Consistent with a Financial Management Service initiative announced in April, 2010, the IRS has issued proposed regulations to significantly increase the number of electronic transactions between taxpayers and the federal government. These proposed regulations would eliminate the use of coupons to make tax payments. Instead, payments starting after December 31, 2010 would need to be made through the Electronic Federal Tax Payment System (EFTPS). The proposed changes would affect both business and individual tax payers. Business owners would need to pay their corporate taxes, excise taxes and payroll taxes via EFTPS. Individual tax payers will need to use EFTPS to make any estimated quarterly tax payments. Per an IRS spokesperson, “Using EFTPS to make federal tax deposits provides substantial benefits to both taxpayers and the government. EFTPS users can make tax payments 24 hours a day, seven days a week from home or your office.”

Information on EFTPS, including how to enroll, can be found at www.eftps.gov.

Additional information can also be obtained by visiting:

* Pay Taxes Online: Publication 4132

* The Secure Way to Pay your Federal Taxes: Publication 966

We will keep you posted when the final regulations are written, but it looks like we are going to need to learn a new method for paying our federal taxes. As always, you can contact us in Dayton at 937-436-3133 and in Xenia at 937-372-3504. Or visit our web site. Rick Prewitt – the guy behind TTW …until next week.

The IRS shortened the extension period for all pass-through entities that issue K-1s a couple of years ago.

If you put your personal tax return on extension (Form 1040), you still have until October 15, 2010 to timely file your 2009 return.

As we mentioned a few weeks ago, putting your tax returns on extension can be a good thing—but penalties to miss the extension deadline can be steep.

Give us a call if you need help meeting your deadlines.

As always, you can contact us in Dayton at 937-436-3133 and in Xenia at 937-372-3504. Or visit our web site.

Rick Prewitt – the guy behind TTW

The couple decided to appeal the penalties in Tax Court.  At trial, the wife said that they consistently filled out their tax returns using this software and she consistently confused capital gains and losses with ordinary income and expenses.  She believed the tax software would accurately prepare their return.

In rejecting the taxpayer’s software misuse (even if unintentional or accidental) as a defense to the penalties, the Tax Court noted that “tax preparation software is only as good as the information one inputs into it.”  Relying on a tax professional’s advice can establish reasonable cause and good faith to avoid a penalty, but the taxpayers did not rely on a professional – they self-prepared the returns.

Reference: Lam, TC Memo 2010-82

Give us a call if you have any questions about your tax return.

As always, you can contact us in Dayton at 937-436-3133 and in Xenia at 937-372-3504. Or visit our web site.

Rick Prewitt – the guy behind TTW

…until next week.

With the Baby Boomer generation (born between 1946 and 1964) coming into the age of retirement, many wonder about their Social Security benefits.  Some of the questions that may arise include:

• What is my full retirement age? For those born in 1937 and before, FRA (full retirement age) is 65.  For 1938-1942, two months is added to the FRA for each year.  From 1943-1954, FRA is age 66.  From 1955-1959, add two months for each year again.  For 1960 & later, FRA is age 67.
• When should I start taking Social Security? This is truly an individual choice.  Some factors to consider are how long you want to work, affects on survivor benefits, personal finances and health.  Although you can start receiving Social Security benefits as early as age 62, you cannot receive Medicare benefits until age 65.  Many people are forced to work until age 65 or FRA just so they can stay on a health insurance plan with their employer.As mentioned, you can start receiving Social Security benefits as early as age 62, wait until FRA, or wait until age 70.  The amount of benefits you will receive will be larger the longer you wait to start coverage.  You should determine your “breakeven point” before beginning distributions.  One rule of thumb: It requires about 12 years of added life expectancy for the higher benefits you receive at age 70 to exceed the lower accumulated benefits if you start at age 62.
• How are my benefits calculated? The simple formula is a percentage of the highest 35 years of earnings prior to age 60.  If, for example, you only work 25 years prior to receiving Social Security benefits the total earnings is still divided by 35.The Social Security Administration sends you an annual benefit report a couple of months before your birthday.  You should review these statements closely to ensure correct reporting of your income.
• Can I still work and draw Social Security? If you start drawing Social Security before your full retirement age, certain earned income restrictions apply.  For 2010: you may earn up to $14,160/year or $1,180/month before your benefits are reduced at a rate of $1 for every $2 over the annual limit if you are younger than full retirement age.  During the year you reach full retirement age, you may earn up to $37,680/year or $3,140/month.  If you go over that limit then $1 for every $3 over the annual limit will be withheld.  Once you reach the month of full retirement age there is no limit on earnings.  If you plan on working while drawing early benefits, be very careful about your earnings.  If you go over the limit and benefits are withheld, then future benefits will be recalculated automatically at full retirement age. Check out the Social Security Administration’s Quick Calculator.

For more information, visit your local Social Security office, or go online at www.ssa.gov.

We highly encourage you to contact us for tax planning advice prior to signing up for Social Security benefits.

As always, you can contact us in Dayton at 937-436-3133 and in Xenia at 937-372-3504. Or visit our web site.

Linda Johannes – author of this week’s TTW
Rick Prewitt – the guy behind TTW

…until next week.

Editors note: Before we dig into this week’s TTW, I want to acknowledge the 52nd tip – or a full year of Bradstreet’s Tax Tip of the Week! To those who have been with us from the beginning – THANK YOU. For those who have joined in along the way – WELCOME! We’d love to hear from you about what you like, don’t like and how we can improve. Shoot me an email or comment here. Happy Anniversary – We hope you’ve learned a few tricks and tips over the past year!

Interest generated from your non-retirement investment accounts such as savings, money markets, CDs, and corporate bonds are all taxed at your ordinary tax rate on both your federal & state tax returns (we will use Ohio in this example).  Depending on your tax bracket, the additional tax on interest-bearing investments can cut deeply into your returns.

One way to minimize interest tax is to invest in U.S. Obligations (Federal Treasury Bonds, U.S. Savings Bonds, etc) and Municipal Bonds.

What are US Obligations and Municipal Bonds?
U.S. Obligations are debt obligations issued by the U.S. federal government and the interest that these U.S. obligations generate is not taxable on your state (OH) income tax return by federal law.  Municipal Bonds are bonds issued by municipalities in the U.S. to complete large projects or to fund cities budgets.  The interest received on municipal bonds is not taxable on your federal tax return and if the municipality that issued the bond is in Ohio, the interest is not taxable on your Ohio tax return.

After factoring in the reduction of tax on interest earned in these types of investment vehicles, bonds of this nature can become quite attractive because of the rate of return plus the tax-free bonus they provide.  However, they are not for all taxpayers, and the decision should not only be based on your tax bracket (see chart below), but should be a part of your overall investment strategy after careful consideration with your investment adviser.  These types of investments are usually not suitable in retirement accounts because of their tax deferred status.

For example:  If you are in a federal tax bracket of 33% and an Ohio tax bracket of 6% and could find an Ohio Municipal Bond that offered a 3% interest rate, it would be equivalent to a fully taxable investment that yields a 4.91% interest rate.

Want the math?

.33 + .06 = .39

.39 – 1 = .61

3/.61 = 4.91

Or you could just Google—Interest rate calculators

Should you have any questions about the tax implications on bonds or other types of investments please don’t hesitate to give us a call.

As always, you can contact us in Dayton at 937-436-3133 and in Xenia at 937-372-3504. Or visit our web site.

Lance Bradstreet – author of this week’s TTW
Rick Prewitt – the guy behind TTW

…until next week.

The statistics don’t lie. Most new businesses will not make it past their first year. The big question is why?

In most cases, it is due to a lack of accounting systems. A new business can be losing money and not even know it.

We’ve also seen situations where the new entity was not compliant with a tax or government agency.  Getting behind with payroll taxes, sales tax, or income taxes can be a hole that is seemingly impossible to climb out of.  The penalties and interest associated with back taxes or failure to file can be a huge hit to any business, but especially a new business.

Practicing your ABCs
The above is a lot of doom and gloom. But if you practice the ABCs of business you can build the foundation needed to succeed in the market place.  What are the ABCs you ask? The ABCs are having an active relationship with an Attorney, a Banker, and a CPA who can give you the extra leg up your business needs to get past the first year hump—and on its way to future success.  Below are just a few of the foundational building blocks a great financial team can help with:

• Entity Choice: An Attorney can help your business choose the right legal entity for asset protection and for tax saving strategies. (For more information see Tax Tip #45: Considerations for choosing an entity.)
• Accounting Software: A seasoned accounting team should be able to get you up and running on accounting software that us right for your new business.  You need to know if you are selling your products for the right prices and if your overhead is in a good place. Good accounting software and systems will answer these questions and more. (For more information see Tax Tip: Getting Organized part II).
• Banking Relationship:  A good relationship with a local banking team can help your business set up separate checking, savings, & credit accounts that are necessary for running a business.  Having these accounts separate from your personal accounts can help you with asset protection issues as well make your accounting for income & expenses easier. You will also need their assistance if you plan on taking credit card payments for your goods and services.

It is a big step when you start your own business—it is best not taken alone. Don’t forget your ABCs!

What’s your story?
Do you have a story about when you started your business? What did you learn?

As always, you can contact us in Dayton at 937-436-3133 and in Xenia at 937-372-3504. Or visit our web site.

Rick Prewitt – the guy behind TTW

…until next week.

The gift tax is often misunderstood since it is not the recipient that owes the tax but the giver.

Generally speaking, one may be responsible for paying federal gift tax if you give away a lot of money or other assets.  Under current federal tax law, up to $13,000 annually may be gifted to any number of individuals without incurring a federal gift tax liability.  There is also a one million dollar lifetime limit on gifts.  Any gifts exceeding these amounts will most likely require the filing of an IRS Form 709.

Planning opportunities exists to minimize the potential gift tax
If properly executed, gifting may be a very effective estate planning tool.  Any large gifts need pre- planning so that neither the giver nor recipient owes a gift tax.

Some other considerations when making large gifts of money or assets follow:

1. You and your spouse can gift annually up to $26,000 to any number of persons.
2. The gift is money or assets given away without any expected return.
3. Giving away money or assets while you are still alive may provide large tax savings to your beneficiaries.
4. Paying someone else’s medical expenses is exempt from these rules.  However, you must pay them directly to the medical institution to qualify.
5. Gifts of educational expenses are also exempt.  These include payments directly made for education, books, supplies, and other related living expenses.
6. Charitable gifts and gifts to your spouse are also not subject to the gift tax.

Note:  As it currently stands for 2010, the federal estate tax was repealed for one year only (don’t confuse that with the Ohio Estate Tax – it is still very much alive and well).  However, beginning next year, all estate and gift rates will revert back to their 2001 levels.  So in 2011, each estate can exclude only $1 million of their estate tax-free to their beneficiaries.  Any estate value above that is subject to federal estate tax.  Please be watchful for any new legislation as Congress continues to debate these issues.

Anything you’d like to add?

We know many of the topics covered in TTW can get complicated quickly. The gift tax is a great example. Let us know what has worked for you or if you need clarification.

As always, you can contact us in Dayton at 937-436-3133 and in Xenia at 937-372-3504. Or visit our web site.

Mark Bradstreet – author of this week’s TTW
Rick Prewitt – the guy behind TTW

…until next week.

Looking this far ahead is unpredictable.  Who knows how many changes may take place within Congress and the Federal Administration during this time period–or how the winds of politics may shift.  However, these highlights give us a roadmap of what to expect:

2013

• Maximum health Flexible Spending Account (FSA) contributions capped at $2,500/year and increased annually by inflation.
• Increases Medicare Part A payroll tax rate by 0.9% on earnings over $200,000 for individuals and $250,000 for married filing joint returns.  Note: this increase is only on the employee share of Medicare and not the employer’s share.
• Self-Employed individuals and couples will also pay an additional 0.9% Medicare care tax with incomes above these levels.
• An added Medicare tax (3.8% total) will be assessed on the investment income of individuals and couples meeting the above-stated thresholds.   This means there will be an additional tax on all interest, dividend and capital gains income.
• The ability to deduct medical expenses on your Schedule A personal tax return will increase from the current “floor” of 7.5% of AGI to a 10% “floor”.  Note:  taxpayers over 65 will keep the 7.5% level until 2016.

2014

• Employer and individual mandate to buy health insurance begins.  Both self-employed and W-2 employees must buy individual polices if their employer does not provide coverage.
• For low-income individuals, a premium assistance credit becomes available.
• Businesses with 50 or more employees must provide health coverage or pay a $2,000 penalty per employee.
• Penalties will also be assessed against individuals who do not buy health coverage.
• Various “Voucher Programs” will be introduced to help pay for health coverage.

2017 – 2018

• A 40% excise tax will be assessed to employers offering “Cadillac Insurance Plans”.  Currently, this is defined as plans where the cost of health coverage for individuals exceeds $10,200 or exceeds $27,500 for family plans.
• States may allow large groups (greater than 100 employees) to purchase coverage through Exchanges.

What Do You Think?
Looks like we’re in for a long ride with the Healthcare Bill! We’ll continue to cover changes in the Tax Tip of the Week, but let’s talk about it. Post your comments here. What do you think about the Healthcare Bill? What are your concerns and comments? Join in the conversation!

As always, you can contact us in Dayton at 937-436-3133 and in Xenia at 937-372-3504. Or visit our web site.

Rick Prewitt – the guy behind TTW

…until next week.

On page 737 of the Healthcare Bill is a three-paragraph section that has nothing to do with hospitals, doctors, drugs or health insurance.  Starting January 1, 2012 all business entities will be required to issue 1099s to all individuals and business with which they spend $600 or more annually for goods and services.

Currently, businesses must file 1099-MISC forms only to individuals and unincorporated business for goods and services provided.  For example, a small business contracts with an individual to design a web site for the company.  The cost is $1,200 to perform the work.  A 1090-MISC is issued to that contractor to insure the income is reported on that contractor’s personal tax return.

The intent of the new reporting requirements is to capture an estimated $2 billion in taxes on income that currently goes unreported each year.

So starting in 2012, if a small business purchases a computer from Staples, they will need to get Staples’ federal identification number and address in order to issue them a 1099.  Same goes for the provider of their internet services, office supply company, software vendor, utility company, etc.

These reporting requirements will add a HUGE compliance problem for American businesses. Small companies, especially, just don’t have the manpower to track down the information and submit 100 or more 1099s each year.  And what about all the companies on the receiving end?  There is going to be a flood of 1099s pouring into Office Max, Apple, Proctor & Gamble, etc. each year.

Fortunately, Representative Dan Lungren (R- Calif.) has introduced a bill to roll back this provision.  We offer him our support!

We’ll keep you posted.

Questions or comments? In Dayton, call 937-436-3133 and in Xenia, call 937-372-3504. Or visit our web site.

Rick Prewitt – the guy behind TTW

…until next week.

2011 Highlights

• A new national employee-funded long-term care benefit known as the “Community Living Assistance Services and Supports Act” (CLASS Act).  Estimated monthly premium of $120 for a $50/day benefit
• The value of employer provided group health coverage to be reported on each employee’s W2
• Distributions of proceeds from HRAs, FSAs and HSAs will no longer be non-taxable for over-the counter medications.
• Any distributions from HSAs and MSAs for non-medical expenses will have an additional 20% penalty tax (currently 10% for HSAs and 15% for MSAs
• Brand-name drug manufacturers and importers will pay an added $2.5 billion in annual taxes

2012 Highlights

• Employers must provide a Summary Plan Description (SPD) of group policies to all employees
• A new tax of $2/covered individual will be assessed to all those covered by self-insured health plans.
• Payors (including all corporations) will need to issue 1099s to report all payments of $600 or more for goods and services purchased.

Next week we will look at this “1099 Nightmare” in more detail.

Questions or comments? In Dayton, call 937-436-3133 and in Xenia, call 937-372-3504. Or visit our web site.

Rick Prewitt – the guy behind TTW

…until next week.