CHARITABLE CONTRIBUTIONS FROM IRAS

Year-end planning Tip: Individuals age 70 1/2 or older should consider making charitable contributions from IRAs

This year may well be the last chance for taxpayers age 70 1/2 or older to take advantage of an up-to-$100,000 annual exclusion from gross income for otherwise taxable individual retirement account (IRA) distributions that are qualified charitable distributions. Such distributions aren't subject to the charitable contribution percentage limits and aren't includible in gross income. This tax advantage will not be available for distributions made in tax years beginning after Dec. 31, 2011.

This is a great opportunity for taxpayers that do not have enough itemized deductions to file the “long form.” For married couples over age 65 the standard deduction is $13,900 and for singles it is $7,250.

Where this becomes a great planning tool is when the taxpayer is in the zone where they are paying tax of Social Security Benefits and making charitable contributions that they effectively can’t deduct because they are taking the standard deduction.

For example:
Bonnie and Clyde are both over age 70 ½. They have interest and other income of $20,000 and are taking $10,000 per year from their IRA. In addition they have Social Security benefits of $20,000. Bonnie and Clyde got religion after they retired from the banking business and annually make charitable contributions of $7,500.

If they draw money from their IRA and put it in their checking account and then make a charitable contribution their total federal and state tax is $1,703.

On the other hand if they direct their IRA administrator to take the IRA money of $7,500 and give it to their charity their tax drops to $176.

There is a saving so $1,527. Pretty cool… easier than robbing a bank.

If you need any more information on this let me know. Remember, unless Congress renews this tax strategy 2011 is your last chance. You might want to think about doing your 2012 contribution in 2011 to beat the expiration deadline.

THE IOWA PUMPKIN TAX REPEALED

Here is how stupid taxes can be. It is estimated that more 750 million pumpkins are carved into jack o' lanterns each October. While the practice brings joy to many, it created heartburn for Iowa tax officials four years ago, who were dismayed that so many people were decorating their pumpkins.

You see, Iowa (like most states) taxes retail sales but exempts groceries. Pumpkins used for decoration should have been taxed but were slipping by because they were also food. So they spent taxpayer’s money sending out a bulletin to retailers reminding them to quiz customers on whether they were buying the pumpkin to eat (not taxable) or decorate (taxable):

Pumpkins: Pies and jack-o'-lanterns
The Department recently refined its position on whether pumpkins are subject to Iowa sales tax to more closely match what we believe to be their predominant use.

In the past, pumpkins were exempt from sales tax as a food (edible squash), even if they were to be later made into jack-o'-lanterns or used as decorations.

Our position now is that pumpkins are taxable if:
1. They are advertised to be used as jack-o'-lanterns/decorations, or
2. It is understood that they will be used as jack-o'-lanterns/decorations

Pumpkins are exempt in the following circumstances:
* The buyer completes a sales tax exemption certificate stating they will be used as food, or
* The pumpkins are a specific variety used to make pumpkin pies and are advertised in that way, or
* They are purchased with Food Stamps.
Retailers who sell pumpkins should keep these guidelines in mind and make any necessary changes to their tax treatment of pumpkin sales.

Fortunately this got picked up by the media and then the blogosphere, which led to local news coverage, and finally Iowa officials rescinded the pumpkin tax a few days later.
One less silly tax.

ACCOUNTANTS IN THE MOVIES

In Hollywood, accounting can seem like a pretty glamorous profession, or not.

Edmund O'Brien plays accountant Frank Bigelow in the fast-paced 1950 film noir crime drama "D.O.A." The movie opens with Bigelow entering a police station to report his own homicide and then in flashback traces how he came to learn that he had been poisoned by a former client who needed him to notarize an incriminating document. The movie was later remade in 1988 with Dennis Quaid playing O'Brien's role, but in the remake Quaid is a college professor. O'Brien is shown here with Laurette Luez, who plays his client's mistress Marla Rakubian.

SCHOOL UNIFORMS

Q. As a mom, I love school uniforms. They’re easy and predictable. What they aren’t is cheap. They’re also not in great demand for wear outside of school which means that they serve one purpose only. So that feels like an expense that should be deductible, right?

A. Sorry, nondeductible. The IRS does not allow deductions for school uniforms, even if required, for public, parochial or private schools.

The rules are a bit different at military school. If you are a student at an armed forces academy, you cannot deduct the cost of your uniforms – that’s consistent with the rules for public, parochial and private schools. However, you do get something of a break at military school in that you can deduct the cost of insignia, shoulder boards, and related items.

SOCIAL SECURITY WAGE BASE INCREASES

Social Security wage base increases to $110,100 for 2012

For those of you that are budgeting, the IRS has released the new base for Social Security tax. If you are at max this will mean an additional $205 tax ($3,300 x .062). For self employed double that.

The Social Security Administration has announced that the wage base for computing the Social Security tax (OASDI) in 2012 increases to $110,100 from $106,800, which was the wage base for 2009 through 2011. The $3,300 increase, which is about 3%, is due to an increase in average total wages.

NOTIFY THE IRS IF YOU MOVE

The IRS has explained how taxpayers must inform, the IRS of a change of address, effective immediately. The IRS uses a taxpayer's address of record for the various notices or documents that are required to be sent to a taxpayer's “last known address.”

The key point is that a notice or document sent to a taxpayer's “last known address” is legally effective even if the taxpayer never receives it.

HMMMM

“Warren Buffett’s company reportedly owes the IRS a billion dollars in back taxes. When he said he wasn't paying enough taxes, he wasn't kidding.” Jay Leno

NO WONDER WE HAVE A DEFICIT

In 1969 20% of US Taxpayers Paid Zero or Negative Tax

In 2009 42%

Now 51%

(Tax Foundation) -- The Tax Foundation's Tax Policy Blog reports that from 1969 to 2009, U.S. taxpayers who have a zero or negative tax liability grew from less than 20% of all filers to 42%, according to the IRS. Congress' Joint Committee on Taxation has "found that 51% of American households paid no income taxes." For millions of these non-payers, "the refundable credits more than exceed their payroll tax contributions." The blog also notes that since 2003, the top 1% of taxpayers' share of the tax burden "has well exceeded that of the bottom 90%, even during the recent recession."

MAN AGAINST MACHINES

It’s technologies fault that we have so much unemployment

A couple of years ago, I was making a presentation to a group of about 250 CPA’s, Certified Public Accountants. Before the talk I was back stage with one of the other presenters. This guy was from one of the big CPA firms and had just returned from working in Europe for one of his tax clients.

During my conversation I asked him about technology in Europe. In his words, “Europe has not embraced technology because it doesn’t do them any good.” It seems that In Europe you can’t lay anybody off so there is no incentive to use computers when they still need to have the people there. I was thinking about that conversation recently as I watched six or seven workers outside my office window tearing up a street and laying new cement. There weren’t many workers walking around with shovels, they were utilizing big machines and technology to build the new road. Anything that needed to be moved was done with a backhoe or a frontend loader. I don’t think I ever saw over ten workers and that was when they were pouring cement. So even “shovel ready” jobs are not going to create a lot of jobs unless they mandate that everything be done by hand.

Actually President Obama was right when he said that ATM’s were part of the employment problem. You don’t need tellers if people are using ATM’s.

Recently I read in Reuters that since 1999 business investment in equipment and software has surged 33% while the total number of people employed by private firms (not the government) has changed very little. The gap between man and machine widened even further in 2008 and 2009 during the recession. You can see why the United States is struggling to bring down employment which is stuck at 9%. I know my clients that went through the 2008 and 2009 recession have not significantly increased their number of employees because they are able to get by with the people they have.

Here is a personal example: I know that in our small accounting office we have 20 to 25 people employed depending on the time of year. I estimate that if we did not have computers and software and two or three monitors on everybody’s desk and internet access, etc. we would need fifty to seventy-five people to do the same amount of work we are doing right now. We used to have one person who worked part-time, just updating our paper tax library. Right now our tax library is out on the cloud and we don’t need that person working part-time. The same is true with our mail room and our filing. Everything is electronically filed.

I guess this is progress and we have to wait for the workforce to get caught up to the progress. I think we can see that it’s more than just the economy that is causing the problem with unemployment.

ACCOUNTANTS IN THE MOVIES

In Hollywood, accounting can seem like a pretty glamorous profession, or not.

Charles Martin Smith (far right) played accountant Oscar Wallace in the 1987 movie version of "The Untouchables," a popular TV series that ran from 1959-1963. Wallace joins a team organized by Treasury agent Elliot Ness, played by Kevin Costner, to break up Al Capone's mob in Prohibition-era Chicago. They finally put Capone behind bars for tax evasion. Capone was played by Robert De Niro. Other members of Ness's Untouchables included Sean Connery and Andy Garcia. Wallace was based on a real-life accountant named Frank J. Wilson who joined the Treasury Department's Intelligence Unit in 1920 and later helped nab Lindbergh baby kidnapper Bruno Hauptmann by insisting that the serial numbers on the ransom money be properly recorded. Wilson later became chief of the Secret Service.

RAFFLE WINNER

Q. We were at a local fundraising event and won a raffle. The prize was a trip to Vail, CO. including airfare and lodging for seven nights. The value is estimated at $12,000 to $18,000. Is the prize taxable?

A. You win... and of course the IRS wins. This is taxable and you most likely be receiving a 1099 for this. If the trip is valued at $12,000 at a 40% tax rate, you will be paying about $4,800 in income taxes on your 2011 tax return for this.

Enjoy the trip.

ORDERING A PIZZA?

This is absolutely hilarious, but the scary part about it is that it's probably not too far away from being reality.

Click Here

Turn up the volume. . Listen closely. ..Watch the pointer!

PROTESTS ON WALL STREET

Maybe this is too political but.... this past summer I read Atlas Shrugged by Ayn Rand. The book explores a dystopian US where leading innovators refuse to to be exploited by society. The protagonist sees society collapse around her as the government asserts control over all industry while the most productive citizens progressively disappear.

As I watch the protests on Wall Street and the ones spreading across the country, I thought of this book and the following statements. If anybody that reads this understands what the protesters are trying to get across would you please email me so that maybe I can understand.



Here are the concepts that I pulled out of my quotes bag.

1. You cannot legislate the poor into prosperity by legislating the wealthy out of prosperity.

2. What one person receives without working for, another person must work for without receiving.

3. The government cannot give to anybody anything that the government does not first take from somebody else.

4. You cannot multiply wealth by dividing it.

5. When half of the people get the idea that they do not have to work because the other half is going to take care of them, and when the other half gets the idea that it does no good to work because somebody else is going to get what they work for, that is the beginning of the end of any nation.

ACCOUNTANTS IN THE MOVIES

In Hollywood, accounting can seem like a pretty glamorous profession, or not.

Will Ferrell plays lonely IRS agent Harold Crick in the 2006 comedy-drama "Stranger Than Fiction." Harold has been assigned to audit Maggie Gyllenhaal, and falls in love with her. However, he keeps hearing a strange British-sounding voice in his head, and he discovers it's author Emma Thompson, whom he tracks down through her tax records. Turns out she has been writing about his life and trying to decide how he will die in her next book.

FISCAL YEAR QUESTION

Q. I have a question if you can help me. I have a new LLC created on earlier this year. I applied IRS online for EIN. Calendar year is a default on this so I have to elect Fiscal year now with form 1128. My question is can I elect 6/30 year end although even though my business started in May of 2011? ~ Thanks

A. First of all, you really shouldn’t be setting up new business entities without the assistance of a qualified adviser. It is too easy to make mistakes that may be impossible to remedy .

There are a couple of rookie mistakes that an experienced tax pro would have alerted you to.

First, if you are choosing to have your LLC taxed as a C corp., you can choose the end of any month to be its fiscal year-end, regardless of when it was chartered.

For example, if you want June 30 to be the fiscal year-end, that’s your right to choose. You would need to file the initial 1120 covering all of the activity for the period from your startup in May through 6/30/11. This 1120 or an extension (Form 7004), would have been due 9/15/11. You need to file that 1120 even if no actual activity took place or IRS will assume that you made millions of dollars.

When you have a brand new C corp., it has no set fiscal year-end, so the initial 1120 becomes the official notification to the IRS of that fact. This is even if you used December 31 on the SS-4.

Secondly, you do not need to file Form 1128 to designate the tax year for a new corp. that has not filed any 1120s.

TEN TAX TIPS FOR INDIVIDUALS SELLING THEIR HOME

The Internal Revenue Service has some important information to share with individuals who have sold or are about to sell their home. If you have a gain from the sale of your main home, you may qualify to exclude all or part of that gain from your income. Here are ten tips from the IRS to keep in mind when selling your home.

1. In general, you are eligible to exclude the gain from income if you have owned and used your home as your main home for two years out of the five years prior to the date of its sale.
2. If you have a gain from the sale of your main home, you may be able to exclude up to $250,000 of the gain from your income ($500,000 on a joint return in most cases).
3. You are not eligible for the exclusion if you excluded the gain from the sale of another home during the two-year period prior to the sale of your home.
4. If you can exclude all of the gain, you do not need to report the sale on your tax return.
5. If you have a gain that cannot be excluded, it is taxable. You must report it on Form 1040, Schedule D, Capital Gains and Losses.
6. You cannot deduct a loss from the sale of your main home.
7. Worksheets are included in Publication 523, Selling Your Home, to help you figure the adjusted basis of the home you sold, the gain (or loss) on the sale, and the gain that you can exclude.
8. If you have more than one home, you can exclude a gain only from the sale of your main home. You must pay tax on the gain from selling any other home. If you have two homes and live in both of them, your main home is ordinarily the one you live in most of the time.
9. If you received the first-time homebuyer credit and within 36 months of the date of purchase, the property is no longer used as your principal residence, you are required to repay the credit. Repayment of the full credit is due with the income tax return for the year the home ceased to be your principal residence, using Form 5405, First-Time Homebuyer Credit and Repayment of the Credit. The full amount of the credit is reflected as additional tax on that year’s tax return.
10. When you move, be sure to update your address with the IRS and the U.S. Postal Service to ensure you receive refunds or correspondence from the IRS. Use Form 8822, Change of Address, to notify the IRS of your address change.

FACT-CHECKING WARREN BUFFETT

Here is an article from the Tax Foundation. They are trying to figure where the Oracle of Omaha get’s his numbers. ~ Larry

Warren Buffett's much-discussed op-ed arguing that high-income earners aren't paying enough taxes makes the following claim:

"Last year my federal tax bill — the income tax I paid, as well as payroll taxes paid by me and on my behalf — was $6,938,744. That sounds like a lot of money. But what I paid was only 17.4 percent of my taxable income — and that’s actually a lower percentage than was paid by any of the other 20 people in our office. Their tax burdens ranged from 33 percent to 41 percent and averaged 36 percent."

To me, the effective rates he claims for other workers in his office seem too high to be realistic, and I can't figure out how he calculated them, even if you include all payroll (employee and employer) taxes. Even if you assume the scenario that leads to the highest possible tax burden (single filer, no deductions), a taxpayer would have to make at least $285,388 (in 2010) before his or her effective rate reaches 33 percent. 41 percent is impossible, as far as I can tell: the limit of total taxes over total income, as income approaches infinity, is 37.358%. That's the highest possible effective rate anyone could have paid in 2010, if you include income and all payroll taxes.

To demonstrate this, I've made a little calculator which shows the maximum possible effective rate for any income amount. Try it out on the Tax Foundation website.

ACCOUNTANTS IN THE MOVIES

In Hollywood, accounting can seem like a pretty glamorous profession, or not.

Kirstie Alley stars as New York accountant Mollie Jensen in the 1989 romantic comedy "Look Who's Talking." She meets cab driver John Travolta when she needs to get to the hospital in a hurry because she's about to have a baby. Travolta helps her bring up the baby, but the real father is her tax client George Segal. The baby's voice also sounds strangely like Bruce Willis. Alley reprised the part of Mollie in the 1990 sequel "Look Who's Talking Too," in which Roseanne Barr joined Willis in providing the voice of another of Mollie's kids. The 1993 threequel "Look Who's Talking Now" added the voices of Diane Keaton and Danny DeVito, but this time as Mollie's dogs.

PROGRAM TO SNIFF OUT GIFT TAX CHEATS!

It appears that the IRS is initiating a program to sniff out gift tax cheaters who are not properly filing their gift tax returns. The IRS estimates that between 60% and 90% of taxpayers who transfer real estate for little or no consideration to family members fail to file form 709 to report the gift. The IRS is now checking real estate transfer records for 15 states: Conn., Fla., Hawaii, Nebraska, NH, NJ, NY, NC, Ohio, PA, Texas, VA, WA, and Wisconsin. So far, over 500 taxpayers have been audited and many more are lined up for audit.

Our normal method of making these types of gifts is to form a partnership or LLC and then gift the partnership or LLC interest. In this case we can many times apply a minority and lack of marketability discount and there is no filing of the transfer of the real estate so nothing for the IRS to catch.

Remember, even if the gift is not taxable, if it exceeds $13,000 to any one person in a year, you are required to file a gift tax return on form 709. Our advice if your are making non cash gifts is to file a gift tax return even if you are under the $13,000 threshold to start the three year statute of limitations.

FOLLOW-UP ON HOBBY LOSSES

Recently I posted two hobby cases (horse breeding) with different results. I have been asked “why the difference?” For tax purposes, a hobby has some very unfavorable consequences to the taxpayer. Net income is always reported, however, a net loss is limited to zero.

Therefore, how do you make sure that your activity is a profit motive and not a hobby? Here are several items to keep in mind:

• Your intent of the operation is to make money, not create a tax loss.
• You must run the operation like a regular business. This means having a separate checking account for the business; do not commingle personal funds together; have letterhead and business cards.
• If the operation runs at a loss for several years, you must be able to document how you will finally make money. In some cases, showing how you have created extra value in the asset when it will be sold will be sufficient, but be ready for an audit if you show too many years of losses.
• A horse farm has a greater chance of being determined as a hobby farm.
• The size of the operation can affect the hobby status. For example, it is fairly hard to argue that a 2 acre garden plot is a farm (however, in some extensive forms of farming, this can be true).

Remember the key point to ask yourself, is this truly an operation being operated like a business, or is it merely intended to create a tax loss? If it is the latter, then it is more difficult to not treat it as a hobby.