligibility begins on the date the transfer was made. The 30-month "look back" period begins when an institutionalized person applies for Medi-Cal or when a Medi-Cal recipient is admitted to a nursing facility. A 60-month "look back" period for assets from certain trusts is also required. Federal law amended trust regulations makes it more difficult to set up a Medicaid qualifying trust for eligibility and estate claims purposes. For a trust already established, it is recommended that an attorney review it. Sat, 06 Dec 2014 19:00:00 GMT Life-Care Facilities Fee http://www.advancedfinancialtax.com/blog/life-care-facilities-fee/192 http://www.advancedfinancialtax.com/blog/life-care-facilities-fee/192 Advanced Financial Tax, LLC Some retirement homes and care facilities require the payment of an up front life-care fee, sometimes referred to as a “founder’s fee.” The question arises whether or not that fee might be deductible as a medical expense.Taxpayers can deduct, in the year paid, the portion of a life-care fee or “founder's fee” paid to a retirement home that is properly allocable to medical care if the payment is made in return for the home's promise to provide lifetime care, including medical care. The same applies to monthly fees paid under a life-care contract. Generally, payments to a private institution for lifetime care, supervision, treatment, and training of a physically or mentally impaired child upon the parents' death or inability to provide care are deductible medical expenses if the payments are a condition for the institution's future acceptance of the child and aren't refundable as deductible medical expenses.For elderly patients, in which only the medical care costs themselves were deductible, the IRS and Tax Court have determined the portion of the life-care fee allocable to medical care as a fraction of the total fee paid to the facility is deductible regardless of the actual costs of the medical care provided. The fraction is determined on the basis of the facility's own experience or that of a comparable facility. Generally, the IRS allows the facility to use one of two methods in determining the portion of the total fee that is deductible as a medical expense, either: (a) All of the facility's direct medical expenses divided by its total expenses, or (b) The portion of fees that the facility historically used to provide medical care divided by the entire fee.The same allocation methods can be applied to the monthly service fees paid to a facility. The facility should provide the allocation of the fee for the medical deduction at the time the fee is paid or annually if part of the monthly fees paid is deductible. Sat, 06 Dec 2014 19:00:00 GMT Tax Topic Brochures http://www.advancedfinancialtax.com/blog/tax-topic-brochures/454 http://www.advancedfinancialtax.com/blog/tax-topic-brochures/454 Advanced Financial Tax, LLC This section is a compilation of our client information brochures. These brochures cover frequently encountered tax and financial issues. There are many topics to choose from, and you will find valuable and useful information for under each one. Whether you're looking for tax planning tips, planning out your child's education, or in the process of selling your home, you can find all the answers here. Sat, 06 Dec 2014 19:00:00 GMT Medical Dependents http://www.advancedfinancialtax.com/blog/medical-dependents/187 http://www.advancedfinancialtax.com/blog/medical-dependents/187 Advanced Financial Tax, LLC Medical expenses paid for dependents may be deducted. To claim these expenses, the person must have been a dependent either at the time the medical services were provided or at the time 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:1. That person lived with the taxpayer for the entire year as a member of the household or is related,2. 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, and3. 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.Medical Expenses Under a Multiple Support Agreement - Under the provisions of a multiple support agreement, only the one who is considered to have provided more than half of a person's support under such an agreement can deduct medical expenses paid, but only the medical expenses actually paid by that individual count. Any medical expenses paid by others who joined in the agreement cannot be included as medical expenses by anyone. Thu, 04 Dec 2014 19:00:00 GMT Support Claimed Under a Multiple Support Agreement http://www.advancedfinancialtax.com/blog/support-claimed-under-a-multiple-support-agreement/188 http://www.advancedfinancialtax.com/blog/support-claimed-under-a-multiple-support-agreement/188 Advanced Financial Tax, LLC A multiple support agreement is used when two or more people provide more than half of a person's support, but no one alone provides more than half. Whoever is considered to have provided more than half of a person's support under such an agreement can deduct medical expenses paid.Any medical expenses paid by others who joined in the agreement cannot be included as medical expenses by anyone. Thu, 04 Dec 2014 19:00:00 GMT Nursing Services http://www.advancedfinancialtax.com/blog/nursing-services/189 http://www.advancedfinancialtax.com/blog/nursing-services/189 Advanced Financial Tax, LLC Wages and other amounts paid for nursing services can be included in medical expenses. Services need not be performed by a nurse as long as the services are of a kind generally performed by a nurse. This includes services connected with caring for the patient's condition, such as giving medication or changing dressings, as well as bathing and grooming the patient. These services can be provided in the home or another care facility. Generally, only the amount spent for nursing services is a medical expense. If the attendant also provides personal and household services, the total expense amount must be divided between the times spent performing household and personal services and the time spent for nursing services. However, certain maintenance or personal care services provided for qualified long-term care can be included in medical expenses. Part of the amounts paid for that attendant's meals are also included in medical expenses. Divide the food expense among the household members to find the cost of the attendant's food. If additional amounts for household upkeep were paid because of the attendant, include the extra amounts with the medical expenses. This includes extra rent or utilities paid because a larger apartment was needed to provide space for the attendant. Additionally, certain expenses for household services or for the care of a qualifying individual incurred to allow the taxpayer to work may qualify for the child and dependent care credit. But the same expenses can’t be used as both medical expenses and for the dependent care credit. The employer’s share of payroll taxes related to the wages for nursing services are includible as a medical expense or for the dependent care credit, whichever is claimed. Thu, 04 Dec 2014 19:00:00 GMT Tax-Free Resources for the Cash-Strapped Elderly http://www.advancedfinancialtax.com/blog/tax-free-resources-for-the-cash-strapped-elderly/191 http://www.advancedfinancialtax.com/blog/tax-free-resources-for-the-cash-strapped-elderly/191 Advanced Financial Tax, LLC Inflation, inadequate retirement planning, medical costs, retiring too early and financial casualties can all strain the financial resources of elderly individuals. When looking for financial resources to supplement their existing retirement income, one might consider one or both of the following options.Home Equity - Home equity is often a large asset that can be tapped. However, selling the home is not always a good option since elderly individuals generally wish to remain in their home. Refinancing through conventional loans will provide temporary funds. Unfortunately, the loans come with a repayment requirement that increases the monthly cash needs and may be counter-productive.However, “reverse mortgages” allow homeowners to remain in their homes while borrowing against the equity they have built up in their dwellings without any current mortgage payments.If the homeowner dies, the heirs can pay off the debt by selling the house and any remaining equity goes to them. If, at that time, the loan balance is equal to or more than the value of the home, the repayment amount is limited to the home's worth.In order to be eligible for this type of loan, the borrower must be at least 62 years of age and have equity in the home. The loan amount will depend on factors such as the borrower's age, the value of the home, interest rates and the amount of equity built up. The borrower has the option of taking the loan as a lump sum, a line of credit, or as fixed monthly payments. In addition, the money can be used for any purpose, without restrictions imposed. Life Insurance Contracts - If a taxpayer is terminally or chronically ill(1) and is insured under a life insurance contract, he or she might consider tapping their insurance death benefits while still living. This type of transaction is called a “viatical” settlement and is generally tax-free if an individual is certified to have a life expectancy of two years or less.Here is how it works. The policy owner sells the policy to a third-party buyer. The buyer is responsible for future premium payments and will receive the proceeds of the insurance policy when the insured dies. In some cases and under certain conditions, an accelerated death benefit may be available directly from the insurance company itself. The payments will be less than the face value of the policy, usually between 60% and 80% of the face value, depending upon the insured's life expectancy, annual premium, etc. Lifetime payments received under a life insurance contract of a terminally or chronically ill individual are excludable from taxable income.Viatical settlements are also possible for individuals who are not terminally or chronically ill, but the settlement is treated as a sale of the policy, and the gain on the sale is taxable, which may or may not be an issue based on the taxpayer's other income and the amount of the settlement. (1) For chronically-ill individuals, payments are tax-free only if the individual is certified by a licensed health care practitioner 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 (memory loss, disorientation, etc.)  Thu, 04 Dec 2014 19:00:00 GMT Keeping Your Tax Records http://www.advancedfinancialtax.com/blog/keeping-your-tax-records/406 http://www.advancedfinancialtax.com/blog/keeping-your-tax-records/406 Advanced Financial Tax, LLC When it comes to your taxes, good records are the best protection you can have if the government decides to audit your returns. But just as important as your effective recordkeeping are the measures you take to make certain that your records are kept safe. While it may cause a chuckle to picture a mythical taxpayer confessing to an IRS auditor that tax records were destroyed by the family pet, it probably wouldn’t be nearly as funny to give a similar response in a real audit of your own.The Advantage of Good Records: A good set of records can help you cut your taxes. Detailed records reduce the chance that you will overlook deductible expenses when your tax return is prepared. After all, how many people remember the exact details of their expenditures months after the fact? Nothing is more frustrating than knowing you incurred deductions yet not being able to prove them. The ultimate consequence of poor recordkeeping is enforced payment of more tax than the law requires. Explicit records provide the best assurance of a favorable outcome if you are audited. Oral testimony alone is seldom enough to prove the deductions you claim on your tax return—auditors want to see a paper trail of receipts, logs, etc. When you’re missing adequate backup records, it can cost a great deal in time and effort to get duplicates. The unfortunate fact is that many businesses balk at hunting down receipts for past sales (you can’t really blame them since it raises their expenses). Your ongoing recordkeeping effort is your best remedy to counteract this problem. Good records help others who might have to handle your financial affairs in an emergency — e.g., an illness. The better your records are, the easier it could be for someone else to temporarily “step into your shoes” to handle your monetary transactions. Tracking IncomeHow you track your income is largely dependent on the type of income you are receiving. For certain kinds of income, you will receive statements from the income payers to tell you the amount. These statements are called “information returns” by the IRS. Examples include: Type of Income Type of Information Return WagesPensions/IRAsInterest DividendsStock SalesReal Property SalesMiscellaneous Income(e.g., rent, prizes, non-employee payments) Gambling Winnings Unemployment Comp Tax RefundCanceled Debts Form W-2Form 1099-RForm 1099-INTForm 1099-DIVForm 1099-BForm 1099-SForm 1099-MISC Form W-2G Form 1099-GForm 1099-GForms 1099-A, -C When you receive an information return, you should compare it to your own records, and if there is a discrepancy in the amount of income reported, you should determine whether your records or the payer’s are in error. If you find your records are accurate, contact the payer to issue a corrected information return or explain to you how they determined the amount they have reported. Be sure to keep information returns you receive in a safe place so that the amounts reported on them can be shown accurately on your tax return. Payers must submit the data to the government as well as to you. The IRS will compare what they have received with your return to see that your reporting and their data match. If there’s a mismatch, you will get a letter asking ‘Why?’ or assessing additional tax. Since the IRS may misinterpret return reporting, check carefully before paying any extra tax they try to assess!Income from Other SourcesIncome not traceable to information returns also needs to be reported on your tax return. It could include such items as: Receipts from a self-employed business, Rental income, Interest income on a personal loan. Taxpayers who receive income from sources like these have a more complicated job in tracking it. It’s recommended that you record it in a separate ledger or through a computer spreadsheet program. In addition, you may want to deposit the funds in a separate bank account earmarked for that income alone.Getting OrganizedNo one method is the only way to maintain your records. What’s important is to develop a system that is the most convenient and comprehensive for your situation, and then to stick to it. The IRS estimates that a non-business taxpayer who files a 1040 return will spend about eight hours doing recordkeeping. For a more complex return, such as one with rental properties or self-employment income, add at least another five hours. The following suggestions may help you organize your records, and also reduce the time you spend doing so.Decide first if you will maintain your records manually or by computer. Bookkeeping software - Some taxpayers, even though they aren’t operating a business, choose computerized “bookkeeping” software that uses their check register data to track their income and expenses by category. Monthly and yearly reports conveniently recap the income and expenses, especially if the accounts (income and expense categories) are consistent with how the information is reported for tax purposes. Spreadsheet method - In lieu of purchasing bookkeeping software, a spreadsheet file (for example, in Excel) may be set up where you record your yearly income and expenses by tax return category. If you normally itemize your deductions, set up a separate sheet for each of the major deduction categories – medical, taxes, contributions, etc. – as found on Schedule A . For medical expenses, for example, record each expense by provider’s name, type, date, amount paid, and payment method. Note medically related auto mileage at the same time. At year’s end, sort income and expenses of the same type together to get a yearly total. For income items, a cross-check from the spreadsheet to the 1099 forms for all bank interest or other income sources is an accurate way to verify that all needed 1099s have been received. If your tax advisor gives you a “tax organizer” to help you prepare for your appointment, you can quickly transfer the totals from your spreadsheet to the organizer, or, instead, you can provide your advisor with a copy of the spreadsheet. Manual lists - If you keep track of your records manually, the same type of system applies as for a spreadsheet, except you’ll set up a paper sheet for each category of income and expense that you normally have on your tax return. Write each payment you receive or expense you incur on the applicable list. At the end of the year, each list is ready to be totaled. If you make your entries no less frequently than monthly, you’ll find that the overall time you spend will be less, and the accuracy of the information will be greater, than if you wait until just before your tax appointment to put together the year’s lists. Methods for retaining source documents - In addition to your lists of income and expenses, the receipts, canceled checks, credit card slips, income statements, etc., that back up the amounts need to be retained in case your tax return is audited. This is true whether you computerize or manually summarize your data. Choose from the following methods the one, or combination of methods, that suits you best: Envelopes – Using several blank envelopes, write the tax year and names of the income and expense categories that correspond to your spreadsheet or manual list of accounts. After you’ve recorded an item on your list, insert the corresponding receipt, canceled check, etc., into the envelope. By storing the source documents by category throughout the year, instead of throwing all of them in a box to get to “later,” you’ll not only save time but considerable frustration if you must search for a particular item. There is also less likelihood that a receipt or other document will be lost. Store the envelopes in a larger master envelope or box. File folders – Some taxpayers prefer to use file folders labeled by income and expense categories. These work well for manually maintained records, as the lists can go right in the folders along with the substantiating receipts, checks, credit card slips, etc. Small-sized receipts should be taped or stapled to a letter-sized sheet of paper to prevent them from falling out of the folder. Binders – A binder, set up with dividers labeled by income and expense categories, is also useful for keeping your lists and paper records. Three-hole plastic sheet protectors are convenient for keeping source documents together by category in the binder(s). Binders are especially useful for filing monthly or quarterly brokerage or bank account statements. Start now – If you aren’t already in the habit of keeping your records organized and maintaining them contemporaneously, start now! The effort will be worth it in time saved when you prepare for your next tax return preparation appointment. And most likely your records will be more accurate than they’ve ever been before.Knowing When to Discard RecordsTaxpayers often question how long records must be kept and how long the IRS has to audit a return after it is filed. ANSWER: 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 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. 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 three-year rule has a number of exceptions: The assessment period is extended to six years instead of three 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 three years old; add a year or so to that if you live in a state with a longer statute. Examples:Sue filed her 2012 tax return before the due date of April 15, 2013. She will be able to safely dispose of most of her records after April 15, 2016. On the other hand, Don filed his 2012 return on June 2, 2013. He needs to keep his records at least until June 2, 2016. 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. Important note:Even if you discard backup records, never throw away your file copy of any tax return (including W- 2 s ). Often, the return itself provides data that can be used in future return calculations or to prove amounts related to property transactions, social security benefits, etc.Records to Keep Longer than Three YearsYou should keep certain records for longer than three years. These records include: Stock acquisition data. If you own stock in a corporation, keep the purchase records for at least four 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 four 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 four years after the underlying property is sold. 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. Thu, 04 Dec 2014 19:00:00 GMT Tax Smart Gifting http://www.advancedfinancialtax.com/blog/tax-smart-gifting/39903 http://www.advancedfinancialtax.com/blog/tax-smart-gifting/39903 Advanced Financial Tax, LLC Article Highlights: Lifetime exemption Annual exemption Medical exemption Education exemption Gifting techniques Frequently, taxpayers think that gifts of cash, securities or other assets they give to other individuals are tax deductible and, in turn, the gift recipient sometimes thinks 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 interrelated with estate tax laws, and Uncle Sam does not want you giving away your wealth before you pass away to avoid inheritance taxes. As a result, what you give away prior to death will reduce the amount that can pass to your beneficiaries free of inheritance taxes after your death. For 2015, the lifetime exemption from inheritance tax is $5.43 million. The following amounts do not reduce the lifetime exemption: $14,000 each to any number of recipients during every tax year. The amount is periodically adjusted for inflation, but the amount for 2015 remains at $14,000. Directly pay medical expenses. This applies to amounts paid by one individual 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. Directly pay education expenses. This applies to amounts paid by one individual on behalf of another individual directly to a qualifying educational organization as tuition for that other individual. Costs of room and board aren’t eligible as direct payments. 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 give $28,000 a year to each recipient under the annual limitation discussed previously. Gifting Techniques: High-Wealth Individuals – If you are a high-wealth individual who would like to pass as much on to your heirs as possible while living, without reducing the lifetime exemption, you could pay directly your heirs’ medical expenses and higher education expenses in addition to annual gifts of cash or property of $14,000. You may want to do this, even if you are not a high-worth individual, to avoid having to file a gift tax return. Medical Expenses – Except in rare circumstances, you cannot deduct the medical expenses you pay for another person, and they cannot deduct the expenses either since they did not pay them. Thus careful consideration should be given regarding whether you make the gift directly to the individual subject to the $14,000 annual limit, which would allow him or her to pay the medical expenses and claim the medical deduction on his or her tax return, or you pay the medical expenses directly. If the medical expenses you want to pay are greater than $14,000, then you could always gift $14,000 to the individual and pay the balance directly to the care provider(s), and thereby avoid reducing the lifetime exemption. Under rare circumstances, the recipient who will benefit from your gifts may qualify as your medical dependent, under which circumstance you would be able to deduct the medical expenses if they had been paid directly to the doctor, hospital or other provider. Education Expenses – When you pay the qualified post-secondary education tuition for another individual, it does not mean, as is the case for medical expenses, that someone cannot benefit taxwise. Tax law says that whoever claims the exemption for the student is entitled to the American opportunity credit or lifetime learning credit for higher education expenses if they otherwise qualify. Gifts of Appreciated Property – Consider replacing your cash gifts with gifts of appreciated property, such as stock for which you have a “paper gain.” When you gift an appreciated asset, the potential gain on the asset transfers to the recipient. This works for individuals, except for children who are subject to the kiddie tax, which requires the child’s income to be taxed at the parent’s tax rate if it is higher than the child’s rate. It also works great for contributions to charitable organizations. Although not subject to the gift tax rules, an appreciated asset gifted to a charity not only gets you out of reporting any gain from the appreciation, but you also get a charitable tax deduction equal to the fair market value (FMV) of the asset. The deduction for these gifts is generally limited to 30% of your adjusted gross income (AGI), but the excess carries over for up to five years of future returns. Please call this office if you need assistance with planning your gifting strategies. Thu, 04 Dec 2014 19:00:00 GMT Home Ownership - Your Best Tax Shelter http://www.advancedfinancialtax.com/blog/home-ownership-your-best-tax-shelter/407 http://www.advancedfinancialtax.com/blog/home-ownership-your-best-tax-shelter/407 Advanced Financial Tax, LLC Homeowners Receive Big Tax BreaksHome ownership can provide you with several important tax benefits… Deductions for real estate taxes and home mortgage interest, and Gain exclusion if you meet certain occupancy and holding period requirements. In fact, tax breaks are probably one of the biggest reasons you decided to buy your home in the first place. Unfortunately, some homeowners lose getting the most from their home’s tax advantages because they aren’t aware that certain limits apply. The purpose of this brochure is to highlight how you as a homeowner can best keep your home’s favorable tax edge. Your Home's BasisThe amount of the gain exclusion permitted under current tax law tends to make most taxpayers forget about keeping track of their home improvements. Don’t forget, inflation will take its toll, and in a few years the exclusion limits may not be as significant as they are today or the law may change again. In either case, it may be appropriate to keep a record of the improvements on your home. Once you buy a home, you need to begin keeping records related to your home’s “ basis,” i.e., the amount you have spent on the property. If you acquired your home through purchase, your basis is what you paid for it originally, including purchase expenses PLUS improvement costs you incur while you own it. Keeping track of basis is extremely important in order to accurately compute gain or loss if you decide to sell. For the purpose of computing basis, it’s important to distinguish between “improvements” and repairs; only improvement costs add to your basis. Minor repairs like replacing faucet washers, painting a bedroom or patching a hole in the roof don’t need to be tracked. In general, improvements are of a more permanent nature than repairs. They enhance the value of your home and are likely to last more than one year. If you make the same improvement more than once, only the most recent improvement adds to your basis. You should log costs of items like the following in a home improvement record (be sure you keep your backup receipts and canceled checks): Room additionsNew drivewayFence Sprinkler systemExterior lightingIntercomStorm windows/doorsCentral vacuumCentral air Filtration systemWiring upgradeSoft water system Built-in appliancesBathroom upgrade Wall-to-wall carpet LandscapingWalkwaysRetaining wallSwimming poolSatellite dishSecurity systemRoofHeating systemFurnaceLight fixturesWater heaterInsulation Kitchen upgradeFlooring Whenever there’s doubt about whether an expenditure qualifies as an improvement, make a note of it in your record anyway. That way, the ultimate decision of qualification can be made later when (and if) you decide to sell. Deductions Related to Your Home Certainly not all costs related to your home are deductible. For example, unless you use your home for business (e.g., you have an office in your home), costs for insurance, repairs, utilities, condo or homeowner association fees, etc., aren’t deductible. However, you generally will be able to deduct: Real Estate Taxes Home Mortgage Interest Keep in mind, however, that home mortgage interest deductions can be limited. Generally, you can deduct the interest from mortgages up to $1 million dollars on a combination of your first and second homes, provided they were the original loans. As the principal on these loans is paid down, the reduced loan amount becomes the new limitation. If you were to later refinance the home for more than the remaining balance on the original loan, the excess would have be used for home improvements or qualify under the provisions that allow a taxpayer to borrow up to $100,000 in home equity. If not, a portion of the interest would not be deductible. The additional $100,000 of home equity can be borrowed from the primary residence and a second home. When used wisely, the $100,000 equity loan can be used to finance other purchases where the interest expense would normally not be deductible. An example of this would be a personal vehicle. Equity debt interest is not deductible for Alternative Minimum Tax (AMT) purposes, so taxpayers who are taxed by the AMT should consider carefully whether or not to incur home equity debt. Because of the current strict home mortgage deduction limits and the complicated tax rules associated with this tax deduction, be sure to review any home financing plans with your tax advisor before finalizing loan deals.Loan Points: A question often comes up about the deduction for points on a home loan. Points are another name for prepaid interest – they may be called loan origination fees or some similar term. One point equals 1% of the loan amount. When points are paid for services a lender provides to set up a loan, the points aren’t deductible. However, when the points are paid as a charge for the use of money, the following rules apply: As a general rule, points are only deductible over the life of a loan. Say, for example, you paid $3,000 in points on a 30-year refinance loan. Your tax deduction would be limited to $100 a year ($3,000/30 years). If you decided to pay your loan off early, say after 15 years, you could write off the balance of the points ($1,500) in that year. An exception to the general rules lets you deduct in full, points you pay in connection with obtaining a mortgage to purchase, construct or improve your main home. Seller-paid points can even be deducted by a home buyer, but the amount deducted reduces the home’s basis. Reporting Gains/LossesExclusion of Gain: When you sell your principal home at a gain, you can exclude all (or a portion) of the gain if you meet certain occupancy and holding period requirements. To qualify for this exclusion, you must have owned and occupied the residence for two years out of the five year period that ends on the date of the sale. If you meet those qualifications and are filing a joint return with your spouse, you may exclude up to $500,000 ($250,000 for a single individual) of gain from the sale. A partial exclusion may be allowed even if the two-of-five year ownership and occupancy tests aren't met if the sale is due to a job-related move, health, or certain unforeseen circumstances. If you do not qualify for the full or partial exclusion, there is no deferral privilege and the gain not eligible for exclusion is fully taxable, but will be eligible for the beneficial maximum long-term capital gains tax rates if you owned the home over one year. NOTE: A second home, such as a mountain cabin or lake cottage, doesn’t qualify for the exclusion of gain. Caution: Gains in excess of any allowed exclusion are treated as investment income and may be subject to the 3.8% Net Investment Income. Previously Postponed Gain: Under prior tax law (generally pre-'98), gain from the sale of a principal residence could be deferred into your replacement residence. Those gains were accumulated from home to home as long as each replacement home cost more than the adjusted selling price (i.e., sales price less expenses of sale and pre-sale “ fix-up” costs) of the previous home. Although gain deferral from a principal residence is no longer permitted under current law, the gains deferred under prior law into a home currently being sold must be accounted for. Sales at a Loss: Losses from the sales of business or investment properties are normally tax-deductible. However, a loss from the sale of your main home is considered personal in nature and therefore, unless the law changes, it is not allowed as a deduction. This rule also applies to second homes. Reporting the Sale: You do not need to report the sale of your main home on your tax return unless you have a gain and at least part of it is taxable - i.e., if the gain is greater than your allowed exclusion, the sale is reportable. Otherwise, if the gain is totally offset by the exclusion, the sale need not be shown on your tax return. However, to be certain that no reporting is required, you should provide your tax advisor with the sales documents, cost basis information, etc., to evaluate your situation. You may receive Form 1099-S showing the gross proceeds from the sale, although settlement agents (escrow companies) are not required to issue a Form 1099-S for most sales of main homes. If you do receive a Form 1099-S, let your tax advisor review it and determine if it is necessary to report the sale. Exclusion Qualifications Under prior law. . . (generally pre-1998), individuals were entitled to a once-in-a-lifetime exclusion of gain from the sale of their principal residence. To qualify for that exclusion, the taxpayer or spouse must have reached the age of 55 prior to the sale and they must have resided in the home for three of the prior five years. Having exercised that exclusion does not bar a taxpayer from qualifying for the current law exclusion. Under current law… there is no age requirement associated with the exclusion. The period of time the home must be owned and occupied as a principal residence is two out of the five years immediately preceding the sale date. The exclusion amount is $500,000 for married couples filing jointly and $250,000 for other individuals. Taxpayers are permitted to exclude a gain every two years if they meet all of the other conditions. There are no gain-deferral provisions in the current law for purchasing a replacement residence; thus, any gain not excludable is immediately taxable. Five-Year Holding Period: If you originally acquired the home you intend to sell by means of a tax-deferred exchange (sometimes referred to as a 1031 exchange), the required ownership period to qualify for the home sale exclusion becomes five years as opposed to the normal two years.Non-Qualified Use: If the home was previously used as other than your main home (non-qualified use), for example, as a second home or a rental, and converted to your personal residence after December 31, 2008, the portion of the prorated gain attributable to the non-qualified use will not qualify for the home gain exclusion. Special Military Rules: Generally, the five-year qualification period for the 2-out-of-5-year use test can be suspended for up to 10 years for persons on qualified extended duty in the U.S. Armed Services or the Foreign Service. Please call this office for more details.Tax Planning and Your HomeThe information outlined here is only a brief overview of the tax rules involving home ownership. Since the rules are complicated, if you’re thinking of buying or selling your home, or refinancing a home loan, it’s best to discuss the plans with your tax advisor to interpret closing documents and to make absolutely certain the transaction meets the necessary qualifications. 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. Wed, 03 Dec 2014 19:00:00 GMT Household Employees and Your Taxes http://www.advancedfinancialtax.com/blog/household-employees-and-your-taxes/409 http://www.advancedfinancialtax.com/blog/household-employees-and-your-taxes/409 Advanced Financial Tax, LLC Employment Tax Responsibilities for Employers of Household Workers Household employees are workers you hire for “ domestic services,” i.e., those services performed in and about your home. Duties of cooks, butlers, housekeepers, governesses, maids, valets, babysitters, caretakers, gardeners, janitors, or personal chauffeurs all can qualify as “domestic services.” Not everyone you hire for work at your home is considered a household employee, though. For example, a self-employed gardener may take care of your lawn and several others in your neighborhood, providing all his own tools and job assistants and setting his own work schedule. That gardener probably won’t be considered your household employee because he is running an independent operation over which you have no “say-so.” You see, a worker at your home becomes an employee when you control what work that person is to do AND how and when the work is to be done. If you qualify as a household employer, you may have to pay certain federal payroll taxes, including social security and Medicare taxes and unemployment taxes. You withhold some of these taxes from your employee’s wages; others you must pay from your own funds. (Some states require certain taxes too, so be sure to check with the state employment department in your area.)Taxes You Withhold from WagesSocial Security and Medicare Taxes:If you pay cash wages in excess of a specified threshold amount during the year to a given employee, you must withhold social security and Medicare taxes from the employee’s wages. This threshold amount $1,900 (2014 and 2015) will vary from year to year and applies to each separate household employee you hire. Call for amounts applicable to other years.Example: This year, Jane hired Louise, a housekeeper, and Rose, a babysitter. She withheld social security and Medicare taxes from their wages. Over the course of the entire year, however, she paid Louise only $500 and Rose $800. Since neither worker’s yearly wage equaled the threshold amount, Jane owes no social security or Medicare tax for them. That being the case, she must repay to the workers the taxes she already had withheld from their wages.Federal Income Tax:Household employees may also ask you to withhold income tax from their wages; you aren’t required to agree to the request. If you choose to withhold, however, you must collect the income tax from the employee’s wages (the IRS publishes tables to let you know how much to withhold) and you pay the amount withheld to the government. Additional Taxes You Must PayEmployer’s Share of Social Security and Medicare Taxes: As an employer, you must match the amount of social security and Medicare tax you withhold from your employee’s wages. For instance, if you withheld $50 in social security from your housekeeper’s wages, you would be required to pay to the government $100 (the $50 withheld from your employee, plus another $50 from your own funds). Federal Unemployment Tax (FUTA): You are also responsible for FUTA taxes if you paid a total of $1,000 (2013 and 2014) call this office for other years) or more in household employee wages during any calendar quarter of the current year or the previous year. FUTA tax isn’t a withholding tax but is paid by you alone on behalf of your employees. (Certain states also assess unemployment taxes – check with the appropriate agency in your area.)Paying the TaxYou report and pay the required federal payroll taxes for your household employees along with your regular individual income tax return. Schedule H, Household Employment Taxes, is used to figure the amount of the tax that you owe. Reporting Wages to EmployeesYou need to give your household employees Form W- 2 ,Wage and Tax Statement, to report wages and tax withholding for the year. The W-2 is due to the employee by Jan. 31 of the year following the year in which you paid the wages . You must also file a copy of the W-2 with the Social Security Administration (usually by the end of February). To accurately prepare W-2s, you need certain information from your employee, including his/her name, address, and social security number. So that you have all the necessary information available for timely filing, you may want to have your workers fill out Form W-9, Request for Taxpayer Identification Number and Certification, when you hire them. That way you will have data on file to complete W-2s when the time comes.Other Paperwork ChoresForm SS-4:If you have household employees, you will need to obtain an employer identification number (EIN) for yourself. This number is not the same as your Social Security Number. The IRS issues the EIN and prefers that you apply online at their website – www.IRS.gov (type EIN in the search box) – or by filling out and faxing or mailing Form SS-4, Application for Employer Identification Number, to the IRS The IRS does not charge for an EIN; beware of web sites on the Internet that charge for this service. Employee Form W–4: If you agree to withhold income tax for an employee, ask him/her to complete Form W-4, Employee’s Withholding Allowance Certificate. The information on this form will help you determine the correct amount of income tax to withhold. Payroll Journal: You should record in a journal each payday the wages and withholding of household employees. Set up a separate record for each employee with room for the following information: Payment date Check number Gross wages (before withholding) Social security tax withheld Medicare tax withheld Federal withholding, if any State withholding amounts (establish a column for each separate kind of tax withheld) For computer users, an inexpensive payroll program may simplify the recordkeeping job. Keep employment tax records for at least four years after the later of: the due date of the return on which you report the taxes, or the date you pay the taxes.If You Have Other EmployeesIf, in addition to your household employees, you have employees in a sole proprietorship, you can choose whether to pay the employment taxes of your household workers with your personal tax return or along with your business payroll returns. If you choose the latter option, you file W-2s for you household employees along with those of all your business employees. Have You Forgotten Anything?Here’s a quick checklist of issues you should make sure you have considered when you hire and pay household employees: Legality of worker’s employment in the United States - complete Form I-9, Employment Eligibility Verification. This is not a tax form but required by the U.S. Citizenship and Immigration Services and available at the USCIS web site (www.uscis.gov). Applicability of state employment taxes and state return filing requirements Applicability of withholding social security and Medicare taxes Income tax withholding agreements with employees Recordkeeping system Employer identification number application W-2 filing with employees and Social Security Administration Return filing and payment deadlines Are the Payroll Taxes you Pay Deductible?In most cases, the payroll taxes you pay in connection with your household workers’ wages are not deductible on your individual tax return. The IRS considers these taxes, and the wages on which they are based, to be personal, nondeductible expenses. However, there are a couple of circumstances when you may be eligible for a tax benefit for the payroll taxes you pay: Child Care Credit – If you are eligible to claim a Child or Dependent Care Credit based on wages you pay a household employee who cares for your child, other dependent, or spouse, the payroll taxes you pay on the wages are counted as part of your eligible expenses when figuring the credit. Medical Care Providers – The wages and associated payroll taxes you pay to a household worker who provides nursing services for you, your spouse, or your dependent are medical expenses that may be deductible on your return if you itemize your deductions. (Note that the same expense can’t be used both as a medical deduction and for the Child or Dependent Care Credit.) In these two situations, the payroll taxes that you include are the FUTA (federal unemployment) tax, state unemployment tax, and your portion of the Social Security and Medicare taxes that you have actually paid during your tax year. For example, if you paid FUTA tax in January for medically deductible wages that you paid to a nurse in the prior year, you would include the FUTA tax as part of your medical expenses on your current year return (return for the year in which the FUTA tax was actually paid). (The wages paid in the prior year are deductible on your prior year return.) Do not include the Social Security and Medicare taxes, federal and state income taxes, or other state or local taxes you’ve withheld from the employee’s wages, since these amounts are already part of the gross wages for which you are claiming the credit or deduction. Are 1099s Required for Non-Employees Working at Your Home? If the person whom you paid during the year for household services is not your employee – as was the case of the gardener described at the beginning of this article – you would not issue a Form 1099-MISC to that individual. Form 1099-MISC is issued by a business to independent contractors who were paid $600 or more during the year for services performed for the business. You are not considered to be operating a business when you engage someone such as a self-employed gardener strictly to provide services at your home (unless, of course, you are operating a business at your home). 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. Tue, 02 Dec 2014 19:00:00 GMT Refinanced Mortgage Interest May Not All Be Deductible http://www.advancedfinancialtax.com/blog/refinanced-mortgage-interest-may-not-all-be-deductible/39885 http://www.advancedfinancialtax.com/blog/refinanced-mortgage-interest-may-not-all-be-deductible/39885 Advanced Financial Tax, LLC Article Highlights: Refinancing home mortgage interest  Acquisition debt  Equity debt  Traceable debt  Allocations  Alternative minimum tax  Mortgage interest rates continue to be low, and home values are on the uptick. If you are considering a refinance, there are some important home mortgage interest rules you should be aware of. Generally, the mortgage interest that you may deduct on your home includes the interest paid on the acquisition debt and on up to $100,000 of equity debt, provided the combined debt does not exceed the lesser of the value of the home or $1,100,000. Acquisition debt is the debt incurred to buy the home or substantially improve it, while equity debt is funds borrowed against the home for other uses. A big problem arises when taxpayers fail to consider that acquisition debt steadily declines over the life of the loan. So, for example, if the original acquisition debt was $400,000 and you refinance 15 years later, the acquisition debt has probably been paid down to somewhere around $300,000. In this case, if the loan was refinanced for $475,000, the refinanced debt would be allocated $300,000 to acquisition debt, $100,000 to equity debt and $75,000 to debt for which the interest would not be deductible as home mortgage interest. In this case, the interest paid on the $300,000 acquisition debt and the $100,000 equity debt would be deductible as home mortgage interest. If the use of the $75,000 can be traced to another deductible use (e.g., purchase of taxable investments or expenses related to operating a business), then the interest on the $75,000 loan would be deductible per the limitations of the other deductible use. If the use of the $75,000 cannot be traced to an interest-deductible use, then the interest would not be deductible. In the example above, the interest would be allocated as follows: 63.15% as acquisition debt interest, 21.05% as equity debt interest and 15.79% as interest not deductible as home mortgage interest. The result would be different if some or all of the new loan in excess of the $300,000 acquisition debt was used to make improvements to the home. For example, say that $125,000 of the new loan was used to add a bedroom and bathroom to the home. This increases the home acquisition debt to $425,000, leaving $50,000 as equity debt, and the interest would all be deductible because the equity debt amount would then be under $100,000. If you have already refinanced or are thinking of doing so, it is imperative that you retain a record of the terms of the original acquisition debt in case you exceed the debt limitation and need to prorate your interest deduction. When refinancing, you also need to watch out for the alternative minimum tax (AMT). The AMT is another way of computing tax liability that is used if it is greater than the regular method. Congress originally conceived the AMT as a means of extracting a minimum tax from high-income taxpayers who have significant items of tax shelter and/or tax-favored deductions. Since the AMT was created, inflation has driven up income and deductions so that more individuals are becoming subject to the AMT. When computing the AMT, only the acquisition debt interest is allowed as a deduction; home equity debt interest is not. Neither is the interest on debt for unconventional homes such as boats and motor homes, even if they are the primary residence of the taxpayer. Before you refinance a home mortgage, it may be appropriate to contact this office to determine the tax implication of your planned refinance and see if there are any other suitable alternatives. Tue, 02 Dec 2014 19:00:00 GMT 2014 TAX DEDUCTION FINDER & PROBLEM SOLVER http://www.advancedfinancialtax.com/blog/2014-tax-deduction-finder--problem-solver/18218 http://www.advancedfinancialtax.com/blog/2014-tax-deduction-finder--problem-solver/18218 Advanced Financial Tax, LLC 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 2014 tax year, although it can be used for other years. The 2014 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 2013 return late, please use this organizer. Mon, 01 Dec 2014 19:00:00 GMT Tax, Payroll and Personal Finance Calculators http://www.advancedfinancialtax.com/blog/tax-payroll-and-personal-finance-calculators/39923 http://www.advancedfinancialtax.com/blog/tax-payroll-and-personal-finance-calculators/39923 Advanced Financial Tax, LLC This section includes a library of over one hundred financial calculators. The calculators are easy-to-use and provide in-depth analysis for virtually any financial scenario, along with graphs, charts and tables. The calculators are categorized by subject matter, which can be accessed from the links. Please give us a call if you need assistance with the input or understanding the computed results for any of the calculators. We are dedicated to providing our clients with valuable online resources to assist them with their everyday needs and long-range planning. Cash Flow How Does Inflation Impact My Standard Of Living? How Much Am I Spending? How Much Do I Need For Emergencies? Should I Pay Down Debt Or Invest My Monthly Surplus? How Long Will My Money Last With Systematic Withdrawals? Should My Spouse Enter The Work Force? What Is My Current Net Worth? What Is My Projected Net Worth? What Is My Current Cash Flow? What Is My Projected Cash Flow? What Is The Value Of Reducing, Postponing or Foregoing Expenses? College How Much Should I Be Saving For College? Feasibility of Student Loan Repayment What Are The Advantages Of A Coverdell ESA? What Are The Advantages Of A 529 College Savings Plan? What Is The Value Of A College Education? What Are The Payments On A Parental (PLUS) Loan? Should I Live At Home, On Campus, Or Off Campus? Credit How Long Will It Take To Pay Off My Credit Card? How Long Until My Loan Is Paid Off? What Would My Loan Payments Be? Should I Lease or Purchase An Auto? What Is The Balance On My Loan? Should I Consolidate My Personal Debt Into A New Loan? Which Is Better: Cash Up Front Or Payments Over Time? What Is The Impact Of Making Extra Payments On My Debt? Should I Pay Off Debt or Invest? Auto Purchase: Loan Versus 0% Dealer Financing? Home and Mortgage How Much Home Can I Afford? Should I Refinance My Mortgage? Comprehensive Mortgage Calculator Comparing Mortgage Terms (i.e. 15, 20, 30 year) Should I Pay Discount Points For A Lower Interest Rate? Should I Rent or Buy A Home? Should I Convert to a Bi-Weekly Payment Schedule? Compare A 'No-Cost' Versus Traditional Mortgage What Are The Tax Savings Generated By My Mortgage? Which is Better: Fixed or Adjustable-Rate Mortgage? Adjustable Rate Mortgage Calculator How Do Closing Costs Impact The Interest Rate? Investment How Should I Allocate My Assets? Compare Taxable Versus Tax-Free Investment Return What Is The Value Of A Bond? What Is The Return On My Real Estate Investment? What Is The Value Of Compound Interest? What Is The Value Of A Call Or Put Option? Taxable vs. Tax-Deferred Savings? What Is My Risk Tolerance? What Is The Long-Term Impact Of Increased Investment Return? Certificate Of Deposit (CD) Analyzer What Is The Dividend Yield On A Stock? Insurance How Much Life Insurance Do I Need? What Is My Life Expectancy? What Are My Needs For Burial And Final Expenses? How Much Disability Income Do I Need? What Are My Chances of Becoming Disabled? What Are My Long-Term Care Needs? How Much Will I Earn In My Lifetime? What Are The Tax Advantages Of An Annuity? How Long Will My Current Life Insurance Proceeds Last? What Is The Future Value Of An Annuity? Paycheck and Benefits The calculators offer unmatched features for paycheck modeling. These personal finance paycheck calculators are here for employees to better manage their paychecks. Paycheck Calculator Here you may calculate your net pay or "take home pay." Take home pay is what is left from your wages after withholdings for taxes and deductions for benefits have been subtracted. Salaried employees can enter either their annual salary or earnings per pay period. Other Paycheck and Benefit Calculators How Much Will My Company Bonus Net After Taxes? How Will Payroll Adjustments Affect My Take-Home Pay? Convert My Salary To An Equivalent Hourly Wage Convert My Hourly Wage To An Equivalent Annual Salary What Is The Future Value Of My Employee Stock Options? Should I Exercise My 'In-The-Money' Stock Options? What May My 401(k) Be Worth? What Is The Impact Of Increasing My 401(k) Contribution? Qualified Plans Evaluate My Company Pension Payout Options How Much Can I Contribute To An IRA? How Much Retirement Income May My IRA Provide? Should I Convert To A Roth IRA? What Will My Qualified Plan(s) Be Worth At Retirement? What Is My Current Year Required Minimum Distribution? What Is My Projected Required Minimum Distribution? What Are My Lump Sum Distribution Options? How Do I Maximize My Employer 401(k) Match? What Is The Impact Of Borrowing From My 401(k) Plan? What Is The Impact Of Early Withdrawal From My 401(k)? Self-Employed Retirement Plan Maximum Contribution Calculator Net Unrealized Appreciation (NUA) vs. IRA Rollover Retirement How Will Retirement Impact My Living Expenses? How Much Will I Need To Save For Retirement? Are My Current Retirement Savings Sufficient? Social Security Retirement Income Estimator How Does Inflation Impact My Retirement Income Needs? I'm Retired, How Long Will My Savings Last? When Should I Begin Saving For Retirement? Should I Convert Discretionary Expenses To Savings? How much retirement income may my 401(k) provide? Compare the Roth 401(k) to a Traditional 401(k) Saving Becoming A Millionaire Income Generated By A Savings Plan How Long Will It Take To Double My Savings? How Long Until My Savings Reach My Goal? Save Now vs. Save Later How Much Should I Save to Reach My Goal? What Will My Current Savings Grow To? Calculate Rate Of Return How Do Taxes and Inflation Impact My Investment Return? What Is The Effective Annual Yield On My Investment? Taxation What Is My Potential Estate Tax Liability? Federal Income Tax Estimator Should I Adjust My Payroll Witholdings? Will My Investment Interest Be Deductible? How Much Self-Employment Tax Will I Pay? Capital Gains (Losses) Tax Estimator Compare Taxable, Tax-Deferred And Tax-Free Investment Growth How Much Of My Social Security Benefit May Be Taxed? What Are The Tax Implications Of Paying Interest? Should I Itemize Or Take The Standard Deduction? What Is My Tax-Equivalent Yield? Sun, 30 Nov 2014 19:00:00 GMT Employers: Beware of Dumping Employees on a Government Health Insurance Marketplace. http://www.advancedfinancialtax.com/blog/employers-beware-of-dumping-employees-on-a-government-health-insurance-marketplace/39851 http://www.advancedfinancialtax.com/blog/employers-beware-of-dumping-employees-on-a-government-health-insurance-marketplace/39851 Advanced Financial Tax, LLC Article Overview: There are consequences to having employee health insurance reimbursement plans.   Health insurance reimbursement plans do not qualify as employer group plans to satisfy the employer insurance mandate.   Penalties can be as high $100 per day per employee for not having a qualified plan.  The IRS earlier this year cautioned employers of the consequences when an employer reimburses its employees for the cost of premiums the employees pay to purchase qualified health plans, either through a health insurance marketplace or outside the marketplace, rather than establishing a health insurance plan for its own employees. Employers may think they can use this strategy to avoid the employer insurance mandate required by the Affordable Care Act that applies to mid- and large-size firms, as well as shift some of the expense of providing employee health care away from the employer. Not so, says the IRS, which refers to this method of avoiding the employer insurance mandate as a “dumping” strategy. This type of arrangement, termed an “employer payment plan,” is considered a group health plan by the IRS, and as such, is subject to the reform provisions of the Affordable Care Act (ACA) and the penalty that applies for failing to meet those provisions. These reforms include a prohibition on the annual limits for essential health benefits and a requirement to provide certain no-cost-sharing preventive care. Employer payment plans can't be integrated with individual policies to achieve the market reform requirements, and therefore they fail to satisfy the market reform requirements. As a result, the employer may be subject to a $100/day per employee excise tax penalty amounting to $36,500 per year per employee for failure to meet the ACA provisions. However, an employer payment plan does not include an employer-sponsored arrangement under which an employee may choose either cash or an after-tax amount to be applied toward health coverage. Individual employers may establish payroll practices of forwarding post-tax employee wages to a health insurance issuer at the direction of an employee without establishing a group health plan. The employer group insurance mandate takes effect in 2015 for larger employers (those with 100 or more full-time employees) and in 2016 for employers with 50 to 99 full-time employees that meet certain conditions. Employers with fewer than 50 full-time employees are not required to provide health insurance coverage for their employees. One last item: because an employer payment plan is considered a group health plan, the employees participating in such an arrangement who purchase their health coverage through a marketplace cannot claim the premium assistance credit because employees who have an employer plan are not eligible for the credit. If you have further questions related to this issue, please give this office a call. Tue, 25 Nov 2014 19:00:00 GMT Tips to Avoid Tax Penalties for 2014 http://www.advancedfinancialtax.com/blog/tips-to-avoid-tax-penalties-for-2014/39813 http://www.advancedfinancialtax.com/blog/tips-to-avoid-tax-penalties-for-2014/39813 Advanced Financial Tax, LLC 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.advancedfinancialtax.com/blog/year-end-planning-strategies-to-lower-your-taxes/39800 http://www.advancedfinancialtax.com/blog/year-end-planning-strategies-to-lower-your-taxes/39800 Advanced Financial Tax, LLC 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.advancedfinancialtax.com/blog/december-2014-individual-due-dates/35301 http://www.advancedfinancialtax.com/blog/december-2014-individual-due-dates/35301 Advanced Financial Tax, LLC 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.advancedfinancialtax.com/blog/december-2014-business-due-dates/35302 http://www.advancedfinancialtax.com/blog/december-2014-business-due-dates/35302 Advanced Financial Tax, LLC 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.advancedfinancialtax.com/blog/recordkeeping-tips-to-keep-the-irs-away/39797 http://www.advancedfinancialtax.com/blog/recordkeeping-tips-to-keep-the-irs-away/39797 Advanced Financial Tax, LLC 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.advancedfinancialtax.com/blog/using-statements-in-quickbooks-the-basics/39815 http://www.advancedfinancialtax.com/blog/using-statements-in-quickbooks-the-basics/39815 Advanced Financial Tax, LLC 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 Going Green At Home Has Tax Benefits http://www.advancedfinancialtax.com/blog/going-green-at-home-has-tax-benefits/5954 http://www.advancedfinancialtax.com/blog/going-green-at-home-has-tax-benefits/5954 Advanced Financial Tax, LLC A credit for home energy-savings improvements is available for 2011 though 2014. 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 does not count. 2011 - 2014 Tax Credit for Residential Energy Improvements - Energy property improvements to a principal residence located in the United States and placed in service during 2011 through 2014 qualify for a credit equal to 10% of the cost of qualified improvements. The maximum lifetime credit allowed (including any credit claimed in a prior year) is $500 ($200 for windows and skylights). Eligible property improvements include: Energy efficient Exterior Windows and Skylights Energy efficient Exterior Doors Energy efficient Metal Roofs with appropriate pigmented coatings Energy efficient Asphalt Roofing with appropriate cooling granules Energy efficient Heating Systems Energy efficient Air Conditioning Systems Insulation Materials or Systems designed to reduce heat loss or gain 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.   Residential Energy Efficient Property Credit (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 U.S.  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 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.  Definition of “Qualified” - These credits are only allowed for “energy efficient components” and the term “qualified” means the components must meet certain energy efficient standards.  That doesn't mean you need to have an engineering degree to determine which components qualify.  For each qualified component the manufacturer is required to supply a certification that the components comply with the energy efficient standards.The IRS has indicated that a taxpayer may rely on a manufacturer's certification that the component is eligible for the credit, provided that the IRS hasn't withdrawn the certification.  The taxpayer is not required to attach the certification statement to the return on which the credit is claimed but must retain it with the taxpayer's records. Reliance on the certification is allowed only if installation of the component is consistent with the certification (for example, the item must be installed in the appropriate climate zone identified in the certificate statement). Exception for exterior windows and skylights: Exterior windows, skylights and exterior doors are qualified energy efficiency improvements if they meet the Energy Star Program requirements.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, and 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 can be carried to the next tax year and is added to that year's allowable credit.Caution - You are strongly urged to contact this office before entering into any contractual arrangements to install any of these energy items to first verify what your tax benefit might be. Sat, 15 Nov 2014 19:00:00 GMT Buying Your First Home http://www.advancedfinancialtax.com/blog/buying-your-first-home/5439 http://www.advancedfinancialtax.com/blog/buying-your-first-home/5439 Advanced Financial Tax, LLC It is just about everyone’s dream to own their own home. Buying your first home can seem like an enormous task. There are a great number of issues to deal with. They include the emotional trauma of a lifestyle change, financial aspects, tax implications and legal considerations. The process may seem a bit overwhelming, but everyone has to go through it. There are many books written on the subject and you certainly should approach the process with your eyes wide open and as prepared as possible for the undertaking. The process from start to finish will consume a great deal of your time. The following are some tips to help you down the path to home ownership. Are You Ready to Buy a Home? Home Ownership vs. Renting Tax Benefits How Much of a Home Can You Afford? Location, Size and Amenities Selecting a Real Estate Agent Creditworthiness Shopping for a Loan Down Payment Holding Title to Your Home Maintaining Home Improvement Records Are You Ready to Buy a Home?This is the first question that needs to be answered before making a home purchase. There is no need to expend the energy and time it takes to find, finance, acquire, and move into a home if you are not ready. Ask yourself the following questions: Do I have a steady source of income (from a job or business)? Have I been employed on a regular basis for the last 2-3 years? Is my current income reliable? Do I have a good record of paying my bills? Do I have few outstanding long-term debts like car payments? Do I have money available for a down payment? Am I credit worthy enough to qualify for home financing? Do I have the ability to pay a mortgage every month, plus additional costs? If you can answer "yes" to these questions, you are probably ready to buy your own home.Home Ownership vs. RentingThere is a big difference between owning your own home and renting. Generally, renting is free of most home maintenance responsibilities other than cleaning and yard care and even the gardening is included with many rental agreements. But at the end of the rental agreement, you have nothing to show for all those rental dollars that you shelled out, and you are generally at the mercy of the landlord. You have also helped the landlord pay down his mortgage and build his equity instead of yours. That’s not to say home ownership is for everyone; many prefer a lifestyle unencumbered by the responsibilities of home ownership.On the other hand, a home purchase provides significant benefits, some immediate and some long-term. When you make a mortgage payment, you are building equity. And that's an investment. Owning a home also qualifies you for tax breaks that assist you in dealing with your new financial responsibilities - like insurance, real estate taxes, and upkeep - which can be substantial. But given the freedom, stability, and security of owning your own home, they are generally worth it.Tax BenefitsThe tax benefits available with home ownership can greatly reduce the cost of ownership. An individual who rents cannot deduct the cost of the rent on his or her tax return. However, if you are buying the home, the mortgage interest and property taxes (1) are a tax deduction (when itemizing) which provides considerable benefits and can substantially offset the cost of owning the home. This is best explained by example.Illustration: Let’s assume that you are a married couple filing jointly. Your mortgage payment is $1,500 per month ($18,000 per year) and the property taxes for the year are $5,000. In the first years after purchasing your home, the mortgage payment is primarily interest, which means most of the payment will be tax-deductible (so we will use $17,000 of the mortgage payment as deductible home mortgage interest). Assume your “other” deductible itemized deductions (medical, charity, other taxes and miscellaneous) for the year after AGI adjustments totaled $4,000 and your standard deduction for the year would have been $12,600. Assuming that you are in the 25% tax bracket, your tax savings can be determined as follows: Deductible Interest $17,000 Property Taxes (1) 5,000 Other Itemized Deductions 4,000 Total Itemized Deductions 26,000 Standard Deduction (2015) <12,600> Net Increase in Deductions $13,400 Net Tax Savings (25% Tax Bracket) $3,350This benefit generally can be more or less based on a number of factors. Had this illustration been for a single taxpayer with a standard deduction of only half that of the joint filing taxpayers, the savings would have been $4,925! Tax bracket also has a big impact. Had the illustration been for a single individual in the 35% tax bracket, the savings would have been $6,895.You can project your savings by substituting your estimated deductible interest and taxes, using the standard deduction that you would use if not itemizing and your marginal tax rate (2).(1) Property taxes are deductible by everyone who itemizes except those subject to the alternative minimum tax (AMT). To the extent you might be subject to the AMT, property taxes will not provide any tax benefit.(2) Frequently, a taxpayer’s taxable income before and after the increase in deductions will straddle two tax brackets and result in a blended marginal rate.Keep in mind that the annual cost of the home will be more than mortgage payments and taxes. The lender will require the home to be insured for fire and possibly flood. Your utility bills may increase and an allowance for home maintenance and repairs should be set aside.Determine How Much of a Home You Can AffordFirst of all, you will need enough up-front cash to cover the down payment and closing costs. In addition, unless you are purchasing a furnished model, you will need some amount of cash to cover curtains, paint, and whatever other modifications you think are necessary to occupy the home. Don’t forget that once you buy the house, you will have expenses moving there.Before you start looking for a home, the following two things should be determined:What Can You Afford: Before anything else, figure out how much you can comfortably afford for monthly home expenses. That will include the mortgage payment, taxes, insurance, possible increased utilities and an allowance for home maintenance. Formulate a budget that includes all of your other monthly expenses less those expenses attributable to your current rental. Be careful not to overlook transportation, entertainment, medical expenses, eating out, etc., unless you plan to change your lifestyle. Use that budget to determine how much you can afford monthly for housing.What Loan Amount Will You Qualify For: Unless you have affluent family members, you will need to determine the maximum loan amount that you will qualify for. A potential lender considers your debt-to-income ratio, which is a comparison of your gross (pre-tax) income to housing and non-housing expenses. Non-housing expenses include long-term debts such as car or student loan payments, alimony, or child support. According to the FHA, monthly mortgage payments should be no more than 29% of gross income, while the mortgage payment, combined with non-housing expenses, should total no more than 41% of income. The lender also considers cash available for down payment and closing costs, credit history, etc. when determining your maximum loan amount.You may wish to get pre-qualified for a mortgage before you make an offer to a seller. Having been previously approved by a mortgage lender removes a large amount of uncertainty in the seller's mind, and increases the likelihood of a quick closing. With pre-qualification, you'll be in a stronger position to negotiate a better price on the house that you would like to buy. Prequalification is quick and easy. Some lenders charge for the service while others don't. It will also let you know ahead of time how large of a loan you are qualified for.Location, Size and AmenitiesBefore you start searching for that perfect home, there are several things you need to determine that will save yourself hours of wasted time. Figure out the type of house that you want early in the process and set your requirements. This cuts out a lot of the guesswork and makes it easier for your real estate agent to find something suitable. Things to consider are:Size: How big of a home do you need? How many bedrooms? Will the family size be increasing?Amenities: Narrow your search by specifying the amenities that you require, such as the number of bathrooms, a pool, 2 or 3-car garage, fireplace, yard size, etc. Categorize these items by the need, from your minimum requirements to a wish list.Location: Select a community that you will be comfortable in. Many people choose communities based on the schools. Do you want access to close shopping and public transportation or a more rural area? How close do you want to be to your place of business or family?Selecting a Real Estate AgentTypically, the first person you consult about buying a home is a real estate agent or broker. Although real estate brokers provide helpful advice on many aspects of home buying, they may serve the interests of the seller and not your interests as the buyer. The most common practice is for the seller to hire the broker to find someone who will be willing to buy the home on terms and conditions that are acceptable to the seller. Therefore, the real estate broker you are dealing with may also represent the seller. However, you can hire your own real estate broker, known as a buyer’s broker, to represent your interests. Also, in some states, agents and brokers are allowed to represent both the buyer and seller.Sometimes, the real estate broker will offer to help you obtain a mortgage loan. He or she may also recommend that you deal with a particular lender, title company and attorney or settlement/closing agent. You are not required to follow the real estate broker’s recommendation. You should compare the costs and services offered by other providers with those recommended by the real estate broker. Make sure that you do your research.Find an agent by inquiring around with associates and friends for recommendations. If you have multiple recommendations, interview them before choosing one. Look for an agent who listens well and fully understands your needs. Pick one who is familiar with the area in which you wish to purchase your home. You want to choose an agent that can provide all the knowledge and services that you need.CreditworthinessWhen you’re applying for credit - whether it’s a credit card, a car loan, a personal loan or a home mortgage - lenders want to know your credit risk level. In other words, “If I give this person a loan or credit card, how likely is it that I will get paid back on time?”There are three major credit reporting agencies (Equifax, Experian and TransUnion) in the United States that maintain records of your use of credit and other information about you. These records are called credit reports, and lenders will want to check your credit report when you apply for credit. In most cases, lenders will also want to know your credit score. A credit score is a number that summarizes your credit risk, based on a snapshot of your credit report at a particular point in time. A credit score helps lenders evaluate your credit report and estimate your credit risk. Your credit score influences the credit that is available to you and the terms (interest rate, etc.) that the lenders offer you. It’s a vital part of your credit health. If your credit score is low, you will generally end up with a less favorable home mortgage. The interest rate most likely will be higher, which will make the monthly home payments higher.If you are in the planning stages of acquiring a home, you may wish to check your credit score before applying for a loan. If you find errors in the report, you should take steps to have those errors corrected to improve your score.The most commonly encountered credit score is your FICO® score, which can range from 300 to 850, and is which is easy to check online. Although in most cases, there will be a charge to obtain the FICO® score. An important time to check your FICO® score is six months or so before you plan to purchase a home. This will give you enough time to verify the information on your credit report, correct errors if there are any, and take actions to improve your FICO® score if necessary. In general, any time you are applying for credit, taking out a new loan or changing your credit mix is a good time to check your FICO® score. Improving your FICO score can help you: Get better credit offers; Lower your interest rates; and Speed up credit approvals. The payoff from a better FICO® score can be big. For example, with a 30-year fixed mortgage of $150,000, you could save approximately $165,000 over the life of the loan - or $459 on each monthly payment - by first improving your FICO® score from 550 to 720.Shopping for a LoanYour choice of lender and type of loan will influence not only your settlement costs, but also the monthly cost of your mortgage loan. There are many different types of lenders and loans you can choose from. You may be familiar with banks, savings associations, mortgage companies and credit unions, many of which provide home mortgage loans. Also check online for a listing of some mortgage lenders or your local newspaper for a listing of rates. Mortgage Brokers - Some companies (known as "mortgage brokers") offer to find you a mortgage lender willing to make you a loan. A mortgage broker may operate as an independent business and may not be operating as your "agent" or representative. Your mortgage broker may be paid by the lender, you as the borrower, or both. You may wish to ask about the fees that the mortgage broker will receive for its services Government Programs - You may be eligible for a loan insured through the Federal Housing Administration ("FHA") or guaranteed by the Department of Veterans Affairs or similar programs operated by cities or states. These programs may require a smaller down payment. Ask lenders about these programs. You can get more information about these programs from the agencies that run them. Computer Loan Origination Systems (CLOs) - CLOs are computer terminals sometimes available in real estate offices or other locations to help you sort through the various types of loans offered by different lenders. The CLO operator may charge a fee for the services the CLO offers. This fee may be paid by you or by the lender that you select. Types of Loans - Loans can have a fixed or variable interest rate. Fixed rate loans have the same principal and interest payments during the loan term. Variable rate loans can have any one of a number of "indexes" and "margins" which determine how and when the rate and payment amount change. If you apply for a variable rate loan, also known as an adjustable rate mortgage ("ARM"), a disclosure and booklet required by the Truth in Lending Act will further describe the ARM. Most loans can be repaid over a term of 30 years or less and have equal monthly payments. The amounts can change from time to time on an ARM depending on changes in the interest rate. Some loans have short terms and a large final payment called a "balloon." You should shop for the type of home mortgage loan terms that best suit your needs.Interest Rate, "Points" & Other Fees - The price of a home mortgage loan is usually stated in terms of an interest rate, points and other fees. A "point" is a fee that equals 1 percent of the loan amount. Points are usually paid to the lender, mortgage broker, or both, at the settlement or upon the completion of the escrow. Often, you can pay fewer points in exchange for a higher interest rate or more points for a lower rate. Ask your lender or mortgage broker about points and other fees.A document called the Truth in Lending Disclosure Statement will show you the "Annual Percentage Rate" ("APR") and other payment information for the loan you have applied for. The APR takes into account not only the interest rate, but also the points, mortgage broker fees and certain other fees that have to be paid. Ask for the APR before you apply to help you shop for the loan that is best for you. Also ask if your loan will have a charge or a fee for paying all or part of the loan before the payment is due, otherwise known as the prepayment penalty. You may be able to negotiate the terms of the prepayment penalty.Lender-Required Settlement Costs - Your lender may require you to obtain certain settlement services, such as a new survey, mortgage insurance or title insurance. They may also order and charge you for other settlement-related services, such as the appraisal or credit report. A lender may also charge other fees, such as fees for loan processing, document preparation, underwriting, flood certification or an application fee. You may wish to ask for an estimate of fees and settlement costs before choosing a lender. Some lenders offer "no cost" or "no point" loans but normally cover these fees or costs by charging a higher interest rate.Comparing Loan Costs - Comparing APRs may be an effective way to shop for a loan. However, you must compare similar loan products for the same loan amount. For example, compare two 30-year fixed rate loans for $100,000. Loan A with an APR of 3.35% is less costly than Loan B with an APR of 3.65% over the loan term. However, before you decide on a loan, consider the up-front cash you will be required to pay for each of the two loans as well.Another effective shopping technique is to compare identical loans with different up-front points and other fees. For example, if you are offered two 30-year fixed rate loans for $100,000 and at 3.5%, the monthly payments are the same, but the up-front costs are different:Loan A - 2 points ($2,000) and lender required costs of $1,800 = $3,800 in costs.Loan B - 2 1/4 points ($2,250) and lender required costs of $1,200 = $3,450 in costs.A comparison of the up-front costs shows Loan B requires $350 less in up-front cash than Loan A. However, your individual situation (how long you plan to stay in your house) and your tax situation (points can usually be deducted for the tax year that you purchase a house that will be your primary residence) may affect your choice of loans.Lock-ins - "Locking in" your rate or points at the time of application or during the processing of your loan will keep the rate and/or points from changing until settlement or closing of the escrow process. Ask your lender if there is a fee to lock-in the rate and whether the fee reduces the amount you have to pay for points. Find out how long the lock-in is good, what happens if it expires, and whether the lock-in fee is refundable if your application is rejected.Tax and Insurance Payments - Your monthly mortgage payment will be used to repay the money you borrowed plus interest. Part of your monthly payment may be deposited into an "escrow account" (also known as a "reserve" or "impound" account) so your lender or servicer can pay your real estate taxes, property insurance, mortgage insurance and/or flood insurance. Ask your lender or mortgage broker if you will be required to set up an escrow or impound account for taxes and insurance payments.Transfer of Your Loan - While you may start the loan process with a lender or mortgage broker, you could find that after settlement another company may be collecting the payments on your loan. Collecting loan payments is often known as "servicing" the loan. Your lender or broker will disclose whether it expects to service your loan or to transfer the servicing to someone else.Mortgage Insurance - Private mortgage insurance (PMI) and government mortgage insurance protects the lender against default and enables the lender to make a loan which is considered a higher risk. Lenders often require mortgage insurance for loans where the down payment is less than 20% of the sales price. You may be billed monthly, annually, by an initial lump sum, or some combination of these practices for your mortgage insurance premium. Ask your lender if mortgage insurance is required and how much it will cost. Mortgage insurance should not be confused with mortgage life, credit life or disability insurance, which is designed to pay off a mortgage in the event of the borrower's death or disability.You may also be offered "lender paid" mortgage insurance ("LPMI"). Under LPMI plans, the lender purchases the mortgage insurance and pays the premiums to the insurer. The lender will increase your interest rate to pay for the premiums - but LPMI may reduce your settlement costs. You cannot cancel LPMI or government mortgage insurance during the life of your loan. However, it may be possible to cancel private mortgage insurance at some point, such as when your loan balance is reduced to a certain amount. Before you commit to paying for mortgage insurance, find out the specific requirements for cancellation.Flood Hazard Areas - Most lenders will not lend you money to buy a home in a flood hazard area unless you pay for flood insurance. Some government loan programs will not allow you to purchase a home that is located in a flood hazard area. Your lender may charge you a fee to check for flood hazards. You should be notified if flood insurance is required. If a change in flood insurance maps brings your home within a flood hazard area after your loan is made, your lender or servicer may require you to buy flood insurance at that time.Down PaymentIf you have the funds for a down payment and a good credit rating, this is probably a good time to purchase a home, since there is a large inventory of property available and in many areas the prices still have not rebounded to the heights they were before the financial crisis of the mid- to late-2000s began.The typical down payment required for the purchase of a home is twenty percent of the purchase price. In the past, banking on steadily increasing home values, some creative financing arrangements required a much smaller down (some no down payment at all). However, with the decline in home values during 2008, these creative home loan arrangements are generally no longer available.If you lack the ready cash for the down payment or are short on the amount you need, the following may be possible sources:IRA Account - If you have an IRA account and you qualify as a first-time home buyer, tax law permits you to make up to a $10,000 penalty-free withdrawal from an IRA to purchase a home. (Please note that even though the withdrawal might be penalty-free, it is still taxable). The tax definition of a first-time homebuyer is quite different from the literal definition of a first-time homebuyer. As it turns out, you can qualify even if you owned a home before. Generally, you are a first-time homebuyer if 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. To qualify for the first-time homebuyer penalty exception, the distribution must be used to pay qualified acquisition costs before the close of the 120th day after the distribution was received. When added to all of your prior qualified first-time homebuyer distributions, if any, the total distributions cannot be more than $10,000. If you are married, and both you and your spouse have an IRA, you each can withdraw up to $10,000.Other Retirement Accounts – The penalty-free withdrawal from IRA accounts does not apply to other types of retirement accounts. However, funds can be rolled from a qualified plan to an IRA and then a penalty-free distribution can be taken from the IRA.Gifts – Often parents or other relatives can assist a potential homebuyer by gifting them the funds to help with the down payment.Holding Title to Your HomeYou also need to consider how you intend to hold title to the home. Surprisingly, many home purchasers don't give much attention to the question even though the manner in which the title is held can have far-reaching ramifications.The best way to come to a decision about the title is to consult with a real estate attorney. Before you do that, however, you may want a little background on the more prevalent title-holding methods:• Title held in the name of one individual. Single individuals would probably be the most likely candidates for this method of holding title. However, married individuals may also, for one reason or another, choose to take title individually rather than with their spouse. When the owner of the property dies, probate is necessary (unless the property was held in a living trust). However, the property takes on a new value for the beneficiary - generally equal to its fair market value at the date of the original owner's death.• Joint tenancy with right of survivorship. Under this form of ownership, all (two or more) owners hold title to the property. Each owns an equal share of the property. When one owner dies, the others become owners of the decedent's portion. An advantage of joint tenancy is that it cuts probate costs since the decedent's portion of the property normally reverts to the remaining joint tenants automatically (ownership recording, of course, need to be changed). The basis of the decedent's part is revalued at the date of death.• Community property. Married couples in community property states of Arizona, California, Idaho, Nevada, New Mexico, Louisiana, Texas, Washington and Wisconsin (and by election, Alaska) can claim community title to property. Under community property rules, each spouse owns half of the property and each spouse can pass his/her portion either to the other spouse or to someone else. An advantage of community property is that when it is willed to a surviving spouse, the entire property gets revalued to its fair market value at the date of the decedent spouse's death.Other methods of holding title, like tenancy in common or holding property in trust, are also available. All have their "special" pros and cons. Some community property states also have special methods of holding title such as California’s “community property with right of survivorship,” which combines the tax benefits of holding title as community property including a double basis adjustment with the ease of property transfer available to the survivor of joint tenancy property. Before making your final decision, take some time to check out the different methods of holding title in your state to determine what’s best for you.Maintaining Home Cost & Improvement RecordsOne of the benefits of home ownership is the ability to exclude up to $250,000 ($500,000 for a married couple) of gain from the sale of the home. To qualify for the exclusion, taxpayers must meet the ownership and use tests. This means that during the 5-year period ending on the date of the sale, taxpayers must have: 1) Owned the home for at least 2 years (if a joint return, only one spouse needs to meet the ownership test), and2) Except for short temporary absences, lived in (used) the home as their main home for at least 2 years. The required 2 years of ownership and use during the 5-year period ending on the date of the sale does 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 5-year period ending on the date of sale. Where taxpayers do not meet the two-out-of-five use and ownership requirements, they may qualify for a reduced exclusion if the home was sold as a result of unforeseen circumstances.Maintaining good records will help reduce any future gain and minimize any potential tax when the home is sold. Therefore, it is important to keep a copy of your purchase documents that itemize the costs of purchasing the property, along with substantiation for all subsequent improvements to the home. Don’t make the mistake of thinking that the $250,000 or $500,000 gain exclusion will cover all subsequent appreciation in value of the home. Fri, 14 Nov 2014 19:00:00 GMT Death of a Loved One http://www.advancedfinancialtax.com/blog/death-of-a-loved-one/5440 http://www.advancedfinancialtax.com/blog/death-of-a-loved-one/5440 Advanced Financial Tax, LLC The death of a loved one is one of life’s most difficult times and a time for reflection and grieving. However, it also triggers unique financial and tax events that must be dealt with by the survivors. For a surviving spouse, this is an especially difficult time and can be devastating if the death was sudden with little or no time to make financial preparations. This material is divided into several sections dealing with the various aspects of a passing and provides information to help you work through the various financial problems and details that must be attended to with the death of a loved one. Collecting Paperwork Social Security Probate Decedent’s Estate Final Tax Return Other Tax Returns Surviving Spouse Surviving Spouse Filing Status Collecting Paperwork – Gathering the proper paperwork is the first step in settling a decedent’s affairs. These documents will be necessary to file and collect benefits, file taxes, etc. This task is generally the responsibility of the decedent’s surviving spouse or, if unmarried, whoever is responsible for the decedent’s affairs. Death Certificate - The death certificate will be needed for many financial procedures that will be encountered. Request several copies (ten is recommended in most cases). These are usually available from the funeral director. If not, they will be available from the county health department. Decedent’s Insurance Policies - These will help you determine the benefits entitled to by the survivors. In addition to looking for life insurance policies, don’t overlook veteran’s policies, mortgage insurance policies and death benefits associated with car loans, credit cards, installment accounts, health policies, employer plans and retirement plans. Surviving Spouse’s Insurance Policies - If the decedent is the beneficiary of the spouse’s policies, the surviving spouse may wish to file change of beneficiary notices with the insurance carrier. Marriage Certificate - A surviving spouse will sometimes need to provide proof of the marital relationship to apply for certain benefits. If you are unable to find one, a copy can usually be obtained from the county offices of the place where the couple was married. Birth Certificates - For dependent children birth certificates may also be needed when applying for certain benefits. If copies cannot be found, one can be obtained from the county or state in which a child was born. Certificate of Discharge from the Military - If your spouse was in the military, you may need his or her certificate of discharge to collect certain benefits. If discharge or separation documents are lost, veterans or the next of kin of deceased veterans may obtain duplicate copies by completing forms found on the Internet at http://www.archives.gov/research/index.html and mailing or faxing them to the NPRC. Alternatively, write the National Personnel Records Center, Military Personnel Records, 9700 Page Ave., St. Louis, MO 63132-5100. It is not necessary to request a duplicate copy of a veteran’s discharge or separation papers solely for the purpose of filing a claim for VA benefits. If complete information about the veteran’s service is furnished on the application, the VA will obtain verification of service. The Deceased's Will or Trust Documents - The decedent may have had a will or trust. A copy of the will or trust will be required. The decedent’s attorney will have copies of these documents. Decedent’s IRA and Pension Plans - Compile a list of the decedent’s IRA accounts and pension plans and determine who the beneficiary or beneficiaries are for each. Spouse’s IRA and Pension Plans - If the decedent is the beneficiary of the spouse’s IRA or pension plans, the surviving spouse may wish to file change of beneficiary notices with the plans. Complete List of All Property - Generally, the assets of all decedents will go through state probate, estate, or trust proceedings and a complete inventory of the decedent’s assets will be needed. The date-of-death value of each of the assets owned by the decedent will need to be determined for the probate or trust administration. For some assets, such as real estate, a professional appraiser may need to be hired to determine the amount. In most cases it is advisable for the surviving spouse, executor and/or trustee to meet with an attorney, as well as their tax and financial advisors, who will guide them through this process. Frequently, taxpayers maintain their most important documents in a safe deposit box. Where possible, the contents should be removed before the decedent’s passing. Depending upon the jurisdiction, sometimes the boxes are sealed upon the owner’s or joint owner’s death. If the box is sealed, it will require a court order to gain access to the box. Social Security – The Social Security Administration (SSA) should be notified as soon as possible when a person dies. In most cases, the funeral director will report the person's death to the SSA. The funeral director has to be furnished with the deceased's Social Security number so that he or she can make the report. Some of the deceased's family members may be able to receive Social Security benefits if the deceased person worked long enough under Social Security to qualify for benefits. Get in touch with the SSA as soon as possible to make sure the family receives all of the benefits to which they may be entitled. The following is information on the benefits that may be available. A one-time payment of $255 can be paid to the surviving spouse if he or she was living with the deceased; or, if living apart, was receiving certain Social Security benefits on the deceased's record. If there is no surviving spouse, the payment is made to a child who is eligible for benefits on the deceased's record in the month of death. Certain family members may be eligible to receive monthly benefits, including: o A widow or widower age 60 or older (age 50 or older if disabled); o A surviving spouse at any age who is caring for the deceased's child under age 16 or disabled; o An unmarried child of the deceased who is: - Younger than age 18 (or age 18 or 19 if he or she is a full-time student in an elementary or secondary school); or - Age 18 or older with a disability that began before age 22; o Parents, age 62 or older, who were dependent on the deceased for at least half of their support; and o A surviving divorced spouse, under certain circumstances. If the deceased was receiving Social Security benefits, the benefit received for the month of death or any later months must be returned. For example, if the person dies in July, the benefit paid in August must be returned. If benefits were paid by direct deposit, contact the bank or other financial institution. Request that any funds received for the month of death or later be returned to the Social Security Administration. If the benefits were paid by check (a rarity these days), do not cash checks received for the month in which the person dies or later. Return the checks to the SSA as soon as possible. Probate – This is the legal process of settling the estate of a deceased person, specifically resolving all claims and distributing the deceased person's remaining property per the decedent’s wishes under a valid will. This process is generally handled by a probate court which protects the wishes of the deceased, confirms the executor (usually named in the will) as the personal representative of the estate, protects the interests of family members who may have claims against the estate, and protects the executor against claims and lawsuits. If there is no will, the court will appoint a personal representative, usually the decedent’s spouse if married at the time of death. In general, the probate process normally entails the following: In most cases, the survivors will engage an attorney to handle the probate and petition the court to begin the probate proceedings. The cost of probate is generally based on the value of the decedent’s assets and is usually set by law. The court will appoint a personal representative. Notices will be published informing creditors, heirs and beneficiaries of the probate proceedings, allowing them ample time to make claims. The assets will be appraised. The creditors will be paid. The remaining assets will be distributed to the heirs and beneficiaries. Note: Assets held in a living trust are not required to be probated and skip the probate process; this saves the beneficiaries both time and money. Also, assets that are jointly owned by the deceased and someone else are not subject to probate. IRA accounts with a named beneficiary and the proceeds from life insurance policies are also not subject to probate. Decedent’s Final Tax Return - Upon the death of a taxpayer, a personal representative (e.g., estate executor/executrix) takes charge of the decedent’s property. This person may be named in the decedent’s will or trust document, or appointed by the court if there is no will or trust. When the taxpayer is married, that person is generally the surviving spouse. The duties of the representative include collecting all of the decedent’s property, paying creditors, and distributing assets to the heirs. In addition, the representative is responsible for filing various tax returns and seeing that the taxes owed are properly paid. The decedent’s final income tax return is filed on a 1040 series return. Filing Requirements - The requirements for filing a return for a deceased taxpayer are generally the same as if the taxpayer were still living--based on income level, age and filing status. Due Date – The due date for a decedent’s final return is the same as for any other individual (Generally April 15 of the following year, but extendable to October 15. Note: if either April 15 or October 15 fall on a Saturday, Sunday or legal holiday the due date is the next business day. Filing Status - Generally, if the taxpayer was married at the time of death, the decedent will file a joint return with the surviving spouse; otherwise, he or she will file as an unmarried individual. However, taxpayers who were married at the time of death may not file a joint return with the surviving spouse, where the spouse refuses to file jointly, the surviving spouse has remarried, or the executor of the estate does not agree to the joint filing status. Refunds - If a decedent’s return claims a refund, Form 1310, Statement of Person Claiming Refund Due a Deceased Taxpayer, should be filed. However, Form 1310 is not needed if the person claiming the refund is the surviving spouse of the decedent, filing a joint return with the decedent, or a court-appointed or certified personal representative is filing an original return for the decedent. Income to Include - Generally, the decedent’s income on the final return only includes income derived up to the date of death. Post-death income is taxable to the decedent’s estate or trust, but the estate or trust will generally pass the taxable income on to the beneficiaries for inclusion in their individual returns if the income has actually been distributed to the beneficiaries during the same reporting period. Tax Attributes - Tax attributes are exemptions, deductions and carryover items. Where a decedent was married, the attributes must be allocated to the decedent and the surviving spouse based on ownership and state property laws. For example, a married couple has a capital loss carryover of $10,000. Assuming the losses came from jointly-owned property, one-half of the capital loss carryover would belong to the decedent and half to the surviving spouse, allowing the surviving spouse to continue to carry over his or her share. The decedent’s share of the carryover can only be used on the final return and any leftover is lost. The following is the treatment of some of the more common tax attributes: Carryovers – Generally, except as noted below, carryover deductions and credits can be used to the extent normally permitted on the decedent’s final return, but any excess does not carry over to the estate or beneficiaries. The carryovers included in this category are net operating loss (NOL), investment interest deduction, capital loss, business credit, minimum tax credit, passive loss credit, and the charitable contribution deduction. Medical Expenses - Medical expenses paid before death are claimed on the decedent’s final return as an itemized deduction in the usual manner. Medical expenses not deductible on the final return become liabilities of the estate, and they are deducted on the estate tax return (Form 706), if one is required to be filed. However, expenses that were paid out of estate funds within one year after death can be, at the discretion of the executor, treated as if paid by the decedent and claimed on the decedent’s final return instead. To make the election, file a statement with the decedent’s final return that the expenses are not being claimed on the estate tax return. Charitable Contributions - As noted previously, charitable contribution carryovers are lost if not used on the final return. The fair market value of property of an individual that is donated to charity after the individual’s death may be claimed as a charitable contribution by the beneficiary who was designated to inherit the property. Domestic Production Deduction - Where the decedent performed qualifying Section 199 production activities with respect to property transferred to a successor in interest, the successor in interest is treated as having performed the qualifying Section 199 production activities. Thus, if the successor in interest satisfies other relevant requirements, the successor in interest will be entitled to a domestic production activities deduction with respect to the transferred property. Foreign Tax Credit Carryovers - Foreign tax credit carryovers can be used by the taxpayer's estate or heirs. Passive Losses - When a passive interest is transferred due to death, the accumulated suspended losses from the activity are deductible on the decedent’s final return. The deduction amount is limited to the excess of the basis of the property in the hands of the transferee (heir) over the decedent’s adjusted basis in the property just before death. In other words, the amount of the passive activity loss that equals the step-up in basis due to the decedent's death is not allowed as a deduction to anyone in any tax year. Example: Robert was the sole owner of a residence used as a rental, a passive activity, when he died. In his will, he left the property to his brother Tom. At Robert’s date of death, the value of the rental was $500,000, his adjusted basis was $494,000, and he had unused passive activity losses of $8,000. Since Tom’s basis of the rental is increased by $6,000, the deduction on Robert’s final return for the year of death would be limited to $2,000 ($8,000 - $6,000). If the inherited basis had been $502,000 or more, none of the suspended passive loss would have been deductible ($502,000 – 494,000 = $8,000; $8,000 - $8,000 = $0). Exemptions - The full value of the decedent’s exemption is claimed on the final return; proration based on the time the taxpayer was alive for the final year is not required. Unrecovered Investment in Pensions - If a retired person dies before recovering the entire basis in a pension or annuity (that started after 1986), the unrecovered portion is allowed as a deduction on the retiree’s final return. If the annuity is for the joint lives of a retiree and a designated beneficiary, the deduction would apply to the final return of the last to die. Otherwise, it would be allowed on the final return of the retiree decedent. Funeral Expenses - Are NOT deductible on the decedent’s or survivor’s income tax returns. If an estate tax return is required to be filed, funeral expenses are an allowed deduction on it. Other Tax Returns – In addition to the decedent’s final return, there are other returns that may need to be filed, along with taxes paid. All income of the decedent both before death and after death is taxable. Since the decedent’s final return only includes income up to the date of death, the income after death, such as income from investments and businesses, is included on a “fiduciary” income tax return (Form 1041 for federal and an equivalent state return). Whether the tax on this income is paid by the estate (or trust) or the beneficiary depends on whether the income is retained by the estate or trust or passed on to the beneficiary during the applicable tax period. It is not unusual for a Form 1041 to have to be filed for more than one tax year (or partial year), as settling an estate or trust often can take over a year. Estate Tax - For 2015, the Federal estate tax exemption is $5.43 million (up from $5.34 million in 2014) and a top tax rate of 35%. Form 706 must be filed if the estate value exceeds the $5.43 million exemption. State laws vary, but generally any estate which pays a federal estate tax must also file a state estate or death tax form and pay the state death tax. Most states do not impose an inheritance tax. Consult this office for further information. Surviving Spouse – Getting one’s financial issues in order after the passing of a spouse can be a difficult and emotional time. Hopefully, you and your deceased spouse had preplanned for this eventuality. If your spouse managed your financial affairs, taking over these affairs and those associated with his or her passing can seem overwhelming. A surviving spouse will need to carefully assess his or her financial situation. If the breadwinner passed away, his or her earned income will probably go away too. If the opposite is the case and there are children, the surviving spouse will need to make arrangements so that he or she can continue working. If the couple was retired, will the retirement income be lost or reduced? Unless you have significant financial resources, these issues need to be addressed rather quickly. However, avoid any immediate long-term decisions; they will probably be emotionally based. Survivor Benefits – One of the first steps should be assessing what benefits you qualify for and then applying for those benefits. Insurance – Hopefully, you have a list of policies issued to your spouse. If not, contact those companies that might have a policy on your deceased spouse. Inquire at your insurance agency and look in the safe deposit box. In addition to your life insurance policies, don’t overlook the following: o Veteran’s life insurance coverage o Installment accounts with life insurance coverage o Mortgages with life insurance coverage o Employer group term policies o Credit card accounts with life insurance coverage o Car loans with life insurance coverage o Health insurance policies o Retirement plans with death benefits o Annuities Note: Be aware of all possible settlement options. Insurers may offer various settlement terms, such as a lump sum payment or annuitized payments (fixed amounts) over a period of years. Carefully consider your circumstances before deciding. A lump sum can help pay off immediate financial needs, but a payment plan can provide long-term income security. Consult with your financial advisor before making a decision. Social Security – You may qualify for Social Security benefits or an adjustment in the benefits you already receive. Veteran’s Benefits – If your spouse was a veteran, you may be eligible for one or more of the benefits provided by the U.S. Department of Veterans Affairs. These include assistance with burial, plot and grave markers. The funeral home may be able to help you apply for these benefits. If your spouse was receiving veteran’s disability benefits, you and your dependent children may also be entitled to continued payments. Contact your area’s VA office for assistance. Employee Benefits – If your deceased spouse was already retired and receiving pension payments from past employers, you will need to contact those employers to see if the pension will continue to pay the full or a reduced monthly amount or whether it will cease paying benefits upon your spouse’s passing. Some employer pension plans also provide a small death benefit. Most employer pension plans, at the time of initial retirement, offer a choice for the retirement plan to pay only over the life of the retiree or a reduced amount over the joint lives of the retiree and spouse. Hopefully, you and your spouse chose the latter. If your deceased spouse was still working at the time of death, there are a number of things you should check into, such as: - Does the employer provide survivor benefits? - Are there 401(k) or similar type retirement savings plans that you are entitled to? - Are you entitled to accrued vacation and sick leave payments? - Was the deceased covered under any life insurance policy provided by the employer? - Was your spouse a member of a union or professional association that might provide death benefits? - If the death was work-related, are you entitled to worker’s compensation benefits? Creating A Budget – Depending upon your overall financial situation, it may be appropriate for you to develop a budget based on your new financial circumstances. This is especially important if your income has been reduced. The sooner you have your finances in order, the better. Estimate your income first; include your wages if working, Social Security and retirement benefits, investment income and other sources. Next, list your expenses. These include housing, food, utilities, taxes, medical care and insurance, entertainment, clothing, transportation, insurance, school expenses for your children, etc. Be sure to set aside an amount that can be added to reserves for unexpected expenses, such as a broken water heater, car repair, etc. Also, if you are not already retired, be sure to set aside amounts to fund your future retirement as well. Now compare your income with your expenses. If your expenses exceed your income, you will need to reduce spending. If the income exceeds your expenses, you can save the difference. Be conservative for the first year or so while you fine-tune your budget. Change Designations - You will want to begin the process of removing your deceased spouse from title to property, credit accounts, vehicle registrations, bank accounts, investment accounts, etc. Also review your beneficiary designations on your own life insurance, IRA accounts and will to ensure who inherits them from you. You may also need or wish to change the executor designation in your own will. Surviving Spouse Filing Status – Generally, an individual’s filing status is predicated on their marital status at the end of the tax year. However, there are special rules related to the spouse of a deceased taxpayer. In the year of death, a surviving spouse is no longer considered married for tax purposes but can still file jointly with the deceased spouse if the executor of the decedent’s estate agrees. Generally, the surviving spouse will file jointly with the deceased spouse. If not, and if the surviving spouse has not remarried, then he or she would file as a married taxpayer separately or as head of household if he or she qualifies. If the surviving spouse has remarried, then he or she would file either married joint with the new spouse or married separate. Subsequent Years – In the years following the death of a spouse and assuming the surviving spouse has not remarried, he or she would file as follows: Qualified Widow(er) – If the surviving spouse has a dependent child living at home, the surviving spouse can file as a qualified widow or widower. This favorable filing status is essentially the same as filing a joint return, except that there is no deduction for the deceased spouse’s exemption. The widow or widower can use this status for a period of two years as long as he or she meets the requirements for the filing status. Head of Household – If the surviving spouse can no longer qualify for the qualified widow(er) status, and he or she provides over half the household expenses for a qualified child or dependent, he or she may qualify for the Head of Household rates, which are not as beneficial as a qualified widow(er) but are significantly better than filing as a single individual. Single – If the surviving spouse does not qualify for one of the filing statuses described above, then he or she would be required to file as a single individual. Widows and widowers should be aware that all of the foregoing filing statuses will provide less exemption deductions and, in the case of the head of household and single filing status, higher marginal tax rates and reduced standard deductions may result. This could, without proper planning, lead to unpleasant taxes due or a significantly reduced refund when the return is filed. Fri, 14 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.advancedfinancialtax.com/blog/failed-to-report-your-foreign-financial-assets-the-irss-streamlined-voluntary-filing-compliance-program-may-be-for-you/39773 http://www.advancedfinancialtax.com/blog/failed-to-report-your-foreign-financial-assets-the-irss-streamlined-voluntary-filing-compliance-program-may-be-for-you/39773 Advanced Financial Tax, LLC 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.advancedfinancialtax.com/blog/how-employee-stock-options-are-taxed/39759 http://www.advancedfinancialtax.com/blog/how-employee-stock-options-are-taxed/39759 Advanced Financial Tax, LLC 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 Mortgage Balance Has No Bearing on Sale Profit http://www.advancedfinancialtax.com/blog/mortgage-balance-has-no-bearing-on-sale-profit/252 http://www.advancedfinancialtax.com/blog/mortgage-balance-has-no-bearing-on-sale-profit/252 Advanced Financial Tax, LLC If you have ever refinanced real property such as a rental, vacant land, or even your home, and the new loan is for more than the balance of the old loan, you have essentially taken out a portion of the profits without actually selling the property. That means when you sell the property, your taxable gain may exceed the amount of cash you actually receive in the transaction.Illustration: Suppose you originally paid $120,000 for your home ($20,000 down and a $100,000 mortgage) and then a few years later, after the property had appreciated in value, you refinanced the loan for $200,000. Later, you sell the property for $250,000 net of sales costs. Your cash from the transaction is $50,000 (the 250,000 selling price less the $200,000 mortgage). However, your taxable gain is 130,000 (the $250,000 selling price less the cost of $120,000). If this was your home, the $130,000 might not present a problem if you qualify for the home sale gain exclusion. If not, you are faced with $130,000 taxable income and only $50,000 cash from the transaction. Wed, 05 Nov 2014 19:00:00 GMT A Twist For Home Sales - Non-Qualified Use http://www.advancedfinancialtax.com/blog/a-twist-for-home-sales-non-qualified-use/4838 http://www.advancedfinancialtax.com/blog/a-twist-for-home-sales-non-qualified-use/4838 Advanced Financial Tax, LLC The version of the home sale gain exclusion that became law back in the 1990s initially made it possible for taxpayers to use a provision of the law as a popular strategy to exclude gain, not just from their primary residence, but also from rentals and second homes as well. They did that by moving into the rental or second home and making it their primary residence for two years, then selling it and excluding the gain, up to $250,000 ($500,000 for joint filers). To qualify for the exclusion, each taxpayer must own and occupy the home as their primary residence for two of the five years prior to the sale and must not have utilized the exclusion in the two years immediately preceding the sale. Thus, with careful planning, taxpayers could employ this technique on multiple properties. Apparently, this strategy became too popular and Congress added a provision in the law, effective as of 2009, to curtail gain exclusion attributable to periods of ownership when the property was not the taxpayer's primary residence. The revised law accomplishes this by prorating the home sale gain between qualified and nonqualified use periods and allowing the home gain exclusion to apply only to gain from qualified periods. Example: An individual taxpayer purchases a home on 1/1/11 and rents it. On 1/1/13, he occupies the property as his primary residence and then sells the home on 1/1/15 for a $200,000 gain. Prior to this law change, the entire $200,000 could have been excluded. However, effective after 2008, the taxpayer would have to apportion the gain between the periods when it was a rental and when it was a personal residence. In this example, he owned it four years, of which time use for two years was nonqualified. Thus, 50% of the gain ($100,000) would be attributable to a nonqualified use period and would not be excludable. As a result, the taxpayer would be able to exclude only $100,000 of the $200,000 gain. Note that had the taxpayer used the home as a second home instead of a rental, the results would have been the same. The law does provide a pretty liberal definition of nonqualified use. A period of nonqualified use means any period during which the property is not used by the taxpayer or the taxpayer's spouse or former spouse as a principal residence, except as noted below. For purposes of determining periods of nonqualified use, do not include any period: Before January 1, 2009,   After the last date the property is used as the principal residence of the taxpayer or spouse (regardless of use during that period), and   Not to exceed two years that the taxpayer is temporarily absent by reason of a change in place of employment, health, or, to the extent provided in regulations, unforeseen circumstances.  If your planning strategies include employing multiple sales, each qualifying for the home sale exclusion, you should carefully analyze the impact of this law on your plans. Please call this office if you have any questions.  Wed, 05 Nov 2014 19:00:00 GMT Selling a Home with a Home Office can be a Tax Trap http://www.advancedfinancialtax.com/blog/selling-a-home-with-a-home-office-can-be-a-tax-trap/258 http://www.advancedfinancialtax.com/blog/selling-a-home-with-a-home-office-can-be-a-tax-trap/258 Advanced Financial Tax, LLC These days, more individuals are working from home offices and availing themselves of the "Home Office Deduction." For tax purposes, this deduction essentially divides your home into two separate pieces of property, your home and business property. Those taking the deduction using the actual expense method will be able to deduct a portion of the home operating expenses including interest, taxes, insurance, utilities, upkeep and office depreciation. Since taxes and interest are generally deductible and any depreciation taken is added back to income when the house is sold and taxed at 25%, the real net benefit of taking a home office deduction lies with deducting the business portion of the utilities, insurance and upkeep. If the home office deduction is figured by using the simplified method ($5 per square foot, up to 300 square feet of office area), interest and taxes paid are deducted as usual as part of itemized deductions but none of the other operating or depreciation expenses are deductible for the home office. For Employees - the home office is deducted as a miscellaneous itemized deduction, which means an individual must itemize their deductions in order to benefit from the deduction. In addition, the total of all the taxpayer's miscellaneous itemized deductions is reduced by 2% of his or her adjusted gross income, so depending upon the income amount, some or all of the home-office expenses may not be deductible at all.   For Self-Employed Individuals - the benefits of a home office deduction are more substantial since the home office deduction is taken on the Schedule C and not subject to the limitations of itemizing deductions. In addition to offsetting income tax, a home office deduction can also reduce self-employment tax for individuals whose net income is subject to self-employment tax. The deduction may be limited by the business' gross income and when that occurs any unused expenses are carried over to a future year. This carryover is not available if the home office deduction is figured using the simplified method.  The tax trap occurs when you sell your home. If the office is an integral part of your home, the entire gain from the home and the business portion qualifies for the exclusion of gain except for the business depreciation taken after 5/6/97. If the business portion is separate, the gain from that portion would not qualify for the exclusion and would be taxable. See Sale of Home Used for Business for additional details. Tue, 04 Nov 2014 19:00:00 GMT Avoid Tax Surprises: Report Life Changes to the Marketplace http://www.advancedfinancialtax.com/blog/avoid-tax-surprises-report-life-changes-to-the-marketplace/39744 http://www.advancedfinancialtax.com/blog/avoid-tax-surprises-report-life-changes-to-the-marketplace/39744 Advanced Financial Tax, LLC 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 Holding Title to Your Home http://www.advancedfinancialtax.com/blog/holding-title-to-your-home/244 http://www.advancedfinancialtax.com/blog/holding-title-to-your-home/244 Advanced Financial Tax, LLC If you're thinking of purchasing a home, have you considered how you intend to hold title to the property? Surprisingly, many home purchasers don't give much attention to the question even though the manner in which title is held can have far-reaching ramifications. The best way to come to a decision about title is to consult with a real estate attorney. Before you do that, however, you may want a little background on the more prevalent title-holding methods: Title held in the name of one individual. Single individuals would probably be the most likely candidates for this method of holding title. However, married individuals may also, for one reason or another, choose to take title individually rather than with their spouse. When the owner of the property dies, probate is necessary (unless the owner had a revocable trust and the home was included as part of the trust's assets).  The property takes on a new value for the beneficiary—equal to its fair market value at the date of the original owner's death. Joint tenancy with right of survivorship. Under this form of ownership, all (two or more) owners hold title to the property. Each owns an equal share of the property and when one owner dies, the others become owners of the decedent's portion. An advantage of joint tenancy is that it cuts probate costs since the decedent's portion of the property normally reverts to the remaining joint tenants automatically (ownership recording, of course, needs to be changed). The basis of the decedent's part is revalued at date of death. Community property. Married couples in community property states of Arizona, California, Idaho, Nevada, New Mexico, Louisiana, Texas, Washington, and Wisconsin can claim community title to property. Under community property rules, each spouse owns half of the property and each spouse can pass his/her portion either to the other spouse or to someone else. An advantage of community property is that when it is willed to a surviving spouse, the entire property gets revalued to fair market value at the date of the decedent spouse's death. Community property with right of survivorship. Since July 1, 2001, married couples in California have been able to hold title to property as "community property with right of survivorship."  This method combines the tax benefits of holding title as community property, including a double step-up in basis, with the ease of property transfer available to the survivor of joint tenancy property, which requires the surviving spouse to inherit the property and allow title to change without court action. Others methods of holding title, like tenancy in common or holding property in trust, are also available. All have their "special" pros and cons. Before making final decisions about the method of taking title that's best for you, take some extra time to check them out.  Sun, 02 Nov 2014 19:00:00 GMT Ever Wonder What a Tax Deduction Might Save You? http://www.advancedfinancialtax.com/blog/ever-wonder-what-a-tax-deduction-might-save-you/39719 http://www.advancedfinancialtax.com/blog/ever-wonder-what-a-tax-deduction-might-save-you/39719 Advanced Financial Tax, LLC 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.advancedfinancialtax.com/blog/watch-out-for-charity-scams/39691 http://www.advancedfinancialtax.com/blog/watch-out-for-charity-scams/39691 Advanced Financial Tax, LLC 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 Sale of a Home Used for Business http://www.advancedfinancialtax.com/blog/sale-of-a-home-used-for-business/257 http://www.advancedfinancialtax.com/blog/sale-of-a-home-used-for-business/257 Advanced Financial Tax, LLC 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 asset is later sold for more than its depreciated value, 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.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 gain is required between the business portion and the personal (home) use portion. However, any depreciation attributable to periods after May 6, 1997 would be taxable to the extent of any gain. Allowable depreciation reduces the basis of the home.Example: Jake, a single taxpayer, sells his home for $350,000. He had originally purchased the home for $55,000 and added a room, which cost $25,000 giving him a cost basis of $80,000. He also had an office in the home for which the allowable depreciation before May 7, 1997 was $500 and after May 6, 1997 was $5,000. The cost of selling the home was $27,000. He meets the 2-of-5-years tests, making him eligible to exclude gain up to $250,000, except for $5,000, an amount equal to the depreciation claimed after 5/6/97.Sales Price.....................................................$350,000Less Sales Expenses......................................Cost Basis.................................80,000Allowable depreciation.................Tax Basis.........................................................Gain.................................................................248,500Home Sale Exclusion..........................................Net Gain (losses not allowed-not less than zero)........0Taxable Amount (depreciation after 5/6/97).............5,000 Separate Property: When 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.  Mixed-Use Property Sales: The IRS has made it quite clear that 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). Please call this office for addition information regarding how to qualify for the tax deferral of the business portion gain. The sale of mixed use property can create some complicated issues. Clients are advised to review their options with this office prior to initiating a sale. Sat, 25 Oct 2014 19:00:00 GMT Obamacare Adds New Levels of Complexity to Tax Returns http://www.advancedfinancialtax.com/blog/obamacare-adds-new-levels-of-complexity-to-tax-returns/39670 http://www.advancedfinancialtax.com/blog/obamacare-adds-new-levels-of-complexity-to-tax-returns/39670 Advanced Financial Tax, LLC 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.advancedfinancialtax.com/blog/depositing-payments-in-quickbooks-the-basics/39677 http://www.advancedfinancialtax.com/blog/depositing-payments-in-quickbooks-the-basics/39677 Advanced Financial Tax, LLC 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.advancedfinancialtax.com/blog/when-can-you-dump-old-tax-records/39664 http://www.advancedfinancialtax.com/blog/when-can-you-dump-old-tax-records/39664 Advanced Financial Tax, LLC 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 Are you Keeping an Eye on Interest Rates? http://www.advancedfinancialtax.com/blog/are-you-keeping-an-eye-on-interest-rates/249 http://www.advancedfinancialtax.com/blog/are-you-keeping-an-eye-on-interest-rates/249 Advanced Financial Tax, LLC If you have a mortgage on your real estate property, you should be keeping an eye on interest rates. Rates have been down over the last few years. This may provide you with a favorable opportunity to refinance your property if you haven't done so already. The decision to refinance may not be solely predicated on obtaining a lower interest rate, but can depend upon a variety of individual circumstances and needs such as: Eliminate PMI Charges – Your original loan may have Private Mortgage Insurance (PMI) payments that you cannot get removed. If you now have enough equity in your home, you may be able to refinance to avoid the PMI charges with a new loan. Obtain a Lower Interest Rate – With interest rates at or near the lowest level in several years, refinancing could lead to lower payments. Replace a Variable Loan with a Fixed Loan – If your current loan is a variable one, this may be your opportunity to switch to a fixed rate mortgage. Consolidate Debt – Although individuals should exercise restraint in tapping the equity from their home, for those with burdensome consumer debt, refinancing may offer the opportunity to convert high interest rate, non-tax deductible consumer debt into deductible home mortgage debt at lower interest rates. Combine Multiple Existing Mortgages – If you have multiple mortgages on your property, the interest rates on the second or third mortgages may be substantially higher than the prevailing interest rates. Refinancing and rolling all the debt into a new first mortgage at prevailing rates may make sense. Finance a Child's Education – Looking for ways to finance your children's education? If you have sufficient equity in you home, it may make sense to refinance your home for the cash needed to finance their education. This is probably a better option than tapping taxable retirement funds or taxable assets. Finance a Business Transaction – Using your home equity to finance the purchase of business assets will probably provide a lower interest rate than a business loan. However, financing business needs with a home loan often leads to tax complications, and you should consider the tax ramifications before proceeding. Mon, 20 Oct 2014 19:00:00 GMT November 2014 Individual Due Dates http://www.advancedfinancialtax.com/blog/november-2014-individual-due-dates/34877 http://www.advancedfinancialtax.com/blog/november-2014-individual-due-dates/34877 Advanced Financial Tax, LLC 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.advancedfinancialtax.com/blog/november-2014-business-due-dates/34878 http://www.advancedfinancialtax.com/blog/november-2014-business-due-dates/34878 Advanced Financial Tax, LLC 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.advancedfinancialtax.com/blog/tax-breaks-for-charity-volunteers/36904 http://www.advancedfinancialtax.com/blog/tax-breaks-for-charity-volunteers/36904 Advanced Financial Tax, LLC 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 Beware of Capital Gains From Previous House Sales http://www.advancedfinancialtax.com/blog/beware-of-capital-gains-from-previous-house-sales/239 http://www.advancedfinancialtax.com/blog/beware-of-capital-gains-from-previous-house-sales/239 Advanced Financial Tax, LLC Unless the taxpayer qualified for the over age 55 exclusion, profits from home sales prior to May of 1997 were generally deferred into the replacement home. This, in effect, reduced the tax basis of the replacement home, so that when it is sold, the profit from the previous home is taken into account when determining the overall profit from both homes. With the current law allowing a $250,000 ($500,000 for qualified couples filing jointly) exemption, many individuals forget about the deferred gain from the first home finding out after the fact that their profit is larger than expected.For example, a single individual made a profit of $175,000 from the sale of a home in 1994. That profit was deferred into a replacement home costing $300,000. Now the replacement home is sold for $500,000. Without considering improvements or sales costs, the overall profit from the replacement home is $375,000 (the $200,000 profit from the replacement home plus the $175,000 profit deferred from the previous home). After taking into account the $250,000 gain exclusion, the taxpayer would end up with a taxable profit of $125,000. Since there is no longer any deferral of profits, the $125,000 will be taxable. Wed, 15 Oct 2014 19:00:00 GMT Divorce Doesn't Untie the Mortgage Knot http://www.advancedfinancialtax.com/blog/divorce-doesnt-untie-the-mortgage-knot/240 http://www.advancedfinancialtax.com/blog/divorce-doesnt-untie-the-mortgage-knot/240 Advanced Financial Tax, LLC Often, when a couple separates and divorces, one spouse continues to live in the family home. Frequently, the departing spouse will simply quitclaim the property to the spouse retaining the home. When filed, the quitclaim deed takes the departing spouse's name off the title. However, it does not remove that spouse's name from the mortgage.  So if you quitclaim a property to your spouse and he/she is late with payments, it will hurt your credit rating. To make matters worse, there is no way for you to get your name removed from the loan. Frequently, divorce attorneys fail to consider this adverse consequence. It may be in your best interest to require that the home be sold, or that your spouse refinance it as part of the divorce agreement. Wed, 15 Oct 2014 19:00:00 GMT Renting Part of a Property http://www.advancedfinancialtax.com/blog/renting-part-of-a-property/272 http://www.advancedfinancialtax.com/blog/renting-part-of-a-property/272 Advanced Financial Tax, LLC If you rent part of your property, such as a room or a portion of the house, you must divide certain expenses between the part of the property used for rental purposes and the part of the property used for personal purposes, as though you actually had two separate pieces of property. You can deduct the expenses related to the part of the property used for rental purposes, such as home mortgage interest and real estate taxes, as rental expenses. You can also deduct as a rental expense a part of other expenses that normally are nondeductible personal expenses, such as utilities and home repairs (such as painting the outside of your house). You do not have to divide the expenses that belong only to the rental part of your property. For example, if you paint the room that you rent or pay premiums for liability insurance in connection with renting a room in your home, the entire cost is a rental expense. If you install a second phone line strictly for your tenant's use, all of the cost of the second line that you pay is deductible as a rental expense. You can also deduct depreciation on the part of the property used for rental purposes, as well as on the furniture and equipment used for that purpose.Generally, the most frequently-used methods of allocating expenses between personal use and rental use are: (1) based on the number of rooms in the home, and (2) based on the square footage of the home. You can use any reasonable method for dividing the expense. It may be reasonable to divide the cost of some items (for example, water) based on the number of people using them. Tue, 14 Oct 2014 19:00:00 GMT Birth or Adoption of a Child http://www.advancedfinancialtax.com/blog/birth-or-adoption-of-a-child/5438 http://www.advancedfinancialtax.com/blog/birth-or-adoption-of-a-child/5438 Advanced Financial Tax, LLC The birth or adoption of a child is a joyous occasion for the new parents, siblings, grandparents and other family members. A birth or adoption also brings significant life style changes and tax implications for the family. The tax code includes numerous provisions dealing with children: Tax Exemptions Education Savings Plans Filing Status Child Care Credit Child Tax Credit Earned Income Credit Medical Expenses Adoption Credit Tax Exemption – A taxpayer who files a federal tax return and is not someone else’s dependent is allowed an exemption for themselves, their spouse, and each of their dependents. An exemption reduces a taxpayer’s taxable income for the year, and the inflation adjusted exemption amount for 2015 is $4,000 (up from $3,950 in 2014). What an exemption means to a specific taxpayer in terms of tax savings depends upon the individual’s tax bracket. Most taxpayers are in the 15% and 25% brackets. Thus, for example, a taxpayer in the 25% tax bracket would save $1,000 $4,000 x 25%) in federal taxes because of the additional exemption. For higher-income taxpayers and those affected by the alternative minimum tax (AMT), the exemption amount may be reduced or not allowed at all. Children are generally dependents of their parent(s), and the new parent(s) will be able to claim an additional $4,000 (2015) personal exemption for the newborn or adopted child. The full amount of the exemption is allowed regardless of when during the year the child was born (see special rules for adopted children below). In other words, the parent(s) will receive the full exemption (not prorated for the year) whether the child was born on January 1st of the year or December 31st. You may recall those media stories every January 1st about the first child born in your local hospital for the New Year. Although the new parent(s) got all the attention for having the first born in the New Year, they also lost a $4,000 (2015) tax deduction that they would have had if the child had been born on December 31st. The exemption cannot be split between two taxpayers, so if the new parents are unwed, the dependency–and 100% of the tax deduction for the exemption–will generally go to the child’s custodial parent. Adopted Children – An adopted child is always treated as the taxpayer’s own child. An adopted child includes a child lawfully placed with the taxpayer for legal adoption. Generally, a taxpayer is allowed an exemption for an adopted child, provided the child is both younger than the adoptive parent and is under the age of 19 or a full-time student under the age of 24. There are special rules for foreign adopted children; please call for additional information. Filing Status – If you are married and have been filing a Joint return, the birth or adoption of a child will not change your filing status. But if you are unmarried and have been filing your tax returns using the Single status, the addition of a child to your household may allow you to use the Head of Household filing status. Eligible Head of Household filers are allowed increased tax benefits. For example, the 2015 federal standard deduction, which is claimed in lieu of itemizing deductions, is $9,250 (up from $9,100 in 2014) for Head of Household vs. $6,300 (up from $6,200 in 2014) for Single status. Many phase-outs of various deductions and credits have higher-income thresholds for Head of Household filers than Single filers, which could result in the Head of Household filer claiming a bigger deduction or credit than a Single filer with the same income. Additionally, the ranges of income are wider for most federal tax rates for Heads of Households than for Singles. For example, a taxpayer with $50,200 of taxable income in 2015 would still be in the 15% tax bracket if filing as Head of Household, but would be in the 25% bracket if filing Single. Thus, the Head of Household filer would pay less tax. Generally, an unmarried taxpayer can claim the Head of Household status if the taxpayer is a U.S. citizen or resident and pays more than half of the cost of maintaining as his or her home a household which is the main home for more than half the year of a qualifying child, or for a child born during the year, the period during which the child lived in the home. The Head of Household status may also apply when a home is maintained for other qualifying relatives or when certain married individuals who are considered unmarried maintain a household for an eligible child. Please call for details. Child Tax Credit – Taxpayers are allowed a tax credit of $1,000 for each qualifying child. A qualifying child is one that is under the age of 17 at the end of the year, is not self-supporting, who lived with the taxpayer over half the year and is a U.S. Citizen or national. Children who were born during the year are treated as living with the taxpayer for over half the year even if born in the last half of the year. This credit is generally nonrefundable except for certain low-income taxpayers. Nonrefundable means it can be used to reduce your income tax to zero, but any additional credit is lost. Thus, a qualifying taxpayer with a tax liability of $900 and a child credit of $1,000 would be able to reduce their tax liability to zero, but the $100 excess credit would be lost. The allowable credit does offset the alternative minimum tax (AMT) and the credit is phased out for higher-income taxpayers. The income phase-out threshold for married taxpayers is $110,000, $75,000 for unmarried taxpayers and $55,000 for married taxpayers filing separately. Adopted child - An adopted child is always treated as the taxpayer’s own child. An adopted child includes a child lawfully placed with the taxpayer for legal adoption. In the case of foreign adoptions, if the taxpayer is a U.S. citizen or U.S. national and the adopted child lived with the taxpayer all of the tax year as a member of the taxpayer’s household, that child is treated as being a U.S. citizen, national or resident. Medical Expenses – The birth of a child is usually accompanied by medical expenses for the care of the mother and the newborn child. Those expenses not reimbursed by insurance or other reimbursement arrangements are added to the taxpayer’s other medical expenses for the year, and deducted as an itemized medical expense to the extent the medical expenses exceed 10% (7½% for taxpayer age 65 and older through 2016) of his or her adjusted gross income (AGI). Where couples are unable to conceive by natural means, some of the artificial methods that have been developed are deductible and some are not. Although not specifically addressed in the tax code or regulations, in vitro fertilization performed on the taxpayer claiming the expense is deductible since the tax code specifically allows procedures that affect the structure or function of the body. IRS has ruled privately that a woman who can't conceive children using her own eggs may claim a medical expense deduction for the costs of obtaining an egg donor, including associated legal costs. The office of IRS Chief Council provided some guidance related to surrogate mother expenses: The tax code allows a taxpayer to deduct the expenses paid during the taxable year, not compensated for by insurance or otherwise, for medical care of the taxpayer, the taxpayer's spouse, or the taxpayer's dependents. A surrogate mother is neither the taxpayer nor the taxpayer's spouse, and typically is not a dependent of the taxpayer. Nor is an unborn child a dependent. Thus, medical expenses paid for a surrogate mother and her unborn child would not qualify as a deduction. Please call this office for more information related to deductible childbirth expenses and future medical expenses of the children. Education Savings Plans – Along with the newborn or adopted child is the future obligation to educate the child. It is never too soon to start thinking about saving for future educational expenses. The tax code provides two tax-favored plans to save for a child’s education. One is called a Coverdell Education Savings Account and the other is the Sec. 529 Plan (also referred to as a Qualified State Tuition Plan). Neither plan provides for a current tax deduction, but both provide for tax-free earnings when the funds are used for the prescribed education expenses. The three major differences in the plans are the amounts that can be contributed, which education is covered, and who has control of the funds. Contributions to the Coverdell account are limited to $2,000 per year per future student, whereas the contributions to a Sec. 529 plan are only limited by the projected cost of the future education. Coverdell qualified education includes kindergarten through post-secondary education, while Sec. 529 qualified education only includes college (post-secondary) education. Control of the Coverdell Account reverts to the child when the child reaches maturity, while the Sec. 529 plan remains under the control of the contributor. There are other important details relating to each plan, and a consultation appointment is recommended before embarking on a plan. Child Care Credit – For working parents, the birth or adoption of a child can lead to the need for child care when the parent resumes their employment. A nonrefundable tax credit may be available for the expenses that are incurred for the care of a child (who generally must be 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), and must be reduced by the amount a taxpayer excludes from gross income under an employer-provided dependent care assistance plan. Generally, self-employed taxpayers use the net earnings on Schedule C as earned income. For taxpayers who file joint returns, the expense is limited to the earned income of the lower paid spouse, so generally both parents must be working or looking for work. Special rules allow a spouse who is disabled or a full-time student to qualify as having earnings when they otherwise have none, thus permitting the couple to claim some credit. Earned Income Credit - The Earned Income Tax Credit (EIC) provides a refundable tax credit for people who work, but have lower incomes. The taxpayer (or spouse if married filing jointly) must be age 25 through age 64. The credit amount is increased if a family also has children. Qualifying taxpayers may receive a refund even if they have had no income tax withheld. Each year, the credit and income limits are adjusted for inflation. If a taxpayer qualifies, this credit could be worth up to $6,242 for 2015 (up from $6,143 in 2014) for a taxpayer with 3 qualifying children. Thus, a qualifying taxpayer will pay less federal tax or could even get a larger refund. While taxpayers without children may qualify for the EIC, the potential amount of the credit is significantly more for eligible taxpayers who have one or more qualifying children. These taxpayers are also allowed to earn over 2½ times more income before the credit is phased out than workers without qualifying children. The IRS estimates 20 to 25% percent of people who qualify for the credit do not claim it. Adoption Credit - Adoptive parents may be able to claim a dollar-for-dollar tax credit for the “qualified” expenses of adopting a child – up to $13,400 for 2015 (up from $13,190 in 2014) for each adopted child. That is equivalent to a deduction of over $53,600 for a taxpayer in the 25% tax bracket. This credit is a nonrefundable credit that may not exceed the sum of a taxpayer’s regular and alternative minimum taxes, but any unused credit can be carried forward up to 5 years. In addition, if the employer has an adoption assistance program, a taxpayer may be able to exclude up to $13,400 for 2015 (up from $13,190 in 2014) of qualified adoption expenses paid by an employer from his or her gross income. Both the credit and the exclusion can be claimed but not for the same expenses. The credit is phased out if the taxpayer's income (modified AGI) exceeds a threshold amount and is fully eliminated when AGI reaches the threshold cap. These values are annually adjusted for inflation, and for 2015, the threshold income is $201,010 (up from $ 197,880 in 2014) and the threshold cap is $241, 000 (up from $237,880 in 2014). Qualified adoption expenses include reasonable and necessary adoption fees, court costs, attorney fees, traveling expenses (including amounts spent for meals and lodging) while away from home, and other expenses directly related to the legal adoption of an “eligible child.” However, the expenses do not include those to adopt a spouse’s child, surrogate mother expenses, and adoption arrangements that are in violation of state or federal laws. Expenses in connection with an unsuccessful attempt to adopt an eligible child before successfully finalizing the adoption of another child can qualify. Expenses connected with a foreign adoption can only qualify if the child is actually adopted. An “eligible child” is a child under the age of 18 at the time the qualified adoption expense is paid. If the child turned 18 during the year, the child is an eligible child for the part of the year he or she is under age 18. A person who is physically or mentally incapable of caring for him- or herself is also eligible, regardless of age. There are additional rules related to adopting “special needs” children. Please call this office if you have questions regarding “special needs” adoptions or how the adoption credit will affect your unique circumstances. Tue, 14 Oct 2014 19:00:00 GMT Naming Your IRA Beneficiary – More Complicated Than You Might Expect http://www.advancedfinancialtax.com/blog/naming-your-ira-beneficiary-8211-more-complicated-than-you-might-expect/33815 http://www.advancedfinancialtax.com/blog/naming-your-ira-beneficiary-8211-more-complicated-than-you-might-expect/33815 Advanced Financial Tax, LLC 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.advancedfinancialtax.com/blog/health-savings-accounts-offer-tax-breaks/39622 http://www.advancedfinancialtax.com/blog/health-savings-accounts-offer-tax-breaks/39622 Advanced Financial Tax, LLC 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.advancedfinancialtax.com/blog/tax-benefits-for-grandchildren/39609 http://www.advancedfinancialtax.com/blog/tax-benefits-for-grandchildren/39609 Advanced Financial Tax, LLC 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.advancedfinancialtax.com/blog/some-tax-facts-for-military-reservists/39589 http://www.advancedfinancialtax.com/blog/some-tax-facts-for-military-reservists/39589 Advanced Financial Tax, LLC 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 Exclusion of Gain from a Taxpayer's Main Home http://www.advancedfinancialtax.com/blog/exclusion-of-gain-from-a-taxpayers-main-home/241 http://www.advancedfinancialtax.com/blog/exclusion-of-gain-from-a-taxpayers-main-home/241 Advanced Financial Tax, LLC Unless they meet the reduced exclusion qualifications, taxpayers must meet ownership and use tests in order to qualify for exclusion of gain. This means that during the 5-year period ending on the date of the sale, taxpayers must have: 1) Owned the home for at least 2 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 2 years. The required 2 years of ownership and use during the 5-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 5-year period ending on the date of sale.  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. Selling Land that is Part of Your Home: Special rules apply to the sale of land on which a taxpayer's main home is located and may or may not qualify for exclusion. Maximum Exclusion: A taxpayer can exclude the entire gain on the sale of their main home up to: 1) $250,000, or 2) $500,000, if all of 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 2-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.e) Since 2009, there were no "nonqualified use periods." Wed, 01 Oct 2014 19:00:00 GMT Fun and Fortune for Fixer-Uppers http://www.advancedfinancialtax.com/blog/fun-and-fortune-for-fixer-uppers/243 http://www.advancedfinancialtax.com/blog/fun-and-fortune-for-fixer-uppers/243 Advanced Financial Tax, LLC Most individuals go shopping for their dream home rather than a fixer-upper when they are looking for a place to call home. However, if you are handy, willing and able to buy a home with the intention of fixing it up and reselling it, you have a unique opportunity for tax-free profits up to $250,000 ($500,000 for a married couple).Under current law, homeowners can sell their main home not more frequently than once every 24 months and pocket the profits (up to the limits) tax-free. All that is required is that the taxpayer(s) own and live in the property for two of the five years preceding the sale.If you are so inclined, real estate sources indicate that "good" fixer-uppers include those homes that are basically sound and well located with the "right things wrong". Good fixer-uppers include those with peeling paint, worn-out carpet, old-fashioned fixtures, tired or no landscaping, need for just minor repairs, and worn but serviceable kitchen cabinets. By making cosmetic repairs, owners of "good fixer-uppers" often add at least $2 in market value for every $1 spent fixing up the property. Tue, 30 Sep 2014 19:00:00 GMT Business Owners Beware — New IRS Matching Program http://www.advancedfinancialtax.com/blog/business-owners-beware--new-irs-matching-program/39572 http://www.advancedfinancialtax.com/blog/business-owners-beware--new-irs-matching-program/39572 Advanced Financial Tax, LLC 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 More than One Home http://www.advancedfinancialtax.com/blog/more-than-one-home/251 http://www.advancedfinancialtax.com/blog/more-than-one-home/251 Advanced Financial Tax, LLC A taxpayer who has more than one home can only exclude gain from the sale of his or her's main home (principal residence), even if the other home meets the 2-out-of-5-years ownership and use tests.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 how the property is used,  relevant factors in deciding whether a property is the taxpayer's principal residence include, but aren't limited to:  Taxpayer's place of employment; Where the family members live; Address listed on taxpayer's income tax returns, driver's license and auto and voter registration; Taxpayer's mailing address for bills and correspondence; Where the taxpayer maintains bank accounts; and Where the taxpayer maintains memberships (e.g., places of worship, clubs, etc.).  Example: The figure below 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.   C                   H  New York   Home              California Home   Main Home Months              QualifyingLived In                  Months 7                             7   7                             7     7                             7     7                             7    7                             7  35                           35        Calendar      Year        One       Two       Three       Four       Five    TOTAL Main Home  Months              QualifyingLived In                Months 5                         0 5                         0 5                         05                         05                         025                        0   Thu, 25 Sep 2014 19:00:00 GMT How to Cut Your Utility Bills While Reducing Your Taxes http://www.advancedfinancialtax.com/blog/how-to-cut-your-utility-bills-while-reducing-your-taxes/39543 http://www.advancedfinancialtax.com/blog/how-to-cut-your-utility-bills-while-reducing-your-taxes/39543 Advanced Financial Tax, LLC 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 Home Tax Deductions http://www.advancedfinancialtax.com/blog/home-tax-deductions/279 http://www.advancedfinancialtax.com/blog/home-tax-deductions/279 Advanced Financial Tax, LLC Many taxpayers have misconceptions about what expenses of owning a home or a second home are deductible for tax purposes. To make the issue more complicated, the deductible items may be currently deductible or deductible at the time the property is sold. In addition, your deductions must generally be itemized to gain any benefit from currently deductible items. • Purchase Escrow Costs – Generally, escrow fees, title fees and real estate agent commissions paid by the buyer are not currently deductible, but do add to the cost basis of the home, and are used to reduce the gain when the home is ultimately sold. Therefore, it is important that a copy of the purchase escrow closing statement is retained. There are, however, certain items (such as points, prorated interest and taxes) included in the escrow statement that may be currently deductible. In the year of the home’s purchase, it is always best to provide us with a copy of the closing escrow, so we can review it and pick up any currently deductible items that are included in that document.• Taxes – Unlike the deduction for mortgage interest, which is allowed only for a taxpayers’ primary and second homes, real property taxes paid for any number of homes, as well as vacant land, can generally be deducted. However, depending upon where the taxpayer resides, there may be some service fees included in the property tax bill that are not deductible. For purposes of the alternative minimum tax (AMT), taxes are not deductible at all. Thus, to the extent the taxpayer is subject to the AMT, he or she will not benefit from the property tax deductions. • Points – Generally, points paid on a loan to acquire or substantially improve a principal residence is a currently deductible expense. Points for another purpose must be amortized over the life of the loan. Where the loan is mixed acquisition debt and other debt, the points are prorated by debt type.• Interest – Interest paid on debt to acquire a home and a second home is fully deductible for both the regular tax and AMT, so long as the combined acquisition debt does not exceed $1 million. In addition, interest on another $100,000 of equity debt is also deductible for regular tax purposes, but not the AMT. Refinanced debt can also be acquisition debt to the extent it replaces existing acquisition debt or is used for substantial home improvements. • Mortgage Insurance Premiums – Certain amounts paid or accrued for mortgage insurance premiums can be deducted as home mortgage interest, through tax year 2014. This applies only for insurance contracts issued after 2007.• Home Improvements – Are not currently deductible, but do add to the basis of the home. Keep a record of the improvements, since they can be used to offset any gain that cannot be excluded when the home is subsequently sold. Improvements are generally items that increase the value of the home and are not repairs or maintenance to keep the home in its original condition. There is one exception for impairment-related improvements, which may be deductible as a medical expense. If a tax benefit was derived from the improvement, such as a credit for installation of certain energy-improvement property, the value of the tax benefit is a reduction of basis. • Home Repairs – Home repairs and maintenance (not improvements) are work that is done to keep the home in its original condition. Examples: A new home is purchased. 20 years later, the exterior is painted and the roof is replaced. The painting is considered maintenance for normal wear and tear and is not deductible either currently or as an adjustment to basis, but the new roof is treated as an improvement and its cost is an increase to the home’s basis. If the roof had leaked in one section and only the defective portion was replaced, then the repair cost would be treated as a nondeductible maintenance expense that also is not an addition to basis. As with all tax matters, there are exceptions; please give us a call if your repair might qualify as a special circumstance.• Sales Escrow Costs – Costs to sell a home are generally not currently deductible, but do add to the cost basis of the home, and are used to reduce the gain from the home sale. As with the purchase escrow, there are certain items (such as prepaid interest, deferred interest, prorated interest and taxes) included in the escrow statement that may be currently deductible. In the year of the home’s sale, it is always best to provide us with a copy of the closing escrow document. We can review it with a trained eye and pick up any currently deductible items that are included in that document. If you are planning to buy or sell a home, it is generally wise to call this office before completing the transaction. We can review the sale, determine how the title should be held, and discuss your financing arrangements to help you avoid any surprises at tax time. Wed, 24 Sep 2014 19:00:00 GMT Gambling Income and Losses http://www.advancedfinancialtax.com/blog/gambling-income-and-losses/39522 http://www.advancedfinancialtax.com/blog/gambling-income-and-losses/39522 Advanced Financial Tax, LLC 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.advancedfinancialtax.com/blog/october-2014-individual-due-dates/34391 http://www.advancedfinancialtax.com/blog/october-2014-individual-due-dates/34391 Advanced Financial Tax, LLC 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.advancedfinancialtax.com/blog/october-2014-business-due-dates/34392 http://www.advancedfinancialtax.com/blog/october-2014-business-due-dates/34392 Advanced Financial Tax, LLC 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.advancedfinancialtax.com/blog/billing-for-time-in-quickbooks-an-overview/39533 http://www.advancedfinancialtax.com/blog/billing-for-time-in-quickbooks-an-overview/39533 Advanced Financial Tax, LLC 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 Avoiding Tax Penalties http://www.advancedfinancialtax.com/blog/avoiding-tax-penalties/3704 http://www.advancedfinancialtax.com/blog/avoiding-tax-penalties/3704 Advanced Financial Tax, LLC 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.” Fri, 19 Sep 2014 19:00:00 GMT October 15th Extension Deadline Approaching http://www.advancedfinancialtax.com/blog/october-15th-extension-deadline-approaching/37797 http://www.advancedfinancialtax.com/blog/october-15th-extension-deadline-approaching/37797 Advanced Financial Tax, LLC 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.advancedfinancialtax.com/blog/getting-around-the-kiddie-tax/39507 http://www.advancedfinancialtax.com/blog/getting-around-the-kiddie-tax/39507 Advanced Financial Tax, LLC 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 Home Equity Can Provide Funds for Children's Education http://www.advancedfinancialtax.com/blog/home-equity-can-provide-funds-for-childrens-education/245 http://www.advancedfinancialtax.com/blog/home-equity-can-provide-funds-for-childrens-education/245 Advanced Financial Tax, LLC Many parents of college age children would like to utilize the equity in their home to help pay for college expenses. When considering this course of action, there are two issues: (1) Should the first trust deed be refinanced or should a second trust deed line of credit be secured? and (2) Will the interest be deductible?The decision whether to refinance the first trust or to obtain a second trust deed will depend on several factors including how favorable the interest rate is on your current mortgage, how much it will cost to refinance, how much you need to borrow and how long you will remain in the home. Generally, if your interest rate is near the prevailing rate for new mortgages, it will be better to obtain a second loan or a line of credit. The line of credit has the added advantage that you can draw on it as needed rather than trying to estimate your needs in advance and borrowing a lump sum. If you are planning to sell your home within the near future, the cost of refinancing the first mortgage is probably not warranted. On the other hand, if your current mortgage is more than 2 points higher than the prevailing mortgage rates and you plan to remain in the current home for the foreseeable future, it is probably better to refinance the first mortgage anyway.The tax laws associated with deducting home mortgage interest can be tricky if you have previously refinanced or have mortgages in excess of one million dollars. However, if your current mortgage is less than $1 million and you have never previously taken any equity out of the home, you can borrow up to an additional $100,000 and still deduct all of the interest. Mon, 15 Sep 2014 19:00:00 GMT Reduced Exclusion http://www.advancedfinancialtax.com/blog/reduced-exclusion/254 http://www.advancedfinancialtax.com/blog/reduced-exclusion/254 Advanced Financial Tax, LLC A taxpayer who does not qualify for the full home sale gain 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 2-year rule, but sold the home due to:a) A change in place of employment, b) Health, or c) Unforeseen circumstances to the extent provided in IRS regulations. The following are examples of unforeseen circumstances for qualified taxpayers:1. Involuntary conversion of the residence;2. Natural or manmade disasters or act of war or terrorism resulting in a casualty to the residence;3. Death of an individual; 4. The loss of employment making the taxpayer eligible for unemployment compensation;5. A change in employment status that results in the taxpayer being unable to pay housing costs and reasonable basic living expenses for the household; 6. Divorce or legal separation under a decree of divorce or separate maintenance; and 7. Multiple births resulting from the same pregnancy.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 720 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) If the taxpayer sold a home just prior to the current sale and the exclusion applied to that sale, the number of days between that sale and the current sale. Mon, 15 Sep 2014 19:00:00 GMT Refinanced Mortgage Interest May Not All Be Deductible http://www.advancedfinancialtax.com/blog/refinanced-mortgage-interest-may-not-all-be-deductible/256 http://www.advancedfinancialtax.com/blog/refinanced-mortgage-interest-may-not-all-be-deductible/256 Advanced Financial Tax, LLC Over the past few years, mortgage interest rates have dropped significantly and homeowners in increasing numbers are refinancing their home mortgages and in the process, have extended the term of the loan. Many of these homeowners frequently take additional cash out of the new loan to pay down other debts, finance education, buy a car, etc. In doing so, homeowners may be unwittingly creating a situation where part of their home mortgage interest may no longer be deductible. Generally, the mortgage interest that you may deduct on your home includes the interest paid on the acquisition debt and $100,000 of equity debt, provided the combined debt does not exceed the value of the home or $1,100,000. The root of the problem is that acquisition debt is not a fixed amount, and it steadily declines to zero over the term of the original purchase mortgage. If that mortgage is refinanced and the new term extends past the term of the original mortgage or the amount of the mortgage is increased, then the amount of the replacement debt that exceeds the original acquisition debt will no longer qualify as acquisition debt. This still may not present a problem so long as the replacement debt never exceeds the original acquisition debt plus the allowable $100,000 of equity debt illustrated in the figure below. The green shaded area represents the debt on which interest would be deductible as home mortgage interest while the red shaded area represents a the portion of a refinanced debt on which the interest would not be deductible as home mortgage interest. Example: From the illustration above, the home was refinanced in the 15th year for $300,000. At the time of the refinance, the original acquisition debt plus the $100,000 equity debt totaled $250,000. Therefore, the amount of interest from the new $300,000 debt will be limited to the interest on $250,000 or 83.3% of the total mortgage interest (250K/300K). If you have or might refinance, it is imperative that you retain a record of the terms of the original acquisition debt in case you exceed the debt limitation and need to prorate your interest deduction. When refinancing, you also need to watch out for the Alternative Minimum Tax (AMT). The AMT is another way of computing tax liability that is used if it is greater than the regular method. Congress originally conceived the AMT as a means of extracting a minimum tax from high-income taxpayers who have significant items of tax shelter and/or tax-favored deductions. Since the AMT was created, inflation has driven up income and deductions so that more and more individuals are subject to the AMT. When computing the AMT, only the acquisition debt interest is allowed as a deduction; home equity debt interest is not. Neither is the interest on debt for unconventional homes such as boats and motor homes, even if they are the primary residence of the taxpayer. Before you refinance a home mortgage, it may be appropriate to contact this office to determine the tax implication of your planned refinance and see if there are any other suitable alternatives. Mon, 15 Sep 2014 19:00:00 GMT Mortgage Insurance Premium Deduction http://www.advancedfinancialtax.com/blog/mortgage-insurance-premium-deduction/280 http://www.advancedfinancialtax.com/blog/mortgage-insurance-premium-deduction/280 Advanced Financial Tax, LLC Qualified mortgage insurance premiums are deductible as qualified residence interest if the amounts: (1) are paid or accrued before Jan. 1, 2015; (2) aren't properly allocable to any period after Dec. 31, 2014; and (3) are paid or accrued with respect to a mortgage insurance contract issued after Dec. 31, 2006.To be deductible, the premiums must have been paid in connection with acquisition debt for a mortgage insurance contract issued after Dec. 31, 2006. It must be for a qualified residence (first and second homes) and the premiums must have been paid or accrued after Dec. 31, 2006 and before Jan. 1, 2015.The deductible amount of the premiums phases out ratably by 10% for each $1,000 (or fraction thereof) by which the taxpayer's AGI exceeds $100,000 (10% for each $500 (or fraction thereof) by which a married separate taxpayer's AGI exceeds $50,000).Qualified mortgage insurance means mortgage insurance provided by the Veterans Administration (VA), Federal Housing Administration (FHA), or Rural Housing Administration (RHA), and private mortgage insurance, as defined by Sec. 2 of the Homeowners Protection Act of '98 (12 U.S.C. 4901), as in effect on Dec. 20, 2006. Prepaid premiums for mortgage insurance, other than that provided by the VA or RHA, are not fully deductible in the year the premiums are paid but must be amortized over the shorter of the stated term of the mortgage or 84 months, starting with the month in which the insurance was obtained.  The unamortized balance is not deductible if the mortgage is paid off before the end of its term. Sun, 14 Sep 2014 19:00:00 GMT Repeated Warning about Phone Scams http://www.advancedfinancialtax.com/blog/repeated-warning-about-phone-scams/39493 http://www.advancedfinancialtax.com/blog/repeated-warning-about-phone-scams/39493 Advanced Financial Tax, LLC 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.advancedfinancialtax.com/blog/alcoholism--drug-addiction/39488 http://www.advancedfinancialtax.com/blog/alcoholism--drug-addiction/39488 Advanced Financial Tax, LLC 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.advancedfinancialtax.com/blog/better-to-sell-or-trade-a-business-vehicle/39480 http://www.advancedfinancialtax.com/blog/better-to-sell-or-trade-a-business-vehicle/39480 Advanced Financial Tax, LLC 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.advancedfinancialtax.com/blog/charity-purchases-and-auctions/30867 http://www.advancedfinancialtax.com/blog/charity-purchases-and-auctions/30867 Advanced Financial Tax, LLC 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.advancedfinancialtax.com/blog/hiring-family-members-in-a-family-business/39434 http://www.advancedfinancialtax.com/blog/hiring-family-members-in-a-family-business/39434 Advanced Financial Tax, LLC 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.advancedfinancialtax.com/blog/inheritances-can-be-tricky/34319 http://www.advancedfinancialtax.com/blog/inheritances-can-be-tricky/34319 Advanced Financial Tax, LLC 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.advancedfinancialtax.com/blog/september-2014-individual-due-dates/33942 http://www.advancedfinancialtax.com/blog/september-2014-individual-due-dates/33942 Advanced Financial Tax, LLC 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.advancedfinancialtax.com/blog/september-2014-business-due-dates/33943 http://www.advancedfinancialtax.com/blog/september-2014-business-due-dates/33943 Advanced Financial Tax, LLC 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.advancedfinancialtax.com/blog/home-modifications-for-disabilities/39397 http://www.advancedfinancialtax.com/blog/home-modifications-for-disabilities/39397 Advanced Financial Tax, LLC 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.advancedfinancialtax.com/blog/customize-quickbooks8217-reports-make-better-business-decisions/39398 http://www.advancedfinancialtax.com/blog/customize-quickbooks8217-reports-make-better-business-decisions/39398 Advanced Financial Tax, LLC 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.advancedfinancialtax.com/blog/can-you-take-a-home-office-deduction/39388 http://www.advancedfinancialtax.com/blog/can-you-take-a-home-office-deduction/39388 Advanced Financial Tax, LLC 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.advancedfinancialtax.com/blog/vacation-home-rentals-how-the-income-is-taxed/39370 http://www.advancedfinancialtax.com/blog/vacation-home-rentals-how-the-income-is-taxed/39370 Advanced Financial Tax, LLC 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.advancedfinancialtax.com/blog/child-care-credit-available-to-student-parents/39366 http://www.advancedfinancialtax.com/blog/child-care-credit-available-to-student-parents/39366 Advanced Financial Tax, LLC 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.advancedfinancialtax.com/blog/borrowing-money-to-finance-an-education/39360 http://www.advancedfinancialtax.com/blog/borrowing-money-to-finance-an-education/39360 Advanced Financial Tax, LLC 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.advancedfinancialtax.com/blog/know-the-rules-before-you-break-open-your-retirement-piggy-bank/39354 http://www.advancedfinancialtax.com/blog/know-the-rules-before-you-break-open-your-retirement-piggy-bank/39354 Advanced Financial Tax, LLC 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.advancedfinancialtax.com/blog/misclassifying-workers-can-be-costly/27423 http://www.advancedfinancialtax.com/blog/misclassifying-workers-can-be-costly/27423 Advanced Financial Tax, LLC 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.advancedfinancialtax.com/blog/tax-tips-for-the-well-traveled-businessperson/36939 http://www.advancedfinancialtax.com/blog/tax-tips-for-the-well-traveled-businessperson/36939 Advanced Financial Tax, LLC 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.advancedfinancialtax.com/blog/selling-your-home/417 http://www.advancedfinancialtax.com/blog/selling-your-home/417 Advanced Financial Tax, LLC 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.advancedfinancialtax.com/blog/understanding-the-health-insurance-mandate/38511 http://www.advancedfinancialtax.com/blog/understanding-the-health-insurance-mandate/38511 Advanced Financial Tax, LLC 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.advancedfinancialtax.com/blog/reap-the-tax-benefits-of-education-planning/39271 http://www.advancedfinancialtax.com/blog/reap-the-tax-benefits-of-education-planning/39271 Advanced Financial Tax, LLC 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.advancedfinancialtax.com/blog/august-2014-individual-due-dates/33379 http://www.advancedfinancialtax.com/blog/august-2014-individual-due-dates/33379 Advanced Financial Tax, LLC 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.advancedfinancialtax.com/blog/august-2014-business-due-dates/33380 http://www.advancedfinancialtax.com/blog/august-2014-business-due-dates/33380 Advanced Financial Tax, LLC 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.advancedfinancialtax.com/blog/a-tour-through-quickbooks-payroll-setup-tool/39278 http://www.advancedfinancialtax.com/blog/a-tour-through-quickbooks-payroll-setup-tool/39278 Advanced Financial Tax, LLC 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.advancedfinancialtax.com/blog/beware-of-trust-fund-penalties/39265 http://www.advancedfinancialtax.com/blog/beware-of-trust-fund-penalties/39265 Advanced Financial Tax, LLC 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.advancedfinancialtax.com/blog/the-alimony-gap/39260 http://www.advancedfinancialtax.com/blog/the-alimony-gap/39260 Advanced Financial Tax, LLC 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.advancedfinancialtax.com/blog/scammers-getting-more-brazen/39250 http://www.advancedfinancialtax.com/blog/scammers-getting-more-brazen/39250 Advanced Financial Tax, LLC 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 Have You Reviewed Your Will or Trust Lately? http://www.advancedfinancialtax.com/blog/have-you-reviewed-your-will-or-trust-lately/39210 http://www.advancedfinancialtax.com/blog/have-you-reviewed-your-will-or-trust-lately/39210 Advanced Financial Tax, LLC 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 The Earned Income Tax Credit: the IRS's Nemesis http://www.advancedfinancialtax.com/blog/the-earned-income-tax-credit-the-irss-nemesis/39151 http://www.advancedfinancialtax.com/blog/the-earned-income-tax-credit-the-irss-nemesis/39151 Advanced Financial Tax, LLC 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.advancedfinancialtax.com/blog/will-the-affordable-care-act-impact-your-tax-return-for-2014/39136 http://www.advancedfinancialtax.com/blog/will-the-affordable-care-act-impact-your-tax-return-for-2014/39136 Advanced Financial Tax, LLC 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 5 Ways You Can Use QuickBooks' Income Tracker http://www.advancedfinancialtax.com/blog/5-ways-you-can-use-quickbooks-income-tracker/39121 http://www.advancedfinancialtax.com/blog/5-ways-you-can-use-quickbooks-income-tracker/39121 Advanced Financial Tax, LLC 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.advancedfinancialtax.com/blog/do-you-have-an-online-gambling-account/39118 http://www.advancedfinancialtax.com/blog/do-you-have-an-online-gambling-account/39118 Advanced Financial Tax, LLC 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.advancedfinancialtax.com/blog/foreign-banks-forced-to-report-us-account-owners8217-tax-information-to-irs/39116 http://www.advancedfinancialtax.com/blog/foreign-banks-forced-to-report-us-account-owners8217-tax-information-to-irs/39116 Advanced Financial Tax, LLC 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 Tax Facts about Summertime Child Care Expenses http://www.advancedfinancialtax.com/blog/tax-facts-about-summertime-child-care-expenses/36988 http://www.advancedfinancialtax.com/blog/tax-facts-about-summertime-child-care-expenses/36988 Advanced Financial Tax, LLC 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 Passwords - Why a List Is Important http://www.advancedfinancialtax.com/blog/passwords-why-a-list-is-important/39006 http://www.advancedfinancialtax.com/blog/passwords-why-a-list-is-important/39006 Advanced Financial Tax, LLC 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.advancedfinancialtax.com/blog/a-new-twist-on-your-favorite-game-show/38977 http://www.advancedfinancialtax.com/blog/a-new-twist-on-your-favorite-game-show/38977 Advanced Financial Tax, LLC 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 8 QuickBooks Reports That You Should Be Running Regularly http://www.advancedfinancialtax.com/blog/8-quickbooks-reports-that-you-should-be-running-regularly/38976 http://www.advancedfinancialtax.com/blog/8-quickbooks-reports-that-you-should-be-running-regularly/38976 Advanced Financial Tax, LLC 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.advancedfinancialtax.com/blog/did-you-overlook-something-on-a-prior-tax-return/36812 http://www.advancedfinancialtax.com/blog/did-you-overlook-something-on-a-prior-tax-return/36812 Advanced Financial Tax, LLC 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.advancedfinancialtax.com/blog/irs-tax-publications-are-not-binding-precedent/38957 http://www.advancedfinancialtax.com/blog/irs-tax-publications-are-not-binding-precedent/38957 Advanced Financial Tax, LLC 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.advancedfinancialtax.com/blog/find-lost-money/38948 http://www.advancedfinancialtax.com/blog/find-lost-money/38948 Advanced Financial Tax, LLC 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.advancedfinancialtax.com/blog/get-a-big-refund-this-year/38935 http://www.advancedfinancialtax.com/blog/get-a-big-refund-this-year/38935 Advanced Financial Tax, LLC 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.advancedfinancialtax.com/blog/are-you-in-danger-of-an-audit/38926 http://www.advancedfinancialtax.com/blog/are-you-in-danger-of-an-audit/38926 Advanced Financial Tax, LLC 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 Virtual Currency & Taxes http://www.advancedfinancialtax.com/blog/virtual-currency--taxes/38862 http://www.advancedfinancialtax.com/blog/virtual-currency--taxes/38862 Advanced Financial Tax, LLC 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 Home Sale Exclusion and Irrevocable Trusts http://www.advancedfinancialtax.com/blog/home-sale-exclusion-and-irrevocable-trusts/250 http://www.advancedfinancialtax.com/blog/home-sale-exclusion-and-irrevocable-trusts/250 Advanced Financial Tax, LLC Some taxpayers use revocable trusts as an alternative to having their property transferred by will. While there is no income or estate tax advantage to a revocable trust, there is a benefit in having the property pass to beneficiaries on the death of the owner without having to go through the probate process with can be lengthy and costly.However, there is a potential pitfall where a married couple transfers their residence to a revocable trust that becomes irrevocable after the first spouse dies - the $250,000 home sale exclusion may be completely lost or available only to a limited extent even though the surviving spouse has the continued right to occupy the residence. An IRS Letter Ruling (PLR 200104005) indicates the exclusion is available only to the extent the survivor is considered to own trust property. In this ruling, a couple, living in a community property state, established a revocable trust while both were living. Upon the death of the spouse, the trust was split into two trusts, the irrevocable bypass trust and the survivor's revocable trust. The home was assigned to the irrevocable bypass trust, and therefore, the surviving spouse is not considered to own the property and any subsequent sale would not qualify for the home sale exclusion. Thu, 24 Apr 2014 19:00:00 GMT Changes in Circumstances Can Affect Your Premium Assistance Credit http://www.advancedfinancialtax.com/blog/changes-in-circumstances-can-affect-your-premium-assistance-credit/38838 http://www.advancedfinancialtax.com/blog/changes-in-circumstances-can-affect-your-premium-assistance-credit/38838 Advanced Financial Tax, LLC 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 President Proposes Reinstating Gift Limits http://www.advancedfinancialtax.com/blog/president-proposes-reinstating-gift-limits/38826 http://www.advancedfinancialtax.com/blog/president-proposes-reinstating-gift-limits/38826 Advanced Financial Tax, LLC 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.advancedfinancialtax.com/blog/do-you-need-to-use-quickbooks-fixed-asset-tools-the-basics/38837 http://www.advancedfinancialtax.com/blog/do-you-need-to-use-quickbooks-fixed-asset-tools-the-basics/38837 Advanced Financial Tax, LLC 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.advancedfinancialtax.com/blog/irs-reinterprets-the-once-per-year-ira-rollover-limitation/38816 http://www.advancedfinancialtax.com/blog/irs-reinterprets-the-once-per-year-ira-rollover-limitation/38816 Advanced Financial Tax, LLC 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.advancedfinancialtax.com/blog/bartering-is-taxable-income/38803 http://www.advancedfinancialtax.com/blog/bartering-is-taxable-income/38803 Advanced Financial Tax, LLC 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.advancedfinancialtax.com/blog/last-minute-payments-and-filing-tips/36644 http://www.advancedfinancialtax.com/blog/last-minute-payments-and-filing-tips/36644 Advanced Financial Tax, LLC 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 Not Able to Pay Your Taxes by the April Due Date? http://www.advancedfinancialtax.com/blog/not-able-to-pay-your-taxes-by-the-april-due-date/36647 http://www.advancedfinancialtax.com/blog/not-able-to-pay-your-taxes-by-the-april-due-date/36647 Advanced Financial Tax, LLC 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 Receiving Tips Can Be Taxing http://www.advancedfinancialtax.com/blog/receiving-tips-can-be-taxing/30377 http://www.advancedfinancialtax.com/blog/receiving-tips-can-be-taxing/30377 Advanced Financial Tax, LLC 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 Spring-Clean Your QuickBooks Company File http://www.advancedfinancialtax.com/blog/spring-clean-your-quickbooks-company-file/38739 http://www.advancedfinancialtax.com/blog/spring-clean-your-quickbooks-company-file/38739 Advanced Financial Tax, LLC 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.advancedfinancialtax.com/blog/haven8217t-filed-an-income-tax-return/38735 http://www.advancedfinancialtax.com/blog/haven8217t-filed-an-income-tax-return/38735 Advanced Financial Tax, LLC 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.advancedfinancialtax.com/blog/don8217t-get-scammed-they-are-very-clever/37909 http://www.advancedfinancialtax.com/blog/don8217t-get-scammed-they-are-very-clever/37909 Advanced Financial Tax, LLC 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.advancedfinancialtax.com/blog/clock-is-ticking-for-retirement-plan-contributions/38731 http://www.advancedfinancialtax.com/blog/clock-is-ticking-for-retirement-plan-contributions/38731 Advanced Financial Tax, LLC 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 und