Archive for 'Taxes'

Mar 09

Here is an interesting question. Say you convert more than one IRA and so you have more than one conversion date. Can you elect to pay tax in 2010 on one conversion and elect to spread the tax (over 2011 and 2012) on the other conversion?

The answer is no. You have to elect the same treatment for all your conversions.

However, IF you are married AND both your spouse and you convert, then you can make a separate election from your spouse.  You could pay all the tax in 2010, for example, while your spouse could elect to defer.

Mar 05

As CPAs we are seeing the incremental creep of state taxes on our clients. A key concept here is “nexus” and – if you got it – you owe state tax. Today let’s talk sales tax.

Nexus is Latin for connection or link. The Due Process Clause of the US constitution requires a minimum link or connection between you and a state before the state can exert its taxing power. Granted, this was a whole lot easier many decades ago when doing business meant a storefront or office, mostly likely staffed by agents or employees who lived in the state. You were physically present. Easy to understand.

Not so much today.  Are you doing trade shows? It takes 16 days of trade shows to establish nexus with California. How about Texas?  Well, Texas requires only one day. Have you got an employee living in the state? That will clinch nexus in all 50 states. Did you send an employee into the state to do installation? You have probably just created nexus.

The preceding of course is tempered with the economic impact of your activities. If you sent one employee for one installation in one state, you may well decide that it is not worth the trouble to register with the state. If you are sending your trucks across the bridge daily into an adjoining state (think Cincinnati and northern Kentucky), then you should probably hurry up and register.

You also have to evaluate what percentage of your sales are taxable. You have to be careful here though, as you may need to get exemption certificates from your customers. Do not rely on getting them later, when a state audit has begun. Not all states allow that. You should find out if the state requires a separate line on the invoice for exempt items. Some states will tax an otherwise exempt item if it is not separately stated.

How are states identifying potential taxpayers? A common way is the sales tax questionnaire. Some states periodically send out mass mailings. Don’t ignore it if you receive one. Sometimes doing so may eliminate certain settlement options with the state. States park people at truck weigh stations, trade shows, construction projects. You may have even been picked up during someone else’s audit. During the audit, the state could have reviewed vendor invoices and sent questionnaires to the companies identified. If they saw your invoice with installation charges – well, you may just have an audit appointment.

Remember that – if you do not file – there is no statute of limitations. Hypothetically a state can go back indefinitely. Let’s say that you are contacted and the state finds nexus (there’s a surprise). They now want $XXXX of back sales taxes, with interest and possibly penalties. It’s a bit late to collect this from your customers. It’s coming out of your hide. You have just reduced your bottom line dollar-for-dollar.

And we are only talking about sales tax. If you send employees into other states as a routine part of your business, you may also be looking at payroll withholding taxes, unemployment taxes, corporate income taxes.

Hey, the point here is not to frighten. The rules are what the rules are. When you get to the point that are you are regularly crossing state lines, contact a tax pro. Find out the ropes. We have seen back state taxes in the hundreds of thousands of dollars. This is real money folks, and the kind of money that – if it catches you wrong – could endanger your business.

Feb 23

I don’t live in New York. I live in Kentucky. I do have friends who live in upstate new York.Visited them last summer. Pretty enough, although I am a little iffy about the aesthetics of windmills in the Mohawk Valley area.

The preceding is to say: I don’t hate New York. Sometimes though I do have to wonder about their tax policies. Have you heard about New Yorkers who try to move to Florida? Why, there is a virtual cottage industry built-up around proving to New York that you really, truly and genuinely left their state without intent of returning. New York of course has no intention of believing you. You may have a Florida, or Arizona, or Texas address, but you secretly long to return to New York. Your heart is still tied to the Big Apple. No sir, you have not truly moved your domicile, so New York still has some tax sway over you. Well, now you have articles, seminars and presentations for CPAs on how to represent the New York client making a break for it.

In that spirit, here is something recent concerning New York sales and use tax. 

Say that you are a professor at a New York college. Say that you receive unsolicited college textbooks. Could happen. You teach. You need a textbook for your course. The textbook publishers know this. They send books out to professors like you in the hope that you will pick up their title.

Sweet. You got a book you did not ask for and have no intention of paying for. What could go wrong?

The New York State Department of Taxation and Finance ruled on February 8, 2010 (in TSB-A-10(3)S) that you have to pay use tax on that book.

That’s what could go wrong.

Feb 22

President Obama unveiled a $950 billion proposal for reforming health care today, Monday February 22, 2010.

Did you see the part about Medicare taxes?

Currently the Medicare tax is 2.9% on wages and salaries. You pay half, your employer pays half. Well, if you make enough money you will now be paying 0.9% more: that is, 2.35% instead of 1.45%.

Oh, and you will be paying 2.9% on your investment income such as dividends and interest. That’s new. Yipes!

What is high income? If you are single, then $200,000. If you are married, then $250,000. Notice the marriage penalty.

Remember that the capital gains rate is expected to increase from 15% to 20% next year. Include another 2.9% and you have a 52% jump in capital gains tax rates.

Feb 20

Starting next month, the IRS is sending questionnaires to a random sample of 401(k)  plan sponsors. The IRS wants to gauge the health of these plans by studying the extent to which employers are complying with plan rules and correcting errors. The IRS unit spearheading this program is the “Employee Plans Compliance Unit” or EPCU. Answers to the questionnaire could prompt someone from the EPCU to follow-up, but the IRS has not indicated whether the follow-up questions could lead to an audit.

Feb 17

This is the old HOPE credit, redone. It actually is a better credit with higher limits and a wider phaseout.

The credit now applies to four years of college. The old HOPE applied to the first two years.

The credit is now $2,500. The HOPE was $1,800.

The phaseout for singles is now $80,000 to $90,000 (it was $50,000 to $60,000).

The phaseout for marrieds is $160,000 to $180,000 (it was $100,000 to $120,000).

And there is a new name for the credit: The American Opportunity Tax Credit.

Feb 16

The actual question is: did you buy a new car in 2009?

If you bought between February 17 and December 31, 2009, then you can deduct the sales tax whether you itemize deductions or not.

Oh, there is a limit to this. The price of the car is limited to $49,500. Not a problem for most of us.

There is a phaseout. If you are single, the phaseout is between $125,000 and $135,000. If you are married, the range is $250,000 to $260,000.

Feb 11

For fiscal 2009:

If you make $1 million or more, your audit rate went to 6.42% from 5.57%.

If you make between $200K and $1 million, your rate went from 2.69% to 2.55%. Yep, it went down.

If you are below $200K, then your rate increased from 0.95% to 0.96%.

Feb 11

Well, as of this writing, there is no estate tax. There is also no generation-skipping tax (GST). There is, however, a gift tax for 2010.

Yippee right? Not so quick. Let’s take a look at the basis carryover rules in place for 2010.

If one passed way in 2009, there was usually no need to file an estate tax return unless the estate exceeded $3.5 million. The basis in assets (as an example: P&G stock) was “stepped-up” to its value on the date of death. If something wasn’t as easy to value (say a second home in Clearwater, Florida), one would obtain an appraisal or equivalent. This meant that any appreciation in the asset went untaxed for income tax purposes.  OK, there were exceptions, the principal one being income in respect of a decedent, but we are talking in general here.

It’s a different game in 2010. For deaths after 12/31/09, property is transferred at the lower of its adjusted basis or its fair market value. This means that the property cannot be stepped-up but it can be stepped-down.  There are two exceptions:

(1)    Everybody gets to increase basis to fair market value by (up to) $1.3 million. If assets have appreciated by $700,000, then the step-up is limited to $700,000. If assets have appreciated by $2.3 million, then the executor has decisions to make, as the maximum step-up is $1.3 million.

(2)    An additional $3 million gets stepped-up if the property is passing to the surviving spouse.

Key thing here is that $1.3 million refers to the appreciation, not the total value of the property. One could have an estate of $2.2 million that has appreciation over $1.3 million. Likewise one could have an estate of $10.8 million that does not have appreciation of $1.3 million.

Note that an estate of $1.4 million now has to file a return in 2010. The House estimated that 6,000 estates would have filed under the old $(3.5 million, 45% rate) rules. More than 70,000 estates will have to file under the new (carryover basis) rules.

The generation-skipping tax goes away also. This guy (the “skip”) is the special forces of federal taxes. You do not want to meet him in the field. The skip applies when you try to pass wealth from one generation to another but skip at least one generation in doing so. The common example is a trust for the grandkids. This is a not a tax to laugh at, as it equals the estate tax and is payable in addition to the estate tax. Think about that for a second. This is one expensive tax.

Does anyone believe that these rules will continue indefinitely? Frankly, no. But they are the law as it stands right now. What if one dies now but Congress changes the law in July? Will the law be retroactive to January 1? It is not clear. The Supreme Court has allowed retroactive increases in tax rates, but this is different. There is no estate or skip tax as of this writing. This would be a retroactive imposition of a tax not just a tax rate.

If you are affected, you really should meet with an attorney who practices in this area. There truly are many things that can go wrong, depending on your situation. An example is the marital/bypass trust combination that is very common in wills. You may have heard this referred to as the A/B trusts. The idea is to fund the bypass trust to its maximum, as the estate tax credit offsets the bypass trust and voila – no estate tax. Any excess estate goes to the marital trust, as assets passing to a spouse (or to a QTIP trust) also trigger no estate tax. Problem? The bypass trust doesn’t know when to shutoff in 2010, as there is no estate tax and no estate tax credit. It therefore sucks up all the assets and leaves nothing left for the marital trust. If the bypass trust is going to the children of a first marriage and the marital trust is going to a second spouse, this could be bad.

One last note. What about the gift tax in 2010? It is still there. The rate has been reduced though. It is now 35%. It was 45% last year. You can still give way $13,000 to anyone you wish without it counting as a gift, though.

Feb 10

We know that windows and doors do – if they meet the energy ratings.

Siding won’t, though. The IRS has privately ruled that – even though the siding is insulated and probably meets the energy ratings – it doesn’t qualify because it provides structural support to the house.