EFTPS

You can save time and trouble by paying your taxes online. If you file estimated taxes through the mail, you have to fill out four quarterly Form 1040ESs, make sure you mail them before the due date and hope the mail arrives on time. Using Form 1040ES you are not limited to making your payments quarterly. Some people prefer to pay monthly.

I like to pay as many bills as possible online so I don't have to worry about forgetting to put a stamp on the envelope or having it lost or delayed in the mail. Once I sent a credit card payment in before it was due, but it was delayed over a month in the mail. Then I was charged interest on the card. I thought it had been lost, so I added it to my next bill and ended up with a credit balance due to paying about $1000 more than the amount I owed.

The IRS prefers that you pay electronically. It is less work for them and less trouble for you.

You can enroll in the IRS electronic payment program, (EFTPS) and pay quarterly, monthly or however you choose. You can prearrange payments to be charged to your bank account when due. If you need to change the scheduled payments you can do so and you can send in an extra additional payment for unanticipated extra income (in case you win the lottery or something).

After you enroll in EFTPS, you will receive a confirmation package by mail. In a separate mailing you will receive an EFTPS Personal Identification Number (PIN) with instructions for activating your enrollment. Employers who apply for and receive a new Employer Identification Number and have a federal tax obligation are automatically enrolled in EFTPS Express Enrollment to make their Federal Tax Deposits.

For more information you can visit IRS.gov. Click on the e-file logo and look for "Electronic Payment Options" and the EFTPS logo. To enroll, visit EFTPS.gov or call EFTPS Customer Service at 800-555-4477.

Link: EFTPS Web Site

TAX SIMPLIFICATION as we once knew it-

-TAX SIMPLIFICATION (it started out pretty simple)

The 1913 Form 1040 was four pages long.

Page 1 summarized everything in 8 lines:

1. Gross Income
2. General Deductions
3. Net Income
4. Dividends and corporate-related income
5. Tax Withheld
6. Exemptions $ 3000-$4000)
7. Taxable Income
8. Tax (1% if your taxable income was $20,000-$50,000) If you made over $ 500,000 the tax was a whopping 6%.

Page 2 was a summary of nine categories of income which were to be included in lines 1 and 4 of page 1.

Page 3 was a summary of “general deductions” consisting of six categories. One category was “a reasonable deduction” of depreciation. They didn’t even use the word depreciation, but called it an allowance for wear and tear.

Page 4 was the instructions.

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This information is not intended to be advice to the recipient. In compliance with Treasury Department Circular 230, unless stated to the contrary, any Federal Tax advice contained in this Blog was not intended or written to be used and cannot be used for the purposes of avoiding penalties.

LATE 1099s FROM BROKERS

LATE 1099s FROM BROKERS

Over the past couple of years, many brokerage companies send amended 1099 Form often after their clients have already prepared their tax returns based on the first 1099s.. Many investors receive as many as of three amendments, with the latest ones being received well after the April 15 tax deadline.

MAY GET WORSE THIS YEAR
It will probably be worse this year since tax-exempt interest has to be reported on Forms 1099-INT and many brokers will be late adapting to this new requirement.

NOT JUST ONE OR TWO BROKERS
The problem is not with just one brokerage firm, but, I’ve been told that it is almost universal.

CAN’T MEET APRIL 15 DEADLINE
If you get amended 1099s meeting the April 15 filing deadline may not be a realistic goal. But if you file late, you could be penalized for both late filing and late payment.

YOU CAN FILE AN EXTENSION REQUEST
If you don’t owe any tax, then there is no penalty, even if you file late. You could calculate your tax based on the initial set of 1099s you receive, but instead of filing the return, you could request an extension with Form 4868 and send a payment with the extension request if you expect to owe. This would give you until October 15 to file.

IF YOU DON'T SUBMIT AN EXTENSION REQUEST AND FILE LATE
Even if you file late and don’t send the extension request, there is no penalty or interest if you do not owe any tax.

YOU CAN FILE AN AMENDED RETURN
If you are substantially overpaid and want the refund, then you might file before April 15, then submit an amended return, Form 1040X, if late 1099s indicate changes are necessary.

PAYING MOST OF YOUR TAX NEAR YEAR-END COULD TRIGGER PENALTIES
Unless you indicate otherwise by filing Form 2210, the IRS assumes your income was received equally throughout the year. If your payments are skewed toward the end of the year, you could be penalized even if you paid a sufficient amount in total. However, if you request an extension and pay MORE than you owe, the IRS may send the refund without checking to see if you paid in equal installments.

YOU CAN PAY YOUR TAXES ONLINE
If you sign up for the Electronic Federal Tax Payment System (EFTPS), you can make your tax payments using the internet. To look into that option, go to http://www.eftps.gov/

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NONTAXABLE IRAs

NONTAXABLE IRAs CAN BE CONFUSING

The form you must prepare is not worded in a way that is easy to interpret. If you have made both deductible and nondeductible contributions to traditional IRAs, then part of your withdrawals are attributable to the nondeductible IRAs and can be withdrawn without paying tax again. But to make it complicated, you have to calculate the percent that can be withdrawn tax-free using Form 8606.. All withdrawals have to be allocated between taxable and nontaxable every year in which you make a withdrawal. You must also update your basis every year in which you make a contribution.

You must update your nondeductible IRA basis, using Form 8606, whether you made withdrawals or not.

NOTE: The allocation applies only to traditional IRAs, not Roth IRAs which do not enter into this calculation. Traditional IRAs are any IRA other than a Roth IRA.

The first line of Form 8606 seems self-explanatory. It asks for nondeductible contributions for the tax year, including those made through April 15 of the year after the tax year.

Line 2 is somewhat confusing.
It asks for your basis in traditional IRAs. The key word is basis. You only have a basis if you paid for it with after-tax money. If you deferred the tax by deducting an IRA contribution, your basis is zero.

So, ENTER just the value of your nondeductible IRAs on line 2

Line 6 asks for the value not basis of your traditional IRAs. The value is both the basis of your nondeductible IRAs plus the value of your deductible IRAs. This amount is the value of your IRAs as of December 31 of the tax year for which you are reporting.

Line 7 asks for distributions you received during the tax year. This amount is added back to the year-end value to get the total you would have had if there had been no withdrawals.

Line 8 asks for anything you converted to a Roth IRA. This is also to be added back to the year-end value since a conversion would be equivalent to a withdrawal.

Line 9 is the Total of Lines 6+7+8.

Line 10 is line 5 (nondeductible IRA basis) divided by line 9 (total value at year-end plus withdrawals and conversions) divided.

The rest of the form is used to calculate the taxable and nontaxable portion of your IRA withdrawals for the year and to calculate the remaining basis of your nondeductible IRAs which will become Line 2 on next year’s Form 8606.

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UNREIMBURSED PARTNERSHIP EXPENSES

-If your partnership agreement requires you to pay expenses under the partnership agreement, you can deduct these items.
If your partnership interest is nonpassive,

• Enter "UPE" (unreimbursed partnership expenses) in column (a) then go to col. (h)
  

• deduct the unreimbursed expense on a separate line in column (h) of line 28, nonpassive loss from Schedule K-1. This amount should not be combined with your other K-1 gain or loss from this activity -- it should be separately stated.

If your expenses are passive, enter "UPE" in column (a) and enter the expense in column (f) of line 28.

These deductions should be ordinary and necessary expense of the partnership, not items which should go on Schedule A as itemized deductions.

STARTING A NEW CORPORATION OR LLC

STARTING A NEW CORPORATION OR LLC

The first thing you need to determine is whether a C Corporation, an S Corporation or LLC would be the best way to go. You should explain the nature of the business to a CPA and get his thoughts on whether to incorporate or set up an LLC.

If you incorporate, you will need to file Form 2553 if you want to be taxed as an S Corporation. This would be done after you get your corporate charter.

After you decide between a corporation and LLC, the next step would be to get a corporate charter from the state.

After you get your charter, you need to file a form SS-4 with the IRS to get an Employer Identification number--whether you will employ anyone or not. The EIN is used by the company instead of using a Social Security Number for an individual.

You can download all forms and instructions at http://www.irs.gov

After you fill out as much as you can on Form SS-4, call the IRS at the number indicated in the instructions for the form and get the EI Number over the telephone. You can now begin filing returns under that number.

Another important point is that you may need to report both an income statement and a balance sheet on your corporate or LLC tax return. That means you may need to maintain a set of double-entry books, or get someone to do your accounting. Most CPAs do some bookkeeping work of that type (they call it write-up work). There are also many unlicensed bookkeepers who do this type of work for their clients.

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FAILURE TO FILE YOUR TAX RETURN

FAILURE TO FILE YOUR TAX RETURN

-You should file your tax return by the deadline even if you can’t pay the tax. There is both a failure to file penalty and a late payment penalty. If you file and don’t pay, at least you have filed. Here is what the IRS says about failure to file:

The failure to file a federal tax return can be costly — whether you end up owing more or missing out on a refund.

There are several reasons taxpayers don’t file their taxes. Perhaps you didn’t know you were required to file. Maybe, you just kept putting it off and simply forgot. Whatever the reason, it’s best to file your return as soon as possible. If you need help, even with a late return, the IRS is ready to assist you.

Here are some things to consider:

• Failure to File penalty. If you owe taxes, a delay in filing may result in a "failure to file" penalty, also known as the “late filing” penalty, and interest charges. The longer you delay, the larger these charges grow.
• Losing your Refund. There is no penalty for failure to file if you are due a refund. However, you cannot obtain a refund without filing a tax return. If you wait too long to file, you may risk losing the refund altogether. The deadline for claiming refunds is three years after the return due date. For example, the last day for claiming a refund for your 2003 tax return will be April 15, 2007.
• EITC. Individuals who are entitled to the Earned Income Tax Credit must file their return to claim the credit even if they are not otherwise required to file.

Whether or not you must file a tax return will depend upon a number of factors, including your filing status, age, and gross income.

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-

TEXAS MARGIN TAX

TEXAS MARGIN TAX

For years the state of Texas has subjected Corporations to a Franchise tax which has gradually evolved into an income tax which the law euphemistically calls income earned surplus rather than admitting the State of Texas imposes an income tax. The tax used to be a tax on capital rather then income, then it became a tax on income, now it is being converted into a tax one either gross profit or a couple of alternatives.

The first margin tax will be due May 15, 2008. The tax rate is 1% of the taxable amount.

The tax does not apply if revenues are less than $ 300,000 or the tax amounts to less than $ 1000.

The taxable amount is gross revenue minus your choice of one of the following:

• Cost of Goods Sold
• Compensation (wages and officer compensation subject to limitations)
• 30% of Gross revenue

The maximum salary allowable to be deducted for a single individual is $ 300,000.

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HOME OFFICE EXPENSE FOR S-CORP SHAREHOLDER

-If you are a shareholder in an S Corporation there are two possible ways of deducting home office expenses (an allocated share of utilities, repairs and other home costs).

You can deduct employee business expense, using Form 2106 and listing it as a miscellaneous deduction on Schedule A. This method requires that you subtract 2% of your adjusted gross income from your miscellaneous deductions. Also, you might get more by using the standard deduction, making the whole thing useless.

A better way, assuming you receive a reasonable salary from the corporation (which you may control or own 100%) would be under an accountable plan in which you provide an accounting to the corporation for the expense and receive reimbursements from the corporation. This would, if done properly, make the expense deductible by the corporation and tax-free to you as an employee.

BUT BEWARE:
In an August 2005 court case the accountable plan approach was disallowed. The corporation had adopted a resolution requiring the shareholder/employee to provide home office facilities and incur other expenses without obligating the corporation to reimburse the employee/owner. Even if the corporation voluntarily reimbursed the employee, it was considered by the court as taxable income to the employee and he could only deduct it by taking it as an itemized deduction (reduced by 2% of his Adjusted Gross Income).

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WHAT'S IN A NAME? THE IRS MAY QUESTION IT.

-THE IRS MAY REJECT YOUR RETURN-
In the past, I’ve had electronically-filed tax returns rejected by the IRS because the wife’s social security number did not match the IRS data base. Often a woman would begin using her husband’s last name for everything but would not change it on her Social Security Card. The IRS might not question it if the return was paper-filed, but electronically-filed returns are only accepted if the social security number and other information matches their data base.

Here is a recent “Tax Tip” from the IRS:

Newlyweds and the recently divorced should ensure the name on their tax return matches the name registered with the Social Security Administration. A mismatch could unexpectedly increase a tax bill or reduce the size of any refund.

• For recently married taxpayers, the tax scenario begins when the bride says "I do." If she takes her husband's last name, but doesn't tell the SSA about the name change, a complication may result. If the couple files a joint tax return with her new name, the IRS computers will not be able to match the new name with the Social Security Number.
• After a divorce, a woman who had taken her husband’s name and made that change known to the SSA should contact the SSA if she reassumes a previous name.

It's easy to inform the SSA of a name change by filing Form SS-5 at a local SSA office. It usually takes two weeks to have the change verified. The form is available on the agency's Web site, www.socialsecurity.gov, by calling 800-772-1213 and at local offices. The SSA Web site provides the addresses of local offices.

Generally, taxpayers must provide SSNs for each dependent claimed on the tax return. For adopted children without SSNs, the parents can apply for an adoption taxpayer identification number, or ATIN, by filing Form W-7A with the IRS. The ATIN is used in place of the SSN on the tax return. The form is available on the IRS Web site, IRS.gov, or by calling 800-TAX-FORM (800-829-3676).

These Forms are available at www.irs.gov
Form SS-5 Application for a Social Security Card
Form W-7A Application for Taxpayer Identification Number for Pending U.S. Adoptions

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Telephone tax refund - Business and personal phone

-HOW TO CALCULATE TELEPHONE TAX CREDIT:

FOR YOUR BUSINESS:
If you are filing a Schedule C with Form 1040, if you are filing Forms 1065 or 1120 or 1120S, then you should claim a refund or tax credit for telephone excise tax.

This tax on long-distance calls was enacted to finance the Spanish-American war. Someone finally noticed the war is over and this tax should no longer to be collected.

You can go through a lot of receipts which I won’t go into, or you can do it the easy way.

[1] First, you take your April 2006 phone bill and divide the federal excise tax by the total phone bill. This bill includes the tax on both local and long-distance service.

[2] Next you take your September 2006 phone bill and divide the federal excise tax by the total phone bill for that month. This bill only includes the tax on local service.

[3] Then you subtract the percent in September from the percent in April which indicates the percent applicable to long-distance only. This percent is limited to 2% --or 1% if you have more than 250 employees.

[4] Now you apply the percent calculated in step 3 to a 41-month period:

10/12 X your 2003 phone bills X the appropriate percent.

100% of your 2004 phone bills X the appropriate percent

100% of your 2005 phone bills X the appropriate percent

7/12 of your 2006 phone bills X the appropriate percent

You don’t have to add all those phone bills if you have your tax returns for those years. Just look up how much you deducted for telephone expense each year.

Enter these amounts on Form 8913 (using the same figure per month within each year, and enter them in the appropriate line of your Form 1040, 1065, 1120 or 1120S (for example, line 71, Form 1040 or line 23d of Form 1120S)

This is NOT for the refund of tax on your personal telephone which is determined by another method.
For your personal telephone tax refund:

1 exemption ----------- $30

2 exemption------------$40

3 exemptions-----------$50

4 or more---------------$60

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bookmark mgr

CAN YOU ROLL OVER AFTER-TAX MONEY FROM A 401k INTO AN IRA?

-You cannot rollover money from a 401K to an IRA.

An IRA is not the same thing as a Qualified Plan.

A qualified plan is established by an employer to provide retirement benefits for employees and their beneficiaries. Unlike SEP and SIMPLE IRAs. A qualified plan is not IRA- based nor subject to the same rules concerning contributions and distributions.

A business may chose either a Qualified OR an IRA-based plan, but an IRA and a Qualified Plan are not the same thing, and some of the rules affecting them are different..

What’s a rollover?

Rollover means to move money from a qualified retirement plan such as a 401(k), 403b or 457 Planinto an IRA. If you receive a payout from your company-sponsored retirement plan, a rollover IRA could be to your advantage. You will continue to receive the tax-deferred status of your retirement savings and will avoid penalties and taxes.

After December 31, 2006 you can roll over both pre-tax and after-tax contributions from one qualified plan to another qualified plan. The rollover from one qualified plan to another must be a direct rollover and the receiving plan must separately account for the after-tax contributions and earnings.

But keep in mind: an IRA is not a Qualified Plan so you cannot roll over after-tax money from a 401K or other qualified plan into a Rollover IRA

You can roll over all except after-tax money from a 401K or 403B Plan into a Rollover IRA

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FLIPPING HOUSES - TAX IMPLICATIONS-

-Depending on whether you do it as a sideline or as a full-time business, the tax treatment would differ. If it is a sideline then you could consider it as an investment and sales would result in capital gains or losses. If you own it more than a year, then it would be a long-term capital gain and profits would not be taxed at more than 15%. A short-term gain would be taxed at your regular tax rate. You would capitalize taxes and interest and add them to the basis of the property.

If it is a year-round activity rather than a sideline, then you would be operating a business. Those fixer-uppers would be considered inventory rather than capital assets. Your gains would be taxed as ordinary income. Costs of upgrading the property would become part of ‘inventory’ and would be deducted as a cost of sale when you sell the property. You could write off the taxes and interest you pay while you hold the property.

Income from this type business would be subject to 15.3% self-employment tax

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HE WHO SELLS WHAT ISN'T HIS'N GOES TO PRISON

-Usually he who sells what isn’t his’n goes to prison. But if it’s on Wall Street then it’s called selling short. IRS rules on short sales are discussed in chapters 3 and 4 of Publication 550 .

If you sell short you are selling borrowed stock and must pay the dividend to the person from whom your broker borrowed it. In some cases you may deduct it as investment interest expense on line 13 of Schedule A. In other situations you cannot deduct it as interest expense, but must add it to the basis of the stock when you buy to cover your short position. Here are some excerpts from Pubication 550:

Short sales. If you cannot deduct payments you make to a lender in lieu of dividends on stock used in a short sale, the amount you pay to the lender is a capital expense, and you must add it to the basis of the stock used to close the short sale.

Payments in lieu of dividends. If you borrow stock to make a short sale, you may have to remit to the lender payments in lieu of the dividends distributed while you maintain your short position. You can deduct these payments only if you hold the short sale open at least 46 days (more than 1 year in the case of an extraordinary dividend as defined below) and you itemize your deductions.

You deduct these payments as investment interest on Schedule A (Form 1040). See Interest Expenses in chapter 3 for more information.

If you close the short sale by the 45th day after the date of the short sale (1 year or less in the case of an extraordinary dividend), you cannot deduct the payment in lieu of the dividend that you make to the lender. Instead, you must increase the basis of the stock used to close the short sale by that amount.

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This information is not intended to be advice to the recipient. In compliance with Treasury Department Circular 230, unless stated to the contrary, any Federal Tax advice contained in this Blog was not intended or written to be used and cannot be used for the purposes of avoiding penalties.

IRA LIQUIDATION AT A LOSS

- IRA LIQUIDATION AT LOSS
In this blog, I will use situations covered in the last two blogs regarding taxable social security modified to illustrate a new point: taxability of an IRA redeemed at less than its cost and how the loss may or may not qualify as a tax deduction.

INCOME SITUATION:

Social Security ……......$32,000

Tax Exempt Interest...…16,000

IRA Withdrawal…….…12,002

Capital Gain…………...100,000

Total Income…………..160,002

Adjusted Gross Income:

Social Security ……......$27200 (85% X 32,000)

Tax Exempt Interest.……..…0

IRA Withdrawal…….…12,002

Capital Gain…………...100,000

Adjusted Gross Income..139,202.

Tax after exemptions and standard deduction = 13194 minus $ 40 refund of telephone excise tax.

SITUATION: Suppose that IRA withdrawal of $12,002 came from stocks purchased in the IRA that cost $52002 and resulted in a $ 40,000 loss.

Can the loss be deducted? Not unless this withdrawal completely liquidated all IRAs.

But let’s suppose that it DID liquidate his IRA completely. As a result of complete liquidation, he can deduct it as an itemized deduction.

By doing so, he will lose his standard deduction, so he only benefits to the extent his itemized deduction exceeds his standard deduction. The $ 40,000 loss would be reduced by 2% of his $ 139202 AGI, leaving a deduction of $ 37,216

Result: This reduces the tax from $ 13,194 to $ 8178. So the $ 40,000 loss saved him $ 5016 in tax.

HOW THE TAX WAS CALCULATED:

AGI ………………………….....…..…$ 139202

Allowable IRA Loss…$ 37,216

Personal Exemptions….6,600………43816

Taxable Income…………...…………….95386

TAX CALCULATION

Tax on $ 61300 = $61,300 X 5% or $ 3065

Tax on $ 34086 = $34086 X 15% or $ 5113

Tax on $ 95386 = ………........……………$8178

The taxable income was taxed based on reduced rates for capital gain

The top of the 15% bracket is $ 61,300, so this much of the income was taxed at 5% which is the maximum capital gain rate for people in the 10% or 15% bracket.

After subtracting the $61,300 from taxable income the remaining taxable income is taxed at 15%.

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85% OF SOCIAL SECURITY TAXED

IF YOUR INCOME EXCEEDS $60,000 part may be taxed at 50% and part at 85%
NOTE: Most often you hear that $32,000 is the starting point for the 50% taxability and $ 44,000 for the 85% level. This refers to half of your Social security ($32,000 X 50%) + another $16000--which is the same as $ 32,000 if you omit half the SS as non-taxable. Your Adjusted Gross income would be $32,000 derived by taking half the SS plus 16,000 of other income.

The same principal applies to 60,000 vs 44,000 for calculating the point at which 85% becomes taxable.

EXAMPLE--USING TOTAL INCOME:
Social Security ……........$32,000

Tax Exempt Interest...…16,000

IRA Withdrawal…....….…12,002

Total Income………....…...60,002

Taxable Social Security $ 6002

(60,000 –48,000) X 50% =6000

($ 60002 – 60000) X 85% = $1.70 (rounded to $ 2)

$6000 + $ 2 = $6002 taxable social security..

Adjusted Gross Income:

IRA Withdrawal…...$ 12,002

Taxable SS…………...…..6002

Taxable Income……..$ 18004

There is no tax due since the standard deduction and exemptions exceed the adjusted gross income.

SITUATION No 2 Income is same as previous Situation plus $ 100,000 Capital Gain.

Income from Example No. 4 = $ 60,002

Capital Gain……………......………100,000

Total Income…………….......……160,002

Taxable Social Security = $ 32,000 X 85% = 27,200

NOTE: Instead of taxing the entire excess over $ 48,000 at 85%, the tax is limited to 85% of total social security.

Adjusted Gross Income:

Social Security ……......$27200

Tax Exempt Interest.……..…0

IRA Withdrawal…….…12,002

Capital Gain…………...100,000

Adjusted Gross Income..139,202.

Tax after exemptions and standard deduction = 13194 minus $ 40 refund of telephone excise tax.

TOMORROW’S BLOG WILL show the effect of withdrawing an IRA purchased for more than its value when withdrawn.

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TAXABLE SOCIAL SECURITY

On a joint return, if total income, including social security, exceeds $ 48000, then half of the social security is taxed. If the total income exceeds $ 60,000 the amount over $60,000 is taxed at 85% from that point and up.

Situation No. 1: Taxpayer and spouse get $ 16,000 each in social security and their only other income is $16,000 from tax-exempt bonds. Result: No taxable income.

Situation No. 2: Same except the tax-exempt interest is $16,002

Social Security …..……….…$32,000

Tax Exempt Interest……….$16,002

Total Income……………....….$48,002

. Result: $1 taxable income. (Total income including tax-exempt interest and social security exceeds $ 48000 by $ 2, so half of the excess becomes the taxable portion of social security)

Situation No. 3.

Social Security……......$32,000

Tax Exempt Interest..16,000

IRA Withdrawal....……10,000

Total Income……....….$58,000

Result:$ 15000 taxable income [$16,000 Tax-exempt interest + $10,000 +$5,000 taxable social security] Half of ($ 58,000 - $48,000) = Taxable Social security of $ 5,000..

Situation No 4. (Income Exceeds $ 60,000)

Social Security …..…......$32,000

Tax Exempt Interest...…16,000

IRA Withdrawal…....….…12,002

Total Income………....…...60,002

Taxable Social Security $ 6002

(60,000 –48,000) X 50% =6000

($ 60002 – 60000) X 85% = $1.70 (rounded to $ 2)

$6000 + $ 2 = $6002 taxable social security..

Taxable Income:

IRA Withdrawal…...$ 12,002

Taxable SS………...……..6002

Taxable Income……..$ 18004

There is no tax due since the standard deduction and exemptions exceed the taxable income.

TOMORROW’S BLOG will illustrate the effect of adding a $ 100,000 Capital Gain which will result in 85% of the Social Security becoming taxable.

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This information is not intended to be advice to the recipient. In compliance with Treasury Department Circular 230, unless stated to the contrary, any Federal Tax advice contained in this Blog was not intended or written to be used and cannot be used for the purposes of avoiding penalties.

TEST

Underpayment penalty

file:///C:/IRS_2006_1/taxmap/pub17/p17-023.htm#TXMP50035f2c

DEMUTUALIZATION Potential Tax Refund due-

Many taxpayers have paid taxes because they received stock for their equity interest in the mutual company when it "demutualized." But now there is a pending court case that may change the taxability of these exchanges.

If you have paid tax on demutualization exchanges you should READ THIS .

It may be best to file an amended 2003 return to claim the potential refund before the statute of limitations expires.

Nothing is final yet and the IRS Instructions still classify demutualizations, unless qualified as tax-free reorganizations as taxable. Here are the current IRS instructions:

Demutualization of a life insurance company occurs when a mutual life insurance company changes to a stock company. If you were a policyholder or annuitant of the mutual company, you may have received either stock in the stock company or cash in exchange for your equity interest in the mutual company. The basis of your equity interest in the mutual company is considered to be zero.

If the demutualization transaction qualifies as a tax-free reorganization, no gain is recognized on the exchange of your equity interest in the mutual company for stock. The company can advise you if the transaction is a tax-free reorganization. Because the basis of your equity interest in the mutual company is considered to be zero, your basis in the stock received is zero. Your holding period for the new stock includes the period you held an equity interest in the mutual company. If you received cash in exchange for your equity interest, you must recognize a capital gain in an amount equal to the cash received. If you held the equity interest for more than 1 year, report the gain as a long-term capital gain on line 8. If you held the equity interest for 1 year or less, report the gain as a short-term capital gain on line 1.

If the demutualization transaction does not qualify as a tax-free reorganization, you must recognize a capital gain in an amount equal to the cash and fair market value of the stock received. If you held the equity interest for more than 1 year, report the gain as a long-term capital gain on line 8. If you held the equity interest for 1 year or less, report the gain as a short-term capital gain on line 1. Your holding period for the new stock begins on the day after you received the stock.

UNDERPAYMENT PENALTY due to DIVORCE

-UNDERPAYMENT PENALTY due to DIVORCE-

-A taxpayer gets divorced late in 2006 and will be unable to file a joint return for 2006. His ex-wife had no income, so now John Q. Taxpayer is going to owe more tax since he can't file a joint return.

Could this cost him an underpayment penalty? Can he file part of the year as married filing jointly and file the rest of the year as single? Is there any way he could still file jointly for his 2006 taxes?

It looks like John Q Taxpayer may be up the well-known tributary without means of propulsion.

He may be in a higher incremental tax bracket. But maybe he qualifies as Head of Household which could keep his bracket down somewhat.

There is no way he could file two tax returns based on a change in filing status within the year—that require some tax laws and new forms that would boggle the minds of even those geniuses that write the tax laws.

He may or may not owe penalty.

If you did not pay enough tax, either through withholding or by making estimated tax payments, you will have an underpayment of estimated tax and you may have to pay a penalty.

Generally, you will not have to pay a penalty for 2006 if any of the following situations applies.

• The total of your withholding and estimated tax payments was at least as much as your 2005 tax (or 110% of your 2005 tax if your AGI was more than $150,000, $75,000 if your 2006 filing status is married filing separately) and you paid all required estimated tax payments on time.
• The tax balance due on your return is no more than 10% of your total 2006 tax, and you paid all required estimated tax payments on time.
• Your total 2006 tax minus your withholding is less than $1,000.
• You did not have a tax liability for 2006.
• You did not have any withholding taxes and your current year tax less any household employment taxes is less than $1,000.

Special rules apply if you are a farmer or fisherman. See Farmers and Fishermen in chapter 4 of Publication 505 for more information.

He will need to fill out Form 2210 to determine the amount, if any, he will owe as an underpayment penalty. The 2006 Form isn't available, but here is a link to the 2005 Form 2210 . I don't anticipate any significant change in the 2006 version.

LINKS AND REFERENCES, go to: IRS References

To Contact me taxxcpa2007@hotmail.com

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This information is not intended to be advice to the recipient. In compliance with Treasury Department Circular 230, unless stated to the contrary, any Federal Tax advice contained in this Blog was not intended or written to be used and cannot be used for the purposes of avoiding penalties.

SALES TAX DEDUCTION filing Delay-

-SALES TAX DEDUCTION-
If you plan to claim a sales tax deduction or any of the other “extender” provisions, the IRS will not process your return until Feb 3. This applies to both e-file and paper tax returns.
This is to allow the IRS enough time to update its systems to accommodate the tax law changes.
Taxxcpa comment: If you live in Texas or any other state with no state income tax, you are highly likely to have a sales tax deduction and possibly one of the other extender items.

To download amounts allowable for your state go to pages 5 thru 7 of Publication 600 at http://www.irs.gov/formspubs/index.html
You can add an additional amount to the amounts shown in the tables for specific large purchases. Also you can increase the amount if your city, county or other local agency imposed a sales tax. For example, the Texas State tax is 6.25%, but I pay 8.25% total sales tax, so I would divide 8.25 by 6.25 and use the result (1.32) and multiply the amount on the table by 1.32.

LINKS and References – go to
IRS References

To Contact me taxxcpa2007@hotmail.com

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This information is not intended to be advice to the recipient. In compliance with Treasury Department Circular 230, unless stated to the contrary, any Federal Tax advice contained in this Blog was not intended or written to be used and cannot be used for the purposes of avoiding penalties.