Job Search Deductions

October 6, 2011

Job Seeker or Self-Employed?

Job seekers would be well-served to get tax advice for the numerous and tricky potential deductions for job search expenses. The most commonly-used provision, the “miscellaneous deduction,” can strictly limit write-offs, while the Alternative Minimum Tax may deny them entirely. However, for people who can earn income on the side while seeking full time employment, setting up a sole proprietorship can convert these limited write-offs into full deductions.

The miscellaneous deduction is the usual first option for deducting business cards, subscriptions, travel, entertainment, and other costs, but permitted expenses are deductible only to the extent they exceed 2% of the taxpayer’s adjusted gross income, and job hunting expenses are only deductible if the taxpayer is looking for work in the same occupation as that held previously. These limits can therefore eliminate potential deductions if the job hunter has a working spouse, a large severance, or other income.

The better option for job seekers who are able to earn some side income while they search may be to set up a sole proprietorship business with income and expenses reported on Schedule C of the tax return. Sole proprietorships can fully deduct “ordinary and necessary” business expenses, including deductions for travel, resume-preparation, health insurance premiums, travel, and business cards, as long as these costs are matched up against income on Schedule C. In addition, there is no requirement that the taxpayer seek work in the same former occupation.

To get the full deductions, the sole proprietorship must earn income. The IRS will closely scrutinize a business that does not show profit in at least three years out of five, but even a small profit opens the door to many deductions. Sole proprietorships must also pay the employer’s and employee’s share of payroll taxes on net income (currently 13.3%), and must file quarterly. There may also be a state tax liability.

Comparing the potential deductions under the miscellaneous deduction or under Schedule C, the benefits of setting up a sole proprietorship are clear. Under the miscellaneous deduction, unreimbursed medical expenses (including insurance premiums) are deductible only for those who itemize and only to the extent that they exceed 7.5% of the taxpayer’s adjusted gross income. With a low income, it is easier to exceed these limits. Meanwhile, for taxpayers who set up a Schedule C business, health insurance premiums may be fully deductible.

Home offices also usually get a better break if they are reported on Schedule C because of the limits on miscellaneous expenses. To be deductible, a home office must be used exclusively and regularly as the principal place of business. Professional fees, cell phone, business cards, and resume-preparation services for the business or the job hunt are often deductible as well, and equipment like a computer can be depreciated over time.

Thorough record keeping is the key for job seekers who anticipate taking deductions of any type. Receipts should be kept and a notebook or diary should be devoted to job-seeking expenses. Professional tax advice can be a significant money-saver in the long run.

photo credit: Manchester Library

 

 

Minnesota Gift/Estate Tax

September 16, 2011

Minnesota is one of 18 states that collect its own estate tax. With an exemption amount of $1 million, the state uses a complex sliding scale to determine the amount of tax owed. For estates worth less than $1 million, there is no tax; for estates worth between $1 million and $5 million, the state collects approximately 10%; and for estates worth greater than $10 million, the tax is about 16%.

Complications arise when one considers Minnesota’s estate tax in tandem with the federal rules. In 2010, Congress revamped the federal tax laws to provide a $5 million exemption for the estate tax, the gift tax, and the generation-skipping transfer tax. Therefore, a Minnesota resident with a $5 million estate would not even have to file with the IRS, but would owe approximately $391,000 in tax to Minnesota.

Anecdotal evidence indicates that some high-net-worth individuals in Minnesota are changing their state of residence at least in part because of these tax peculiarities. For a Minnesota resident who already has a winter home in another state, establishing a new state of residence can be as simple as spending six months there instead of five.

Under Minnesota law, one must spend over half the year, at least 183 days, outside of Minnesota to change the state of residence. In combination with the 183-day rule, the state may consider a 26 part facts and circumstances test that the Minnesota Department of Revenue lays out in an A-to-Z format, taking into account where a driver’s license was issued, club memberships, active church affiliations, and location of bank accounts. In the current economic downturn, the state has become much more aggressive in challenging state of residency for tax purposes.

Of course, Minnesota’s estate tax is just one piece of the puzzle. Minnesota also has state income and capital gains taxes, but even in states with no income tax, other factors must be considered before changing residences, including property taxes, sales taxes, gas taxes, and quality-of-life factors.

There are other tax planning opportunities besides simply moving away, however.  Although Minnesota has an estate tax, it does not have a corresponding gift tax. Therefore, that same $5 million estate can be gifted, even on one’s death bed, without incurring any federal or state tax liability. Gifting clearly makes more sense for Minnesota residents than leaving a high-value estate to heirs when they die, but one must be sure to keep enough to live comfortably.
The economic downturn and corresponding decline in the commercial real estate market have also depressed the value of businesses and their holdings, making it a great time to gift shares in a business, especially if it is poised for growth. Business owners planning to sell a business instead of passing it on have even established residency in other states to avoid Minnesota’s capital gains taxes.

Opportunities for tax planning are everywhere and are constantly shifting. Congress’ 2010 revamp of the tax code will expire in 2012, and any new provisions may require revised planning.

photo credit: Unhindered by Talent

Tax Planning Goals

July 2, 2011

Tax planning strategies can range from minimizing the amount the government takes from your paycheck to blending with investment and estate strategies, helping to mimimize the overall amount Uncle Sam thinks you should pay.

Tax Planning Quadrant Goals

1. File your taxes on time.

2. Maintain good records.

3. Go over your return each year to understand the “big picture” and review for accuracy.

4. Research ways to minimize your taxes. Check with your CPA.

5. Properly budget for taxes due:

Meet with tax advisor before year-end to calculate estimated tax.

Consider the impact of deferring income or expenses to next year.

Find a qualified tax professional. (CPA)

Meet with your CPA every 6 months.

Maintain a good understanding of tax laws.

Complete a 5 year tax projection.

photo credit: MoneyBlogNewz

 

How Do “High Income” Individuals Pay No Tax?

June 6, 2011

The Internal Revenue Service recently released tax data from 2007. 

In 2007 over 2.5 million Americans reported “adjusted gross incomes” of $200,000 or more.  Over 10,000 of them paid zero federal income taxes.   Many more high income taxpayers paid only minimal income taxes .

How did they do it?  According to the IRS the items that produced the largest tax effects on high-income taxpayers were:

1.  Interest paid (including mortgage interest and investment interest)

2.  Taxes paid (Real Estate and State Income Taxes)

3.  Charitible contributions

4.  Casualty and theft losses

5.  Partnership and “S corporation” losses

6.  Tax-exempt interest

What sets these people apart frequently is “TAX PLANNING.”  Higher income individuals utilize professionals to help them in tax planning.  Middle income taxpayers may not have all the same opportunities, but can frequently save considerable taxes with some planning.  

We cannot promise that tax planning will eliminate your tax entirely, but it will give you your best shot to save some money.    

  photo credit: kenteegardin

Automatic IRS Installment Agreements

May 28, 2011

Dear CPAS

I’m not able to pay the full amount due on my 2010 tax return, and would like to file an installment agreement.  Does the IRS approve everyone for an installment agreement?

Brad B., Minneapolis, MN.

Dear Brad:

The IRS has created automatic and streamlined installment agreements.   Taxpayers can have an installment agreement automatically, as long as the liability is paid within five years and they:

1.  Owe less than $25,000

2.  Have filed all their tax returns.

3.  Have not had another installment agreement within the last five years.

4.  Complete and sign the installment agreement form.

Hope this helps,

Joe

photo credit: Valerie Everett

Tax Refund to Fund Fun?

February 23, 2011

As snow melts and the calendar slides into April it means a new season is on the way. No, not spring. Tax season. For many, tax season means a refund check. Then the question becomes: What do I do with that refund?

The answer to that question for many people, at least according to recent surveys, is pay bills. And that is a strong plan—paying down credit card bills or other high-interest loans pays off in the end.

But what about more creative uses for your refund? After all, you can’t spell refund without fun. Consider spending your refund on a trip you have been planning. Or consider other health benefiting activities such as a massage or signing up for a health club membership. Investing money on your health—mental or physical—will continue to pay dividends in the future.

No matter what you choose, make sure you stay within your means and never lose sight of your long-term financial plans.

And if you’re not gettting a refund?  Perhaps you should be visiting somebody as myself for tax planning.  We can help ensure that your financial picture will be bright in the spring of 2012.

photo credit: Just Add Light

What to bring to your tax appointment

March 23, 2010

photo credit: hughelectronic

 

As April looms nearer, and people begin preparing for their tax appointments, I am flooded with questions about what to bring to tax appointments. So, in the spirit of tax season, here are some thoughts on how to prepare for your upcoming tax appointment.

The first piece of advice is also the most important (and probably the most ignored): Keep thorough records throughout the year. Each year you resolve to do this, but come April, you are sorting through shoeboxes, file folders, and behind the dresser for your W-2 or last receipt. Start now. Keep all your records in one spot. Keep a spreadsheet of expenses and deductions. And keep these things up-to-date.

The next piece of advice is to begin preparing and organizing your documents a couple weeks before the appointment. I have seen my share of clients who come to appointments with bloodshot eyes and frazzled nerves—and it’s not because they are worried about how much Uncle Sam is going to take—it’s because they spent the whole night before preparing.

So what do you need to bring to your appointment? Ask your accountant. Most will have a list of what they like to see. Since you asked me, here is a list of commonly needed items. You may not need all of these—but it surely won’t hurt to have them. I recommend sorting your information in the following categories:

Income Documents

* All your W-2s. When you receive one in the mail, keep them together with all your other documents.

* Form 1099-INT of interest statements from banks

* Form 1099-DIV from investments

* Form 1099-B from transaction statements from stock/bonds sold during year. Make sure to bring the original purchase price and date of purchase.

* Form 1099-G for any unemployment insurance received

* Scheduled K-1 received from partnership, estate, or S-corporation

* Social Security statements

* Any additional income (or debts) such as miscellaneous income from jobs, gambling winnings/losses, and alimony paid/received.

Deduction Documents

* Form 1098 for mortgage interest

* Mortgage points on a new home or a refinance

* Real estate taxes

* Vehicle taxes and license tab fees

* College and education expenses for you and dependents

* Interest paid on student loans

* Amount paid for child care providers. Also bring a tax ID number.

* Money spent for job-related travel, tools, clothing that you were not reimbursed for

* Contributions to IRA and other savings plans

* Expenses paid for medical items such as co-pays, prescriptions, hospitalizations, eye exams or glasses, mileage for medical appointments

* Donations to charities and churches. Make sure to bring receipts.

* Home improvements for energy efficiency and medical reasons

* Closing costs for real estate you bought or refinanced during the year

Business Records (If you have your own business)

* A spreadsheet with categorized expenses/income

* A mileage log of driving done for business. Make sure you include the date, location driven, and miles. I only need the total miles, but if you are audited, the mileage log can save you.

* Percentage use of items such as internet and cell-phone for business-related expenses

* Names of contractors, addresses, SSN, and monies paid

* Health insurance premiums

If you keep an office in your home, you are eligible to deduct proportional expenses of your utilities, repairs, and improvements. However, these deductions are complicated and can carry fees when you sell your home later.

Even if you have been less than fastidious in your record keeping, you can start preparing yourself now. If you bring these items in an organized fashion, your tax appointment will go much smoother and get you in and out of the appointment quicker.

And you can make next year the one where you keep the detailed records…

Your primary residence in a divorce

October 10, 2009

photo credit: steakpinball

Joe,

My wife of seven years and I have been talking about divorce. While nothing is finalized yet, I am curious what we can do with our family home. Should we sell it now and split? Wait? Will the selling hurt us coming tax time?

Roland, White Bear Lake

Roland,         

First, let me say I am sorry to hear you are going through such a difficult time. Divorce is not easy—not emotionally and not financially. While I hope you don’t need this advice, it is good you are preparing now.

I am not sure of the exact particulars of the situation—for instance having kids, time lived in home, and current marital status all play a role in determining the best course of action. That said, here is a hypothetical example I give many of my clients:

Let’s say Jack and Jill, a couple who has been married for five years, decide to separate. In the past, in a housing market long, long ago, it would have been easy for the couple to sell the home and divide the profit. If they divorced and filed as “single”, Under IRC §121 Jack and Jill could exclude up to $250,000 of gain on the sale of a principal residence if the ownership and use tests are met. To meet these tests, both Jack and Jill would need to  1) own and  2) use the home as their primary residence for two of the five years preceding the sale. However, if one of the spouses did not meet the test, they might be best off staying married until  year end and file jointly.  This way Jack and Jill could claim $500,000 so long as they both meet the use test and one of the two meets the ownership test.

Additionally, reduced exclusions are available to those couples who fail the two out of five year test due to health, employment, or marital changes—think divorce or lay off.

However, the plummeting real estate market has turned many homes into toxic assets. Many couples cannot afford to sell their homes at their current value. In that situation, Jack and Jill may decide to have Jill continue to live in the house, and pay Jack his portion when she sells or refinances the house. However, this is problematic in a couple respects.

First, with the current real estate market, it may be a considerable time before the home is sold at a favorable price, leaving Jack waiting for his potential payout. Second, Jill would need to sell the house within three years of the divorce for Jack to be eligible for the exclusion.  This time frame can be extended to six years if the former spouse is granted use of the home by a divorce “instrument.”

Also, Roland, make sure you keep the lines of communication open with your former spouse. This will provide a chance to communicate a strategy that is most advantageous to both of you. Then make sure you find a tax professional to handle the situation should the divorce proceeding continue. Not only will they provide you the best strategy to minimize your taxes, they will also protect you so you don’t unwillingly underpay your taxes and be liable for penalties years from now. The rules governing divorce and deductions are complex and nuianced.  Also, it may sound ideal to use the family CPA—they  have done the family taxes for years afterall. However, in divorce proceedings it is best for each party to have his and her own accountants, as some of the decisions that could be advantageous to one client, might be disadvantageous to the other. You want to make sure your CPA goes to bat for you.

Hope this information helps. As always, contact me should you need further advice. Best of luck reaching an amicable solution.

Late 2009 Tax Planning – Equipment Purchases

October 6, 2009

Joe,
Are there some tax rules my small business could take advantage of before the end of 2009?

Brad, Bloomington, MN

Dear Brad, 

That’s a good question. There are two favorable items due to expire on December 31, 2009.

1. Bonus depreciation. The 50 percent first-year bonus depreciation (for new equipment) is due to expire at the end of 2009. What this means is that 50% the cost of the new asset may be depreciated in addition to using the standard depreciation tables. Also, the $8,000 additional first-year depreciation allowed for new vehicles placed in service ends in 2009. For bonus depreciation to apply, the equipment must be placed in service by the end of 2009.
2. Code Section 179 expensing. Although this does not affect many clients, the limit for Code Section 179 expensing drops from $250,000 in 2009 to a maximum of $125,000 in 2010.

The rules are somewhat complex and you should review the specifics with your tax professional. 

For more information, visit:  http://www.irs.gov/businesses/small/article/0,,id=213666,00.html

Joe

Reasonable Compensation for S Corporation Shareholders

August 5, 2009

photo credit: 16 Miles of String

“Reasonable Compensation” in regard to S Corporation shareholders has been a hot topic with the IRS.  Recently there have been several court cases that support the position of the IRS that:

S Corporations must pay reasonable wages to a shareholder-employee who performs services to the corporation, before non-wage distributions may be made to the shareholder-employee.  What this means is that S Corporation shareholders are required to pay payroll taxes on what should be considered as “reasonable compensation” for services.

What factors should be considered to determine ”reasonable compensation”?

A.  Training and expertise

B.  Duties and responsibilities

C.  Payments to non-shareholder employees.

D.  Time and effort devoted to the business.

E.   What comparable businesses pay for similar services.

Please contact us for further guidance on this issue.

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