Ask Fred
Fred Daus, CEO Fredrick James
We all know Accounting and Taxes aren’t the hottest topics around and, to most people, not the least bit interesting. But we also know that everyone, eventually, ends up having some kind of tax or accounting question that they’d just love to find the answer to. Yes, you can search the blogs and forums but once you find an answer, you begin to ask yourself, just how accurate is that advice from FuNnyBuNnyLoL anyway?
We want people making good financial decisions, we want you to succeed…and we know that smart, savvy folks like you educate yourselves on important topics in order to be a success at whatever you do. Of course not every question requires a long consultation with a professional, so you may not be inclined to call an Accountant or Tax adviser for an appointment, but you’d still like accurate, professional information. This is where “Ask Fred” comes in to save your day…go ahead, ask your question and Fred will provide you with the answer…just like that!
Please keep in mind most tax situations are highly individualized, so this area is for asking more generalized questions like: If I’m making minimum wage, how do I determine what my take home pay will be? How much should I set aside for taxes if I’m self employed? I’m thinking about starting a business, what are the benefits of the different types of corporations vs. sole proprietorship? Are there any tax deductions or incentives that will help me pay for my kids college education?
So. What’s your question?
Fred,
Can you clarify the purpose of why one would file exempt on their taxes for a few months and then change back? Can you also confirm if this is legal? Some co-workers and I have been discussing this. One feels that this is legal & has done it for years. I thought it was illegal & if caught would have a hefty price to pay.
Sheila,
I believe that you are talking about claiming exempt on the W4 that you would present to your employer so that your employer does not withhold federal income tax from your wages. Ok, I am going to get on my soapbox and preach it now, get ready. This is legal under the following conditions:
1. The employee must have had NO tax liability for the previous year and must expect to have NO tax liability for the current year.
2. If the employee can be claimed as a dependent on a parent’s or another person’s tax return, additional limitations apply and they may NOT be able to claim exempt on the W4.
In addition, I would recommend that a person who files exempt read the instructions for the W4 and seek professional tax advice prior to making the exempt election on the W4. This election DOES NOT mean that you don’t have to pay federal taxes, it means that the employer does not have to withhold federal taxes from your paycheck. When tax time comes, a person who made the “exempt” election should be faced with 1 of 2 scenarios: 1. They do not owe the IRS any taxes due on the tax return or 2. They should be receiving a refund.
The reason that I take a strong stance on this issue is because a lot of people eventually get caught owing the IRS money at the end of the year and they don’t have the money to pay the IRS. This is where the tax problems start and generally the taxpayer never files and runs from the IRS for a number of years. Then one day the taxpayer wakes up and decides to fix the problems for one reason or another, calls a tax professional, finds out that their mistake is going to take a good amount of time to fix and cost them thousands of dollars. And of course, they don’t have the money to fix the problem, less pay the taxes. It’s a viscous cycle and I have seen too many taxpayers get hung in the end with IRS levis and garnishments.
My final advice is to see your tax professional before adjusting withholdings or claiming “exempt” on a W4 on a yearly basis because tax circumstances change with new circumstances such as: getting married, a new baby, the purchase of a home, divorce, working as a sub contractor (1099 Misc), getting a raise, getting a unexpected bonus, starting a new job and the list goes on and on. The small investment you will pay your tax professional, will help keep the IRS away.
Ok, I am putting the soap box away now, Please let me know if you have any additional questions. Take care.
Fred Daus
I presently serve as a Board member for a large condominium in Northern Pinellas County.
During a recent meeting it was brought out that our in-house bookkeeper books the maintenance fees, as receivables (income) when they are due and not when they are actually paid. One gentleman criticized that practice as the worst accounting policy he had ever heard of.
It is my understanding that our practice is exactly correct for us since we use the Accrual Method of accounting, which differs from the Cash Method.
Am I missing something here?
What has been your experience as far as accounting methods used in other condominium communities, and what is your opinion on our present policy as stated above? I would ask this question of our present CPA firm, but since they recommended the Accrual Method in the first place, and have never questioned our use of that method, I want to get an opinion from elsewhere.
Regards, Brad
Hi Brad,
That’s a great question. There are some definite differences between the two accounting methods but rest assured, most Condo associations use the accrual method of accounting. This is because it is very helpful for budgeting reasons to determine the budget vs. actual comparisons.
The Accrual Method of Accounting allows balance sheet accounts like Accounts Receivable to populate all current amounts owed but not received yet by the condo owners and at the same time it allows the income from Accounts Receivable to be reported on the Income Statement in the period that the income was actually earned. This method is also helpful when tracking delinquent receivables from condo owners.
It also allows Accounts Payable expenses to be reported on the Income Statement as an expense if the amounts have not been paid yet to venders and at the same time it allows the expenses from Accounts Payable to be reported on the Income Statement in the period that the expense resulted. This method is also helpful when tracking aging payables to venders so you can better manage cash flow.
The Accrual Method also allows the accrual of certain expenses that need to be added to a reserve account so the money will be available when a very large outflow of cash is needed. For example: The replacement of a roof, repaving of a parking lot and yearly insurance premiums are some of the expenses that should be accounted and accrued for on a monthly basis.
We account for these expenses on a yearly basis because each month a portion of the roof has depreciated or an amount of the Insurance premium has been consumed. The roof will one day need to be replaced, the parking lot will need to be repaved and the yearly insurance bill will come due. If these amounts are not accrued for and money is not set aside for these expenses, then most condo associations would have to assess its owners to cover the huge outlay of cash.
Also, the monthly expenses would be understated over many periods and then all of a sudden the expenses would be overstated in the period that the condo pays for its new roof. Accounts Payable expenses are reported on the Income Statement as an expense if the amounts have not been paid yet to venders and at the same time it allows the expenses from Accounts Payable to be reported on the Income Statement in the period that the expense resulted.
I hope that this explanation helps. If you have any additional questions, please contact me at 727.474.0922 and I would be happy to discuss them with you.
I always learn something new
Very well written!
Love all the information here. My son is in desperate need of info like this.
Good to hear it, if he’s got any questions have him post here and I’ll be happy to address them.
You wouldn’t believe it but I’ve wasted all day digging for some articles about this. You’re a lifesaver, it was an excellent read and has helped me out to no end. Cheers,
How do you do it, awesome SERP ranking of your website, Google pointet me directly to your site and what I found here is awesome, thanks guys.
Dedicated staff, Danika, and a commitment to quality information for our readers. It’s nice to know it’s appreciated, thanks!
Wanted to share my opinion here, this websites delivers, never found so much information about a specific topic like what I found here, thanks.