Wednesday Tax Tip #23 - IRS loses

In a big tax case that has received little notoriety, the IRS lost a tax case on insurance company demutualizations.

First some background. Many big name insurance companies were "owned" by the policy holders, also known as mutual ownership.

In the late 90's early 2000's, many big insurance companies (John Hancock, Prudential, Western & Southern, etc.) "demutualized" their ownership. Meaning, they gave stock to the policy holders based on their policies and premiums paid over time.

When the stock holders sold that stock the IRS argued that the entire amount of proceeds was fully taxable as a capital gain since the taxpayer did not "pay" anything for the shares.

On it's face I believed that was incorrect because different policy holders received differing number of shares. In my mind, they must have "paid" for the shares otherwise everyone would have received the same number of shares.

Well an ornery accountant in Minnesota took on the IRS and won.

If you own shares of an insurance company as a result of a demutualization, check out his site and it may give you some insight as to how to go about reporting the sale of those shares.

Check with your accountant if you've already filed a return and claimed a full capital gain on the return to see what your recourse is.

Wednesday Tax Tip #22 - IRS mileage rate

As a result of soaring fuel prices, the IRS has increased the mileage rate to .585/mile effective 7/1/08.

This is probably a good time to remind taxpayers that you need documentation to claim this rate.

At a minimum, this documentation should include the following.

Date
Trip ( From/To )
Number of miles
Reason for Trip

If you need any additional information regarding your business use of an auto, please call me at 513-683-0520 or email at gtvcpa@yahoo.com.

Wednesday Tax Tip #21 - Estimated Payments

If you forgot to mail your 2nd quarter estimated payment to the feds or the state, now is a good time to get those in, albeit late.

Like all payments in the government, late payments are better than no payments. In the case of estimated payments, a late payment penalty may be assessed for what amounts to interest from the time the payment was due to the time it was actually received.

So minimize any penalty and get those payments in ASAP.

Wednesday's Tax Tip #20 - Stimulus checks

If you should have received your stimulus check by now and have not. The IRS has established a place to check on the status of your check.

Click the link below and you may be able to find out the check's status.

IRS Stimulus Check Status

Wednesday's Tax Tip #19 - IRS Tax Processing

Not so much a tax tip this week, but an interesting item.

Hat Tip. TaxProf

2008 FILING SEASON STATISTICS
Cumulative through the weeks ending 5/18/07 and 5/16/08
Individual Income Tax Returns	2007	2008	% Change
Total Receipts	129,150,000	143,138,000	10.8%
Total Processed	119,827,000	130,342,000	8.8%
E-filing Receipts:
TOTAL	77,076,000	86,347,000	12.0%
Tax Professionals	54,932,000	59,975,000	9.2%
Self-prepared	22,145,000	26,372,000	19.1%
Web Usage:
Visits to IRS.gov	142,282,000	205,654,000	44.5%

Wednesday's Tax Tip #18 - Rebate checks

If you are wondering where your rebate check might be here is a schedule of the release dates.

If you had your 2007 federal income tax refund direct deposited, you rebate check will direct deposited.

Last two SSN digits:	Payments will be transmitted no later than (and received by the end of the day of):
00 through 20	May 2
21 through 75	May 9
76 through 99	May 16

If you did not have a direct deposited refund you schedule will be as follows.

Last two SSN digits:	Payments will be mailed no later than (and received a few days after):
00 through 09	May 16
10 through 18	May 23
19 through 25	May 30
26 through 38	June 6
39 through 51	June 13
52 through 63	June 20
64 through 75	June 27
76 through 87	July 4
88 through 99	July 11

If you have any questions about your individual circumstance , please email me at gtvcpa@yahoo.com

Wednesday's Tax Tip #17 - Rebate schedule

Here is a schedule of when the government rebate checks will be sent out.

Please note, if you had your 2007 tax refund direct deposited, this rebate will be direct deposited.

Wednesday's Tax Tip #16 - Capital Gains

Often times, taxpayer's are afraid to sell a stock for fear of triggering a capital gain.

In general the tax implication should be one of the last issues you consider when sell a capital stock. As I like to tell my clients, I would much rather have you pay capital gains tax on income than deduct losses.

Here is the decision making rationale I believe the owner's of capital assets should consider.

Can I make more money leaving my investment where it at or is there an investment where it will earn more?

For instance, assume you have a stock that you paid $15,000 for and now it's worth $24,000. you're decision should negate the $9,000 gain to date. The investment question should be, where can I invest that $24,000 where it will earn more? Maybe you decide to keep it where it's at because you like the long term prospects of the industry/company.

Maybe you decide there's a better place to invest that money, in which case you sell. But if you decide to hold on to that stock because you will have to pay $1,350 in capital gains tax, you may find that it costs you more money.

Let's assume that investment, now worth $24,000, drops to $22,000, you have just lost $2000 in real dollars, just because you didn't want to pay the capital gain; and you still have the capital gain tax.

Ideally, you would analyze your investment portfolio continually to maximize your gains. But time makes that impractical.

I would recommend that you corner your broker or account manager on a quarterly basis and review your portfolio and adjust your investments accordingly.

Hopefully, you've got quite a few capital gains, it means you're making money.

Wednesday's Tax Tip #15

So far this tax season, I've had two clients take distributions from retirement accounts to cover debt issues.

A word for the wise, avoid doing this at all costs.

First, typically when people take money from an retirement account (IRA's, SEP's, SIMPLE's) they will typically have the payor withhold a flat 20% for income tax. This is just an estimate of the tax consequences not the actual tax on the distribution.

For example, if you are in the 15% tax bracket, you will have 15% in income tax plus an additional 10% excise penalty for the withdrawal. You're effectively 5% under withheld on that withdrawal.

In addition, a particularly large distribution may throw you into the 25% tax bracket, thus resulting in 25% federal tax plus the 10% excise penalty.

But we're still not quite finished, you also have state income tax to pay on said withdrawal. In Ohio, I advise clients to factor roughly 5% for state tax (but it can be as high as 6.55%).

Now, you not only have issues around debt but you also have the compounded problem of a tax debt.

So before you yank any funds from a retirement account you should

1) Analyze your personal financial situation. If you are simply prolonging an eventual bankruptcy filing, don't add to it by creating more debt with a big tax bill. In addition, a bankruptcy attorney may be able to keep those assets from being seized.

2) Talk to an accountant about the actual tax impact of such a withdrawal. You may be able to lessen the tax burden with some effective planning.

3) Be ready to pay the additional tax on any distributions.

During my career, I've seen way too many people add to already stressful financial situations with some unwise handling of retirement accounts. Talk to a professional and avoid the same pitfalls.

Wednesday's tax tip - Volume 14

As we approach year end, you may want to consider accelerating the payment on things like medical expenses, charitable contributions, state and local tax payments, etc.

These itemized deductions are deductible when paid, not when incurred or due. As a result, if you find that you have a spike in your income this year, you may be able to offset that income by paying your real estate taxes now rather than wait until January of next year.

If you have any questions about the tax deductibility of certain items, feel free to email me at gtvcpa@yahoo.com.

Wednesday's tax tip - Volume 13

Reminder.....

If the 4th quarter, 2007 federal and state of Ohio estimated payments are due before 1/15/08. I recommend that if you itemize, pay your state estimate prior to 12/31/07. By doing so, you'll be able to deduct the estimate for 2007.

If you have any questions about your estimate, email me at gtvcpa@yahoo.com.

Wednesday's tax tip - Volume 12

I've hesitated to post on the following issue because I have been anticipating a change in tax law since it was addressed by the media. But, to date, it does not look like anything will change in the near term.

The issue, the capital gains tax rate.

Next year, if your marginal tax rate is 0%, you will have any capital gains will be taxed at a 0% rate. This is an ideal situation for people with children in college who have little earned income.

A good strategy is to gift your child shares of appreciated stock and sell the stock in their name. Since they may be in the 0% bracket, you may be able to elude any capital gains tax on the transactions.

To date, Congress has not closed this loophole, but look for them to do so in the future.

Wednesday's tax tip - Volume 11

If you are looking to make any type of energy saving improvements such as installing new windows, doors, furnace, etc. You may want to accelerate your purchase of these items during 2007.

The residential energy credit expires at the end of 2007. To date, there is no indication that the credit will be extended.

To see what all qualifies for the credit, click here for IRS guidance.

Wednesday's tax tip - Volume 10

If you use your automobile for business purposes, you can deduct the business use of the automobile against your income.

You can use one of two methods of determining your deduction; Actual v. the mileage reimbursement rate.

If you use actual expenses, you need to maintain records of all your expenses related to auto usage; this includes gas, repairs, oil changes, depreciation, interest, car washes, etc...

You then deduct the business percentage of those expenses. For instance if you use you car 15% of the time for business purposes and your expenses amount to ten thousand dollars, you can deduct $1,500 against your business income.

Under the mileage reimbursement rate plan, assume you drive 1500 miles for business purposes. Under the current rate of .485/mile, your deduction would be $728.

Items to keep in mind,

1) You must maintain a log of your mileage related to your car under either scenario.
2) Once you use actual expenses for an automobile, you must use actual expenses for the life of that automobile.
3) There are depreciation limitations related to luxury automobiles. Check with a tax adviser to know the limits.

In my experience, I find the mileage reimbursement rate to be the easier of the two methods and usually provides for the maximum deduction. You do not need to keep a shoe box full of gas receipts and the rate for most cars is fairly generous.

Wednesday Tax Tip

Just a reminder that Monday, September 17 is the date for paying your 3rd quarter estimated payments.

In addition, if you filed an extension in April, your tax return is to be filed on that date.

Wednesday's tax tip Vol. 19 - Sole Proprietors

I've read numerous articles surrounding increased audits of sole proprietorships.

Because the IRS believes that this is where most of the under reporting of tax exists, they are intensifying their efforts on those businesses. I've read and I know from my own personal experience on audits, the IRS is primarily focusing in on receipts not reported as income.

How do they check this?

In my audit it was as simple as taking all my bank statements and adding up all the deposits. I needed (and fortunately for me, was able) to document any bank deposits that went into my business accounts that were not sales.

So if you transfer lots of funds between accounts or borrow money from lines of credit of over draft protection accounts, you need to be able to reconcile those transfers above and beyond sales receipts.

While on it's face it makes sense for the IRS to hone in on this type of activity, it occurs to me that there is a huge amount of business activity that is never reported on any tax return. I would guess that there are tens of thousands of businesses that never report any income because they work "under the table". No 1099's have been issued and as a result, there is nothing to tip off the IRS as to the reporting of any income.

This is becoming a larger and larger issue with illegal immigrants and citizens avoiding child support or paying any tax all together. But we'll let the IRS deal with those issues.

Wednesday's tax tip Vol. 18 - Exemptions for the Divorced

If you are or anticipate being divorce in the near future, who claims the dependents on their respective tax returns?

The IRS specifically permits the custodial parent to claim any dependents for their returns regardless of child support or other agreements between the parties.

The only way the IRS permits any noncustodial parent from claiming the dependent(s) is through use of the form 8332 to be completed by the custodial parent. This form essentially grants the non custodial parent to claim an exemption.

Please keep in mind that this form is to be completed regardless of any agreement in a divorce decree. The IRS would tell you they are not in the business of reviewing and determining dependent exemptions for hundred of thousands of decree agreements, some of which can be very detailed.

When and if you are in a position to negotiate the claiming of dependents on your returns, make sure your attorney includes this form as part of your decree documents.

Wednesday's tax tip Vol. 17 - Sales Tax

Business owner's ask me often about sales tax. When they should charge or not charge it.

In general, Ohio sales tax is charged on any product not for resale. For instance, if you sell soda to a business who provides it for their employees, you must charge sales tax. If you sell it to a merchant who intends to resale it, you do not charge the sales tax.

If you think of it this way, only one business charges sales tax. The only business that charges sales tax is the business that sells the product to the end user.

To muddy the waters a little more, some services are subject to sales tax. Manicure services, lawn services, massages, etc. are subject to sales tax. Legal and medical services are not subject to sales tax.

In addition, sales tax is not charged to any tax exempt, non profit business.

If a business, communicates that they are not subject to sales tax, you must obtain a copy of their vendor's license for your records. Otherwise, you could be legally liable for the tax due.

If you have a question regarding the sales tax, please email me at gtvcpa@yahoo.com

Wednesday's tax tip Vol. 16 - Gift Tax

Maybe one of the most misunderstood tax laws is the gift tax. Here is a FAQ on the IRS site about gift taxes.

In general, the giver of the gift must pay gift tax if the amount of the gift exceeds $12,000 per person, per year (2006 & 2007). The receiver of the gift does not claim the gift as income or need to pay gift tax from receipt of the gift.

For example, let's assume you decide to give your child $20,000. That gift would be subject to gift tax. However, a married couple can each give the $12,000 to that child meaning that no gift tax is now due.

In addition, you could give a family of four up to $48,000 and, if married, up to $96,000 to that family each year.

Another myth buster.... Gifts to individuals are not deductible (for federal income tax purposes) for the giver, regardless of the circumstances. The only deductible gifts are to qualified 501(c)3 charities.

Like most tax advise, this is a simple rule of thumb, if you want an answer to your particular situation, talk to your adviser or email me at gtvcpa@yahoo.com.

Wednesday's tax tip Vol. 15- Homestead Credits

At one time, the state of Ohio maintained a homestead credit for home owner's over the age of 65 provided that they meet certain income parameters.

Recently the state eliminated the income requirements so that all home owners over the age of 65 and/or permanently disabled, now qualify for the credit.

Here are the applications for the Southwest Ohio counties.

Hamilton County - Hamilton County Auditor
Clermont County - Clermont County Auditor
Warren County - Warren County Auditor
Butler County - Butler County Auditor

If you have any questions please give me a call @ (513) 683-0520.