FEBRUARY 8TH, 2010
By CPA SAM
The IRS recently released a new list of Frivolous Tax Arguments. This list shows all the ways people try to avoid paying their tax bills. The problem is that most have been disproved in court many times. In 2006, the U.S. Congress increased the penalty for filing a tax return with one of these or some other frivolous argument from $500 to $5000! Is it really worth the risk?
I recommend reading through this document just so you are aware if anyone tries to pull one of these on you. Many of these arguments are so ridiculous that they could be used in late night comedy programs. Sometimes even tax preparers attempt these unfortunately. If that is the case, you know it is time to find a new one. Many times, water cooler conversations with fellow employees lead to a mistaken belief that some position is legitimate when it is in fact already in this document.
Some of the more famous ones are:
-The tax system is voluntary
-My income does not fall under the definition that requires taxation
-The United States consists of only DC, territories and enclaves.
In short, these claims simply don’t work. If you don’t like the tax laws the way they are, contact your Congressman or woman. They write the laws that the IRS enforces. If enough support is garnered from people wanting a change, Congress will listen. If they don’t, they don’t win at the next election cycle. There are many legal ways to reduce taxable income. Talk to your tax preparer before filing any returns yourself. They can help you find the hidden legal deductions for your situation.
JANUARY 18TH, 2010
By CPA SAM
The IRS issued the new form 5405 for those wishing to claim the Homebuyers Tax Credit on their 2009 tax returns. The new form is for those who have not yet claimed the credit using an amended tax return 1040-X. Now required, an executed copy of form HUD-1. This documentation is required simply to reduce the fraud that was occurring in this program during 2009. When you visit your tax preparer, you will need to bring a copy of this document along with your other standard supporting paperwork. Inclusion of this document in your tax return filing means you must file on paper and cannot use e-file. Unfortunately, this also greatly increases the time before you can get your refund.
On a side note…
The IRS is requiring tax preparers who file more than 10 returns to file all of them electronically next year. However, if Congress comes up with another idea that ultimately requires paper filing like this one, which directive am I to follow? As a preparer, I am attempting to get all my clients on e-file. Why is there no provision to attach scanned documentation to a return that is filed electronically? We all have scanners and the reduction in paper and handling time would be significant if all supporting documentation could be included via pdf at the time of return submission.
JANUARY 15TH, 2010
By CPA SAM
Q. My payroll person told me that the filing status on the W-4 doesn’t necessarily mean the same thing as my marital status. Is that true? What is filing status?
A. Filing status on the W-4 and filing status on your tax return are not necessarily the same thing. The W-4 drives withholding only. The withholding formulas issued by the IRS come in only two flavors, married and single. Any other situation is handled by the number of allowances claimed. Other situations include head of household, children and multiple jobs. In certain situations, if married folks claim married on their W-4s, they will not have enough withholding. By switching over to the single withholding formula, additional withholding takes place. Some companies use the W-4 to determine the marital status of their employees. This is not a good policy. In fact, if an employer receives a lock-in letter for a specific employee, he/she may be directed to withhold at Single with zero allowances regardless of the marital status of the employee.
On your tax return, the rules are different. You are only allowed to claim married if you are in fact married. If you are married, you cannot claim single. There is a special status called married filing separately for those who wish to use it. Certain situations may warrant this for better tax treatment. The key here is that your marital status on the last day of the tax year determines your status for the tax return for that year.
I hope this helps.
JANUARY 8TH, 2010
By CPA SAM
Hooray!! The annual update to the document every employer is anticipating finally occurred. Okay, maybe not all employers were as excited to see this as I was. Publication 15 should be every employer’s best friend. This document contains instructions on everything from obtaining an Employer Identification Number (EIN) to withholding, to employer taxes.
How does a business determine if it has employees or contractors? Read page 8 section 2.
What if I want to hire a family member for an employee? Read page 9 section 3.
How does the IRS define wages? What is included? Read page 10 section 5.
How much do I withhold from my employees’ wages? Read page 39 and 40 if you want to use a formula. Reference pages 41-60 if you wish to use the charts. You could also use PaycheckCity.com for this since all the values have already been programmed into all the calculators for the last 10 years.
Have you considered employer costs like FUTA (unemployment)? Read page 30 section 14.
Do you get the hint yet that this is a very important document? Some of the most frequent questions I get from employers through the American Payroll Associations member hotline are related to supplemental pay. This could be bonuses, commissions, overtime pay etc. There are specific instructions in Publication 15 for the right way to withhold from these types of payments.
Each state that has required withholding will have a similar document. Employers should also find and download a version of the state document to make sure they understand specific requirements for their state that may be different than the federal information.
DECEMBER 7TH, 2009
By CPA SAM
Q. I borrowed $15,000 from my 401(k) in Feb, 09. In May, 09, I was laid off from my job. My only options for the loan were to pay it in full (not going to happen) or default. They would NOT allow me to continue making payments and would not transfer the loan to my new employer! Anyway, can you tell me how to calculate the penalty that I will be charged when i file my taxes for 2009?
A. Generally, the fees charged for early withdrawal amount to a 10% penalty. Sometimes the vendor of the company’s 401(k) plan will take the 10% penalty from the proceeds when someone cashes out a plan. However, in your situation, there was no way to know this would eventually be considered a cash out. Because the contribution to the plan is pre-tax for federal purposes, you will pay regular income tax on the withdrawal as well. This means the calculation of total income on your tax return for 2009 will include the loan balance that was forgiven. Your taxable income will be higher than it would have been without this dollar amount. How much higher is to be calculated between you and your accountant or tax preparer. You can run a calculation for estimated annual liability using Publication 919 from the IRS. Beware!!! This process is like completing a simulated tax return. If you miss one number in your calculation, the whole thing could be wrong. This of course does not help you find your tax liability number.
If you find after working through Publication 919 that you will be short on your tax liability payments, you can adjust your withholding with your new employer for the remaining periods in the year. This is a good idea to ensure that you don’t have any underpayment penalties at tax time. Also, you can estimate what your check would look like using any changes you might make to your withholding allowances using the free Paycheck Calculator at PaycheckCity.com.
JULY 22ND, 2009
By CPA SAM
Q. I followed your advice and had my payroll department withhold based on W4 stuff instead of a flat percent. How do I know if I’m on track?
A. That’s a rather amusing question actually. Publication 15 and the W-4 both require that you use only marital status and number of allowances on the form. If that is not the case, then the form is invalid and you revert to the status of Single-0 which is the highest regular withholding amount available. You are not permitted to use a flat percent when calculating your federal withholding. Your payroll department should already know this.
To answer your question, you have two options when deciding if your withholding needs to be adjusted. I recommend to my clients that they do the annual check up in late August or early September. That way, if there is gross over or under withholding, there is still time to fix it before the end of the year without breaking the budget. Your CPA or tax planner of course is the first place you should check. He/she will know your financial situation already and can quickly compare your withholding to your expected liability.
Secondly, you could visit the IRS website and download Publication 919. This document is not for the faint of heart. Basically, you will be completing a tax return using your last paystub and estimated information from your tax return.
Remember, the objective of withholding for federal and state purposes (not Social Security and Medicare) is to have your payments (withholding) match your liability (from your tax return) so that your refund or extra payment with the 1040 is as small as possible.
On a side note, if you look in the right margin of this blog, you will see my most recent Twitter posts. Feel free to follow me on Twitter for daily financial thoughts.
MARCH 4TH, 2009
By CPA SAM
The IRS just released it’s taxpayer statistics for the 2006 tax year. With all the press dedicated to analyzing the new administration’s tax proposals, I thought it would be good to look at just who is paying taxes these days.
First, the average tax rate paid on all returns was 13.8%, which is slightly higher than the year before. There were 138.4 million tax returns filed that year of which 67% had some level of income tax reported. This is line 61 of the 1040, line 28 from the 1040A and line 11 of the 1040EZ form. I think if more people looked closely at how much tax is assessed for their situation, they would be stunned.
Back to the statistics, the top 1% of taxpayers paid 39.9% of the tax paid that year. The top 5% of taxpayers paid 60.1% of the total tax. The top 5% of taxpayers includes those with Adjusted Gross Income of at least $153,542. That means 95% of the taxpayers only pay 40% of the taxes on returns.
What does this mean? There is only so much money that can be squeezed from the population of taxpayers. If one takes into consideration the total Federal, Social Security, Medicare, State, Local, sales and property tax that each person in this country pays, it is truly a staggering number that in some cases could exceed 50% of income.
As I have stated before on this blog, individual consumers must find a way to live within their means. No person can continue to spend more than they take in. Eventually, they must repay the debts. Invariably, in the lives of ordinary taxpayers, we have unforeseen issues occur that require we maintain a “slush fund”. If no financial cushion is available, the average person would be forced into bankruptcy. Let’s hope our federal, state and local governments can learn this principle soon as well.
JULY 2ND, 2008
By CPA SAM
Q. I looked at the Stimulus payment schedule and mine was due almost 2 weeks ago. What do I do?
A. The answer to this lies somewhere deep within the bowels of the IRS. While most people are getting direct deposits and checks according to schedule, it was a huge undertaking to get that much money to that many people in that short of a time frame. That being the case, there have been Read more »
Q. What happens if I no longer have the same checking account for my direct deposit to go into with the Economic Stimulus Check?
A. The IRS has a great section of Frequently Asked Questions regarding the Economic Stimulus payment. Many questions, like this one are already answered. According to the IRS website at this address, “Typically, the direct deposit will be rejected. After the IRS receives Read more »
MARCH 14TH, 2008
By CPA SAM
Q. What about this tax rebate everyone is talking about? Is it real? How do I know how much I will receive?
A. It seems like everyone is excited about the prospect of getting money from the government. The IRS has begun issuing lots of guidance on exactly how to go about getting your share of this payment. Because this topic is so complex, I will discuss in two parts. Today, you get the first section.
The most important component is that you must file a Tax Year 2007 tax return in order to receive your payment. That means even seniors must file a return even if they normally fall below the filing threshhold. The IRS made the Free File system available for this class of citizen. Other stipulations include Read more »
