Comments on Tax Laws and Changes
December 20, 2011
Well,
here we are again! It’s the end of December and we still don’t
know what is happening to your paycheck next month. With all the
talk in Washington about “extending the payroll tax cut”, I’d like
to point out a few truths that the politicians and media people
aren’t telling you.
You
may not know that your “payroll tax” is the amount taken from your
paycheck and paid into social security, which is then paid out to
Seniors, orphans, and the disabled in social security benefits.
You remember, don’t you? This is the same social security that
badly needs fixing because it is going broke!
Hmmm ….
You
may or may not know, too, that the “payroll tax cut” is from the
employee’s side of the paycheck only. Your employer must still pay
in the full amount of social security and medicare. So how exactly
will “extending the payroll tax cut” create new jobs? And how
exactly is it going to help YOU if you aren’t getting a paycheck?
Hmmm …..
Anyone
out of work and unable to find a job is a tragedy, but being a
“numbers person”, may I point out that if unemployment is at 10%,
it means that 9 out of 10 people are working! Not as bad as parts
of the world where 1 out of 3 or 4 are unemployed.
Hmmm ….on-line
April 4, 2011
Another Tax Season is almost over!
I thought I would post answers to a couple of recurring questions
I hear each year. I hope these are a help to you.
Q.
I owe federal and state taxes. Isn’t there some place on-line
where I can use a credit card to pay the
tax I owe?
A. Two
websites come to mind. Both are independent of the IRS or state
Dept of Revenue and charge a fee for the service. You can go to
www.officialpayments.com or to
www.1040paytax.com to pay both
the state and the federal tax due.
FYI
You are allowed to
deduct the fee charged to pay your taxes with a credit card off
next year’s tax return.
Q.
You’ve sent the money in for a Roth IRA and now you find out
that your income is too high to
contribute to a Roth. What are you supposed to do?
A.
If your income is too high for a Roth IRA, it is also too high for
a deductible IRA, but you CAN contribute to a non-deductible
Traditional IRA. What you want to do is called a
recharacterization. Contact the company and ask them to: a)
send back the money you put into the Roth, or b) recharacterize it
to a traditional IRA.
Don't
mix this money with any 401k rollovers or deductible IRAs, which
are pre-tax contributions and fully taxable when you make a
withdrawal.
Since
this Roth contribution is after-tax money, you will be able to get
your original investment back tax-free when you withdraw it, and
only the interest will be taxable.
A word
of caution: a reporting form goes to the IRS annually. If you
leave this year’s contribution in the Roth, there is a 6% annual
Excise Tax until you take it out.
March 17, 2010
Happy St Patrick’s Day!
What a week this has been. Calendar year
corporate tax returns are due on March 15, so those of
us who prepare corporate tax returns as well as personal tax
returns have TWO deadlines during tax season. Life is interesting!
Most of the corporate returns I prepare are small
businesses and new businesses, and there lies the problem.
Have you heard of LLCs? If you
are a company doing business as an LLC, when is your tax return
due?
There are many good reasons for a small
business to be an LLC - all of those reasons deal with Legal
Protection, but an LLC does not exist in Tax Law. A lot of
small businesses assume they are corporations, or S-Corps, because
they formed as an LLC. IRS says No. If your company is a
single-person LLC, you are a Sole Proprietor for tax purposes. You
report your business income and expenses on a Schedule C and
attach it to your personal tax return. If you and a couple friends
form an LLC and start a business together, you are a Partnership.
The Partnership tax return is due April 15, and the K1, showing
your share of the income and expenses, must be included on your
personal tax return, also due April 15.
So, how does an LLC get to be treated as a
corporation by the IRS? The company has to
file a form with the IRS electing
the change. IRS Form 8832 is used to change a sole proprietor or a
partnership into a corporation. Form 2553 is an election to be
treated as an S-Corp (small business corporation). The IRS has
made things easier for an LLC to choose to be treated as an S-Corp
by allowing the company to bypass Form 8832 and make the request
on Form 2553, but failure to submit the formal request means
that, for tax purposes, you are not a corporation!
March 10,
2010
The Housing Market
hasn’t improved much and I am getting a lot of questions about
“Short Sales” – that is giving
the property back to the bank for the amount of the mortgage you
still owe on it; a common alternative to foreclosure – and
what the tax consequences are. Here is my answer to one
client’s question about a short sale of a condo he rents:
If you lived in the
condo for 2 of the past 5 years, it will qualify as a personal
residence. Assuming the mortgage is still the original debt,
selling a personal residence on a short sale would have no (zero)
tax consequences. I don't think your condo will qualify
because it was a rental.
Therefore, the short sale will probably result in a taxable gain
to you. Here's why: In a short sale, you are "selling" the
property back to the bank for the amount of the remaining
mortgage, but the bank doesn't want the real estate (they are in
the money business, not the housing business), so the bank will
eventually sell the property for whatever they can get for it.
Since you have been unable to sell the property yourself, you have
a pretty good idea of how THAT sale will go! The bank will then
send you a statement (called a 1099-C*)
for the difference between the selling price and the amount that
was still owed on the mortgage. That difference is a taxable
gain.
So how much should
you sell it back to the bank for? Good question. I don’t see
any way you can win in this situation. The condo is not going to
sell for anything close to what you paid for it. The lower you
can get the bank to agree to, the better for you, but start
putting money aside for taxes next year! That
1099-C gets taxed just like any other income at your personal tax
rate. Ouch!
*
Almost all 1099-C are taxable. This form is commonly issued for
settlement of debt (like paying $5000 to settle a $10,000 credit
card debt) and we have seen a large increase in their frequency
over the last couple years with the down-turned economy. It
sucks that you settle a debt only to get clobbered on your
taxes.
January 21, 2010
You do not owe tax on the total
amount you receive from the sale of
inherited stock.
Great news! So how do you handle the sale of inherited stock?
Note, first of all, that inherited stock and stock you receive as
a gift are handled differently. My comments here are for stock
that was inherited and not received as a gift.
You must find out what the dollar
value of the stock was on the date of death. You can get the
amount from the estate attorney, contact a Broker, or go on-line
(I use
www.bigcharts.com). Your basis in the stock is that per share
amount for however many shares you received from the estate. You
may own more shares than that, however, because of dividend
reinvestments. So you also need to know how much the dividends
were (because you paid taxes on the dividends each year even
though you did not receive the cash from them), and you need to
know how many shares those dividends bought. The determination
gets more complicated if there was a stock split anytime while you
owned the stock.
IRS allows you to use several
different methods to figure the capital gains as long as you stick
to the same method for as long as you own those shares. The most
commonly used method is average cost basis where we take
the inherited cost of the stock and add the amount of dividends
reinvested and divide the total by the number of shares to come up
with a cost basis per share.
If you are not selling all of
the stock, you may prefer to use either the FIFO (first in, first
out) or LIFO (Last in, first out) method, but once you begin
either method, you must continue using the same method as long as
you own the stock. In both cases, you need to know your cost for
each share you own, whether inherited or bought with dividend
reinvestment. Most importantly, you need to keep accurate,
written records of when the stock was received and what shares
were sold when.
January 14, 2010
For years I have been telling clients that they should take a
loan
against their 401k instead of withdrawing the money. The tax
issues are:
-
A loan can be repaid, thus
preserving your retirement funds. Once withdrawn, your
retirement money is gone.
-
Any money withdrawn is taxable; a
loan is not.
-
If you are under 59 ½ years old,
you owe an additional 10% penalty on any money withdrawn.
As long as you planned to stay with the company, a loan instead of
a withdrawal made a lot of sense. You were able to use the money
now and postpone the tax consequences until some future date when
you decided to retire, at which time you would be over 59 ½. You
would owe the tax on the amount of the loan still unpaid, but
avoid the 10% penalty. Even better, with a paycheck deduction,
eventually you would pay it all back.
Now I am talking to people who planned to stay with the company
until retirement, but the company downsized, or the company got
bought out, or the company went out of business, and quite
unexpectedly, they find themselves out of a job. What happens to
the loan they had against the 401k?
Suddenly, my advice isn’t so great anymore. Once you leave the
company, no matter what the reason, the loan against your
401k becomes a distribution, fully taxable in the year you leave
the company. If you are under 59 ½, it is also subject to a 10%
penalty for early withdrawal. This is true, even if you did
not have the choice of leaving the company. You may have
borrowed the money years ago, but now you are faced with owing tax
on money you don’t have, at a time you can least afford it. It
isn’t fair, I know, but taxes rarely are.
