THE JUST TAXES! CLIENT NEWSLETTER

PUBLISHED SEMI-ANNUALLY BY JUST TAXES!

7311 Greenhaven Drive, Suite 274, Sacramento, California 95831-3579

(916) 393-3430

________________________________________________________________________

Dear Client:                                                                                                                        January 2011

“Settling In”

We mentioned in our last newsletter that we were “Dropping Anchor” at our old office. However, as you also hopefully noted in the insert to that newsletter our situation changed rather suddenly. As a result, we have moved to a new office complex just down the street from our old office. We’re now located in the Greenhaven Executive Park, at the corner of Greenhaven Drive and Corporate Way. We’ve included a map along with driving directions to assist you in finding us. We think that you’ll be well pleased by our “new digs.”

New E-Mail Addresses

As shown on the Masthead, our telephone numbers have not changed. However we do have new email addresses: Diana Muller: diana@ just-taxes.com or Dennis Graff: dennis@just-taxes.com.

Shred-It day

Our annual free Shred-It Day for our clients, their families, neighbors, and friends will be held on Saturday, January 29^th, from 10 am to 2 pm. Refer to the enclosed insert for details.

New Employee

After considerable thought we decided that it was time to hire an additional tax preparer. Deciding to hire a new employee was the easy part. The hard part was finding a qualified individual who would enable us to maintain our standards of professionalism and client service. Rather than advertising, or hiring a search firm, Diana and I decided to conduct our own search. After considerable effort we were finally able to identify and hire a new employee. We have no doubt but that you’ll like her as well as we do.

Meet Jennifer

Jennifer Smith is an Enrolled Agent authorized to practice before the Internal Revenue Service. A native of Minnesota, Jennifer has an Associate of Science Degree in Accounting and ten years of finance and accounting experience, including employment as a Certified Tax Preparer for a national income tax service. Additionally, she is the founder of a home-based income tax preparation service and has a well established client base. She is also bilingual and speaks, reads, and writes fluent German. Jennifer will provide support during week days and will also be available to prepare tax returns for new clients.

We’re Registered

On August 24, 2010 our business name, Just Taxes, was officially registered by the United States Patent and Trademark Office. As a result, no other business entity may use that name without our express consent. We’re now in the process of registering our logo as well.

The Election

Perhaps the most salient point of the November mid-term election was not who won or lost, but rather the effect that the election will have on a number of unresolved tax issues. Since the Congressional leadership will remain in Democratic hands until January 3rd the “legislative ball” will remain in their court until control of the House of Representatives shifts to the Republicans. As a result, significant tax related issues will have to be addressed by the lame-duck Congress. There are, at this point, two significant tax issues that must be resolved in short order. First, Congress must pass yet another temporary “patch” to the Alternative Minimum Tax to prevent a significant tax increase for over 32 million tax payers. Second, Congress must determine whether to extend the Bush tax rates to prevent an across the board tax increase for all taxpayers. Until this issue is resolved the IRS will not be able to compute the 2011 income tax withholding tables, and individuals will be unable to do any meaningful tax planning. I assume that these issues will have been resolved by the time that you receive this newsletter.  Regardless, listed below are brief summaries of the 2010 tax code that may affect your individual income taxes this year:

• The personal exemption for all taxpayers will remain the same as in 2009;  $3,650. The standard deduction for married and single taxpayers will also remain the same at $11,400 and $5,700, respectively. However, the standard deduction for those filing as Head of Household will increase by $50 to $8,400

• The Hope Education Credit has been replaced by the American Opportunity Credit. This credit provides a deduction of up to $2,500 per student per year for four years of college.

• The credit for Energy Saving Home Improvements is 30 percent of the cost incurred, not to exceed $1,500. This credit applies to qualified insulation, windows, outside doors, biomass fuel stoves and high-efficiency furnaces, water heaters, and central air conditioners.

• The educator’s deduction of up to $250 for unreimbursed expenses remains in effect.

• The first $2,400 in unemployment benefits is no longer tax free.

• The new vehicle sales tax deduction has expired.

• The standard mileage rate for business travel has been reduced from $0.55 to $0.50 per mile.

“The Tanning Tax”

A reminder for those of you who provide indoor tanning services that you must now pay a 10 percent excise tax quarterly using Form 720. We’ve also heard rumors that the “tanning police” will soon be ticketing individuals who have really good tans and fining them for excessive personal use of solar energy. However, this “sun tax” will apparently be waived if the individual can provide proof that they got their tan using an indoor tanning service. There is, of course, a waiver for farmers and construction workers provided that their tans are limited to their arms and neck. Celebrities, politicians, and television news anchors are, of course, exempt. (Just kidding, but don’t mention the idea to a politician).

Do You Own Rental Property?

Recipients of rental income from real estate who make payments of $600 or more to a service provider (such as a plumber, painter, electrician) related to earning rental income are now required to file a Form 1099-MISC with the IRS and the service provider effective for payments made after December 31, 2010. For example, if you pay your gardener $1,200 and your handyman $900 to take care of your rental property you will need to issue a Form 1099 to both. This will require that you have the name, address, and social security number of each service provider. In that regard, you should have each provider complete a Form W-9 which will provide you with the required data. For payments made in 2011, the Form 1099-MISC must be filed not later than January 31, 2012.

Who Says Gambling Doesn’t Pay?

A long-time client, who doesn’t gamble, recently visited one of the nearby Indian casinos to have lunch with friends. They were informed that there would be a short wait prior to being seated so she reluctantly put a few coins in a slot machine -- and won over $200,000! After recovering from the shock she made an appointment with Diana to discuss the tax ramifications of her winnings. I haven’t been able to keep Diana out of the casinos since that time. Congratulations, Anna!

Due Diligence: “A Rock and a Hard Place”

At a recent Nationwide Tax Forum that I attended the IRS representative stated that merely accepting a “yes” or “no” answer to a question from a client was not acceptable. Specifically the agent stated that the tax preparer must ask the client detailed questions to ensure that the answer given is, in fact, correct. Further, the agent stated that the questions asked be documented to prove that the preparer in fact exercised due diligence. Based on our experience there are many instances in which a straightforward “yes” or “no” answer is fully acceptable. In other instances additional information obviously needs to be obtained. We are somewhat concerned that the IRS may be trying to force the tax preparer to act as an agent of the IRS instead of as a representative of the taxpayer. That really puts tax preparers between a “rock and a hard place.” We’ll keep you informed on this situation as it evolves.

My New Year’s Resolution

I somehow always manage to convince myself to make a New Year’s resolution, usually with little success. But, in doing so, I always review my previous resolutions to see how I’m doing. Here’s the list:

                2007: I will get my weight down below 180 pounds.

                2008: I will follow my new diet religiously until I get below 200 pounds.

                2009: I will develop a realistic attitude about my weight.

                2010: I will work out 3 days a week.

                2011: I will try to drive past a gym at least once a week

P.S. Did you know the “stressed” spelled backwards is “desserts”?

“The Use Tax”

As you are probably aware, you must pay California use tax if you purchase an item out-of-state (by telephone, over the internet, by mail, or in person) and the seller does not collect California sales tax. This is becoming an area of ever increasing scrutiny by the Board of Equalization due to its potential as yet another source of income for our beleaguered state budget. So now you know why we will be asking each of you if you made any out-of-state purchases during the tax year and, if so, the approximate value of the purchases for which you were not charged California sales tax.

Factoids That Probably Only Interest Me .  . .

USA TODAY reported that the number of federal workers earning $150,000 or more a year has soared tenfold in the past five years and has doubled since President Obama took office.

The bipartisan panel charged with finding ways to cut the $13.7 trillion national debt will apparently recommend more than $3.8 trillion in cuts from defense and domestic spending programs. This proposal met with quick resistance from Democrats and Republicans alike. Democrats refuse to cut spending, and Republicans refuse to raise taxes. Wow! What a surprise.

On November 3^rd the people of California overwhelmingly reelected Democratic incumbents and candidates. The following week the “non-partisan” Legislative Analyst’s Office projected that California must close a $25.4 billion shortfall next year, twice as large as Democratic legislative leaders predicted prior to the election. Meanwhile several of our reelected legislators are vacationing in Maui, compliments of special interest groups and lobbyists. And another group is conducting a “fact finding” trip to Spain, again compliments of a special interest group.

The Kiplinger Letter listed California as the most tax-unfriendly state for retirees.

Client Organizers

We will mail client organizers in mid-January to those clients who have requested them. Call us if you want an organizer but haven't received one by the end of the month.

                                We look forward to seeing you,

                                Dennis “Diet King” Graff            Diana “Casino Queen” Muller  

                                Resident Grump                               Enrolled Agent

The Just Taxes Client Newsletter is published semi-annually for our clients by Just Taxes!, 7311 Greenhaven Dr, Ste 274, Sacramento, CA 95831-3579. Copies may be obtained by calling (916) 393-3430.

The content in this newsletter is provided for your personal information only, and is not intended to be used for making specific tax related decisions, nor is it intended to provide any form of investment or legal advice.

Quotations for political or commercial use are not permitted. Duplicating or photocopying individual items for personal use is permitted.

THE JUST TAXES! CLIENT NEWSLETTER

PUBLISHED SEMI-ANNUALLY BY JUST TAXES!

7220 Greenhaven Drive, Suite 3, Sacramento, California 95831-3581

(916) 393-3430

________________________________________________________________________

Dear Client:                                                                                                                        July 2010

Whew . . . What a Year!

Both of us are still in the recovery mode from an extraordinarily hectic tax season in which seven day weeks and 10 hour days were the norm. However, shortly after April 15^th Diana conned some poor unsuspecting soul into taking care of her two hyperactive dogs, her two mean spirited cats (“Bitey” and “Scratchy”) as well as her two overly rambunctious kittens, quickly packed her bags, and headed for Hawaii. I brought a beach blanket, umbrella, suntan lotion, and a sunlamp to the office and tried to imagine that I was laying on the beach in Maui. Didn’t work, so I’ve stopped wearing my Speedo to the office. Regardless, we can’t complain since our goal in starting Just Taxes! was to “grow the business.” It is obvious, however, that we either need to hire an additional tax preparer or limit the number of new clients. At this point we’re considering both options.

We’ve “Dropped Anchor”

For the uninitiated dropping anchor is “Navy talk” for “staying put.” Anyway, our office building has been sold and we are negotiating a lease with the new owner. Hopefully we’ll be in the same location for the foreseeable future. That’s good news for us, and we hope for you as well.

Looking Ahead

We have been besieged by questions regarding changes in the 2010 tax code. While most of the proposed changes are still in the negotiating stage there are some changes that appear to be “set in stone.” Our thoughts are summarized below:

Tax Rate Increases. Since this is an election year we don’t anticipate any tax rate increases until the first of the year when the Bush tax cuts expire. The reason, of course, is that the primary goal of virtually all of our elected officials is to be reelected and raising taxes in an election year might hinder that endeavor. However, lawmakers will be forced to raise taxes before long in order to rein in the federal budget deficit. Our national debt is currently in excess of $13 trillion. To keep these numbers in perspective, $13 trillion is the equivalent of about $42,000 for each of us and, based on current projections, this amount will grow substantially by the end of the decade. For clarity, the government has charged $42,000 to the credit cards of every man, woman, and child residing in the United States and we, the taxpayers, are paying an ever increasing amount of interest as our debt continues to grow. To further complicate matters, if the cost estimates for the recently enacted health care reform law are not accurate the deficit will increase exponentially. And we still have a “carbon tax” looming on the horizon. Since we are not aware of any government program enacted in our lifetimes that has not cost significantly more than the initial projections, we believe that our concerns are well warranted. We are sincerely concerned about the deficit. You should be too. The government needs to stop spending money that they don’t have on things that we don’t need.

So Let’s Just Tax The Rich. President Obama has announced his intent to raise taxes on “the rich” which he generally defines as married couples earning more than $250,000 a year.  Additionally, there is little doubt but that the 33 and 35 percent tax brackets will be increased to 36 and 39.6 percent, respectively. These rate increases will affect married couples earning more than $209,000 and singles earning more than $172,000. (As I noted in a previous newsletter there is nothing unique about the 39.6 percent rate other than the fact that it is 99 percent of 40 percent. It’s like selling something at $ 1.98 instead of $2.00; somehow $1.98 just sounds better). If nothing else, our legislators are good used car salespeople. (My apologies to used car salespeople). The rich will also be paying a 0.9 percent Medicare surtax on their wages and self employment income and, starting in 2013, a 3.8 percent Medicare tax on their investment income. Investment income is defined as interest, dividends, capital gains, annuities, royalties, and passive rental income. As you may know, these new taxes were the primary source of revenue for the health reform law. It also seems inevitable that tax rates on capital gains and dividends will be increased to at least 20 percent for upper income earners. Additionally, some legislators are also proposing that dividends be taxed as “ordinary income.” This could increase those tax rates to 39.6 percent. It is, of course, easy to engage in “class warfare” by demonizing the wealthy. This seems to be particularly effective in gaining political support from those who pay little if any tax. Virtually all of our clients are in the top 50 percent of wage earners (i.e., they earn more than $31,000 per year). So collectively you belong to that group of wage earners who pay 97 percent of all federal income taxes. The bottom 50 percent, who pay only 3 percent, apparently believe that they shouldn’t have to pay anything at all. It seems as though the Obama administration agrees.

Watch Out for Stealth Taxes. The government needs additional sources of income and I have no doubt but that our elected officials are hard at work figuring out how to increase our taxes while denying that they’ve done so. These so called “stealth taxes” are taxes that are levied in such way that they are largely unnoticed, or at least not recognized as a tax. Examples include taxes on candy and soft drinks because the government “wants to improve our diets,” or taxes on cigarettes because the government “wants to improve our health,” or taxes on carbon emissions because the government “wants to improve our environment,” and so on, and so on and so on. Don’t believe the rhetoric. In my opinion our congressmen and women could care less about your diet, health, or the environment. They just want the money, because spending other people’s money is the basis of their power. Stealth taxes are also readily evident in our tax codes which give special exemptions to favorite industries, or which reduce or eliminate personal deductions or tax credits based on arbitrary income limitations. Our state and federal officials are also considering requiring service industries (such as attorneys, financial advisors, accountants, and tax preparers) to collect sales taxes on their services. I somehow believe that lawyers, who are politically well connected (i.e., they spend a lot of money keeping incumbents in office) will be exempt. Additionally, the Obama administration is now considering the “Mother of all Stealth Taxes” – the Value Added Tax, or VAT.  The VAT is essentially a consumption tax that is placed on a product whenever “value is added” at each stage of production. For example, a logger cuts down a tree and pays a value added tax because in doing so he has increased the value of the tree by making it into a log that can be sold to a mill. (For the politically sensitive, this particular logger is a young male who has been forced to work in the timber industry in order to support his aging grandmother and younger sister who was disabled after being attacked by a spotted owl). Anyway, the mill then processes the log into lumber and, as a result, pays a value added tax because the tree/log/lumber can now be sold to a furniture manufacturer. The manufacturer then uses the tree/log/lumber to produce tables and chairs and pays a value added tax because the value of the tree/log/lumber/furniture has again been increased. While the tax is assessed and paid at each different stage, it is the consumer who eventually ends up paying the additional cost. For example, when a customer purchases a table she is now paying $240 instead of $200 since the VAT has increased the price at each stage of production and those costs are, of course, passed through to the consumer. (This particular consumer is an attractive female wearing flats, form fitting jeans, a black sweater over a white Tee shirt, and a Muslim head scarf. (Whoa . . . I’m not certain whether I’m fantasizing, hallucinating, or profiling). The bottom line is that your taxes are going to increase. You can bet on it . . .

 A Case Study

Just Taxes! is a partnership and, as such, our profit is “passed through” to our individual income tax returns. As a result, I pay both federal and state income taxes as well as self employment tax on my earnings. In 2009, these taxes consumed 48 percent of my income from our business. In short, after taxes I got to keep $0.52 of every dollar that I earned (and I’m not even close to being rich). In comparison, if I were unmarried with three illegitimate children and received no child support payments from the father(s) of my children I would be eligible for social assistance (SSI/SSDI, Welfare, Medicare/Medi-Cal, and Food Stamps) as well as the Earned Income Tax Credit. If I were to work nine months a year at minimum wage, and had no income tax withheld, at the end of the year I would receive a tax refund from the federal government of over $7,400. In short, I would be earning almost $20,000 a year tax free (excluding the value of any social assistance that I received). Where is the incentive to work?

On a Lighter Note . . . Actual Letters Received by Government Agencies

"I am glad to report that my husband who was reported missing is dead."

"I am very much annoyed to find you have branded my boy as illiterate. This is a dirty lie. I was married to his father a week before he was born."

“I am forwarding my marriage certificate and my three children, one of which was a mistake as you can see.”

"In accordance with your instructions, I have given birth to twins in the enclosed envelope."

“You have changed my little boy to a girl. Will this make any difference?”

“Cash for Caulkers”

Most of the residential energy credits available in 2009 will continue to be available this year. But there have been some changes. Last year it was “Cash for Clunkers.” This year it is “Cash for Caulkers.”  Specifically, the House of Representatives has approved a $6 billion measure to provide rebates to homeowners who invest in energy efficient improvements. This bill would fund rebates of as much as 50 percent (not to exceed $3,000) for energy-savings efforts such as insulation improvements and the replacement of windows, doors, heating and cooling systems. This work must be completed by a qualified contractor. Additionally, homeowners who conduct comprehensive energy audits and reduce their home’s total energy consumption by 20 percent can receive up to $8,000 in rebates. This bill, which remains unfunded (surprise, surprise) is awaiting Senate confirmation.

Are You Self Employed?

The IRS is continuing to increase the frequency of audits for those of us who are self employed. As Diana and I stress to each of our self employed clients, your business must be carried on in a business like manner and you must maintain financial records that fully document your income and expenses. Further, we usually urge our self employed clients to maintain separate business checking and credit card accounts so as not to comingle personal and business related expenses. You should also have at least a simple business plan. If you don’t, you need to consider creating one. Finally, in a recent court case a self employed taxpayer was denied the deduction for the business use of his vehicle because of improper substantiation. Specifically, the taxpayer kept a log of his travel and noted the beginning and ending mileage each day, but did not include a listing of the places he stopped or the business purpose of each stop. As a result, the taxpayer was denied any mileage deduction. Enough said. In the event of an audit you must provide comprehensive documentation of your expenses, or those expenses will be denied.

Quick Notes

A gentle reminder for those of you old enough to have voted in the 1960 presidential election that you are once again required to take the Minimum Required Distribution from your IRA.

In response to popular demand (well, two phone calls) we are once again planning to have our annual Shred-It Day in late January. We’ll provide you with the details in our next newsletter.

Tax Preparer Reforms

As you may be aware, the IRS has announced changes in its oversight of tax return preparers. Specifically, IRS will require registration of all preparers who sign returns along with competency testing and mandatory continuing education. We fully support and endorse this effort.

Words That Give Me a Headache

(In No Particular Order)

Stakeholder, Unidentified Source, Diversity, Undocumented Worker, Nazi, Fascist, Racist, Bigot, Awesome, Lunatic Fringe, Homophobe, Politically Correct, Pro Choice, Pro Life, Empowered, commercials that state “But Wait, There’s More” or “You Deserve” and, my personal favorite, Experimented with Drugs. Let’s see, I guess that means that I “experimented” with cigarettes for about 20 years and I still “experiment” with a glass of red wine before dinner whenever possible. Now I’ve really got a headache. Time to refill my medical Marijuana prescription . . .

And In Closing

In reviewing this epistle it seems as though it is somewhat negative. I considered rewriting it, but decided that doing so would be a disservice to you. I’m very concerned about the economy, and the future of my children and grandchildren. You should be as well.

                                Until Next Time,

                                Dennis “Speedo”Graff                  Diana “Mai Tai” Muller               

                                Resident Grump                               Enrolled Agent

The Just Taxes Client Newsletter is published semi-annually for our clients by Just Taxes!, 7220 Greenhaven Dr, Ste 3, Sacramento, CA 95831-3581. Copies may be obtained by calling (916) 393-3430.

The content in this newsletter is provided for your personal information only, and is not intended to be used for making specific tax related decisions, nor is it intended to provide any form of investment or legal advice.

Quotations for political or commercial use are not permitted. Duplicating or photocopying individual items for personal use is permitted.

President Obama recently said that he wants a tax reform/deficit reduction package by August and lawmakers have many proposals to consider. The President has introduced a $3.77 trillion budget for fiscal year (FY) 2014 with a host of tax reform proposals, the House and Senate Budget Committees have approved competing deficit reduction and tax reform blueprints, other committees are exploring ideas for tax reform, and private groups, most notably authors of the Simpson-Bowles Plan, are also making proposals. Whatever proposals are adopted, the outcome is sure to impact your tax strategy and planning.

President Obama recently said that he wants a tax reform/deficit reduction package by August and lawmakers have many proposals to consider. The President has introduced a $3.77 trillion budget for fiscal year (FY) 2014 with a host of tax reform proposals, the House and Senate Budget Committees have approved competing deficit reduction and tax reform blueprints, other committees are exploring ideas for tax reform, and private groups, most notably authors of the Simpson-Bowles Plan, are also making proposals. Whatever proposals are adopted, the outcome is sure to impact your tax strategy and planning.

All of the proposals have one common goal: reduce the federal government's approximate $16 trillion federal budget deficit. To reduce the budget deficit, many of the plans propose to cut spending and raise revenues. Lawmakers and the White House also want to replace sequestration (across-the-board spending cuts for many federal agencies) for FY 2014 and beyond. Replacing sequestration will require spending cuts, new revenue or a combination of both. Let's take a look at how some of the tax proposals would affect individuals, businesses and others.

Individuals

The American Taxpayer Relief Act of 2012 (ATRA), signed into law on January 2, 2013, set the individual tax rates at 10, 15, 25, 28, 33, 35 and 39.6 percent for 2013 and beyond. The House GOP budget blueprint would consolidate the current seven individual income tax rate brackets into two rates. The lower rate would be 10 percent with the goal of a top rate of 25 percent. The Simpson-Bowles plan also calls for lower rates but does not specify the amounts; however, lower rates would be contingent on eliminating certain tax credits and deductions, possibly some popular ones such as the home mortgage interest deduction. President Obama has not proposed any changes to the current individual income tax rates.

President Obama has, however, proposed a minimum 30 percent tax on individuals with incomes over $1 million (full phase in at $2 million).  This was known as the "Buffett Rule" (now called the Fair Share Tax).  President Obama would also limit the tax rate at which higher income individuals can reduce their tax liability to a maximum of 28 percent. This limit would apply to all itemized deductions; foreign excluded income; tax-exempt interest; employer sponsored health insurance; retirement contributions; and selected above-the-line deductions. Another proposal would limit contributions and accruals on tax-favored retirement accounts, including IRAs, qualified plans, tax-sheltered annuities, and deferred compensation plans.

The budget blueprint put forward by Senate Democrats makes similar proposals. The Senate plan would impose across-the-board limits on itemized deductions claimed by the top two percent of income earners, by capping the rate at which itemized deductions and other tax preferences reduce tax liability, a percentage of income cap, or a specific dollar cap.  The Senate plan also proposes to change, without giving details, unspecified itemized deductions into tax credits.

Not surprisingly, the House plan, written by the GOP, does not include these proposals.  Along with consolidating the individual tax rates, the House blueprint would repeal the 3.8 percent net investment income (NII) surtax and the 0.9 percent Additional Medicare Tax, both of which took effect in 2013. The House plan also calls for repealing the alternative minimum tax (AMT). The House plan also calls for tax simplification but does not give details.

Another proposal endorsed by the President but which will be a difficult sale in Congress is to increase the federal estate tax. ATRA "permanently" extended the estate tax at a maximum rate of 35 percent with a $5 million exclusion (indexed for inflation).  President Obama wants to raise the maximum rate to 45 percent with a $3.5 million exclusion (not indexed for inflation) after 2017. 

Businesses

Reducing the U.S. corporate tax rate is a common goal of many of the tax reform proposals but they take different approaches. President Obama has said he would support lowering the corporate tax rate in exchange for businesses giving up unspecified tax preferences. These could include tax incentives for fossil fuels, the Code Sec. 199 deduction and more. The House blueprint would reduce the top corporate tax rate to 25 percent, paid for by tax savings elsewhere. The Simpson-Bowles plan also calls for a reduction in the corporate tax rate, contingent on businesses relinquishing unspecific tax preferences.

President Obama and the House and Senate budgets also propose a number of incentives to encourage business spending and job creation. These include:

• Enhanced small business expensing (Obama and House but at different amounts);
• Permanent research tax credit (Obama, House and Senate);
• Temporary tax credit for increasing payrolls (Obama); and
• Special incentives for manufacturing in the U.S. (Obama).

Another key difference among the competing proposals: the House budget plan would repeal the Patient Protection and Affordable Care Act, including all of its business tax-related provisions, such as employer-shared responsibility provisions, the medical device excise tax, and more.  The Senate approved a non-binding resolution to repeal the medical device tax but is not expected to go along with repeal of the entire Affordable Care Act.

Internet sales tax

In May, the Senate is expected to approve the Marketplace Fairness Act (H.R. 743). The bill gives states the authority to compel online merchants, no matter where they are located, to collect sales tax at the time of a transaction.  However, states would be able to compel collection of sales tax only after they have simplified their sales tax laws, such as by adopting the Streamlined Sales and Use Tax Agreement.  The bill has the support of President Obama. However, the bill may not pass in the House, where many lawmakers view it as a tax increase.

Discussion drafts

The two Congressional tax writing committees – House Ways and Means and Senate Finance – are engaged in discussions among their members over tax reform.  Ways and Means has produced three detailed discussion drafts exploring possible approaches to reforming the taxation of financial products, the taxation of small businesses and moving the U.S. to a territorial system of taxation. Ways and Means Chair Dave Camp, R-Mich., has promised to introduce tax reform legislation this year. Senate Finance has also produced four discussion drafts, less detailed than the House drafts, on simplifying the Tax Code, business taxation and education, and infrastructure, energy and natural resources. Senate Finance Committee Chair Max Baucus, D-Mont., has pledged his commitment to seeing tax reform through before his retirement, which he announced would start at the end of 2014.

Looking ahead

Tax reform coupled with deficit reduction is starting to gain momentum. Whether this will lead to legislation this summer or before year-end is unclear. As long as the key players continue their discussions, there is the chance of tax reform.

Our office will keep you posted of developments. Please contact our office if you have any questions about the tax reform proposals we have reviewed.

Did you owe tax on your 2012 tax return? Did you receive a sizeable refund? Or, conversely, did you receive a smaller refund than you expected? If so, take another look at your tax return from this past year. It is quite possible that by making a few changes, you could put more money in your pocket in the short term. And by examining your investments as they are reported on your tax return, you may be able to strategize for the long-term future. Trying to implement this type of plan may seem difficult at first. However, just by looking at your tax return, you can start the critical planning that can lead you to broader goals of financial independence and a comfortable retirement.

Did you owe tax on your 2012 tax return? Did you receive a sizeable refund? Or, conversely, did you receive a smaller refund than you expected? If so, take another look at your tax return from this past year. It is quite possible that by making a few changes, you could put more money in your pocket in the short term. And by examining your investments as they are reported on your tax return, you may be able to strategize for the long-term future. Trying to implement this type of plan may seem difficult at first. However, just by looking at your tax return, you can start the critical planning that can lead you to broader goals of financial independence and a comfortable retirement.

Federal withholding

If you received a large tax refund, it might be time for you to adjust the amount of tax the federal government withholds from your paycheck. Although next year your refund check may not be as large, you will have the advantage of seeing a larger sum deposited directly into your pocket every month. To adjust your withholding, fill out and sign a Form W-4, and submit it to your employer. You would want to do this in cases where your adjustments to income, exemptions, and deductions remain relatively steady from year-to-year, and where the government consistently is required to give you a large refund.

If you do not change your withholding allowances, the government essentially is holding your money for a year without paying any interest on it. You may lose some potential investment opportunity or, at the very least, the ability to increase your monthly discretionary income. On the other hand, many taxpayers prefer to receive the large refund check after tax filing season because it is a no-hassle way to ensure large savings at the end of the year.

Conversely, many taxpayers may want to change their withholding allowances because they owe the government a significant amount of money at the end of the year. Taxpayers who expect to owe at least $1,000 in tax for the 2013 tax year, after subtracting withholding and any refundable credits, and who also expect their 2013 withholding and credits to be significantly less than the projected tax owed for 2013, may need to file estimated taxes. Failure to do so could result in penalties. Alternatively, taxpayers should consider making quarterly estimated tax payments, especially if they anticipate a significant amount of investment gains for the year or other income unrelated to wage compensation.

State withholding

Some people are entirely exempt from state tax, but it is withheld from their paychecks nevertheless. At the end of each year, they may include the amount of their state taxes in their itemized deductions, but then receive a refund which they have to declare as income in the next year. This problem particularly applies to active duty military families, many of whom are posted in states other than their state of residency. Military families can check with their state income tax authority to see if there is an appropriate form that can be completed and filed, which would exempt them from withholding. A higher adjusted gross income (AGI), even if it is subsequently reduced by itemized deductions, can erode other adjustments to income, such as a deduction for student loans, IRA contributions, higher education expenses, and more because of certain AGI caps on these benefits.

Tax rates and adjusted gross income

As you may have heard, Congress allowed the Bush-era tax cuts to expire for higher-income earners. That means joint filers with more than $450,000 of adjusted gross income ($400,000 for single individuals) are now in the 39.6-percent tax bracket. Taxpayers at this level of income or above are also subject to a higher long-term capital gains tax rate: 20 percent, up from 15 percent paid by other taxpayers.

In addition, for tax years beginning in 2013, the 33-percent tax bracket for individual taxpayers ends at $398,350 for married individuals filing joint returns, heads of households, and single individuals. If you were hovering near the bottom of the 35-percent bracket for the 2012 tax year, then you might want to see if you can readjust your income so that you fall within the 33-percent category.

Higher-income taxpayers also have two new taxes to worry about for 2013 and beyond. Joint-filing taxpayers with modified adjusted gross income of $250,000 ($200,000 for single filers) are also subject to the 3.8-percent surtax on net investment income and a .9-percent Additional Medicare Tax. Look at your adjusted gross income for last year. Does it approach these figures? Is it on the edge of the income brackets? Will stock market increases this year put you over the top of those income thresholds? If so, it may be time to find ways to reduce your income for 2013.

Investments

At some point in your efforts over the years to accumulate a savings nest egg, you will need to consider diversification, the process of putting your money in the right kind of investment vehicles to satisfy your personal risk strategy and achieve your goals. Looking at your tax return will help you decide whether the investments you now have are the right ones for you. For example, if you are in a high tax bracket and need to diversify away from common stocks, investing in tax-exempt bonds might help, especially if you have state income taxes to worry about, too.

Reviewing the Schedule D and Form 8949, which cover Capital Gains and Losses from last year's return and from the past three or four years, can be an eye-opener for many. Did you hold stocks long enough to be entitled to the long-term capital gains rate? Did you try to balance short-term gains with short-term losses? Are you bouncing from one investment trend to another without a long-term investment plan that achieves long-term needs? Are your mutual funds "tax smart"? Become familiar with different types of banking institutions and their products. Find out about CDs, money-market funds, government securities, mutual funds, index funds, and sector funds and how they interrelate with the determination of your tax liability each year. You may want to put that knowledge to work in your investment strategy.

Medical costs

Should you be taking advantage of the medical expense deduction? Many people assume that with the 10 percent adjusted gross income floor on medical expenses now imposed for tax years starting in 2013 (7.5 percent for seniors) that it doesn't pay for them to keep track of expenses to test whether they are entitled to itemize. But with the premiums for certain long-term care insurance contracts now counted as a medical expense, some individuals are discovering that along with other health insurance premiums, deductibles and timing of elective treatments, the medical tax deduction may be theirs for the taking.

Retirement planning

Don't forget to protect for eventualities. Are you maximizing the amount that Uncle Sam allows you to save tax-free for retirement? A look at your W-2 for the year, and at the retirement contribution deductions allowed in determining adjusted gross income should tell you a lot. Should your spouse set up his or her own retirement fund, too? Are you over-invested in tax-deferred retirement plans? If so, you may lose a significant amount of your nest egg to tax after retirement.  

When you are reviewing last year's tax return, it may help to review some of what you've learned from it. This could foster an important conversation with your tax advisor about how to establish or modify your plan for your financial future. If you would like to review last year's completed tax return with future planning in mind, please feel free to give us a call and set up a time when we can meet and discuss this matter.

Questions over the operation of the new 3.8 percent Medicare tax on net investment income (the NII Tax) continue to be placed on the IRS's doorstep as it tries to better explain the operation of the new tax.  Proposed "reliance regulations" issued at the end in 2012 (NPRM REG-130507-11) "are insufficient in many respects," tax experts complain, as the IRS struggles to turn its earlier guidance into final rules.

Questions over the operation of the new 3.8 percent Medicare tax on net investment income (the NII Tax) continue to be placed on the IRS's doorstep as it tries to better explain the operation of the new tax.  Proposed "reliance regulations" issued at the end in 2012 (NPRM REG-130507-11) "are insufficient in many respects," tax experts complain, as the IRS struggles to turn its earlier guidance into final rules.

A public hearing on the existing regulations, held at IRS headquarters in Washington, D.C., in early April 2013, only confirmed how the application of the NII Tax to certain categories of income—particularly income arising from "passive activities"—is challenging even the experts. Nevertheless, taxpayers are not getting a reprieve from the immediate application of this new tax.  The 3.8 percent Medicare surtax on net investment income (NII) became effective January 1, 2013. Current confusion over exactly how the 3.8 percent operates can impact on tax strategies that should be put into motion in 2013. Any misinterpretation can also bear on 2013 estimated tax that may be due to cover any 3.8 percent NII Tax liability.

NII Tax Thresholds

For tax years beginning after December 31, 2012, the NII surtax on individuals equals 3.8 percent of the lesser of: net investment income for the tax year, or the excess, if any, of:

• the individual's modified adjusted gross income (MAGI) for the tax year, over
• the threshold amount.

The threshold amount in turn is equal to:

• $250,000 in the case of a taxpayer making a joint return or a surviving spouse,
• $125,000 in the case of a married taxpayer filing a separate return, and
• $200,000 in any other case.

Trusts and estates are also subject to the NII surtax, to the extent of the lesser of: (i) undistributed net investment income, or (ii) the excess of adjusted gross income over the dollar amount at which the highest tax bracket begins (which, for 2013, is $11,950).

Net Investment Income

The primary confusion over application of the 3.8 percent NII Tax revolves around finding a precise definition of "net investment income" as enacted by Congress. To appreciate the complexity of the task, just look at the applicable Internal Revenue Code provision. Code Sec. 1411(c)(1) defines net investment income as the sum of:

• Category (i) income: Gross income from interest, dividends, annuities, royalties, and rents, other than such income which is derived in the ordinary course of a trade or business not described in Code Sec. 1411(c)(2);
• Category (ii) income: Other gross income derived from a trade or business described in Code Sec. 1411(c)(2); and
• Category (iii) income: Net gain attributable to the disposition of property, other than property held in a trade or business not described in Code Sec. 1411(c)(2); over

Deductions properly allocable to such gross income or net gain.

A Code Sec. 1411(c)(2) trade or business includes a passive activity under Code Sec. 469 with respect to the taxpayer or trading in financial instruments or commodities.

Comment.  Code Sec 1411 effectively creates a new tax and a new tax base, on top of the income tax, alternative minimum tax, self-employment tax and payroll taxes. Nevertheless the Preamble to the proposed regs states that, except as otherwise provided, the income tax rules should apply to Code Sec. 1411 unless good cause otherwise exists. Practitioners have asked the IRS that the final regulations give greater reassurance of this general rule.

Complexity

The IRS has stated that the principal purpose of Code Sec. 1411 is "to impose a tax on unearned income or investments of certain individuals, estates, and trusts." Unfortunately, Code Sec. 1411 is not so direct and simple, with its three categories of income (that is, (i), (ii) and (iii), above), complicating matters, albeit in an effort to close every door to those who try to "game the system."

Application of the 3.8 percent NII Tax to capital gains and dividends from a personal stock portfolio is clear under this rule of thumb. But clarity breaks down when a "trade or business" is thrown into the mix and the concept of "passive activity" is added to it.

If gain or other income is the result of an active business activity, it generally escapes NII Tax. However, when the "active" business is a passive activity (for example, a rental business), it may be deemed to generate income that is subject to the NII Tax. Furthermore, when a passive activity is not merely incidental to a business however otherwise active that business should be, the NII Tax also becomes an issue. 

Passive Activity

Any revised or additional rules from the IRS on the application of the NII Tax on passive activities should be made more user friendly to the broad middle range of taxpayers and their advisors, one expert at the hearing recommended.  The IRS should err on the side of explaining things clearly and simply, even at the expense of not covering every possible nuance of interpretation.

At the same time, however, other experts are asking for more detail, at least in the way of clarification. For example, the IRS has stated that passive activity for NII Tax purposes should be applied within a narrower scope than the passive activity loss rules under Code 469.  Those Code Sec. 469 rules restrict "passive losses" from reducing income that is not "passive income."  Experts want the IRS to explain exactly what they mean by a "narrower scope."

Self-Rental Activities/Grouping

The self-rental recharacterization rule under Code Sec. 469 affects taxpayers who rent property to a trade or business in which they materially participate. Concern has been expressed over the possibility of interpreting net investment income under Code Sec. 1411 to include rental income from a self-rental activity grouped with a trade or business activity in which the taxpayer materially participates.

The material participation and trade or business requirements should be tested on the grouped activity as a whole rather than on a component basis, one expert in particular stressed at the hearing. If that test is passed, he argued, the trade or business income and rental income from the grouped activity should be excluded from the reach of the NII Tax. For example, the owners of self-rental properties should not have that rent considered as separate from their overall business activity and subject to the net investment tax simply because properties are held in a separate LLC to avoid tort liability.

Regrouping deadline

The proposed regulations permit businesses subject to the NII Tax to elect to regroup their activities for passive-loss purposes in 2013 or 2014. This regrouping election allows taxpayers with a fresh start to accommodate the new NII surtax. Without permitting regroupings, taxpayers would be bound by their original grouping decisions, some of which may have been made as many as 20 years ago, only for purpose of Code Sec. 469 passive loss rules and not the NII Tax. Some small business representatives are also concerned that, because of the complexity of the rules, the final regulations should extend the deadline for a regrouping election through 2015.

Application of the net investment income tax is particularly difficult to get a handle on in a variety of situations.  Unfortunately, however, at 3.8 percent, it is costly enough not to be ignored. 

If you have any questions about how the NII Tax may apply to your business, rental operations, or overall investment strategy, please do not hesitate to call our office.

Under the Patient Protection and Affordable Care Act (PPACA), small employers can claim a credit for providing health insurance for employees and their families. Health insurance includes not only basic medical and hospital care, but dental or vision, long-term care, and coverage for specific diseases or illness. Self-funded plans do not qualify; the insurance must be provided through a third party.

Under the Patient Protection and Affordable Care Act (PPACA), small employers can claim a credit for providing health insurance for employees and their families. Health insurance includes not only basic medical and hospital care, but dental or vision, long-term care, and coverage for specific diseases or illness. Self-funded plans do not qualify; the insurance must be provided through a third party.

For 2010-2013, for-profit employers can claim a credit of 35 percent of the employer's nonelective contributions, increasing to 50 percent for 2014 and 2015. Nonprofit employers can claim a credit of 25 percent through 2013, and 35 percent for the two succeeding years. Beginning in 2012, the credit for nonprofit employers is limited to the payroll taxes paid by the employer.

Small employers

Employers can claim the full credit if their full-time equivalent (FTE) employees are 10 or less, and their average annual wages per employee are $25,000 or less. FTEs are determined by figuring total hours of service for all employees and dividing the total by 2,080.

The credit is phased out for employers with 11 to 25 employees or with average wages between $25,000 and $50,000. The credit percentage is reduced 6.67 percent per "excess" employee (over 10) and four percent for each $1,000 of average wages in excess of $25,000.

To determine the amount of the credit, employers must add up the total premiums they paid on behalf of their employees during the year, subject to the state average premium limit. This total is then multiplied by the applicable percentage (25 or 35 percent for 2013, minus any phase-out). The credit is then reduced for FTEs in excess of 10, and for average annual wages (in units of $1,000) over $25,000. The result is the total credit that the employer can claim.

Other requirements

Under current law, employers must pay at least 50 percent of the insurance costs and must pay a uniform percentage for all employees. The credit is reduced if the employer premiums exceed the state's average premium for small group markets.

In its proposed fiscal year 2014 budget, the Obama administration would modify or eliminate some of these requirements. The credit phase-out would apply to employers with 21-50 employees, rather than 11-25. The phase-out rate would also be more gradual. Furthermore, the administration would eliminate the requirement that employers make a uniform contribution for each employee, and would eliminate the limit for state average premiums.

Reports indicate that the small business health insurance credit is being underutilized, with many businesses leaving this tax money on the table without claiming it or arranging their affairs to do so.

If you have any questions about how you might be able to position your business to claim this credit or claim a larger credit, do not hesitate to call this office for an update.

A business that manufactures products to be sold, or purchases products for resale, must value its product inventory at the beginning and the end of each tax year to determine the cost of goods sold (COGS) during the year. The business determines its gross profits by deducting COGS from its gross receipts for the year. The business then deducts its other business expenses from gross profits, to determine its net (taxable) income for the year.

A business that manufactures products to be sold, or purchases products for resale, must value its product inventory at the beginning and the end of each tax year to determine the cost of goods sold (COGS) during the year. The business determines its gross profits by deducting COGS from its gross receipts for the year. The business then deducts its other business expenses from gross profits, to determine its net (taxable) income for the year.

Certain expenses are included in COGS. Expenses that are included in COGS cannot be deducted again as a business expense. COGS expenses include:

• The cost of products or raw materials, including freight or shipping charges;
• The cost of storing products the business sells;
• Direct labor costs for workers who produce the products; and
• Factory overhead expenses.

Purchased inventory

If the business purchases its inventory for resale, its inventory costs are the invoice price plus transportation and other necessary expenses, less discounts.  Discounts that must be deducted from the costs of purchased inventory include trade discounts, manufacturer's rebates, and cash discounts.

Trade discounts are a reduction in the price of goods that a manufacturer or wholesaler provides to a retailer.  It includes a discount that is always allowed, regardless of the time of payment. A manufacturer's rebate is based on the dealer's purchases during the year. A cash discount is a reduction in the invoice price that the seller provides if the dealer pays immediately or within a specified time. The cash discount may reduce COGS, or it may be treated separately as gross income. Certain excise tax reimbursements may reduce the value of ending inventory and therefore reduce COGS.   

Methods of accounting

It is usually impractical to associate items of intermingled or fungible inventory with specific invoices and costs. Instead, taxpayers use certain assumptions or methods of accounting to identify the goods on hand and their costs. The traditional assumptions include FIFO (first-in, first-out) and LIFO (last-in, first-out). In some cases, specific identification is used. The courts have approved the average cost method, although the IRS disagrees with its use. The IRS will permit taxpayers to use other inventory cost assumptions, such as the rolling-average method, if they are reasonable for the taxpayer's trade or business and clearly reflect income.

Under the FIFO, the taxpayer is presumed to sell the oldest goods in inventory and to retain the most-recently produced or purchased items. If production (inventory) costs are rising, the use of FIFO reduces COGS and increases the taxpayer's income. Under LIFO, the taxpayer is presumed to sell the most recently obtained goods and to retain the oldest goods in inventory. Assuming that inventory costs are rising, the LIFO method will increase COGS and decrease the taxpayer's income. Under the average cost method, all units purchased during the year are averaged with the cost of beginning inventory, to determine an average cost.

As an individual or business, it is your responsibility to be aware of and to meet your tax filing/reporting deadlines. This calendar summarizes important tax reporting and filing data for individuals, businesses and other taxpayers for the month of May 2013.

As an individual or business, it is your responsibility to be aware of and to meet your tax filing/reporting deadlines. This calendar summarizes important tax reporting and filing data for individuals, businesses and other taxpayers for the month of May 2013.

May 1
Employers. Semi-weekly depositors must deposit employment taxes for payroll dates April 24-26.

May 3
Employers. Semi-weekly depositors must deposit employment taxes for payroll dates April 27-30.

May 8
Employers. Semi-weekly depositors must deposit employment taxes for payroll dates May 1-3.

May 10
Employers. Semi-weekly depositors must deposit employment taxes for payroll dates May 4-7.

Employees who work for tips. Employees who received $20 or more in tips during April must report them to their employer using Form 4070.

May 15
Employers. Semi-weekly depositors must deposit employment taxes for payroll dates May 8-10.

May 17
Employers. Semi-weekly depositors must deposit employment taxes for payroll dates May 11-14.

May 22
Employers. Semi-weekly depositors must deposit employment taxes for payroll dates May 15-17.

May 24
Employers. Semi-weekly depositors must deposit employment taxes for payroll dates May 18-21.

May 30
Employers. Semi-weekly depositors must deposit employment taxes for payroll dates May 22-24.

May 31
Employers. Semi-weekly depositors must deposit employment taxes for payroll dates May 25-28.

June 5
Employers. Semi-weekly depositors must deposit employment taxes for payroll dates May 29-31.