Refund Anticipation Loans

Many of the "Tax Shacks" offer high-interest Refund Anticipation Loans (RALs) sometimes called Rapid Refunds.  The people who obtain these loans are usually low-income people who are so impatient to receive their money that they will pay almost anything to get it a few days sooner.

If someone wants to pay an enormous amount of interest to obtain a loan, that's their business, but having the IRS aid and abet such a rip-off is where I take exception.  Apparently, the IRS has begun to realize the error of its ways and will no longer provide the banks which provide these loans a "debt indicator" so if the refund is denied by the IRS the bank would be left holding the bag.

One other feature of these loans were that the bank deducted the tax preparer's fee as well as their fees from the refund.  Since some people could not otherwise pay a tax preparer, the IRS is now considering allowing the tax preparation fee to go direct to the preparer and the balance to the taxpayer.  This would eliminate one other justification for RALs.

The only remaining incentive for anyone to take the RAL would be to get the money as soon as the return was prepared rather than waiting for a few more days.  After waiting 365 days for the refund, some people just can't wait another ten days!  So RALs may not entirely disappear but the banks will have to take a much bigger risk without the debt indicator, so this will greatly decrease this sort of fleecing the poor. 




 

FLORESCENT LIGHT FOR MY OFFICE

A few days ago I went to Home Depot and bought a florescent light fixture for my office.
I've been working in the dark too long with just the regular light bulbs.
I sent an e-mail to "maintenance" at the company that manages my condo. However, the e-mail was opened by the Manager of the company who thought I was trying to get free service. I had previously spoken to Jeff, the maintenance guru, who told me he could install a florescent light fixture. So, I called Jeff and he said he could install it on Tuesday after he got off work.
Jeff arrived on schedule.
He had to spend a lot of time on the light switch and finally had to get a new one since ths old one had a dimmer switch.
Finally, the got everything done and now I no longer feeling I am having to work in inadequate light.
I do accounting and tax work, and need adequate lighting in my office to work.
My home office was designed as a den, but we use the living room as our den.

We live near Turtle Creek which is where the expensive houses start.
Our condo unit is on Blackburn Street.

Section 1031 Exchange

1031 Exchange:
If you sell certain property and have a taxable gain, you can defer taxes if you structure it as a Section 1031 exchange. Equipment used in a business could qualify, but if old equipment is traded in on new equipment, it is not necessary to use a Sec. 1031 intermediary. In the case of a rent house, however, you are not likely to trade in an old house on a new house. You are more likely to sell the old house, then, after a delay, buy a new rent house which gives rise to the possible need to use the provisions of Section 1031.

The following example illustrates the process:

Day 1: Sell rent house FOR $ 110,000 with funds going to a qualified intermediary.
The house cost $ 100,000 and is fully depreciated so the basis for
gain/loss is zero. If there is no section 1031 exchange, then the entire $110000 would be taxable as ordinary income.

Day 45 (or earlier): [1] Identify the Replacement property ( new rent house) which
will cost of $ 200,000—consisting of $110000 down payment derived from the sale of the old house and a mortgage for $ 90,000.

[2]Complete the “identification of Replacement
Property” and give it to the qualified intermediary. NOTE: this can be
done before the 45th day if the replacement property is identified earlier.

Day 180: This is the deadline. The replacement property must be
acquired by the 180th day.
There will be a deferred gain of $ 110,000 on the old house.
The new house will have a depreciation basis of $ 90,000 ($200,000
minus the deferred gain). NOTE: The $ 90,000 basis assumes NO
value for the land. If the land was worth $25,000 then the depreciable
value would be reduced to $ 65,000.

File even if you can't pay

File your tax return even if you can’t pay. If you can’t file, request an extension and pay what you think you owe—or at least part of it.

Here is what the IRS says:

Taxpayers who owe taxes and don’t file their tax return by the deadline may face interest on the unpaid taxes and a failure-to-file penalty. Interest and penalties add to the total amount a taxpayer owes. Filing by the deadline allows taxpayers to avoid the failure-to-file penalty, even if they can’t pay all or some of their taxes by the deadline. Taxpayers who can’t file their return by the deadline can request an extension of time to file. However, an extension of time to file is not an extension of time to pay.

NEW 2009 TAX PROVISIONS

The American Recovery and Reinvestment Act of 2009 was signed into law on February 17, 2009, and contains the following provisions:

New economic recovery payments designed to give taxpayers cash benefits during 2009 to help stimulate the economy.

A new Making Work Pay tax credit designed to give working families up to $400 ($800 MFJ) when filing their 2009 tax return.

New withholding tables designed to increase an employee's take-home pay during 2009 as a result of the new Making Work Pay credit.

An increase in the Earned Income Credit for families with 3 or more qualifying children.

An increase in the refundable portion of the Child Tax Credit.

A new and improved Hope Scholarship Credit renamed the American Opportunity Education Tax Credit.

A new provision to allow students to treat the purchase of computers as qualified education expenses under Section 529 plans.

An extension of the First-Time Home Buyer Credit and the elimination of the recapture rules for homes that are held more than 3 years.

A new sales tax deduction for non-itemizers who purchase a vehicle.

A new exclusion for unemployment benefits received.

AMT relief for 26 million families.

An extension of the Special Depreciation Allowance.

An extension of the increased Section 179 deduction limits.

Net Operating Loss provisions affecting 2008 tax year NOLs.

The ability for certain businesses to spread cancellation of debt income over 10 years.

New targeted groups for the Work Opportunity Tax Credit.

New Section 1202 small business stock rules.

New safe harbor rules for estimated tax payments.

New S corporation built-in gains tax rules.

Extension and new provisions for the various energy tax credits.

New provision affecting transportation fringe benefits.

New COBRA continuation coverage rules.

and more…

If you have too much or too little withheld from your pay check, you can increase or decrease the number of exemptions so that your withholding will be more in line with your tax situation. If you have some large itemized deductions and you are single, you can claim more than just one exemption. Likewise if married filing jointly or head of household

To calculate extra exemptions, go to:

http://www.payroll-taxes.com/calculators.htm

Select item # 1 (Payroll Calculator) which takes you to the next screen

Select the your state of residence

Enter filing status

Enter your annual salary. (I entered 124800)

Enter pay frequencey (I entered 'weekly')

Enter Federal allowances (first I used 5, then recalculated using 6)

Using 5, I got $442 per week for withholding

Using 6, I got $ 422 per week for withholding

You might first try it using the same figures I used first to make sure you are doing it the same way.

Then, if your pay period is NOT weekly, change that part of the calculation and change the salary to the amount of your own salary..

If you have too little withheld, you can drop some of your exemptions, or you can just submit a new W-4 form to your employer and specify that you want a specified extra amount withheld.

Choice of entity

When you start a new business, you will need to decide what type of business entity you will select. If you are a sole proprietor, you can file as such or you could form a single-member Limited Liability Company. Another choice would be to form a corporation and whether to operate as a C-Corporation or an S-Corporation.

Here is a link comparing the various type entities I obtained from a local law firm.

http://docs.google.com/fileview?id=F.0b861824-da33-4d38-897b-8b849b6e96e4&hl=en


One exception I would take is the statement that LLC members do not pay self-employment tax. Amounts paid as "guaranteed payments" are generally considered to be subject to self-employment tax and such payments should be the equivalent of a 'reasonable salary.' The LLC member's share of profits in excess of his 'guaranteed payment' would not be subject to self-employment tax.

It is highly likely that a greater amount of such income may later be subjected to self-employment tax.

Accumulated Adjustment Account

In most of the examples I have seen illustrating the Accumulated Adjustment Account (AAA) for an S-Corporation show it as being identical in amount with the Retained Earnings Account. This would be possible if the books and the tax returns used exactly the same method of depreciation and the shareholder does not make withdrawals in excess of his stock basis. If different depreciation methods are used, the AAA is not reduced for tax deductions in excess of book deductions.

Many S-Corporations do not use the same method for recording depreciation on the books as they use for income tax. When you depreciate an an asset, the tax method can produce larger deductions in the earlier years, then later produce smaller deductions than the Generally Accepted Accounting Procedures that are used for bookkeeping purposes. However, any method that ultimately fully depreciates the asset results in the same total deductions by the time an asset is fully depreciated.

Some assets may be written off completely or up to a maximum allowable amount under Section 179 in the year purchased. In such cases, it would be best to write the same amount off on the books to avoid confusion. However if they are written off on the tax return and not fully deducted on the books, then a timing difference would again exist just as if different methods of depreciation were used.

In any case, the AAA and Retained Earnings will vary due to timing differences. Over time, unless new assets are continually added, the two would come back into agreement (provided that the owner(s) do not withdraw more than their stock basis.

If shareholders DO withdraw more than their stock basis, they cannot reduce the AAA below zero. Withdrawals in excess of the owner's stock basis are taxable as capital gains.

LINK toi 1040.com web site

Web site:

http://www.1040.com/taxxcpa/

Loss on Inherited house

Question:
Three siblings inherited 1/3 interest in their parents home. One sibling lived in the home for two years after the inheritance, the others did not. The house had a substantial decrease in value since the date of death and has been sold at a loss.

Is the loss deductible to the siblings that did not utilize the home as a residence?

My opinion:
The two who did not live in the house could probably take a capital loss, but the one who lived there could not. However, before I would take this kind of loss on a tax return I would do more research. I have not encountered this situation, but another accountant raised the question and most of the people responding made the same interpretation I did.

I have always taken a loss on inherited property when it is sold for less than the tax assessor's appraisal. Often, if they had an independent appraisal from a licensed appraiser, they might claim a bigger loss.

I recently got my tax appraisal lowered, but later had an independent appraisal which came up with a much higher figure than the tax appraisal board did.
http://www.1040.com/taxxcpa/

Capital Gains???

Will there ever be capital gains again?
I am looking for the Dow Jones to go down about 50% from the 14,000 level to the 7,000 level as it did in the 1973-74 decline. However it could even be worse. The one thing that may limit it somewhat is all the bailout proposals and government intervention which provide a short-term solution which we will pay for in the long run when the federal deficit bankrupts us.

Tax situations that baffled me this year

It is becoming more difficult finding time for blogging now that the tax season is moving into high gear.

To make things more difficult, I’ve had two never-before encountered tax situations arise for two of my clients.

DROUGHT-RELATED SALE OF LIVESTOCK
One client bought a half interest in a cattle business and they formed a new Limited Liability Company. A few months afterward there was a drought and they had to sell off a large part of the herd. This caused a recovery of my client’s investment, but created a potential taxable gain. There is a provision, however, that, under certain conditions, a drought-related sale of livestock qualifies as an involuntary conversion and enables the sellers to avoid paying tax on all or part of the the gain if they reinvest in replacement livestock within a specified time. A lot of research was necessary for this situation.

CANADIAN FORM NR4 INCOME FROM ESTATE
Another client had a Canadian Form NR4 which baffled me. I finally consulted with a Canadian accountant who explained that one line represented Canadian Taxable Income and Canadian Tax withheld. Another line represented U.S. Income and U.S. tax withheld. I decided that it should go on Schedule E, page 2 as Income from a Trust or Estate, but assumed that there would be a problem since a Canadian Estate would not have a U.S. ID number. The Canadian accountant said they probably did have a U.S. ID.

Later when I was looking at the Form again, I discovered a nine-digit number just below the address of the company that issued the form—so that solved my dilemma.

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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.

Foreign Income

U S Citizens often invest in foreign securities from Canada, South Africa, Europe and other nations. Some U S citizens take overseas jobs in foreign countries. This type of income has tax implications. For example Canada withholds 15% tax from dividends paid to U S investors. You may be able to deduct this tax on line 47 of your form 1040 but you may need to complete Form 1116 in order to determine if all or what part can be deducted. If you don't deduct it on line 47 of your 1040, you can deduct it as an itemized deduction.

The following is from an IRS "Tax Tip."

INCOME FROM FOREIGN SOURCES

Many United States citizens earn money from foreign sources. These taxpayers must remember that they must report all such income on their tax return, unless it is exempt under federal law.

U.S. citizens are taxed on their worldwide income. This applies whether a person lives inside or outside the United States. The foreign income rule also applies regardless of whether or not the person receives a Form W-2, Wage and Tax Statement, or a Form 1099 (information return).

Foreign source income includes earned and unearned income, such as:

• Wages and tips
• Interest
• Dividends
• Capital Gains
• Pensions
• Rents
• Royalties

An important point to remember is that citizens living outside the U.S. may be able to exclude up to $82,400 of their 2006 foreign source income if they meet certain requirements. However, the exclusion does not apply to payments made by the U.S. government to its civilian or military employees living outside the U.S.

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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.

NOMINEE DIVIDENDS AND INTEREST

Reporting Dividends or Interest you receive for another person.

If a corporation reports dividends in your name that actually belong to someone else, this is called dividends you received as a NOMINEE. You could also receive Interest as a nominee. In such cases, you should not pay tax on such income, but you must follow proper procedures to report the income to the person who actually receives the money from the dividends or interest.

You should prepare a Form 1099-DIV or 1099-INT and send them together with a Form 1096 transmittal to the IRS. You should also give the actual owner of the dividends Copy B of the Form 1099. On these forms, you should list yourself as the Payer and list the actual owner as the Recipient.

You should also report dividends or interest which you received as a nominee on Schedule B of your Form 1040 just as you would any other dividends or interest. You should then add all dividends or interest and put a subtotal on Schedule B a few lines below the last dividend or interest item you have entered.

Below this subtotal, enter “Nominee Distribution” and show the amount received as a nominee. Subtract the total of your nominee distributions from the subtotal. Enter the result on line 6 in the case of dividends. For interest you would subtract the nominee interest from the subtotal and enter the result on Line 2 of Schedule B.

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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.

Inherited Real Etate

INCOME FROM SALE OF INHERITED REAL ESTATE

- If you inherit a home or other real estate from a deceased relative, you may actually have a tax loss. Often the heir inherit the home of the deceased and want to dispose of it as soon as possible to avoid paying ad valorem taxes on an empty house.

When they sell it they may reduce the price for a quick sale and incur real estate commissions and other closing costs.

You should value your basis in the inherited property at its value on the date of death, which might be a greater value than you received for the property. A quick and easy way to check its value would be to look at its assessed value on the county tax rolls which are usually available on the internet. That should be a safe assumption if you choose to value it as if that were your cost.

If you think the tax assessor undervalued it, you might need to get an independent appraisal.

When you report it on your tax return, it goes on Schedule D. Instead of entering the date acquired, enter “Inherited.” For the date sold, enter the actual date title was transferred to the purchaser. Even if you sold it a week after you inherited it, you would report it as a long-term capital gain or loss.

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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.

Can you trust the IRS?

Can you trust the IRS?

I noticed something new this year on the first return I prepared for which the taxpayer wanted a check mailed to him instead of a direct deposit to his bank account. Lines 74a and 74b on page 2 of Form 1040 have a place to enter your bank routing number and account number. When I printed the tax return I noticed these lines were filled in with XXXXXXXX. At first I thought this must be a flaw in my tax software.

After making inquiries, someone suggested that it might be something the IRS asked tax software companies to add to these lines. But why? The reason suggested was that some unscrupulous IRS employees might fill in their own bank account numbers if these lines were left blank.

Has this actually happened? I don't know and the IRS isn't likely to admit that your confidential information isn't safe in their hands.

This brings some related risks to my mind.

• Don't make your check out to 'IRS" Some female employee at the IRS might change the "I" in IRS to "M" then add 'rs' and the check would then be to Mrs. XXX.
• Be cautious in selecting a tax preparer. I heard that some employee of a large tax-preparation company was caught after having using the clients' information such as credit card numbers and social security numbers in an identity theft scheme

Where there is a will, there is a way----to cheat.

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IRS-related phishing scams

IRS-related phishing scams
If the IRS doesn't get you, the scammers will (if they can).
Taxpayers to be on the lookout for bogus e-mails claiming to be from the tax IRS.

Scammers send e-mails, which are designed to trick the recipients into disclosing personal and financial information that could be used to steal the recipients’ identity and financial assets.

“The IRS does not send out unsolicited e-mails asking for personal information,” said IRS Commissioner Mark W. Everson. “Don’t be taken in by these criminals.”

The IRS has seen a recent increase in these scams. Since November, 99 different scams have been identified, with 20 of those coming in June – the most since 40 were identified in March during the height of the filing season.

Many of these schemes originate outside the United States. To date, investigations by the Treasury Inspector General for Tax Administration have identified sites hosting more than two dozen IRS-related phishing scams. These scam Web sites have been located in many different countries, including Argentina, Aruba, Australia, Austria, Canada, Chile, China, England, Germany, Indonesia, Italy, Japan, Korea, Malaysia, Mexico, Poland, Singapore and Slovakia, as well as the United States.

The current scams claim to come from the IRS, tell recipients that they are due a federal tax refund, and direct them to a Web site that appears to be a genuine IRS site. The bogus sites contain forms or interactive Web pages similar to IRS forms or Web pages but which have been modified to request detailed personal and financial information from the e-mail recipients. In addition, e-mail addresses ending with “.edu” — involving users in the education community — currently seem to be heavily targeted.

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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.

Are you missing the point(s)?

If you bought a new house in 2006, you may be overlooking some tax deductions.
Take a look at your settlement statement (HUD Form).

Lines 801 and 802, Entitled Loan Origination Fee and Loan Discount - These are points charged to either the buyer or the seller - or both. The buyer can deduct these charges as interest on Line 11 or 12 of Schedule A (itemized deductions). Even the seller-paid points are deductible by the buyer, since, theoretically, the seller has priced the house high enough to cover these expenses.

However, you should check your Form 1098 to see if the Mortgage company lists the points. If it does show them, then the points go on line 11 and you don't get to deduct the same amount twice.
If the Form 1098 does NOT list the points, then you should enter them on line 12 of Schedule A.

Some other items listed on the settlement statement that are deductible by the buyer:

• line 106 and 107 Taxes charged to the buyer to reimburse the seller for prepaid taxes
• Line 901 Interest in buyer column. (not deductible if reported on Form 1098)

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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.

Corporartion Sole

TAX AVOIDANCE SCHEMES-Corporation Sole

A few months ago someone asked me about doing business as a Corporation Sole to minimize his tax burden. He was skeptical since it sounded too good to be true. I checked with the IRS and here is what I found:

Taxpayers should be wary of promoters offering a tax evasion scheme that misuses “Corporation Sole” laws. Promoters of the scheme misrepresent state and federal laws intended only for bona-fide churches, religious institutions and church leaders.

"This scheme shamelessly tries to take advantage of special tax benefits available to legitimate religious groups and church leaders," said IRS Commissioner Mark W. Everson. "Unscrupulous tax promoters always look for ways to game the system and prey on unsuspecting victims. Taxpayers should be on the look-out for these and other scams."

Scheme promoters typically exploit legitimate laws to establish sham one-person, nonprofit religious corporations. Participants in the scam apply for incorporation under the pretext of being a “bishop” or “overseer” of the phony religious organization or society. The idea promoted is that the arrangement entitles the individual to exemption from federal income taxes as an organization described in Section 501(c)(3) laws.

The scheme is currently being marketed through seminars with fees of up to $1,000 or more per person. Would-be participants purportedly are told that Corporation Sole laws provide a “legal” way to escape paying federal income taxes, child support and other personal debts by hiding assets in a tax exempt entity.

While fraudulent Corporation Sole filings have happened sporadically for many years, the IRS has recently seen signs the scam could be starting to spread with multiple cases seen recently in states such as Utah and Washington. The IRS is concerned about this increase and is taking steps to pursue Corporation Sole promoters and participants.

Used as intended, Corporation Sole statutes enable religious leaders — typically bishops or parsons — to be incorporated for the purpose of insuring the continuation of ownership of property dedicated to the benefit of a legitimate religious organization. Generally, creditors of a Corporation Sole may not look to the assets of the individual holding the office nor may the creditors of the individual look to the assets held by the Corporation Sole. Currently, 16 states permit Corporation Sole incorporations. The IRS suggests that individuals considering becoming involved in any kind of tax avoidance arrangement obtain expert advice from a competent tax advisor not involved in selling the arrangement. Do not rely on legal opinions obtained or provided by the arrangement’s promoter. Start by asking the following questions:

• Is the arrangement designed to hide income or assets?
• Is the arrangement designed to evade income taxes?

Answering “yes,” or even “maybe,” to either of these questions should raise red flags for taxpayers.

Tax guidelines for churches and religious institutions can be found in Publication 1828, “Tax Guide for Churches and Religious Organizations”.

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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.