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5 Practical Tips You Can Implement To Raise The Liquidity Ratio Of Your Business

Having a good liquidity ratio is exceptionally important for all business no matter whether they are big or small. In layman terms, liquidity indicates the company’s self sufficiency and whether it can make timely payments of bills and other expenditures incurred all round the year. As the old catch phrase goes, cash is truly kind and here are 5 ways you can improve the liquidity ratio of your business without making drastic changes in the way you run your business.

Roll Your Extra Cash into Interest Accounts

There will be times when you have a lot of extra cash on hand and there are not many expenses that you would have to pay for except for some of the fixed costs. This situation is favorable for your business because you can simply move that extra amount to an interest bearing account to make surefire profit from it without making a risky investment.

 Whenever you need the cash, you can move it into the current account as and when you need it. You will be amazed at how much extra income you have generated by just making this one smart move.

Review Overhead Costs From Time To Time

Another method you can adopt to improve the liquidity ratio of your business is to check the cost of your overheads from time to time on a regular basis. By doing so, you will actually be able to find a way to reduce the costs which will have a positive impact on the liquidity ratio inevitably. Some of the overhead expenditures that you can cut down on are advertising, professional fees, rent and indirect labor.

Say No to Unproductive Assets

One of the major reasons why some businesses tend to have bad liquidity ratios despite of having everything else in check is because they store unnecessary unproductive assets that the business is better off without. Remember that a smart businessman is one who spends money on assets that play a vital role in revenue generation for example, the office building, cars, trucks and equipment to name a few. If your business is still holding onto assets that are of no use anymore, it’s time to chuck them out and make some extra cash on the side.

Keep a Tab on the Account Receivables

In order to have an optimal liquidity ratio, the business owner must pay attention to all the aspects of running a business. One such aspect that needs to be monitored closely is the account receivables. You must make sure that timely payments are being made by all your clients and no bad debt is recorded.

Go Easy On the Drawings

In a sole proprietor business, the profit made by the businessman is ultimately his income and he may withdraw it at any time for his personal use. But in order to maintain a good liquidity ratio, it is advised that you go easy on the drawings for excessive amount of withdrawals can portray a negative impact on the liquidity ratio of your business unnecessarily. So be on the lookout when you withdraw amounts for your personal use to avoid cash drains.

If you have trouble with accounting and bookkeeping, then free yourself from your accounting responsibilities by hiring CFAs and CPAs from SK Financial CPA at highly affordable rates.



The 3 Most Effective Tax Planning Strategies for Small and Medium Scale Businesses

The prime focus of tax planning is to arrange one’s financial activities for the year in such a way so that the lowest possible amount for tax payment is incurred. Undoubtedly, the most difficult time for small and medium enterprise owners is the tax season in which they have to pay a taxable amount on all the income they’ve earned during the previous financial year.

Most business owners end up paying more than they should because they are not well aware of the legal tricks they can use to minimize their tax burden. But now, you can save up on taxes by following the three awesome tax burden reduction strategies mentioned in this blog.

Reduce Your Income

One of the key determining factors in figuring out the taxable amount is adjusted gross income also called AGI in short. Your tax rate and different tax credits also rely on AGI. Since the AGI play a vital role in the entire journey of determining and making tax payments accordingly, it is best to pick the adjusted gross income as the starting point of your tax planning process. If you are not sure what AGI exactly is, it is actually the entire income collected from all resources minus the adjustments made to the aggregate income.

Ideally, if your total income is high, your AGI will also follow the higher trend and if you make less income, your AGI for the year will decrease automatically. Therefore, the most effective method to minimize the tax load is to slash down your income. But how exactly can you reduce your income? The answer is pretty simple. Just set aside a large chunk of your income for your retirement plan by following the conventional IRA plan or 401k at work plan.

Boosting Your Tax Deductions

You can also smooth out your tax situation over all by focusing on your taxable income. Now the taxable income actually is the left over amount that is calculated once all the deductions and exemptions are cut off from AGI. Itemized deductions is what you should aim for in various categories such as interest on mortgage, charity, health care, tax planning and preparation expenses, local as well as state taxes and expenses linked to investments.

The best way to do this is to record all your itemized expenses incurred throughout the year in an excel spreadsheet and review it from time to time. By recording all these expenditures, you can easily compare your standard deduction with the itemized expenses incurred within the one year time frame. Remember to always consider the higher of your standard deduction or itemized deduction. When itemizing your expenses, make sure you pay more attention to three main categories; donations to charity, state taxes and interest on mortgage.

Using Tax Credits To Your Advantage

Once you have adjusted your taxable income to reduce your tax burden, the next step is to take full advantage of the tax credits. Some tax credits that can help in minimizing the taxable amount considerably are going to college, adopting a child or setting aside money for retirement.

SK Financial CPA is where you should get help from when filing for taxes by letting professional CPAs and CFAs give you advice on how to present your accounting statements for the year.

10 Most Tax-Friendly States in the U.S and 10 Least Tax-Friendly States in the U.S.


1. Delaware

State income tax: 2.2%-6.6%
State sales tax: None
Gas taxes and fees: $0.23 per gallon (National average is $0.31)

2. Wyoming

State income tax: None
State sales tax: 4%
Gas taxes and fees: $0.24 per gallon

3. Louisiana

State income tax: 2%-6%
State sales tax: 4%
Gas taxes and fees: $0.20 per gallon

4. Mississippi

State income tax: 3%-5%
State sales tax: 7%
Gas taxes and fees: $0.18 per gallon

5. Alabama

State income tax: 2%-5%
State sales tax: 4%
Gas taxes and fees: $0.21 per gallon

6. Arizona

State income tax: 2.59%-4.54%
State sales tax: 5.6%
Gas taxes and fees: $0.19 per gallon

7. Nevada

State income tax: None
State sales tax: 6.85%
Gas taxes and fees: $0.33 per gallon

8. New Mexico

State income tax: 1.7%-4.9%
State sales tax: 5.125%
Gas taxes and fees: $0.19 cents per gallon

9. South Carolina

State income tax: 3%-7%
State sales tax: 6%
Gas taxes and fees: $0.17 cents per gallon

10. West Virginia

State income tax: 3%-6.5%
State sales tax: 6%
Gas taxes and fees: $0.36 cents per gallon

10 Least Tax-Friendly States in the U.S.

1. California

State income tax: 1%-13.3%
State sales tax: 7.5%
Gas taxes and fees: $0.50 per gallon (National average is $0.31)

2. Connecticut

State income tax: 3%-6.7%
State sales tax: 6.35%
Gas taxes and fees: $0.49 per gallon

3. New Jersey

State income tax: 1.4%- 8.97%
State sales tax: 7%
Gas taxes and fees: $0.15 per gallon

4. New York

State income tax: 4%-8.82%
State sales tax: 4%
Gas taxes and fees: $0.48 per gallon (varies by county)

5. Hawaii

State income tax: 1.4%-11%
State sales tax: 4%
Gas taxes and fees: $0.48 per gallon (varies by county)

6. Rhode Island

State income tax: 3.75%-5.99%
State sales tax: 7%
Gas taxes and fees: $0.33 per gallon

7. Maine

State income tax: 6.5%-7.95%
State sales tax: 5.5%
Gas taxes and fees: $0.32 per gallon

8. Minnesota

State income tax: 5.35%-9.85%
State sales tax: 6.875%
Gas taxes and fees: $0.29 per gallon

9. Vermont

State income tax: 3.55%-8.95%
State sales tax: 6%
Gas taxes and fees: $0.33 per gallon

10. Illinois

State income tax: 5%
State sales tax: 6.25%
Gas taxes and fees: $0.39 per gallon


Ten steps on how we save you money


Ten steps on how we save you money:

1. We save you money by automating your accounting department. By doing so, you save on direct/indirect payroll, overhead costs as well as technology costs. Your data is saved on our dedicated secure server in an SAS70 certified data center. You will have absolutely no computer or software costs. We also eliminate your hiring and training headaches. Our skilled, experienced professionals handle your daily accounting and bookkeeping. We will help you develop standardized and consistent policies and procedures to streamline the accounting process for you.

2. We save you money by implementing numerous tax strategies. You save on taxes with our proactive accounting and tax advice and guidance. We have more than 100 tax planning strategies, which we will gradually implement as we monitor the progress of your business. You will be amazed to see how the implementation of just one, sound tax strategy can help you save way more money than our fees for the entire year.

3. We save you money by not allowing you to pay any penalties to the IRS or state authorities. You are guaranteed never to pay any penalties due to our strict adherence to deadlines. We will handle all your required filings in the most efficient and timely manner. If we don’t file any forms or make a tax deposit on time, then we will pay any tax penalties on your behalf.

4. We save you money by valuing your time. Your phone calls and emails will be returned within 24 hours. We will finish any tasks requested by you within 48 hours. We are easily accessible through phone, email, chat, Skype and other social media. We will complete your bookkeeping by the end of every month, or you will not be charged for that month.

5. We save you money with our audit protection plan. If you get audited or receive a notice from the IRS, all you have to do is just forward it to us, and we will take care of the rest. We will represent you and correspond with the IRS on your behalf. You will not have to pay any fees for our additional work.

6. You save money by automating your payroll and HR process. We process your payroll online with direct deposit, make tax payments electronically, prepare quarterly payroll tax returns, 1099s and sales tax returns and submit them electronically. We will also automate your time sheets, vacation benefits, expense reimbursements and HR functions through our Human Resource Information System (HRIS).

7. You save money by having a CPA firm by your side throughout the year. We provide unlimited consultation regarding accounting, tax, marketing and business matters throughout the year.  You also have access to our resource library and your own online portal.

8. You save money with our marketing consultation. We meet with hundreds of entrepreneurs throughout the year, and will share with you the many outstanding marketing strategies that are being implemented by other successful businesses.

9.We save you money by automating your A/P and A/R departments. All you have to do is to scan, fax, or email your paperwork to us, your capable accountants, and your hassles are no more. For A/P (bills) we keep track of all your due dates, set an approval process and automatically pay on the scheduled date. For A/R (invoices), we email or post your invoices, so you have no more hassle with printing, postage and mailing.

10. Your savings will be significantly higher with our accounting packages than with any other accounting firm. You will know what your fees will be well in advance, so there will be no unpleasant surprises. On average, our fees are far less than our competitors’. So you receive superior quality of work for a low, fixed monthly fee.

Sitting Down with a Tampa CPA and Preparing for Next Year


Tax time can be a stress filled time of the year for everyone. For both business owners and individuals alike, the race is on to file on time and accurately, to maximize deductions and to minimize penalties. The slightest mistake on tax forms can cause a company to lose out on valuable deductions, and being late by a week can add up in interest. Whether it is business taxes, personal taxes, or both, between January and April, everyone is pressed for time, trying to get all their paperwork in order to meet that April 15th deadline. After everything is filed, all that needs to be done is to wait and see if everything goes through as planned. By the time September rolls around, often the last thing on peoples’ minds is sitting down with their Tampa CPA and reviewing their tax plan for next year.

With no deadlines looming, September is the perfect time to do a financial performance review with your Tampa CPA.  With the details from last year’s returns, including any missed opportunities and prior losses, fresh in mind, it can be beneficial for everyone to start thinking now about what they want for next year’s taxes. For both business owners and individuals, starting the tax planning process in the fall works greatly to their advantage in the spring.

Having regular quarterly consultations with your Tampa CPA can benefit any business.  From planning for any potential tax issues that may come up, to doing a financial check up and ensuring your business is on the right track, to doing tax research on your behalf, so that you and your business can maximize your after-tax income. A consultation ahead of time can help you plot your course for next year.

And even if the taxes that need to be planned are strictly personal taxes, a consultation with a Tampa CPA months ahead of time, can yield great results. From income splitting to maximizing family and household deductions, being proactive with tax planning can pay off for individuals.  CPA’s can help structure your cash flow to help you pay for things such as vacation homes, education, and discovering which investments are best for you.

And, if you are in the market for a new Tampa CPA, now is the best time to look. As many offer free consultations, you can shop around and see which one meets your business, personal, or family’s needs, without the rush or pressure that comes from looking at tax time. You will have the opportunity to review their credentials ahead of time and ask around and determine which CPA you chose to hire. The right CPA is as crucial to your financial health as a doctor is to your physical wellbeing.

Tax time doesn’t need to be stressful. Sitting down with a Tampa CPA now, in September, rather than waiting until March or April, can benefit anyone. With no deadlines looming and no pressure to file on time, individuals and business owners alike can take the time to make the right decisions for their specific needs.

Owners of self-directed IRAs must be very careful with the IRAs’ investments…


Owners of self-directed IRAs must be very careful with the IRAs’ investments, as this case shows. Two individuals formed a new firm and directed their IRAs to buy all of the stock. The company that the IRAs owned then purchased a business for cash and a note that was secured by the personal guaranties of the IRA owners.

The guaranties by the IRA owners violate the prohibited transaction rules, according to the Tax Court. That means the IRAs are terminated for tax purposes, and the owners wound up having to pay a substantial tax bill (Peek, 140 TC No. 12).

The moral of the story: Be sure that you get good legal advice in advance if you are planning to have your IRA invest in nonpublicly traded stock and the like.


Funding for the IRS will remain very tight. Congress will be stingy until the agency can prove that it has been able to clean up its act.

So expect fewer examinations. The current trend toward single-issue audits by mail and away from face-to-face exams with agents will continue at full throttle.

Poorer customer service. Anticipate longer waits if you’re trying to call IRS.

And a decline in respect for the tax system. That may embolden people to be more fast and loose with the Service, leading to a dip in voluntary compliance.

Estate Taxes

Relief is on the way for estates that made late portability elections. According to an IRS official, the agency is weighing issuing private rulings granting additional time to elect portability. Under this rule, when one spouse dies, any unused estate and gift tax exemption passes to the surviving spouse. We expect that the Service will rule favorably on late elections. Many executors did not realize that the election must be made on a timely filed estate tax return, even if total assets are less than the normal filing threshold for Form 706 … $5 million for deaths in 2011, $5.12 million for 2012 and $5.25 million for estates of decedents who die in 2013.

Benefit Plans

Hardship distributions from 401(k) plans can be hit with the 10% penalty if the recipient hasn’t reached age 59½, the Tax Court says. In addition, withdrawals that are made on account of hardship are taxed (Mayer, TC Summ. Op. 2013-39).

The IRS has a helpful chart listing withdrawals that escape the penalty, such as a series of substantially equal payments that last for the longer of five years or until age 59½ and withdrawals that are made to cover large medical expenses. The chart also notes which exceptions apply to 401(k)s and other qualified plans, those only for IRAs, SIMPLEs and SARSEPs, and which ones apply to all plans. Go here here to view the complete list.


The Service will not have access to taxpayer medical records as the agency enforces the penalty on people who don’t have health insurance after 2013.

Insurance companies will send a report of coverage to IRS and taxpayers, listing the names, addresses and tax ID numbers of all individuals with coverage. If an employer self-insures, the employer will make the report. No medical history will be listed. The Service will then check to make sure that uncovered individuals have paid the penalty, which is capped at $95 a person for 2014. And remember, IRS can enforce the penalty only by docking tax refunds. It can’t use liens or levies.

Tax-related identity theft may result in even slower refunds next year, according to IRS officials. Fraudsters are taking stolen Social Security numbers and quickly filing for fake refunds. Victims learn that their identities have been stolen only after their true return filing is rejected. The number of such cases is skyrocketing. Efforts IRS took this year to stop refund fraud slowed down payment of valid refunds, but the problem has continued to grow. So if the Service implements stricter controls to combat fraudulent refunds, the waiting time for refunds will only get longer.

The Service is continuing to aggressively pursue offshore tax evasion. Its latest project involves working with tax authorities in Australia and the U.K. to target foreign trusts and companies that are organized in offshore tax havens such as Singapore, the Cook Islands, the British Virgin Islands and the Caymans. The three countries will share information on the individual owners of these entities as well as on the advisers who assisted in establishing the offshore structures.

Can a lender collect on a debt after issuing Form 1099-C to the defaulter? and More…


Can a lender collect on a debt after issuing Form 1099-C to the defaulter?

A bankruptcy court says no. A couple failed to pay their home mortgage, and the bank foreclosed, issuing them a 1099-C showing debt discharge income of $5,000, the excess of the mortgage balance over what the house was sold for. The couple reported the $5,000 as income. The bank sued them for the shortfall, and they later filed for bankruptcy. The bankruptcy court ruled that the issuance of the 1099-C by the bank barred any later collection efforts (Reed, D.C., Tenn.).

But other courts have disagreed, pointing out statements in IRS rulings that agency regulations do not prohibit subsequent collection activities by lenders.

Eventually, a higher Court will have to step in and settle the dispute.

Payroll Taxes

The Social Security wage base is expected to be $115,500 for 2014, up $1,800 from this year’s ceiling, according to Social Security Admin. trustees. That’s down $300 from President Obama’s budget forecast that came out in April.

Back Taxes

A three-decade-old employment tax debt can still come back to haunt you. A man who was an officer of a company that didn’t pay payroll taxes in 1982 was found jointly liable with two other corporate executives for the overdue taxes many years later. When the Service finally attempted to collect the debt from him, he claimed that it had been fully satisfied by one of the other responsible persons. But the Tax Court found that only part of the money had been repaid, and it said IRS could go after him for the balance, despite the debt’s age (Beeler, TC Memo. 2013-130).

IRS has an uphill battle if the statute of limitations has run out on a tax year.

It has to prove fraud to collect back taxes, as this case shows. A couple were audited by the Service, which found evidence of some unreported income and personal expenses being claimed as business expenses. Unfortunately for IRS, its examiners let the statute of limitations lapse, so it alleged fraud. The Tax Court said that the couple’s actions were negligent and didn’t amount to fraud. Their books were detailed, and they cooperated with IRS agents (Bohannon, TC Memo. 2013-122).

Benefit Plans

Want to know whether or not a fringe benefit is taxable income?

The Revenue Service has a helpful guide to fringes, a training manual for government entities that has been updated for 2013 to reflect IRS’ current views. It covers the gamut of perks … cars, dependent care assistance, mass transit passes, meals and lodging, etc., as well as whether payroll taxes are due and reporting of taxable fringes. Click here to see the handbook.

The Labor Dept. is continuing its push for annuities in retirement plans. It now proposes to have 401(k) plans, 403(b)s and others show annuity illustrations in benefit statements. Participants would see not only their current account balance, but also a projected retirement balance. Both would be reported as a lifetime stream of monthly payments, based on expected-mortality tables. The Labor Dept. believes that individuals will be better able to understand their finances and might save more for retirement if they see account balances expressed as lifetime monthly income.


An important filing deadline is nearing for owners of foreign accounts: U.S. citizens with foreign accounts whose total value exceeded $10,000 at any time in 2012 have to file TD Form 90-22.1 with the Treasury Dept. no later than June 30. This filing rule is in addition to the requirement that those with lots of assets abroad attach IRS Form 8938 to their timely filed tax returns, so one or both of the forms may have to be filed by a taxpayer, depending on his or her particular circumstances.

Should I File My Own Taxes This Year?

The many pros and cons to do your own tax filing and the benefits of having a tax preparation service file your income taxes instead.

It’s that time of year again: Tax Season. While it may be very tempting to try and complete your own tax preparation, there are a few things you should know before you begin. The tax laws and codes are accessible to everyone, but the reality is they are very complex. Understanding the US tax laws takes many years of training and expertise with filing tax returns. Since the tax laws change every year, it makes it all the more complicated to keep up with. You would need ongoing training in order to ensure your taxes get filed with all of the applicable deductions and credits for your tax situation. The downside is that you may miss something vital or incorrectly record a number, which can result in large fines, an audit, or even worse, being charged with fraud.




So, if you are still intent on doing your own taxes, then the next question you have to ask yourself is, “Am I ready to learn?” Because if you are going to take on your own tax preparation, then you need to make sure you are indeed aware and educated in all the vital information, new legislations, and guidelines necessary to claim each deduction and credit you file. If you have the time and money to invest in the proper courses and training, then filing on your own may very well be a good choice for you. However, if you are not good at arithmetic or studying, then it’s best to leave tax preparation to the professionals.


There are different tax preparation services to choose from.  A variety of companies offer online software that can be used. These different software programs can be very convenient by allowing you to complete your tax preparation in the comfort of your home. The drawback of these programs is they are set up as your standard tax filing systems, meaning that they may not get you all the deductions and credits you really have coming to you. Are you willing to take the chance on losing out on more money?


The best choice is to find a good tax preparation service with actual people, as opposed to a computer program. It is important to find an established company with a good reputation that offers many benefits with their services, along with a staff of seasoned, experienced CPA’s and tax professionals. The best tax preparation services typically offer free electronic filing, past refund reviews, free consultations, and year round assistance. Finding a company that offers a guarantee gives you peace of mind that your taxes have been done properly, and in accordance to all of the US laws. There are even some companies that allow you to drop off your taxes to be completed while you finish other errands. It’s an obvious decision to choose a service with plenty of experience, excellent customer service, and that way you can take confidence in the fact that they are doing all they can to get you the maximum refund.


If you are unsure and nervous about completing your own tax preparation, then you should definitely choose our tax professionals here at SK Financial to handle your tax returns, and let us seek out all your deductions and credits to maximize your tax refund.

Think you know your 2013 marginal tax rate?

Think you know your 2013 marginal tax rate?

It may be higher than you expect. The rates on upper-incomers can be far greater than the ones listed in the new income tax brackets. The same goes for tax-favored dividends and long-term capital gains.

Phaseouts of tax benefits are one culprit.

They actually are stealth rate increases, pushing your marginal rate above the 39.6% bracket in the new law. That rate applies to taxable income over $400,000 for singles and $450,000 for marrieds.

The cutback in itemized deductions adds up to 1.19% to your marginal rate. After 2012, these write-offs are reduced by 3% of the excess of adjusted gross income over $250,000 for singles … $300,000 for couples. The total haircut can’t exceed 80% of total itemizations. Medicals, investment interest and casualty losses are exempt. Note that the phaseout is based on the amount of your AGI and not taxable income … what’s left after itemized deductions. Filers with extremely large itemized deductions on Schedule A can start to feel the effects of this phaseout in the 28% bracket.

The loss of personal exemptions adds as much as 1.05% per exemption to your true rate. Personal exemptions are trimmed by 2% for each $2,500 of AGI over the $250,000/$300,000 thresholds we just noted. They disappear once AGI exceeds $372,500 for singles and $422,500 for joint filers. So a family of four in the phaseout zone can have a 4.2-percentage-point hike in its marginal rate.

Two other brand-new taxes for 2013 can increase your marginal rate:

The 0.9% Medicare surtax on high-earners. Singles owe it once earnings top $200,000 … couples, over $250,000. It hits wages and self-employment income.

And the 3.8% Medicare surtax on net investment income … gains, interest, dividends, royalties and passive rental income. This levy starts to bite single filers with adjusted gross income over $200,000 and married couples above $250,000.

Marginal rates on long-term gains and dividends can be higher than expected. If you are in the 10% or 15% tax brackets this year, gains and dividends are tax free until they push you into the 25% bracket … $72,500 of taxable income for couples and $36,250 for singles. Then they are taxed at 15% until your gains and dividends bump you into the 39.6% tax bracket, when the 20% top rate kicks in on the excess.

The 3.8% surtax raises the effective rate on tax-favored gains and dividends to 18.8% for filers below the 39.6% tax bracket and to 23.8% for upper-incomers.

The marginal rate can be even greater for high-incomers who owe the AMT.

Nominally, the 15% and 20% rates on gains and dividends also apply for the AMT. But for filers in the phaseout zones for the minimum tax exemptions … from $150,000 to $473,200 of AMT income for couples and $112,500 to $320,100 for singles … the marginal rate is 6.5 or 7 percentage points more. So most filers hit by this cutback pay a marginal rate of 22% on their gains and dividends. And a good chunk of them end up owing the 3.8% Medicare surtax on top of that, boosting the rate to 25.8%.

Let’s continue our review of the new tax law:

The 2013 withholding tables are out, reflecting the new 39.6% top bracket. The Revenue Service issued them Jan. 3, the day after the president signed the bill. See www.irs.gov/pub/irs-pdf/n1036.pdf for a copy. If an employer did not realize that the Social Security tax rate for employees has returned to 6.2% for 2013, the firm should adjust workers’ pay as soon as possible, but not later than March 31.

The withholding rate on bonuses over $1 million rises to 39.6% for 2013.

Trusts and estates will bear a higher income tax burden this year.

The 39.6% top tax bracket will kick in on taxable income over $11,950, replacing the old 35% maximum tax rate that applied in 2012. The next-lowest rate for 2013 is 33%.

Trusts and estates will be hit by the 3.8% Medicare surtax as well if their AGI exceeds $11,950 and they have any undistributed net investment income.

The AMT exemptions were increased retroactively for 2012 … to $78,750 for joint filers and $50,600 for singles and heads of household. In upcoming years, the exemptions will be adjusted for inflation, so the AMT rolls won’t grow dramatically. For 2013, the exemptions are set at $80,800 for couples and $51,900 for single filers and household heads. Our projection for couples in the Jan. 4 Letter was $50 low.

The adoption credit for 2013 is higher than we first reported. It can be taken on up to $12,970 of costs, IRS says, $200 above our estimate. And the phaseout zone starts at a higher level of AGI this year … $194,580. The credit goes away at $234,580.

The exclusion for company-paid adoption aid also increases to $12,970.
The tax credit for energy-saving home improvements was revived for 2012 and 2013. The credit remains at 10%, with a $500 maximum, and any credits taken in previous years are counted against the $500. No more than $150 can be claimed for furnaces and water heaters, $200 for windows and $300 for biomass fuel stoves.

Two special rules affect direct transfers from IRAs to charity. The new law restored for 2012 the rule that folks 70½ and older can directly transfer up to $100,000 free of tax from their IRAs to charity. The provision now is set to expire after 2013.

Payouts that IRA owners took in Dec. 2012 can qualify for tax free treatment as long as cash is transmitted to a charitable organization prior to Feb. 1, 2013.

And direct transfers made in Jan. 2013 can be treated as made in 2012.

The mass-transit-pass cap for 2012 was retroactively hiked to $240 a month, up from $125. Ditto for van pools. IRS recently issued guidance on FICA tax refunds and W-2 adjustments for firms that gave transit benefits of more than $125 a month. Employers that treated the excess as wages can make adjustments for all of 2012 on their fourth quarter Form 941 and on W-2 forms. But they’ll have to first reimburse their employees for the overcollected FICA tax before utilizing this special option.

The start of this year’s filing season will be delayed to Jan. 30, IRS says. Congress is to blame, since it did not finalize the income tax rules for 2012 until Jan. 1, 2013. IRS postponed the opening so it could reprogram its computers.

However, many filers will have to wait until late Feb. to file, at the earliest.
This will affect taxpayers who use several popular forms. Among them: Form 4562 for depreciation. Form 5695 for residential energy credits. Form 8582 to report passive losses. Form 8839 for the adoption credit. And many forms used for business credits, such as Form 5884 for the work opportunity tax credit.

Farmers who claim depreciation are in a bind. Estimated tax penalties for 2012 are waived if they file by March 1. But Form 4562 may not be ready by then. If the filing delay stretches into March, it’s likely that the IRS will provide them relief.
IRS loses again on levying FICA taxes on severance pay for laid off workers. The 6th Circuit Court of Appeals has refused to reconsider a 2012 decision that payments made in conjunction with a reduction in force aren’t subject to FICA.

Odds favor a Supreme Court appeal. A different Appeals Court OK’d the tax. And IRS estimates refund claims could top $1 billion if it doesn’t ultimately prevail.

A worker can be both an employee and an independent contractor of a firm, the IRS says privately in the case of a consultant who is engaged on separate projects. In such cases, the Service will examine each role independently, and FICA taxes apply only to the portion of pay attributable to an employer-employee relationship.

An IRS attempt to reclassify payments to an S firm owner is partially rebuffed. An S corporation paid its co-owner $60,000, but treated only $2,400 of it as wages. The balance was ostensibly reimbursement for cash advances he made to employees to cover their business expenses. IRS classified $55,000 as salary subject to FICA. The Tax Court agreed that $2,400 was too low a salary. But, because part of his pay was used to reimburse workers, the Court said his average pay for the past five years … $30,000 … was appropriate for payroll tax purposes (Herbert, TC Summ. Op. 2012-124).
Business Taxes

Selling and buying back a business can sometimes generate a tax break. After suffering a brain aneurysm, a CPA sold his practice for $900,000. Less than five months later, the buyer had a seizure and sold it back to the CPA for $900,000. Since the firm’s assets consisted of goodwill and other intangibles, the CPA amortized the repurchase cost over 15 years. IRS balked at the write-off, but the Tax Court OK’d the amortization deduction, finding in this case that the sale and buyback were separate and unrelated transactions (Fitch, TC Memo. 2012-358).
Social Security

Replacing private disability pay with Social Security is bad for your tax health. A disabled worker got tax free benefits under an insurance policy. However, he also was required to apply for Social Security disability and turn over the benefits to the insurer. The Tax Court ruled that he owes tax on the Social Security benefits, even though they are a substitute for nontaxable payments (Brady, TC Memo. 2013-1).

Bad news for a man who financed the purchase of a home and adjoining land:
Interest on borrowings over $1.1 million isn’t deductible, the Tax Court says. He paid $1.8 million for the property, intending to subdivide it and develop a portion of the land. But the purchase contract didn’t allocate the cost between the residential and nonresidential portions. He can deduct the interest on $1.1 million of indebtedness as mortgage interest … $1 million of acquisition debt plus $100,000 of home equity debt. He can’t write off the balance as investment interest (Norman, TC Memo. 2012-360).

Giving a family member a break on rent won’t always nullify a like-kind swap, the Tax Court decides. A landlord exchanged one rental home for another property that needed substantial renovations. His son, who had home building experience, fixed up the place and moved in with his family. The son paid below-market rent because he continued renovating the home during the four years he lived there. Thus, the low rent won’t nix like-kind-exchange treatment (Adams, TC Memo. 2013-7).

The tax implications of home foreclosures depend on the type of loan used. If a mortgage is nonrecourse, so the owner isn’t personally liable on it, the waived debt is included when figuring gain or loss on the transfer, the Revenue Service says. For primary homes, no loss is allowed, and only the portion of gain over the $250,000 or $500,000 exclusion is taxed. On a recourse mortgage, the forgiven debt is treated as income, unless the homeowner is insolvent right before cancellation. And if the loan is on the main residence, up to $2 million of debt forgiveness is deemed to be tax free.

The 2012 audit rate fell to 1.03% for individuals, one out of every 97 returns. 2011’s rate was 1.11%. The number of enforcement staff dropped nearly 6%, partly due to budget cuts. And many agents were detailed to work identity theft cases.
Filers with incomes of $1 million or more continued to get the most scrutiny. The Service audited 12.14% of these filers. That’s one out of every eight tax returns. Exams of folks with lower incomes declined in proportion to the drop in the audit rate.
Audits of all classes of business returns rose last year to 0.71%. That reflects an effort by IRS to check more S companies, partnerships and regular corporations. Exam rates ranged from 17.78% for returns by corporations with assets of $10 million or more to 1.12% for small corporations, 0.48% for S firms and 0.47% for partnerships.

IRS isn’t doing enough to police noncash donations, Treasury inspectors say. Too many tax returns that claim noncash charitable contributions of more than $500 are slipping by without a Form 8283. So the agency will start flagging such returns and asking filers to send in the missing form before allowing the charitable write-off.

Filers will have a simplified option for claiming the home office deduction, beginning with returns for 2013, which will be filed in 2014. Their write-off can be based on a standard rate of $5 per square foot of space used for business, with a maximum deduction of $1,500. This way, they avoid allocating actual costs and figuring depreciation on the 43-line Form 8829. Of course, the requirement that the office be used exclusively for business still applies, no matter which method is used.
Tax Burden

Don’t believe the talk that the 2013 tax hikes nail only the highest earners.
Lower- and middle-incomers are hit because of the payroll tax cut’s repeal. The effect of the expiration of the two-percentage-point drop in employees’ share of Social Security tax is being felt this month, as many workers see lower paychecks. An employee making $50,000 this year owes an additional $1,000 in payroll taxes, lowering his or her paycheck by about $19 a week. Individuals making under $100,000 wind up bearing more than 60% of the burden of this year’s payroll tax increase.
By contacting us, we can tailor a particular plan that will work best for you.

Tax Update as of 12/14/2012

As the stalemate on taxes continues between President Obama and Speaker Boehner…

Look at two tax hikes that will apply in 2013, regardless of the outcome of the current negotiations. IRS has issued guidance on these Medicare surtaxes for upper-incomers…a 3.8% tax on unearned income and a 0.9% levy imposed on their earned income.


Start with the 3.8% Medicare surtax. It applies to unearned income of single filers with modified adjusted gross incomes above $200,000 and of couples over $250,000. Marrieds filing separately get a $125,000 threshold. Modified AGI is AGI plus any tax free foreign earned income. The surtax is levied on the smaller of the filer’s net investment income or the excess of modified AGI over the thresholds. Investment income includes interest, dividends, payments of substitute interest and dividends by brokers, capital gains, annuities, royalties and passive rental income. Tax free interest is exempted, along with payouts from retirement plans such as 401(k)s, IRAs, deferred-pay plans and pension plans.


Most gain on the sale of a primary residence is exempt from the surtax. Only profit in excess of the $250,000 exclusion for singles or $500,000 for couples can be hit by the surtax. But the levy can apply to all gain on a second home.


Income from a passive activity is subject to the surtax if the recipient doesn’t materially participate in the operations, even if the income is from a business.


Now turn to the 0.9% Medicare surtax on earned income…wages and income from self-employment. Singles will owe the levy once total earnings exceed $200,000. Couples…over $250,000. Marrieds filing separately…over $125,000. So for earnings

over the thresholds, the effective Medicare tax rate will be 3.8%…the usual 2.9% rate plus an extra 0.9%. The surtax applies only to the employee’s share of Medicare tax.


Employers don’t owe it. Employers will withhold the surtax once an employee’s wages

exceed $200,000. Employees will then calculate the actual tax due on their 1040s.

So marrieds who each make below the $200,000 threshold but expect their total wages

to top $250,000 in 2013 should consider having more income tax withheld on their pay


Year End Tips:


Our final tax reminders for 2012 so you can avoid making last-minute errors:


Check the balance in your flexible spending account. You must clean it out by Dec. 31 if your employer still has not implemented the 2½-month grace period that IRS now permits. Otherwise, any money remaining in your account is forfeited.

Remember that a $2,500 annual ceiling on health FSA payins takes effect for 2013.


People 70½ and over must take their payouts from IRAs and company plans by year-end. You start with your Dec. 31, 2011, IRA balances and divide each of them by the factor for your age, which you can find in a table in IRS Publication 590.You can use a higher factor if you are more than 10 years older than your spouse. The sum of these amounts can be taken from any IRA you pick. The process is similar for retirement plan payouts, but you must take the required amount from each plan.


If you turned 70½ this year, you can delay the distribution for 2012 to April 1, 2013. But this option doesn’t apply for payouts in subsequent tax years, and the withdrawal for 2012 must still be based on the total of your IRA balances as of Dec. 31, 2011. And be careful if you decide to defer the distribution to 2013. Doing so means that you will be taxed in 2013 on two payouts: The one for 2012 that you deferred and the required withdrawal for 2013. The doubling-up of payouts in one tax year could have the effect of pushing you into a higher tax bracket.


Note the various deadlines for retirement plans, IRAs and Coverdells. Generally, employer plans such as Keoghs must be established by Dec. 31 so payins to them can be deducted for 2012. Self-employeds who miss the Keogh setup deadline for 2012 can open up a SEP by the due date for filing the 1040 plus any extension.  Keoghs and S EPs have the same payin cap: 20% of net self-employment earnings… the net profit shown on your Schedule C less one-half of your SECA tax liability.


Regular IRAs must be established by April 15, 2013, for 2012 deductions. Payins are due by then as well. A filing extension will not buy you additional time. Nondeductible payins to IRAs and Roth IRAs are also due by April 15. Ditto for contributions made to Coverdell education savings accounts.


If you are making a gift by check, be sure the donee deposits it in 2012 if you want the money to count as a 2012 gift for gift tax purposes. Alternatively, deliver a certified check to the recipient this year. That will count as a 2012 gift, even if the donee does not deposit the check into his or her account until next year. Remember that if you don’t use up the full $13,000-per-donee exclusion this year, you lose the shortfall forever. You can’t give a donee extra next year to make up for it.


If you’re giving securities, endorse them over to the donee and deliver them by year-end if you want the gift to count for 2012. If you send them to the corporation late in the year to be retitled, the process might not be completed by Dec. 31.


Mail checks for deductible items before year-end to ensure a 2012 write-off. You’re able to claim the deduction this year even if the checks don’t clear until Jan.  And make sure you know the tax rules if you are charging deductible items.


For charges that you make with a retail store credit card, you are allowed to claim the deduction for the item only in the tax year in which you pay the bill. For transactions made with a bank credit card, you take the write-off in the tax year that you charged the goods, even if you pay the bill next year.


Business Taxes:

The standard mileage rate for business driving is ticking upward for 2013. The rate will increase to 56.5¢ per mile, up a penny from 2012. Businesses with fewer than five vehicles can use the allowance. If you use the standard rate, you must reduce the vehicle’s basis by the depreciation component…23¢ per mile.


The rate for medical travel and moving will rise to 24¢ a mile next year, up 1¢ from this year. But the rate for charitable driving will stay static at 14¢ a mile because the amount of that write-off is determined by Congress, not by the IRS.


You also can claim the cost of parking and tolls. Use of the standard rate won’t bar deducting personal property taxes on the vehicle. But you can’t add the cost of fuel or repairs. And you can’t use the rates if you depreciated or expensed the car.


A warning to accrual method firms that pay bonuses to their employees:

The tax write-off is delayed if the funds can revert back to the employer, IRS lawyers say. A firm pays its workers bonuses a couple of months after year-end, based on their performance in the prior year. Under the plan, if an employee leaves after the manager finalizes the awards but before payment is made, his or her share is forfeited to the company. Thus, the firm’s liability isn’t fixed until the money is paid.


Watch what you put on a credit application. IRS may use it against you, as a woman who ran a cash-intensive massage therapy business at home discovered. She failed to file tax returns and didn’t cooperate with the Service during the audit. IRS reconstructed her income, relying on the income she listed on a credit application she filed with a bank. The Tax Court sided with IRS (Trescott, TC Memo. 2012-321).


Preparers of earned income credit returns for 2012 have extra work to do.

The IRS is requiring more documentation of due diligence efforts. Preparers of returns taking the credit must submit Form 8867 to show how they determined that the filer’s claim for the credit was valid, or IRS can slap a $500 penalty on them. Now, preparers will have to detail the documentation that clients supplied on issues such as residency and disability of qualifying children, as well as income reported on Schedule C. Preparers also have to disclose whether they asked follow-up questions when a qualifying child wasn’t the client’s child or when a child lived over six months during the year with someone else who could also claim the credit for the child.


IRS is eyeing businesses that fail to report income shown on 1099-K forms. It compared 1099-Ks filed by credit card companies and third-party networks such as PayPal with income shown on returns by taxpayers who received the forms. It’s now mailing notices to firms it believes may have underreported gross receipts.


But the 1099-K matching program is imprecise. The form reports receipts for a calendar year, which doesn’t jibe for firms with fiscal years. And businesses don’t have to separately report amounts shown on 1099-Ks. So the form’s usefulness as a tool to spot underreporting is lessened. Nevertheless, IRS will still ask businesses to explain discrepancies and will follow up with firms that don’t respond to the notices.


The Service is getting serious about the governance practices of nonprofits. Based on the results of surveys that agents fill out after exempt-organization audits, IRS believes nonprofits with good governance policies, such as independent boards and written management policies, are more tax compliant. It will test this premise by examining 200 social welfare groups and a like number of charities next year.


The Revenue Service is tightening the rules for individual tax ID numbers. ITINs are issued to individuals who are not eligible to get Social Security numbers. Newly issued ITINs will expire after five years unless the recipient reapplies for validation, IRS says. And all applicants must supply original documentation of identifying information, such as birth certificates or passports, or copies certified by the issuing agency. Folks can mail the documents to IRS along with Form W-7,or submit them to a certifying acceptance agent. The Service has tightened the rules on these agents, too.


Filers with ITINs who claim the refundable child tax credit are on IRS’ radar.

It’s clamping down after being criticized for permitting too many bogus tax refunds.

Schedule 8812 will require more residency information for dependents with ITINs.

And the Service is reconfiguring its computer programs to screen questionable claims.