Healthcare Tax Tips
Tax Tip of the Week
Plan Now, Avoid High Taxes Later
There are thousands of tax-exempt organizations that operate in the US and many of your clients make tax-deductible contributions to these groups that get claimed as charitable deductions on their personal Forms 1040. While you probably know that the American Cancer Society and American Heart Association are tax-exempt charitable organizations for which contributions are tax deductible, chances are your clients may have made contributions to other organizations that are less well known. How do you know if an organization is truly a charitable tax exempt organization?
One way to quickly find this information is to go to www.irs.gov and visit the charities and nonprofits section of the website or copy this link into your computer's web browser: http://apps.irs.gov/app/pub78. This section allows you to search an organization by name or location to see if it is a charitable organization. It is quicker and more up to date than relying on Publication 78.
IRS Business Gadget - Find Usefull IRS Websites
National Association of Tax Professionals (NATP) Appleton, WI - What is more exasperating than having to pay taxes? Understanding the constantly changing legislation affecting them! Yet, not fully understanding rights and how provisions work together costs taxpayers significantly every year. A mid-year tax review with an expert will help you. Here is why. Following are some common areas fraught with complex rules that cause taxpayers to miss valuable opportunities to leverage their options and lower their tax bills. Financial advisors and tax preparers are experts in these areas so you don't need to be. Call your tax advisor for your mid-year review soon to discuss your financial plans and learn how you can save on your next tax return.
- Overpayment or underpayment of taxes. Did you receive a big refund last year? If so, you overpaid and the government kept your money as a tax-free loan while you could have invested it and earned interest. Did you owe? Worse, were you stuck paying Alternative Minimum Tax? A mid-year review will help determine where you are and allow you to adjust your withholding now to avoid penalties later.
- Saving for retirement - IRAs, 401(k)s, profit-sharing, pensions, employer-sponsored plans, etc Many changes have taken place in the last few years regarding retirement savings plans. The plan you originally began with may have been advantageous when you started it, but it might not be anymore. So much has changed with these plans that it's important to review them to see if they are still performing as you intended, and to find out if there are new products available that you are not taking advantage of.
Many taxpayers do not have an Individual Retirement Account (IRA) and are missing an opportunity to defray their taxes and save for their own future. One of the primary reasons for not having an IRA is not starting one. Begin now, even if it is only a few dollars a paycheck. The government has increased the amounts IRA holders can save, and those over age 50 can place additional catch-up amounts into their IRAs. - Medical savings accounts and health savings accounts. Try comparing your high premium medical insurance plan against a high-deductible plan combined with a health savings account (HSA). You may be surprised at not only which one is less expensive, but reap tax savings besides. And are you using any available flexible spending accounts through your employer? They are another way to reduce taxable income.
- Estimated tax payments. Adjusting these payments now will avoid underpayment penalties at year-end.
- Take advantage of deduction bunching. Some itemized deductions must meet certain thresholds before you can claim them. By being aware of these and managing your expenditures to fall primarily in one year, rather than spread over two years, you may realize significant tax savings. This applies to several expenditures, especially to medical expenses, property tax payments, and charitable donations.
- Getting married? Or Divorced? These life-changing events have very significant tax implications. A divorce or change in child custody arrangements can mean tax implications in several areas. Attempting to reach a divorce settlement or filing taxes without expert financial advice will most likely not be to your advantage.
- Beneficiary designations, Powers of Attorney, wills, estate planning. Are these working advantageously for you? Do you even have them in place? This is the time to get your plans in order and be sure that tax changes have not changed how you intended these contracts to work.
- Buying or selling stocks, bonds, real estate, or other investments. Many tax rules apply to all of these transactions. For example, a real estate like-kind exchange may work to your advantage. If you're selling a residence, perhaps the exclusion for selling a principal residence applies to you. There are capital gains and losses, wash sale rules, long-term gains and losses, and a whole array of other rules when it comes to stocks and bonds. And don't forget, investment expenses count as miscellaneous itemized deductions when used for the production of income. Handling these transactions wisely, rebalancing, and making changes are the name of the game with investments. Your financial adviser is worth his or her weight in gold here.
- Financial planning is important when you have children and teens. Coverdell Education Savings Accounts (ESAs) and Section 529 plans are two ways to begin tax-deferred savings for a child's education. Children grow up quickly, so begin these accounts early, and know how much you can add to them. Discipline yourself to save, and you help both yourself and your child.
Self-employed parents can hire their children or grandchildren and lower the overall family tax bill. The business also may benefit from hiring children under age 18, as their wages are exempt from social security and unemployment taxes paid from a parent's sole proprietorship. Teens with earned income can make IRA contributions as well. However, if children plan to attend college, it is important to structure savings carefully to best work with college financial aid programs. When children are in college, remember to claim the education credits or the tuition and fees deduction. - Self-employed taxpayers and those with small businesses have many ways to plan for tax savings. This is another area where tax preparers prove their value. Several changes in recent years allow flexibility with carrybacks, carryforwards, employee benefit plans, expense deductions, etc. Certain small businesses that start retirement plans for their employees may even qualify for a tax credit to help recover the costs of starting up. The number-one rule-of-thumb here is to carefully document, backup, and substantiate all expenses in order to claim them on tax returns. If you have not done that, you will miss deductions. Timing of purchases and assets can make big differences on your tax return, and some of these things need to take place before year-end to qualify. Work closely with your tax preparer and plan carefully, using his or her advice.
The result of the calculated tax burden on your annual income tax return is not due to a few transactions, but is instead the result of how you've planned, invested, and leveraged your financial dealings throughout the year. Make this the year when you start taking a more deliberate and informed approach.
Legitimate Contribution?
There are thousands of tax-exempt organizations that operate in the US and many of your clients make tax-deductible contributions to these groups that get claimed as charitable deductions on their personal Forms 1040. While you probably know that the American Cancer Society and American Heart Association are tax-exempt charitable organizations for which contributions are tax deductible, chances are your clients may have made contributions to other organizations that are less well known. How do you know if an organization is truly a charitable tax exempt organization?
One way to quickly find this information is to go to www.irs.gov and visit the charities and nonprofits section of the website or copy this link into your computer's web browser: http://apps.irs.gov/app/pub78. This section allows you to search an organization by name or location to see if it is a charitable organization. It is quicker and more up to date than relying on Publication 78.
IRS Warns Taxpayers of New E-mail Scams
Updated Sept. 19, 2007 - Another recent e-mail scam tells taxpayers that the IRS has calculated their "fiscal activity" and that they are eligible to receive a tax refund of a certain amount. Taxpayers receive a page of, or are sent to, a Web site (titled "Get Your Tax Refund!") that copies the appearance of the genuine "Where's My Refund?" interactive page on the genuine IRS Web site. Like the real "Where's My Refund?" page, taxpayers are asked to enter their SSNs and filing status. However, the phony Web page asks taxpayers to enter their credit card account numbers instead of the exact amount of refund as shown on their tax return, as the real "Where's My Refund?" page does. Moreover, the IRS does not send e-mails to taxpayers to advise them of refunds or to request financial information.
Updated Aug. 24, 2007 - The Internal Revenue Service today warned taxpayers of a new phishing scam, in which an e-mail purporting to come from the IRS advises taxpayers they can receive $80 by filling out an online customer satisfaction survey. The IRS urges taxpayers to ignore this solicitation and not provide any requested information. The IRS does not initiate contact with taxpayers through e-mail.
Updated June 19, 2007 - In another recent scam, consumers have received a "Tax Avoidance Investigation" e-mail claiming to come from the IRS' "Fraud Department" in which the recipient is asked to complete an "investigation form," for which there is a link contained in the e-mail, because of possible fraud that the recipient committed. It is believed that clicking on the link may activate a Trojan Horse.
Estate and Gift Taxes
If you give someone money or property during your life, you may be subject to federal gift tax. The money and property you own when you die (your estate) may be subject to federal estate tax. The purpose of this web page is to give you a general understanding of when these taxes apply and when they do not. It explains how much money or property you can give away during your lifetime or leave to your heirs at your death before any tax will be owed.
News and Events:
The annual exclusion for gifts is raised to $12,000 beginning in 2006
The applicable exclusion amount is increased to $2,000,000 for estates and remains at $1,000,000 for gifts
IRS Announces "Dirty Dozen" Tax Scams for 2006
IR-2006-25, Feb. 7, 2006
WASHINGTON - The Internal Revenue Service today issued the 2006 "Dirty Dozen"--its latest annual tally of some of the most notorious tax scams--along with an alert to taxpayers this filing season to watch out for schemes that promise to reduce or eliminate taxes.
Read the entire news article "Dirty Dozen Tax Scams for 2006"
Tax Tip
3/9/2006
Alternative Minimum Tax - Not Just for High Earners Anymore
National Association of Tax Professionals (NATP) Appleton, WI - In 1990, 132,000 individual taxpayers paid alternative minimum tax (AMT), a tax created to ensure that high-income taxpayers paid their fair share of taxes. Because Congress has not indexed the AMT for inflation, increasing numbers of middle-income taxpayers will end up footing the bill in the future. Unless things change, the nonpartisan Congressional Budget Office estimates that by the year 2016, AMT will affect 33 million taxpayers to the tune of $81 billion
Think you're exempt from AMT? Think again. Consider George Greatheart (fictitious name to protect identity), whose elderly parents are in declining health and incurring some astronomical medical bills. George's father requires the use of a wheelchair and needed an accommodating home. George, in caring for his parents, took over their support and purchased a small wheelchair-friendly house in which his parents could more comfortably reside. He planned to deduct the real estate taxes paid on his own residence and two years of back taxes on the house purchased for his parents, anticipating a significant refund. Instead, George found out that the over $17,000 in medical expenses and $11,000 in real estate expenses are AMT 'preference items' and they put him over the 7.5 percent adjusted gross income threshold. Instead of a much-needed refund, George got stuck paying the AMT. After the sick feeling he got when he saw his tax return, he enlisted the help of a tax professional so he knows how to better leverage his expenditures and avoid similar situations in the future.
Stan Smoothtalker (another fictitious name), a regional sales manager earned a nice fat W-2 of about $350,000. However, he also had to pay his own business expenses which were substantial because travel comprised about 80 percent of Stan's work time, plus he worked out of a home office. Stan learned that instead of a sizeable tax refund check, he instead owed another $10,000 in taxes. Stan, like an increasing number of middle-income taxpayers, was caught by another AMT preference item - employee business expenses. Stan's tax preparer, Linda Burney-Fuhr, an NATP member and enrolled agent from Lewisville, Texas, worked with Stan to fix this problem so it wouldn't happen in subsequent years. Here's how they did it: Linda and Stan developed a plan that Stan took to his employer. It restructured how Stan was paid by having him take a drastic salary cut in exchange for his employer reimbursing his expenses under an accountable plan. This puts Stan in a positive cash flow situation. By planning now, Stan greatly reduces his chances of getting caught by AMT again in the future.
"AMT is like a 'stealth tax'," contributes NATP enrolled agent Kevin Huston of Arden, North Carolina. "It comes out of nowhere when you least expect it, and catches you by surprise. All the rules for regular tax planning are turned upside down when you are planning to avoid or minimize AMT. It looks very much like a flat tax, where you don't get to use your deductions - with AMT, planning is critical, as tax professionals cannot usually fix it after the end of the year," Huston adds. However, Dawn J. Renner, CPA, MBA of Minnetonka, Minnesota, mentions that that in some cases there is a glimmer of hope, "In years after paying AMT, tax preparers can see if filing Form 8801, Credit for Prior-Year Minimum Tax, will allow you to recoup some of the AMT paid." Renner also reminds that many states also have an AMT and the state AMT may be computed differently than federal taxes.
Depending on your circumstances, you may be a target for AMT. Here are the top ten AMT preference items that could potentially hurt you in the future:
Personal exemptions.
Standard deduction.
State and local income, sales, and property taxes.
Mortgage interest on refinanced or second mortgages and home equity loans not used to buy, build, or improve a home.
Medical expenses.
Miscellaneous itemized deductions subject to the two percent floor.
Exercise of incentive stock options.
Long-term capital gains.
Tax-exempt interest from private activity bonds.
Business tax deductions.
If you are part of the potential group of middle-income taxpayers that may be ensnared in the coming years by AMT, talk with your tax preparer when you have your taxes prepared this year, to avoid being caught in coming years. Small changes can reap big rewards.
The IRS will allow employers with SIMPLE IRA plans until December 31, 2006 to update their plans to reflect the provisions of the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA).
Remember the tough, new auto-donation rules are in effect for 2005. In the case of donated motor vehicles (as well as boats and airplanes) with a claimed value of more the $500, the amount of a taxpayer's charitable deduction for the donation depends on how the vehicle is used by the charity.
If the charity sells the vehicle without any "significant intervening use" or "material improvement" the donor's charitable deduction generally can't exceed the gross proceeds from the charity's sale. If the significant-intervening-use or material-improvement tests are met, the taxpayer can generally claim a deduction for the full fair market value (FMV) of the donated vehicle. The FMV deduction can also be claimed if the charity sells the vehicle at a price significantly below FMV (or gives it away) to a needy individual.
Talking Turkey About Employer Gifts
All are Not Taxed Equally
National Association of Tax Professionals (NATP) Appleton, WI - Does your holiday gift from your employer gobble, oink, or slide nicely into your wallet? With holiday gifts to employees, what matters to the Internal Revenue Service (IRS), thus to taxpayers, is the form in which an employers' holiday gift is given.
Nominal gifts (of minimal dollar value) of items such as turkeys or hams that are given by employers to promote good will to their employees can be given without being included as part of employee wages. This means that the value of these gifts (which fall under de minimis fringe benefits rules) do not need to be included in wages that are subject to withholding and taxes.
Internal Revenue Code Section 132(e)(1) defines a de minimis fringe benefit as "any property or service the value of which is so small as to make accounting for it unreasonable or administratively impracticable after taking into account the frequency with which similar fringes are provided by the employer to the employer's employees."
Gift cards for an equal value are not the same. If an employer distributes cash, gift certificates, or similar items of any amount or value, which are readily convertible to cash value, the cash or value of such gifts is considered as additional wages or salary. Thus, gifts of this type do not fit the definition of a de minimis fringe benefit under the code and regulations and must be included in wages for both income and tax purposes.
So, turkey, ham, or gift card; what matters at tax time is the form an employer's holiday gift takes.
For more information on this and other tax issues, consult our tax professionals. Tax professionals are experts who keep up-to-date on tax law changes. They can save you time and offer insight on how to use the tax breaks available to you.
Members of the National Association of Tax Professionals (NATP) strive to assist taxpayers with information and knowledge. NATP is a nonprofit professional association founded in 1979 and is committed to excellence in the tax profession. NATP's national headquarters, located in Appleton, WI, employs over 40 professionals and 25 instructors. NATP exists to serve professionals who work in all areas of tax practice and has more than 17,500 members nationwide. Members include individual tax preparers, enrolled agents, public accountants, accountants, attorneys, and financial planners. Learn more at www.natptax.com.