KKAJ Blog Posts in Default Category
The Pros and Cons of a Remote Office
The Pros and Cons of a Remote Office
Deducting Business Expenses: Separating Fact From Myth
- Startup costs.
- Assets.
- Improvements.
- Employees' pay — You can generally deduct the pay you give your employees for services they perform within your business.
- Retirement plans — Retirement plans are savings plans offering tax advantages to set aside money for your and your employees' retirement funds.
- Rent expenses — Rent is any amount you pay for the use of property you don't own. You can deduct rent as an expense only if the rent is for property you use in your trade or business. If you have or will receive equity in the title to the property, the rent is not deductible.
- Interest — Business interest expense is an amount charged for the use of money you borrowed for business activities.
- Taxes — You can deduct various federal, state, local and foreign taxes directly attributable to your trade or business as business expenses.
- Insurance — Generally, you can deduct the ordinary and necessary cost of insurance as a business expense if it's for your trade, business or profession.
2021 Tax Tips: A look at the Future
- Increasing the top ordinary income tax rate from 37% to 39.6%, which was the rate prior to the passage of the Tax Cuts and Jobs Act of 2017.
- Increasing the long-term capital gains and qualified dividend rate from 20% to 39.6% for taxpayers with annual adjusted gross income of more than $1 million.
- Changing the capital gains tax to:
- Tax capital gains when assets are gifted or transferred to people at death.
- Tax capital gains when assets are transferred to or from an irrevocable trust or partnership.
- Tax capital gains on unrealized appreciation of assets held in trust if capital gains have not been paid on a property for 90 years (e.g., property in a generation-skipping trust).
- Tax carried interests as ordinary income instead of capital gains.
- Subjecting pass-through income to either the 3.8% Medicare tax or the 15.3% self-employment tax i taxable income is greater than $400,000.
- Repealing the Section 1031 like-kind exchange rules for real estate so that investors cannot defer taxes by rolling profits from the sale of a property into their next purchased property.
- Transfer any appreciated assets you were planning to transfer by the end of 2021. Waiting until 2022 may expose these gifts to a capital gains tax. This is a good idea even for transfers to a spouse, revocable trust, not for profit, small business or family farm because we do not yet know whether transfers to any or all of these entities will be excluded from taxation.
- Review any estate tax planning strategies involving irrevocable trusts or partnerships to assess whether a capital gains tax may be triggered on appreciated assets to be contributed or distributed in the future.
- Consider selling investment real estate and buying new property in 2021. This may help avoid triggering taxes if the Section 1031 exchange rules change.
- Maximize contributions to retirement plans. Be aware that backdoor Roth IRAs may be eliminated in 2022.
- Cash out any carried interest positions.
2021 Tax Tips: A look at the Future
- Increasing the top ordinary income tax rate from 37% to 39.6%, which was the rate prior to the passage of the Tax Cuts and Jobs Act of 2017.
- Increasing the long-term capital gains and qualified dividend rate from 20% to 39.6% for taxpayers with annual adjusted gross income of more than $1 million.
- Changing the capital gains tax to:
- Tax capital gains when assets are gifted or transferred to people at death.
- Tax capital gains when assets are transferred to or from an irrevocable trust or partnership.
- Tax capital gains on unrealized appreciation of assets held in trust if capital gains have not been paid on a property for 90 years (e.g., property in a generation-skipping trust).
- Tax carried interests as ordinary income instead of capital gains.
- Subjecting pass-through income to either the 3.8% Medicare tax or the 15.3% self-employment tax i taxable income is greater than $400,000.
- Repealing the Section 1031 like-kind exchange rules for real estate so that investors cannot defer taxes by rolling profits from the sale of a property into their next purchased property.
- Transfer any appreciated assets you were planning to transfer by the end of 2021. Waiting until 2022 may expose these gifts to a capital gains tax. This is a good idea even for transfers to a spouse, revocable trust, not for profit, small business or family farm because we do not yet know whether transfers to any or all of these entities will be excluded from taxation.
- Review any estate tax planning strategies involving irrevocable trusts or partnerships to assess whether a capital gains tax may be triggered on appreciated assets to be contributed or distributed in the future.
- Consider selling investment real estate and buying new property in 2021. This may help avoid triggering taxes if the Section 1031 exchange rules change.
- Maximize contributions to retirement plans. Be aware that backdoor Roth IRAs may be eliminated in 2022.
- Cash out any carried interest positions.
New: Special PPP Loan Provisions for Small Businesses
Starting on Feb. 24, 2021, the SBA is establishing 14-day, exclusive PPP loan application period for businesses and nonprofits with fewer than 20 employees. This is according to guidance on the SBA and White House sites. According to the statement, this will give lenders and community partners more time to work with the smallest businesses to submit their applications.
The SBA also announced four additional changes to open the PPP to "more underserved small businesses than ever before." The SBA will:
- Allow sole proprietors, independent contractors, and self-employed individuals to receive more financial support by revising the PPP’s funding formula for these categories of applicants.
- Eliminate an exclusionary restriction on PPP access for small business owners with prior non-fraud felony convictions, consistent with a bipartisan congressional proposal.
- Eliminate PPP access restrictions on small business owners who have struggled to make student loan payments by eliminating student loan debt delinquency as a disqualifier to participating in the PPP.
- Ensure access for non-citizen small business owners who are lawful U.S. residents by clarifying that they may use Individual Taxpayer Identification Number (ITIN) to apply for the PPP.
The statement further noted that a critical goal from Congress for the latest round of PPP was to reach small and low- and moderate-income (LMI) businesses who have not received the needed relief a forgivable PPP loan provides. Although Congress set a $15 billion set-aside for small and LMI first draw borrowers, the current round has only deployed $2.4 billion to small LMI borrowers, "in part because a disproportionate amount of funding in both wealthy and LMI areas is going to firms with more than 20 employees." The SBA believes this special 2-week window and the other changes will allow the distribution of more funds.
The program is slated to end on March 31, although additional relief programs are expected before then.
Election Outcome Update: Tax Policy Post-Georgia Senate Runoffs
Managing Risk in Estate Planning
2020 Year-End Tax Planning for Individuals
2020 Year-End Tax Planning for Individuals
As the year-end approaches, individuals, business owners and family offices should be reviewing their situations to identify any opportunities for reducing, deferring or accelerating tax obligations. Areas that should be looked at in particular include tax reform provisions that remain in play, as well as new opportunities and relief granted earlier in 2020 under the CARES and SECURE Acts. This article highlights specific areas and provides preliminary inflationary adjustment items for 2021 as of October 15, 2020, compared to current 2020 amounts, to aid taxpayers as they plan deferrals and accelerations before year-end (anticipated inflationary adjustments provided by Thomson Reuters Checkpoint and Bloomberg Tax & Accounting are used; official numbers have not yet been published by the IRS, but are expected to be made available later in 2020).
A discussion about 2020 year-end tax planning likely should involve a discussion about the U.S. presidential election. To date, neither candidate has released a formal plan regarding the tax code. Taxpayers can still make informed decisions by taking into consideration what the candidates have said about tax policy on the campaign trail. Of note, Joe Biden has spoken to:
• Raising the top individual income tax rate to 39.6%
• Raising the tax on capital gains at 39.6% for taxpayers with more than $1,000,000 in income
• Eliminating step-up of basis at death
The information contained within this article is summarized. Taxpayers should consult with a trusted advisor when making tax and financial decisions regarding any of the items below.
Individual’s Tax Planning Highlights
Long-Term Capital Gains
• The brackets for long-term capital gains for 2020 and the projected 2021 rates are shown below. Long-term capital gains are subject to a lower tax rate, so investors may wish to consider holding on to assets for over a year to qualify for those rates.
Social Security Tax
• The Old-Age, Survivors, and Disability Insurance (OASDI) portion of the social security tax is imposed on employee compensation and self-employment income, but only to the extent of the maximum wage base set by the Social Security Administration ($137,700 for 2020 and $142,800 for 2021 by the Social Security Administration).
• The OASDI program is funded by contributions from employees and employers through FICA tax. The FICA tax rate for both employees and employers is 6.2% of the employee's gross pay. Self-employed persons pay a similar tax, called SECA (or self-employment tax), based on 12.4% of the net income of their businesses.
• On August 8, 2020, President Trump issued an executive order allowing employers to defer the withholding, deposit and payment of certain employee payroll taxes from September 1 to December 31, 2020. Further guidance is contained under Notice 2020-65.
• Employers, employees and self-employed persons also pay a tax for Medicare/Medicaid hospitalization insurance (HI), which is part of the FICA tax, but is not capped by the OASDI wage base. The HI payroll tax is 2.9%, which applies to earned income only. Self-employed persons pay the full amount, while employers and employees each pay 1.45%.
• Some high earners must pay an extra 0.9% HI payroll tax on earned income that is above certain adjusted gross income (AGI) thresholds, i.e., $200,000 for individuals, $250,000 for married couples filing jointly and $125,000 for married couples filing separately in 2020. However, employers do not pay that extra tax. This tax, also known as the Additional Medicare Tax, was enacted as part of the Affordable Care Act (ACA). The constitutionality of the ACA has been challenged in California v. Texas, No. 19-840, which is set for oral arguments before the Supreme Court on November 10, 2020. Specifically, the issue before the Court is whether the ACA became unconstitutional when Congress reduced the individual mandate penalty to $0. The effective date of the penalty repeal was January 1, 2019. Accordingly, the Court’s ruling in California v. Texas could ultimately impact the Additional Medicare Tax.
Long-Term Care Insurance and Services
• Premiums an individual pays on a qualified long-term care insurance policy are deductible as a medical expense. The maximum amount of a deduction is determined by an individual’s age. The following table sets forth the deductible limits for 2020 and 2021:
These limitations are per person, not per return. Thus, a married couple, both spouses over 70 years old, has a combined maximum deduction of $10,860 ($11,300 projected for 2021), subject to the applicable AGI limit.
Retirement Plan Contributions
• If an employer (including a tax-exempt organization) has a 401(k) plan or 403(b) plan, the maximum amount of elective contributions that employee can make in 2020 is $19,500 ($26,000 if age 50 or over and the plan allows “catch up” contributions, which allows an additional $6,500). For 2021, those limits are projected to remain the same. Qualified plan limits are based on the year-to-year increases in the third-quarter Consumer Price Index for All Urban Consumers (CPI-U), so those amounts cannot be finalized until after the September CPI-U values are published in October. The IRS is expected to announce the official 2021 limits in late October or early November.
• The SECURE Act permits a penalty-free withdrawal of up to $5,000 from traditional IRAs and qualified retirement plans for expenses related to the birth or adoption of a child after December 31, 2019. To qualify, the distribution must be made during the one-year period beginning on the date the child is born or the adoption is finalized. Eligible adoptees are any individual who has not reached age 18 or is physically or mentally incapable of self-support. Qualified birth or adoption distributions are included in the taxpayer’s income in the year of withdrawal but are not subject to the 10% early withdrawal penalty or to the mandatory 20% tax withholding and may be repaid to the retirement plan at any time. The $5,000 distribution limit is per individual, so a married couple could each receive $5,000.
• Previously, individuals were not able to contribute to their traditional IRAs in or after the year in which they turn 70½. The SECURE Act eliminates this age cap.
• The SECURE Act changes the age for required minimum distributions (RMDs) from tax-qualified retirement plans and IRAs from age 70½ to age 72 for individuals born on or after July 1, 1949. Generally, the first RMD for individuals who were born on July 1, 1949, or later is due by April 1 of the year after the year in which they turn 72.
• The SECURE Act generally requires that designated beneficiaries of persons who die after December 31, 2019, take inherited plan benefits over a 10-year period. Eligible designated beneficiaries (i.e., surviving spouses, minor children of the plan participant, disabled and chronically ill beneficiaries and beneficiaries who are less than 10 years younger than the plan participant) are not subject to this rule. Conduit trusts and see-through accumulation trusts are required to use the 10-year payout rule unless the trust is for the sole benefit of a disabled or chronically ill beneficiary. Non-see-through accumulation trusts will continue to use the five-year payout period, which was required before the SECURE Act.
• The CARES Act allows eligible individuals to withdraw up to $100,000 from qualified retirement plans during 2020 without incurring the 10% early distribution penalty. Individuals or their spouses, dependents or other household members affected by COVID-19 may qualify for this relief. Such taxable distributions can be included in gross income ratably over three years. Taxpayers may recontribute the withdrawn amounts to a tax-qualified plan or IRA at any time within three years after the distribution. These repayments will be treated as a tax-free rollover and are not subject to that year’s cap on contributions.
Foreign Earned Income Exclusion
• The foreign earned income exclusion is $107,600 in 2020, projected to increase to $108,700 in 2021.
Alternative Minimum Tax
• A taxpayer must pay either the regular income tax or the alternative minimum tax, whichever is higher. The established exemption amounts for 2020 are $72,900 for unmarried individuals and individuals claiming head of household status, $113,400 for married individuals filing jointly and surviving spouses, and $56,700 for married individuals filing separately. For 2021, those amounts are projected to increase to $73,600 for unmarried individuals and individuals claiming the head of household status, $114,600 for married individuals filing jointly and surviving spouses, and $57,300 for married individuals filing separately.
Kiddie Tax
• The SECURE Act reinstates the kiddie tax previously suspended by the Tax Cuts and Jobs Act (TCJA). For tax years beginning after December 31, 2019, the unearned income of a child is no longer taxed at the same rates as estates and trusts. Instead, the unearned income of a child will be taxed at the parents’ tax rates if those rates are higher than the child’s tax rate. Taxpayers can elect to apply this provision retroactively to tax years that begin in 2018 or 2019 by filing an amended return.
Charitable Contributions
• Currently, individuals who make cash contributions to publicly supported charities are permitted a charitable contribution deduction of up to 60% of their AGI. Contributions in excess of the 60% AGI limitation may be carried forward in each of the succeeding five years. The CARES Act suspends the AGI limitation for qualifying cash contributions and instead permits individual taxpayers to take a charitable contribution deduction for qualifying cash contributions made in 2020 to the extent such contributions do not exceed the taxpayer’s AGI. Any excess carries forward as a charitable contribution that is usable in the succeeding five years. Contributions to non-operating private foundations or donor-advised funds are not eligible for the 100% AGI limitation.
Estate and Gift Taxes
• The unified estate and gift tax exclusion and generation-skipping transfer tax exemption is $11,580,000 per person in 2020. For 2021, the exemption is projected to increase to $11,700,000.
• All outright gifts to a spouse who is a U.S. citizen are free of federal gift tax. However, for 2020 and 2021, only the first $157,000 and $159,000 (projected), respectively, of gifts to a non-U.S. citizen spouse are excluded from the total amount of taxable gifts for the year.
Simplified Employment Pension Plans
• Small businesses can contribute up to 25% of employees’ salaries (up to an annual maximum set by the IRS each year) to a Simplified Employee Pension (SEP) plan. The SEP contribution must be made by the extended due date of the employer’s federal income tax return for the year that the contribution is made. The maximum SEP contribution for 2020 was $57,000. The maximum SEP contribution for 2021 is projected to be $58,000.
• The calculation of the 25% limit for self-employed individuals is based on net self-employment income, which is calculated after the reduction in income from the SEP contribution (as well as for other things, such as self-employment taxes).
Net Operating Losses
• Under the TCJA, net operating losses generated beginning in 2018 were limited to 80% of taxable income and could not be carried back but could be carried forward indefinitely. The CARES Act permits individuals with net operating losses generated in taxable years beginning after December 31, 2017, and before January 1, 2021, to carry those losses back five taxable years. The CARES Act also eliminates the 80% limitation on such losses.
Excess Business Loss Limitation
• Under Section 461(l), a taxpayer will only be able to deduct net business losses of up to $262,000 (projected) in 2021 (joint filers can deduct $524,000 (projected) in 2021) for taxable years beginning after December 31, 2020, and before January 1, 2026. Excess business losses are normally disallowed and added to the taxpayer’s net operating loss carryforward, but the CARES Act suspends the application of this excess business loss rule for 2020, and retroactively suspends the excess business loss limitation rule for 2018 and 2019.
Remember the New FBAR Filing Deadline
Manage Assets for Smooth Operations
As manufacturers look for every opportunity to cut costs, one important area to address is equipment downtime. A breakdown, even for just an hour, reverberates through the manufacturing process. It can slow or halt production, leave employees idle and play havoc with just-in-time delivery schedules.
10 Important Tax-Related Developments for 2016
Several significant tax developments happened last year that may affect federal income tax returns that individual and business taxpayers file in 2017. Here's a quick look at 10 key changes that you should be aware of during this tax season.
1. Stand-Alone HRAs
Tax Fraud Awareness: How to Protect Your Identity and Assets
The IRS, taxpayers and tax preparers share a common enemy: identity thieves. We all have a part to play in the fight against tax-related identity theft. Your role starts by learning the mechanics and warning signs. From there, taxpayers can take proactive steps to protect their data online and at home.
Understand How Tax Fraud Happens
Dishonest individuals may steal taxpayers' personal and financial information from sources outside the IRS, such as social media accounts where people tend to share too many details or bogus phishing emails that appear to come from the IRS or a bank. Once they obtain an unsuspecting taxpayer's data, thieves may use it to file fraudulent federal and state income tax returns, claiming significant refunds.

Loan Applications: Put Your Best Foot Forward
Need a loan to start or expand your business? Nearly a decade after the financial crisis of 2008, many banks remain hesitant about loaning money to start-ups and small business owners. Stricter lending policies often make applying for financing a nerve-wracking and time-consuming process. Here are some ways to give your loan application a leg up on other applicants.
Think like a Lender
Remember the Three C's
Be Prepared
Compile a Formal Package
Afraid of Rejection?
Understanding Business Credit Scores
Ten Potential Mistakes to Avoid in Estate Planning
Ten Potential Mistakes to Avoid in Estate Planning
Sometimes people attempt to make an estate plan without consulting legal and financial professionals.
7 Tax-Savvy Ways to Give to Charity
7 Tax-Savvy Ways to Give to Charity
1. Monetary Contributions
2. Gifts of Property
3. Quid Pro Quo Contributions
4. Volunteer Services
5. Donor-Advised Funds
6. Booster Clubs
7. Conservation Easements
Considering a Charitable Donation?
Highlights of the Giving USA Report
FAQs about Social Security Retirement Benefits
For years, people have questioned...
How Soon Can I Start Collecting Retirement Benefits?
What Is My FRA?
How and When Do I Apply for Social Security Retirement Benefits?
What Happens if I Receive Social Security Retirement Benefits While Still Working?
Can I Collect More Benefits if I Retire After My FRA?
Can I Manage Retirement Benefits for an Incapacitated Person?
Do I Qualify for Social Security Survivors Benefits?
Are Social Security Benefits Subject to Income Tax?
Highlights of New Trustees Report
Avoid Costly Employer Mistakes
When Not-for-Profit Organizations Join Hands
Potential Risks of Joining Together
Proposals for Not-for-Profit Mergers and Acquisitions
Dirty Dozen Tax Scams to Watch For
The 2016 "Dirty Dozen"
Made in America: The Pursuit of Life, Liberty and Global Opportunities
A Gift from Uncle Sam: Congress Passes the Extenders Package
This holiday season, taxpayers are receiving a "gift" from Washington, D.C. It's the Protecting Americans from Tax Hikes Act of 2015 or, simply, the PATH Act. It does more than just extend expired tax provisions for another year. The bipartisan deal makes about one-third of these tax provisions permanent. Many others have been extended for periods ranging from two to five years.
Develop a Strong Hand to Negotiate Loan Covenants
Last-Minute Tax Savings: Hurry Before Time Runs Out
Tax Advice for Military Families and Veterans
Guarding Intellectual Property
Debt Stress
Revising Estate Strategy Assumptions
Workers' Compensation: Strategies to Keep Costs Down
Is everything possible being done to protect your company from the costly impacts of workers' compensation claims? As an employer, you know that injuries will happen. However, this doesn't mean you shouldn't try to prevent them by knowing the dynamics and utilizing safety strategies.
Minor Injury, Major Claim
It's the small injuries that often result in big claims. Some statistics show that 80 percent of workplace injuries are inconsequential, meaning they just require first aid or a trip to a physician.
Observing Patterns Some research has found patterns of re-occurring claims within groups, such as among certain industries or particular groups of employees. For example, more injuries may be seen in equipment operators who don't receive proper eye screenings. Overweight employees tend to have more injuries than those of an average weight. The healing of injuries may be longer and more difficult among certain employees. Overexertion, meaning doing too much, too fast and too frequently, is one of the primary causes of sprain and strain injuries. This often comes from employees demanding more of their bodies than they are capable of doing. The challenge is that this is a human behavior. Studies have shown that the majority of workplace injuries are from unsafe acts, not unsafe conditions. In other words, even in the absence of workplace hazards, injuries will happen. Additionally, there are also patterns of re-occurring fraudulent and exaggerated claims, such as an employee that seems to repeatedly have accidents. |
Eight percent of such claims are sprains and strains to the neck, back and various joints. However, these types of injuries account for an estimated 80 to 90 percent of the system's costs. Major claims are likely to follow if the frequency of such seemingly inconsequential injuries is not addressed.
Falsified and Exaggerated Claims
Claims that didn't actually occur or that occurred outside the workplace are only representative of a small fraction of claims. However, employers can implement tip lines, video surveillance, drug screenings both before employment and after accidents and so forth to reduce false claims:
The larger problem is from exaggerated injuries. Employers can take these steps to address exaggerated claims:
- Get injured employees immediate and appropriate treatment.
- Even if their duties need to be temporarily modified, get injured employees back to work as quickly as possible.
- Ensure that supervisors communicate with injured employees and convey their concern and support.
- Do as much as possible to reduce the disruption that employees may face after an injury.
- Assess and address behavioral issues that could be driving an injured employee's disability.
Claim Reduction
Begin with the hiring process. Ensure that potential employees are capable of doing the physical and mental demands you've listed in the applicable job description. It's important to understand that injury prevention must be embraced at the leadership level to be effective. Some statistics show employees are most likely to have injuries when they feel their management doesn't care. You may also consider:
- Effective workplace safety programs.
- Efficient communication programs that allow your business, injured employees and insurance adjusters to easily communicate.
- A post-injury protocol, specifying the immediate reporting of an injury to appropriate personnel.
- Routing injured employees to seek medical care from a provider specializing in occupational injuries.
- Staying in touch with both the injured employee and their medical provider, making sure that your business communicate its concern and care to the employee as they recover and accommodate any physical restriction recommended by the provider upon their return.
Cost Mitigation
Employers can take several routes to reduce the financial impact of claims. Transitional duty programs that enable an injured employee to continue working in some capacity as they recover would be one example. Research shows that around 40 percent of employers don't currently have a transitional duty program.
Another example would be referencing treatment guidelines to determine typical recovery times for various injuries. This information can be used to approximate how long it should take an injured employee to be treated and recover.
Employers may consider having an on-site clinic for employees to go to for both acute injuries and everyday health issues.
Partnering with a physical therapy network may be a consideration. Some research has shown that companies affiliated with physical therapy networks see injured employees returning to full-duty work 30 percent faster.
Consider Wellness Programs
Lastly, some employers are apprehensive about implementing wellness programs because they're concerned that participation itself may cause injuries. However, the risk is far outweighed by the many benefits of a wellness program, including claim-related benefits such as having injured employees heal faster and be able to resume work sooner. Remember, the success of any program comes from it being accepted from the top down.
Keep Your Company Running Smoothly With a Smart Strategy
In any company, making employees familiar with more than one job is critical to developing the business and dealing with the unexpected. A sure-fire strategy for coping with unforeseen circumstances is a cross training program.
Don't Make These Financial Mistakes
Fight Back Against Internal Fraud
Industries that Could Be Booming as the Baby Boomers Age
Small Business Reprieve on Health Premium Reimbursement Plans
- For 2014, the credit percentage increased from 35 percent to 50 percent of employer-paid premiums. For tax-exempt employers, the percentage increased from 25 percent to 35 percent.
- Small businesses may claim the credit for only two consecutive taxable years beginning in tax year 2014 and beyond.
- For 2014, the credit is phased out beginning when average wages equal $25,400 and is fully phased out when average wages exceed $50,800. The average wage phase-out is adjusted annually for inflation.
- Generally, small businesses are required to purchase a Qualified Health Plan from a Small Business Health Options Program Marketplace to be eligible to claim the credit. Transition relief from this requirement is available to certain small employers.
Defending the Status of Independent Contractors
- Consistently treat all workers performing similar tasks as either independent contractors or employees. If contractors must wear ID badges or use company vehicles, make sure their contracts explain why. For example, the policy was instituted after customers expressed safety concerns about deliveries in unmarked cars.
- Give outside workers considerable discretion about how and when they perform their duties. In general, independent contractors must control the way they get the job done.
- Send each contractor a Form 1099 showing non-employee income if you pay $600 or more in a calendar year.
- Don't supply freelancers with services you give employees. Some companies have run into trouble with the IRS for providing contractors with office space, computers, cars and other perks. Independents generally furnish their own tools and materials.
So what if you do rehire some laid-off employees as independent contractors? It's difficult -- but still possible -- to classify them as contractors. But don't let freelancers work in your office and give them new titles. For example, your retained employees might be staff representatives while your new workers are outside service agents.
There's nothing illegal about rehiring former workers as freelancers. You just have to make sure you structure the deals properly so you don't have the IRS breathing down your neck.
A Way to Increase Donor Confidence
10 Year-End Tax Planning Ideas for Individuals
Selling losing investments held in taxable brokerage firm accounts can lower your 2014 tax bill, because you can deduct the resulting capital losses against this year's capital gains. If your losses exceed your gains, you will have a net capital loss. You can deduct up to $3,000 of net capital loss (or $1,500 if you are married and file separately) against ordinary income, including your salary, self-employment, alimony or interest income. Any excess net capital loss is carried forward to future years and puts you in position for tax savings in 2015 and beyond.
6. Gift Appreciated Assets to Family Members in Lower Tax Brackets
If you have appreciated stock or mutual fund shares (currently worth more than you paid for them) that you've owned for over a year, consider donating them to IRS-approved charities. You can generally claim an itemized charitable deduction for the full market value at the time of the donation and avoid any capital gains tax hit.
9. Sell Under-Performing Stock and Donate Proceeds to a Charity
If you've owned stocks that are worth less than you paid for them, don't donate them directly to a charity. Instead, sell the stock, book the resulting capital loss and give away the cash proceeds to a charity. That way, you can generally write off the full amount of the cash donation while keeping the tax-saving capital loss for yourself. Only taxpayers who itemize deductions will gain any tax-saving benefit from charitable donations, however.
10. Consult with your Tax Pro
These tax-saving tips are generally geared toward deferring income and accelerating deductions to minimize 2014 taxes. This approach may also help minimize or avoid phaseouts of various tax breaks based on a taxpayer's AGI (or MAGI). As always, however, year end tax planning doesn't occur in a vacuum. It must take into account each taxpayer's particular situation and planning goals. While most taxpayers will come out ahead by following the traditional approach of lowering the current year's taxable income, others with special circumstances may do better by accelerating income and deferring deductions.
Medical Costs: Can I Really Get a Tax Break for That?
ELIGIBLE | NOT ELIGIBLE |
A weight-loss program undertaken at a physician's direction to treat obesity or a condition such as heart disease. | A weight-loss program to maintain your appearance. Meal replacements, diet foods and supplements that are substitutes for the food that you would normally consume. |
Treatment at a drug or alcohol clinic. Smoking-cessation program and prescribed drugs for nicotine withdrawal. | Trips your doctor recommends to rest or improve your morale |
Acupuncture | Marriage counseling |
Dentures, hearing aids and orthopedic shoes. | Household help, even if recommended by a doctor. |
Admission and transportation to a medical conference if the conference concerns the chronic illness of you, your spouse, or a dependent. (Meals and lodging are not deductible.) | The collection and storage of DNA, unless you can show how DNA will be used for diagnostic testing. (IRS Private Letter Ruling 200140017). |
Lamaze classes for a mother-to-be. | Maternity clothes. |
Teeth cleaning and orthodontia | Teeth bleaching and toothpaste |
A wig purchased on the advice of a physician for the mental health of a patient bald from disease. | Hair transplants |
Contact lenses and peripheral materials as saline solution and enzyme cleaner. | Retin-A for wrinkles |
Nursing services at home or a care facility, including giving medication, changing dressings, bathing and grooming. | Nursing services for a normal, healthy baby. (But you might be able to take a credit for child-care expenses.) |
Evaluating Your Financial Situation
Now is a good time to evaluate your financial situation to determine if you are making progress toward your financial goals. To make this evaluation, prepare a net worth statement and analyze how your income is spent.
Net Worth Statement
A net worth statement lists all your assets and liabilities, with the excess representing your net worth. All assets should be included, such as vested balances in retirement plans and 401(k) plans, personal property, jewelry, and household items. Assets should be valued at the price you would obtain if you sold them now, not the amount you paid for them. Prepare a net worth statement at least annually so you can assess how much progress you made during the year. Ask yourself the following questions when reviewing the statement:
- Has your net worth grown by more than the inflation rate? To make progress toward achieving your financial goals, your net worth should increase by more than the inflation rate. If your net worth is not growing, determine why. If stock investments are a major portion of your assets, then your net worth may have fluctuated over the past three or four years.
- What is your ratio of assets to liabilities? A ratio of less than one indicates you have more liabilities than assets and a negative net worth. If that is the case, take active steps to reduce your liabilities. This ratio should increase over time, which indicates you are reducing debt.
- What is the trend in your liabilities? Review the amounts and types of debt you have. Mortgages are typically used to purchase items appreciating in value and are generally considered "good" debt. Credit card balances and auto loans are used to finance items that typically don't appreciate in value and should be kept to a minimum.
- What percentages of your assets are liquid and nonliquid? Nonliquid assets include items like your home, other real estate, jewelry, and works of art. Although they may increase in value over time, they can be difficult to sell quickly at full market value. Liquid assets, such as bank accounts and stocks, are more easily converted to cash. You want sufficient liquid assets to cover financial emergencies.
- How have your investments performed? Now may also be a good time to thoroughly analyze your portfolio's performance over the past year. Measure the performance of each investment, comparing it to an appropriate benchmark. This can help you identify portions of your portfolio that may need to be changed. Also calculate your overall rate of return and compare it to your targeted return. If your actual return is lower than the return you targeted when designing your investment program, you may need to increase your savings, select more aggressive investments, or settle for less money in the future.
Spending Analysis
Even if you don't feel the need for a budget, analyze how you spend your income. This analysis can help you identify ways to reduce spending so you can increase saving.
First, prepare a cash flow statement that details your income for the past year and your expenditures by category, which will reveal your current spending patterns. Looking back over an annual period will help you identify normal monthly expenses as well as periodic expenses, such as insurance premiums, tuition, and gifts. Canceled checks, credit card receipts, and tax returns can provide much of the needed information. However, you might want to keep a journal of all expenditures for a month or so if you are unable to account for large sums of money.
Divide the expenditures among fixed and essential expenses (housing, insurance, taxes, saving, etc.), variable and essential expenses (food, medical care, utilities, etc.), and discretionary expenses (entertainment, clothing, travel, charitable contributions, etc.). Analyze the statement to find items you can cut back on, allocating those sums to savings.
Your budget should incorporate your financial goals and serve as a guide for future spending. Some points to consider when preparing a budget include:
- Make conscious spending decisions. Don't just assume you'll spend the same amounts as last year.
- Prepare a flexible budget. Unexpected expenditures are bound to happen and your budget should incorporate the possibility of them happening.
- Budget for large, periodic expenditures, such as tuition or insurance premiums.
- Don't try to be too exact. All members of the family should have a reasonable personal allowance that can be spent without accounting for it.
- Periodically compare your actual expenditures to your budget to ensure you stay on track.
- Your budget shouldn't be a dreaded exercise, but a tool to help you achieve your financial goals. So keep it short, simple, and easy to implement.
These two tools can help you evaluate where you currently stand financially. Prepared annually, they can also help you assess your progress and keep you on track toward achieving your financial goals.
Who Are the Latest IRS Targets? A List of 22 Audit Triggers
What triggers an IRS tax audit? While the IRS isn't about to publish a list, there are a number of items that are known to raise the IRS's interest in a return.
What are your chances of being audited? For individuals, it depends on your income. In fiscal year 2013, returns reporting income of under $200,000 stood a 0.88 percent chance of an audit. Those with incomes of $200,000 and more had a 3.26 percent chance. And if your income was $1 million or more, you had a 10.85 percent chance. While audit rates were generally down in 2013 from the previous couple of years, they're still much higher than in earlier years.
In addition to income, it's the entries onyour return that are likely to flag it. What items are likely to trigger a letter from the IRS? Here's a list of items some tax preparers believe trigger an audit. Some items only apply to individuals or individuals who file a Schedule C, while others apply to both individuals and businesses. In some cases, items are likely to only generate a letter from the IRS requesting documentation for the item.
1. Outsized charitable contributions.The IRS publishes data on the average size of charitable contributions for various income levels. If you take a deduction for an amount that is materially larger than the averages, you could get a letter.
2. Large property contributions.Significant charitable contributions of property require an appraisal and certain return attachments. Appraisals are often challenged by the IRS.
3. Unmatched alimony. If you take a deduction for $24,000 of alimony, your ex-spouse should be reporting $24,000 of income.
4. High mortgage interest. The maximum amount of qualified home indebtedness is $1.1 million (including home equity loan). A mortgage interest deduction that's in excess of a certain percentage of the debt limit could indicate an excessive deduction.
5. Unreported income. Failure to report gambling winnings, interest and dividends, non-employee compensation (1099-MISC), K-1 items, etc. may just trigger a letter and bill from the IRS -- or it could generate an audit.
6. Gambling losses. You're allowed to deduct losses on Schedule A up to the amount of your winnings. But the IRS knows that many taxpayers don't keep the required records.
7. Miscellaneous itemized deductions. Breaking the 2 percent of adjusted gross income threshold is difficult, so large miscellaneous itemized deductions may perk the interest of the IRS.
8. Foreign bank accounts. Checking the box indicating that you have a foreign bank account on Schedule B could increase your chances of an audit. But not checking the box, when you should, could too. The IRS continues to get information on many foreign bank accounts.
9. Unreimbursed employee business expenses. These expenses may be deductible, but substantial amounts are likely to raise questions because they are frequently reimbursed by an employer. If the expenses involve travel and entertainment or auto usage, your chances of hearing from the IRS may increase further.
10. Cash transactions. Banks and merchants are required to report cash transactions in excess of $10,000. If you have a business, the IRS may want to know where you got cash.
11. Rental losses of a real estate professional. A qualifying individual can deduct rental losses in excess of the usual $25,000 limit. Meeting the required time involved in real estate activities and substantiating it isn't easy. Checking the box on Schedule E could increase your audit chances.
12. Casualty losses. This can be a complicated area where appraisals and other outside information may be required.
13. Bad debt losses. Again, this is often a complex area. Many taxpayers lose on this issue because they can't show a bona fide debt existed or that a loss occurred in an earlier or later year.
14. Home office. If you use a portion of your home exclusively for your business, you can deduct the expenses and depreciation associated with the space. But you've got to show the business connection and that the space was used exclusively for business. Both can be challenged by the IRS. The tax agency can also question the expenses involved in a home office. There's plenty of opportunity for an IRS auditor to make adjustments. In general, the higher the percentage of the home claimed for business, the greater your audit chances.
15. Day-trading losses. Claiming to be a day trader and taking losses on Schedule C is a red flag.
16. Net operating loss. If your business (sole proprietorship, S corporation, partnership) has losses you may have an NOL (net operating loss) that can be carried back or forward to offset income in other years. You may be asked to substantiate the loss if you claim a refund for an earlier year or on a later return where the NOL is used.
17. Rental losses. These could be challenged if there's no revenue from the property.
18. Hobby losses. Multi-year losses on Schedule C (or a pass-through entity such as an S corporation) may be scrutinized, particularly if the business is listed as one that has elements of personal pleasure such as horse breeding, photography or auto racing. Your audit chances increase if the losses offset substantial other income on the return.
If you file a business return such as a Schedule C, S corporation or LLC, there are other triggers. Some of them also apply to rental properties.
19. Travel and entertainment. Because of the recordkeeping requirements, and the fact that some deductions can be questionable, this is always a ripe area for the IRS.
20. Auto usage. Again, the IRS is well aware that many taxpayers fail to keep the required records, making it a fruitful area for an IRS adjustment during an audit.
21. Repairs and maintenance. What property owners believe is a repair and what the tax law considers a repair is often different. The IRS may require you to capitalize and depreciate expenses that you deducted.
22. Zero officer salaries for an S corporation. If an S corporation is active, showing no salary for officers is a red flag.
What should you do? It doesn't make sense to not take a deduction you're entitled to, such as for a home office. Just make sure you're entitled to the deduction and have the required records and tax law justification to back it up. For example, if you're not sure if the part business/part personal trip is deductible, give your tax adviser the facts and get a professional opinion.
In terms of an IRS audit, larger businesses may have to undergo detailed examinations involving many issues, but for individual taxpayers and Schedule C filers, audits may be limited to selected items -- unless those items indicate problems.
SCVEDC Releases Q4 Economic Snapshot
The Santa Clarita Valley Economic Development Corporation recently released the Economic Snapshot for data through December 2012. As a member of the SCVEDC Board of Directors, I welcome the opportunity to discuss any of the information provided.
Chaos at the IRS
Many of you may have heard in recent news reports that because of the late passage of the law to avoid the “fiscal cliff” the Internal Revenue Service will not be able to process tax returns until after January 30, 2013. We want you to be assured that even though the IRS will not be working, KKAJ is. As soon as we have your information (tax organizer), we will prepare your returns. By getting your information in early, you will know your refund amount or amount due sooner and ensure that your tax returns are ready to be filed as soon as the IRS will accept them.
Because of the law changes, tax compliance will be more complicated than ever. It is imperative that you do not delay in getting your information to us.
Tax Changes Included in Congress’ Fiscal Cliff Legislation (January 1, 2013)
The following is a summary of the provisions included in Congress’ “Fiscal Cliff” legislation passed on New Year’s Day, which the President is expected to sign.
Tax rates beginning January 1, 2013
A top rate of 39.6% (up from 35%) will be imposed on individuals making more than $400,000 a year, $425,000 for head of household, and $450,000 for married filing joint.
2% Social Security reduction gone
AMT permanently patched
A permanent AMT patch, adjusted for inflation, will be made retroactive to 2012.
Dividends and capital gains
The maximum capital gains tax will rise from 15% to 20% for individuals taxed at the 39.6% rates (those making $400,000, $425,000, or $450,000 depending on filing status, as noted above).
Itemized deduction and personal exemption phase-outs
The Pease itemized deduction phase-out is reinstated, and personal exemption phase-out will be reinstated, but with different AGI starting thresholds (adjusted for inflation): $300,000 for married filing joint, $275,000 for head of household, and $250,000 for single.
Estate tax
The estate tax regime will continue to provide an inflation-adjusted $5 million exemption (effectively $10 million for married couples) but will be applied at a higher 40% rate (up from 35% in 2012).
Personal tax credits
The $1,000 Child Tax Credit, the enhanced Earned Income Tax Credit, and the enhanced American Opportunity Tax Credit will all be extended through 2017.
Other personal deductions and exclusions
The following deductions and exclusions are extended through 2013:
- Discharge of qualified principal residence exclusion;
- $250 above-the-line teacher deduction;
- Mortgage insurance premiums treated as residence interest;
- Deduction for state and local taxes;
- Above-the-line deduction for tuition; and
- IRA-to-charity exclusion (plus special provisions allowing transfers made in January 2013 to be treated as made in 2012).
Business provisions
- The Research Credit and the production tax credits, among others, will be extended through 2013;
- 15-year depreciation and §179 expensing allowed on qualified real property through 2013;
- Work Opportunity Credit extended through 2013;
- Bonus depreciation extended through 2013; and
- The §179 deduction limitation is $500,000 for 2012 and 2013.
KKAJ will keep you informed as new information becomes available. As always, if you wish to discuss your specific situation, contact the KKAJ tax and accounting professionals at (818) 848-5585 or (661) 705-4222.
Oh, Holy Night
Wisemen gathered at the foot of the manger during a live nativity performance at the First Annual Christmas Nativity Festival in Burbank at the Church of Jesus Christ of Latter-day Saints earlier this month. The festival featured about 350 nativities and a live nativity. KKAJ staff accountant Daniel Holbrook, along with his wife and 3-month-old child, portrayed Joseph, Mary, and Baby Jesus. See more pictures on the Burbank Leader's website: http://www.burbankleader.com/photos/blr-1201-nativity-pg,0,6480160.photogallery
Babies Galore
KKAJ has exploded this year, with five children or grandchildren born in six months! Congratulations to Bud Alleman, Tracy Odland, Evan Faucette, Mike Garrison and Daniel Holbrook for the new additions to their families! Now for the challenge: Match which baby goes with each parent or grandparent. Answers below.
Parents/grandparents of babies starting top left corner, going clockwise: Tracy Odland, Daniel Holbrook, Evan Faucette, Bud Alleman, and Mike Garrison in the middle.
Imagining Peace
Bud Alleman, Noon Lions Club treasurer and KKAJ partner, helped congratulate winners of the Lions Club International “Imagine Peace” poster contest at an awards ceremony in November at the Burbank Central Library. The posters were designed to portray the participant’s idea of peace.
Congratulations to winners Margo Akopov, Micayla Siemon and Tanishka Nair. Each winner received $25 and certificates from the Lions Club, City of Burbank, and offices of Representative Adam Schiff, State Senator Carol Liu, Assemblyman Mike Gatto, and Supervisor Michael Antonovich.
This event was the first step in the judging process, and winners will go on to the next level. The top prize of the global contest can win $5,000 and a trip to New York to attend Lions United Nations Day.
Telling It Like It Is
by Dennis King
While in Tampa for the Republican National Convention, Patti and I joined radio personality Michael Medved for an on air segment of his show where we shared some personal stories of our future president. While all the online listener comments were encouraging, there were certainly a few that let us appreciate our contribution to Mitt’s story.
“This was a very interesting interview. I learned more about Mitt Romney listening to this lovely couple than I have in all the years he’s been on the national stage. I hope we hear more personal stories like these in the days to come. This was an important contribution to the conversation! Kudos!”
“I don’t think it is in his nature to brag about all he has done in his life and these long-time friends shed some light on the real Mitt.”
Glad we were able to share the personal side of Mitt’s story.
History in the Making
by Dennis King
It’s not every day that you find yourself inserted into a story of such immense political importance that history books might later frame the events of this day as a turning point of global import. I’m referring to the Republican National Convention in Tampa, Florida. Not even threat of hurricanes and destructive storms could deter us from the opportunity to witness first-hand some of the finest moments in our nation’s history. Patti and I attended the convention, reveled in the camaraderie and excitement, and joined the world as we welcomed our long-time friend Mitt Romney as the Republican candidate for President of the United States.