Foreign Financial Asset Reporting

2011 is the first year that information on foreign contracts, foreign financial accounts, or stocks issued by a foreigner has to be attached to your income tax return. If the foreign assets exceed $100,000 on a joint return or $50,000 on a single return on 12/31/11, the information on the assets has to be reported on form 8938, Statement of Specified Foreign Financial Assets. There is a $10,000 penalty if you don't comply.

Cash or Check Donations of $250 or More

In order to deduct a donation of $250 or more, you have to get a written acknowledgement from the charity. This can be an email, and it does not have to be attached to the tax return. Charities are required to give you a written acknowledgement for any donations of $250 or more given at one time. A cancelled check is not good enough for the IRS. Protect yourself by getting those acknowledgements.

Medicare

Medicare comes in the following 4 parts:
Part A: This is hospital insurance and covers inpatient hospital care, hospice and home health care.
Part B: Outpatient care and doctor services are included here under medical insurance. Individuals pay a monthly premium each month for this coverage starting at $96.40.
Part C: This covers medicare advantage plans provided by private companies which provide additional coverage such as vision, dental and hearing programs.
Part D: This is the prescription drug option run by private insurance companies.

The one thing that medicare doesn't cover that can end up costing a huge amount of money is long term care like at a nursing home or assisted living facility.

Applying for Social Security and Medicare

You should apply for social security benefits 4 months before you want to start the benefits. You should apply for medicare 3 months before the month you turn 65. There is a penalty of 10% of the cost of medicare part B for each year you delay enrolling.

Volunteer Work

When you work for a charity you can deduct your out of pocket costs like mileage and postage. However,  you can't deduct the value of your time or services.

Spousal Social Security Benefits

The best way to maximize spousal benefits is to have the higher earning spouse wait to age 70 to apply for benefits and have the other spouse apply at say age 66 under their account. The lower earning spouse will get 100% of their benefit assuming full retirement age at 66 and then can switch to receiving 50% of the higher earning spouse when that spouse applies for benefits at age 70 assuming that amount is higher. Your family can then end up  with a max of 150% of the higher earning spouse's benefit. If your spouse dies, you can apply for 100% of their benefit as early as age 60. You can receive benefits based on an ex spouse's record if you are unmarried and were married to the ex spouse for at least 10 years.

Buy that New Truck!

New trucks, vans and SUVs with loaded gross vehicle weight in excess of 6,000 pounds bought for a business can qualify for 100% bonus depreciation based on 100% business use. This bonus depreciation applies to new qualified assets placed in service from September 9, 2010 through December 31, 2011. Note that it expires at the end of this year so act now.

Social Security Benefits

The calculation for social security benefits is based on your highest 35 years of earnings (W-2 wages and self employment income). This is called the primary insurance amount (PIA) and you want it to be as high as possible. If you didn't work for some of those years, you'll have some zeros which will drive the PIA down. To maximize your benefit, you may want to consider working longer to replace some of the lower wage years.

Basis

If you sell an asset, how do you determine whether you had a taxable gain or loss? It seems simple but it's not. You first have to determine the basis of the asset which is cost plus acquisition and installation charges if you purchased the asset. If you received the asset as a gift, then your basis is the donor's basis or the fair market value (FMV) at time of gift  determined when you sell the gift property. If you sell at a gain it is the donor's basis, and if you sell at a loss it is the lesser of the donor's basis or the FMV at time of gift. Inherited property basis is the FMV at date of death. Does any of this matter if you sell the family car for much less than you paid for it? No because a loss on the sale of property used for personal purposes is not deductible.

Foreign Charities

In general, donations to foreign charitable organizations are not tax deductible. However certain Canadian, Mexican, and Israeli charities qualify for US tax deduction per their income tax treaty with our country.

Taxability of Insurance Claims and Lawsuits

If you receive money from a lawsuit or insurance claim, is it taxable?  It isn't if it is paid on account of physical injury or illness. Even if you receive damages for emotional distress relating to an injury it still isn't taxable. The following damages are taxable: punitive damages, interest on awards, discrimination, slander, defamation, libel, and harassment. Payment for property damages less than basis is also not taxable.

IRAs and Roths Differences and Similarities

The regular annual contribution limit for both is $5,000 and they both grow tax free. You have to have earned income up to $5,000 to make the maximum contribution. You have to start taking money out of your IRA at age 70 1/2 but you aren't forced to with a Roth. When you take money out of an IRA it is generally subject to income tax. Qualified distributions from a Roth are nontaxable. The Roth contribution is not tax deductible but an IRA contribution is if you are not covered by an employer retirement plan. If you are covered by an employer plan, the deduction is subject to a phase out based on adjusted gross income.

Feeding Your Employees

You can provide the following items to employees without adding to their W-2s:
1.Coffee, doughnuts, soft drinks or similar items.
2. Occasional meals provided to an employee working overtime.
3. Occasional parties or picnics for employees and their guests like the office Christmas party.
The IRS calls these items a de minimis benefit and allows you to deduct their full cost instead of the normal 50% for business meals and entertainment. It is the best of both worlds, a full tax deduction for you and no compensation for the employee.

Are Inheritances Taxable?

Suppose you get two million dollars from your deceased Aunt Sally per her will. Do you have to give the IRS a portion of that? No you don't as long as none of the money came from retirement accounts such as IRAs or 401ks.

US Treasury Bonds and State and Local Bonds

US Treasury bond interest is subject to Federal tax but not state tax. State and local bond interest is exempt from Federal tax and state tax if the bond is from your state of residency. For example, a bond for Fulton County GA is exempt from Federal and Georgia tax if you are a Georgia resident. This can be a nice way to receive totally tax free income. If you are a Georgia resident and you have bond interest from a California city bond, the interest is not subject to Federal tax but  is subject to Georgia tax.

$100,000 Penalty OMG!

The IRS really wants you to disclose any foreign bank accounts. If you have over $10,000 in the bank account at any time during the year, you need to fill out form TDF 90-22.1. Only the government could come up with such a form number. There is no tax due as the IRS only wants information regarding the account. If you willfully fail to follow the rules, the IRS can hit you with a penalty up to $100,000.

How Long Should You Keep Tax Records?

You should keep copies of the tax returns forever. The documents supporting the return should be kept for the current year and the three previous years. Records showing the cost or basis of an asset you own such as real estate or stocks need to be kept until the asset is sold.

Nondeductible Contributions

You can't take a tax deduction for the following contributions: politicians or political groups, individuals, most foreign charities, a group lobbying for law changes, raffle tickets, and even giving blood to a blood bank. If you donate your time to a charity, that isn't deductible either. You usually can deduct your out of pocket expenses working for a charity though.

Employee vs Independent Contractor

The IRS wants everyone to be an employee because tax compliance and collection are better with employees than with independent contractors. One way to make the case that your workers are independent contractors is to show that they work for others too and not just for you. How can you show that? Make sure your workers have business cards which they use to promote their services out to the general public.

Hobby Expenses

Hobby expenses are only deductible to the extent of hobby income, and to even make it worse they  are subject to the 2% of adjusted gross income limitation as miscellaneous expenses on schedule A. So you want the IRS to think of your activity as a business and not a hobby so all of the expenses are deductible. How do you do that? You may have to prove to the IRS or a court based on all of the facts and circumstances that you intend to make a profit such as keeping businesslike books, using a business checking account, using a separate credit card for business, and developing an expertise in the activity. You may not have had a profit in ten years, but if you can prove you intend to make a profit you are ok. You also help your case if there are no elements of personal pleasure or recreation in the activity.

You Can Have A Gold IRA

If you are really worried about the stock market, inflation, or can't stand the incredibly low interest rates on fixed income assets, you can  invest in gold or other precious metals in your IRA per IRC Sec. 408(m)(3). Right now only 2% to 5% of IRA's own some precious metal assets. The coins or bullion must be held by the IRA custodian and not by the IRA owner. Most of the major brokerage firms will not do this for you but there are many firms out there that will. You have to set up a self directed IRA with a firm that will handle the transfer and storage of the precious metals. You are allowed to own American Gold Eagle coins, Canadian Gold Maple Leaf coins, American Silver Eagle coins, and gold and silver bars (bullion) that are 99.9% pure or better. These rules apply to Roth, SEP and SIMPLE IRA's also.

Traveling for Charity

Meals and entertainment expenses can be deducted 100% if related to charitable travel. The 50% business related deduction does not apply. The IRS can disallow if there is a significant element of personal pleasure in the travel. You can deduct car expenses at a standard mileage rate of 14 cents per mile which is statutory rate that hasn't changed for years.

Mid Year Change in IRS Business Mileage Rate

The IRS rate for business mileage increased to 55.5 cents per mile from 51 cents per mile effective July 1, 2011.

Taxes You Can't Deduct

The following taxes cannot be deducted on your tax return: Federal income, excise, estate, and gift taxes, custom duties, parking and speeding tickets, marriage license fees, and social security and medicare payments. Automobile license fees based on factors other than the value of your car are not deductible. Local taxes charged for improvements that increase the value of your property such as streets, sidewalks, and sewer systems are also not deductible.

Tickets to College Games

You can support your college by buying season tickets and also get a tax deduction. If you have to make a contribution for the right to get tickets to college games, 80% of the contribution is deductible. The cost of the actual tickets is not deductible.

Can You Deduct Legal Fees for Wills and Estate Planning?

It seems like you should be able to doesn't it, but there is a catch. You can only deduct them if the fees relate to tax matters. Ask the attorney to break out the tax advice part of the bill on his invoice and then you can deduct that portion. The general rule is that you can deduct legal expenses paid in connection with the determination, collection or refund of any tax or in the production or collection of taxable income.

INVESTMENT TRAVEL

You can deduct trips to your broker, financial advisor, and to look after investment property. However, you can't deduct attending shareholder meetings with certain exceptions such as proxy fights, or investment seminars and conventions. The management or conservation of investments is generally deductible.

Offers in Compromise

Offers in compromise is an IRS process where they will consider settling your tax debt for a lower amount. You hear a lot of tax experts advertising that they can settle your tax debt at pennies on the dollar. This is the process they are talking about. You have to pay a $150 application fee and fill out a long financial form. There is no negotiation as the form calculates the amount you can pay after an allowance for basic living expenses. Most offers are rejected by the IRS and only 20% are accepted. It is a tough way to go.

What You Should Know About IRS Penalties

One of the worst penalties is the failure to file penalty of 5% of the unpaid balance for each month or part of a month that the return is late up to a maximum of 25%.  So you should file a return or an extension even if you can't pay. There is also a .5% penalty per month or part of a month up to a max of 25% of the unpaid balance for failure to pay tax on time. If you don't have a reasonable explanation for not reporting a 1099 amount or a W-2 amount, you are subject to a 20% accuracy related penalty on the underpayment amount. Along with the above penalties, the IRS also charges interest on the unpaid amount from the due date of the return until paid. Currently the interest rate is an annual rate of 4% which can change each quarter. As you can see penalties and interest can add up fast.

Donations of $250 or More

You have to obtain a written acknowledgement from the charity to take a deduction on your tax return for donations of $250 or more. A cancelled check is not enough. This is an easy area for the IRS to audit so get those letters from the charities. A lot of charities will give you a yearly summary of all of your contributions which is very helpful.

Donating Stock to Charities

It is usually a good idea to donate stock that has gone up in value to charities. You get to deduct the value of the stock on the day you make the donation and you don't have to recognize any capital gain. How do you determine the value of the stock? The IRS rule states that you use the average of the high and the low price for the stock on the day of the donation which you can look up on the internet or ask your broker.

The Chronically Ill and Taxes

You are defined Chronically Ill by IRS standards if you can't do two of the six normal daily tasks of eating, bathing, dressing, toileting, transferring, and continence without substantial assistance. Bathing and dressing are the two that usually apply first it seems. You are also chronically ill if you have Alzheimer's disease or similar dementia. If you are so classified, then all expenses including room, board, and personal care are deductible as  medical expenses. With nursing home and assisted living costs so high, you can quickly exceed the 7.5% of adjusted gross income threshold for medical expenses so you can get a benefit for the deduction. A licensed health care provider needs to certify your condition.

Health Savings Accounts

A health savings account is like an IRA for medical expenses, but only better. Your contributions to it are deductible and when you take money out for medical expenses, it isn't taxable.  In reality, you have shifted medical expenses from itemized deductions subject to a reduction of 7.5% of your adjusted gross income to page 1 of the tax return where it is 100% deductible. You must be covered under a high deductible health plan and you cannot be enrolled in medicare. You can even make contributions for the previous tax year by the due date of the return, so for 2010 you had until April 18, 2011 to make a tax deductible contribution. I like it.

Great I got a tax refund!

No it is not such a great thing. You have just loaned the government your money interest free by having too much withholding or estimated tax payments. You are just getting your own money back. You should strive to break even with the government  at tax time.

How do I become a resident of Florida?

It would be nice to live in a state that has no income tax like Florida or Texas, and many people claim that they do live in these states. In case of a dispute, how does a court determine your tax residency? It is a facts and circumstances test. The court looks at where you vote, where you have your driver's license, where you get your mail, where you have your safe deposit box, the amount of time you spend in a state, and also your intent. One item they don't consider is that you just want to save on state income taxes. Some states like New York and California are very aggressive in tracking down former residents for taxes so get the facts in your favor.

Married or Single

The IRS looks at what your status is on December 31st to determine whether or not you are married for that tax year. If you are married, you can file jointly which usually will save you money. The IRS recognizes common-law marriage if the state where you live does. Same sex couples are not considered married for federal tax purposes even if state law approves of such marriages.

401(k) Contributions- How much should you do??

The answer is you should do the maximum which is $16,500 for those under 50 and $22,000 for those 50 and older. Many companies have matching programs that put money in your retirement plans based on your contribution. It is like getting a raise. The 401(k) contribution is deducted from your paycheck which is not a good thing, but it also comes off your taxable compensation which is a wonderful thing. Any money earned in your 401(k) account is tax free. You do pay taxes on the funds when you pull them out for retirement. Making 401(k) contributions is one of the easiest and best tax planning ideas out there.

Tax Preparation Fees

Tax preparation fees are deductible as a miscellaneous itemized deduction. However they are subject to a 2% of adjusted gross income haircut so it might not be beneficial. A reasonable portion of the fee can be deducted on a rental or business schedule though which will usually end up reducing your taxes.

Giving away Gifts to Family and Friends

You can give up to $13,000 this year to anyone without having any gift tax consequences. You don't have to pay gift tax or file a gift tax return, and the person who receives it doesn't have to report it on their income tax return. You can give up to $26,000 from a joint account and all of the above still holds true. You can give $26,000 away from your own individual assets, and if your spouse agrees to split the gift with you, then the only thing you have to do is file a gift tax return reporting the gift but no gift taxes will be due. This is one of the best estate planning tools for those with large estates.

When Should You Start Taking Social Security?

You can start receiving benefits at age 62 but the benefits are reduced by 25% of what you would get at your full retirement age (ages 65 through 67 depending on when you were born). Also if you wait until  after your full retirement age you get an 8% benefit for each year you wait until age 70. For example for those born between 1943 and 1954, waiting until age 70 gives you 32% more benefits for life. Another advantage to waiting is that your social security benefit is calculated using your highest earnings for a 35 year period. If you have high wage years after age 62, you can replace lower earning years early in your career and your calculated benefit will be higher. My feeling is if you are in reasonable health and don't currently need the extra funds, wait until age 70 to start receiving social security.

Starting a New Business - Beware the Self Employment Tax

All new unicorporated business owners should watch out for the self employment tax (S/E tax). It is 15.3% of 92.35% of your net business income after health insurance and is meant to cover your social security and medicare that you and your employer would have paid on your W-2 wages if you were not self employed. You do get to deduct one-half of the tax as an adjustment for adjusted gross income. However, I've seen many situations where the taxpayer has negative taxable income due to large itemized deductions and owes no income tax but still owes the self employment tax on the net income of the business. To say the taxpayer is surprised is an understatement. Watch out.

How to Help Your Tax Preparer

Give him all of your 1099s, W-2s, K-1s, 1098s, non cash donations, or anything with a government # on it that says it relates to tax reporting. Provide amounts for areas such as business income and expenses, rental income and expenses, charitable donations, medical expenses, misc expenses, office in the home expenses, business car mileage, and anything tax related that is not on a reporting form such as a 1099. Do not bring him receipts. Indicate any significant changed circumstances for the current year or the next. If you want to really make his day, fill out his tax organizer. What do you get in exchange for all of this? You get a happy tax preparer who can concentrate all his skill on trying to save you money and keep you out of trouble.

Is Reinvesting Dividends a Good Thing?

When you sell a stock you have to know your cost basis which is the original cost of the stock including reinvested dividends. Otherwise you can't calculate properly the gain or loss on the sale of the stock for your tax return.  If you've been with the same full service broker since you first bought the stock, you will have the cost basis information and everything will be fine. How many people though never change brokers or for that matter always use a full service broker?  Not knowing the full cost basis can cost you money on your tax return since your basis might be too low. The IRS assumes basis is zero if you can't prove it.

The IRS Notice: What to Do and Not Do

Don't put it away unopened in a drawer and forget about it. It probably isn't as bad as you think it is going to be. Respond as soon as possible. It makes the IRS happy and  could keep you out of trouble. Keep in mind that sometimes you have to wait about 45 minutes before you can get someone on the phone at the IRS. If you don't respond , the IRS computer will keep mailing you more serious notices with consequences like more penalties and interest. Send a copy to your CPA if you want him to handle it. Also, the earlier the CPA sees it, the more help he can be. Your CPA will usually need a power of attorney to discuss your notice with the IRS. Don't procrastinate!

Donating Household Items and Clothing

This can be a great tax deduction especially for families with growing children. When our children were younger and living at home, our deduction was usually around $3,000 each year since we gave away so much clothing. The easiest way to keep up with the donations is to record each item donated on a sheet of paper and attach it to a copy of the receipt from the charity. Keep all the receipts in your tax file. Then at the end of the year value each donated item per the valuation guide at the Salvation Army website. The deductible amount of donations of household items and clothing in good condition is based on thrift shop value which in my opinion is roughly 20% of your original cost.

Self Employed Health Insurance

Great news! For 2010, you can now subtract self employed health insurance from income in the calculation of self employment tax on schedule SE.

2011 Nonbusiness Energy Property Credit

The credit is still available for property placed in service in 2011 but in greatly reduced form. You can now get a maximum of $500 based on 10% of  qualified improvements. Qualified improvements include energy-efficient windows, doors, insulation, certain roofs, and heating and air conditioning systems. Installation costs only qualify in the case of heating and air conditioning systems. This $500 credit is reduced by the total of any credits taken on your return for 2006 through 2010 so it probably won't help many taxpayers.

Don't forget Charitable Mileage.

You can deduct $.14 a mile for your charitable mileage which includes mileage to deliver items to Goodwill and any volunteer activities with a charitable organization. Any time you go to church except for regular services should qualify. For example, you can deduct the round trip mileage to a church committee meeting.  You may be surprised how it can add up.

Limits on personal exemptions and itemized deductions gone for 2010!

High adjusted gross income will not lower your personal exemptions and itemized deductions like it has in prior years. You get to deduct 100% in 2010.

Scam Alert

If you get an email from the IRS, it is a scam. The IRS does not send emails to taxpayers ever. The emails are just a trick trying to get your confidential personal and financial information and  flourish during the tax filing season. You have been warned!

Tax Deadline Extended to April 18th

The tax deadline, normally April 15th, has been extended to Monday, April 18th due to a District of Columbia holiday.  Read more from the Atlanta Business Chronicle

Gift and Estate Tax

The gift tax has the same $5,000,000 exemption for 2011 and 2012 as the estate tax. This is an opportunity that may not come up again for significant gift tax planning.

Also for 2011 and 2012, non-taxable estates will have to file an estate tax return to establish the amount of unused estate tax exemption going to the surviving spouse. This makes the exemption portable and can create a tax free estate of up to $10,000,000 for a husband and wife.

Estate assets passing to heirs will receive a step up in basis to fair market value at date of death effective back to January 1, 2010.