The Bush tax cuts were passed in 2001 as the Economic Growth and Recovery Tax Act. This was in response to a beginning of a recession and 9/11. The cuts increased the child tax credit from $500 per child to $1000, the standard deduction for married couples was increase to eliminate the marriage penalty, contribution limits for savings plans were increased, and tax rates were lowered.

Later in 2003, The Jobs and Growth Tax Relief Act of 2003 added tax cuts to dividends and capital gain. The impact of the Bush Tax Cuts saved the country from a recession and allowed us to work past 9/11.

Tax Rates Before & After Expiration of Tax Cuts

What should you expect for 2013? As you can see from the Tax Bracket Chart above we will be paying more income taxes.

Dividend Tax Rates. Dividend tax rates were also cut, and the current tax rate on dividends is 15%. If Congress makes no additional policy changes this year, dividend rates will revert your ordinary tax rates listed above.  Long Term Capital Gains rates are also at 15% now. These will increase to 20%.

What else? The current child tax credit of $1,000 will be reduced to $500; the standard deduction will be lowered for married couples, and limits will be placed on savings plans.

Other increases in your taxes will be derived from the new tax law changes that take affect at the end of the year. Currently medical expenses can be deducted as an itemized deduction. Total medical expenses, doctor visits, co-pays and dental can be deducted if they exceed 7 ½% of adjusted gross income. The new change in 2013 will raise this limit to 10% of adjusted gross income. For example, your adjusted gross income was $100,000 for 2012 this means you would have to exceed $7,500 in medical expenses to add to itemized expenses. After 2012 with the same adjusted income you will now have to exceed $10,000 before you can include any medical expenses as part of your itemized expenses.

Lastly, is alternative minimum tax. More people will fall into AMT if congress does not extend the threshold amounts. Once you fall into AMT everything changes for a tax payer. Itemized deductions, exemptions, and credits become limited.

What actions should you take?  Schedule a meeting with Fredrick James Accounting for a tax forecast for 2012. Let us help you to lessen the impact of these expiring tax cuts and other tax changes by planning ahead!

The Bush era Tax Cuts were not designed to last forever, be prepared to pay more in taxes 2013.

Visit us at FredrickJames.com. We serve clients throughout the world through our virtual office. Read more about our virtual office. If you have any questions or need assistance with your accounting, payroll or taxes please Contact us Today!

What is a “tax audit”, really? Tax audits fall into two categories. The first category being the full scale audit where you meet face to face with an IRS agent, the “real deal” tax audit that everyone dreads. The second category is known as an unreal audit or paper audit. Basically, you get a letter from the IRS that you under reported income, had math errors, or that you did not file a tax return and the IRS has filed a substituted tax return on your behalf.

Who is going to be picked? This depends on the complexity of the tax return and the amount of adjusted gross income. Tax returns with adjusted gross income of $500,000 to $1 Million had a 2.9% chance for a full scale audit and a 9.4% chance for an unreal audit. On the other end of the scale your odds of being selected for an audit decrease with your income. Tax returns with adjusted gross income of $50,000 to $75,000 had just a 0.7% rate of selection for full scale audit vs.7.1% for unreal audit.

What triggers an audit? Some areas of concern that the IRS is looking at are tax returns with Schedule C an E income. On recent audits, the IRS has discovered that taxpayers were trying to take personal expense as deductions for businesses and rental property. This is not allowed. The NAICS number that is entered on Schedule C, 1120 forms, and 1065’s are tracked by the IRS. Through database analysis the IRS can gauge what your income and deduction ratios should be compared to industry averages.

Who is preparing your taxes? Another part of the database analysis that is rumored to be looked at is your tax preparer. The IRS can see how many tax returns have been completed by the preparer and how they break out by category. For example, if your tax preparer suddenly starts preparing a large number of low income tax returns with all large tax refunds this may be an area of concern.

What can you do? For the most part, audit risk can be reduced by simply verifying financial documentation. Check to make sure the correct social security numbers are reported, all income has been reported, and the math is correct. Of course, also ensuring that all of the correct forms are filed and properly completed is a requirement. It can be complex! From 2000 until 2010 tax law have seen over 4,000 changes. This, on average, is over 400 changes per year that taxpayers have to navigate to prepare tax returns!

The bottom line: the best way to lower your chances of being audited is to have your tax returned prepared by professionals at Fredrick James. We keep up with all of the tax code changes and will ensure that your tax return is accurate and properly filed to keep you out of trouble with the IRS!

You can visit us at FredrickJames.com. We serve clients throughout the world through our virtual office. Read more about our virtual office. If you have any questions or need assistance with your accounting, payroll or taxes please Contact us Today!

Personal Taxes:

Monday, April 18, 2011 at midnight is the official deadline for the taxes to be postmarked or e-filed since Friday, April 15, 2011 is Emancipation Day a national holiday.

Florida Business Taxes:

If you have not yet filed your Florida Tangible Tax return because you extended the return for 30 days, it will be due on May 1, 2011.  It is very important to file this return timely to make sure that you qualify for the $25,000 Tangible Property Florida Exemption.

Florida Annual Reports are due on May 1, 2011 for Corporations and LLC’s.  It is extremely important that the Florida Annual Report is filed timely to avoid the $400 penalty and the possibility of your corporation being administratively dissolved.

1st Quarter Payroll Taxes are due on April 30, 2011. Florida Business’s need to remit Form 941 to the IRS and Form UCT-6 to the Florida Department of Revenue.

As you can see there are a lot of deadlines over the upcoming days. I wish everybody a happy tax day!

In December we went through a brief overview of the Tax Relief, Unemployment Insurance Re-Authorization and Job Creation Act of 2010.  Now that the dust has settled and the bill is in place, we are going to spend a few weeks dissecting it in more detail. Today we are going to cover some personal tax items that the media has not covered as well as the main items.

We all know that the 2011 and 2012 Income Tax Rates stayed the same and that tax rates for 2011 and 2012 Long Term Capital Gains stayed the same as well, but the big news that will affect a majority of taxpayers is that the Marriage Penalty tax relief for married individuals filing jointly has been extended through 2012.  Yep, the Marriage Penalty tax relief was not a permanent fix, it was temporary like most of the tax cuts are. It seems like our lawmakers give us expiring tax cuts and permanent tax hikes.

Another “big deal” tax cut that was only expanded through 2011 was the deduction for state and local sales tax in lieu of state and local tax on Schedule A. This one was also on the chopping block and is due to expire once again at the end of 2011. This will affect a lot of residents in states that have no income tax like Florida.

The last tax cut that is near and dear to my heart (I come from a family of teachers) is the $250 above the line deduction for elementary and secondary schoolteacher’s classroom expenses. This tax cut has been expanded for 1 year through 2011 and will be history if it is not extended by our lawmakers.  I know what teachers spend for their classrooms and it would be a shame to tax them more when they make so little, yet give so much.

So, as politicians try desperately to keep their constituents happy in order to keep their jobs; are our lawmakers intentionally subjecting taxpayers to bait and switch tactics or are they trying to avoid making the hard decisions that might upset voters in the short-term?  What do you think?

That’s all for this week.  I will have a few more “Did you Knows” concerning the Tax Relief, Unemployment Insurance Re-Authorization and Job Creation Act of 2010 for next week.

Last week we went over the individual tax payer’s record keeping requirements, this week I want to discuss what business owners should be holding onto and for how long.

Obviously businesses have a more extensive list of record keeping requirements than individual do but it’s an important detail not to be overlooked as it will help you to avoid unpleasant surprises in an audit.

Businesses are all different, but in this case documentary evidence for business deductions, those that are reasonable and ordinary in the course of business, is generally the same for all types of business entities.

One big mistake a lot of smaller businesses make is not having a separate business checking account. This is a big “no-no”. Get your business checking account set up if you don’t have one and use it for all transaction to prove gross income and business expenses.  If faced with an audit, you can bet the auditor will probably reconcile this account and if any personal deposits or disbursements appear, you’d better have the paperwork to back that up.

What to keep for business deductions:

• Receipts
• Canceled checks
• Bills
• Petty cash slips
• Bank statements (bank statements are very important for electronic receipts)

Receipts should list the name and location of vendor, dates, itemized charges, number of people, and written explanation of the expense to prove its business purpose.  For entertainment expenses, you must document the business relationship of those attending.

Canceled checks are very important for proving amounts, but do not necessarily prove business purpose.

Business expenses should be recorded as close as possible to the actual time of the expense.

There are a few exceptions for Travel, Meals and Entertainment where documentation is relaxed:

1. Under an accountable employee reimbursement plan that adopts the per diem method, which is a fixed daily reimbursement amount
2. A travel expense (except for lodging) less than $75
3. A receipt for transportation is not available (e.g. taxi fare)

I would highly recommend NOT making estimates, they are rarely allowed (except in extraordinary situations where records are destroyed). This is especially true for Travel, Meals and Entertainment, and deductions related to listed property (items commonly used for personal use), all of which have very strict deductibility requirements.

Fred’s Fast Tax Tip: Records for business assets should be retained through the statute of limitations for the tax year in which the assets are disposed of. This is important for audits that investigate depreciation expense.

Employment records must be retained for 4 years after the tax is due or paid, whichever is later.

As important as proper record keeping is for successfully responding to tax audits, record keeping is just as important for effectively managing a business (small or large) in terms of cash flow, short-term working capital needs, and profitability over the long-run.

Record keeping and analysis of accounting reports ultimately reveal where a business needs improvement and where growth opportunities exist. So, you’ve got even more good reasons to keep on top of your business record-keeping! If it all gets to be too much, and you’re losing the battle then I would recommend you find a qualified bookkeeper to help you whip your books in shape. Then kick back, put your feet up on the desk and give yourself some much deserved praise for being such a savvy business owner!

Many people don’t think they make enough to worry about tax planning, but what they don’t realize is no matter what your income level, tax planning can help you make adjustments that will significantly reduce your tax liability.

If given the choice, would you rather owe $148.67 or be getting a check for $352.10? See, not bad, huh?

With a little planning, knowledge and effort on your part, you could actually be looking forward to tax day for once!

Here are some ways the Average Joe can save on taxes:

1. Self-employed? Make sure you’re taking full advantage of tax deductions including most ordinary business expenses which can include money spent generating business, retaining clients, vehicle expenses, health insurance and capital expenditures.
2. IRAs. If you’re like a good amount of American’s you’ve seen your retirement savings sucked dry by the stock market. Planning now will ensure proper handling of IRA retirement contributions including the new unlimited Roth IRA conversion provision available in 2010, and allow you to address issues with retirement plans that have declined in value.
3. Education. If you or a dependent are attending school you need to be sure to claim all credits and deductions available to you–it’s free money, don’t miss out on it!
4. Bankruptcy/Foreclosure. You’ve already suffered enough if you’ve endured bankruptcy or a foreclosure this year, so a little planning now will avoid further headaches ahead. Minimize the taxable income impact of a home foreclosure or bankruptcy petition.
5. What If? There are several big tax changes waiting for Congress to either reverse or put into action, all of which could dramatically affect your tax bill. Planning now, as best you can, for potential tax rate hikes after 2010 for ordinary income and investment income keeps you from being blind-sided in the coming months.

So, hopefully these tax saving ideas will inspire you to take a look at your own situation and get you thinking about asking for some tax advice this year. Knowing what to expect and how to maneuver your finances throughout the year for maximum tax savings is the beginning of taking control of your finances, rather than letting your finances control you.

As a trusted tax advisor I am in the position of researching new proposed tax laws and passing that information on to my clients. Sometimes a new bill comes along that I feel is important for my clients and readers to get a heads up on due to the major tax implications. This latest bill has quietly moved through the House and is on its way up the ladder.

A bill titled “The American Jobs and Closing Tax Loopholes Act of 2010″ was passed by the house on 5/28/2010. The US House and Senate plans to raise the taxes of Small Business Owner S-Corporation’s starting in 2011 through H.R. 4213. This bill targets small personal and professional service businesses with 3 or fewer professionally skilled individuals (performing artists, athletes, accountants, lawyers, actuaries, architects, consultants, engineers, health professionals, veterinarians, lobbyists, brokers, and investment advisors) with the goal of raising over $11 billion in SECA Tax over the next 10 years!

So what does this mean to me?

The SECA tax is an additional 15.3% of taxable income earned by S-Corporations.  This is only the beginning of this far reaching SECA Tax.  If our elected officials pass this bill for small personal and professional service businesses, it is only a matter of time until a SECA tax is placed on all S-Corporations. The tax implications are huge! For example:  an S-Corporations owner who has a taxable income of $50,000 from his or her S-Corporation business could be taxed an additional $7,650 on top of the Federal Taxes.

What can I do?

It’s important to let your representative’s know how you feel about this bill, and quickly. Click the link below to contact your Senator now!  Let your Senator know if you don’t agree with H.R. 4213, “The American Jobs and Closing Tax Loopholes Act of 2010″, Section 413: the 15.3% SECA tax on S-Corporations could hurt small business in the United States.

To contact your senator:

http://www.senate.gov/general/contact_information/senators_cfm.cfm

Click here to read the white paper on this bill.

In the last part of this series, we covered the consumer side of bad debt charge-offs and how the IRS handles that from a tax perspective. Today I want to delve into the business side of bad debt charge-offs. This side of things is usually quite complex and hard to generalize but I will attempt to keep my “tax guru” side in check and you on board.

Business Not What It Used To Be?

Let’s assume that we’re talking about a business (Corporation or LLC that is treated as an S-Corp for tax purposes) that has been hit hard by the recession and has run out of money to pay its creditors. Typically in cases like this the business will notify creditors who will then turn around and liquidate the business assets in order to attempt to recoup at least part of the debt owed. Once that happens the business is faced with a balance plus late fees and interest to cover.

Many times business owners will be able to negotiate a settlement far under the remaining balance owed and once that agreed upon price has been paid, the business owner will generally feel they have taken care of everything and their ordeal is over. Hooray!

But Wait! There’s More!

It’s not exactly time to celebrate yet. Come tax season the, now former, business owner receives a 1099-C for the canceled debt and interest. Now what to do? At this point the business owner would be wise to contact their accounting professional who will review the situation and offer advice on how much of that total will actually be taxable.

Their accounting professional will be able to determine this number by assessing the net worth of the business (a negative number at this point), the fair market value of any remaining business assets, and the amount of the canceled debt among other factors. Whatever the balance is, if any, is the amount of taxable income the business owner would be liable for paying taxes on.

The business owner may also be entitled to an ordinary business loss equal to the difference between the fair market value of business assets that were auctioned off (or the canceled debt, if less) and the cost of the assets to the owner.

Call Now And Save

As always there are a hundred different variables that will affect the outcome of a scenario like this; this example is a highly simplified version used to provide a general understanding of the concept and should not be taken as de facto for all situations.

My goal is to provide fair warning to business owners with a loss that they WILL have to deal with charged off debts when it comes time to handle their taxes. I also want to point out that it isn’t nearly as awful as it might first seem and, with the help of a professional, your tax liability may be significantly reduced or even eliminated. So don’t ignore those 1099-Cs, if you do it will create an even bigger and more expensive mess to straighten out.

There are two general categories for discharged debts: consumer loans (credit cards, automobile loans, mortgages) or business related loans (bonds, commercial mortgages, equipment loans). Each type is treated slightly differently when it comes to income tax recognition and/or exclusion. Today we’re going to cover the personal or consumer related loans.

Let’s go back to my $10,000 Italian vacation debt scenario. Suppose that I charged that entire amount on my personal credit card. Over time, my unpaid balance would be increasing due to interest charges. The bank decides to write-off the entire debt balance totaling $12,000 and issues me a Form 1099-C.

You can't ignore charged off debt as taxable income.

Quick Fact: Historically, credit card companies have not always issued 1099-Cs on charge-offs. Credit card companies are, however, required to submit to the IRS and taxpayer 1099’s for the debt it writes off, under most circumstances.  This means that if you do not include this canceled debt on your tax return and/or include a reason for income tax exclusion, the IRS will find out and send you a letter regarding the income that you did not claim on your tax return along with the additional taxes that are due.

So, my credit card debt has been charged off, I decide to be a good taxpayer and include the 1099-C of $12,000 in my tax return. Does this mean my taxable income increases by the same amount? Well…it depends.

There are two common tax law exceptions that may allow taxpayers to avoid recognizing some or all of their canceled debt income:

Bankruptcy Exclusion.

Declaring bankruptcy and having the court cancel all credit card debt, would mean the entire $12,000 from our example would be excluded from income. The bank may still send a 1099-C anyways, which would still need to be reported on your personal tax return along with your special bankruptcy exclusion.

Common Tax Law Exclusion.

This addresses debtor insolvency, or in other words you can’t pay back your debts and your liabilities exceed your assets. There are variables in this equation that could mean the entire debt is excluded, or a portion of the debt can be considered taxable income.

Generally, if assets-debts+charged off debt as income leaves you with a negative net worth, the entire amount will be excluded.

If, however, assets-debts+charged off debt as income leaves you with a positive net worth, the amount of canceled debt as income that creates a positive net worth is now considered taxable.

Of course these are very basic examples to provide an understanding of the concept, keep in mind though that there are multiple factors that go into determining taxable income and it’s important that you speak with a tax professional who can explain some of the more complex issues you may face.

Next week we’ll get into the business side of charged off debts as taxable income…

At first, it may not make sense that the IRS would be concerned with a debtor’s written off debt. But the tax code is quite clear in stating that (under many circumstances) discharged debt is considered taxable income. This fact may leave you scratching your head and saying to yourself, “What?!? If I don’t have the money to pay off my debts, then how can I pay income taxes on my discharged debt? It makes no sense to me!”

Those who exploit tax code loopholes make it harder on everyone.

It is important to realize the tax code is written by very educated individuals that are trying to prevent abuses by a minority of unscrupulous taxpayers. Of course, the honest taxpayer must suffer in the process. The reasoning behind this seemingly silly tax law actually makes some sense (in theory).

For example, I borrow $10,000 from my local bank to go on a week-long luxury vacation to Italy. After having a grand time enjoying the excellent food, wine & culture I come back home with a full belly and empty pockets. In fact my pockets are so empty that I don’t have any money to pay off my bank debt. Eventually, the bank decides that it will not be able to collect on my loan and thus writes it off the debt from their loan portfolio (and their tax return).

The way the IRS sees it, the bank gave you $10,000 tax-free and the bank also took a tax deduction. So you benefit, and in some way the bank benefits. The IRS sees that as being unfair…to the IRS! Not surprisingly, there are those out there who would take advantage of such a loophole in order to disguise otherwise taxable income as tax-free discharged debt. Thanks to them, this code had to be created with provisions to close this loophole.

Unfortunately, in practice, this tax law adversely affects the honest taxpayers. If an honest taxpayer can’t pay their debts due to job loss or illness, then why should they be put into the same group as a dishonest taxpayer and be forced to pay income tax on discharged debt?

The good news is that Congress has attempted to help the honest taxpayer by creating several exceptions to recognizing discharged debt as income. The bad news is these exceptions are limited in scope and in some instances may only delay income recognition to a future date.

Tune in next week as the saga continues…