Archive for the ‘General’ Category
Can’t Finish Returns by October 15 Deadline?
Filed under: Extensions, General | Tags: 1040, Extension, K-1, late, late filing penalty, LLC, October 15, partnership, S-Corporation, trust
Comments (2) Originally published in the Cedar Street Times
October 5, 2012
If you placed your 2011 personal tax returns on extension, you have 10 days left to complete the returns and get them filed. This is especially important if you did not withhold enough tax or make enough estimated tax payments during the year to cover your tax liability that was technically due on April 17. Penalties are assessed based on the unpaid balance of tax that was due on that date. There are several penalties assessed, but the hefty penalty is the late filing penalty which equates to five percent of your unpaid tax as of April 17 for each month or part of a month the return is late (capped at 25 percent).
In the past, I have had problematic situations where a client did not receive tax documents until after October 15. This is sometimes seen when a client is invested in a partnership or has an interest in an S-Corporation or LLC and that entity is filing their returns late – causing all the others to be late as well. There are even situations when other entities are filing timely and it can cause you to be late. An example of this would be if you were a beneficiary of an irrevocable trust. These types of trusts generally have the same due dates that your personal returns do – April 15, with a six month extension to October 15. What if the trust is completed at the end of the day on October 15? Will the beneficiary be able to get their K-1 tax document and provide to their accountant to finish before midnight!! Maybe not!
So what do you do if you still cannot file by October 15? Is there any hope? There are some specific exceptions for military service members and taxpayers working abroad, but if you do not qualify for those exceptions, what then? One option would be to wait until the information is received and then file the return requesting penalty relief for reasonable cause. This is a tough row to hoe in actuality, because the IRS places a high degree of responsibility on the taxpayer: I can almost guarantee you that what you feel is reasonable will not be the same as what the IRS feels is reasonable! You will be categorized as delinquent from the outset, and then you will start on the defensive.
A better solution in many cases would be to go ahead and file a tax return with the information available and your best estimate of any missing information. (There are provisions in the code that allow for estimates under certain circumstances.) A statement should be included with the return explaining the situation and the efforts made to obtain the information. You should also state the intent to amend the return if materially different from the actual information when it is available. This would prevent a late filing penalty from being assessed, and you would be categorized as timely filed unless the return is challenged by audit.
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.
Timeshare Tax Issues
Filed under: General, Rental Property | Tags: deed, fee-simple, property tax, real estate, right to use, second home, timeshare, timeshares, vacation home
Leave a comment Originally published in the Cedar Street Times
September 7, 2012
Timeshares sound like a great idea, but you need to be very careful and do your research before acquiring one. After the timeshare honeymoon is over, owners often find themselves stuck with an unwanted monthly or annual financial obligation and an “asset” that is very difficult to sell or even give away. It is so bad that there are even organizations out there that will charge you a fee to take the timeshare off your hands! Besides these issues, there are also some tax pitfalls for the unwary.
When you attend a sales presentation you will likely be told that your interest and taxes on the timeshare are deductible just like your primary home and that you can rent out the timeshare like a rental property if you choose. Do yourself a favor and do not take tax advice from your timeshares sales representative. The large majority of timeshares in the U.S. are fee-simple interests in real property- meaning you have a deed to a specific property with all the burdens and benefits of ownership as your home likely is. If you take out a mortgage to buy the timeshare; if the mortgage is secured by the deed to the property; and if you treat it as your second home for tax purposes, you will typically be able to deduct the interest. (Note that if you bought the timeshare with a loan not secured by the property or on a credit card, you would lose the interest deduction.)
There are, however, an increasing number of timeshare interests that are written as “right to use.” These are essentially leases and are often coupled with points systems (some points systems are still tied to a fee-simple deed). If you have a right to use contract, you will be disqualified from deducting the interest. One way to solve this problem would be to pay for the timeshare with a line of credit secured by your main home: you can deduct mortgage interest on the first $100,000 of debt regardless of what you buy with it.
In a similar parallel, real property taxes must be assessed against an interest in real property. They also must be broken out from maintenance dues and other fees. Surprisingly, some timeshare operators do not split this out on your statements, and you may have to call to get this information.
If you rent out your timeshare, you are presumed to be subject to the vacation home rules (see my prior two articles) limiting your deductions to the income generated. In other words you cannot take a loss as you may with a regular rental property. This is because vacation home rules take into account the activity of all owners. For timeshares this means you have to count the personal use of the other 25-50 owners that have a week or two interest in the property as well! The courts and the IRS have different views on the precise application, but either way, it is still not tax friendly.
Finally, if you are able to sell your timeshare, resulting in a nearly guaranteed loss, it will generally be a nondeductible personal loss.
Buyers beware!
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.
Elijah Bennett Long
Originally published in the Pacific Grove Hometown Bulletin
April 18, 2012
At 10:16 am on April 3rd, I entered fatherhood! Needless to say, this has made the most interesting end to a tax season for me so far! Elijah Bennett Long was born at our home weighing in at seven pounds four ounces and 20 inches long. Personally, I think it is quite neat that he will have a Pacific Grove birth certificate – not too many of those around!
I was negotiating with him while he was in the womb for the past few months and explaining why it would not be wise to renege on his contract date of April 21st. He brought up several valid points: 1) he was not the proximate cause of this event 2) there were early escape clauses in his contract, and 3) interested parties (Joy – Momma) would prefer to have him at seven pounds four ounces rather than closer to nine pounds! I admit, the kid had some good points.
Despite his exercising the early exit-strategy rights on the development phase, we have decided to approve his initial contract for child-rearing. We are thinking to have this contract extend through kindergarten with two renewable six-year options. The second renewable option would include an opt-out for us after the middle school years. There would be some additional language which could allow for a third six-year option to get through the college phase depending on certain performance benchmarks achieved in the prior option period.
With business out of the way, we have been having the time of our lives! How fun it is to come home and see that tiny bundle of love. It actually has worked out quite well these past few weeks as tax season has come to a close. I was working late hours anyway which made it perfect to help out with some of the night duties since I was still wide awake! What a blessing!
Next step…convincing Momma that baby-modeling is a good idea so he can generate earned income and open a Roth IRA!
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.
Why You Should Donate Appreciated Assets Instead of Cash
Filed under: General, Tax Strategy | Tags: appreciated assets, cash, charitable contributions, donate, donation, mutual funds, real estate, stock
Leave a comment Originally published in the Pacific Grove Hometown Bulletin
March 7, 2012
Last issue I spoke about the issues surrounding charitable deductions for donated goods or services. I mentioned at the end of the article a much better way of making donations rather than through the contribution of goods, services, or even cash – that way is through the donation of appreciated assets. I will use stock in my explanation below, but keep in mind this same principal generally applies to any appreciated assets including mutual funds, real estate, art work, collectibles, etc.
The donation of appreciated assets, such as stock, is an incredible tool if you 1) have some, or 2) can plan to have some for donations down the road! Donating appreciated stock is like having your cake and eating it too: you basically get two tax benefits. Here is how it works. Let us assume you buy $1,000 of stock, and over time, and after a treacherous dip to $400 (!), it rebounds and climbs to $1,500. Then let us assume your favorite charitable organizations need funds. You could sell that $1,500 of stock and give the cash proceeds to the organization. You would get a $1,500 charitable donation, but you would also have a taxable gain of $500 ($1,500 sales price less $1,000 cost) since you sold the stock.
Instead of selling the stock, let us assume you transferred the stock in-kind to the charitable organization. You still get the $1,500 charitable donation but you do not have to pay any tax on the built-in-gains of $500. This could be a huge benefit, especially if you have stock that has appreciated substantially over many years. You would be much better off making your charitable contributions in this manner, rather than writing checks.
For those with no appreciated stock, long-term planning might suggest opening a separate brokerage account and investing money each year in growth stocks to be used in the future for making donations in lieu of your less favorable cash. This may take a number of years to achieve, but eventually you could turn the tables and find yourself making your larger donations in appreciated stock, saving you even more tax.
Keep in mind, if you plan to donate something other than financial assets that have a readily determinable value, you would typically need an appraisal if the value is over $5,000.
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.
Deducting Services/Goods Your Business Donates
Filed under: General | Tags: charitable deduction, contributions, donating goods, donating services, donating time, donations, services
Leave a comment Originally published in the Pacific Grove Hometown Bulletin
February 15, 2012
Every year I inevitably have a few clients that bring in statements from a charity thanking my client’s business for the donation of my client’s services or goods with a fair market value of X dollars. Of course they want to write it off as a charitable deduction. The first question I have for them is, “Did you include it in your taxable income, otherwise how many dollars did you actually spend to provide the services or buy the goods donated?”
The answer to the first part is always no! At that point, if they provided the services themselves, the answer is no deduction. If they used a hired worker to perform the services – they are already getting a deduction when they deduct the workers’ wage. For goods or materials donated they will get a deduction when they write off the purchase from the supplier or take inventory.
But why can’t they use the fair market value for the deduction? The simple answer is you cannot take a deduction for donating theoretical pretax profits! Compare the woman who donates $100 cash to the man who donates $100 of his time. Besides the the value of the man’s time being subjective and subject to abuse, the woman’s $100 cash started as approximately $130 of services or $130 of markup on goods, and then she paid $30 of tax, leaving her with $100 to donate. When she donates it, the taxing authorities give her a deduction to basically rebate her for the $30 in tax she already paid. The man has not included his $100 in income and has paid no tax, so he has nothing to rebate, and is therefore not entitled to a deduction.
Donations are generally limited to your cost basis in the donation. However, there are exceptions. In a future issue, I will discuss why donating appreciated stock is much more effective than donating goods, services, or cash.
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.
How to Handle Late Documents from Investment Companies This Year
Filed under: General | Tags: cost basis, investment, reporting
Leave a comment Originally published in the Pacific Grove Hometown Bulletin
February 1, 2012
This year, the IRS put a new demand on investment firms to report the cost basis of stock sales that occurred in 2011. Next year they will have to report similar information for mutual funds, and the following year for various other securities. This demand will likely cause these firms to send you their normal tax documents late, or perhaps re-issue documents several times while they sort out this new process. I have seen one large firm that stated they will not be issuing tax documents until the end of February.
The result of this will likely be a further compression of the already compressed time that tax professionals have to complete the returns for their clients. If you want to ensure your return is completed by April 17 (the due date this year), you may wish to assume those documents will come late. Gather everything else and provide to your tax professional early. Include a note asking they prepare your returns except for the straggling investment company tax documents which you will provide later. This gets your return in a great position to get it out the door as soon as the information arrives.
One further step may be to request they not file your returns until March 7th or so to lessen the chances that you will need to file an amendment because your investment company re-issued their tax document in late February. If you are e-filing and sign electronic authorization forms, your tax professional is technically supposed to file the returns within three days of your dated signature. That said, it would make more sense to sign your e-file authorizations later when you want the returns filed.
If you find yourself in the situation where you file the return and then receive a changed document – discuss it with your tax professional. The larger the difference, the more likely you are to get a notice down the road. If you owed more money as a result, you would be subject to interest and penalties at that point (which could be up to three years later and include interest and penalties for the whole time period). You would need to balance that risk with the cost of amending.
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.
Tax Organizers
Filed under: General | Tags: Tax Organizer, Tax Return Preparation
Leave a comment Originally published in the Pacific Grove Hometown Bulletin
January 18, 2012
The use of a tax organizer is a great way to prepare for your income tax return when working with tax professionals. All things considered, it allows the professional to spend more time on important issues, and typically results in a more accurate and less expensive return.
An organizer is essentially a document that prompts you for the vast majority of standard information a tax professional would need to work on your returns in an order that is logical and efficient for the professional. Organizers often contain questionnaires that alert the professional to potential reportable transactions or areas that may need additional planning or questions. It also allows the individual to convey preferences about refunds, the use of estimates, future expectations or anything else that seems appropriate. If you want to get a gold star, sort your supporting tax documents in the same order as the organizer!
Some people think filling out an organizer is a waste of their time because that is what they are paying someone else to do. The “shoe-box” approach is where all documents are thrown in a box and the professional is supposed to grind out a return. This is possible, but the reality of the situation is that you will probably end up with either an inferior result or a lot of questions and a large bill. I have done returns like these over the years – in some cases opening all the client’s mail for the first time including bank statements, bills, and even birthday cards from grandma with a check enclosed!
Better than the “shoe-box” approach is your own ordered approach. My father was an architect and he had his own business. I remember the zippered bags he used for sorting tax documents and his all-important summary sheets where he proceeded to add every expense in two-point hand-written font on yellow notebook paper that only he could fully understand (but of which he was quite proud)! Of course, his CPA – Dan, had to learn parts of it as well. I can assure you that Dan would have preferred my father use his firm organizer instead, and he probably would have charged my dad less for preparation as a result!
Using a firm provided organizer allows the professional to move quickly through the low value process of data collection and entry and think more about high-impact planning or additional deductions. The first year you fill out an organizer for a professional, it will typically be more voluminous with many non-applicable pages. In future years it will often be tailored to you and provide your prior year information for easy comparison – and it helps you know what you may be missing.
In any case, tax organizers are a great tool to help you stay organized from year-to-year. If you have never used an organizer, you can download one for free from my website at www.tlongcpa.com/forms.
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.
Do You Know if You Need to File a 1099-Misc by January 31st?
Filed under: General | Tags: $600, 1099, 1099-Misc, employee, independent contractor, Penalties
Comments (2) Originally Published in the Pacific Grove Hometown Bulletin
January 4, 2012
Happy New Year! Now that the holidays are over and you are starting those New Year’s Resolutions, perhaps you should add one more to the mix – reviewing whether or not you need to file 1099s. Penalties have doubled this year, and if you paid a non-employee over $600 in the course of your business during 2011, you likely need to file a 1099-Misc by the end of this month.
Penalties
Due to the strain of the economy, pressure is being put on taxing authorities to collect revenue wherever they can. One way of collecting this revenue is through penalties for failure to comply with regulations. This year we are witnessing increasing penalties, the creation of new penalties, and the enforcement of old penalties not previously enforced. The filing of 1099s is no exception and is a large target because it also helps the taxing authorities identify people who fail to report income (and pay tax) of their own volition. You may think, “I have never done this before,” but given the increased enforcement, this is a hollow reason for not reconsidering your position.
The federal penalties have doubled this year to $100 per 1099 for failure to provide a 1099 to a recipient, and another $100 for failure to file a copy with the IRS (I am sure you will find it a relief to know that the combined penalties are capped at $3 million for most of us!). California has matching penalties of $50 each and they can also disallow the deduction for the amount you paid the person in question.
Who Gets 1099-Misc Forms
Generally, 1099-Misc forms are filed for service-providers that your business (sole proprietorship, nonprofit, or other business entity) pays to someone other than a corporation over $600 during a year. There are many exceptions and reading through the instructions for form 1099-Misc (available online) is a great way to find out if you have filing requirements. Exceptions include payments to attorneys, medical service providers, royalties, fish payments, direct sellers, and many more. Just because you have a CPA or someone else prepare your taxes does not mean they know all the people for which you need to file 1099s.
When to File
Form 1099-Misc is required to be mailed to recipients by January 31st. You also have to file a copy with the IRS by February 29th. Copies mailed to the IRS have to be filed on specific forms printed in red ink, unless they are electronically filed by professionals or other online service providers. The printed forms and software can be found at your local office supply store.
If you need additional help with a 1099 filing determination or with actually filing the 1099s this year, you should seek professional help as soon as possible.
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.
I’m Having a Baby!
Filed under: General | Tags: baby, baby modeling, child tax credit, earned income credit, exemption, HSA, medical expenses, Roth-IRA, section 529
Leave a comment 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.
Mr. Postman Has No Tax Forms for Me
Originally Published in the Pacific Grove Hometown Bulletin
March 2, 2011
If you are still waiting for your tax forms to arrive in the mail and you refuse to file without them, you might find yourself on a blind date with an IRS agent next year. No doubt, the agent will be very interested in you, however, the personal finance questions may be a rude topic on a first date. In case you missed the IRS postcard last October, the decision was made not to mail forms for the 2010 tax year – primarily for economic and technological reasons. (It is not because the new Congress repealed the income tax system as I saw rumored on one online blog!)
The decision is only estimated to save taxpayers about $10 million – a seemingly trivial amount by today’s standards. Computerized e-filing continues to devour the tax filing landscape and only 8 percent of Americans received paper packages in the mail in 2009. In the near future, it is conceivable that virtually all filing with the IRS will be electronic.
So what do you do this year if you still want paper forms? April 15 is fast approaching. Well, you could go to www.irs.gov and try to navigate and download the forms and publications (I also have links on my website www.tlongcpa.com/forms) – but then again, if you have a paper persuasion, that may not be the answer for you. You can still get paper forms at the local post office or IRS office and some local libraries. If you experience a hardship getting the forms or publications, you can call the IRS at 1-800-829-3676 to request them through the mail (it takes about ten days).
If you decide you would like help filing your return there are a number of free options sponsored by the IRS and available for taxpayers meeting certain criteria. People 60 and older may contact Tax Counseling for the Elderly (TCE) – 1-888-227-7669. People making $49,000 or less may be able to get assistance via the Volunteer Income Tax Assistance (VITA) program – 1-800-906-9887. There are other programs as well and full details are available from the IRS. These programs do not meet the needs of everyone, and your best option may be to call a local tax professional.
No matter what you choose, make sure you file a return if required – I assure you the new Congress did not repeal the income tax system!
Travis H. Long, CPA is located at 706-B Forest Avenue, PG. Travis can be reached at 831-333-1041.
Travis H. Long, CPA, Inc. Blog 