FORGIVENESS OF CREDIT CARD DEBT IS USUALLY TAXABLE, BUT NOT IN THIS CASE

A man who owed on his credit cards failed to pay up, and the credit card company eventually wrote off his debt. More than 10 years later, a firm that acquired the debt from the credit card company contacted him to collect, but he did not owe the debt because of the states statute of limitation had run out.

He protested and the firm ceased its collection efforts. But, the new collection company issued him a Form 1099-C reporting debt cancellation income for that year. The IRS said that meant he owed tax on the amount listed on the form.The taxpayer won but had to go all the way to the Tax Court. In its view, the debt was discharged years ago, which is when the 1099-C should have been issued.(Stewart, TC Summ. Op. 2012-46).

STUDENTS AND SUMMER JOBS

School’s out and many students will be starting summer jobs. I want to remind you that employers may be withholding taxes, so you may not get all of the money that you earn and if you don't take action you may have to file a tax return to get your refund.

Here is a tip that might help:

When you first start a new job, you must fill out a Form W-4, Employee’s Withholding Allowance Certificate. This form is used by employers to determine the amount of tax that will be withheld from your paycheck.

If you have multiple summer jobs, make sure all your employers are withholding an adequate amount of taxes to cover your total income tax liability. To make sure your withholding is correct, use the Withholding Calculator on www.irs.gov.

If you do not anticipate owing any tax and did not owe tax last year, you can simply indicate on your W-4 and your employer should not withhold.

OBAMACARE - WHAT DOES IT MEAN TO YOU

Unless you live in a cave, by now you've heard that the U.S. Supreme Court has upheld the key provisions of the Affordable Care Act, or "Obamacare." In an unexpected twist, the Court ruled that the controversial individual mandate is constitutional, but under the government's power to tax, rather than to regulate commerce.

We don't need to go into the details of the ruling itself -- just turn on your television, and somewhere, somebody is opining on it right now! But we do want to remind you the Court's decision means several new taxes will go into effect as scheduled:

·         On January 1, 2013, the Medicare Tax will go up by 0.9% for individuals earning over $200,000 ($250,000 for joint filers, $125,000 for married individuals filing separately). 

·         Also on January 1, there will be a new "Unearned Income Medicare Contribution" of 3.8% on investment income, for those earning more than $200,000 ($250,000 for joint filers). 

·         Beginning on January 1, 2014, there will be a new $2,500 limit on tax-free contributions to flexible spending account. 

·         Also beginning January 1, 2014 employers with more than 50 employees will face a penalty of $2,000 per employee for not offering health insurance to full-time employees.  

·         Finally, the threshold for deducting medical and dental expenses rises from 7.5% of adjusted gross income to 10%. This will make these expenses even harder to deduct without help from advanced strategies like Health Savings Accounts or Medical Expense Reimbursement Plans.

That’s not all.  On January 1, 2013 the so called “Bush Rates” are repealed and we go back to the “Clinton Tax Rates.”  This change impacts every taxpayer.  So, while the constitutional issues of Obamacare may be settled, several planning challenges certainly remain. We'll be following developments carefully in order to help you navigate these new challenges. If you have any questions, don't hesitate to call us at 402.362.6636.  In addition, now that the Supreme Court has ruled we will be planning a local seminar and/or webinar to keep you informed.

HEALTH SAVINGS ACCOUNT FORM

Q:  I made a contribution to my health savings account in 2011. I deducted this on the 2011 return. Now I get a form from my health insurance company Form 5498 – SA. How come we get these so late? Is there anything I need to do?

A: I am unsure as to why you get these so late. I guess it might have something to do with the fact that you can make your contributions up to April 15, 2012, and still have those count for 2011 and of course April 15 is the due date of your tax return (actually April 17 this year).  Really there is nothing to do as long as the amount that is shown as a contribution matches what you reported on your 1040. Don’t stress out over this.

JUNE IS HERE - TIPS FOR RECENTLY MARRIED TAXPAYERS

Summer wedding season is in full swing. If you recently got married or are planning a wedding, the last thing on your mind is taxes. However, there are some important steps you need to take to avoid stress at tax time. Here are some tips for newlyweds.

1. Notify the Social Security Administration.Report any name change to the Social Security Administration so your name and Social Security number will match when you file your next tax return. File a Form SS-5, Application for a Social Security Card, at your local SSA office. The form is available on SSA’s website at http://www.ssa.gov.
2. Notify the IRS. If you move and have a new address you should notify the IRS by sending Form 8822, Change of Address. You may download Form 8822 from http://www.IRS.gov.
3. Notify the U.S. Postal Service.You should also notify the U.S. Postal Service when you move so it can forward any IRS correspondence or refunds.
4. Notify your employer. Report any name and address changes to your employer(s) to make sure you receive your Form W-2, Wage and Tax Statement, after the end of the year.
5. Check your withholding.If both you and your spouse work, your combined income may place you in a higher tax bracket. You can use the IRS Withholding Calculator available on http://www.IRS.gov to assist you in determining the correct amount of withholding needed for your new filing status. The IRS Withholding Calculator will give you the information you need to complete a new Form W-4, Employee's Withholding Allowance Certificate. You can fill it out and print it online and then give the form to your employer(s) so they withhold the correct amount from your pay.
6. Choose the best filing status.A person’s marital status on Dec. 31 determines whether the person is considered married for that year. Generally, the tax law allows married couples to choose to file their federal income tax return either jointly or separately in any given year. Figuring the tax both ways can determine which filing status will result in the lowest tax, but usually filing jointly is more beneficial.
7. Don't forget the non tax items such as wills, beneficiaires of pension plans and life insurance policies.
8. Health Insurance.If both parties have health insurance at work or private health insurance you need to look at your options.

OCTOBER SURPRISE? U.S. COULD HIT DEBT LIMIT BEFORE ELECTION

The U.S. government's debt is nearing $15.8 trillion.  And now there are reports that at the recent pace of debt growth, the U.S. will reach its $16.4 trillion statutory debt limit some time in October — just before the 2012 election. 

According to a report by Investor's Business Daily, the government can employ some accounting maneuvers to stay below the ceiling for a few months, giving lawmakers a grace period.  But if the economy continues to weaken -- and federal tax receipts decline in growth -- the debt limit deadline could arrive just in time to play a large role "the super-charged environment of a presidential election."  In addition to the debt limit, Congress must also decide what it wants to do about the pending tax increases -- which, collectively, would be the largest tax hike in U.S. history -- as well as the automatic spending cuts that were a part of last summer's debt ceiling deal.  Already, Fitch has warned that the U.S. will lose its AAA credit rating without a credible deficit-reducing plan.  
And "paired with last year's Standard; Poor's downgrade, a Fitch cut would add chaos in financial markets and raise U.S. borrowing costs," according to IBD.

TAX TIPS FOR JOB SEEKERS

With unemployment so high right now, many people are looking for jobs.There may be some tax advantages by deducting costs related to job search. The amount is limited because you can only claim job search expenses as an itemized deduction (long form) and only the amount that is more than 2 percent of your adjusted gross income.You figure your deduction on Schedule A.

1. To qualify for a deduction, the expenses must be spent on a job search in your current occupation. You may not deduct expenses you incur while looking for a job in a new occupation.
2. You can deduct employment and outplacement agency fees you pay while looking for a job in your present occupation. If your employer pays you back in a later year for employment agency fees, you must include the amount you receive in your gross income, up to the amount of your tax benefit in the earlier year.
3. You can deduct amounts you spend for preparing and mailing copies of your resume to prospective employers as long as you are looking for a new job in your present occupation.
4. If you travel to an area to look for a new job in your present occupation, you may be able to deduct travel expenses to and from the area. You can only deduct the travel expenses if the trip is primarily to look for a new job. The amount of time you spend on personal activity compared to the amount of time you spend looking for work is important in determining whether the trip is primarily personal or is primarily to look for a new job.
5. You cannot deduct job search expenses if there was a substantial break between the end of your last job and the time you begin looking for a new one.
6. You cannot deduct job search expenses if you are looking for a job for the first time.

SAME SEX COUPLES AND TAXES

This decision will almost certainly be appealed to the Supreme Court, delaying any final resolution until next year. So until the High Court gives the rules, all same-sex couples remain barred from filing joint income tax returns with IRS.

In the interim, married same-sex couples should file protective refund claims with IRS on Form 1040-X if joint return status would save them tax. The Service will hold the protective claims in abeyance until there’s a final decision in the case.

Same-sex couples also can enroll in long-term-care insurance programs that states offer to their employees. A federal district court struck down a U.S. law that disqualifies state-maintained long-term-care plans if married same-sex couples or domestic partners are covered (Dragovich v. Treasury Department, D.C. Calif.).

WILL THE BUSH TAX BREAKS REALLY EXPIRE?

Q: You have showed how much it will cost me if the Bush tax cuts are repealed and we go back to the Clinton rules. Any chance Bush will be extended for everyone?

A: President Obama will be campaigning to allow the Bush tax rate cuts to expire for upper income taxpayers.The people that seem to be in the know don't think that this will happen.Believe it our not, there may be a little compromise in Washington.

In exchange for keeping the Bush rates will require the GOP to concede on continuing the payroll tax cut for workers, a debt limit hike, and more spending on jobless benefits and other items.

The compromise will give the next Congress time to start serious work on tax reform, and the results of the November elections will be a big factor in how the overhaul plays out.

HIRE YOUR KIDS – FOLLOW UP

A week ago I blogged the tax advantages to hiring your kids.  Here are a few follow-up suggestions:

The IRS tends to view employment arrangements between parents and children with a touch of skepticism. So be careful to observe the strict letter of the law when you hire your child for the summer. Here are a few points to keep in mind.

• Treat your child like any other employee. Make sure the child completes a W-4, fills out time sheets when appropriate and follows other company procedures. Don't give your child special leeway to run personal errands while he or she is on the clock.
• Pay your child the going rate for the job. Providing an exorbitant salary for an entry-level position or setting a flat rate at the beginning of the summer is likely to draw the ire of the IRS. Establish an hourly rate that is reasonable for the work performed.
• Follow the payroll tax rules. Impose the usual withholding amounts to your child's wages unless he or she qualifies for exemptions. Issue an annual Form W-2. Don't make any exceptions for your child.

Of course, taxes will be withheld from your child's wages, even if he or she won't have any income tax liability for 2012. But in this case, you can have your child avoid income tax withholding by entering the word "EXEMPT" on Line 7 of Form W-4.

This is only available to a child claimed as your dependent if he or she had no tax liability for 2011 and won't earn more than $5,950 in 2012. If your child exceeds the limit, a new W-4 should be filed.

RETREAT FOLLOW-UP QUESTION

Q: Recently you mentioned a business retreat.  I understand the steps.  Do you have any suggestions on how we get the retreat started?

A:  Make sure that you have an agenda.  Items on the agenda include financial; staffing; budget; goals etc.  Those things are basically reports but are necessary.  I think the thing that really gets the conversation and planning process going is DOS.  This stands for “dangers” “opportunities” and “strengths.”  Start out by identifying and discussing these three phases of your business. 

Another suggestion, use these three questions and points in meeting with your staff.  You might be surprised at their response.

MOST COMMON TAX CREDITS

Q:  I hear people saying that they are getting a credit that helps them reduce their tax bill.  Where do I go to get these credits?

A:  Actually you don't need to go somewhere to get the credit.  You get the credit by filling out your tax return.  The problem is that you have to quaify (meet certain facts and circumstances) to qualify for the credit. 

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

Here are the four most common refundable tax credits you should consider to increase your refund on your 2011 federal income tax return:

1. The Earned Income Tax Credit is for people earning less than $49,078 from wages or self-employment. Income, age and the number of qualifying children determine the amount of the credit, which can be up to $5,751. Workers without children also may qualify. For more information, see IRS Publication 596, Earned Income Credit.

2. The Child and Dependent Care Credit is for expenses paid for the care of your qualifying children under age 13, or for a disabled spouse or dependent, while you work or look for work. For more information, see IRS Publication 503, Child and Dependent Care Expenses.

3. The Child Tax Credit is for people who have a qualifying child. The maximum credit is $1,000 for each qualifying child but, if your earned income is too high, the credit is phased out. You can claim this credit in addition to the Child and Dependent Care Credit. For more information on the Child Tax Credit, see IRS Publication 972, Child Tax Credit.

4. The Retirement Savings Contributions Credit, also known as the Saver’s Credit, is designed to help low-to-moderate income workers save for retirement. You may qualify if your income is below a certain limit and you contribute to an IRA or workplace retirement plan, such as a 401(k) plan. The Saver’s Credit is available in addition to any other tax savings that apply. For more information, see IRS Publication 590, Individual Retirement Arrangements (IRAs).

There are many other tax credits that may be available to you depending on your facts and circumstances such as education credits.  Unfortunately this  is one of the reasons the tax system is so complicated.  For more information check out www.IRS.gov

I hope that this helps.

HIRING MINORS IN NEBRASKA

Q: Are there restrictions on hiring minors in Nebraska? What hours are minors allowed to work?

A: Minors must be at least 14 years of age to be employed in the State of Nebraska. Some exceptions to this law include minors working for their parent’s own business and minors working in agriculture. Minors under 16 years of age must obtain an Employment Certificate from the school district in which they reside. Under state law, minors 14 and 15 years of age are not permitted to work more than 8 hours a day, 48 hours per week, before the hour of 6:00 AM or after the hour of 10:00 PM. Federal law is more restrictive for minors under the age of 16. State and Federal labor laws sometimes differ, as is the case with child labor laws. When both laws apply, the more stringent standard must be observed.

Note, this is Nebraska law. Other state laws may vary.

WANT A TAX BREAK – HIRE YOU KIDS

By hiring the child to work for the business, it can be a win-win for the family.

Here are the potential perks.

·         Income tax savings. Say that you reduce your compensation by the amount of salary you pay your child. Instead of being taxed to you at rates reaching up to 45 percent this year, the income is taxable to your child. For 2012, your child can earn up to the standard deduction amount of $5,950 without paying any federal income tax. Any excess is taxed at a low 10 percent rate.

o   Example:

§  You pay your child $5,000 to work during the summer before she heads off to college. The entire $5,000 in wages is covered by the standard deduction. In contrast, if you are in a 33 percent bracket, $5,000 in wages would save you $1,650 in tax. In addition, your adjusted gross income (AGI) is also lowered, which means there is less chance that you'll be subject to unfavorable AGI-based phase-out rules.

·         Kiddie tax avoidance. Generally, the unearned income of a child under age 19, or a full-time student under age 24, is taxed at the parents' tax rate to the extent it exceeds an annual threshold ($1,900 in 2012). But this rule doesn't apply to "earned income" that your child is paid in wages.

·         Business tax deduction. You get a business deduction for money that, as a parent, you might have given your child anyway.  The wages you pay the child are deductible by the business just like the wages paid to any other employee of the company. However, when a family member is employed, you must take care to ensure that the wages are reasonable in amount for the services actually provided (see right-hand box).

·         Payroll tax savings. If a child under age 18 is employed by his or her parent in an unincorporated business, the earnings are exempt from FICA tax. This exemption also applies to FUTA tax up until the age of 21. These payroll tax breaks can provide significant tax savings for a parent who is self-employed or a partner in a partnership.

o   An unincorporated business includes a sole proprietorship; husband-and-wife partnership (owned only by you and your spouse); a husband-and-wife limited liability company (LLC); or a single-member LLC, which is treated as a sole proprietorship for federal tax purposes.

o   What if your business operates as another type of entity, such as a C or S corporation? Your child's wages are subject to Social Security, Medicare, and FUTA taxes, regardless of age. That's the bad news.

·         Children Age 18 and Older: After your children reach age 18, the tax advantages decrease, because their wages are then subject to Social Security and Medicare taxes (however no FUTA tax is due until age 21).

o   As the employer, your business must pay its share of the Social Security and Medicare taxes. The employee's share is withheld from your child's paychecks. However, again, the child's standard deduction still shelters up to $5,950 from the federal income tax. And you still collect a nice business write-off that cuts your income tax and self-employment tax bills.

·         Tax-free fringe benefits. As an official employee, the child is in line to receive tax-free company fringe benefits. This may include health insurance coverage, group-term life insurance coverage up to $50,000 and educational assistance plans. As with wages, payments under a qualified plan are tax-deductible by the business.

·         Individual Retirement Arrangements (IRAs). If your child has earnings from a job, he or she can contribute to a traditional or Roth IRA. The maximum contribution for 2012 is $5,000. Because the child's income is low, contributions to a traditional IRA are deductible on the child's return. Contributions to a Roth IRA aren't deductible, but any withdrawals made after age 59 1/2 are tax-free, as long as the account has been open five years. Retirement will seem like a long way off to the child, but this is a good way to save for the future.

Tax-smart idea: Have your child open a Roth IRA and fund it with summertime earnings. They can use these accounts to save money for college, a first home -- and, of course, retirement. By socking away some of their earnings in a Roth IRA, your youngsters can begin a savings plan that can grow into a small fortune.

Roth IRAs allow earnings to build up tax-free. And the tax law allows money to be taken out penalty-free in special circumstances, which include paying for college and buying a first home.

There's a lot to be gained by hiring your child to work for the business, but don't ignore the human element of the arrangement. Make sure it's a good fit for everyone involved.

HUGE PENALTY IF YOU DON’T REPORT FOREIGN ACCOUNTS TO THE IRS

Many taxpayers may have investments in overseas.  If this investment is in the form of mutual funds or other passive holdings, there is usually no extra reporting to the IRS or Department of Treasury.  However you can accidently have an account that might trip you up.  For example, if you have a timeshare that you sell, even though the money normally goes right out of the account to your US account you are subject to the stringent reporting requirements.  Why?  For a brief time, maybe only one day, you have money from the sale in a foreign account.

Also, if you own a foreign bank account, securities account, etc. and the value of these accounts exceed more than $10,000, than this needs to be reported, both to the IRS and to the Department of Treasury.  The reporting to the IRS is included with your tax return and the reporting to the Department of Treasury is on a separate form that is due by June 30 of each year with no extensions and it must be received by that date, not postmarked.

If you forget to report these holdings, in many cases, the penalty for not reporting these accounts can actually exceed the value of the account, so it is extremely important to review these accounts.  The penalties are high because Congress wants to stamp down on foreign accounts so they set the penalty high.

RETREATS: A POWERFUL BUSINESS TOOL

Two weeks ago my partners Candy Otte, Stacey Stark and I scheduled ourselves for our annual partner retreat.  According to the dictionary, a retreat is a place of privacy or safety. When you think of the work “retreat” you think of falling back, but a retreat is a powerful way to move forward.

Retreats can be very helping to advance your business. They are an important part of bringing together key people in your company, at a well-planned destination, so that you can build camaraderie, enhance leadership, and give your team the extra push that they may be need.  After our partner retreat, we then conduct a full staff retreat.  Sure this takes time and is expensive, but it is well worth it.  It is amazing how it can clarify your business goals, put everyone on the same page, and help to refocus on working “on your business not just in your business.”  Every year, I come back with fresh perspectives and new insights, totally reinvigorated. An annual business retreat works great for me, and it might for you, as well.

Here are some tips on how to pull off the ideal business retreat:

•  Hold your business retreat at least one hour away from the office. The last thing you want is it to be interrupted with calls and clients that “just need a second.”  If you are not there, then you can stay focused. The idea of a retreat is to leave the office behind.  

• By being away from the office and staying overnight you won’t lose the focus by going home to hear the problem of the day from the spouse or kids. To get the most bang for your buck on a business retreat, you really need to make it an overnight event. This helps keep everyone from staring at their watch all day, assuming that when 5 p.m. hits, they get to jet. Overnight retreats let people relax and not rush the experience.

• Aim to have all your meals together as a group. This will be a great time for bonding and personal insights to occur. And when people feel more connected and more trusting of each other, they will work together way better.

If you have never taken time to walk away and work on planning your business, consider giving it a try.

NEBRASKA’S CURRENT MINIUMUM WAGE

Q: What is the current minimum wage in Nebraska?

A: Nebraska’s minimum wage is $7.25 per hour effective 7-24-09. All employers having four or more full or part-time employees are subject to paying the minimum wage.

Note, this is Nebraska law. Other state laws may vary.

CLEVELAND WAITRESS GETS $434,712 TAX REFUND CHECK FROM IRS

Just because you receive a check from the IRS does not mean that the money is yours. The taxpayer rightly turned back the money to the IRS. Here is the information as reported in USA Today.

USA Today, Cleveland Waitress Receives Huge IRS Refund Check by Mistake:

A longtime Cleveland waitress got the surprise of her life this week when an enormous income tax refund check arrived in the mail.When Ginny Hopkins filed her tax return, she expected a refund of $754 — money she really needs to fix her car, among other things. Instead of that check, she found a check mistakenly issued for $434,712 in her mailbox. ...

Hopkins knew that cashing the check could get her in a whole lot of trouble. "They'll put me in Alactraz, waiting on the night shift at Alcatraz," she said. "They'll reopen the place." ...

Hopkins made arrangements Wednesday to return the check to the IRS office at the federal building in downtown Cleveland. Since Hopkins needs the money right away, her friends at the restaurant and WKYC-TV in Cleveland advanced her the money. The IRS said sometimes mistakes like this happen, but it happens less often as more people file their taxes electronically. Hopkins should get her correct refund check in six weeks, the IRS said.