Hackettstown, NJ
908-813-3180
myCPApros BLOG
Analysis, news, observations on taxes, finance and accounting by
Ali H. Mahmoud, CPA
Do I Need a CPA?
A CPA can assist your business in:
Establishing an
Accounting System,
Bookkeeping Maintenance,
Preparing Financial
Statements...and more.
The Right CPA
Choose your CPA carefully. Your financial records and
tax information are highly sensitive and should not be divulged to just
anyone....more
Deadlines
Tax Filing Dates
April
17, 2012
File Federal and NJ State Income Tax Returns (and Tax Extension requests) -
*The traditional deadline is April 15th but this year it falls on a Sunday, and
April 16, 2012 is Emancipation Day in the District of Columbia.
October
15, 2012
Deadline to efile a 2011 Income Tax Return for Tax Extension filers
and late Tax Return filers.
Summary
New Tax Treatment of Cell Phones for Business
Lifts Record Keeping Burden for Small BusinessThe IRS categorization of mobile phones as listed property required business owners and their employees to keep detailed records listing exactly which phone calls were personal. Many employees needed to carry multiple cell phones just to avoid a heavy cell phone recordkeeping burden.
The new recently issued Internal Revenue Service guidance provides an explanation on the treatment of employer cell phone as an excludible fringe benefit (a fringe benefit is a form of pay [including property, services, cash or cash equivalent] in addition to stated pay for the performance of services).
Accordingly, when an employer provides an employee with a cell phone primarily for noncompensatory business use, the business and the personal use of the cell phone is generally nontaxable to the employee. The IRS will not require recordkeeping of business use in order to receive this tax free treatment for cell phones. This new guidance also applies to arrangements common to small businesses that provide a cash allowance and reimbursements for work-related use of personally-owned cell phones. So, employers that require employees to use their cell phones for business purposes may treat reimbursements of the employees’ expenses as nontaxable.
That is great news for the millions who use their cell phone for business.
"Offers in Compromise" --Method to Resolve Debt
What is an “Offer in Compromise” (OIC)?
For tax payers overburdened by tax debt, the IRS provides for an “Offer in Compromise.” The IRS has the authority to settle, or “compromise” federal tax liabilities by accepting less than full payment under certain circumstances. An offer in compromise is an agreement between a taxpayer and the IRS that resolves the taxpayer’s tax debt.
To make it easier for taxpayers to determine if they are eligible for the program and to prepare the necessary forms accurately, the Offer in Compromise application package, IRS form 656, was recently redesigned with new instructions, worksheet and checklist. The IRS will consider an offer in compromise only after all other payment options have been exhausted. If you, as a taxpayer, are unable to pay your taxes in full, there are other payment options, such as monthly installment agreements, that you must explore with the help of your CPA before you can submit an offer in compromise. (Form 9465 Installment Agreement Request.)
If you are a taxpayer who is unable to pay your taxes in full and you have explored the various options, you should consult your CPA who will help you review the checklist in the Form 656 package to determine if you are eligible for an offer in compromise.
The IRS will generally accept an offer in compromise (OIC) when it is unlikely that the tax liability can be collected in full and the amount offered reasonably reflects collection potential. The IRS considers an OIC as a legitimate alternative to declaring a case currently not collectible or to a protracted installment agreement. The IRS wants to collect what is potentially collectable at the earliest possible time and at the least cost to the government.
In turn, you as taxpayer are expected to provide reasonable documentation to verify your ability to pay. The ultimate goal is a compromise which is in the best interest of both the taxpayer and the IRS. Acceptance of an adequate offer will also result in creating a fresh start for you, the taxpayer, with an expectation of compliance with all future tax filing and tax payment requirements.
Go to my website, mycpapros.com to read the article: Offers In Compromise, A Method to Resolve Tax Debt, for more information about IRS requirements, payment plans, application fees and other general information about OIC.
Hot Tax Tips for 2011
HOT TAX TIPS FOR 2011
1. If you donate stock directly to a charity instead of cash you can get a charitable deduction for the full value of the stock that went up in the value, and you can avoid paying any capital gains tax. The securities should be gifted directly to the charity. Caution: Do not sell the securities first and then give the money to the charity.
2. The law allows a deduction for the mortgage interest on your primary residence and one other second residence. A boat, camper and RV qualify for the second home definition. Therefore, the loan interest on any of these items would be a qualified deduction.
3. Timing your divorce could save you taxes. Getting a divorce before the year end will save taxes by eliminating the marriage penalty. This is the opposite of what’s recommended tax-wise for when to get married.
4. Take advantage of your company’s “cafeteria plan” (which allows employees to choose from different kinds of benefits) and other tax-free benefits. As an example, the dependent care credit provides for a credit of 20% of the child care expenses, but on your company’s “cafeteria plan” you get a tax benefit equal to the taxpayer tax bracket. Another example of this regards medical expenses. Your medical expenses can rarely be taken on schedule A due to the limitation of 7.5% of AGI. But through the company’s cafeteria plan, full deduction can be accomplished from your wages.
5. If you are starting up a business, an LLC may be the right choice. LLCs offer the advantages of limited liability and partnership taxation. There are still good reasons for choosing to operate a business as a C corporation, S corporation, or sole proprietorship.
6. Maximize your 401(K) deductions. These deductions lower your taxable income. Money in your 401(K) account is protected by law against creditors even if you declare bankruptcy. On the other hand, IRA’s do not provide the same protection against creditors.
7. Convert non- deductible expenses such as interest on credit cards and automobile loans into deductible home mortgage interest. Interest on a home equity loan or line of credit is deductible on your tax return no matter how it used. The interest expense for a home equity loan is limited to $100,000.
8. Assure that the numbers on your tax return match the 1099’s received from broker, employer or Investment Company. The gross proceeds shown on schedule D should be exactly what is shown on the 1099’s.
Common Tax Errors to Avoid
COMMON TAX ERRORS
1. If you had a baby during 2011, you must get a Social Security number for the child before filing your tax return. You will not be able to claim a child dependency exemption, child tax credit or earned income credit without a valid Social Security number.
2. If you receive a notice from IRS, do not assume that it is correct and automatically pay the amount shown on the notice. Many IRS notices just require you to give the additional information to show why you do not owe the additional tax and penalty.
3. You are required to receive a minimum distribution from your IRA or SIMPLE IRA when you reach the age 70 1/2. If your distribution is less than the minimum required distribution, an excise tax may be imposed on the shortfall. The minimum distribution requirement does not apply to Roth IRA’s.
4. If you are younger than 59 1/2, think twice before you take an early distribution from your 401K or IRA. A 10% early distribution penalty is charged in addition to federal and state tax on the distribution. A large distribution will result in a higher tax bracket on the distribution and the regular income.
5. A custodial parent who has released the right to claim their child as a dependent to their ex-spouse still has the right to claim head of household status, the earned income credit, and dependent care credit.
6. Make sure that your tax return numbers match the 1099’s you receive from all sources such as employer, investment companies or broker. The IRS now matches what’s on your tax return with what is shown on the 1099’s.
7. If you cannot complete and file your tax return by the April 15th deadline, you must file Form 4868, Application for Automatic Extension of Time To File U.S. Individual Income Tax Return by the due date for filing your calendar year return (usually April 15) or fiscal year return. This form is also available en español. File for an extension to avoid an additional charge of 5% a month. Even if you do not have the money to pay the due taxes by April 15th, an extension without any payment would avoid the large 5% filing penalty and you will only have to pay the much smaller late payment penalty.
Tax Rule for U.S. Citizens and Resident Aliens Abroad
Tax Rule for U.S. Citizens and Resident Aliens Abroad
For citizens of the United States and resident aliens living abroad, the general rule for both is the same: your worldwide income is subject to U.S. income tax regardless of where you reside. You must file yearly income tax and pay estimated tax whether you are living in the United States or abroad. If you reside overseas or are in the military on duty outside the U.S., the IRS allows an automatic two- month extension until June 15th to file the tax return. However, to avoid interest, any tax due must be paid by the original date of April 15th.
Foreign earned income includes wages, salaries, professional fees and other amounts received as compensation. Qualified persons who live and work abroad may elect to exclude from their gross income a certain amount of foreign earned income related to residence in a foreign country during the tax year. The exclusion is $92,900 for 2011 and $95,100 for 2012. Also, to prevent income from being subject to double taxation, you may be entitled to a credit for taxes paid or accrued to a foreign country.
In order to qualify for the foreign earned income exclusion, individuals’ tax home must be in a foreign country and they must satisfy either the bona fide residence test or the physical presence test. Qualified individuals must make a separate election with respect to the foreign earned income exclusion and they must file Form 2555 by the tax deadline. Once the election is made, it will remain in effect for the current tax year and all subsequent years unless revoked. Taxpayers who revoke the election will be prohibited from making a new election for at least the next five years, unless they obtain IRS approval.
Reporting Stock Transactions
Now, taxpayers will have fewer headaches reporting their securities transactions on their tax returns. Determining the cost basis to calculate the profit/loss for each transaction was always a great hassle. This year, the IRS is forcing your broker to give this information to you when you acquire the stocks through them.
Beginning with the tax year ending 2011, all brokerage firms must report not only sales proceeds on “covered” securities, but they must also track and report cost basis data for the client and for the IRS on form 1099B. The word “covered” means securities purchased on or after January 1, 2011. This includes stocks, mutual funds and other securities as designated by the IRS. Securities purchased before that specified reporting date for their type are labeled “non-covered.”
The best thing you can do is to make sure that your broker has the cost basis for all of the securities in your entire portfolio. Especially when you switch brokers, make sure you get this information transferred from the previous broker. Also, you should discuss with your broker the system regarding cost reporting of multiple transactions on the same security. Each broker has his or her own system that could affect your profit/loss realization on these transactions.
Innocent Spouse Relief
Innocent Spouse Relief
The IRS created "innocent spouse relief" for situations where it would be unfair to hold a spouse liable for the tax liability that was created. "Innocent spouse" tax relief is available from the IRS and some states. It can relieve you from taxes, penalties and interest from a joint tax return that you filed with your spouse or ex-spouse.
The IRS has abandoned its controversial stand and will revise regulation imposing a two-year limitation period on taxpayers requesting equitable innocent spouse relief. Now, whoever requests equitable relief will no longer be required to submit the request within two years. Now the request must be filed on Form 8857.
For taxpayers whose requests for equitable innocent spouse relief were denied as untimely and not litigated, the IRS instructed them to re-apply by filing a new Form 8857.
The IRS generally will take no further collection activity with respect to a taxpayer who sought equitable innocent spouse relief in a judicial proceeding where the validity of the two years was at issue and the decision in the case is final.
This is surely good news for the spouse that gets caught between the IRS demands and the tax liability, interest and penalties that result from an error or tax fraud committed by his/ her spouse who acted alone.
VOW to Hire Heroes Act provides tax credits
President Obama signed a new law providing a tax credit to employers who hire military veterans. Named the "VOW to Hire Heroes Act," it was designed to help the approximately 240,000 veterans of the wars in Iraq and Afghanistan who remain unemployed, according to White House records, while the administration reports a total of 850,000 veterans overall are out of work. President Obama commented: "No veteran who fought for our nation should have to fight for a job when they come home."Under this new law, a company can claim a tax credit of up to $2,400 if it hires veterans who have been looking for work for at least one month with a maximum credit increased to $5,600 for hiring veterans who have been searching for work at least six months. Additional employer tax credits of $9,600 will be granted for hiring unemployed veterans with service-related disabilities. The new legislation also provides for veteran job training. The prior law, which was the Work Opportunity Tax Credit (WOTC), is scheduled to expire after December 31, 2011.
MyCPAPros Blog
New Tax Treatment of Cell Phones for Business
Lifts Record Keeping Burden for Small BusinessThe IRS categorization of mobile phones as listed property required business owners and their employees to keep detailed records listing exactly which phone calls were personal. Many employees needed to carry multiple cell phones just to avoid a heavy cell phone recordkeeping burden.
The new recently issued Internal Revenue Service guidance provides an explanation on the treatment of employer cell phone as an excludible fringe benefit (a fringe benefit is a form of pay [including property, services, cash or cash equivalent] in addition to stated pay for the performance of services).
Accordingly, when an employer provides an employee with a cell phone primarily for noncompensatory business use, the business and the personal use of the cell phone is generally nontaxable to the employee. The IRS will not require recordkeeping of business use in order to receive this tax free treatment for cell phones. This new guidance also applies to arrangements common to small businesses that provide a cash allowance and reimbursements for work-related use of personally-owned cell phones. So, employers that require employees to use their cell phones for business purposes may treat reimbursements of the employees’ expenses as nontaxable.
That is great news for the millions who use their cell phone for business.
"Offers in Compromise" --Method to Resolve Debt
What is an “Offer in Compromise” (OIC)?
For tax payers overburdened by tax debt, the IRS provides for an “Offer in Compromise.” The IRS has the authority to settle, or “compromise” federal tax liabilities by accepting less than full payment under certain circumstances. An offer in compromise is an agreement between a taxpayer and the IRS that resolves the taxpayer’s tax debt.
To make it easier for taxpayers to determine if they are eligible for the program and to prepare the necessary forms accurately, the Offer in Compromise application package, IRS form 656, was recently redesigned with new instructions, worksheet and checklist. The IRS will consider an offer in compromise only after all other payment options have been exhausted. If you, as a taxpayer, are unable to pay your taxes in full, there are other payment options, such as monthly installment agreements, that you must explore with the help of your CPA before you can submit an offer in compromise. (Form 9465 Installment Agreement Request.)
If you are a taxpayer who is unable to pay your taxes in full and you have explored the various options, you should consult your CPA who will help you review the checklist in the Form 656 package to determine if you are eligible for an offer in compromise.
The IRS will generally accept an offer in compromise (OIC) when it is unlikely that the tax liability can be collected in full and the amount offered reasonably reflects collection potential. The IRS considers an OIC as a legitimate alternative to declaring a case currently not collectible or to a protracted installment agreement. The IRS wants to collect what is potentially collectable at the earliest possible time and at the least cost to the government.
In turn, you as taxpayer are expected to provide reasonable documentation to verify your ability to pay. The ultimate goal is a compromise which is in the best interest of both the taxpayer and the IRS. Acceptance of an adequate offer will also result in creating a fresh start for you, the taxpayer, with an expectation of compliance with all future tax filing and tax payment requirements.
Go to my website, mycpapros.com to read the article: Offers In Compromise, A Method to Resolve Tax Debt, for more information about IRS requirements, payment plans, application fees and other general information about OIC.
Hot Tax Tips for 2011
HOT TAX TIPS FOR 2011
1. If you donate stock directly to a charity instead of cash you can get a charitable deduction for the full value of the stock that went up in the value, and you can avoid paying any capital gains tax. The securities should be gifted directly to the charity. Caution: Do not sell the securities first and then give the money to the charity.
2. The law allows a deduction for the mortgage interest on your primary residence and one other second residence. A boat, camper and RV qualify for the second home definition. Therefore, the loan interest on any of these items would be a qualified deduction.
3. Timing your divorce could save you taxes. Getting a divorce before the year end will save taxes by eliminating the marriage penalty. This is the opposite of what’s recommended tax-wise for when to get married.
4. Take advantage of your company’s “cafeteria plan” (which allows employees to choose from different kinds of benefits) and other tax-free benefits. As an example, the dependent care credit provides for a credit of 20% of the child care expenses, but on your company’s “cafeteria plan” you get a tax benefit equal to the taxpayer tax bracket. Another example of this regards medical expenses. Your medical expenses can rarely be taken on schedule A due to the limitation of 7.5% of AGI. But through the company’s cafeteria plan, full deduction can be accomplished from your wages.
5. If you are starting up a business, an LLC may be the right choice. LLCs offer the advantages of limited liability and partnership taxation. There are still good reasons for choosing to operate a business as a C corporation, S corporation, or sole proprietorship.
6. Maximize your 401(K) deductions. These deductions lower your taxable income. Money in your 401(K) account is protected by law against creditors even if you declare bankruptcy. On the other hand, IRA’s do not provide the same protection against creditors.
7. Convert non- deductible expenses such as interest on credit cards and automobile loans into deductible home mortgage interest. Interest on a home equity loan or line of credit is deductible on your tax return no matter how it used. The interest expense for a home equity loan is limited to $100,000.
8. Assure that the numbers on your tax return match the 1099’s received from broker, employer or Investment Company. The gross proceeds shown on schedule D should be exactly what is shown on the 1099’s.
Common Tax Errors to Avoid
COMMON TAX ERRORS
1. If you had a baby during 2011, you must get a Social Security number for the child before filing your tax return. You will not be able to claim a child dependency exemption, child tax credit or earned income credit without a valid Social Security number.
2. If you receive a notice from IRS, do not assume that it is correct and automatically pay the amount shown on the notice. Many IRS notices just require you to give the additional information to show why you do not owe the additional tax and penalty.
3. You are required to receive a minimum distribution from your IRA or SIMPLE IRA when you reach the age 70 1/2. If your distribution is less than the minimum required distribution, an excise tax may be imposed on the shortfall. The minimum distribution requirement does not apply to Roth IRA’s.
4. If you are younger than 59 1/2, think twice before you take an early distribution from your 401K or IRA. A 10% early distribution penalty is charged in addition to federal and state tax on the distribution. A large distribution will result in a higher tax bracket on the distribution and the regular income.
5. A custodial parent who has released the right to claim their child as a dependent to their ex-spouse still has the right to claim head of household status, the earned income credit, and dependent care credit.
6. Make sure that your tax return numbers match the 1099’s you receive from all sources such as employer, investment companies or broker. The IRS now matches what’s on your tax return with what is shown on the 1099’s.
7. If you cannot complete and file your tax return by the April 15th deadline, you must file Form 4868, Application for Automatic Extension of Time To File U.S. Individual Income Tax Return by the due date for filing your calendar year return (usually April 15) or fiscal year return. This form is also available en español. File for an extension to avoid an additional charge of 5% a month. Even if you do not have the money to pay the due taxes by April 15th, an extension without any payment would avoid the large 5% filing penalty and you will only have to pay the much smaller late payment penalty.
Tax Rule for U.S. Citizens and Resident Aliens Abroad
Tax Rule for U.S. Citizens and Resident Aliens Abroad
For citizens of the United States and resident aliens living abroad, the general rule for both is the same: your worldwide income is subject to U.S. income tax regardless of where you reside. You must file yearly income tax and pay estimated tax whether you are living in the United States or abroad. If you reside overseas or are in the military on duty outside the U.S., the IRS allows an automatic two- month extension until June 15th to file the tax return. However, to avoid interest, any tax due must be paid by the original date of April 15th.
Foreign earned income includes wages, salaries, professional fees and other amounts received as compensation. Qualified persons who live and work abroad may elect to exclude from their gross income a certain amount of foreign earned income related to residence in a foreign country during the tax year. The exclusion is $92,900 for 2011 and $95,100 for 2012. Also, to prevent income from being subject to double taxation, you may be entitled to a credit for taxes paid or accrued to a foreign country.
In order to qualify for the foreign earned income exclusion, individuals’ tax home must be in a foreign country and they must satisfy either the bona fide residence test or the physical presence test. Qualified individuals must make a separate election with respect to the foreign earned income exclusion and they must file Form 2555 by the tax deadline. Once the election is made, it will remain in effect for the current tax year and all subsequent years unless revoked. Taxpayers who revoke the election will be prohibited from making a new election for at least the next five years, unless they obtain IRS approval.
Reporting Stock Transactions
Now, taxpayers will have fewer headaches reporting their securities transactions on their tax returns. Determining the cost basis to calculate the profit/loss for each transaction was always a great hassle. This year, the IRS is forcing your broker to give this information to you when you acquire the stocks through them.
Beginning with the tax year ending 2011, all brokerage firms must report not only sales proceeds on “covered” securities, but they must also track and report cost basis data for the client and for the IRS on form 1099B. The word “covered” means securities purchased on or after January 1, 2011. This includes stocks, mutual funds and other securities as designated by the IRS. Securities purchased before that specified reporting date for their type are labeled “non-covered.”
The best thing you can do is to make sure that your broker has the cost basis for all of the securities in your entire portfolio. Especially when you switch brokers, make sure you get this information transferred from the previous broker. Also, you should discuss with your broker the system regarding cost reporting of multiple transactions on the same security. Each broker has his or her own system that could affect your profit/loss realization on these transactions.
Innocent Spouse Relief
Innocent Spouse Relief
The IRS created "innocent spouse relief" for situations where it would be unfair to hold a spouse liable for the tax liability that was created. "Innocent spouse" tax relief is available from the IRS and some states. It can relieve you from taxes, penalties and interest from a joint tax return that you filed with your spouse or ex-spouse.
The IRS has abandoned its controversial stand and will revise regulation imposing a two-year limitation period on taxpayers requesting equitable innocent spouse relief. Now, whoever requests equitable relief will no longer be required to submit the request within two years. Now the request must be filed on Form 8857.
For taxpayers whose requests for equitable innocent spouse relief were denied as untimely and not litigated, the IRS instructed them to re-apply by filing a new Form 8857.
The IRS generally will take no further collection activity with respect to a taxpayer who sought equitable innocent spouse relief in a judicial proceeding where the validity of the two years was at issue and the decision in the case is final.
This is surely good news for the spouse that gets caught between the IRS demands and the tax liability, interest and penalties that result from an error or tax fraud committed by his/ her spouse who acted alone.
VOW to Hire Heroes Act provides tax credits
President Obama signed a new law providing a tax credit to employers who hire military veterans. Named the "VOW to Hire Heroes Act," it was designed to help the approximately 240,000 veterans of the wars in Iraq and Afghanistan who remain unemployed, according to White House records, while the administration reports a total of 850,000 veterans overall are out of work. President Obama commented: "No veteran who fought for our nation should have to fight for a job when they come home."Under this new law, a company can claim a tax credit of up to $2,400 if it hires veterans who have been looking for work for at least one month with a maximum credit increased to $5,600 for hiring veterans who have been searching for work at least six months. Additional employer tax credits of $9,600 will be granted for hiring unemployed veterans with service-related disabilities. The new legislation also provides for veteran job training. The prior law, which was the Work Opportunity Tax Credit (WOTC), is scheduled to expire after December 31, 2011.
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