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If you thought 2015 tax season was bad, IRS says 2016 to be worse!

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It’s always nice to get encouraging news about how swell everything at IRS!

© CPA Trendlines 2015

If You Thought Tax Season 2015 Was Bad…

…The IRS says 2016 could be even worse.

IRS projects even worse taxpayer service for the 2016 filing season (FY 2015).

By CPA Trendlines

The 2015 filing season was akin to a Tale of Two Cities, according to the IRS’s own watchdog.

“For the majority of taxpayers who filed their returns and did not require IRS assistance, the filing season was generally successful,” according to the report issued to Congress by the national taxpayer advocate’s office headed by Nina Olson. “For the segment of taxpayers who required help from the IRS, the filing season was by far the worst in memory.”

Meanwhile, Olson urges Congress to undertake “fundamental tax reform,” pass a “Taxpayer’s Bill of Rights” law, and boost IRS funding.

“Everyone is in collective denial about what inadequate funding for the IRS means to taxpayers,” Olson says.

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“This denial must stop. We have to face up to the fact that we have an incredibly complex tax system that, by virtue of its complexity, creates burden, confusion, and unfairness. It is a challenge for any tax agency to properly administer a system such as the one we have. But it is impossible for an underfunded tax agency to do so. The victims of this underfunding are not the IRS and its employees—the victims are U.S. taxpayers.”

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Olson urges Congress to:

1. Repeal the Alternative Minimum Tax – Require returns of partnerships made on the basis of the calendar year to be filed on or before March 15th following the close of the calendar year, and returns made on the basis of a fiscal year to be filed on or before the 15th day of the third month following the close of the fiscal year.

2. Permit a qualifying, newly incorporated small business to elect to be treated as an S corporation for any taxable year if the business makes such an election on a timely filed Form 1120S, U.S. Income Tax Return for an S Corporation.

3. Suspend the period to file a petition with the U.S. Tax Court for judicial review of determination of spousal relief while a person is prohibited by a bankruptcy stay from filing such a petition, and for 60 days thereafter..

4. Permit organizations that unsuccessfully seek recognition of IRC § 501(c)(4) exempt status to seek declaratory judgments.

5. Provide a safe harbor for de minimis errors on information returns and payee statements.

6. Develop an Internet platform for Form 1099 filings.

7. Require that electronically prepared paper returns include scannable codes.

8. Grant the IRS the authority to regulate federal income tax return preparers.

9. Assign victims of identity theft a single point of contact.

10. Accelerate the due dates for filing Forms W-2, Wage and Tax Statement, W-3,Transmittal of Wage and Tax Statements, and 1099 with the IRS and Social Security Administration.

The 2015 filing season presented the IRS with extraordinary challenges and considerable risks, the report says.

Highlights and Lowlights

Following are excerpts from the report.

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The IRS’s budget has been declining since fiscal year (FY) 2010 and now stands about 17 percent below its FY 2010 peak in inflation-adjusted terms. 1 At the same time, the IRS this year was charged by law with implementing the most challenging portions of the Patient Protection and Affordable Care Act (ACA)2 as well as the Foreign Account Tax Compliance Act (FATCA)3 and “tax extenders” legislation passed last fall. 4 The IRS received the same appropriation for its Taxpayer Services account in FY 2015 as it had received in FY 2014. However, it did not receive any additional funding to implement the ACA and FATCA. To enable it to implement those laws, the IRS reallocated about $133 million in user fees from Taxpayer Services to its Operations Support account, primarily to complete required systems programming. 5 That decision left less funding for taxpayer services

Overview of the Filing Season

The report says the IRS ran a generally successful filing season under difficult circumstances.  “With funding down about 17 percent on an inflation-adjusted basis since FY 2010, and with the IRS having had to implement large portions of the [ACA] and the Foreign Account Tax Compliance Act (FATCA) this year without any supplemental funding, sharp declines in taxpayer service were inevitable,” Olson says. However, the report says,  “For the majority of taxpayers who filed their returns and did not require IRS assistance, the filing season was generally successful.  For the segment of taxpayers who required help from the IRS, the filing season was by far the worst in memory.”

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The report notes:

During the filing season, the IRS processed 126.1 million individual tax returns (compared with 125.6 million last year) and issued 91.8 million refunds (compared with 94.8 million last year).  The average refund amount was $2,711 (compared with $2,686 last year).

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    The IRS answered only 37 percent of taxpayer calls routed to customer service representatives overall, and the hold time for taxpayers who got through averaged 23 minutes.  This level of service represents a sharp drop-off from the 2014 filing season, when the IRS answered 71 percent of its calls and hold times averaged about 14 minutes.

  • The IRS answered only 39 percent of calls from taxpayers seeking assistance from TAS on the National Taxpayer Advocate (NTA) Toll-Free hotline, and hold times averaged 19 minutes.  TAS serves as the IRS’s “safety net” for taxpayers who are experiencing a financial or systemic hardship as a result of IRS action or inaction.
  • The IRS answered only 17 percent of calls from taxpayers who called after being notified that their tax returns had been blocked by the Taxpayer Protection Program (TPP) on suspicion of identity theft, and the hold times averaged about 28 minutes.  In three consecutive weeks during the filing season, the IRS answered fewer than 10 percent of these calls.
  • The IRS answered only 45 percent of calls from practitioners who called the IRS on the Practitioner Priority Service line, and hold times averaged 45 minutes.
  • The number of “courtesy disconnects” received by taxpayers calling the IRS skyrocketed from about 544,000 in 2014 to about 8.8 million this filing season, an increase of more than 1,500 percent.  The term “courtesy disconnect” is used when the IRS essentially hangs up on a taxpayer because its switchboard is overloaded and cannot handle additional calls.
  • The decline in telephone performance can be attributed largely to three factors: The number of taxpayer calls routed to telephone assistors increased by 41 percent, the number of calls answered by telephone assistors decreased by 26 percent, and the average call duration increased by 10 percent.
  • The IRS sharply restricted the availability of paper copies of forms and publications, imposing burden on taxpayers without Internet access or online literacy.  The IRS’s own Taxpayer Assistance Centers (TACs) and its Tax Form Outlet Partners such as libraries and post offices did not receive forms until February 28, almost halfway through the filing season.  Once a TAC ran out of forms or publications, it could not order more.

Olson says that the decline in taxpayer service imposes increased compliance burdens on taxpayers and may lead to erosion in taxpayer trust.

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“For a tax system that relies on voluntary self-assessment by its taxpayers, none of this bodes well,” she says.  “In fact, there is a real risk that the inability of taxpayers to obtain assistance from the government, and their consequent frustration, will lead to less voluntary compliance and more enforced compliance.”

Long-Term IRS Strategic Planning

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The report attributes the decline in taxpayer service levels to the reduction in IRS funding and reiterates the Advocate’s longstanding view that the IRS requires additional funding to meet taxpayer service needs.  However, Olson says, “temporary periods of limited funding can have the salutary effect of causing an organization to rethink its mission and allocate its resources more effectively.”

OIson commends the IRS for undertaking development of a new concept of operations (CONOPS) that aims to establish a vision for where the IRS should be in five years.  However, she says the foundational principles on which the CONOPs are based are critical to success and expresses concern about two aspects of those principles.

First, Olson expresses concern that the IRS continues to view itself primarily as an enforcement agency, with taxpayer service receiving less emphasis.  For example, the IRS Enforcement budget is more than double the Taxpayer Services budget, and even that comparison understates the disparity because much of the Taxpayer Services budget is allocated to tax return processing, which most taxpayers would not view as a service.

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“It should be emphasized that more than 98 percent of all tax revenue collected by the IRS is paid voluntarily and timely.  Less than two percent is collected through enforcement action,” the report says.  “Thus, increasing enforced collection would be a hollow victory if voluntary compliance declines because of decreasing taxpayer service and the attendant loss of good will.”

The report says the IRS develops its policies largely around the relatively small portion of the taxpayer population that is unwilling to comply with the tax laws.  “This focus has all sorts of consequences for the vast majority of taxpayers who are willing to comply, not the least of which is that they bear an increased burden in navigating processes designed for evaders,” Olson wrote.  “That is unwise, counterproductive, and expensive.”  She urges the IRS in developing its long-term plans to place primary emphasis on “meet[ing] the needs of the overwhelming majority of taxpayers who are trying to comply with the tax laws.”

Second, Olson expresses concern that the IRS is contemplating plans that would replace traditional IRS employee-to-taxpayer interaction with online services and expanded use of third parties such as preparers, tax professionals, and even software packages, to serve as the taxpayers’ interface with the IRS.  She says that expanded availability of online services will provide significant benefits in many areas, but “it is wishful thinking, if not foolhardy, to expect taxpayers to rely on computer-driven systems for resolution of tax problems that, if not resolved fully, could lead to devastating financial consequences.”

She continues: “Taxpayers, and their representatives, need the ability to talk with IRS employees, explain their circumstances, and make sure that the IRS understands their position.  The IRS shouldwant to talk with these taxpayers, because each conversation provides an opportunity for it to understand the taxpayer’s facts and circumstances, recognize a situation that presents a different issue, educate the taxpayer about what is required for full compliance, and provide a full resolution to the taxpayer’s problem.”

The report cites the recent unauthorized access to tax information through the IRS’s “Get Transcript” application as an example of the risks of automation.  While TAS itself has recommended the IRS accelerate efforts to give taxpayers online access to their accounts, Olson says “The ‘Get Transcript’ incident serves as an important reminder that where data security must be balanced against convenience and budget savings, data security must be paramount.”  She said that “all existing plans must be double-checked and triple-checked before implementation to ensure that every reasonable data security precaution has been considered.”

Olson views the IRS’s attempt to define its vision through the CONOPS as potentially transformative for taxpayers.  For that reason, she recommends that after the IRS completes a draft of the CONOPS, it make the draft CONOPS public and solicit taxpayer comments before finalizing them.  “This is the taxpayers’ tax system, after all, and taxpayers have the right to know what the IRS is planning for them,” she says.

Filing Season Statistics Comparing Weeks Ending April 18, 2014, and April 17, 2015.

Assisting Victims of Identity Theft-Related Refund Fraud

In recent years, taxpayers (and the IRS) have been victimized by identity thieves who use stolen identity information to file fraudulent returns to try to obtain refunds.  As the problem has grown worse and the IRS has understandably implemented more filters to identify questionable returns, an increasing number of taxpayers have been affected and have faced significant delays in receiving their refunds.

There are two circumstances under which taxpayers may be affected.  First, if an identity thief has filed a false return on which the IRS has paid a refund, the IRS will automatically freeze the return later filed by the legitimate taxpayer.  A recent TAS study showed that the IRS takes about six months to resolve these cases and pay out the legitimate taxpayer’s refund.  The IRS and TAS continue to see large numbers of these cases.  In each of calendar years 2013 and 2014, the IRS received about 730,000 identity theft cases with taxpayer impact, and over the last three fiscal years, TAS has received an average of about 52,000 identity theft cases a year.

Second, the IRS runs most returns claiming a refund through certain filters to identify suspicious returns.  When it identifies a return as suspicious, the IRS suspends the processing of the return and issues a notice requiring the taxpayer to authenticate his or her identity.  During the 2015 filing season, the IRS’s Taxpayer Protection Program (TPP) filters stopped more than twice as many questionable returns as in the prior year.  Specifically, as of April 23, 2015, the TPP stopped 1,558,874 returns as compared with 764,439 at a similar point in 2014, an increase of 104 percent.  About one-third of the returns stopped by the TPP turned out to come from legitimate filers, and at least for the largest segment of the TPP inventory, this false positive rate is up substantially from the 2014 filing season.  Thus, more than 600,000 taxpayers who filed legitimate returns had their returns frozen as suspicious and had to take additional steps to receive their refunds.

During the filing season alone, the IRS received about 1.6 million taxpayer calls on its Identity Protection Specialized Unit (IPSU) telephone line.  The level of service was about 54 percent and the average hold time was about 25 minutes.  It also received about 2.9 million taxpayer calls on its TPP telephone line.  As noted above, the level of service was 17 percent for the TPP line, and the average hold time was about 28 minutes.

The report expresses concern that the IRS is not doing enough to assist identity theft victims and reiterates the National Taxpayer Advocate’s longstanding recommendation that the IRS assign a single employee to coordinate complex identity theft cases.  “Without a single employee with whom to work, identity theft victims often have to call the IRS multiple times and talk with multiple employees about different aspects of their case,” the report says.  “Equally important, no one employee is held accountable for the resolution of the case.  Thus, affected taxpayers often feel like they are victimized a second time by the IRS’s processes.”

The report says a primary focus for TAS during the upcoming year will be to recommend improvements and alternative approaches to reduce the time it takes to achieve complete and accurate resolution of identity theft cases from the victim’s perspective.

Affordable Care Act

The report says the most significant new challenge the IRS faced during the 2015 filing season was the processing of tax returns reflecting two central provisions of the ACA – the Premium Tax Credit (PTC) and the Individual Shared Responsibility Payment (ISRP).  Overall, the report credits the IRS with doing a commendable job implementing those provisions, including by developing or updating information technology systems, issuing guidance, and working with other federal agencies.

On tax returns processed through the end of April, taxpayers filed about 2.6 million returns with Form 8962, Premium Tax Credit (PTC), which reflected either the receipt of the Advanced PTC or new PTC claims for 2014.  The average amount of PTC claimed per return was about $3,000.  In addition, taxpayers filed about 6.6 million returns reporting the ISRP, and the average amount reported was about $190.  About 10.7 million taxpayers filed Form 8965, Health Coverage Exemptions, claiming exemptions from the health-insurance coverage requirements.  The IRS cautions that this data is preliminary and subject to change as it reviews the data, processes additional tax year 2014 returns, and conducts compliance activities.

The report says there were some significant glitches that occurred during the filing season, but most were not attributable to IRS error.  The most significant was the Center for Medicare and Medicaid Services’ issuance of erroneous Forms 1095-A, Health Insurance Marketplace Statement, to about 800,000 individuals who had purchased health insurance from the federal Exchange.  The Treasury Department addressed the mistake by issuing taxpayer-favorable guidance informing taxpayers who had already filed returns based on the incorrect information that they did not need to file amended returns and pledging that the IRS would not pursue the collection of any additional tax based on the updated information in the corrected forms.  The IRS answered about 68 percent of taxpayer telephone calls on ACA issues that were routed to telephone assistors, which far exceeded the overall average on its customer service lines of about 37 percent.

As a result of IRS data sampling and additional analysis conducted by TAS Research, it was discovered that more than 300,000 taxpayers overpaid the ISRP on tax returns processed through the end of April, the report says.  Most of those taxpayers did not owe the ISRP because they were eligible for an exemption due to their low incomes.  The report says the average ISRP overpayment was a little over $110 per return.  The National Taxpayer Advocate has recommended that the IRS issue refunds to the affected taxpayers without requiring them to file amended returns.  Since the majority of taxpayers use paid tax return preparers, most would probably spend more than the roughly $110 average overpayment amount in preparer fees if amended returns are required.  At the time the report was finalized, the IRS had not made a decision.

The report says a primary ACA focus for TAS during the upcoming year will be to train its Case Advocates to better assist taxpayers requiring assistance, notably on ACA collection activities and the Employer Shared Responsibility Payment provision.

 

EMPLOYMENT LAW UPDATE: MASSACHUSETTS’ SICK LEAVE LAW

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Employment Law Update: Massachusetts’ Sick Leave Law

What Massachusetts Employers Need to Know About the New Earned Sick Time Law

The Earned Sick Time ballot question recently approved by Massachusetts voters impacts all Massachusetts employers Effective July 1, 2015, the new law entitles employees in Massachusetts to earn and use sick time in accordance with certain conditions.

How much earned sick time can employees accrue?

Employees who work for employers having 11 or more employees earn and may use up to 40 hours of paid sick time per calendar year, while employees working for smaller employers may earn and use up to 40 hours of unpaid sick time per calendar year.  All full-time, part-time and temporary employees are counted for determining the number of employees.

Employees earn 1 hour of sick time for every 30 hours worked and begin accruing those hours on the date of hire or on July 1, 2015, whichever is later. Employees may begin using earned sick time on the 90th day after hire.  Earned paid sick time must be compensated at the same hourly rate paid to the employee when the sick time is used.

When can an employee use earned sick time?

An employee may miss work (1) to care for a physical or mental illness, injury or medical condition affecting the employee or their child, spouse, parent, or parent of a spouse; (2) to attend routine medical appointments or those of their child, spouse, parent, or parent of a spouse; or (3) to address the effects of domestic violence on themselves or their dependent  child.

Employees must make a good faith effort to notify the employer in advance if the need for earned sick time is foreseeable.

How must earned sick time be paid?

Earned paid sick time must be compensated at the employee’s regular hourly rate, and must be paid to the employee in the payroll cycle covering the time period when the sick time is used.

What if an employee does not use all their earned sick time? 

Employees may carry over up to 40 hours of unused sick time to the next calendar year, but may not use more than 40 hours of sick time in a calendar year.  Employers do not have to pay employees for unused sick time at the end of their employment. Employers may not require an employee to work additional hours or to make up for missed time.

Can an employer require certification of the need for sick time? 

Employers may require certification of the need for sick time if an employee uses sick time for more than 24 consecutively scheduled work hours.  Employers, however, may not delay the taking of or payment for earned sick time because they have not received the certification.

What is a violation of the earned sick time law?

Employers may not interfere with or retaliate based on an employee’s exercise of earned sick time rights or an employee’s support of another employee’s exercise of such rights. The Attorney General will enforce the new law, using the same enforcement procedures applicable to other state wage laws, and employees may file suits in court to enforce their earned sick time rights.  Violations of the earned sick time law may subject employers to civil penalties up to $25,000 per violation.  Additionally, employees may file civil suits against employers for violations of this law and may recover treble damages, the cost of litigation and reasonable attorneys fees.

What if there is already a sick time policy in place? 

Employers that have their own policies providing as much paid time off, usable for the same purposes and under the same conditions, as the earned sick time law would not be required to provide additional paid sick time.  The new law does not override employers’ obligations under any contract or benefit plan with more generous provisions than those in the proposed law.

Is there a poster requirement for the sick time law?

The Attorney General will prepare a multilingual notice regarding the right to earned sick time, and employers will be required to post the notice in a conspicuous location and to provide a copy to employees.

How should employers prepare for the new earned sick time law?  

Employers should review their sick time policies to assure they are in compliance with this new law.  Specifically, employers should assure they have a system that calculates the accrual of sick time in accordance with the sick time law.  Additionally, employers should document any employee agreements concerning the use of accrued sick time.

 

Additional recent developments that may affect your 2014 tax return

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January 12, 2015

Additional recent developments that may affect your 2014 tax return

Dear Client:

The following is a summary of the most important tax developments that have occurred in the past three months that may affect you, your family, your investments, and your livelihood. Please call us for more information about any of these developments and what steps you should implement to take advantage of favorable developments and to minimize the impact of those that are unfavorable.

New tax-advantaged ABLE accounts. A new law allows states to establish tax-exempt “Achieving a Better Life Experience” (ABLE) accounts, which are tax-free accounts that can be used to save for disability-related expenses. They can be created by individuals to support themselves or by families to support their dependents. Assets can be accumulated, invested, grown and distributed free from federal taxes. Contributions to the accounts are made on an after-tax basis (i.e., contributions aren’t deductible), but assets in the account grow tax free and are protected from tax as long as they are used to pay qualified expenses. Withdrawals are tax-free if the money is used for disability-related expenses including: education; housing; transportation; employment support; health, prevention, and wellness costs; assistive technology and personal support services. A nonqualified distribution is subject to income tax and a 10% penalty on the part of the distribution attributable to earnings. Each disabled person is limited to one ABLE account, and total annual contributions by all individuals to any one ABLE account can be made up to the inflation-adjusted gift tax exclusion amount ($14,000 for 2015).

Health care impacts 2014 income tax returns. The IRS has provided details on how health care reform under the Affordable Care Act (ACA) affects the upcoming income tax return filing season. The most important ACA tax provision for individuals and families is the premium tax credit. Under another key provision, individuals without coverage and those who don’t maintain coverage throughout the year must have an exemption or make an individual shared responsibility payment, as separately detailed in final regulations and a notice issued by the IRS in November. The IRS stresses that most people already have qualifying health care coverage and will only need to check a box to indicate that they satisfy the individual shared responsibility provision when they file their tax returns in early 2015. Individuals and families who get coverage through the Health Insurance Marketplace (Marketplace, also known as an exchange) may be eligible for the premium tax credit. Eligible individuals and families can choose to have advance credit payments paid directly to their insurance company to lower what they pay out-of-pocket for their monthly premiums. Early in 2015, individuals who bought health insurance through the Marketplace will receive Form 1095-A, Health Insurance Marketplace Statement, which includes information about their coverage and any premium assistance received. Form 1095-A will help individuals complete their return. Individuals claiming the premium tax credit, including those who received advance payments of the premium tax credit, must file a federal income tax return for the year and attach Form 8962, Premium Tax Credit.

Supreme Court to decide if premium credit is allowed for health insurance purchased on federal exchange. A controversy has erupted concerning the ACA’s premium credit. The statute makes the credit available for insurance purchased on an exchange established by a state. A federal exchange was established for many states that did not establish their own exchanges. The IRS has issued regulations making the credit available for insurance purchased on a federal exchange. The regulations were challenged in court; one Circuit Court upheld them and another said they were invalid. After these conflicting decisions, the Supreme Court agreed to resolve the issue. The Supreme Court will hear the case in 2015. Its decision could affect about 5 million people getting a credit for insurance purchased on the federal exchange and could affect other key ACA provisions that are intertwined with the credit..

More guidance on toughened IRA rollover rule. A law limits the number of IRA rollovers that can be made in any 1-year period to one. Earlier, the Tax Court held that the limit applies to all of an individual’s IRAs even though the IRS had stated that the limit applies to each separate IRA an individual owns. Shortly after this decision, the IRS announced that it will adopt the more restrictive view for distributions after 2014. Then, in November, the IRS issued more guidance to clarify the start of the new policy. As clarified, an individual receiving an IRA distribution on or after Jan. 1, 2015 cannot roll over any portion of the distribution into an IRA if the individual has received a distribution from any IRA in the preceding 1-year period that was rolled over into an IRA. However, as a transition rule for distributions in 2015, a distribution occurring in 2014 that was rolled over is disregarded for purposes of determining whether a 2015 distribution can be rolled over, provided that the 2015 distribution is from an IRA that neither made nor received the 2014 distribution.

Personal service corporation in group avoids flat tax. Normally, a qualified personal service corporation (e.g., an employee-owned corporation performing legal, health or other professional services) is subject to a flat tax of 35%, unlike other corporations that are subject to graduated rates of 15%, 25% and 34%. In one case, the IRS sought to tax a qualified personal service corporation that was part of an affiliated group of corporations at the flat 35% rate. The Tax Court wouldn’t allow the IRS to do so. Rather, it said that the group’s consolidated income, including the income of the qualified personal service corporation, had to be taxed at the graduated rates.

Standard mileage rates up and down for 2015. The optional mileage allowance for owned or leased autos (including vans, pickups or panel trucks) is 57.5¢ per each business mile traveled after 2014. That’s 1.5¢ more than the 56¢ allowance for business mileage during 2014. But the 2015 rate for using a car to get medical care or in connection with a move that qualifies for the moving expense deduction is 23¢ per mile, 0.5¢ less per mile than the 23.5¢ rate for 2014..

Non-farmer escapes self-employment tax on conservation payments. A recent case addressed a tax issue concerning payments an individual received under a U.S. Department of Agriculture voluntary conservation reserve program. Specifically, an appellate court held that payments received under the program by the taxpayer (who was not a farmer) were not subject to self-employment tax (i.e., social security taxes imposed on self-employed persons). Rather, they were rentals from real estate excludible from self-employment income.

Tenant’s death extinguished tax lien on jointly held property. A district court has held that an IRS lien on a taxpayer’s interest in property was extinguished at his death because the property was owned jointly with a right of survivorship and the other joint tenant survived the taxpayer. Thus, there was no interest left to which the lien could continue to attach.

Tax developments involving West African Ebola outbreak. The IRS has designated the Ebola outbreak occurring in the West African countries of Guinea, Liberia, and Sierra Leone as a qualified disaster for purposes of the income tax exclusion for qualified disaster relief payments. The IRS also made clear that employer-sponsored private foundations can provide disaster relief to employee-victims in areas affected by the outbreak without jeopardizing their exempt status. In addition, the IRS announced that employees won’t be taxed when they forgo vacation, sick, or personal leave in exchange for employer contributions of amounts to charitable organizations providing relief to Ebola victims in Guinea, Liberia and Sierra Leone. Employers may deduct the amounts as business expenses.

© 2015 Thomson Reuters/Tax & Accounting. All Rights Reserved.

DECEMBER, 2014 TAX UPDATE

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Dear Client:

 

I wrote this newsletter to update you on a few important matters including:

  1. Scam alert
  2. IRS and audit enforcement
  3. Tax bill “extenders” finally passed !
  4. Office alerts

I. Scam alert!

Scam Reports have surged this year! IRS warns that people pretending to be IRS or police officials are calling taxpayers demanding immediate payment for back taxes rand even refer to a warrant and threatening the taxpayer that the police will be there within 30 minutes if you don’t pay up! (There are reports of scammers even calling your local Police reporting a crime in progress- so you may see cruiser at your address) Like last year, other scams also use email. IRS is not permitted to use email for taxpayer correspondence for any reason. Agents also do not telephone taxpayers either unless letters via US Mail has been in use and you were expecting the call. Never release any personal information! Scammers are looking for social security numbers, dates of birth, and banking/credit card information. If you are concerned that the caller is really IRS, you can tell the caller that you are represented by this firm. Just contact us right away. You may also telephone IRS at 800-829-1040, but be prepared to wait on hold for a while. Please do not speak to or give any information to these crooks! Just hang up!!

 

II IRS and audit enforcement

The recent budget bill gave the IRS a budget of $10.945 billion for FY 2015. That’s $346 million less than the year before. Now, for every 5 employees that leave the IRS can only hire 1. These cuts will cause individual audit rates to fall in 2014 and 2015 across all levels of income. IRS’ current funding level is less than the amount appropriated in 2008. The most recent exam rate for individuals has sunk..0.24%, or 1 out of every 417 returns.

High-income taxpayers got the most scrutiny. More than 5% of filers with incomes of $1 million or more encountered a revenue agent. The face-to-face examination rate was a bit lower for filers who had incomes between $200,000 and $1 million…1.11%. Folks with incomes under $200,000 had a 1 in 519 chance of seeing a revenue agent. S Corps and Partnerships are below 1%.

But with these newest cuts those rates will drop even further and the agents have to control, run, and police the Affordable Care Act ’s 25,000 + new regulations (more each day)

Less IRS agents means less field audits and less service, but computer generated audits are significantly being increased! These can lead to less qualified examiners dragging out audits and much more communications via faxing and telephone taking longer and longer to resolve.

Corporate exams are still more likely to be examined by a field agent. But with the cuts, less will be selected. The service has 3 years from the date the tax was assessed or date due, whichever is later.

 

Massachusetts is cracking down on any return with the EIC (Earned Income Tax Credit) and also increasing sales or meals tax audits.

 

III Certain business and personal deductions finally passes House and Senate (The “extenders”)

 

The US Congress actually pushed through a bi-partisan bill making most of these deductions effective 01/01/14 thru 12/31/14. So in 2015 we are set back to old, smaller deductions until they fix this again.

The day before the over $1Trillion ‘omnibus’ funding agreement to keep the bloated government running into next year was signed into law by President Obama. Please contact the office if you have questions, or bring it up during this year’s tax appointment.

Here is a list of the extended tax law provisions:

 

Individuals:

  1. Ability to deduct state sales taxes if you reside in a non-income tax state (I.e. Florida)
  2. Deductible education expenses up to $4,000
  3. $250 teacher deduction
  4. Mortgage interest debt forgiveness on a principal residence, up to $2 Million. This targets taxpayers involved in short- sales and foreclosure. Without this change, all canceled debt would be included in income. In MA it is still income since MA does not follow the IRS here.
  5. PMI (private mortgage insurance) remains deductible, subject to phase-outs.
  6. Charitable deduction from IRA distribution up to $100,000 for those age 70-1/2 and up
  7. Special rules for donations of real estate for conservation purposes.

 

Business:

  1. Bonus depreciation stays. Up to 50% of the cost of the asset purchased. Luxury auto get an extra $8,000 in depreciation the first year.
  2. Immediate write-off (section 179) resumes its $500,000 of assets instead of the $25,000 limit.
  3. Qualified leasehold improvements and restaurant property may be treated using Section 179.
  4. Research tax credit 14% to 20%
  5. Work opportunity tax credit for hiring veterans and other qualified individuals.
  6. Exclusion for gain on Qualified small business stock.

There are many more extended, but not as popular as the ones listed here.

 

Items not extended include the electric plug in vehicle credit and the energy efficient appliance credit.

 

IV. Office alerts and new items

 

  1. Tax Planning– many clients have met with us during October thru December to plan either 2014 tax year results, or to look forward to 2015. The year still isn’t over! If you think 2014 company or taxable income results will differ greatly than the 2013 tax year, you still have time to email, or telephone us to see is one of our strategies will work for you. Telephone 978-514-8829 or email info@henrykulikcpa.com. Fees start at one billable hour.
  2. Need a 2015 appointment?. Please contact the office right away if you want an appointment with Henry or Matthew. Or- you can mail in your information, or use our secure on-line electronic portal. Many clients that have been with us for a while seem to like the ease of the portal or mailbox. We still call you back with questions, just like you were sitting here! ALL tax returns and accounting work are eventually reviewed, strategized and signed by Henry. No matter how you get your information to us, we will handle it carefully and make sure its triple checked for accuracy.
  3. Payment plan for eligible clients. Quite a few corporate clients are requesting to pre-pay our fees monthly as opposed to making payments of a larger invoice at work completion or during interim. Any payments made in December are deductible for 2014 too! If interested, call or email the office and one of us will explain the details. If you just cannot wait to send us a payment, just start off by sending in 25% of last year’s billings. We will credit your account. Of course, this is optional and no one has to send in early payments. You can keep the present method of billing and payments. It’s your choice! We are just trying to assist those clients who requested a plan like this.
  4. New website features- An electronic secure credit card processor was installed earlier this year on our website. Everyone seems to like it. Just click “Make a Payment” on the top of the home page in the blue navigation bar. If you do not have an invoice number, just use “” We immediately get the information to post to your account, and you get an immediate electronic email receipt!
  5. New IRS deposit limits for refunds. In an effort to combat fraud and identity theft, new IRS procedures effective January 2015 will limit the number of refunds electronically deposited into a single financial account or pre-paid debit card to three. The fourth and subsequent refunds automatically will convert to a paper refund check and be mailed to the taxpayer.
  6. Our office welcomes Ms. Marsha Lacroix from Central Mass joining our tax team during our busiest periods. Marsha graduated Assumption College in Accounting and has a wealth of knowledge in Bookkeeping systems, Individual and Payroll tax filings and Corporate returns.

 

 

Merry Christmas and Happy Holidays!

 

The staff at Henry C Kulik, Jr. CPA, LLC

2013 Last MInute Tax Planning Ideas

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LAST MINUTE TAX PLANNING IDEAS FOR INDIVIDUALS AND BUSINESS

All corporate and partnership clients are strongly encouraged to get the business info for the year ended 12/31/13 in early January so we can start the work and stay ahead of curve! Contact the office anytime if you have any questions.

December 2013

Dear Client:

Year-end tax planning could be especially productive this year because timely action could nail down a host of tax breaks that won’t be around next year unless Congress acts to extend them, which, at the present time, looks doubtful. These include, for individuals: the option to deduct state and local sales and use taxes instead of state and local income taxes; the above-the-line deduction for qualified higher education expenses; and tax-free distributions by those age 70-1/2 or older from IRAs for charitable purposes. For businesses, tax breaks that are available through the end of this year but won’t be around next year unless Congress acts include: 50% bonus first year depreciation for most new machinery, equipment and software; an extraordinarily high $500,000 expensing limitation; the research tax credit; and the 15-year writeoff for qualified leasehold improvements, qualified restaurant buildings and improvements and qualified retail improvements.

High-income-earners have other factors to keep in mind when mapping out year-end plans. For the first time, they have to take into account the 3.8% tax surtax on unearned income and the additional 0.9% Medicare (hospital insurance, or HI) tax that applies to individuals receiving wages with respect to employment in excess of $200,000 ($250,000 for married couples filing jointly and $125,000 for married couples filing separately).

The surtax is 3.8% of the lesser of: (1) net investment income (NII), or (2) the excess of modified adjusted gross income (MAGI) over an unindexed threshold amount ($250,000 for joint filers or surviving spouses, $125,000 for a married individual filing a separate return, and $200,000 in any other case). As year-end nears, a taxpayer’s approach to minimizing or eliminating the 3.8% surtax will depend on his estimated MAGI and net investment income (NII) for the year. Some taxpayers should consider ways to minimize (e.g., through deferral) additional NII for the balance of the year, others should try to see if they can reduce MAGI other than unearned income, and others will need to consider ways to minimize both NII and other types of MAGI.

The additional Medicare tax may require year-end actions. Employers must withhold the additional Medicare tax from wages in excess of $200,000 regardless of filing status or other income. Self-employed persons must take it into account in figuring estimate tax. There could be situations where an employee may need to have more withheld toward year end to cover the tax. For example, an individual earns $200,000 from one employer during the first half of the year and a like amount from another employer during the balance of the year. He would owe the additional Medicare tax, but there would be no withholding by either employer for the additional Medicare tax since wages from each employer don’t exceed $200,000. Also, in determining whether they may need to make adjustments to avoid a penalty for underpayment of estimated tax, individuals also should be mindful that the additional Medicare tax may be overwithheld. This could occur, for example, where only one of two married spouses works and reaches the threshold for the employer to withhold, but the couple’s income won’t be high enough to actually cause the tax to be owed.

We have compiled a checklist of additional actions based on current tax rules that may help you save tax dollars if you act before year-end. Not all actions will apply in your particular situation, but you will likely benefit from many of them. We can narrow down the specific actions that you can take once we meet with you to tailor a particular plan. In the meantime, please review the following list and contact us at your earliest convenience so that we can advise you on which tax-saving moves to make:

Year-End Tax Planning Moves for Individuals

•Increase the amount you set aside for next year in your employer’s health flexible spending account (FSA) if you set aside too little for this year.

•If you become eligible to make health savings account (HSA) contributions in December of this year, you can make a full year’s worth of deductible HSA contributions for 2013.

•Realize losses on stock while substantially preserving your investment position. There are several ways this can be done. For example, you can sell the original holding, then buy back the same securities at least 31 days later. It may be advisable for us to meet to discuss year-end trades you should consider making.

•Postpone income until 2014 and accelerate deductions into 2013 to lower your 2013 tax bill. This strategy may enable you to claim larger deductions, credits, and other tax breaks for 2013 that are phased out over varying levels of adjusted gross income (AGI). These include child tax credits, higher education tax credits, the above-the-line deduction for higher-education expenses, and deductions for student loan interest. Postponing income also is desirable for those taxpayers who anticipate being in a lower tax bracket next year due to changed financial circumstances. Note, however, that in some cases, it may pay to actually accelerate income into 2013. For example, this may be the case where a person’s marginal tax rate is much lower this year than it will be next year or where lower income in 2014 will result in a higher tax credit for an individual who plans to purchase health insurance on a health exchange and is eligible for a premium assistance credit.

•If you believe a Roth IRA is better than a traditional IRA, and want to remain in the market for the long term, consider converting traditional-IRA money invested in beaten-down stocks (or mutual funds) into a Roth IRA if eligible to do so. Keep in mind, however, that such a conversion will increase your adjusted gross income for 2013.

• If you converted assets in a traditional IRA to a Roth IRA earlier in the year, the assets in the Roth IRA account may have declined in value, and if you leave things as-is, you will wind up paying a higher tax than is necessary. You can back out of the transaction by recharacterizing the rollover or conversion, that is, by transferring the converted amount (plus earnings, or minus losses) from the Roth IRA back to a traditional IRA via a trustee-to-trustee transfer. You can later reconvert to a Roth IRA.

•It may be advantageous to try to arrange with your employer to defer a bonus that may be coming your way until 2014.

•Consider using a credit card to prepay expenses that can generate deductions for this year.

•If you expect to owe state and local income taxes when you file your return next year, consider asking your employer to increase withholding of state and local taxes (or pay estimated tax payments of state and local taxes) before year-end to pull the deduction of those taxes into 2013 if doing so won’t create an alternative minimum tax (AMT) problem.

•Take an eligible rollover distribution from a qualified retirement plan before the end of 2013 if you are facing a penalty for underpayment of estimated tax and the increased withholding option is unavailable or won’t sufficiently address the problem. Income tax will be withheld from the distribution and will be applied toward the taxes owed for 2013. You can then timely roll over the gross amount of the distribution, as increased by the amount of withheld tax, to a traditional IRA. No part of the distribution will be includible in income for 2013, but the withheld tax will be applied pro rata over the full 2013 tax year to reduce previous underpayments of estimated tax.

•Estimate the effect of any year-end planning moves on the alternative minimum tax (AMT) for 2013, keeping in mind that many tax breaks allowed for purposes of calculating regular taxes are disallowed for AMT purposes. These include the deduction for state property taxes on your residence, state income taxes (or state sales tax if you elect this deduction option), miscellaneous itemized deductions, and personal exemption deductions. Other deductions, such as for medical expenses, are calculated in a more restrictive way for AMT purposes than for regular tax purposes in the case of a taxpayer who is over age 65 or whose spouse is over age 65 as of the close of the tax year. As a result, in some cases, deductions should not be accelerated.

•Accelerate big ticket purchases into 2013 in order to assure a deduction for sales taxes on the purchases if you will elect to claim a state and local general sales tax deduction instead of a state and local income tax deduction. Unless Congress acts, this election won’t be available after 2013.

•You may be able to save taxes this year and next by applying a bunching strategy to “miscellaneous” itemized deductions, medical expenses and other itemized deductions.

•If you are a homeowner, make energy saving improvements to the residence, such as putting in extra insulation or installing energy saving windows, or an energy efficient heater or air conditioner. You may qualify for a tax credit if the assets are installed in your home before 2014.

•Unless Congress extends it, the up-to-$4,000 above-the-line deduction for qualified higher education expenses will not be available after 2013. Thus, consider prepaying eligible expenses if doing so will increase your deduction for qualified higher education expenses. Generally, the deduction is allowed for qualified education expenses paid in 2013 in connection with enrollment at an institution of higher education during 2013 or for an academic period beginning in 2013 or in the first 3 months of 2014.

•You may want to pay contested taxes to be able to deduct them this year while continuing to contest them next year.

•You may want to settle an insurance or damage claim in order to maximize your casualty loss deduction this year.

Purchase qualified small business stock (QSBS) before the end of this year. There is no tax on gain from the sale of such stock if it is (1) purchased after September 27, 2010 and before January 1, 2014, and (2) held for more than five years. In addition, such sales won’t cause AMT preference problems. To qualify for these breaks, the stock must be issued by a regular (C) corporation with total gross assets of $50 million or less, and a number of other technical requirements must be met. Our office can fill you in on the details.

•If you are age 70-1/2 or older, own IRAs and are thinking of making a charitable gift, consider arranging for the gift to be made directly by the IRA trustee. Such a transfer, if made before year-end, can achieve important tax savings.

• Take required minimum distributions (RMDs) from your IRA or 401(k) plan (or other employer-sponsored retired plan) if you have reached age 70-1/2. Failure to take a required withdrawal can result in a penalty of 50% of the amount of the RMD not withdrawn. If you turned age 70-1/2 in 2013, you can delay the first required distribution to 2013, but if you do, you will have to take a double distribution in 2014-the amount required for 2013 plus the amount required for 2014. Think twice before delaying 2013 distributions to 2014-bunching income into 2014 might push you into a higher tax bracket or have a detrimental impact on various income tax deductions that are reduced at higher income levels. However, it could be beneficial to take both distributions in 2014 if you will be in a substantially lower bracket that year, for example, because you plan to retire late this year.

• Make gifts sheltered by the annual gift tax exclusion before the end of the year and thereby save gift and estate taxes. You can give $14,000 in 2013 to each of an unlimited number of individuals but you can’t carry over unused exclusions from one year to the next. The transfers also may save family income taxes where income-earning property is given to family members in lower income tax brackets who are not subject to the kiddie tax.

Year-End Tax-Planning Moves for Businesses & Business Owners

•Businesses should consider making expenditures that qualify for the business property expensing option. For tax years beginning in 2013, the expensing limit is $500,000 and the investment ceiling limit is $2,000,000. And a limited amount of expensing may be claimed for qualified real property. However, unless Congress changes the rules, for tax years beginning in 2014, the dollar limit will drop to $25,000, the beginning-of-phaseout amount will drop to $200,000, and expensing won’t be available for qualified real property. The generous dollar ceilings that apply this year mean that many small and medium sized businesses that make timely purchases will be able to currently deduct most if not all their outlays for machinery and equipment. What’s more, the expensing deduction is not prorated for the time that the asset is in service during the year. This opens up significant year-end planning opportunities.

•Businesses also should consider making expenditures that qualify for 50% bonus first year depreciation if bought and placed in service this year. This bonus writeoff generally won’t be available next year unless Congress acts to extend it. Thus, enterprises planning to purchase new depreciable property this year or the next should try to accelerate their buying plans, if doing so makes sound business sense.

•Nail down a work opportunity tax credit (WOTC) by hiring qualifying workers (such as certain veterans) before the end of 2013. Under current law, the WOTC won’t be available for workers hired after this year.

•Make qualified research expenses before the end of 2013 to claim a research credit, which won’t be available for post-2013 expenditures unless Congress extends the credit.

•If you are self-employed and haven’t done so yet, set up a self-employed retirement plan.

•Depending on your particular situation, you may also want to consider deferring a debt-cancellation event until 2014, and disposing of a passive activity to allow you to deduct suspended losses.

•If you own an interest in a partnership or S corporation you may need to increase your basis in the entity so you can deduct a loss from it for this year.

These are just some of the year-end steps that can be taken to save taxes. Again, by contacting us, we can tailor a particular plan that will work best for you. Very truly yours,

Henry

HENRY C KULIK, JR.
CERTIFIED PUBLIC ACCOUNTANT,LLC

114 Merriam Ave; Suite 201
Leominster, MA 01453
Tel (978) 514-8829
Fax (978) 514-8820
www.henrykulik.com

2013 September Tax Information Update

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September 6, 2013

Dear Client:
I wrote this newsletter to update you on a few important matters including:

  1. Firm changes
  2. Scam alert!
  3. Due dates-important
  4. Tax updates-including new rules for same sex couples/DOMA
  5. Tax planning and new/additional taxes!
  6. IRS audits and projects; Massachusetts DOR audits
  7. Billing options available from us

1. Firm changes • We have implemented further enhancements to our secure online portal system (https://secure.netlinksolution.com). All clients have their own portal, including folders within their own portal for their family and related companies. We are now updating everyone’s data which includes 2011 and 2012 pdf copies of tax returns, and 2012 source documents, i.e. Forms W2, 1099, etc. Please do not be surprised if you get an email alerting you to a copy of tax work recently placed in your portal. We are striving to become more paperless each year. Remember, you can upload documents, QuickBook files, excel spreadsheets, and scans of all types. Easier than buying a stamp! We expect to complete all necessary upgrades and data uploads by sometime in November or December, before the next organizers are uploaded.
• We have hired Lori Anderson and Pam Keogh, CPA as our newest staff accountants. Both have solid experience and training and we welcome them! Matthew Doucette, Accounting Supervisor will also be seeing clients for office appointments for the upcoming 2014 tax season in addition to myself for your convenience. Just tell the front desk your preference when you schedule. I will still be reviewing each return before finalizing. We are also strengthening our bookkeeping positions to fully assist all clients in not only tax, but their office management and bookkeeping needs. The office is also currently being redesigned to accommodate the larger staff and clients comfortably to ensure the very best customer service and accuracy!
2. Scam alert!
Reports have recently described people pretending to be IRS officials calling taxpayers looking for information(scammers). Other scams use email. IRS is not permitted to use email for taxpayer correspondence for any reason. Agents do not telephone taxpayers either unless letters via US Mail have been in use and you were expecting the call. NEVER release any personal information! Scammers are looking for social security numbers, dates of birth, and banking/credit information. If you are concerned that the caller is really IRS, you can tell the caller that you are represented by this firm. Just contact us right away. You may also telephone IRS at 800-829-1040, but be prepared to wait on hold for 3 or more hours, if you can even get through. They have been short-staffed and overwhelmed.
3. Due Dates
All calendar year corporate, partnership & trust tax returns are due 09/15/13 (w/extension).
All individual tax returns are due 10/15/13 (w/extension).
If you have not yet provided us with your year-end information, or have a few items remaining on a list, please get us the information quickly. After 09/01 we cannot guarantee a timely filed return for corporates; after 09/15 we cannot guarantee a timely filed individual return. But we always use our resources in an effort to make all returns filed timely.
Only corporates that are fiscal year filers (i.e. October vs. December) are the exception.
4. Tax Updates
• You may be aware that the Supreme Court has ruled the “Defense of Marriage Act” unconstitutional. On Thursday, August 29 the IRS issued Revenue Ruling 2013-17 which states that the following are among the tax breaks newly available to legally married same-sex couples: (This does not include civil unions or registered domestic partners)
1) the right to file a joint return; 2)the opportunity to get tax free employer health coverage for the spouse; 3) the opportunity to transfer unlimited assets to the spouse tax free of gift or estate taxes; 4) the opportunity of the first to die estate to utilize the marital deduction (estate taxes) 5) other tax matters such as alimony deductibility, and innocent spouse provisions. You can read the entire IRS ruling by going to www.irs.gov.
What does this mean right now? Effective September 16, 2013 the IRS has ruled that 2013 tax returns will be prepared MFJ (married filing joint) generally saving big tax $$. Years 2010, 2011, and 2012 can also be amended. If 2012 is still on extension, that can be filed with the new MFJ status. Year 2009 is past statue (for amending) unless you were on extension that year. If so, you have until October 15, 2013 to file a 2009 amended return for refunds. If you would like us to examine your return(s) and calculate your tax savings for amending, please contact the office. The amended returns can be filed on or after September 16, 2013; our usual and customary fees will apply.
Tax increases for individuals (including S-corporation and Partnership pass-thru amounts). Depends on filing status. Married filing separate- $125,000; Single $200,000; Married filing joint $250,000. These taxes are in effect now. Estimated tax payments and/or withholding should be adjusted if you fall into these categories. (Note-rates are rounded)
1. Additional 1% surtax on all earned income above the amounts listed above
2. Additional 4% surtax on all unearned/investment income (includes all gambling, rental profits and all taxable capital gains, interest, and dividends)
3. Reduction/elimination of exemptions (children and taxpayer/spouse)
4. Reduction to as low as 20% of all itemized deductions (including mortgage interest, donations, etc.)
5. After $400,000, the income tax rate increases to 39.6%
6. AMT remains as in past years (in case you were worried that you were still not paying in enough)
5. Tax Planning; new business taxes
We are booking rapidly for October 16 through December for 2013 tax planning. Many companies by this time have a pretty good idea where they might end up regarding profitability. With all the new taxes and regulations (and possibly more in the near future), please don’t hesitate to book at least an hour to review and see if any strategies can be utilized to minimize these increases. This year it’s not always about just buying another truck! Call the office anytime to schedule your appointment. And please remember—Any company (Schedule C to Corporation) that is able to have most of their books complete right after January 01 can help us get your work done earlier in 2014! Here are a few of the (per current law) changes effective 01/01/14:
• In 2013, companies can “write-off” assets up to $500,000 immediately that are placed in service. This ends on 12/31/13 and returns to the old $25,000 limit. (IRC 179)
• In 2013 “Bonus depreciation” was allowed, accelerating vehicle purchase deductions and improvements. Ends on 12/31/13.
• Many states will face an increase in federal (FUTA) unemployment taxes. They include our neighbors of CT, NY, and RI but not MA! We do such a great job with our taxes here, no need to raise those!
Massachusetts new Sales and Use Tax on Computer Services (Effective 07-31-13) In summary, if your business is software/computer hardware consulting and configuration of systems and software, you now have to collect MA sales tax (6.25%) on your invoice and remit that to the DOR. Per Mass TIR 13-10 (MGL 64H $1) These services are defined as follows: “the planning, consulting, or designing of computer systems that integrate computer hardware, software, or communication technologies and are provided by a vendor or 3rd party.” “Services” shall be limited to the following items: telecommunications services, computer system design services, and the modification, integration, enhancement, installation, or configuration of standardized software. Please contact the office for further details or clarification.
6. More audits, triggers, and enforcement
• If you accept credit cards or pay-pal, the IRS is watching! Forms 1099-K, which appeared to be of no value at first are being used to send out warning letters (which require an explanation and proof that your are not under-reporting income) or audit notices if credit cards sales make up a large portion of your sales reported on your tax return, or exceed your reported revenue. We can discuss this further in detail at your next appointment.
• If you have not filed tax returns for a few years, you will likely be on the audit list. If this could be you, please call the office and let us help you get these cleaned up ASAP.
• Clubs and groups that service the military (American Legion, etc) and some church groups are being closely watched and many audited by IRS. We’ll see where this one goes.
• Mass DOR is now doing their own “substitute tax returns” gathered from IRS income transcripts to generate a bill if you are late with them. The state needs the cash, after all.
7. Office billing options for corporate accounts Some clients have indicated a preference to get a monthly bill that approximates their fees from us, rather than a larger bill when the work is complete. We can now do this with our new, updated billing system. We can start it for anyone whose 2012 work is complete and paid. Call Maureen Ehwa at the office if you are interested in this option or have any questions. (maureen.ehwa@henrykulikcpa.com)

Warm regards,

Henry C Kulik, Jr CPA .
CERTIFIED PUBLIC ACCOUNTANT,LLC
114 Merriam Ave; Suite 201
Leominster, MA 01453
Tel (978) 514-8829
Fax (978) 514-8820

www.henrykulik.com

2013 January Tax Information Update

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January 21, 2013

Dear Client:

Below I have outlined a summary of recent tax legislation. Feel free to bring any questions with you when you have an appointment, or email the office! I also hope everyone has had the opportunity to register and look at our new online portal system. Just a reminder that this system does not mean that you will be preparing your own tax return online via the portal. It is only a delivery method used in place of us mailing you a paper organizer booklet as in prior years. We can also deliver electronic copies of tax returns and source documents (like W2) and you are now able to upload documents and files for us to use in preparing your personal or business tax return via the “file exchange” feature.

TAX LAW RECENT CHANGES

FAFSA: The IRS is now in control of student loans, FAFSA, and of course all student/education tax credits and deductions. Most schools now require your federal tax return to be filed first, prior to completing your “already filed” final version of your FAFSA. Schools are then expecting individuals to use the “Let IRS” complete your income tax details prior to submission in order to get any type of financial aid.
FILING DELAY: Due to the “fiscal cliff” being resolved after January 1, 2013, the IRS has been forced to re-program all of its computers resulting in the inability to file simple returns until January 30 or later; other tax returns may not be filed until late February or early March. Appointments and preparations will continue as scheduled. We have the law, forms, and software. We are only delayed (like everyone else) on the E-File part.
IRS: I know everyone will find this disturbing, but IRS is running on “low power” with most computers down until about January 31. In addition, IRS is down at least 6% staffing of revenue/audit agents. 2012 audit rates are only 1.03% for individuals, down from 2011. If your AGI exceeds $1 Million, however they are watching those returns closely: 1 out of 8 tax returns go under audit. S Corporate tax return and Partnership audit rates are down to .48% and .47% respectively. Those returns require better record keeping, books & records, and are more likely to be professionally prepared.
FLEX SPENDING: Reduced to $2,500 from $6,000. (2013 vs 2012)
ESTATE TAX CHANGES: For federal purposes, you must file an estate tax return if your gross estate exceeds $5,250,000 (includes life insurance, etc) and pay a tax rate of 40% for passing away after 12/31/12. MA remains a lower threshold at $1,000,000 filing requirement as in most states.

I NEW TAXES ON ALL TAXPAYERS

All taxpayers in 2013 will pay 2% higher social security tax through 2013 on income up to $113,700 per taxpayer. This results in a tax increase on a dual income household up to $4,548.

Affordable Care Act (Obamacare) assesses a 2.3% tax on all medical devices including braces, medicine pumps, and other medical items. Although the tax is imposed on the selling price (Gross revenue) to the manufacturer, the new tax is expected to be passed right through to the buyer/consumer. This tax is imposed regardless if the manufacturer made a profit or loss for the year.

II NEW TAXES ON MODIFIED AGI OF $125,000 AND UP

The Affordable Care Act has created new taxes that were unrelated to “fiscal cliff” agreements. These taxes kick in at the following Modified Adjusted Gross Income (MAGI) levels: Married Filing Separate – $125,000 Single – $200,000 Married Filing Jointly – $250,000

Tax #1 Earned income surtax – Charges an extra .9% tax on all earned ordinary income above the levels above. However, any W2 that hits $200,000 must have the new tax withheld by the employer, regardless of family income. The tax includes the self-employed. There is no limit on this tax. Higher income=higher tax!

Tax #2 Investment income surtax– Charges an extra 3.8% on the tax return on any interest, dividends, capital gains, rental income, and any other passive activities including “profits” from K-1/partnership investments, and sale of business assets. Capital gains also include any taxable gains on sale of personal residences. (Must have profit exceeding $250,000 (single) or $500,000 (married/joint). NOTE: These taxes hit trusts quickly – everything after $11,650 in gross income!

The below new taxes affect taxpayers with the following Modified Adjusted Gross Income (MAGI) levels:
Married Filing Separate – $150,000 Single – $250,000 Married Filing Jointly – $300,000

Tax #3 Phase outs of itemized deductions and exemptions- Starts to reduce all itemized deductions at the levels noted above. But the most IRS regs will remove is 80% of those, allowing not less than 20% of your itemized deductions.

Tax #4 Phase outs of personal exemptions including kids/dependents – Starts to reduce all of these at the levels noted above. Example: A husband/wife/2 kids would get 4 x $3,900 exemptions or $15,600 tax exemption. This gets reduced by 2% for each $2,500 of income that exceeds the amounts above. Therefore, once income reaches $125,000 above the amount, exemptions are $0. That means they are completely phased out at $275,000 MFS, $375,000 Single, $425,000 MFJ

Tax #5 Income tax rates – The Bush tax cuts have been made “permanent” until your taxable income hits $225,000 Married Filing Separate, $400,000 single, $450,000 Married Filing Joint. The regular (ordinary) income tax rates increases to 39.6% from 35%. This rate affects all income (to infinity) above the applicable amount above. Of course at that level you can easily add the .9% earned income surtax, 3.8% investment income surtax, and complete phase-out of exemptions and losing a big chunk of your itemized deductions (a loss of the first $17,000 or so minimum). Some consider those last two stealth tax increases of about 5% (depending on individual circumstances). When you add the surtaxes you can see a top rate of just about 50% plus any AMT and state taxes. Please make sure your withholding and quarterly estimates are accurate to avoid additional penalties on tax day!

Tax #6 Dividend and Capital Gains – This is a little more complicated. The rate you pay on these income items is determined by your regular/ordinary tax rate.
If your income tax rate is 10% – 15% your capital gain rate is 0% (Bush tax cuts)
If your income tax rate is 25% – 35% your capital gain rate is 15%; 18.8% if surtax applies
If your income tax rate is 39.6% your capital gain rate is 20%; 23.8% if surtax applies

III TAX CREDIT PHASEOUTS

1. $5000/$5,500 IRA Deduction phases out at: AGI $10,000 $92,000 2. $1,000 Child tax credit phases out at: AGI $55,000 – $110,000
3. $1,500 Lifetime Learning credit of $1,500 phases out at: AGI $53,000 – $107,000
4. $2,500 Student loan interest deduction phases out at: AGI $60,000 – $125,000
5. $4,000 Education deduction phases out at: AGI $65,000 – $130,000
6. $2,500 American Opportunity credit phases out at: AGI $80,000 – $160,000
Note- most of the above credits do not apply ($0 credit) to Married Filing Separate status

IV WHAT’S NEXT?

The current administration and Washington insiders are already looking for more tax increases, including “closing loopholes” on possible middle income to higher income taxpayers. Nothing specific yet- we’ll have to see. In Massachusetts, the Governor last week announced that he is looking for a 20% income tax increase (to 6.25% from 5.25%) and the elimination of 23 deductions including all education and business deductions for individuals. Higher tolls on more turnpike-controlled roadways, gasoline tax increases, higher MBTA fares, higher registry fees (drivers license, plate fees, etc), but lower sales tax and greater exemptions. This would result in everyone earning about $35,000 or greater to expect a tax increase!

Since the last “fiscal cliff” deal was only recently enacted, no-one knows what kinds of new federal taxes are on the way or when they will be effective. In Massachusetts, something will happen but we don’t know what or when until the final analysis. We will keep you posted.

I look forward to seeing and/or speaking to everyone in the near future.

Warm regards,

 

Henry C Kulik, Jr CPA
CERTIFIED PUBLIC ACCOUNTANT,LLC
114 Merriam Ave; Suite 201
Leominster, MA 01453
Tel (978) 514-8829
Fax (978) 514-8820 

www.henrykulik.com

2012 November/December Tax Update

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November 28, 2012

Dear Client:

Year-end planning is a greater challenge this year than in past years. Unless the President and Congress work together, we will roll right off the “Fiscal Cliff” that I am sure you have read or heard about. But while we all hear calls for bipartisanship, the president and his spokesmen have stated repeatedly, including yesterday (November 27)  that no deal will be considered unless tax rates are increased on those earning over $125,000, $200,000 and $250,000 (depending on filing status) and not to expect any social program or entitlement cuts. Wow, that’s really compromising! Sounds like a line in the sand to me! So while there are republican bills all over the place cutting here and increasing taxes in other places, I would not read too much into those plans unless the other side actually decides to “compromise.”  Quite frankly my gut tells me forget it. I think the “cliff” will occur. ( and somehow the House of Representatives will get blamed, regardless of whose fault this is) The truth is these matters should have been dealt with last year. Senate Democrats are already on talk shows explaining that this “cliff” is really more of a “slope” anyway and it won’t be that bad. We can recover from a short “recession” quickly now anyway! Republicans are trying to push “limits” of itemized deductions for wealthy taxpayers (i.e. mortgage interest, etc). I just cannot see that happening. Besides, the President won easily on this very issue of a “balanced approach” of raising those tax rates. So I expect that. Please understand that the above is my opinion based on information available today. We have been surprised before, but I am obligated to tell you, my clients what I sense is right around the corner in the tax world.

WHO PAYS WHAT TAXES?

New IRS data reveal the 2010 (most recently released) taxpayer burden statistics.

Top 1% – Paid 37.4% of all taxes; 18.9% of all adjusted gross income ($369K+)

Top 5% – Paid 59.1% of all taxes; 33.8% of all adjusted gross income ($161K+)

Top 10%-Paid 70.6% of all taxes; 45.1% of all adjusted gross income ($116K+)

Bottom 50%- Paid 2.36% of all taxes; 45% of all adjusted gross income

FISCAL CLIFF

What  exactly is the “Fiscal Cliff”? Its actually a series of many laws and changes that can get complicated. Below I have attempted to simplify it somewhat for you by outlining key components. There are more pieces that I have not included.

1. Tax rate increases. If no bill or law is passed quickly (I do not expect one) all americans will face a sharp increase in their federal tax bill effective January 01, 2013. Current rates start at 10% and go up to 35%. Without the “Bush tax cuts” those rates would range from 15% to 39.6% (not including surtaxes and other new fees) The problem is the Democrats and the President want these rate increases to only impact people earning over (modified adjusted gross income) $125,000, $200,000, or $250,000 depending on filing status. Republicans do not want to increase anyone’s rates for fear of small business cutbacks when they absorb these tax increases. The average person should expect $50-$100 less weekly in their paycheck if these increases occur. The tax policy center recently published that, based on a average family of 4 earning $100,000 in MA the tax increase would be $6,632 while NH would see a $5,660 increase.

2.  Alternative Minimum Tax This ugly tax can reach households with earnings under $100,000 under the right conditions unless a new “patch” is written. Even 2012 has no “patch” so you could owe tax April 2013 and beyond. for 2012, AMT exemptions have dropped and fewer personal credits can be used to offset the AMT. This is rarely talked about and separate from the “Bush tax cuts.” My guess? Congress will write some sort of patch as they have every year by December 31. IRS has already programmed computers expecting this fix. They announced last week that if the fix doesn’t come through, tax return filings could be delayed by several months! (March-April filings for many taxpayers)

3.  Reduced itemized deductions and exemptionsThere has been talk, mostly as an alternative to rate increases, to deal with higher tax rates. Forget it (in my opinion). However, others the other part no-one talks about is already law effective January 01, 2013. As in several years past, if your modified adjusted gross income exceeds $160,000 or so, itemized deductions just “phase-out” as do exemptions. For simplicity, here is an example: Your (modified) AGI is $200,000 and your mortgage interest, taxes paid, and other itemized deductions total $40,000. A “phase-out” kicks in reducing the $40,000 by 3% of your AGI ($6,000) for a new itemized deduction allowed total of $34,000. Meanwhile, exemptions (about $4,000 per dependent) also get reduced by a more complex formula by about 2% for every $2,500 of income over  thresh-hold amount. Based on years past, once your income hits about $350,00 for married filing joint ($175,000 filing separate) the exemption is reduced all the way to $0! These are estimated thresh-hold amounts, since the new 2013 amount has not been announced. This reduction is not even talked about but is already written into law!

4.  Education credits/Child Tax Credit Rather than $1,000 per child (with no limit of kids) it reverts back to $600 per child, limit two. So if you had 4 children under age 17 and AGI $110,000 or less your credit (refundable) was $4,000. Now its $1,200. The education credit changes from the $2,500 per student to $500/$1000 limit two (the old Hope and Life Learning credit return)

5.  Mandatory budget cuts  (Sequestration) This has nothing to do with tax increases, but is part of the “fiscal cliff.” Since an agreement failed between the white house and congress to reduce the deficit, and an earlier “super-committee” failed, mandated $500 billion in defense & security spending (and related industries and contractors) and another $700 billion in non-defense spending (education, housing, etc) will all begin to take affect January 02, 2013. Additional annual cuts will continue for 9 years. By law the amounts cannot be individually tinkered with. I won’t go further here, as this is beyond the scope of my practice but provides useful information for this discussion.

6.  Dividends and Capital Gains Currently taxed at 15%, dividends will be taxed the same as salary (ordinary) in 2013. Long term gains from stocks and other items will be taxed at 20% in 2013.

7.  Obama’s “Affordable Care Act”  These new taxes are law and play a part of the“Fiscal Cliff” problem. These are not subject to change and will occur as written.

(a)  Additional Medicare Tax for Certain Employees and Self-employed Individuals Beginning in 2013, individuals who have wage and/or self-employment income exceeding $200,000 ($250,000 if married, filing a joint return; $125,000 if married, filing separately) will be subject to an additional 0.9% Medicare tax (i.e., 2.35% total) on their earned income exceeding the applicable threshold. Employers are required to withhold and remit the additional tax for any employee to whom it pays over $200,000. Self-employed individuals who pay both halves of the Medicare tax (i.e., 2.9%) will pay a total Medicare tax of 3.8% on earnings above the thresholds. The additional 0.9% tax will not be deductible for income tax purposes. Couples may have to make quarterly estimated tax payments to be sure they are not hit with an underpayment penalty when filing their income tax return each year.

(b) Medicare Tax on Investments

Through 2012, the Medicare payroll tax only applied to wages. Beginning in 2013, a 3.8% Medicare tax (i.e., the Medicare contribution tax) will, for the first time, apply to the net investment income of high-income taxpayers. The tax will be levied on single individuals with a modified adjusted gross income (MAGI) above $200,000 and on joint filers with MAGI over $250,000. The $250,000 threshold will also apply to a surviving spouse. Married individuals who file a separate return will have a $125,000 threshold. The amounts are not indexed for inflation. Net investment income generally includes gross income from interest, dividends, royalties, rents, gross income from a trade or business involving passive activities, and net gain from the disposition of property (other than property held in a trade or business)The tax will not apply to distributions from tax-deferred retirement accounts [e.g., 401(k) plans and IRAs]. However, those distributions may increase MAGI and, therefore, could cause an individual’s net investment income to be subject to the new tax.

Individuals May be Subject to Both Taxes

Individuals may be subject to both additional taxes, because their earnings are over the $200,000/$250,000 threshold and they have net investment income. These individuals must be especially diligent regarding their tax planning.

(c) Other taxes and fees from “Obamacare”

*Individual penalties The monthly penalty amount is an amount equal to one-twelfth of the greater of a flat dollar amount or an amount based on a percentage of the applicable individual’s income [IRC Sec. 5000A(c)(2)].

*Business penalties Under IRC Sec. 4980H, certain employers must offer health insurance coverage to full-time employees, or pay a penalty. However, IRC Sec. 4980H has the phrase “and their dependents” in parentheses, which makes it unclear if employers are required to offer coverage to full-time employees’ dependents. An applicable large employer, generally, is an employer that employed an average of at least 50 full-time equivalent (FTE) employees on business days during the preceding calendar year (1/1/2013)

*Other fines and penalties  (1) A 40% excise tax will be levied on certain high-cost employer-sponsored health insurance coverage [IRC Sec. 4980I(a)]. These high-cost plans are also referred to as Cadillac plans. (2) Another penalty imposed by HHS under PHSA Sec. 2723(b)(2)(C) for failure to implement the PHSA provisions is $100-per-day for each individual for whom a violation has occurred. (3) An excise tax (i.e., penalty) of $100-per-day/per-affected-participant, applies to a group health plan  The minimum excise tax for a violation that is discovered after the IRS has issued a notice of examination (i.e., after an IRS audit has begun) is $2,500 [IRC Sec. 4980D(b)(3)(A)]. This minimum tax is increased to $15,000 if the violation is considered more than a de minimis amount. The maximum excise tax for a single-employer plan for violations that are due to reasonable cause and not willful neglect is the smaller of 10% of the aggregate amount the employer (or a predecessor employer) paid for group health plans during the preceding year (i.e., the prior year’s cost of group health coverage), or $500,000 [IRC Sec. 4980D(c)(3)].

8. Estate tax increase. Currently, the federal estate tax affects gross estates with a value in excess of $5,300,000 and has a maximum tax rate of 35%. This increases to 55% January 01, 2013 and it now affects estates worth over $1,000,000. Remember, a gross estate includes all expected life insurance proceeds, and fair market value of any privately held business.

9.  Increase in social security tax. Something else not talked about. The “temporary” two year reduction in the paycheck withholding of 5.65% FICA tax will return to the statutory 7.65%. So on an annual salary of $50,000, that’s a 2% or $1,000 increase for each paycheck in the household.

10. Other tax increases A number of tax provisions will expire at the end of 2012. Rules that expired at the end of 2011 include, for example, the research credit for businesses, the election to take an itemized deduction for State and local general sales taxes instead of the itemized deduction permitted for State and local income taxes, and the above-the-line deduction for qualified tuition. Rules that will expire at the end of this year include generous bonus depreciation allowances and expensing allowances for business, and expanded tax credits for higher education costs. More changes are outlined below in tax planning suggestions. Indeed, the prospect of higher taxes next year makes it even more important to engage in year-end planning this year. To that end, we have compiled a checklist of actions that can help you save tax dollars if you act before year-end. Many of these moves may benefit you regardless of what Congress does on the major tax questions of the day. Not all actions will apply in your particular situation, but you will likely benefit from many of them.

We can narrow down the specific actions that you can take once we meet with you to tailor a particular plan. In the meantime, please review the following list and contact us at your earliest convenience so that we can advise you on which tax-saving moves to make.

Year-End Tax Planning Moves for Individuals

•Increase the amount you set aside for next year in your employer’s health flexible spending account (FSA) if you set aside too little for this year. Keep in mind that beginning next year, the maximum contribution to a health FSA will be $2,500. And don’t forget that you can no longer set aside amounts to get tax-free reimbursements for over-the-counter drugs, such as aspirin and antacids.

•If you become eligible to make health savings account (HSA) contributions late this year, you can make a full year’s worth of deductible HSA contributions even if you were not eligible to make HSA contributions for the entire year. This opportunity applies even if you first became eligible in December. In brief, if you qualify for an HSA, contributions to the account are deductible (within IRS-prescribed limits), earnings on the account are tax-deferred, and distributions are tax free if made for qualifying medical expenses.

•Realize losses on stock while substantially preserving your investment position. There are several ways this can be done. For example, you can sell the original holding, then buy back the same securities at least 31 days later. It would be advisable for us to meet to discuss year-end trades you should consider making.

•If you are thinking of selling assets that are likely to yield large gains, such as inherited, valuable stock, or a vacation home in a desirable resort area, try to make the sale before year-end, with due regard for market conditions. This year, long-term capital gains are taxed at a maximum rate of 15%, but the rate could be higher next year as noted above. And if your adjusted gross income (as specially modified) exceeds certain limits ($250,000 for joint filers or surviving spouses, $125,000 for a married individual filing a separate return, and $200,000 for all others), gains taken next year (along with other types of unearned income, such as dividends and interest) will be exposed to an extra 3.8% tax (the so-called “unearned income Medicare contribution tax”).

•If you are in the process of selling your main home, and expect your long-term gain from selling it to substantially exceed the $250,000 home-sale exclusion amount ($500,000 for joint filers), try to close before the end of the year (again, with due regard to market conditions). This can save capital gains taxes if rates go up and can save the 3.8% tax for those exposed to it.

•You may own appreciated-in-value stock and you want to lock in a 15% tax rate on the gain, but you think the stock still has plenty of room to grow. In this situation, consider selling the stock and then repurchasing it. You’ll pay a maximum tax of 15% on long-term gain from the stock you sell. You also will wind up with a higher basis (cost, for tax purposes) in the repurchased stock. If capital gain rates go up after 2012 and you sell the repurchased stock down the road at a profit, the total tax on the 2012 sale and the future sale could be lower than if you had not sold in 2012 and had just made a single sale in the future. This move definitely will reduce your tax bill after 2012 if you are subject to the extra 3.8% tax on unearned income.

•Consider making contributions to Roth IRAs instead of traditional IRAs. Roth IRA payouts are tax-free and thus immune from the threat of higher tax rates, as long as they are made (1) after a five-year period, and (2) on or attaining age 59-1/2, after death or disability, or for a first-time home purchase.

•If you believe a Roth IRA is better than a traditional IRA, consider converting traditional IRAs to Roth IRAs this year to avoid a possible hike in tax rates next year. Also, although a 2013 conversion won’t be hit by the 3.8% tax on unearned income, it could trigger that tax on your non-IRA gains, interest, and dividends. Reason: the taxable conversion may bring your modified adjusted gross income (AGI) above the relevant dollar threshold (e.g., $250,000 for joint filers). But conversions should be approached with caution because they will increase your AGI for 2012. And if you made a traditional IRA to Roth IRA conversion in 2010, and you chose to pay half the tax on the conversion in 2011 and the other half in 2012, making another conversion this year could expose you to a much higher tax bracket.

•Take required minimum distributions (RMDs) from your IRA or 401(k) plan (or other employer-sponsored retired plan) if you have reached age 70-1/2. Failure to take a required withdrawal can result in a penalty equal to 50% of the amount of the RMD not withdrawn. If you turn age 70-1/2 this year, you can delay the first required distribution to 2013, but if you do, you will have to take a double distribution in 2013—the amount required for 2012 plus the amount required for 2013. Think twice before delaying 2012 distributions to 2013—bunching income into 2013 might push you into a higher tax bracket or bring you above the modified AGI level that will trigger a 3.8% extra tax on unearned income such as dividends, interest, and capital gains. However, it could be beneficial to take both distributions in 2013 if you will be in a substantially lower bracket in 2013, for example, because you plan to retire late this year or early the next.

•This year, unreimbursed medical expenses are deductible to the extent they exceed 7.5% of your AGI, but in 2013, for individuals under age 65, these expenses will be deductible only to the extent they exceed 10% of AGI. If you have a shot at exceeding the 7.5% floor this year, accelerate into this year “discretionary” medical expenses you were planning on making next year. Examples: prescription sunglasses, and elective procedures not covered by insurance.

•Consider using a credit card to prepay expenses that can generate deductions for this year.

•Increase your withholding if you are facing a penalty for underpayment of federal estimated tax. Doing so may reduce or eliminate the penalty.

•If you expect to owe state and local income taxes when you file your return next year, consider asking your employer to increase withholding of state and local taxes (or make estimated tax payments of state and local taxes) before year-end to pull the deduction of those taxes into 2012 if doing so won’t create an alternative minimum tax (AMT) problem.

•Take an eligible rollover distribution from a qualified retirement plan before the end of 2012 if you are facing a penalty for underpayment of estimated tax and the increased withholding option is unavailable or won’t sufficiently address the problem. Income tax will be withheld from the distribution and will be applied toward the taxes owed for 2012. You can then timely roll over the gross amount of the distribution, as increased by the amount of withheld tax, to a traditional IRA. No part of the distribution will be includible in income for 2012, but the withheld tax will be applied pro rata over the full 2012 tax year to reduce previous underpayments of estimated tax.

•You may want to pay contested taxes to be able to deduct them this year while continuing to contest them next year.

•You may want to settle an insurance or damage claim in order to maximize your casualty loss deduction this year.

•Make gifts sheltered by the annual gift tax exclusion before the end of the year and thereby save gift and estate taxes. You can give $13,000 in 2012 to each of an unlimited number of individuals but you can’t carry over unused exclusions from one year to the next. The transfers also may save family income taxes where income-earning property is given to family members in lower income tax brackets who are not subject to the kiddie tax. Savings for next year could be even greater if rates go up and/or the income from the transfer would have been subject to the 3.8% tax in the hands of the donor.

Year-End Moves for Business Owners

•If your business is incorporated, consider taking money out of the business by way of a stock redemption if you are in the position to do so. The buy-back of the stock may yield long-term capital gain or a dividend, depending on a variety of factors. But either way, you’ll be taxed at a maximum rate of only 15% if you act this year. If you wait until next year to make your move, your long-term gains or dividends may be taxed at a higher rate if reform plans are instituted or the Bush-era tax cuts expire. And if your adjusted gross income (as specially modified) exceeds certain limits ($250,000 for joint filers or surviving spouses, $125,000 for a married individual filing a separate return, and $200,000 for all others), gains taken next year (along with other types of unearned income, such as dividends and interest) will be exposed to an extra 3.8% tax (the so-called “unearned income Medicare contribution tax”). Keep in mind that you will need expert help to plan and execute an effective pre-2013 corporate distribution.

•If you are thinking of adding to payroll, consider hiring a qualifying veteran before year-end to qualify for a work opportunity tax credit (WOTC). Under current law, the WOTC for qualifying veterans won’t be available for post-2012 hires. The WOTC for hiring veterans ranges from $2,400 to $9,600, depending on a variety of factors (such as the veteran’s period of unemployment and whether he or she has a service-connected disability).

•Put new business equipment and machinery in service before year-end to qualify for the 50% bonus first-year depreciation allowance. Unless Congress acts, this bonus depreciation allowance generally won’t be available for property placed in service after 2012. (Certain specialized assets may, however, be placed in service in 2013.)

•Make expenses qualifying for the business property expensing option. The maximum amount you can expense for a tax year beginning in 2012 is $139,000 of the cost of qualifying property placed in service for that tax year. The $139,000 amount is reduced by the amount by which the cost of qualifying property placed in service during 2012 exceeds $560,000 (the investment ceiling). For tax years beginning in 2013, unless Congress makes a change, the expensing limit will be $25,000 and the investment ceiling will be $200,000. Thus, if you anticipate needing property in early 2013, you may want to push the purchase into 2012 to gain a higher expensing deduction (if you are otherwise eligible to claim it). The time of purchase doesn’t affect the amount of the expensing deduction. You can purchase property late in the year and still get a full expensing deduction. Thus, property acquired and placed in service in the last days of 2012, rather than at the beginning of 2013, can result in a full expense deduction for 2012.

•If you are in the market for a business car, and your taste runs to large, heavy SUVs (those built on a truck chassis and rated at more than 6,000 pounds gross (loaded) vehicle weight), consider buying in 2012. Due to a combination of favorable depreciation and expensing rules, you may be able to write off most of the cost of the heavy SUV this year. Next year, the write-off rules may not be as generous.

•Set up a self-employed retirement plan if you are self-employed and haven’t done so yet.

•Increase your basis in a partnership or S corporation if doing so will enable you to deduct a loss from it for this year. A partner’s share of partnership losses is deductible only to the extent of his partnership basis as of the end of the partnership year in which the loss occurs. An S corporation shareholder can deduct his pro rata share of an S corporation’s losses only to the extent of the total of his basis in (a) his S corporation stock, and (b) debt owed to him by the S corporation.

These are just some of the year-end steps that can be taken to save taxes. Again, by contacting us, we can tailor a particular plan that will work best for you.

Very truly yours,

President/Owner

HENRY C KULIK, JR.
CERTIFIED PUBLIC ACCOUNTANT,LLC
114 Merriam Ave; Suite 201
Leominster, MA 01453
978-514-8829
www.henrykulik.com

November, 2012-2013 Tax Information

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November, 2012

Dear Client:

For your convenience and information, I have a included below a pdf link to the firm website page that explains the tax side of the new health care bill.
http://www.henrykulikcpa.com/HCTA-1012.pdf
These taxes are among many new taxes effective January 01, 2013. I remind everyone that all of the new taxes are law as written today. Right now these laws affect every taxpayer, regardless of income level when they become effective January 01. You can also locate this section titled “New 2012-2013 tax info” on the left side of our home page at www.henrykulik.com

Feel free to contact the office if you desire to schedule a tax-planning appointment in an effort to avoid excess taxation.

I will write and send out a more comprehensive year-end newsletter on or about December 01 when the direction of our nation will hopefully become clearer.

Thank You,

Henry

HENRY C KULIK, JR.
CERTIFIED PUBLIC ACCOUNTANT,LLC
114 Merriam Ave; Suite 201
Leominster, MA 01453
Tel (978) 514-8829
Fax (978) 514-8820
www.henrykulik.com

2012 Summer office and tax update

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SUMMER 2012 OFFICE AND TAX UPDATE

June 06, 2012

New features from our office for your convenience Many of you already know that we had to do a major upgrade to our US tax and software system this tax season. This state of the art system has enabled us to add some new features via NetClient cS that we are very excited about!

Netclient cS uses the power of the internet to let you access our services directly from our website. It’s like a virtual visit to our office, thanks to a secure, private portal that’s created especially for you. (if you’ve ever checked your banking information or personal investments online, then you’ve accessed a portal—it’s that simple.)
• Convenient—access your information 24/7, from anywhere you have an internet connection. • Secure—enter your password-protected portal and securely access documents and software, 
transfer data, and exchange information with our firm. • Fast—within minutes you can access files and software, enter data, and more!
Some of the new features include:

* Tax organizers available directly for downloading, printing, or data entry. * Document presentation—need a copy of your financials or a tax return to apply for a bank loan? Or need copies of W2s? Just log into Netclient cS and view or print your information. * File exchange—retrieve and send documents we’re working on together via your portal. It’s a great way to share files quickly and securely with tough 256 bit encryption. * Account aggregation available—access the account information for your financial holdings in one convenient place and view a dynamic picture of your finances.

In addition to the NetClient addition, we are turning the office more “paperless” by implementing the latest paperless work-paper and electronic record storage technology. The first noticeable change will be the tax organizers, usually mailed on or about January 1, will instead be available in your web portal via our website. If requested, one will be mailed to your address as in the past.

Other office changes
Many clients have been asking us to email or mail copies of multiple years of various tax returns, W2s to banks and third party institutions. Some clients have asked for this multiple times within a short period, causing us to tie up staff and resources to accomplish these requests. To serve our clients in the best way possible, we always have done whatever was requested via encrypted scanning and other means. To remain competitive and cover our own costs, we must now charge a $25 per return that has to mailed or emailed. You may always retrieve your tax returns and W2s at no charge by using the new web-portal feature of Netclient CS described earlier.

Reminder- (not new) Payment is due (for appointments) at the time of services being rendered unless other arrangements are made.

Tax Update

Being an election year plus the stalemate in Washington makes 2012 especially difficult for tax planning. What many individuals do not understand is that if nothing is done, automatic significant tax increases will affect everyone. Some of these increases are from the “sun-setting” or expiration of earlier tax provisions. Others were enacted with President Obama’s health care mandate, nicknamed “Obamacare” by many political pundits.

Already changed:

  1. The refundable “make work pay” credit of $800 for married-filing-joint filers eliminated
  2. Deduction for health insurance (from self-employment 15.3%) tax for self-employed individuals eliminated
  3. Personal energy property credit reduced by 75%, then eliminated after 12/31/2012
  4. Using personal credits against AMT tax eliminated
  5. Above the line “teacher deduction” eliminated

Changes effective 12/31/12:

  1. 10% individual income tax rate bracket eliminated for all taxpayers with “Bush tax cuts” expiration
  2. Larger 15% rate bracket eliminated with “Bush tax cuts” expiration for all taxpayers
  3. Tax brackets currently 25%,28%,35% increase to 28&,31%,36%,39.6% via elimination of the “Bush tax cuts”
  4. Adoption credit and assistance enhancements eliminated
  5. $1,000 child tax credit is reduced to $500 again; eligibility reduced.
  6. Education credits American Opportunity $2,500 per student credit rescinded, replaced by the old Hope credit as in 2008. Only good for freshman and sophomore college yrs.
  7. Tax exclusion of debt discharge on a principal residence eliminated for all taxpayers (short-sale debt discharge and any mortgage “forgiveness” becomes taxable income like credit card debt forgiveness)
  8. Itemized deduction limits and personal exemption phase-outs reinstated increasing taxable income for adjusted gross income over $150,000
  9. 50% bonus depreciation eliminated
  10. Increased section 179 immediate depreciation limits reduced back to smaller amounts for all taxpayers
  11. Coverdell IRA $2,000 goes back to $500
  12. Capital Gains taxed at 20% instead of 15%
  13. Maximum Estate tax rate returns to 55%
  14. Increased Medicare taxes of .9% on earned income and 3.8% on all capital gains and investment income on individuals ($200K AGI), trusts ($12K) and estates.
  15. “Tax free” municipal bonds become taxable
  16. Other various taxes and regulations too numerous to mention in this space

Remember, all these new tax changes are law today-but could be changed by the President and the U.S. Congress.

Other IRS and DOR issues Both the IRS and the Massachusetts Department of Revenue (and other state revenue offices) are experiencing hiring freezes and some labor shortages. This has resulted in longer hold times and less customer service help to resolve some tax issues. Both agencies are relying more on software upgrades for such things as computer matching and reporting, resulting in more notices and correspondence audits. Some items are now matched by either agency at the moment we attempt to file a tax return electronically. On the other hand, we now have online electronic access to an IRS secure portal that helps us with tax resolution matters.

Remember, part of our business model is that of tax resolution. We handle individual and corporate/business cases for both federal and state matters. The IRS electronic portal is one of the tools we utilize to help solve tax issues.

The DUA (Mass Department of Unemployment and Training) is using a complex computer system called “Quest” to handle unemployment tax reporting, billing, and collection. Users have found this system to be rather unfriendly! Even if you use a payroll service, when you start running payroll for the first time, you must log into the system with the username and password sent to you by DUA. You should not have to do anything after that so long as your payroll service (Paychex, ADP, etc.) is listed by you as a “TPA” (third party administrator) And if everything is not followed to the letter, you will be billed even for “estimated” amounts that could be incorrect, plus interest and penalties. Call Maureen Ehwa at the office for information or help with Quest.

Remember to contact the office and schedule an appointment if you desire 2012/2013 tax planning. Regular tax appointments during January through April filled up very early this year so I encourage everyone to plan ahead.

Please have a healthy, happy, and safe summer! Don’t forget the September 15 and October 15 deadlines if you are on extension.

Very truly yours,
HENRY C KULIK, JR.
CERTIFIED PUBLIC ACCOUNTANT,LLC
114 Merriam Ave; Suite 201
Leominster, MA 01453
978-514-8829
www.henrykulik.com