Archive for December, 2011|Monthly archive page

Do You Buy Online or Via Catalogs? – Use Tax – Merry Christmas to CA!

Originally Published in the Pacific Grove Hometown Bulletin

December 21, 2011

If you made any purchases over the Internet or via mail-order catalogs for your holiday shopping (or any time during the year) for business or pleasure, California does not want to be left out of the gift-getting!  Due to the strain on California’s budget over the past few years they have been looking high and low for additional revenue – including the enforcement of existing laws that have historically been quite lax.

For decades, California, and many other states have had use tax laws.  California use tax is basically sales tax imposed on all those purchases you make online or via mail-order catalogs, or while in no sales tax states like Oregon (you know – all those purchases you made so you could avoid paying sales tax!).  If you bring the goods into California and use them here (or give them to somebody in California), you owe California use tax equivalent to the sales tax rate where you reside.  This applies to individuals as well as businesses. Certain goods like cold meats, cheeses, crackers and other grocery type foods that are not subject to sales tax are not subject to use tax either.

The California Board of Equalization (BOE) has been aggressively marketing its efforts to pursue this tax including sending letters to tax professionals several times a year, hiring auditors, registering businesses, working with the Franchise Tax Board (FTB) to add a form to your 540 income tax return, and now creating safe-harbor use tax tables based on your income.  The downside of not complying is that if audited, they can go back for years looking through your bank statements and credit card statements for purchases from the likes of Amazon.com – and who knows what else they might find…

The new safe-harbor use tax tables are available for use with your individual 540 California tax return (business entities including schedule C businesses cannot use these tables).  Instead of collecting all your receipts for non-taxed purchases, California will allow you to pay a predetermined amount based on your adjusted gross income (up to $20K – $7, up to $40K – $21, up to $60K – $35, up to $80K – $49, up to $100K – $63, up to $150K – $88, up to $200K – $123, over $200K – multiply by 0.07%).

If you elect to use the tables, you will be presumed to have met your requirement and they will not ask for more, even if the actual tax based on receipts would have been much higher.  Individual purchases over $1,000 are treated separately from the use tax tables.  This can be a strategic move.  Beware, if you owe money to the FTB for any other reason such as past due taxes, the FTB will not pass the use tax paid to the BOE, and you will get a bill from the BOE with a 10 percent late penalty.  Your other option is to file a separate Form BOE-401-DS Use Tax Return, but the safe harbor tables are not available for this return.

All businesses (including schedule C businesses) that have gross receipts over $100K, and do not already have a seller’s permit with the BOE, are required to register with the BOE and file a separate use tax return.  Even if they made no qualifying purchases they have to register and file a zero return each year.  If you fail to register and file, and the BOE discovers this, they will likely require use tax returns for the past eight years.  It is probably in your best interest to register and file simply to avoid the possibility of an eight-year look-back!

So as you open gifts this year and ponder how smart you will look in that new sweater, you may also think, “I wonder if the giver has a use tax issue?!”

For more information on use tax, registering, and filing returns you can go to http://www.boe.ca.gov/sutax/sutprograms.htm.

Prior articles are republished on my website at www.tlongcpa.com/blog.

IRS Circular 230 Notice: To the extent this article concerns tax matters, it is not intended to be used and cannot be used by a taxpayer for the purpose of avoiding penalties that may be imposed by law.

Travis H. Long, CPA is located at 706-B Forest Avenue, PG, 93950 and focuses on trust, estate, individual, and business taxation. He can be reached at 831-333-1041.

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I’m Having a Baby!

Originally published in the Pacific Grove Hometown Bulletin

Decembery 7, 2011

Well, not me, technically, but my wife is.  After 12 years of wedded bliss, we are entering the baby business.  Like most future parents we are excited, but being a CPA takes it to a whole new level of joy!  There are so many planning opportunities around children.

Planning can start well before birth or even years before conception.  For example, the highly tax savvy high school senior could think, “Someday, I am going to have a family of my own.  Knowing the high cost of college I am about to incur, I should really start saving for my future child’s education now to maximize tax-deferred growth!  That raucous week in Cancun is really a waste of money, anyway.”  Instead this high schooler opens a section 529 plan and names his older sister’s child as a beneficiary.  After four years in a frat house, a year traveling after school, a few years bouncing around finding himself, falling in love, getting married, and finally having a child, this new parent then renames the beneficiary to his own child with a ten-year jump start on tax deferred education saving!

What about the expense of having the child?  This natural process which has gone on quite successfully for a few million years or so at no cost, mostly outdoors in the dirt, can now be quite pricey, and sterile.  It may cost $5,000 if you use a midwife or $25,000 in a hospital!  You will likely go over your deductible and insurance will pick up the rest.  A great option is to have a high deductible health plan going forward with a health savings account.  This setup makes virtually all of your family medical expenses deductible whereas people with traditional plans are stuck itemizing with a 7.5 percent of AGI floor – meaning most people do not get any tax benefit.  It also allows the deductibility of more types of expenses and alternative care.

Next, there is the additional exemption deduction to get excited about – we are talking $3,700!  You are also eligible for child tax credits – up to a $1,000 per child.  And if you are low income, the child may help qualify you for a larger earned income credit: up to $3,094 with one child or $5,751 with three or more!  Child tax credits and earned income credits can be refundable – meaning, even if you do not pay a dime in tax, the federal government will “refund” the money to you anyway – but having children is not a great way to get rich.   For advanced tax planning, you aim to have your child near the end of December and still receive the exemption and credits for the whole year.  No expense, but full benefit – brilliant!

Do not forget about dependent care credits and education credits either.  Dependent care credits will save you up to $1,050 for one child or $2,100 for two or more children.   Education credits for college age children such as the Hope credit can save you up to $2,500 in tax.

My favorite planning opportunity which I have yet to implement with a client is baby modeling.  If you can get your baby into print or TV commercials, then I feel you would have a strong case to say the baby has earned income.  Maybe the “talent’s” agent, a.k.a. mom or dad, would need to be paid out a heavy agent fee since it really required a lot of work on their part – but then again, I am sure that many famous actors and actresses have to be babied by their agents too!  Once your baby has earned income, you can establish a Roth-IRA for retirement!  Think about 18-22 years of additional investment compounding!  (Call me if you have a child in this situation – I want to put this in action!!)

So when is our baby due – LATE April…we hope!

Prior articles are republished on my website at www.tlongcpa.com/blog.

IRS Circular 230 Notice: To the extent this article concerns tax matters, it is not intended to be used and cannot be used by a taxpayer for the purpose of avoiding penalties that may be imposed by law.

Travis H. Long, CPA is located at 706-B Forest Avenue, PG, 93950 and focuses on trust, estate, individual, and business taxation. He can be reached at 831-333-1041.