• How to avoid getting audited - Avoid the "Red Flags"

    07 February 2013 / Uncategorized / Comments Off on How to avoid getting audited - Avoid the "Red Flags"

    Be aware of audit flags when filing!

    Increasingly, the Internal Revenue Service has been chasing the big tax cheats and top earners to uncover missing tax revenue. But don’t think you’re immune to an IRS audit just because you’re a middle-class working stiff. Often, a simple mistake or an honest deduction in an area rife with abuse means that you could wind up getting audited anyway.

    Most average Americans think their chance of an audit is slim, and that’s not altogether untrue. Millionaires and big corporations have a higher chance to be audited because they have a bigger tax obligation. Beyond these big guys, only about 1 percent of individuals taking home less than $200,000 annually are audited each year.

    But while the IRS is understaffed, it isn’t foolish; systems are in place to identify those most likely to be tax cheats, and separate them from run-of-the-mill filers, regardless of income levels.  If your return boasts something the IRS sees as a red flag, it can dramatically increase the likelihood of an audit to your 2012 filing.  Here are five important items on your tax return that could grab unwanted attention from the tax man:

    Not reporting all your income. This may seem obvious, but you must declare every penny you earned. Even the slightest variation from your filing and official IRS income records will raise red flags.  If you briefly held a temp job or did one or two freelance projects, you better track down the extra 1099s and W-2s no matter how small the income. If you miss them, there’s a chance the IRS will flag your return simply because the numbers don’t add up.

    Minor mistakes on major information. A common audit prompt is a simple mistake regarding crucial information. Maybe you mixed up some numbers in your spouse’s Social Security number or forgot to carry the 2 when adding up your adjusted gross income (please...if you don't hire a CPA, at least use software!). The mistake may be honest, but unfortunately, IRS auditors don’t like mistakes.  If you’re a do-it-yourself filer, you should double-check every single line before submitting your form.

    Home office deductions.
    These deductions were abused for years by people who did a little work in the den in exchange for a lot of tax benefits they might not have deserved. The IRS frequently audits those claiming home office deductions, making them prove “exclusive use” for business purposes (if you have a daybed in the room...it's NOT exclusive!!).  This is not to say you can’t claim a home office, of course, and those who are eligible can win big deductions for property taxes, utilities and insurance, among other items.  However, complying with IRS guidelines is key, or your deductions won’t survive the audit. That means no double-duty with the office functioning as a guest bedroom or a playroom for the kids, and avoiding seemingly benign dual uses, including stowing skis or Christmas ornaments in the closet!

    Frequent business vehicle use.
    Just as it’s easy to mix personal with business use in a home office, business vehicles are ripe for unqualified deductions and a red flag for auditors. Listing a business vehicle use on your tax form can warrant IRS attention whether you deserve it or not. This doesn’t mean you can’t claim a business vehicle, but make sure you have a detailed log with the date, destination and mileage for each trip – and that you don’t include stop-offs for coffee or dry cleaning.  It’s very rare for a vehicle to be solely for work (100% business use) without a single personal trip all year, so be honest when you file, and be aware that heavy business vehicle use means the tax man could likely come looking for your mileage log down the road.

    Business “entertainment.”
    If you’re self-employed, it’s tempting to claim lots of meals and travel on your tax return. However, while Schedule C allows for big-time deductions, it also historically has been a source of big-time overstatement. That means the IRS watches these kinds of items like a hawk.  If you’re claiming business-related trips and entertainment, it’s crucial to keep detailed records and receipts of who was there and what business was discussed at the meeting. Many Americans try to sneak in personal expenses, and that means even honest filers risk a red flag by claiming these kinds of deductions.

    We here at Widget do NOT want you to be audited.  We preach good accounting and documentation to our clients so that the audit flags are minimized and that if they ARE audited, they will survive with their deductions intact.  If we can help you, please give us a call!

  • Tax Season Opens Today! (** FOR SOME **)

    30 January 2013 / Uncategorized / Comments Off on Tax Season Opens Today! (** FOR SOME **)

    It's time to start thinking taxes!!

    Today (Wednesday, January 30th, 2013) marks the beginning of tax season, when most Americans can e-file their returns with the IRS.  The IRS had originally planned to kick things off on January 22nd, but the fiscal cliff debate forced them to push the official start date back eight days.

    Many Taxpayers must continue to wait!

    Tax returns claiming the American Opportunity Tax Credit or the Lifetime Learning Credit, two popular education credits, won't be processed until mid-February.  This means the roughly three million people who typically file returns claiming these credits before mid-February will likely have to wait longer for refunds this year.

    Other filers with more complex returns will need to wait until late February or March for their returns to be processed. The full list of forms that will delay the filing of your return are shown below with the most common forms shown in bold:

    • Form 8863 Education Credits
    • Form 3800 General Business Credit
    • Form 4136 Credit for Federal Tax Paid on Fuels
    • Form 4562 Depreciation and Amortization (Including Information on Listed Property)
    • Form 5074 Allocation of Individual Income Tax to Guam or the Commonwealth of the Northern Mariana Islands
    • Form 5471 Information Return of U.S. Persons With Respect to Certain Foreign Corporations
    • Form 5695 Residential Energy Credits
    • Form 5735 American Samoa Economic Development Credits
    • Form 5884 Work Opportunity Credit
    • Form 6478 Credit for Alcohol Used as Fuel
    • Form 6765 Credit for Increasing Research Activities
    • Form 8396 Mortgage Interest Credit
    • Form 8582 Passive Activity Loss Limitations
    • Form 8820 Orphan Drug Credit
    • Form 8834 Qualified Plug-in Electric and Electric Vehicle Credit
    • Form 8839 Qualified Adoption Expenses
    • Form 8844 Empowerment Zone and Renewal Community Employment Credit
    • Form 8845 Indian Employment Credit
    • Form 8859 District of Columbia First-Time Homebuyer Credit
    • Form 8864 Biodiesel and Renewable Diesel Fuels Credit
    • Form 8874 New Markets Credits
    • Form 8900 Qualified Railroad Track Maintenance Credit
    • Form 8903 Domestic Production Activities Deduction
    • Form 8908 Energy Efficient Home Credit
    • Form 8909 Energy Efficient Appliance Credit
    • Form 8910 Alternative Motor Vehicle Credit
    • Form 8911 Alternative Fuel Vehicle Refueling Property Credit
    • Form 8912 Credit to Holders of Tax Credit Bonds
    • Form 8923 Mine Rescue Team Training Credit
    • Form 8932 Credit for Employer Differential Wage Payments
    • Form 8936 Qualified Plug-in Electric Drive Motor Vehicle Credit

    If you're a victim of identity theft, you may also have to wait. The IRS has been struggling to keep up with surging tax fraud, and identity theft victims often experienced delays of at least 180 days last tax season, according to the Taxpayer Advocate Service.

    Absent of all that…you can generally expect to receive a refund within three weeks after the IRS receives your return.

    We here at Widget are here to help you during this “taxing” time.  If we can be of service to you, please give us a call!

  • Home Office Deduction...Simplified by the IRS?

    16 January 2013 / Uncategorized / Comments Off on Home Office Deduction...Simplified by the IRS?

    Wait...the IRS actually made something EASIER!?!?

    On Tuesday, the IRS released Revenue Procedure 2013-13, which gives taxpayers an optional safe-harbor method to calculate the amount of the deduction for expenses for business use of a residence during the tax year, beginning with 2013!

    Individual taxpayers who elect this method can deduct an amount determined by multiplying the allowable square footage by $5.  The allowable square footage is the portion of the house used in a qualified business use, but not to exceed 300 square feet.  The maximum a taxpayer can deduct annually under the safe harbor is $1,500. The IRS may update the $5 allowance from time to time (of course they didn't index it for inflation...that would have been intelligent!).

    Electing the safe-harbor is done on a timely filed original tax return (avoiding Form 8829!! YES!) and taxpayers are allowed to change their treatment from year-to-year. However, the election made for any tax year is irrevocable.

    No depreciation is allowed for the years in which the safe harbor is elected, but it is permitted in the years in which the actual expense method is used. The revenue procedure has detailed examples of how depreciation is calculated in a year subsequent to a year the safe-harbor method is used.

    To use the sale-harbor method, taxpayers must continue to satisfy all the other requirements for a home-office deduction, including the requirement that the space in the residence used as an office be used exclusively for that purpose and the limitation that an employee qualifies for the home-office deduction only if the office is for the convenience of the taxpayer’s employer.

    The deduction under the safe-harbor method cannot exceed the amount of profit, and a taxpayer cannot carry over any excess to another tax year. If a taxpayer uses the actual expense method for calculating the deduction and has had his or her deduction limited by the gross income limitation in that year, the taxpayer can deduct this amount in the next year he or she uses the actual expense method, but cannot use the disallowed amount in a year he or she elects the safe harbor. This limit on carryovers for the safe-harbor method means taxpayers must be careful before electing it to be sure they will not lose any of their deduction.

    Taxpayers sharing a home ( roommates or spouses, regardless of filing status), if otherwise eligible, may each use the safe harbor method provided by the revenue procedure, but not for qualified business use of the same portion of the home. The revenue procedure contains detailed rules for use of the home for part of the year. It allows taxpayers who have a qualified business use of more than one home for a tax year to use the safe harbor for only one home, but it permits them to use the actual expense method for the other homes.

    You can read more about this on the IRS website at:

    http://www.irs.gov/uac/Newsroom/Simplified-Option-for-Claiming-Home-Office-Deduction-Starting-This-Year

    We at Widget are glad you are here.  Because we Know More than our competition,  you will Keep More of your hard earned income!

    If we can serve you, please call us!

  • Start of Tax Season...DELAYED?

    10 January 2013 / Uncategorized / Comments Off on Start of Tax Season...DELAYED?

    The IRS plans to open the 2013 filing season on January 30th!!

    The IRS says it will be able to begin accepting tax returns on Jan. 30 after updating forms and completing programming and testing of its processing systems to account for most of the tax law changes enacted Jan. 2 by the American Taxpayer Relief Act of 2012. The IRS says that this will allow “the vast majority of tax filers—more than 120 million households” to start filing tax returns on Jan. 30. The delayed start of tax season applies to both electronic and paper returns. The IRS had originally planned to open electronic filing of tax returns on Jan. 22.

    The IRS says that on Jan. 30 it will be able to accept tax returns affected by the late change in the alternative minimum tax (AMT) exemption amount as well as three other major extended provisions: The state and local sales tax deduction, the higher education tuition and fees deduction, and the "above the line" deduction for schoolteacher expenses ($250).

     Some returns delayed

    Because of the need for more extensive form and processing systems changes, many taxpayers will not be able to file returns until February or March. For example, the IRS says taxpayers who claim residential energy credits or general business credits or who depreciate property will not be able to file starting Jan. 30. However, the IRS in its press release downplays this delay, claiming that most of these taxpayers “typically file closer to the April 15 deadline or obtain an extension.”

    Forms that will require more extensive programming changes include Form 5695, Residential Energy Credits, Form 4562, Depreciation and Amortization, and Form 3800, General Business Credit. The IRS is promising to post a full list of the forms that it will not accept until later on its website, and will announce a specific date when it will start accepting these forms in the near future.

    We here at Widget are glad you are here.  We are here to serve you.  Please call and let us know how we can help!

  • American Taxpayer Relief Act - The MOST IMPORTANT changes!

    03 January 2013 / Uncategorized / Comments Off on American Taxpayer Relief Act - The MOST IMPORTANT changes!

    American Taxpayer Relief Act - The MOST IMPORTANT changes!

    President Barack Obama has signed into law a bill to avert the fiscal cliff, a day after the House and Senate approved the much-debated legislation.  This article outlines the major tax changes that appear in this bill.

    Individual tax rates

    All the individual marginal tax rates are retained (10%, 15%, 25%, 28%, 33%, and 35%).  A new top rate of 39.6% is imposed on taxable income over $400,000 for single filers and $450,000 for married taxpayers filing jointly.

    Phaseout of itemized deductions and personal exemptions

    The personal exemptions and itemized deductions phaseout is reinstated at a higher threshold of $250,000 for single taxpayers and $300,000 for married taxpayers filing jointly.

    Capital gains and dividends

    The zero rate is retained for taxpayers in the 10% and 15% brackets; the 15% rate is retained for taxpayers in the middle brackets and a 20% rate applies to capital gains and dividends for individuals above the top income tax bracket threshold.

    Alternative minimum tax

    The exemption amount for the AMT on individuals is permanently (finally!) indexed for inflation. For 2012, the exemption amounts are $50,600 for single taxpayers and $78,750 for married taxpayers filing jointly.

    Estate and gift tax

    The estate and gift tax exclusion amount is retained at $5 million indexed for inflation ($5.12 million in 2012), but the top tax rate increases from 35% to 40% effective Jan. 1, 2013.

    The estate tax “portability” election, under which, if an election is made, the surviving spouse’s exemption amount is increased by the deceased spouse’s unused exemption amount, was made permanent by the act.

    Permanent extensions

    Various temporary tax provisions enacted were made permanent. These include:

    • Marriage penalty relief (i.e., the increased size of the 15% rate bracket (Sec. 1(f)(8)) and increased standard deduction for married taxpayers filing jointly (Sec. 63(c)(2));
    • The liberalized child and dependent care credit rules (allowing the credit to be calculated based on up to $3,000 of expenses for one dependent or up to $6,000 for more than one) (Sec. 21);
    • The exclusion for employer-provided educational assistance (Sec. 127);
    • The enhanced rules for student loan deductions (Sec. 221);
    • The employer-provided child care credit (Sec. 45F);

    Individual credits that had expired at the end of 2012

    The American opportunity tax credit for qualified tuition and other expenses of higher education was extended through 2018. Other credits and items that were extended for the same five-year period include enhanced provisions of the child tax credit under Sec. 24(d) and the earned income tax credit under Sec. 32(b).

    Individual provisions that had expired at the end of 2011

    The act also extended through 2013 a number of temporary individual tax provisions, most of which expired at the end of 2011:

    • Deduction for certain expenses of elementary and secondary school teachers (Sec. 62);
    • Exclusion from gross income of discharge of qualified principal residence indebtedness (Sec. 108);
    • Mortgage insurance premiums treated as qualified residence interest (Sec. 163(h));
    • Deduction of state and local general sales taxes (Sec. 164(b));
    • Above-the-line deduction for qualified tuition and related expenses (Sec. 222); and
    • Tax-free distributions from individual retirement plans for charitable purposes (Sec. 408(d)). 

    Business tax provisions that had expired at the end of 2011 and 2012

    The act also extended many business tax credits and other provisions. Notably, it extended through 2013 and modified the Sec. 41 credit for increasing research and development activities, which expired at the end of 2011.  The credit is modified to allow partial inclusion in qualified research expenses and gross receipts those of an acquired trade or business or major portion of one.

    The increased expensing amounts under Sec. 179 are extended through 2013. The availability of an additional 50% first-year bonus depreciation (Sec. 168(k)) was also extended for one year by the act. It now generally applies to property placed in service before Jan. 1, 2014.

    Other common business provisions extended through 2013, and in some cases modified, are:

    • Indian employment tax credit (Sec. 45A);
    • New markets tax credit (Sec. 45D);
    • Employer wage credit for employees who are active duty members of the uniformed services (Sec. 45P);
    • Work opportunity tax credit (Sec. 51);
    • Fifteen-year straight-line cost recovery for qualified leasehold improvements, qualified restaurant buildings and improvements, and qualified retail improvements (Sec. 168(e));
    • Enhanced charitable deduction for contributions of food inventory (Sec. 170(e));
    • Temporary exclusion of 100% of gain on certain small business stock (Sec. 1202);
    • Basis adjustment to stock of S corporations making charitable contributions of property (Sec. 1367);
    • Reduction in S corporation recognition period for built-in gains tax (Sec. 1374(d));
    • Empowerment Zone tax incentives (Sec. 1391);

    Energy tax provisions that had expired at the end of 2011 and 2012

    The act also extends through 2013 a number of energy credits and provisions that expired at the end of 2011:

    • Credit for energy-efficient existing homes (Sec. 25C);
    • Credit for energy-efficient new homes (Sec. 45L);
    • Credit for energy-efficient appliances (Sec. 45M);

    Other important tax changes that occurred as of 01/01/2013

    In addition to the various provisions discussed above, some new taxes and important changes in the law also took effect this as of 01/01/2013.  The most important of these changes are discussed below.

    Additional Medicare tax on high-income taxpayers. The employee portion of FICA, normally 1.45% of covered wages, is increased by 0.9% on wages that exceed a threshold amount. The additional tax is imposed on the combined wages of both the taxpayer and the taxpayer’s spouse, in the case of a joint return. The threshold amount is $200,000 for single taxpayers and $250,000 for married taxpayers filing a joint return.

    For self-employed taxpayers, the same additional Medicare tax applies self-employment income in excess of the threshold amount.

    Medicare tax on investment income. Sec. 1411 now imposes a tax on individuals equal to 3.8% of the lesser of the individual’s net investment income for the year or the amount the individual’s modified adjusted gross income (MAGI) exceeds a threshold amount. For estates and trusts, the tax equals 3.8% of the lesser of undistributed net investment income or AGI over the dollar amount at which the highest trust and estate tax bracket begins.

    For single taxpayers the threshold amount is $200,000; for married individuals filing a joint return the threshold amount is $250,000.

    Net investment income means investment income reduced by deductions properly allocable to that income. Investment income includes income from interest, dividends, annuities, royalties, and rents, and net gain from disposition of property, other than such income derived in the ordinary course of a trade or business. However, income from a trade or business that is a passive activity and from a trade or business of trading in financial instruments or commodities is included in investment income.

    Medical care itemized deduction threshold. The threshold for the itemized deduction for unreimbursed medical expenses has increased from 7.5% of AGI to 10% of AGI for regular income tax purposes. This is effective for all individuals, except, in the years 2013–2016, if either the taxpayer or the taxpayer’s spouse has turned 65 before the end of the tax year, the increased threshold does not apply and the threshold remains at 7.5% of AGI.

    Flexible spending arrangement. Effective for cafeteria plan years beginning after Dec. 31, 2012, the maximum amount of salary reduction contributions that an employee may elect to have made to a flexible spending arrangement for any plan year is $2,500.

    We at Widget are glad you are here.  We are here to help you.  If you need us, please don't hesitate to call us.

  • Fiscal Cliff Averted? How? What did they do?

    02 January 2013 / Uncategorized / Comments Off on Fiscal Cliff Averted? How? What did they do?

    Fiscal Cliff Averted?  How?  What did they do?

    After falling off the cliff for one day, the House and Senate took action to avert the full force of some $600 billion in spending cuts and tax hikes that were scheduled to take effect throughout 2013, preventing a fiscal shock that some economists thought would be enough to put the U.S. economy back into a recession.

    The legislation will avoid most of the scheduled tax hikes for the large majority of taxpayers and will extended emergency unemployment benefits for one year. However, the legislation does not address larger budget issues such as deficit reduction, tax reform, or raising the debt limit. In addition, it delays the automatic cuts to defense and domestic spending for just two months. Thus the stage is set for another fiscal battle in 2013 as the U.S. approaches it statutory borrowing limit toward the end of February.

    As the debt ceiling debate unfolds, it could test markets once again.  So although we are not falling off a cliff at the moment, we are still on the brink.

    Here are the tax changes of this bill:

    Income tax rates. Permanently extends the lower tax rates and other tax cuts enacted in 2001 and 2003 for single filers with taxable incomes below $400,000 and joint filers with taxable incomes below $450,000. The top income tax rate will permanently increase from 35% to 39.6% (as scheduled under current law) for single filers with taxable incomes above $400,000 and joint filers with taxable incomes above $450,000.  

    Limits on exemptions and deductions for higher wage earners. Permanently reinstates the phase-out of personal exemptions (PEPs) and the limitation on itemized deductions (Pease) for single filers with adjusted gross income (AGI) above $250,000 and joint filers with AGI above $300,000.

    Payroll tax.  Restores the employee Social Security payroll tax contribution to 6.2% on income up to $113,700 in 2013. This payroll tax contribution had been temporarily reduced to 4.2%.

    AMT (alternative minimum tax) patch. Permanently (THANK GOD!) extends the AMT patch with annual inflation adjustments.

    Estate and gift tax. Permanently extends the lifetime estate and gift tax exemption of $5.12 million (with annual inflation adjustments), but increases the top tax rate from 35% to 40%. Provisions for spousal portability and reunification of the estate and gift tax are also permanently extended.

    Capital gains and dividends. Permanently extends the 0% and 15% tax rates for long-term capital gains and qualified dividends for single filers with taxable incomes below $400,000 and joint filers with taxable incomes below $450,000. The top rate will permanently increase to 20% for filers with taxable incomes above these thresholds.
    The new 3.8% Medicare tax enacted under the healthcare law is not repealed and takes effect as scheduled in 2013. The new 3.8% tax applies to single filers with modified AGI above $200,000 and joint filers with modified AGI above $250,000. As a result, the tax law will include four different rates for long-term capital gains and qualified dividends depending on the investor’s modified AGI and taxable income: 0%, 15%, 18.8%, and 23.8%.

    Annual expiring provisions. Two-year extension (through 2013) of dozens of tax provisions that expired in 2011, including the ability to make tax-free rollovers from an IRA to a qualified charity. The charitable rollover provision includes two transition rules. The first would allow individuals who make qualified charitable rollover distributions in January 2013 to count the rollover as if it were made in 2012. The second would allow individuals who took a distribution in December 2012 to contribute that amount to a charity and count it as an eligible charitable rollover.

    2009 stimulus-related tax relief. Five-year extension of certain tax credits enacted in the 2009 stimulus bill (e.g., the American Opportunity Tax Credit and enhancements to the refundability of the child and earned income credits).

    We here at Widget are glad you're here.  We are happy to serve your needs and look forward to your phone calls!

     

  • The Top Ten IRS "Red Flags"

    20 December 2012 / Uncategorized / Comments Off on The Top Ten IRS "Red Flags"

    Ever wonder why some tax returns are eyeballed by the Internal Revenue Service while most are ignored?

    The IRS audits only slightly more than 1% of all individual tax returns annually. The agency doesn't have enough personnel and resources to examine each and every tax return filed during a year. So the odds are pretty low that your return will be picked for review. And, of course, the only reason filers should worry about an audit is if they are cheating on their taxes.

    However, the chances of being audited or otherwise hearing from the IRS increase depending upon various factors, including your income level, whether you omitted income, the types of deductions or losses you claim, the business in which you're engaged and whether you own foreign assets. Math errors may draw IRS inquiry, but they'll rarely lead to a full-blown exam. Although there's no sure way to avoid an IRS audit, you should be aware of red flags that increase your chances of drawing unwanted attention from the IRS.

    1. Making too much money

    Although the overall individual audit rate is about 1%, the odds increase dramatically for higher-income filers. 2011 IRS statistics show that people with incomes of $200,000 or higher had an audit rate of almost 4%, or one out of every 25 returns. Reporting $1 million or more of income? There's a one-in-eight chance your return will be audited. The audit rate drops significantly for filers making less than $200,000; only 1% of such returns were audited during 2011, and the vast majority of these exams were conducted by mail. We're not saying you should try to make less money -- just understand that the more income shown on your return, the more likely it is that you'll be hearing from the IRS.

    2. Failing to report all taxable income

    The IRS gets copies of all 1099s and W-2s you receive, so make sure you report all required income on your return. IRS computers are pretty good at matching the numbers on the forms with the income shown on your return. A mismatch sends up a red flag and causes the IRS computers to spit out a bill. If you receive a 1099 showing income that isn't yours or listing incorrect income, get the issuer to file a correct form with the IRS.

    3. Taking large charitable deductions

    We all know that charitable contributions are a great write-off and help you feel all warm and fuzzy inside. However, if your charitable deductions are disproportionately large compared with your income, it raises a red flag. That's because IRS computers know what the average charitable donation is for taxpayers at your income level. Also, if you don't get an appraisal for donations of valuable property, or if you fail to file Form 8283 for donations over $500, the chances of audit increase. Be sure to keep all your supporting documents, including receipts for property contributions made during the year, and abide by the documentation rules. And attach Form 8283 if required.  Cash is no longer deductible, so all contributions should be made via property (furniture, clothing, appliances, etc.) or check.

    4. Claiming the home office deduction

    The IRS is drawn to returns that claim home office write-offs because it has found great success knocking down the deduction and driving up the amount of tax collected for the government. If you qualify, you can deduct a percentage of your rent, real estate taxes, utilities, phone bills, insurance and other costs that are properly allocated to the home office. That's a great deal. However, to take this write-off, you must use the space exclusively and regularly as your principal place of business. That makes it difficult to successfully claim a guest bedroom or children's playroom as a home office, even if you also use the space to do your work. "Exclusive use" means that a specific area of the home is used only for trade or business, not also for the family to watch TV at night.

    5. Claiming rental losses

    Normally, the passive loss rules prevent the deduction of rental real estate losses. But there are two important exceptions. If you actively participate in the renting of your property, you can deduct up to $25,000 of loss against your other income. But this $25,000 allowance phases out as adjusted gross income exceeds $100,000 and disappears entirely once your AGI reaches $150,000. A second exception applies to real estate professionals who spend more than 50% of their working hours and 750 or more hours each year materially participating in real estate as developers, brokers, landlords or the like. They can write off losses without limitation. But the IRS is scrutinizing rental real estate losses, especially those written off by taxpayers claiming to be real estate pros. The agency will check to see whether they worked the necessary hours, especially in cases of landlords whose day jobs are not in the real estate business.

    6. Deducting business meals, travel and entertainment

    Schedule C is a treasure trove of tax deductions for the self-employed. But it's also a gold mine for IRS agents, who know from experience that the self-employed sometimes claim excessive deductions. History shows that most underreporting of income and overstating of deductions are done by those who are self-employed. And the IRS looks at both higher-grossing sole proprietorships and smaller ones. Big deductions for meals, travel and entertainment are always ripe for audit. A large write-off here will set off alarm bells, especially if the amount seems too high for the business. Agents are on the lookout for personal meals or claims that don't satisfy the strict substantiation rules. To qualify for meal or entertainment deductions, you must keep detailed records that document for each expense the amount, the place, the people attending, the business purpose and the nature of the discussion or meeting. Also, you must keep receipts for expenditures over $75 or for any expense for lodging while traveling away from home. Without proper documentation, the deduction is lost.

    7. Claiming 100% business use of a vehicle

    Another area ripe for IRS review is use of a business vehicle. When you depreciate a car, you have to list on Form 4562 what percentage of its use during the year was for business. Claiming 100% business use of an automobile is a red flag for IRS agents. They know that it's extremely rare for an individual to actually use a vehicle 100% of the time for business, especially if no other vehicle is available for personal use. IRS agents are trained to focus on this issue and will scrutinize your records. Make sure you keep detailed mileage logs and precise calendar entries for the purpose of every road trip. Sloppy recordkeeping makes it easy for the revenue agent to disallow your deduction. As a reminder, if you use the IRS' standard mileage rate, you can't also claim actual expenses for maintenance, insurance and other out-of-pocket costs.

    8. Writing off a loss for a hobby activity

    Your chances of audit increase if you have wage income and file a Schedule C with large losses. And if the loss-generating activity sounds like a hobby -- horse breeding, car racing and such -- the IRS pays even more attention. Agents are specially trained to sniff out those who improperly deduct hobby losses. Large Schedule C losses are always audit bait, but reporting losses from activities in which it looks like you're having a good time all but guarantees IRS scrutiny.

    You must report any income you earn from a hobby, and you can deduct expenses (as an itemized deduction on Schedule A!) up to the level of that income. But the law bans writing off losses from a hobby. For you to claim a loss, your activity must be entered into and conducted with the reasonable expectation of making a profit. If your activity generates profit three out of every five years (or two out of seven years for horse breeding), the law presumes that you're in business to make a profit, unless IRS establishes otherwise. If you're audited, the IRS is going to make you prove you have a legitimate business and not a hobby. So make sure you run your activity in a businesslike manner and can provide supporting documents for all expenses.

    9. Running a cash business

    Small business owners, especially those in cash-intensive businesses -- think taxis, car washes, bars, hair salons, restaurants and the like -- are a tempting target for IRS auditors. Experience shows that those who receive primarily cash are less likely to accurately report all of their taxable income (shocker!). The IRS has a guide for agents to use when auditing cash-intensive businesses, telling how to interview owners and noting various indicators of unreported income.

    10. Taking higher-than-average deductions

    If deductions on your return are disproportionately large compared with your income, the IRS may pull your return for review. But if you have the proper documentation for your deduction, don't be afraid to claim it. There's no reason to ever pay the IRS more tax than you actually owe.

    At Widget, we want our clients to pay the lowest amount of tax legally possible.  That being said, we also know how invasive and uncomfortable an IRS audit can be and work with our clients to pull red flags off the return if the benefit doesn't justify the risk.  Please feel free to call us if you have any questions!

  • Dollar Limitations for Pension Plans for 2013

    27 November 2012 / Uncategorized / Comments Off on Dollar Limitations for Pension Plans for 2013

    The Internal Revenue Service today announced cost-of-living adjustments affecting dollar limitations for pension plans and other retirement-related items for tax year 2013.

    Some of the key changes in what truly matters to Widget clients:

    • The elective deferral (contribution) limit for employees who participate in 401(k) and 403(b) plans increases from $17,000 to $17,500.
    • The catch-up contribution for employees aged 50 and over who participate in 401(k) and 403(b) plans remains at $5,500.
    • The limit on annual contributions to an IRA (Traditional or Roth) rises to $5,500, up from $5,000.
    • The limitation on the annual benefit under a defined benefit plan increases from $200,000 to $205,000.
    • The limitation for defined contribution plans is increased in 2013 from $50,000 to $51,000.
    • The annual compensation limit increases from $250,000 to $255,000.
    • The limitation for SIMPLE retirement accounts is increased from $11,500 to $12,000.

    Obviously this is a very brief summary.  The plans discussed above have deadlines to implement and have qualifications that need to be met in order to participate.  If we can answer any questions for you, please let us know.

    Widget Bookeeping and Tax, P.A.

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  • 2013 Standard Mileage Rates

    21 November 2012 / Uncategorized / Comments Off on 2013 Standard Mileage Rates

    2013 Standard Mileage Rates

    The IRS has released the 2013 standard mileage rates!  And you know how we at Widget LOVE the standard mileage rate!

    BUSINESS MILES

    The standard mileage rate for transportation or travel expenses is 56.5 cents per mile for all miles of business use (business standard mileage rate).

    OTHER MILES

    The standard mileage rate is 14 cents per mile for use of an automobile in rendering gratuitous services to a charitable organization under § 170.

    The standard mileage rate is 24 cents per mile for use of an automobile (1) for medical care or as part of a move for which the expenses are deductible under § 217.

    If you are still taking actual expenses, wanting assistance in creating and maintaining your mileage log, or any other issue, please give Widget a call!  We can help!

    Widget Bookkeeping and Tax, PA

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  • Delayed Tax Season (Thank you IRS and Congress) and AMT Explanation!!

    20 November 2012 / Uncategorized / Comments Off on Delayed Tax Season (Thank you IRS and Congress) and AMT Explanation!!

    IRS Warns - Tax Season could be delayed into MARCH due to slow-acting Congress!!

    As the end of the year approaches, and now that Obama has been re-elected, our attention is now focused on the “fiscal cliff,” (see Widget's article on what this means here: http://www.widgetcpa.com/uncategorized/what-does-the-term-the-fiscal-cliff-mean/)

    But a much more immediate result of Congress’ inaction threatens the 2013 filing season: the alternative minimum tax (AMT) patch, which expired at the end of 2011.

    The IRS warns that the start of tax season could be delayed for millions of taxpayers if the AMT patch is not enacted by the end of the year.  The problem is serious enough that the acting IRS commissioner, Steven T. Miller, wrote a letter to Sen. Max Baucus, D-Mont., chair of the Senate Finance Committee, on Nov. 13, 2012. The IRS Oversight Board followed up with a second letter on Nov. 19, urging Congress to act and saying, “We do not believe that the IRS has ever faced such a formidable operational risk.”

    The Alternative Minimum Tax (AMT) is an income tax imposed by the government on individuals, corporations, estates, and trusts and is imposed at a nearly flat rate (26% or 28%) on an adjusted amount of taxable income above a certain threshold (also known as exemption).  Regular taxable income is adjusted for certain items computed differently for AMT, such as depreciation and medical expenses and no deduction is allowed for state taxes or miscellaneous itemized deductions in computing AMT income.  AMT income is then multiplied by 26% or 28%, depending on your income level, and the tax computed under the AMT system is then compared with your regular income tax and you get to pay whichever is higher!

    For 2011, the AMT exemption amount was $48,450 for single taxpayers and $74,450 for married taxpayers filing jointly.  At that level, 4 million taxpayers paid AMT for 2011, according to Miller. Without the patch for this year, however, the exemption reverted to $33,750 for individuals and $45,000 for married filing jointly, which, the IRS estimates, will cause 28 million more taxpayers to be subject to the tax, giving them a much larger tax liability than they had anticipated.

    Because twice in the past when the AMT patch has expired, it has been reinstated retroactively, the IRS made the decision this year to maintain its tax filing systems “as-is” for the 2013 filing season. As a result, if the AMT patch and tax credit ordering rules are not enacted, the IRS warns of significant delays in the upcoming filing season. The programming changes it would have to make to its processing systems would mean it would have to notify 60 million taxpayers that they may not file a tax return or receive a refund until late in March 2013 and possibly later.

    A lesser problem, but one that still may cause delays in the 2013 filing season, is the expiration of a number of special tax breaks, including the educators’ deduction for classroom expenses. Miller noted that these deductions were reinstated late in the year in 2010 (mid-December), which delayed the 2011 filing season by four weeks for 9 million taxpayers while the IRS made the necessary changes. Having to deal with similar issues this year will cause inconvenience and delay for a large number of taxpayers, but would be much more manageable than the problems caused by failing to act on the AMT, Miller said.

    We at Widget keep our ear to the ground on all taxation issues and will continue to keep you informed!  If you have any questions, please feel free to give us a call!

    Widget Bookkeeping and Tax, P.A.

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