Will the IRS call your venture a business or a hobby?

Have you started a new business? Planning to start one? If so, the tax difference between a business and a hobby could turn out to be very important to you.

If the IRS considers your new venture a business, you can deduct losses against other income. But if it’s classified as a hobby, losses are generally deductible only to the extent of hobby income (with the additional limitation imposed on them as miscellaneous itemized deductions subject to the 2% of adjusted gross income floor).

The tax law presumes that an activity is a business, not a hobby, if it is profitable in three out of the last five consecutive years (two out of seven consecutive years for activities involving horses).

Some factors used by the IRS to determine whether you have a hobby or a business include the following:

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The 2013 annual gift tax exclusion: Use it or lose it

Time is running out for making 2013 tax-free gifts. You have only a few more months to use your annual gift tax exclusion for this year, or it’s gone forever.

Each year you can make gifts up to a certain dollar limit to an unlimited number of people, free of any gift tax. For 2013, the dollar limit per recipient is $14,000. These gifts do not reduce your lifetime exemption from gift and estate taxes.

Why would you want to make annual tax-free gifts? There are a number of possible reasons. Tax-free gifts are often used in estate planning as a way of steadily reducing the value of a taxable estate during the owner’s lifetime. Another strategy is to transfer income-producing assets to children or other family members who are in a lower tax bracket. If done carefully to avoid the “kiddie tax,” the result can be a lower overall tax bill for the family unit.

If you fail to use this year’s exclusion, it is not carried over to future years. To qualify as a 2013 gift, the transaction must be completed by December 31, 2013. If you are writing a check as a 2013 gift, do so in time for the recipient to deposit it before year-end.

Check with us if you would like more information about making tax-free gifts in your situation.

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Information on the Affordable Care Act (ACA)

The IRS has launched a new Affordable Care Act Tax Provisions site at wwwIRS.gov/aca if you are looking for more information regarding the provision of the act. Also Open enrollment will start October 1, 2013 to acquire insurance through the exchanges. You can find more information about the exchanges at www.healthcare.gov or if you are a resident of California www.coveredca.com

Tax-cutting moves to consider now

The end of the year is rapidly approaching. That means now is the time to consider your tax situation and the steps you could take to lower your 2013 tax liability. Here are a half-dozen options that might fit your situation.

1. Review your investments and start thinking about offsetting gains and losses for the year. You can deduct $3,000 of losses against ordinary income.

2. Be sure you set aside the maximum allowed in your retirement plans. This year you can put $17,500 in a 401(k) plan, $12,000 in a SIMPLE, or $5,500 in an IRA. Additional amounts can be contributed if you’re 50 or older.

3. December 31 is the deadline for taking a 2013 required minimum distribution from your traditional IRA if you’re 70½ or older. Miss this requirement and a 50% penalty could apply.

4. Start a retirement plan for your small business. You may be entitled to a tax credit of up to $500 in each of the plan’s first three years.

5. Buy needed assets for your business before year-end to utilize the first-year expensing option (Section 179) of up to $500,000 for 2013. New asset purchases might also qualify for 50% bonus depreciation.

6. Install energy-efficient improvements to your home; you might qualify for a lifetime tax credit of as much as $500. Solar improvements such as water heaters or panels may be eligible for a credit of up to 30% of the cost.

For a more complete look at ways to cut taxes in your particular circumstances, call our office for a year-end planning appointment.

Posted in tax |

Do these upcoming tax deadlines apply to you?

You might think tax filing time is over for 2013, but that’s not necessarily the case for many taxpayers. There are several important tax deadlines in September and October. Check the list below to see if any of them apply to you or your business.

September 16 – Due date for third quarter installment of 2013 individual estimated income tax.

September 16 – Filing deadline for 2012 tax returns for calendar-year corporations that received an extension of the March filing deadline.

September 16 – Filing deadline for 2012 partnership tax returns that received an extension of the April filing deadline.

September 16 – Due date for third quarter installment of 2013 corporate estimated tax.

October 1 – Deadline for self-employed individuals and small businesses to establish a SIMPLE retirement plan for 2013.

October 15 – Filing deadline for 2012 individual income tax returns that received an extension of the April filing deadline.

October 15 – Deadline for undoing a 2012 conversion of a regular IRA to a Roth IRA and switching the Roth back to a regular IRA without penalty.

If you need more information or filing assistance, contact our office.

Posted in tax |

Take advantage of tax credits

Keeping track of deductible expenses is smart, but tracking your qualification for tax credits is even better. Tax credits work much like tax payments; that is, they offset your tax liability dollar for dollar.

Here’s an illustration: Suppose you owe $750 in federal income tax. If you’re eligible for a $500 credit, you’d subtract that from the $750 to arrive at your final tax bill of $250.

The tax code is full of tax credits, both for individuals and businesses. Here are just a few:
* Education credits
* Child and dependent care credit
* Child tax credit
* Adoption credit
* Foreign tax credit
* Research credit
* Energy credit
* Credit for the elderly
* Retirement savings contribution credit
* Alternative minimum tax credit
* Disabled access credit
* Health insurance credit
* Pension plan startup credit
* Work opportunity credit

Most tax credits have specific requirements, and many are subject to income limitations. Don’t overlook tax credits in your tax planning; find out how to qualify for those that could reduce your tax bill.

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Don’t make these common IRA mistakes

These days we need to do all we can to boost our retirement savings, and tax breaks can be a big help. Using a traditional IRA to build your nest egg is a great idea. Just be sure you don’t make any of these common IRA mistakes.

THE WRONG INVESTMENTS. Don’t put tax-free investments, such as municipal bonds, in an IRA. You’ll end up paying ordinary income tax on money that wouldn’t have been taxed, or you’ll sacrifice earnings for a tax benefit you’ll never receive.

NO CATCH-UP CONTRIBUTIONS. Be aware that if you’re 50 or older, you can contribute an extra $1,000 to your IRA each year.

THE WRONG BENEFICIARY. Your choice of beneficiary can affect how quickly IRA funds must be distributed. The longer money stays in an IRA, the longer it grows tax-free.

EARLY WITHDRAWALS. You’ll pay regular income tax as well as a 10% federal penalty and a 2.5% state penalty on early withdrawals from your IRA unless an exception applies. Early withdrawals are those you take when you’re under age 59½.

MISSED RMDs. You are required to take distributions from your IRA when you reach 70½. You have until April 1 of the year after you turn 70½ to begin withdrawals. The penalty for withdrawing less than the required amount is 50% of the shortage.

IRA mistakes can be costly. If you’d like answers to your IRA questions, give us a call.

You Truly are A Tax Nerd if You Enjoy this Posting

I Thought I might share some Tax Humor

You know you are an extraordinary tax nerd if:

1. At your wedding on December 31, you insisted that the photographer take a picture of you exchanging vows in front of the Big Ball in Times Square to prove to the IRS that you got married before midnight.

2. On April 15th you keep moving west as you prepare income tax returns so as to extend the filing deadline by three hours.

3. Your favorite play is Phantom Income of the Opera.

4. When you finish preparing a return, instead of saying 10 4 over and out, you say 1040 completed and filed.

5. You insisted that your daughter Susie pay kiddie tax on her lemonade stand income.

6. You consider a Rabbi Trust an example of a reputable clergy person.

7. You analyze DNI to determine the genetics of the grantor of a trust.

8. You think a tax table is where deals are cut with the IRS.

9. You think that any person who masters the Internal Revenue Code is entitled to a Lifetime Learning Credit.

10. You think Batman collects taxes for the Commissioner.

11. Whenever you explain a QTIP, you give your client an earful.

12. You think the decision to hire a CPA rather than an attorney is a tax preference.

13. You think that people who get paid under the table use the cash method of accounting.

14. You keep changing your mind when asked if you recommend creating a revocable trust.

15. You think people who create disregarded entities lack self confidence.

16. You equate the office of the IRS Taxpayer’s Advocate to the fox watching the hen house.

17. You think of an IRS furlough day as a tax holiday.

18. You think those who are careless with their tires should be subject to a flat tax.

TOP 10 TIPS FOR MANAGING YOUR FINANCES

1. Track your monthly spending. Many people do not know how much they spend each month on food, clothing, housing, or entertainment. Whether you are paying with cash, a debit card or credit card, total your expenditures at the end the month to gain a better picture of how you’re spending your income.

2. Develop a household budget you can follow. Using the data you’ve compiled by tracking your monthly expenses, develop a realistic budget so that it’s easier live with. Track how well you follow it each month – that means continuing to track your monthly expenses.

3. Be sure to budget for savings. Your savings are a Rainy Day Fund, which is important when unforeseen expenses or emergencies arise. Be sure to budget part of your monthly paycheck for deposit into a savings account – ideally at least 10% of each check. If you find or earn extra money – put that away in a savings account, too!

4. Pay your monthly bills on time and avoid late charges. Take inventory of your regular monthly bills and make reminders for yourself on when each bill is due. That way you can avoid costly late fees, which can also damage your credit score. The best approach is to pay bills as soon as they arrive.

5. Review your credit report. The details of your credit report can have an enormous impact on your financial future. Obtain a free report once a year at www.annualcreditreport.com, and check it for accuracy. Be sure to dispute any errors.

6. Obtain your credit score. Your three-digit credit score tells lenders and businesses how well you manage your credit and your finances. Scores range between 500 and 850. The higher the number, the better the rating and the better chance you have of obtaining credit at a better rate. You can purchase your credit score through any of the nationwide credit reporting agencies after receiving your free annual credit report at www.annualcreditreport.com.

7. Eliminate credit card debt. Credit cards can make it easy to pile on debt. If your debt adds up faster than you can pay it off, you’re likely living beyond your means. Stop using the credit cards and pay off existing balances – the sooner you do, the less you’ll pay in interest. Remember: not all debt is bad; taking on loans for higher education or to buy a home is really an investment in your future.

8. Take advantage of free money. If your employer offers a contribution match for retirement savings or heath savings accounts, be sure that you’re contributing enough to obtain the maximum match amount. Otherwise, you’re missing an opportunity for free money. Maximizing your contributions can lower your taxable income.

9. Assess your insurance policies. Insurance is an important tool for protecting against financial hardships, and the premiums you pay can be one of your top household expenses. Talk with your provider to be sure you have the appropriate level of protection – that way, you’re not paying too much for coverage.

10. Use legitimate financial institutions. Millions of people do not rely on traditional banks or financial institutions to manage their money. Open a checking and/or savings account at an FDIC-insured bank, savings and loan, or credit union. Be sure to research whether there are any fees for their services before choosing an institution.

Tips for Choosing a Tax Return Preparer

If you pay someone to prepare your tax return, the IRS urges you to choose that preparer wisely. Taxpayers are legally responsible for what’s on their tax return even if it is prepared by someone else. So, it is important to choose carefully when hiring an individual or firm to prepare your return. Most return preparers are professional, honest and provide excellent service to their clients.

This year, the IRS wants to remind all taxpayers that they should use only preparers who sign the returns they prepare and enter their Preparer Tax Identification Numbers (PTINs).

Here are a few points to keep in mind when someone else prepares your return:

Check the person’s qualifications. New regulations require all paid tax return preparers to have a Preparer Tax Identification Number (PTIN). In addition to making sure they have a PTIN, ask if the preparer is affiliated with a professional organization and attends continuing education classes. The IRS is also phasing in a new test requirement to make sure those who are not an enrolled agent, CPA, or attorney have met minimal competency requirements. Those subject to the test will become a Registered Tax Return Preparer once they pass it.

Check the preparer’s history. Check to see if the preparer has a questionable history with the Better Business Bureau and check for any disciplinary actions and licensure status through the state boards of accountancy for certified public accountants; the state bar associations for attorneys; and the IRS Office of Enrollment for enrolled agents.

Find out about their service fees. Avoid preparers who base their fee on a percentage of your refund or those who claim they can obtain larger refunds than other preparers. Also, always make sure any refund due is sent to you or deposited into an account in your name. Under no circumstances should all or part of your refund be directly deposited into a preparer’s bank account.

Ask if they offer electronic filing. Any paid preparer who prepares and files more than 10 returns for clients must file the returns electronically, unless the client opts to file a paper return. More than 1 billion individual tax returns have been safely and securely processed since the debut of electronic filing in 1990. Make sure your preparer offers IRS e-file.

Make sure the tax preparer is accessible. Make sure you will be able to contact the tax preparer after the return has been filed, even after the April due date, in case questions arise.

Provide all records and receipts needed to prepare your return. Reputable preparers will request to see your records and receipts and will ask you multiple questions to determine your total income and your qualifications for expenses, deductions and other items. Do not use a preparer who is willing to electronically file your return before you receive your Form W-2 using your last pay stub. This is against IRS e-file rules.

Never sign a blank return. Avoid tax preparers that ask you to sign a blank tax form.

Review the entire return before signing it. Before you sign your tax return, review it and ask questions. Make sure you understand everything and are comfortable with the accuracy of the return before you sign it.

Make sure the preparer signs the form and includes his or her preparer tax identification number (PTIN). A paid preparer must sign the return and include his or her PTIN as required by law. Although the preparer signs the return, you are responsible for the accuracy of every item on your return. The preparer must also give you a copy of the return.

The IRS can help many taxpayers prepare their own returns without the assistance of a paid preparer. Before seeking a paid preparer, taxpayers might consider how much information is available directly from the IRS through the IRS Web site. Check out these helpful links: