Sunday, November 17, 2013

Tax "Mis-Information"

Have you received an email with a situation describing how the Federal or State government has passed a law to _____________ (fill in the blank)?  The story sounds quite possible and believable but after digging around and going to a true reference source it turns out to be an "urban legend".  As a tax advisor, I am often sorting out the truth from the fiction.  I think it's critical to ask questions of trusted advisors when you hear of some purported tax scheme, as there many tax court cases where the IRS wins due to erroneous understanding of tax laws, publications or even just frivolous arguments (for examples look for info on Wesley Snipes tax troubles). 

Some recent stories include the 3.8% sales tax on the sale of your home.  The origins of this revolve around the Affordable Care Act/Obamacare law that enacts an additional 3.8% tax on Net Investment Income. Since the sale of a home is generally a capital gain (investment income), the sale of a home MAY be subject to this tax. But there are a couple of hurdles that have to be overcome before this sale is subject to the 3.8% tax - 1) if this is your primary residence and has been owned and used as a primary residence for 2 years out of the last 5 years, the first $250,000 in gain ($500,000 for married taxpayers) is not taxable for income tax or the additional 3.8% tax, 2) the amount that exceeds item 1 then get transferred to Schedule D/Form 8949 and netted with any other gains or losses, if that is a negative then still not subject to the 3.8% tax, 3) the "last hurdle" is to see if investment income is over $200,000 single or $250,000 for married taxpayers and the amount that exceeds that threshold is subject to this additional tax.

As you can see this story started with a kernel of truth but then grew from there.  This also demonstrates that the US tax laws can be overly complicated and difficult to understand or to explain. Because of these reasons, I highly suggest discussing your situation with an advisor that can clearly explain the tax impact of choices before you make that choice because there may be a better way to structure a transaction but you can't make changes once it is done.

Is there a tax question you want to discuss? Send me a comment and I may be able to address that request.

Saturday, November 9, 2013

Defer income or pay tax now?

As an accountant, I generally like things to be "black and white" and have a high degree of certainty.  When dealing with taxes and planning through the year, that high degree of certainty is generally thrown out the window because no one can foretell the future.  Like investing, we can look back and analyze the past for probability of changes and which direction that change may lead, but there is still uncertainty involved in that process.

Most of the during the year planning our office does involves minimizing the taxes for the current year.  That historically is the easiest type of planning because the laws are in place for the current year.  We can plan steps to defer income or increase deductions to the current year.  That leads to a favorable short term outcome but considerations of beyond this year need to be considered so that this year'is actions are not detrimental in a future year.  I observed this several years ago when the large deduction was allowed for SUVs, the full allowed deduction would be taken in one year but the vehicle was financed and payments extended 4-5 years into the future with no major tax break after the first year.  Explaining and understanding these choices can be very beneficial for both the taxpayer and the advisor.

When asked if a deduction should be accelerated or income deferred, my answer is often "it depends". Some of the considerations include: 
- Am I near a change in marginal tax brackets?
- Do I expect income to be higher or lower in the future?
- Does my income exceed thresholds for tax credits?
- Will my income level impact available health insurance subsidies?
- Will I exceed allowable limits on earnings for early Social Security recipients?
- Is my income going to impact Medicare premiums?
- Does lowering my income affect my application for financial aid, sale of my business, line of credit with the bank, ability to refinance my house?
- Do I need the additional income now versus saving for retirement?

And there are other considerations that you may think of that I have not listed, some tax considerations and some not.  Everyone's situation is unique and as such needs attention as such.  I recommend that you review your financial situation more frequently than just at tax filing time.  We call current year planning appointments "mid-year" because it is still during the year and before the clock strikes midnight on 12/31 there is still time to take some action to impact your current year taxes.  

Strive to learn more about your particular situation and take steps to improve your situation.  If you need assistance, please seek the advice of a competent professional. 

Monday, October 14, 2013

2013 Arizona Charitable Tax Credits

2013 AZ Tax Credits

Arizona is a generous state in that it allows taxpayers to direct contributions towards organizations and be provided a state tax credit for those donations. This is a reminder of the tax credits available for these charitable contributions to certain causes (available to those individuals that file and pay Arizona income taxes).

Arizona tax credits are available to reduce your tax liability, but are not refundable. Some of the unused contribution credits are eligible to roll forward to future years (5 year carryover). A taxpayer who makes $1,800 of eligible contributions but has only a $400 liability will reduce their liability to and have $1,200 available for future years. To see if this may be beneficial, you should review your State of Arizona liability for the last year. You will find your 2012 State of Arizona tax liability on Form 140 Line 26. If you have any questions, please contact the office.

Working Poor Tax Credit - $200/$400 Single/Married

List of Qualifying Organizations -

The Working Poor Credit contributions are reserved for charitable organizations that spend at least 50% of their budget on services to Arizona residents who received Temporary Assistance for Needy Families (TANF), households living below a certain income level, or households containing chronically ill or physically disabled children.
I have a personal preference recommendation as I am involved with Helping Hands for Single Moms (a qualified organization) and Becky is involved with ShoeBox Ministry (also qualified).  If you can support these organizations, that would be greatly appreciated.

School Tuition Organization - $514/$2,062 Single/Married

Qualifying Organizations -

The STO credit changed in the past year. It is now automatically indexed for inflation and there is a new additional tax credit available for kids switching to a private school from public school, increasing the total amount available. The purpose of the credit is to allow students attending underperforming schools to attend private schools based on merit or need, however there is no limitation on who may accept scholarships. Additionally, the contribution can now be made up to the April 15 tax deadline and qualify for the prior year as a credit.

For single taxpayers, the 2 credit amounts total $1,031 that you can contribute, the total for married taxpayers is $2,062. You have to inform the school tuition organization of the year the credit is being claimed and if you have made any other contributions.

Credit for Contributions Made or Fees Paid to a Public School - $200/$400 Single/Married
Eligible Organization: Any Arizona public or charter school

Credit amount benefit the school's general activity fund or designated extracurricular programs such as music, sports, arts, and civic activities. This is a great opportunity for individuals to provide funding for programs they are passionate about or participated in during their high school careers. This is also a chance to support an under-served school that might not otherwise get funding.

Arizona Military Family Relief Fund - $200/$400 Single/Married

Arizona Department of Veterans Services This link will  provide access to the form needed to remit your donation.

Contributions to this fund assist military families during the loss of a loved one, unforeseen financial hardships, or rehabilitation stints. This fund, an incredibly worthy cause, is capped at $1 million dollars of contributions annually. I urge you to CONTRIBUTE AS SOON AS POSSIBLE. 

As of November 27, 2013 we have received a total of $610,303.34 to help Arizona's Military Families!

If your contribution is received subsequent to the fund's cap, your contribution will be returned and the credit will not be available.

If you have any questions about how the tax credits are applicable to your tax return, please contact the office.

Best Regards,



Tuesday, October 1, 2013

Affordable Care Act - info to get you started

There has been a lot of information circulating the internet, news outlets and around the office water coolers.  I wanted to try and provide some information related to this re-vamping of the health insurance industry so here is information that I think folks need to know:

1) Individual Insurance coverage is required to be in place as of 1/1/2014.  To help facilitate that, the insurance exchanges open on 10/1/2013 (regardless of Federal shut down or not, this has been deemed an essential government service). To apply for individual coverage, you can go to to find out more information and fill out the application.

The government is providing insurance premium assistance to qualified individuals and families that have income levels up to 400% of the Federal poverty amount.  For a single person that would be up to roughly $44,000 or more to still qualify for assistance. 

If you have Medicare, Medicaid or employer provided insurance, you do not have to apply through the exchanges for insurance.  As long as you have insurance in place for 2014 you will not be subject to the tax (that is how the Supreme Court decided the penalty under ACA is applicable), this includes insurance through the exchange, Medicare, Medicaid or employer plan.

2) another change in the law is more tax related, the limitation on Medical expense deductions.  The limit has been historically subject to a reduction for 7.5% of Adjusted Gross Income, that now changes to 10% reduction.  Taxpayers that have attained 65 years old are "grandfathered" in at the 7.5% for the next few years. This change is effective for the 2013 tax return to be filed in 2014.

For Arizona taxpayers (my home state), there is no reduction or threshold if you itemize deductions.  So all medical expenses may provide tax relief for Arizona taxpayers.

3) Health insurance costs have dramtically increased and are expected to increase for some populations.  Older insured individuals may be provided reduced insurance costs due to ACA, but younger insured individuals will see costs increase. Speaking with a local broker, currently the 64 year old's premium is 6 times that of a 20ish individual, that is going to change to 3 to 1 next year.  Insurance agents and brokers are awaiting rates to be released by the companies.

As I learn more I will attempt to provide updates.

Monday, July 1, 2013

What if you get audited?

The word "AUDIT" is enough to give almost anyone a shiver down their spine.  After the initial shock from receiving notice from either the IRS or from the state taxing agency has worn off, what should you do next?

First review the notice to identify what the tax authority is questioning.  The majority of "audits" in my experience have been computer generated notices of discrepancies between what the taxpayer reported and what was reported to the taxing authority.  This notice is rather intimidating and although it doesn't appear this way, it is asking for additional information to clarify the discrepancy.  The notice also calculates an additional tax due if the discrepancy is correct, but that does not mean an amount to be paid if the original filing was correct.  So review your tax return and if you used a preparer to assist you, contact that to get assistance in responding to this notice.

Secondly, make sure you fully respond to the notice within the time frame provided.  If you are uncomfortable responding, contact a qualified professional for assistance.  The notices always have dates that a response is requested by so be sure you meeet those deadlines.  If you are to contact someone at the taxing agency, be sure to contact them or have your representative (tax preparer) do that once provided Power of Attorney if necessary.  The majority of IRS "audits" are now conducted via mail, so respond in writing and fully explain and address all issues raised on the notice.  If you need to amend your tax return, be sure you amend both the Federal and State returns to correct for any oversights.  If there is an amount due, try to pay as quickly as possible to avoid accruing additional interest and penalties related to the amendment or correction.  If the result is an additional refund to you, you will be entitled to interest as well.

Lastly be prepared to wait.  The IRS and tax authorities are overwhelmed with responses to these notices and send out acknowledgement letters that indicate "thank you for sending in your response, we need more time to review and will follow up with you within XX days."  So be patient as the tax agency reveiws your response and attempts to resolve the issue.

Sometimes it may take more than one response to get an issue resolved.  Again be patient as you work with the representatives at the tax agency to resolve the issue.  Generally being polite and respectful with the representative is more appreciated by both the representative and yourself, as the old saying goes - "you can catch more flies with honey than with vinegar."

Love is in the air...

Ah...Summer love, that time of year when young (or not so young) couples may decide to get married.  It is a joyous event and a time to celebrate the joining of two families into one new family.  The newlyweds then proceed to go on a honeymoon to celebrate their nuptials and then return to go back to work as the new Mr. and Mrs.

But you may be asking why is a tax professional writing about the topic of marriage and that answer is simply, almost every decision we make has an impact on your tax calcuations.  Marriage is no different and the IRS even sent out a recent reminder of things to review when you have gotten married like:

  • It’s important that the names and Social Security numbers that you put on your tax return match your Social Security Administration records. If you’ve changed your name, report the change to the SSA. To do that, file Form SS-5, Application for a Social Security Card. You can get this form on their website at, by calling 800-772-1213 or by visiting your local SSA office.
  • If your address has changed, file Form 8822, Change of Address to notify the IRS. You should also notify the U.S. Postal Service if your address has changed. You can ask to have your mail forwarded online at or report the change at your local post office.
  • If you work, report your name or address change to your employer. This will help to ensure that you receive your Form W-2, Wage and Tax Statement, after the end of the year.
  • If you and your spouse both work, you should check the amount of federal income tax withheld from your pay. Your combined incomes may move you into a higher tax bracket. You can make changes to your withholding by submitting a new form W-4 to your employer.
  • If you didn’t qualify to itemize deductions before you were married, that may have changed. You and your spouse may save money by itemizing rather than taking the standard deduction on your tax return.
  • If you are married as of Dec. 31, that’s your marital status for the entire year for tax purposes. You and your spouse usually may choose to file your federal income tax return either jointly or separately in any given year. You may want to figure the tax both ways to determine which filing status results in the lowest tax. In most cases, it’s beneficial to file jointly.  Also if you live in a Community Property state, different rules may apply to allocation of income between the spouses so please consult with a professional to determine if this impacts you.
I recommend that you consult with your advisor to see if and how you may be impacted and do that while you can still make changes to avoid a big surprise when you go to file your tax returns next April.