Capitalizing on a Tax Holiday

GiftNet long-term capital gain is generally taxed at a relatively low 15% or 20% rate in 2015. But low-bracket taxpayers enjoy an even better deal: Their net capital gain is tax-free (i.e., the tax rate on the gain is 0%) to the extent it would have been taxed at the 10% or 15% rate if it had been ordinary income instead of capital gain.

Are tax-free capital gains out of your reach if your marginal tax rate is higher than 15%? Maybe not. Here are a few family gifting strategies that could save you money:

Gift to parent. If you’re helping your folks financially, a gift of appreciated stock might be a tax-smart way to do it. As long as your parents’ taxable income stays below $74,900* in 2015, they can sell the stock and a 0% rate would apply to the capital gain.

Gift to child/grandchild. Until children reach age 19 (24 if they’re full-time students), the 0% rate generally would apply to only a limited amount of capital gain because of the “kiddie tax” rules.** But these rules aren’t an issue for older children (or for children ages 18-23 who have earned income exceeding one-half of their support).

You can make tax-free gifts of up to $14,000 (per recipient) in 2015 without using up any of your $5.43 million estate- and gift-tax exemption amount.

* Substitute $37,450 for $74,900 if your parent is a single taxpayer. These figures represent the top of the 15% bracket for single and married-joint taxpayers, respectively.

** Under the kiddie tax rules, children pay tax at their parents’ highest rate on unearned income over $2,100 (in 2015).

IRS Identity Letter 5071C

The IRS has been dealing with an increasing wave of tax scams this year in which fraudsters have been leaving messages on taxpayers’ phones claiming to be from the IRS demanding payment, and have been sending phishing emails to taxpayers purporting to come from the IRS. On Thursday, IRS Commissioner John Koskinen met with leaders of several of the major tax software companies, tax preparation chains, state tax commissioners and other officials to coordinate an approach to deal with identity theft. In an effort to protect taxpayers from identity theft, the IRS is releasing the Identity Letter 5071C to taxpayers whose return is deemed “suspicious” upon filing.

Fraud_IdentityTheft3The letter asks taxpayers to verify their identity in order to complete processing of their return if the taxpayer did file it or reject the return if the taxpayer did not file it. The letter gives taxpayers two options to contact the IRS and confirm whether or not they filed the return. Taxpayers may use the idverify.irs.gov site or call the toll-free number provided in the letter. Due to the high-volume on the toll-free numbers, the IRS-sponsored website, idverify.irs.gov, is the safest, fastest option for taxpayers with web access.

The website will ask a series of questions that only the real taxpayer can answer. Taxpayers should have available their prior year tax return and their current year tax return; if they filed one, including supporting documents, such as Forms W-2 and 1099 and Schedules A and C.

Please note that the IRS does not request such information via email, nor will the IRS call a taxpayer directly to ask this information without you receiving a letter first. The letter-number can be found in the upper corner of the page. If you have questions regarding your letter, please visit the IRS website.

 

Active Versus Passive Appreciation

When Jed Clampett went to shoot at a critter, he missed his target but tapped into an oil gusher. Old Jed, the lead character in TV’s “The Beverly Hillbillies,” got rich and moved to the land of swimming pools and movie stars. The “Jed Clampett defense” is what some court pundits are calling the position an oil billionaire took in his recent divorce case, according to an article in The New York Times. The defense is based on the “active versus passive appreciation” concept in divorce law.

divorce valuationLuck versus skill: In some states, if a spouse owns an asset before the marriage, the increase in value of that asset is not subject to division if the increase was due to “passive” appreciation, that is, if the asset’s value increases due to factors outside of either spouse’s control. But if the value increases due to the efforts or skills of a spouse, it is considered “active” and is thus subject to division in a divorce. So the question comes down to luck versus skill.

If this correlates with you, make sure you discuss “active versus passive appreciation” with your attorney and valuator. Depending on the state your case is in, this could have a large impact on your financial outcome.

By: Ryan Leininger, CPA, CVA

Frequent Asked Questions About Form 1099 Misc

Each year, I receive multiple questions during the first few months regarding issuing 1099 Misc forms. Many of the questions are general in nature. For example, “when are the forms due?” However, there are always some questions that are not a quick one or two-word answer.

Do we need to send a 1099 Misc to a company if they are an LLC?Answer: It depends on how the LLC is being taxed by the IRS? The best way to find out is to ask the company to complete a Form W-9, or Request for Taxpayer ID number. In Box 3, if the vendor checks the first box Individual/Sole Proprietor or single member LLC or the Partnership box, then you must issue a 1099 Misc form.

1099If the company checks the C or S Corporation or Trust/estate, you would not have to issue a 1099 form, UNLESS the company you paid is an attorney and you paid $600 or more for business-related services (not personal legal services).

If you ask vendors to complete the W-9 when you begin doing business, it will save time at the end of the year filing a 1099 Misc, since you will already have the information.

Do we need to issue a 1099 to someone who earned less than $600?Answer: A company is not required to send a 1099 Misc to a vendor who was paid less than $600. There are sometimes when a company may still choose to send a 1099 for less. Legally, the vendor should still be reporting the income on their taxes, whether or not they received a 1099.

Do we need to correct a 1099 when the vendor notifies you their address has changed after you have sent them their 1099 Misc form?Answer: No, you do not have to go through the process of correcting the 1099 form just for an address change. The IRS tracks the forms by the Social Security/Federal ID number and name associated with the number. You should update your software records with the new address and you could give them an updated vendor copy with the new address for their records, but the IRS does not need to receive a corrected copy with the new address.

By: Sandra Stone, Accountant

Tax Savings on Your Education

If you’re helping to pay for your child’s college education, you need a break. See if you can take advantage of any of the tax breaks that follow.

Take Credit
There are two federal tax credits for the payment of qualified tuition and related expenses (not room and board). A tax credit is a big break because it reduces your income tax dollar-for-dollar. You can’t use both credits in the same year for the same student.

American Opportunity Tax Credit is available for the first four years of post-secondary education. The credit for 2015 is 100% of the first $2,000 of qualified expenses and 25% of the next $2,000. So, the maximum credit for each eligible student in your family is $2,500.

Lifetime Learning Credit is available for both undergraduate and graduate education. The credit is 20% of up to $10,000 of qualified expenses per taxpayer return. So, the maximum credit you can claim in one year for all students in your family is $2,000. Both credits are subject to income restrictions.

Education_Diploma2

Deduct Your Expenses
A tax deduction reduces the income on which you’ll be taxed. If you’re eligible, you can claim a deduction for student loan interest even if you don’t itemize your deductions. Interest of up to $2,500 is deductible in 2015 if your income doesn’t exceed tax law limits. If you’ve taken a loan to pay for your child’s education, check into the requirements for the deduction — it’s a break you won’t want to miss.

What Do I File If I Have Income From A Neighboring State?

My father, who is an Indiana resident, recently asked me what type of Ohio return he needed to file since he had some income from Ohio during 2014. Earning an income in a neighboring state is certainly a familiar situation for many Northwest Ohioans, being so close to both Indiana and Michigan. Many states have helped to ease the filing burden on residents with out-of-state income by signing reciprocal (reciprocity) agreements with neighboring states. For example, Ohio, Michigan, and Indiana are reciprocal states.. This allows residents of one state to request an exemption from withholding for wages earned in a second reciprocal state. Therefore, only a return for the resident state needs to be filed.

multistate

Depending on the state, there are slightly different requirements. The requirements for Ohio, Michigan and Indiana are as follows:

Ohio:  A full-year nonresident living in a border state does not have to file if the nonresident’s only Ohio-sourced income is wages received from an unrelated employer. Nonresident employees in Ohio should file IT-4NR with their employers to be exempt from having to withhold Ohio income taxes.

Michigan: Residents of reciprocal states working in Michigan do not have to pay Michigan tax on their salaries or wages earned in Michigan. The following states are reciprocal with Michigan: Illinois, Indiana, Kentucky, Minnesota, Ohio, and Wisconsin. Nonresident employees in Michigan should file MI-W4 with their employers to be exempt from having to withhold Michigan income taxes.

Indiana: If you were a full-year resident of Kentucky, Michigan, Ohio, Pennsylvania or Wisconsin, and your only income from Indiana was from wages, salaries, tips or commissions, then you need to file Form IT-40RNR, Indiana Reciprocal Nonresident Individual Income Tax Return. You aren’t required to pay Indiana income tax, but you are required to file the Indiana form to pay any Indiana local and county tax owed. Nonresident employees in Indiana should file WH-47 with their employers to be exempt from having to withhold Indiana income taxes.

If taxes from a non-resident reciprocal state were erroneously withheld, you would need to file a return in that state to be able to have it refunded. My father Reciprocal Nonresident Individual Income Tax Return was glad to hear that with Ohio being a reciprocal state of Indiana, he didn’t have to file a return in Ohio, saving him time and money. See your tax professional for more guidance.

By: Brent D. Ringenberg, CPA

Top 5 Myths About Outsourced Accounting

WVC RubixCloud - Full_Tagline

Outsourced accounting is changing the way organizations do business. Not only can it provide clarity to how costs are incurred, where revenues are earned and highlight areas for growth, it can also make organization’s stronger. However, some are reluctant to explore the option of cloud-based outsourced accounting based simply on common misconceptions. Here are the top 5 myths and the truth about outsourced accounting and its benefits.

Myth #1: Losing control of your organization
Outsourced accounting actually enhances the control you have over your procedures and accounting data. Your financial processes will be standardized and established guidelines will be followed rigorously. You will have real-time data at your disposal providing you greater control of your cash flow and other performance indicators. Time and time again, our clients t feel they are no longer alone and have gained their own personal team of experienced accountants. Outsourcing has offered our clients the ability to work collaboratively and more efficiently to establish greater control over their financial well-being.

Myth #2: Outsourcing eliminates jobs
Many organizations have limited resources and as a result they rely heavily on their employees to perform multiple functions. Often times, employees are acting in roles in which they do not have any formal training. Wearing too many hats can lead to inefficiencies. Not only does this hinder growth within the organization, but it also adds stress to the employee. Outsourcing your accounting function allows your staff to be refocused on efforts that are more suitable for their skill set. Furthermore, the organization can now direct its resources towards their mission, funding and grant writing.

Myth#3: It’s Not Secure
Besides transforming how businesses function internally and externally, the growth of cloud computing also has a consequence on outsourcing data management. By partnering with WVC RubixCloud your security can and will be improved. Security is a top priority and we have partnered with the leading software company to ensure data is protected. Furthermore, as a result of the shared access of real-time data, transactions are visible from any source with an internet connection. If a transaction has been completed and you are not sure of its nature, you can instantaneously take action.

Myth #4: Outsourcers Don’t Understand My Business
When you partner with a WVC RubixCloud, you will gain a well-rounded team of financial experts who have worked in a variety of industries both in public and private sectors.

Myth #5: Outsourcing is only viable for large organizations
No matter the size of your organization, outsourced accounting options are flexible. One of the main advantages of outsourcing is the streamlining of processes to attain business efficiencies and actionable insights. Smaller organizations can benefit tremendously from the economies of scale offered through outsourcing. Frequently, the cost is considerably lower compared to having the work completed in-house.

In conclusion, don’t fall victim to the most common myths of cloud outsourced accounting. Take the time to research the facts. Check out WVC RubixCloud at www.wvcrubixcloud.com and learn how we can be the game changer for your organization!

By: Jennifer Kinzel, CPA, CMA, MBA

ODT Identity Confirmation Quiz

Ohio Department of Taxation

With income tax fraud and identity theft on the rise, the Ohio Department of Taxation (ODT) has implemented a new initiative to increase security measures. Ohio’s Identity Confirmation Quiz is just one of the tools the ODT is using to prevent fraudsters from receiving a refund as a result of identity theft.

Taxpayers who have filed their tax returns are selected at random to receive an identity confirmation letter instructing them to complete the quiz within 60 days. The quiz can be taken online at the Ohio Department of Taxation’s website. If selected to take the quiz, you will need the reference number from your Identity Confirmation letter, your social security number (SSN) and the amount of refund claimed on your tax return.

The quiz consists of multiple-choice questions very specific to the individual taxpayer. According to the ODT, the information used to populate the personal quiz comes from many public and commercial data sources and consists of current and historical information about the identified individual. In addition, the quiz is timed, allowing only a few minutes to be completed.

Once the quiz is complete, the taxpayer will know immediately whether or not they passed or failed.

  • If a taxpayer passed, processing of the tax return continues.
  • If a taxpayer fails, they may have the opportunity to take a second quiz. If passed the second time, processing of the tax return continues.
  • If a taxpayer fails twice, they must mail documentation to the ODT proving their identity.  Please click here for further instructions.

Please note the selection for this Identity Confirmation Quiz is a random process and should not concern a taxpayer if they receive it. This is unrelated to the size of the refund or with the taxpayer being audited. For additional information or answers to frequently asked questions, please visit the ODT’s Identity Confirmation Quiz page.

By: Jenny Furey, CPA

3 Steps To Lower Taxes For The Self-Employed

When you are self-employed, your business profits are taxed to you at federal rates as high as 39.6%. Add self-employment taxes, which in 2015 will amount to 15.3% of the first $118,500 of your net self-employment earnings plus 2.9% of any earnings over that amount. Then there’s an additional 0.9% Medicare surtax on earnings in excess of $200,000 ($250,000 if married filing jointly). At tax rates like these, it pays to take steps to reduce your tax burden.

Step One: Deduct Business Expenses

Be sure you have an organized system for recording your expenses. To be deductible, a business expense must be “ordinary” (common and accepted in your trade or business) and “necessary” (helpful and appropriate for your trade or business). Since personal expenses are generally not deductible, it’s smart to have a separate business bank account and use a separate credit card for business purchases.

Step Two: Deduct Health Insurance Premiums

self_employment1You may qualify to deduct premiums paid for medical, dental, and qualified long-term care insurance coverage for you, your spouse, and your dependents.* The coverage may include children who haven’t reached age 27 by the end of the year, even if you don’t claim them as dependents on your tax return.

Unlike health insurance premiums paid for employees, the self-employed health insurance deduction won’t save you self-employment taxes. However, it will lower your taxable income. You must meet certain requirements to qualify for the deduction.

Step Three: Deduct Retirement Plan Contributions

Funding a retirement plan can also save you significant tax dollars. Within limits, plan contributions will be tax deductible.** Several types of plans may be suitable for you as a self-employed taxpayer, including a simplified employee pension (SEP) plan, a savings incentive match plan (SIMPLE), or a solo (individual) 401(k) plan. Each plan has specific features and requirements that you will want to weigh carefully before making a choice.

* Dollar limits apply to the deduction for long-term care insurance premiums.

** Although deductible for income-tax purposes, contributions to your own retirement plan account do not reduce earnings subject to self-employment taxes.