Sunday, April 16, 2017

Sticker Shock From The Tax You Owe: Read This!


Everywhere these days commercials are vying to get you to spend your big tax refunds on their products and services..oh yeah even that liposuction place! But you just finished preparing your taxes and you find out you OWE Uncle Sam big bucks. That is quite the sticker shock if you are short on cash or are unprepared.

There is one school of thought that it is okay owing at the end of the year as long as one does not pay penalties-- at least you did not have the government keep your money interest free! 

But if you don't like that line of thinking and owing money, here are some steps you can take to make life easier at tax time: 

1.  Check Your Withholding:   

Check the Forms W-4 you have filed with your employer to make sure you are having enough taxes taken out of your salary. The more taxes you need to be taken, the lower should your withholding number should be. It also matters if you put down if you are single or married. Many people get confused with the Form W-4--it lets you manage your cash flow from your paycheck. 

2. Paying In Quarterly If You Are A Freelancer: 

This is how I think most freelancers can reduce the pain of owing a lot at tax time or the uncertainty of not knowing how much they will pay. The freelancer has more options as far their write-offs go. They can take certain expenses such as mileage, home office, supplies etc and reduce their income. 

3.  Check if You Qualify For Contributions to IRA:

If you have the cash, and if your income limits permit, you have time until the deadline to contribute into a Traditional IRA for the previous tax year. You can contribute a maximum of $5,500 (with a catch-up of $1000 if you are over 50 years old) and defer some income from taxes. Plus if your income is within the qualifying limits, you will also earn a Retirement Credit. 

4. If You Are Married, play out the "Married Filing Separately" scenario

Almost all married couples benefit from filing jointly but it doesn't hurt to run a mock "Married Filing Separately" scenario to check if you could potentially reduce taxes. This is especially true of high-earners. Filing separately may put each of you in a lower income bracket and qualify you for some contributions and/ or deductions. Note: Do check if the state you live in is a community property state, rules here will be different for "married filing separate". 

5. Apply For An Extension: 

Okay so you are still in sticker shock, take a deep breath, apply for an extension. Get some time to figure out your finances and arrange for money. Send in as much as you can with the extension and check out the Internal Revenue Service's various resources for:


  • Installment / Payment Agreements: This can be done online or by filing Form 9465 with your tax return. You will qualify for this if you owe less than $50,000 as an individual or $25,000 as a business.
  • An Offer-In-Compromise: You can find out if there is a way to settle your debt for less than what you owe.  
  • Delay The Collection Process: The Internal Revenue Service may determine that you cannot pay your tax debt and delay action in collecting it. But penalties and interest keep accruing till the debt is paid off. 

These three suggestions above are all complicated methods of paying off your taxes and you will need professional assistance from an Enrolled Agent.

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As always, read my disclaimer here. Please consult a qualified tax professional for your unique tax needs. More of my contact information is on my website, www.mntaxbiz.com.





Sunday, March 26, 2017

Procrastinators Of The World Unite-File Your Taxes!

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Are you a straggler when it comes to filing taxes? You are not alone! There are many who dread the idea, in fact I know of many tax consultants who have someone else file their own. If you are the glass-half-empty type, then brace yourself, April 18th is right around the corner and the clock is ticking. If you are the eternal optimist, then yes, you still have time to get all your documents together and well, file an extension so you have more time to keep calm and file your taxes. 

Did you know that stalling too long increases your risk of falling prey to tax refund fraud? Not only so, you may also be slapped with hefty fines and the dreaded failure-to-file penalty. If I have scared you into action now, that's great! Let us look at what you can do to get going.

Gather your paper-work. I like to send my existing clients a tax organizer in January so they have their filing history to go off on and get started gathering their paper-work. If you do not have such an organizer, you can also look at your previous years' tax returns and put your paper-work together. 

If you have large stock sales, make sure you go through the sales and check if you have the dates of purchases and cost information of the various stocks sold. This is one of the major areas where taxpayers leave money on the table by over reporting their stock sales and not backing out the costs of such stocks sold. 

Do you have receipts for all the deductions you will have to claim? Even if you did not itemize one year, you may have enough expenses to be able to itemize in another year. The trick is to collect the information you need and check every year if the total of the itemized deductions goes over the standard deduction. Usually a large medical expense or a charitable donation might trigger you going over the standard deduction. 

If you do not feel confident enough to tackle this arduous task on your own or your situation is more complicated than the average taxpayer, you will have to find yourself a professional to file your taxes. And you just cannot go to anybody, you must go see an Enrolled Agent, especially one who is a member of the National Association of Enrolled Agents. You can find one in your area by going to this website

Don't let the fear of owing the government keep you from filing. There are options for you to pay a large tax bill. If you owe less than $50,000, you can get into an installment plan with the Internal Revenue Service. You can also pay with a credit card or take a loan but there will be interest charges.

If you think you need more time to gather your paper-work and file your taxes, you will need to file an extension via Form 4868. Most states accept the federal extension, for some you have to mail in a separate state extension. Filing an extension gives you time till October 15th to file your main return. 

Don't let Uncle Sam or Lady Liberty waving to you from the neighborhood curb make you cringe. Go find an Enrolled Agent and take care of your taxes! 

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As always, read my disclaimer here. Please consult a qualified tax professional for your unique tax needs. More of my contact information is on my website, www.mntaxbiz.com.


  





Friday, March 17, 2017

Tax Due Dates & the FBAR: Get With The NEW Program Peeps!

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Remember all that excitement around the Surface Transportation and Veterans Health Care Choice Improvement Act? Yes, I bet you do! We talked about it in this post. So it is here- the new FinCEN Form 114 (AKA FBAR) filing deadline!  

For those who are new to Foreign Bank Account Regulations {FBAR}, a quick refresher:

The Bank Secrecy Act, P.L. 91-508, and its regulations require FBAR reporting from “each United States person having a financial interest in, or signature or other authority over, a bank, securities, or other financial account in a foreign country”, if the aggregate maximum values in that person’s foreign accounts exceed $10,000 at any time during the calendar year (31 C.F.R. §1010.350(a)) and (31 C.F.R. §1010.306(c)). 


FBAR reporting applies to U.S. persons, as defined by regulations under Title 31, which along with individuals can also include certain corporations, partnerships, trusts, estates, and other entities. While this is a broader requirement than for individuals required to file Form 8938, the latter has been extended in recent regulations to include certain specified domestic entities. 

Also see my post here. And here

New FBAR Extension and Due Dates:

The Act changes the deadline for the FBAR from June 30th to the April 15th, which is the due date for an individual who is resident in the United States. In addition to this, the FBAR can be extended for a period of six months ending October 15th, just as an Individual tax return. 

For those who are not resident in the United States and have to file a US tax return, there is an automatic 2 month extension until June 15th {Under § 1.6081-5}. Under the Act now this extension is available to their FBAR filing as well. 

For those who are filing an FBAR for the first time, the Act specifically states that, "[f]or any taxpayer required to file [an FBAR] for the first time, any penalty for failure to timely request for, or file, an extension, may be waived by the Secretary." 


These due dates are applicable to those returns filed after December 31st, 2015. 

How To Extend Your FBAR?:

According to the information put out on the FinCEN Website, "FinCEN will grant filers failing to meet the FBAR annual due date of April 15 an automatic extension to October 15 each year.  Accordingly, specific requests for this extension are not required".

What Happens If You Filed Your Tax Return On Time But Not The FBAR?:

From information put out by FinCEN and experts weighing in, it has been explained that the six-month extension is automatic for each year and the taxpayers do not have to request extensions. 


Please contact your Enrolled Agent or other tax professional if you think you may be impacted by the above changes. 

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As always, read my disclaimer here. Please consult a qualified tax professional for your unique tax needs. More of my contact information is on my website, www.mntaxbiz.com.





Thursday, February 16, 2017

Tax Season is On NOW...Find Yourself An Enrolled Agent!

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Tax season officially opened January 23rd and I happened to catch an ad on television of Humpty Dumpty doing his taxes sitting on the wall using an over-the-counter tax software bundle on his phone!  Well, no surprise there but yes, Humpty Dumpty did have a great fall and yes, he did crack up! I guess there is a moral to this story...my take on that is NOT to do your taxes on the phone in the first place but then again if you are Humpty, you are not going to listen to me, are you?

It is February 16th today, unlike Humpty here, I hope you have started gathering your papers and made an appointment with your tax professional. Speaking of tax professionals,  there are only three kinds of tax professionals who have unlimited practice rights. What this means is that they are unrestricted as to which taxpayers they can represent, what types of tax matters they can handle, and which IRS offices they can represent clients before.  

An Enrolled Agent is the only federally-licensed tax practitioner who both specialize in taxation and have unlimited rights to represent taxpayers before the Internal Revenue Service. 

This is a tax professional who has earned the privilege of representing taxpayers before the Internal Revenue Service by either passing a three-part comprehensive IRS test covering individual and business tax returns, or through experience as a former IRS employee. Enrolled agent status is the highest credential the IRS awards. 

Individuals who obtain this elite status must adhere to ethical standards and complete 72 hours of continuing education courses every three years. The Enrolled Agent is governed by the rules set forth in the Treasury Department Circular No. 230 and is subject to a rigorous background check by the IRS before they are conferred a license. 

The National Association of Enrolled Agents {NAEA} is one of the premium organizations for Enrolled Agents. Members of the NAEA have to complete 90 hours of continuing education credits every three years in order to maintain their NAEA membership status. 

Navigating through tax rules and regulations is not for the faint of heart, hire an Enrolled Agent today to help guide you. Find an Enrolled Agent here.  

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As always, read my disclaimer here. Please consult a qualified tax professional  Enrolled Agent for your unique tax needs. More of my contact information is on my website, www.mntaxbiz.com





Saturday, January 14, 2017

Trust Fund Recovery: Penalties & Pitfalls

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I for one am glad that 2016 finally ended. Coming out of a contentious election with a boat load of vitriol thrown around, I don't know about you, but I was swinging between the need for relief for it all to be over and the fear of who would take over the presidency and if it would go into capable hands. I am so glad tax season started so I can get to the business of preparing returns! 

Every year I get a mix of audits my way, but in Tax Year 2016 it seemed as if I saw more than my share of Trust Fund Recovery audits fall into my lap. Some of these small businesses had a tax preparer assisting them and some were on their own. 

Trust Funds are those payroll taxes that are withheld from employees' salaries and are to be deposited into the Employer's account with the IRS on a timely basis. To help ensure that taxpayers remit these taxes properly and on time, § 6672(a) imposes a penalty on any person who is responsible for paying and willfully fails to do so. This penalty is known as the Trust Fund Recovery Penalty or TFRP for short. 

These funds are considered to be held by the business "in trust" for the government. The responsible person in the business needs to deposit these taxes on a timely basis. 

The timeliness of the deposits is determined by the amount of the withholdings. This could be every week/ semi-weekly/ monthly. Businesses are also liable to pay the Federal Unemployment Tax (FUTA) once a year. FUTA is discounted if the employer is signed up for the State Unemployment taxes (SUTA). The SUTA liability is based on the state where the employee is located. So if an employer has employees in various states, they have to keep track of the state unemployment insurance liability in each of those states. 

The failure to pay trust fund taxes and/ or the failure to deposit these taxes on time means that either the business or the responsible person is subject to very heavy penalties. Typically, The amount of the penalty is equal to the unpaid balance of the trust fund tax (e.g., Social Security, Medicare, and income taxes)

The penalty is computed based on:

  • The unpaid income taxes withheld, plus
  • The employee's portion of the withheld FICA taxes.

For collected taxes, the penalty is based on the unpaid amount of collected excise taxes.

Generally, assuming Forms 941, Employer’s Quarterly Federal Tax Return , or comparable returns were timely filed, the IRS has three years to assess the TFRP from the April 15 that succeeded the return’s due date (IRM §5.7.3.5). If the business’s return was filed after the due date, the statute of limitation begins to run from either the April 15 that succeeded the return’s due date or three years from when the return was actually filed, whichever is later. However, false or fraudulent returns or substitute returns prepared by the IRS under Sec. 6020(b)(1) do not start the running of the statute. 

Many employers outsource their payroll and related tax duties to third-party payroll service providers. They can help assure filing deadlines and deposit requirements are met and streamline business operations to a large extent. But remember, employers are ultimately responsible for the payment of income tax withheld and both the employer and employee portions of social security and Medicare taxes.

New Deadlines: The PATH Act, enacted in December 2015, includes a new requirement for employers: They have to now file their copies of Form W-2, with the Social Security Administration, by January 31st. The new January 31st filing deadline also applies to certain Forms 1099-MISC reporting non-employee compensation such as payments to independent contractors.

One 30-day extension may be filed by January 31st via Form 8809, Application of Extension to File Information Returns. 

I always recommend that a small or medium business hire an Enrolled Agent to oversee their Payroll Taxes payment and filing even if the process has been outsourced to a payroll provider. This ensures 2 sets of eyes on the trust funds. Please call your tax professional immediately if you believe that there may be mistakes on your payroll returns. 
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As always, read my disclaimer here. Please consult a qualified tax professional for your unique tax needs. More of my contact information is on my website, www.mntaxbiz.com






Monday, November 28, 2016

Foreign Asset Reporting For Entities: New for 2016!



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There is a lot of attention these days on big companies (Apple, Google, General Electric, Facebook and others) stashing their earnings overseas in what are considered tax havens to avoid paying US taxes on their corporate income. Some international tax reform proposals have been suggested as to how to get the corporation to either bring this stash back into the US by way of a "repatriation holiday" or "deemed repatriation" or ending the system of tax deferrals. 

These rules and proposed tax reforms are for the big players, in the mean time, what is happening with the little guys?

For those of us tax professionals who specialize in international tax and compliance with FATCA, Form 8938 has played a big role since 2011. I wrote in detail about this Form and its filing requirements in my widely read blog post here. The Form 8938 had applied to individuals alone and entities had not been considered as falling under the law to report their Specified Foreign Financial Assets {SFFA}. 

What changed in 2016? 
The Treasury Department and the Internal Revenue Service {IRS} adopted § 1.6038D-6 (REG-144339-14) early this year as final. As per the new regs, for tax years beginning after December 31, 2015, certain domestic corporations,partnerships, and trusts that are
considered formed or availed of for the purpose of holding, directly or indirectly, specified foreign financial assets must file Form 8938 if the total value of those assets exceeds $50,000 on the last day of the tax year or $75,000 at any time during the tax year. 

What is a Specified Domestic Entity {SDE}?
§ 6038D(f) defines an SDE as "any domestic entity which is formed or availed of for purposes of holding, directly or indirectly, specified foreign financial assets, in the same manner as if such entity were an individual". 

An entity can be a corporation, partnership or a disregarded entity. 

In order to be classified as an SDE, the entity has to make a determination every year 
under Treasury Regulation § 1.6038D-6(b)(2) if: 
  • At least 50% of the corporation or partnership’s gross income or assets is passive; 
                                                                   OR
  • At least 80% of the corporation or partnership’s gross income or assets is closely held directly, indirectly or constructively by a specified individual on the last day of the corporation's or partnership's tax year. 

Is A Trust a Specified Domestic Entity?:
A trust could be broadly considered an SDE under the new rules if it has one or more specified individuals as current beneficiaries. A "current beneficiary" is generally any person who at any time during the tax year is entitled to, or at the discretion of any person may receive, a distribution from the principal or income of the trust (determined without regard to any power of appointment to the extent that such power remains un-exercised at the end of the tax year).

There are many exceptions to a trust being considered an SDE. One can determine this only after careful reading of the regulations. Some of the excepted trusts include REITs, IRA accounts, § 403(b) or § 457(g) plans. A Grantor Trust is also exempt from reporting SFFAs under the new regs.

The above rules are in effect for Tax Year 2016 that is the coming 2017 tax season. If the above rules effect you and you do not take any action, the penalty for non-disclosure is $10,000 for failure to file the Form 8938 up to a maximum of $50,000. 

The tricky and complicated part of tax compliance here is determining if the SDE passes the passive income test; the 80% closely held test; and the total income from all sources. 

Please contact your Enrolled Agent or other tax professional if you think you may be impacted by the above changes. 


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As always, read my disclaimer here. Please consult a qualified tax professional for your unique tax needs. More of my contact information is on my website, www.mntaxbiz.com




Thursday, November 17, 2016

2016 Year End And Tax Planning: What To Expect?

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When that first leaf changes color, there's a nip in the air, and the sunshine starts to fall into corners it did not before, you know the year is coming to an end. Typically that is when I start getting phone calls for year end tax planning. 

This year has been tumultuous, to say the least, as we recover from all the pre and post election trauma or elation depending on which candidate you favored, we need to put our tax plans in place based on what we know about likely tax changes for 2017 and 2018.

Most tax planning usually starts with identifying the need to either postpone income & accelerate deductions if you think you are going to be in a lower tax bracket in the coming years OR to accelerate income & postpone deductions if your income is going to increase. And then we look into your withholding and taxes, your employer retirement contributions etc. 

Filers who claim itemized deductions on their taxes are the ones who have the flexibility in shifting deductions. For example, one can send in the last estimated tax check before December 31st to claim the deduction in the current year. A mortgage payment for January can be made in December and your charitable contributions for 2017 can be moved back as well. 

If your total medical expense for any reason is over 10% of your AGI, you can have any elective procedures before December 31st so you will be eligible for the tax write-off as well. This is especially very important if you are 65 years of age or older since the special 7.5% medical cost threshold is gone for the Tax Year 2017 and you get the same 10% medical cost threshold as the rest.

If you are going to have a spike in income and that is going to put you into the Alternative Minimum Tax category, the planning of deductions will change. 

Now would also be a good idea to visit Capital Loss Harvesting or Tax Loss Harvesting and see if that will be a right strategy for you. The basic premise of this fancy term is that you sell off your low-yield investments or those that have lost value to off-set the gain(s) from the sale of those that increased in value. There are downside risks to this strategy that you should have your tax professional or financial advisor weigh in for you. 

Speaking of tax planning for the coming years, we must take into reckoning some important points from President-Elect Trump's proposed tax plan. These proposals stand a very high chance of passing since both the House and the Senate are in Republican hands & they have been itching for tax reform. From many accounts and experts weighing in, these plans if implemented will reduce revenue by an estimated $7.2 trillion in the first decade and as a result deficit is expected to increase as well. 

Proposed Tax Plan from President-Elect Trump:

  • Tax brackets reduced to three: 12%, 25% and 33%.
  • Elimination of:
         a. Alternative Minimum Tax.
         b. Head of Household filing status.
         c. Net Investment Income Tax.
         d. Personal Exemptions.
         e. Estate Tax
  • Business tax rate lowered to 15%.
  • Cap on itemized deductions at $100,000 for single filers and $200,000 for married filing joint. 
  • Standard deduction $15,000 for single filers and $30,000 for married filing joint. 
  • Low-income families get a credit up to $1200 a year for child-care costs. 
  • Carried interest is taxed at ordinary tax rates instead of capital gains rates. 

Based on the above, 2016 would probably be a good year to accelerate your charitable contributions. This is especially true if you are in a higher income tax bracket, the percentage of savings is higher as well. Donating appreciated stock to a tax-exempt charity is also a good way to increase your itemized deductions. 

We do not know yet how the GOP will go with the proposals, please check with your Enrolled Agents and make sure advice is tailored to your unique situation. 

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As always, read my disclaimer here. Please consult a qualified tax professional for your unique tax needs. More of my contact information is on my website, www.mntaxbiz.com.