Tax Guru – Ker$tetter Letter

Helping real people win the tax game.

Loose Lips…

Posted by taxguru on December 23, 2016

With holiday parties and adult beverages loosening people’s inhibitions, it’s a good time for another warning that if you have tax or other secrets that you don’t want the IRS to know about, keep your mouth shut.  Just as with people confessing to all kinds of nefarious acts on social media, there are also numerous cases where IRS agents catch people who feel safe bragging about their abilities to cheat on their taxes, while trying to impress people at parties.  There is a name for those folks; idiot blabbermouths.

IRSAgentAtParty(12-23-2016)

Posted in IRS | 1 Comment »

Gifting Confusion

Posted by taxguru on December 16, 2016

Q:

Subject: S Corp Gifting 

I stumbled into your web site back in 2007 when I was thinking of changing from a C Corp to an S Corp.
Very helpful information written for the non-accounting business owner.

My company (S Corp) has had a banner year and I am now facing a HUGH tax check payable to Uncle Sam.

Here is my question: Obliviously trying to lower my bottom line as much as I can before years end, can I
gift 2 of my best employees $100K each. Our company would pay the taxes for them but then they would
gift back to me $50K each making all of us happy and lowering my bottom line?

I love these guys and they have been employed here for over 35 years each. I have already given them
a bonus of $20K to employee #1 and $13K to employee #2 this Thanksgiving. They are both happy to
receive and willing to file form 709 on their taxes for a cut of the $100K. Can I do this?

Thank you for any help –

 

A:

I don’t want to seem harsh, but I’m getting the impression that you have been trying to navigate the tax waters on your own, without the assistance of professional tax advisors. Any tax pro would have been able to explain how misguided your proposed gifting plan is.

Your ideas regarding the use of gifting as a tax savings strategy are dangerously off-course. Here are just a few of the reasons why this idea is completely wrong for achieving your goal of reducing your 2016 taxable income.

Gifting is a strategy for reducing future Estate (aka Inheritance) taxes and does not produce any kind of current income tax deduction. You could give away everything you have and it would have zero effect on your current year income taxes.

Gifting can only be done by individuals, because only humans are subject to the Estate Tax. Corporations have potentially infinite lives, so they are not ever subject to the Estate Tax.

Gifts have to be no strings attached. Having the recipients gift you back half of the gift clouds what the transaction really is.

True gifts are tax free to the recipients and not deductible by the giver, unlike wages and bonuses, which are reported on W-2s and fully deductible by your business. If you were to gift any person more than $14,000 during a calendar year, you as the giver would need to file a Form 709 Gift Tax return and either pay Gift taxes or utilize part of your lifetime exclusion. The gift recipients do not file 709s. Only the givers do.

There are a number of simple ways that you can still actually reduce your 2016 taxable income. Since most of them will need to be done by 12/31/2016, you need to start working with a professional tax advisor ASAP.

Good luck.

Kerry

TaxCoach Software: Are you giving your clients what they really want?

Posted in Gifting | 1 Comment »

Lower IRS Mileage Rates for 2017

Posted by taxguru on December 13, 2016

The recently lower fuel prices have caused IRS to reduce their standard rate per mile deductions for business, medical and moving in 2017.  Only Congress has the power to modify the per mile cost that can be claimed as a Schedule A Charitable Donation from the 14 cents per mile rate that they cemented into the Tax Code rather than allow it to fluctuate with current costs as calculated by IRS.

From the IRS press release:

Beginning on Jan. 1, 2017, the standard mileage rates for the use of a car (also vans, pickups or panel trucks) will be:

  • 53.5 cents per mile for business miles driven, down from 54 cents for 2016
  • 17 cents per mile driven for medical or moving purposes, down from 19 cents for 2016
  • 14 cents per mile driven in service of charitable organizations

While these rates are for 2017 miles driven, to be claimed in 2018 when preparing 2017 1040s, having this info now is very useful for employers who use the IRS rate for their own employee reimbursement policies.

My Standard Reminders in regard to deducting vehicle expenses:

Most State tax agencies synchronize their allowable deductions with what IRS allows; but some don’t.

For heavy business use of vehicles, it’s a good idea to keep track of actual operating costs.  In many cases, it is possible to switch back and forth between standard rate and actual expenses from year to year. 

The IRS rate is based on average costs that may not represent your actual operating costs.  For example, if you are like many motorcyclists and owners of older cars, who use the much more expensive Ethanol Free gasoline to prevent the expensive carburetor problems that Ethanol causes, your fuel costs will be much higher than what IRS has built into their standard rate. 

 

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Another April 18 National Tax Day

Posted by taxguru on December 11, 2016

Practically forever, everyone in the US has associated April 15 with the dreaded income tax deadline.  It’s become such a part of our culture that it is treated as a sick kind of holiday that fosters celebrations and business sales of the kind we see for other more traditional holidays.

For the second year in a row, the calendar and a special Washington DC holiday have aligned so that we have a little longer before 2016 individual income tax returns are due.  As IRS has announced in an official press release, Tuesday, April 18, 2017 will be the magic day for 2016 1040s. 

Most States automatically synchronize their due dates with IRS’s, but you should check with your own State’s tax agency to be certain.

For this coming tax return filing season, there are also going to be several other new due dates for 1099s, 1065s, 1120s and various other types of tax returns.  I will be posting more details on these new deadlines in the next few weeks. 

   

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Trump Tax Change Proposals

Posted by taxguru on December 9, 2016

The TaxCoach folks have produced a very concise seven page pdf pamphlet with some of the possible changes the Trump Team may try to get passed after they assume power.  You can download it from:

Donald Trump Tax Change Proposals

As with most of the concepts promoted by TaxCoach, they are forward thinking ideas for people, especially small business owners, to use to reduce the amount of their wealth that is confiscated (stolen) by our rulers in government.  Many of the Trump proposals do have opportunities for modifying tax reduction techniques. 

While most of the suggested strategies are at the discretion of the taxpayers. the last one probably isn’t an optional choice for most folks, but would be a win-win if the Trump Team can eliminate the insidious Marxist grave-robbing Estate Tax.

Avoid the estate tax by deferring death to 2017 or later

TaxCoach Software: Finally! Plain-English Tax Planning That Builds Your Business!

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Tax Changes Under the Trump Administration?

Posted by taxguru on November 9, 2016

Now that Hitlery is out of the equation, we don’t have to waste time and energy worrying about the trillions of dollars in new taxes she was promising-threatening.  We can now focus on the what changes we might be seeing over the next few years under President Trump, along with the GOP controlled Congress. 

A good start at analyzing the changes we can expect is the following news release from TaxCoach, one of the most useful resources for any tax pros who are interested in keeping up on the most state of the art tax savings techniques for their clients.

Trump Won…Now What?

On January 20, Donald Trump will take the oath of office as the 45th President of the United States. He’ll have the full support of a Republican House and Senate, meaning an end to the gridlock of the past six years. What effect will his inauguration have on your taxes?

Trump has proposed a conventionally Republican suite of changes: lower rates, new deductions for families, and incentives to repatriate foreign earnings. At the same time, he has proposed to limit certain breaks and cap overall itemized deduction.

However, these are just the latest of several proposals Trump floated during the campaign. Trump appears to be less focused on policy details than on broad themes, so we shouldn’t be surprised if he lets Congressional Republicans take the lead on tax planning policy.

 

Individual Taxes

• Cut brackets to three: 12-25-33%

• Boost standard deduction to $15,000 ($30,000 for joint filers)

• New deduction for individual health insurance premiums

• New deduction for child care costs and “dependent care savings accounts”

• Limit itemized deductions other than mortgage interest and charitable gifts

• Cap itemized deductions at $100,000 ($200,000 for joint filers)

• Tax “carried interest” as ordinary income

• Repeal Alternative Minimum Tax

• Repeal “Obamacare” taxes

Estate Taxes

• Repeal Gift & Estate Tax

• Repeal stepped-up basis on gains over $10 million

Corporate Taxes

• Eliminate deferral of tax on foreign business income

• Impose 10% repatriation tax on accumulated profits of foreign subsidiaries

Repeal most business tax incentives (except R&D).

TaxCoach Software: Are you giving your clients what they really want?

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Einstein’s Tax Dilemma

Posted by taxguru on November 5, 2016

The old worn-out cliché that something isn’t Rocket Science does have a connection to the realm of taxes with the famous quote from Albert Einstein (the famous physicist and not the actor who was born with the same name, but changed it to Albert Brooks). IRS even includes this on its page of humorous tax quotes.

The hardest thing in the world to understand is the income tax.”

For a very interesting look at the history of this quote from one of the planet’s most intelligent residents, check out this article from a website I just discovered courtesy of Mr. Google, QuoteInvestigator.com

In this article, author Garson O’Toole explains the history of this famous Einstein quote. It actually came from a 1963 letter to Time magazine from Einstein’s tax advisor-preparer, Leo Mattersdorf of New York City.  It adds a bit more depth and context to the quote we are all familiar with. 

…the professor turned to me and with his inimitable chuckle said: “The hardest thing in the world to understand is income taxes.” I replied: “There is one thing more difficult, and that is your theory of relativity.” “Oh, no,” he replied, ”that is easy.” To which Mrs. Einstein commented, “Yes, for you.”

I encourage anyone who is interested in learning more about Einstein’s feelings about taxes to read the full article.

 

I am discussing this as an introduction to some pictures we took a few days ago, while visiting the Madame Tussauds Wax Museum in Orlando.  Unlike other wax museums I have visited in San Francisco and Branson, the statues are not chained off, but are open and accessible for picture taking.  Sherry took these pics with her iPhone. 

1KerEinstein1KerEinstein2

At first, I thought some of the statues, including this one, might be shorter than the people actually were.  However, checking online, the records indicate that Einstein was around 5’7”, so this does look realistic.

 

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Catching the Scammers

Posted by taxguru on October 27, 2016

There has been a lot of press coverage about the scumbags who call or write to people, impersonating IRS agents and demanding payments of fictitious tax debts.  We have received plenty of those communications, as have some of our clients.   So far, nobody that we know has fallen victim to these sleazebags.  However, it appears that many people have forked over some serious amounts of money to those a-holes.

When I receive a scam email from an IRS imposter, I forward the entire email, including any attachments, to the IRS’s special email address, phishing@irs.gov.  Some times I receive an acknowledgement back from IRS, and some times, nothing back.  What we never receive back are details of how well they are doing at tracking down, stopping and prosecuting those criminals. 

Every so often, a story pops up in the press about the progress against the scammers, such as this in USA Today.

Feds charge 56 in fraud scheme that siphoned $300M from 15,000 victims

With the ease of setting up these kinds of scams, it would be foolish to let our guard down just because these particular gangs have been caught.  For every internet criminal who is nabbed, dozens more pop up to take his/her place.

It is interesting to scroll through the actual indictment of these crooks.  Most of the people named are in India, so who knows how many of them the USA can actually catch and prosecute.  There are a fair number of names with USA locations, including several from here in Florida. Hopefully, they are not donors to Hitlery, the Clinton Crime Family Foundation, or the DemonRat Party so they can be prosecuted and severely punished.  

 

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IRS’s 2017 Inflation Adjustments

Posted by taxguru on October 26, 2016

As anyone who follows the tax systems in this country knows, they consist of a crazy quilt of thousands of different provisions.  Some of the provisions have dollar amounts that are never changed without an official Act of Congress.  As a result, many of these have been in the system at the same amounts for decades and have not kept up with inflation.

One of the biggest such unchanged figures is the $250,000 per person tax free exclusion of gain from sales of primary residences, under Section 121. This has been the exemption amount when this provision took effect on May 7, 1997 and is still that exact same amount today.  While that amount does cover the gains that most people have when they sell their homes, especially in “fly-over” parts of this country, it is far from adequate to cover the gains sellers in expensive areas have, such as on the coasts.

Other provisions of our tax systems have been written with annual inflation adjustments in order to keep up with the cost of living.  The most important area is with the “progressive” (aka “soak the rich”) tax rate structure that we have that assesses much higher percentages on taxpayers who earn more money than others.  Before our rulers in DC added annual inflation adjustments to where these tax brackets begin and end, many people were victims of what was called “Bracket Creep.”  Their income was growing at the pace of inflation, but they were finding themselves pushed into the higher percentage brackets.  With annual inflation adjustments of the brackets, taxpayers whose income only rises at the same rate as the CPI should stay in the same marginal brackets.

Interestingly, the inflation adjustments for tax rates only apply to individual taxpayers.  The tax rate structure for C corporations has been pretty much the same for decades and does not change until our all powerful rulers in DC so decree.

This is a longer than normal introduction to the IRS’s official calculation and announcement of the inflation adjusted amounts for 2017.  These are very handy for tax planning purposes. 

Some States also have similar kinds of inflation adjustments for their state level taxes, but they are normally announced much later than IRS’s timetable.  For example, the California Franchise Tax Board just announced its 2016 inflation adjustments on Sept 7, 2016.

IRS Summary of 2017 Changes:

In 2017, Some Tax Benefits Increase Slightly Due to Inflation Adjustments, Others Are Unchanged

IRS Details of Changes: 

Revenue Procedure 2016-55  (30 page PDF)

 

Annual Gifting Exclusion:

The amount that is exempt from Gift Tax reporting is not adjusted every year.  It is only adjusted when the cumulative CPI change since the most recent change is close to $1,000 so the amount can always be an even multiple of thousands and not some odd looking number.  Since I constantly receive questions about gifting, I want to point out that the 2016 inflation has been so low that the annual exclusion will remain at the same $14,000 per donor per donee amount for 2017 as it has been since 2013.

 

 

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Late Filing 2015 1040s Without Penalties

Posted by taxguru on October 17, 2016

Today, October 17, is the expiration of the automatic six month extensions that were filed with IRS and the States back in April.  While most people have been able to get their tax returns in by now, many have not.  For those folks, it’s not as serious a situation as it may seem, as I explained earlier today in this email exchange with a client.   

From the client:

Subject: Extension for personal taxes

We are still dealing with S’s medical issues and have not been able to finish getting all the information together for our personal taxes. Would you be able to file another extension for us?

Thanks much,

 

My Reply:

IRS no longer has a form to request additional time to file after the first six month extension expires. 

Late penalties are based on the amount of taxes due with the return.  Nothing due, no penalty.

If you do end up owing money, IRS & DFA will waive the late penalties for Reasonable Cause.  The most common Reasonable Cause that is acceptable justification for late filing is health problems of the taxpayers and/or their family.  As cold-hearted as their reputation is, IRS is actually very compassionate when it comes to waiving late penalties due to health and medical situations.

So, you should focus on getting S well and then worry about your 2015 tax returns. 

Good luck.

Kerry 

TaxCoach Software: Are you giving your clients what they really want?

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