Taxes Are The Symptom

While it should be obvious, I always need to remind people that our ever increasing Federal tax burden is merely the symptom of a much bigger problem. The root cause is this, a non-stop expansion of the reach and cost of running all of the programs that our rulers in DC insist on sticking their noses into. Over 2.2 trillion dollars need to be taken from the people each year. The chances of this number ever decreasing in our lifetimes are slim to none; so you can either accept the fact that you have an increasingly greedy financial partner or you can take steps to minimize the damage.

KMK

Not All or Nothing

As I have been advising for decades, there is no quicker way to reduce one’s tax burden than by using a C corporation. However, too many people shoot themselves in the foot by not consulting with a professional advisor who understands how to most effectively utilize the corporation. I have touched on several of the most common mistakes made over the past few years and will continue to comment on others.

Most corporations are an evolution from a Schedule C sole proprietorship. Moving to a C corp allows huge savings in both income and Self Employment taxes, as well as allows for the corp to pay for many tax free benefits for the owners, such as medical, childcare, travel and education costs. Most people believe that once the corp is established, the Schedule C business should be terminated. That’s not a good idea for a number of reasons, such as family employees and self employed retirement accounts.

One of the big tax breaks that many people overlook is the special exemption that there is for employing their kids in their business. Dependent children under 18 are statutorily exempt from all of the payroll taxes that are normally due for unrelated employees. Rather than paying kids a non-deductible allowance, it is a much more tax efficient means to pay them family wages for helping out in the business. How much you pay is up to you. Many people pay their kids up to the amount of the standard deduction ($4,750 for 2003) so that they (the kids) don’t have to file income tax returns. However, I have seen plenty of cases where teenagers are paid $20,000 or more per year for working in their parents’ businesses. While the kids obviously have to file tax returns and pay tax on this, they are usually in a much lower tax bracket than their parents. Income shifting in this manner has been around much longer than I have; but can still save some serious money.

The reason that it’s a good idea to keep at least one Sch. C going in addition to the C corp is to be able to channel some tax free family wages for your kids. The corp pays your Sch. C business some money for generic services. Your Sch. C business then pays your kids for helping out. It’s a wash. Corporations aren’t human and thus can’t have family employees, so the only way to avoid the payroll taxes on wages for your kids is to run them through your Sch. C. What you call the Sch. C business isn’t really important. It should just be whatever will allow you to deposit the check from your corp into your personal bank account. Your corp should also report those payments to you on a 1099-MISC.

Another common mistake I have seen is for people to bleed out all of the profits from their corporations by paying all of the income out to themselves. This defeats the benefit of smoothing out income between the 1040 tax brackets and the 1120 brackets. With the punitive tax structure in this country, the worst thing is to have all income show up on one tax return, 1120 or 1040. With accurate up to date books, as well as a different fiscal year for the C corp, it is very easy to smooth income out so that neither the 1040 nor 1120 goes over the 15% Federal tax bracket.

KMK

Tax Division of the Justice Department

IRS isn’t the only Federal agency dealing with tax cheats. This is an interesting look at how the serious cases are dealt with, especially many of the tax protestor schemes that I have been warning about.

Again, it seems to me that it would be a good idea for the convictions of tax cheats to be more widely publicized as a means of discouraging others from following the lead of such charlatans as Bob Shulz, Irwin Schiff and Lynn Meredith.

Phone bill �cramming� spikes again

Phantom charges sneaked onto statements across the U.S.

It’s crucial to check your monthly phone bill to catch these sneaky charges. Same thing with credit card bills.

To the DemonRats, taxpayers are a bottomless pit of money.

IRS E-File Not for Everyone

It looks like I’m not the only tax pro who recognizes the limitations to the the IRS e-filing program and refuses to use it for clients.

1099 Recipient Misconceptions

During this time of year, as people are receiving their 1099 and W-2 forms and preparing to give everything to their tax preparers, it’s a good time for a refresher on some of the most common mistakes made regarding these documents.

First is the perception many people have, that if they do not receive a 1099 or W-2 from payers, the income is tax free. With the legal requirement for 1099-MISC forms to be filed when annual payments exceed $600, the common belief is that any income below $600 is tax free. Not true. All income received for services is taxable, whether or not a 1099 is received.

In the unlikely event that you are selected for an IRS audit, the auditor will come prepared with a listing of 1099s that have been received reporting income that you were paid. The auditor will also demand to see all of your bank statements for the year under review, plus the statements for the previous December and subsequent January. The auditor will total up all of the deposits shown on the bank statements for the year under audit. S/he will then try to match up the total deposits to the gross income you reported on the various schedules of your 1040. While some kinds of deposits are not technically taxable or reportable income, such as transfers from other accounts, loan proceeds or gifts, the burden of proving their tax free source is on you. That is why I have always advised making photo-copies of each and every deposit you make. If you can’t prove that a deposit is from a tax free source, IRS will consider it unreported taxable income. Trying to defend not reporting compensation with the argument that there was no 1099 received will get you nothing more than a laugh from the auditor.

Accuracy: Believe it or not, information on 1099s and W-2s is often wrong. The burden of verifying their accuracy is also on you. You should never accept the amounts as gospel before you have gone through your records and matched up the totals. This is another reason why it is crucial to have all of your personal accounts set up on QuickBooks. If the amount is wrong, notify the payer ASAP to correct it. If you do this before the payer has sent the IRS its copy (which isn’t due until February 28), it will save everyone a lot of grief later on. If the change is made after the original forms have been sent to IRS, there will probably be a mis-match with IRS computers now having two 1099s, even though one may have the tiny “CORRECTED” box checked.

Attaching: I constantly hear people complain that they can’t finish their tax returns because they haven’t yet received all of their 1099s. This is a bogus excuse for a couple of reasons. First, the amount of income you received and will be reporting on your 1040 is not dependent on what shows up on the 1099. Your records (ideally QuickBooks) will have those amounts. Second, 1099s are not required to be attached to 1040s. W-2s are required to be attached to 1040s if there has been any Federal income tax withheld. Same thing with the States. They will not give you credit for those withholdings without the W-2s attached.

KMK