Tax Planning Suggestions?

Since the "new tax law" is mostly the "old tax law continued" tax planning is pretty much the same as you've been hearing for the last ten years:

• Most taxpayers should try to get as many deductions in 2010 unless you have reason to believe that in 2011 you're going to have a significant increase in your taxable income next year.  This will allow you to get your tax break sooner.  Examples would be paying your Jan. mortgage payment in December or paying your property taxes in December or donating to charity in December.


• Along the same lines as above, it’s probably also a good idea to delay income if possible.

It now looks like we're not going to have any changes regarding taxation of dividends or long-term capital gains, so you may not need to adjust your investment choices.

Single 2011 Tax Brackets (Projected)

Taxable Income	Marginal Tax Rate:
$0-$8,425	10%
$8,425-$34,200	15%
$34,200-$82,850	25%
$82,850-$192,000	28%
$192,000-$375,700	36%
$375,700+	39.6%

Married Filing Jointly 2011 Tax Brackets (Projected)

Taxable Income	Marginal Tax Rate:
$0-$16,850	10%
$16,850-$68,400	15%
$68,400-$138,050	25%
$138,050-$232,950	28%
$232,950-$375,700	36%
$375,700+	39.6%

Head of Household 2011 Tax Brackets (Projected)

Taxable Income	Marginal Tax Rate:
$0-$12,000	10%
$12,000-$45,800	15%
$45,800-$118,300	25%
$118,300-$189,350	28%
$189,350-$375,700	36%
$375,700+	39.6%

Married Filing Separately 2011 Tax Brackets (Projected)

Taxable Income	Marginal Tax Rate:
$0-$8,425	10%
$8,425-$34,200	15%
$34,200-$69,025	25%
$69,025-$116,475	28%
$116,475-$187,850	36%
$187,850+	39.6%

Tax law can change daily, please talk to your tax adviser before making decisions that will affect your taxes.

Tax Reductions for All

The world series version of the tax code ended yesterday with President Obama's signature on a tax package that provides tax reductions for all!





Most of the Bush Tax cuts were extended for TWO years AND additional tax incentives were also bundled in this package of joy including:

• For 2011 only all employees will be paying in 2% less on their social security taxes without their social security income being affected in later years.  The new rate for employees social security will be 4.2% on the first $106,800 of wages.  For employers it will remain at 6.2%.


• Teachers will get to write off the $250 of out of pocket expenses


• We still have the option of writing off sales tax instead of state income taxes, if we itemize.


• The credits on energy efficient appliances have been extended.


• The tax rates as they were last year are extended through 2012.


• AMT patch was issued for 2011 & 2012!  Each year taxpayers are required to compute their tax using the regular tax rules and rates as well as an alternative method known as the AMT (Alternative Minimum Tax), which is close to a flat tax as it eliminates most itemized deductions.  The original idea of this parallel system was to insure that high income taxpayers pay a minimum amount of tax.  The problem is that each year as our income increases and more middle class families are hit with this tax unless Congress passes a patch.  The patch is an exemption for lower income filiers.  Without the patch single filers would be exempt if they make LESS than $33,750 and married filers would be exempt if they made LESS than $45,000.  Thankfully this patch was included and the exemption rates have been increased to $47,450 for single filers and $72,450 for married filing joint filers.


• 100% bonus depreciation on assets purchased Sept. 9, 2010 through 2011.

What's different:

• You have to itemize your deductions in order to deduct your property taxes.


• Retroactive to January 1, 2010 estates above $5 million will be taxed at 35%, but there is an election if you wish to keep the 0% rate with minimal basis adjustments.  There's also a portability clause, which makes things complicated enough that you should talk to your attorney about revising your estate plan.  


• For 2013 estates above $1 million will be taxed at 55%.

Tax law can change daily, please talk to your tax adviser before making decisions that will affect your taxes.

Social Security and Medicare

There are many questions to ask and decisions to be made regarding Social Security and Medicare as you approach retirement. 

• How do you qualify for benefits?


• Should you take social security early?


• How much can you earn and still get full social security beneifts?


• Who is eligible for Medicare?


• Are all the Medicare plans the same?


• Do you need Medigap? 

If you, or someone you know, would like a free booklet that explains in plain language the basics of Social Security and Medicare I will send it to them free of charge until I run out of booklets.





Simply tell them to send me an email (HelpMe@GLGcpa.com) with their name, address and current age.

Tax law can change daily, please talk to your tax adviser before making decisions that will affect your taxes.

Household Worker Tax

Not unlike other taxes, the household worker tax is very confusing to many people.  This tax usually applies to individuals who are 18 years of age or older who you hired as a nanny, housekeeper, maid, companion, babysitter, private nurse, health aide, caretaker, butler, household manager, personal secretary or any other service to be performed in your home. 

If you pay someone $1700 or more (in 2010 - this amount is adjusted each year by the Social Security Administration) for services that they provide in your home you are considered their employer by the IRS.  

Being their employer make you solely responsible for remittance of the Social Security and Medicare taxes.  This means that if you fail to collect this tax from the employee (usually done through payroll withholding) you just increased your taxes because now you have to pay their share of Social Security and Medicare taxes as well as your share.  In addition to Social Security and Medicare taxes, depending on the state you live in, you may also be subject to State Unemployment and disability insurance taxes.

The person you hire is subject to Social Security tax, Medicare tax, Federal taxes and possibly state and local taxes as well as employee disability and unemployment taxes. 

Household employees must be paid at least the minimum wage (Federal minimum wage is currently $7.25 - you are required to pay the higher of the Federal or your state's minimum wage).  If your household employee does not live with you, you are required to pay them one and one-half times their normal rate when they work more than 40 hours per week per Federal law (again your state law may be different and if it requires you to pay more than Federal that's what you have to pay).

You are required to report the names and social security numbers of all newly hired workers to the state within 2-4 weeks of their hire date.

Most state require that employers report their household employee wages and remit their taxes quarterly, some allow annual reporting.  In addition to these reporting requirements you are also required to provide a W-2 to your employee and submit a copy of the W-2 to the Social Security Administration as well as preparing another schedule (Schedule H) on your individual tax return.  Many employers are surprised by the size of their annual employment tax liability for their household employee.  This usually seems to fall in the $5,000 - $8,000 range.  Most employers include this amount in their quarterly estimated tax payments.

Tax law can change daily, please talk to your tax adviser before making decisions that will affect your taxes.

Disregarded Entity - Single Member LLC

The term "disregarded entity" as it is associated with Single Member LLCs, carries with it a lot of confusion.  In simplistic terms I'm going to try and clear up some of this confusion.....

Single Member LLCs are disregarded entities which means they are:

1. An entity where the business, as far as legal liability is concerned, is separate from it's owner AND


2. An entity where the business, as far as federal employment taxes are concerned, is responsible for filing and paying all employment taxes on wages paid to its employees AND


3. An entity where the business, as far as federal income taxes are concerned, are reported with the owner on Form 1040, usually Schedule C.

LLCs are entities created under state law the purpose of which is to provide liability protection to it's owners.  In the case where there is only one owner, we refer to this type of business as a "Single Member LLC".

When "Single Member LLCs" hires employees the LLC must obtain an EIN for the LLC and file federal payroll tax returns (Forms 940, 941, W-2s) using the name and EIN of the LLC.

Single Member LLCs do not have a separate tax return to file for federal income tax purposes.  For federal income tax purposes Single Member LLCs report their income and expenses on Form 1040 of the single member owner, using Schedule C.

Tax law can change daily, please talk to your tax adviser before making decisions that will affect your taxes.

Is this taxable?

Most of the questions I receive throughout the year are really asking this one question...Is this taxable?  In this article I will discuss some of the specifics for certain items that seem to come up more frequently than others...





Gambling:

• If you happen to win money while gambling (this includes raffles and lottery winnings) that income is taxable as "other income".  


• Video poker is also a type of gambling wherein your winnings by playing the game should be declared as "other income" and will also be taxable. Online gambling such as video poker and other online casino games are also taxable. It's not true that if you gamble online you don't have to pay its taxes. US Tax Code Section 61(a) states that gross income
  
  means "all income from whatever source derived" and that includes gambling.


• If you happen to lose money while gambling, you are allowed to deduct those losses up to the amount of your winnings, as a miscellaneous itemized deduction.


• If you can prove that your gambling activity was conducted as a "trade or business" your losses (and/or winnings) would be reported on Schedule C (instead of as an itemized deduction for losses), but be careful here....your gambling losses are still limited to the extent of your gambling gains.  Also, you should be very careful when completing your return as a professional gambler as the courts have a hard time envisioning gambling as not being pure recreation. 

Prizes:

• If you win cash (or a cash equivalent like a shopping card or gift certificate) from a drawing or contest it is considered taxable income and must be reported on your return as "other income".


• If you win something that is not cash, like a TV (or car, boat, a trip, etc.) then the fair market value of your winnings needs to be reported on your return as "other income".   You are allowed to report a value lower than the FMV reported on Form 1099 if you can substantiate the lower value.

Finder's Keepers:

• If you happen to find a briefcase full of money and the police was not able to find it's prior owner, the money is yours and it's taxable as other income.


• If you happen to find any non-cash item and the police are not able to find it's prior owner, the item is yours and the FMV is taxable as other income.

Gifts:

• When someone gives you a gift of cash it is NOT taxable to you.


• When someone gives you a non-cash gift, it is NOT taxable to you.


• The sale of a gift may produce a capital gain, which would be taxable.

Inheritances:

• Inheritances are usually not taxable to you.


• Inheritances that would have been taxable income to the decedent is taxable to you.


• Income earned from the inherited property is taxable to you after transfer to you.


• The sale of inherited property may produce a capital gain, which would be taxable to you.

Tax law can change daily, please talk to your tax adviser before making decisions that will affect your taxes.

Multiple Non-Incorporated Businesses

If you, alone, try to sell your services or a product for profit this venture is usually considered a business (in certain circumstances the hobby-loss rules may apply).  The income and expenses of this business operation are reported to the IRS on Schedule C of your Form 1040, with you being the sole proprietor (only owner) of this business.  This is true even if you are a LLC (single member).





Many individuals attempt to sell unrelated services or products.  When the activities are not related the reporting of those activities on your tax return must be kept separate.  This means you will prepare a separate Schedule C for each business activity.  If you combine unrelated or separate business activities onto one Schedule C you may be facing negligence penalties (Rev. Rule 81-90).





If two or more people work together in the non-incorporated activity with the intent of sharing the profits, then the activity is considered a partnership and not a sole proprietorship.  In this case, the activity would report it's income and expenses on a Partnership Return, Form 1065.  The exception to this is if the partnership is between a husband and wife.  When this is the case, if both the husband and wife materially participate in the business and intend on filing a joint tax return, they may each elect not to be treated as a partnership and file their respective income and expenses regarding the business on their own Schedule C.  This exception does not apply if the husband and wife business is organized as a LLC.  If the husband and wife business has organized as an LLC they must file a partnership return. 

Tax law can change daily, please talk to your tax adviser before making decisions that will affect your taxes.

C-Corporation vs. S-Corporation

When considering a C-Corporation vs. a S-Corporation there are many legal items to consider which are NOT discussed in this article, please see an attorney regarding these matters.

Aside from legalities here are some things to consider:

• If you plan to take out significant amounts of profits (cash) above what you would consider a "reasonable salary" for the work that you are doing for the corporation (as officer), an S-Corporation may be more beneficial because once a reasonable wage is paid, excess profits can be taken out of the corporation as a distribution free from self-employment taxes.  If you did this in a C-Corporation the money taken out would be considered a dividend and be doubled taxed.


• C-Corporations often pay high wages rendering the corporation to have no profits and thus pay no taxes. This is perfectly fine as long as the wages paid are considered "reasonable".  The IRS can challenge the wages if they believe they are in excess of a reasonable salary and reclassify them as dividends.  Having said this, the IRS can also challenge a S-Corporation's officer's salary if they believe the wage was too low and then they will want to reclassify the distributions taken as salary.


• Many retirement plan maximum contributions are based upon your salary.  This usually negates the negative of paying payroll taxes on more wages.


• If you plan to retain profits in the corporation remember that in an S-Corporation you still have to pay taxes on that money - some shareholders may need a distribution in order to pay these taxes.


• There are many restrictions placed on S-Corporations that have not been discussed such as who is allowed to be a shareholder of a S-Corporation, how many shareholders, only one class of stock is allowed, etc.

Tax law can change daily, please talk to your tax adviser before making decisions that will affect your taxes.