Author Archives: Harris Smith

Owning a home opens the door to a plethora of tax-saving opportunities, and there are a literally dozens of tax breaks that homeowners should leverage. So, too, should the enrolled agent as the registered tax return preparer working on their behalf. The rule of thumb, as enrolled agents know from the EA examination and tax CPE, the enrolled agent continuing education courses required for ongoing certification, is that homeowners are required to file Form 1040, and any itemized deductions (including those specifically for homeowners) must be indicated on Schedule A. Even if a taxpayer itemizes, and cannot take the standard tax deduction, there still are several tax credits and exclusions that they are able to take whether or not they itemize. Many homeowners are in the dark when it comes to this, and it is the responsibility of enrolled agents make these deductions known, along with the fact that they may also be able to amend previous years’ returns if these deductions were previously unclaimed.

This tax credit was originally introduced by Congress in 1975 through legislation and the original intent of this credit was to provide some form of offset to the Social Security taxes for the lower income earners. There are various guidelines and rules that apply to this tax credit. Some of these rules are provided below:

Home Sale Profits Homeowners are able to exclude up to $250,000 of gain on the sale of a home (the analogous sum for joint filers is $500,000) provided they have owned and lived in the home as their main residence for two out of the five years prior to the sale Mortgage Interest Homeowners are also permitted to deduct mortgage indebtedness of up to $1 million. The This deduction can be taken on both the principal residence and one other home. Home Equity Up to $100,000 in interest on a home equity loan can also be deducted, provided the loan was used to acquire, build or “substantially improve” a home.

Mortgage Points Mortgage points on the purchase or improvement of a principal residence are deductible, provided they reflect customary practice in the area. However, points paid on a refinancing loan must be deducted over the term of the loan. Insurance Premiums Mortgage insurance premiums are also deducted as mortgage interest through 2010, provided the insurance was acquired on January 1st of 2007 or after.

Property Tax Homeowners can also take state and local property taxes as an itemized deduction. It is important to note, however, that, unfortunately, the previous option of taking up to $500 ($1,000 for joint filers) as an additional standard deduction for real estate taxes expired at the end of 2009 and was not renewed for 2010. Rentals When taxpayer’s residence is rented for less than 15 days a year, the rental income can be excluded from gross income. As a result, no deductions attributable to such rental are permitted.

Single and married couples without children may still qualify for the tax credit subject to age, residency, dependency, and other conditions. Couples who choose to file their incomes separately are not eligible for the EITC.

The EITC qualifications and disqualifications are not final and apply only for a given year. Therefore, you may not have qualified in a previous tax year and yet be eligible for the credit in the current or future years. Various tax changes can lead to an individual or couple qualifying for the credit, even though they were previously ineligible. Therefore, if you earn less than $48,362 a year, it is always advisable to keep applying every year.

The IRS website provides an EITC Assistant tool with a questionnaire that helps individuals know if they qualify for the tax relief. You can also seek help from the IRS Taxpayer Assistance Centers as provided on the IRS website.

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The 2007 mortgage meltdown and subsequent collapse of the financial system brought about significant change on practically every front. The impact of these events on the tax system was both far-reaching and substantial, as most any enrolled agent or registered tax return preparer can testify. One aspect of this change included an at-times dizzying number of new tax breaks in the form of credits and deductions designed to help both alleviate the financial strain on average Americans and stimulate the economy in the process. One such credit, the Home Buyer Tax Credit, is so popular that it occupies a focal point in tax CPE and EA CPE, enrolled agent continuing education courses that enrolled agents take to maintain certification. Below is a summary of what enrolled agents need to know about this credit to ensure their clients receive the full tax credit offered by the government.

Qualifying for the home buyer tax credit Contrary to popular opinion, both first-time homebuyers and long-time owners are able to apply for a credit. If the house was purchased on November 30, 2009, to qualify taxpayers must not have owned their homes since December 1, 2006. The earliest date to qualify for this credit is January 1, 2009. To qualify for the credit as long-time homeowners, taxpayers must have owned their existing home for any five-year period during the eight-year period ending on the date of purchase of the new home. The earliest date of purchase to qualify for this credit is November 8, 2009. For either credit, if the date of purchase is in May or June 2010, taxpayers are required to verify that they entered into a contract to buy the house before May 2010. Below is a summation of the required documentation.

Flat 25 % Option With this option, the employer is able to withhold a flat 25% for federal income taxes from the bonus pay. This amount is increased to 35% when this amount is over $1 million.

Tack-On Option One of the most popular methods involves the employer (1) combining the bonus and regular income payments, (2) figuring the standard withholding total on this combined sum, (3) subtracting the amount withheld from the recent regular income payment, and (4) withholding the remainder from the bonus.

Exercising Stock Options Enrolled agents and other tax professionals often work with executives who are sitting on unexercised stock options. Depending on the type of stock option, exercising these options can trigger taxable compensation. Clients planning to exercise these options should make the move before the close of 2011, since the compensation recognized in 2011 may be subject to lower rates.

Exception One notable exception to the idea that bonuses are taxed like other income involves hedge fund and other investment managers. This type of income is referred to as “carried interest.” Investment managers will skim their bonuses from investment gains, and these can be taxed at the long-term capital gains rate of 15%, a rate usually lower than their marginal tax rates.

Also, enrolled agents should end copies of these forms, not the originals. Complete Form 1040. Include the bottom line on Form 5405 on the appropriate line on the taxpayer’s income tax return. This is line 67 on the 2010 Form 1040 return. This credit cannot be claimed with Form 1040EZ. 4. Submit forms by mail. The typical wait time is about six-weeks, but may be longer if documentation was missing.

IRS Circular 230 Disclosure Pursuant to the requirements of the Internal Revenue Service Circular 230, we inform you that, to the extent any advice relating to a Federal tax issue is contained in this communication, including in any attachments, it was not written or intended to be used, and cannot be used, for the purpose of (a) avoiding any tax related penalties that may be imposed on you or any other person under the Internal Revenue Code, or (b) promoting, marketing or recommending to another person any transaction or matter addressed in this communication.

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It’s no coincidence that taxes are due around Easter each year. Anyone who’s ever needed an answer to a tax question will be familiar with the rabbit hole that they call the IRS Website. If, like tens of thousands of individuals, you started a business last year, this year might be the first time you’ve ever needed to file business taxes. You might think that they’re just like individual taxes, but you’d be wrong. Business taxes are the Complete Works of Shakespeare. Your individual taxes are the Cliff Notes of “Where’s Waldo?” Call the Internal Revenue Service, and they’ll direct you to their website to answer your questions. You should review its checklist for starting a business. But for the non-CPA, non-tax attorneys out there, the Web site can more confusing than an average episode of “Lost.”

Tax Advantages There are three fundamental tax advantages of becoming an S-Corp. All three advantages stem from its status as a “pass-through” entity: meaning, items of income or loss, deductions, and credits are passed through directly to a corporation’s shareholders on a pro-rata basis on par with their ownership percentages. The most significant benefit of this pass-through approach is the ability to avoid double taxation: that is, taxes on corporate profits and taxes imposed at the individual shareholders level on those profits as dividends.

To deduct such contributions, enrolled agents should complete Form 1040 and itemize deductions on Schedule A. When taxpayers receive some sort of benefit because of a contribution – like box seats at the World Series – the amount of the charitable deduction must be minus the amount of the benefit received.

How much does an audit cost? Diane Kennedy, author of Smart Business, Stupid Business, says, “you can count on paying $5,500 in extra taxes. And that’s before you count penalties and interest and accounting and legal fees,” which Kennedy says make the real cost closer to $8,000. Kennedy also says that the chances of being audited are 1 in 3 for sole proprietorships, but only 1 in 100 for S corporations. Large corporations can much more easily afford to fight an audit. The National Small Business Association claims that “the IRS is preying on those least able to defend their businesses, and giving large corporations a pass. In 2007, IRS audits of the nation’s largest corporations plunged to its lowest level in the past 20 years.” The NSBA also say that the IRS learned that “a far easier way to raise tax revenue is to target small-business owners who may not have the resources to defend themselves.”

Another advantage of the S-Corp treatment lies in utilizing corporate net operating losses. Subject to certain complex requirements, a shareholder would be positioned to potentially offset S-Corp. losses against personal taxable income from other sources. Thus, the shareholder could capitalize on the time value of money by leveraging these losses sooner than might be feasible were the company a C-Corp. The rule of thumb is that shareholders mush have sufficient “basis” in the S-Corp. to leverage losses to offset other forms of income.

Contributions of cash or property of $250 or more operate in much the same manner. The same rules apply for maintaining bank records and deductions for payroll, as does the requirement of written proof from the charitable organization listing the amount of the cash, a description of any donated property, and any goods or services exchanged. According to the IRS, a single document is often good enough to fulfill these various requirements. In the event that the total deduction for all non-cash contributions for the year exceeds $500, taxpayers are required to complete and attach IRS Form 8283, “Non-cash Charitable Contributions,” to the federal income tax returns.

Internal Revenue Code (IRC) 1361(b)(1)(C) renders nonresident aliens ineligible as shareholders of an S corporation, and also precludes foreign trusts from setting up as S corporation shareholders. Below are trust types the IRS permits to be S corporation shareholders: * Trusts owned by a U.S. citizen or individual under the grantor trust rules (IRC 671-679). * Trusts transferred through a will (but only for the two-year period from the date the transfer) * Voting trusts * Qualified Subchapter S Trust (QSST). * Electing Small Business Trusts (ESBT). * Estates. * Exempt organizations, as described in 401(a) and 501(c)(3).

IRS Circular 230 Disclosure Pursuant to the requirements of the Internal Revenue Service Circular 230, we inform you that, to the extent any advice relating to a Federal tax issue is contained in this communication, including in any attachments, it was not written or intended to be used, and cannot be used, for the purpose of (a) avoiding any tax related penalties that may be imposed on you or any other person under the Internal Revenue Code, or (b) promoting, marketing or recommending to another person any transaction or matter addressed in this communication.

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The farming industry has represented a vibrant part of our country since its founding, and it continues to thrive today-from big time commercial farmers to little moms and pops who have capitalized on the rising demand for locally grown food by turning the farmers’ market into a viable livelihood. In an effort to support this age-old industry, especially in times of recession, the government provides a host of special tax incentives for farmers. However, navigating the complex IRS tax code associated with these incentives can be tall order. This represents an opportunity for CPAs, enrolled agents and other tax professionals who are in a position to offer tax assistance to taxpayers working in the farming industry. This is why, over the past several year, tax tips for farmers have been gradually included in Tax CPE-the tax continuing education courses required of any registered tax agent to maintain their professional certification. Professionals looking to tap this market can do so by digesting the following tips and then communicating to them their farming clients.

A corporation is a legal entity designed to exist separately from its owners, the shareholders. The corporation, under authorities granted by the state where it’s formed, can enter into contracts, pay taxes, sue and be sued. The goal in forming a corporation is to keep the personal activities from commingling with business transactions.

All in the Family It is not uncommon for Farmers to employ their own kin, namely their children, due to the advantageous tax benefits for the parents as well as the children. However, certain rules govern these perks. When a child is between the ages of 7 and 18, and the farm is not incorporated, then social security taxes do not need to be paid in connection with their employment. The wages are also still deductible on Schedule F. Around-the-clock Planning The majority of farmers are confronted with a unique business situation insofar as it is difficult for them to estimate how much they will produce and sell in advance. Because of this tax professional should advice them to stay active in year-round tax planning. To this end, an CPA or enrolled agent working with a farming clients should help prepare a mock return a few times per year to ensure they understand their tax liability.

Record keeping requirements are more complicated for a corporation. You must maintain a separate bank account, file annual corporate income tax returns, and pay taxes on corporate profits. Even though you’re the sole owner of the corporation, you receive salary just like an employee, subject to the same payroll withholding taxes and periodic tax filing requirements.

A regular corporation, known as a C Corporation, usually has the worst tax bite, with top rates at 39%. You pay taxes on the company profits, and then when you take the money out for yourself, you may pay tax on it again, generally as a dividend. If you’re counting, that’s paying taxes twice. And if you’re a professional who incorporated your practice, you’re considered a professional service corporation and your first dollar of profit could be taxed at 35%. On the plus side, a C corporation allows for deductions for medical expenses for shareholders under a medical reimbursement plan that isn’t available under other types of entities.

Averaging Income The IRS states “if you are engaged in a farming business, you may be able to average all or some of your current year’s farm income by shifting it to the 3 prior years (base years).” The agency also makes it clear that farmers do not need to be engaged in a farming business during any base year, and that farmers running the farm business as an individual, a partnership, or an S corporation also qualify.

Weather-related Sales The IRS also provides certain special incentives for farmers whose business has been impacted by bad weather. Meaning, if a farmers are forced to sell more livestock, for instance, than usual because of weather-related conditions, they are able to then delay reporting the gain until the next year.

IRS Circular 230 Disclosure Pursuant to the requirements of the Internal Revenue Service Circular 230, we inform you that, to the extent any advice relating to a Federal tax issue is contained in this communication, including in any attachments, it was not written or intended to be used, and cannot be used, for the purpose of (a) avoiding any tax related penalties that may be imposed on you or any other person under the Internal Revenue Code, or (b) promoting, marketing or recommending to another person any transaction or matter addressed in this communication.

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The Internal Revenue Service is scary, and they know it. Reports of abuse of power have come from ill-treated taxpayers have come through the IRS for years. However, you do have rights with the IRS, and dealing with tax problems does not have to be a fearful endeavor. Here is a declaration of your rights which matter when faced with an IRS audit.

The budget includes the “largest set of tax law changes in more than 20 years, with more than 40 provisions that amend the tax laws.” It also explains that the new laws will be phased in, not just dumped on us at once.

You also have the right to eliminate penalties if you can show that you acted in good faith and not in a way intended to avoid the IRS. Along the lines of the negotiation process, you have the right to make an installment agreement with the IRS. Even though they want their money now, and they want all of it, you have the right to pay it on terms that are less of a burden on you. In order to negotiate an installment agreement, you will need IRS Form 433-A, the Financial Statement which asks you for your income, expenses, assets, and liabilities and helps you figure out how much you realistically can pay.

Not all income is taxable, however. The taxable amount is generally less than your gross amount. To compute the taxable amount, you first deduct “above the line deductions” from your gross income.

Of course there are many more provisions included in this document, but the important thing is that expanding IRS services because of this bill is going to cost, no matter what. Congress seems to believe that the revenue collected will offset these new high costs. The new administrative requirements are enough to make the National Taxpayer Advocate service take note.

In addition to deductibles, income exclusions can lower your tax bill. Some common examples include child support received, employer-paid retirement contributions, municipal bond interest, money and assets received by gift or inheritance, and up to $250,000 in home sale gains (or $500,000 if married). These will offer a lot of tax relief, so do not forget to include these in your taxes when you are filing!

To calculate the Alternative Minimum Tax (AMT), you start with your regular taxable income and add back some write-offs, income exclusions, and personal and dependent exemptions. This amount is then taxed at 26% or 28% depending on your income level. If this figure is higher than your regular tax, then you pay the AMT.

Now that you have the “gist” of the most popular (and let’s face it, basic) tax terms, you can have a little more confidence going into tax season.

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A number of our seasoned ISA Investors have previously asked us to send regular ISA reminders at the end of each tax year.

So here is reminder number 1! The tax year is drawing to a close and those of you who are not fully funding may wish to add a lump sum. REMEMBER use it or lose it, unused allowances cannot be rolled over to the next tax year.

How much can I invest? The maximum that you can invest in your ISA is 10,200GBP for the tax year 2010/2011.

Of the overall limit of 10,200GBP, up to 5,100GBP can be put into a cash ISA. E.g. – if you have already put 5,100GBP into a cash ISA, the maximum that can be invested in an Investment ISA is 5,100GBP and if you have put 3,200GBP into a cash ISA, the maximum that you can contribute to an Investment ISA is 7,000GBP. It is also possible to switch savings in cash ISAs to Investment ISAs at any time. But remember, you cannot then switch back the other way!

A levy is when they actually take your assets, such as money from your bank accounts, to pay the debt. When you receive notice of a lien or a levy, you need to call a tax attorney so that the levy or lien can be removed and you can set up a payment plan instead. A lawyer can even work with the IRS to make your payments less. Failing to call a lawyer can result in the loss of your home, money, or possessions.

Delinquent tax returns, tax fraud, and tax evasion can all result in jail time and steep fines. This is one battle you cannot win on your own and it is imperative that you hire a tax attorney. Hiring an expert lawyer will give you the advice you need and hopefully allow you to avoid going to jail.

Offers in Compromise The IRS is expanding on a new streamlined Offer in Compromise (OIC) program to cover a new larger group of struggling tax payers. This streamlined OIC is being expanded to allow taxpayers with annual incomes up to $100,000 with tax liabilities of less than $50,000 to participate. This is double the current limit of $25,000 or less in an attempt for the IRS to ease up on liens.

Although these changes are welcoming for the taxpayer in 2011 it is not certain that the IRS will ease up on liens and reduce collective enforced measures. The current economic climate has placed more people in a position where it is difficult to timely pay their tax obligations.

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