Raising Cain and Obama

My job requires review of potential tax changes and how they will affect my clients. One of the most radical proposals to change the tax code is Herman Cain's 9-9-9 plan. Much has been said in the news about the plan, but nowhere is it mentioned which class of taxpayer will be affected.

Herman Cain's tax plan is almost the complete opposite of President Obama's plan. Obama proposed a tax increase on all taxpayers making more than $250,000 per year. The American people and Congress gave a loud, resounding NO to this idea.

Cain's plan will give a tax cut to the people Obama wanted to tax more. Under Cain, people under $250,000 per year will pay more. A lot more. Half of all households pay no federal income tax. Cain's plan will introduce a 9% national sales tax that everyone will pay regardless of income. The second 9 is for the personal income tax rate. Since over half of all taxpayers pay less than 9%, most taxpayers will get a tax increase. Corporations will do well, however. Most regular corporations that pay at a 35% tax rate will now only pay 9%, the last of the three 9s. The idea is that the tax savings by businesses will get reinvested into the business to create jobs. That is why people start a business. To create jobs. Right?

Maybe we should be careful what we wish for.

I wonder what "Joe the Plumber" thinks about Cain's plan? He did say he would pay more taxes under Obama's plan. He should love the tax cut.

Four Smart and Effective Ways in Which You Can Get Tax Debt Relief

Today I have a special treat for you; Angela Brown is my guest blogger, providing solid information on IRS debt issues. Angela can be reached via the link in her bio.

Author Bio: Angela Brown is a contributory writer associated with a US-based debt consolidation non profit community and has written several articles for various financial websites. She holds her expertise in the Debt industry and has made significant contribution through her various articles.

4 Smart and effective ways in which you can get tax debt relief

If you have incurred a huge amount of taxes, it can soon get stressful for you to handle. It is not that you are the only person who has incurred tax debts with the IRS. There are many people who could not pay their taxes and have accumulated a huge list of tax debts. If you owe a huge amount of tax debts, your primary aim should be to pay them back and become debt free. But what would you do if you’re unable to pay off your debts on your own? Is there any solution to your IRS tax debt problem? Well, if these are the questions that are bothering you, you must read this article to gain some knowledge on paying back your IRS tax debts.

1. Request for extension of limit: If your personal finances are in a state of haywire and you’re unsure about whether or not you will be able to pay your taxes, then you must request the IRS to extend the time limit of your debt repayment period. But always make sure that you apply for this request before the last date of payment or else your request might be rejected. The extensions may vary from 30 days to 120 days according to the kind of financial condition you are in.
2. Penalty abatement: As you default on your IRS tax payments, there are various penalty fees that are added to your already existing tax amount. This may add up your tax to a huge amount and if you think that there is any mistake in the penalties that are added, you can legally request the IRS to remove them. However, before you ask for penalty abatement, make sure that you have all the documents at your hand so that you can give a proof of the suggested mistakes.
3. Request for installment agreements: If your total tax amount is large and you are finding it difficult to pay it off at once, make sure that you ask the IRS to allow you to pay in installments. With an affordable installment agreement, you can pay off your taxes without straining your wallet. Let the IRS devise a payment plan according to which you can repay your debts affordably and become debt free.
4. Offer-in-compromise: Offer in compromise is very much similar to a debt settlement policy that a consumer carries out with a creditor. The only difference is that this request is made to the IRS instead of a debt settlement company. This is a formal agreement where the tax payer offers to pay off an amount that is within his financial affordability. The IRS will accept your request only after reviewing your financial situation and checking whether or not you’re really able to pay off your debts.

Thus, if you’ve incurred huge amount of IRS tax debts and are looking for smart ways to becoming debt free, follow the ways mentioned above. Pay off your IRS tax debts and secure your financial life.

Tax Tips to Simplify Your Life

I have published over 50 articles this year, most of them on taxes. Blogs are suited for shorter nuggets of informations while an article dives deeper into the subject. Below are links to what I consider the best articles.

Starting and Building a Career in Tax Preparation/Accounting

An enrolled agent is a tax professional that can represent his client's before the IRS. Becoming an enrolled agent is hard work. Effective study skills are needed to pass the three part exam the first time. About a third do. I passed the first time and will share how I did it. Back when I took the exam (1992) it was four parts and there were no do-overs.

Enrolled Agent Training Made Easy

Best Enrolled Agent Software

Enrolled agents and CPAs are required to take a minimum level of continuing education (CE). This is a major expense that must be repeated each year. CE credits should increase the tax professional's skills and at a reasonable cost.

Online CPE Courses for CPAs

Cheap CPE for EAs

CPE Credits That Pay You

The CPE Credit: An Unsung Hero

Tax Help

There are so many ways to get in trouble with taxes. The rules continually change and the IRS audits tax returns daily. How can the average person manage the demands of 80,000 pages of tax code? Below is help for common tax problems.

Passive Activity Rules

The IRS Installment Agreement

How to Pay Back Taxes Owed

The IRS Audit Process and Procedures: A Survival Guide

Material Participation Rules and Passive Activities

The Real Estate Professional and the IRS

Winning IRS Appeals

5 Best Wisconsin Tax Attorneys Ranked

Choosing the Best Wisconsin Tax Attorney

How to Pay Taxes

5 Questions to Ask Your Tax Preparer

Filing YourTax Return With a Missing or Incorrect K-1

Easy Fix for Missing or Incorrect W-2s

Small Business and Bonus Depreciation

Roth Conversion Issues

The Non-Standard Standard Deduction

The Tax Deductible Roth IRA

There is enough reading listed here to keep you busy. Bookmark this page and refer back to articles when the need arises.

Substantiate or Lose the Deduction

CPA trainer extraordinaire, Jack Surgent of Surgent-McCoy CPE, LLC, is fond of saying, “In taxes, form trumps substance.” What Jack means is that you need documentation if you intend to take a deduction. If you don’t, the IRS will levy penalties against the taxpayer AND tax preparer. The penalties can be steep.

Most deductions require a receipt only to prove the deduction. However, when deducting auto expenses and meals and/or entertainment, you need more. The IRS will disallow a deduction based solely on a receipt.

When you keep records of vehicle miles for business, you also need to state where you went, whom you saw, and the purpose of the trip. For meals and entertainment, you need to include on the receipt, who you were with and the purpose of the business meal or entertainment event.

The rules can get tricky when deducting vehicle expenses, travel, meals, and entertainment. It is a wise investment to consult your friendly accountant to avoid nasty surprises in an audit. Also, don’t give your friendly accountant the evil eye when he requests you keep documents in the fashion listed above. He is working to protect you and keep his own career. The IRS has no problem penalizing and barring tax preparers that flaunt the rules.

Annuity Taxation

Annuities are tax advantaged vehicles that aid in tax planning when handled correctly. Money invested in an annuity is not deductible unless it is a traditional IRA contribution meeting the qualifications of a deductible IRA. For this blog post, I am talking about non-IRA annuities.

Money withdrawn from an annuity is taxed one of two ways: 1.) all the profit first and then principle, or 2.) profit is taken pro-rata. Lump-sum distributions from an annuity come from taxable profit first and then principle, which has already been taxed and will NOT be taxed again. If you annuitize (take a stream of income), principle and profit come out in proportion to the account value. In English: If you have a 25% gain in your annuity and annuitize, then only 25% of the payment is taxable income and 75% is a return of your own money.

Unlike a traditional IRA, there is no requirement to withdraw money at a certain age. You can let the money grow tax deferred as long as you like. The biggest drawback of annuities is cost. The internal expenses of annuities make them a last resort for tax planning. There are many other ways to invest and save taxes before you consider annuities.

If you already own an annuity, be careful about cashing it in. If you are under age 59 1/2 you will be hit with a tax penalty on the gain. I recommend you consult your friendly accountant, one that doesn't sell insurance, mutual funds, or investments, to review your options.

I also publish articles on a variety of subjects at Hub Pages. Here is a sample.

Do I Have to Charge Interest If I Borrow Money to the Kids?

Young families wanting to take advantage of the First-Time Homebuyers Credit face a challenge: the down payment. Mom and dad can come to the rescue and lend the money, co-sign the loan, or own the home jointly with their son or daughter. Let's review the options and the consequences.

The worst option, in my opinion, is owning the home jointly with your child. The home must be a principle residence to qualify for the credit and owning the home jointly will not work in many cases. Worse, when the home is sold, your child gets a section 122 exclusion of the gain; you, as the joint owner, get a capital gain tax bill. In the future I may go into a detailed analysis of this situation.

Under new banking regulations and tighter lending standards, co-signing a loan may not be enough. A down payment will be required. You can gift the money to your child, but if you have more than one child and want to distribute the wealth equally, the well may not be deep enough for you to give an equal amount to each child. All that remains is a loan of the down payment.

Lending money to family can be tricky. The IRS says you can make an interest-free loan to your child (anyone for that matter) if:

1.) The amount is under $10,000, or
2.) Up to $100,000 if the person's investment income is less than $1,000.

If you lend over these amount you must charge at least the federal rate (AFR), which is:

.78% for a loan of three years or less,
2.5% for a loan over three years and under nine years, or
3.4% for a loan term in excess of nine years.

The AFR rates are low at this time and home price are about as good as they'll ever get. Kick in the First-Time Homebuyers Credit, and now may be the ideal time to help the kids begin their lives as homeowners.

Tax Update on Home-buyers Credit

The IRS has not updated Form 5405 to carry back the tax credit on a home purchased after November 6th. The rules for the third incarnation of the credit are different than the previous credits and required a complete reworking of Form 5405.

There is now a new $6,500 credit for those that owned a home five of the last eight years. Also, homes purchased after November 6th must not exceed $800,000; there was no ceiling prior to this. A signed closing statement must accompany Form 5405.

Golf Cart Tax Credit

This should make golfers smile. Street-legal electric golf carts qualify for a federal income tax credit. The credit has a base rate of $2,500. This is an actual cash reduction in your federal income tax, rather than a deduction. Depending on the battery capacity, the credit can be larger, in some cases, as much as half the cost of the vehicle.

The golf cart manufacturers understand the tax credit and are building golf carts that meet the tax standard. The golf cart can still be used on a golf course, but qualifies for the credit because they are manufactured for highway use primarily.

Harvesting Losses

The last corn fields around my house were harvested this past week. All the hard work and risk (think weather, corn prices) the farmers took has paid off.

When things go wrong (drought, flood, wind) and the crop is poor, the farmer still harvests what he can. Now that the year in closing, it is time for taxpayers to harvest losses as well.

The stock market has left many people in the hole. The rally that started in March has made some of us feel a little better, but anxious we are overdue for a correction. Locking in losses now for tax purposes can make sense and put you in a position to benefit if the market continues to rally.

If you have mutual funds or ETFs, it is easy to harvest losses with little risk. By selling a growth stock mutual fund and purchasing a different growth fund in the same fund family, you have harvested the first mutual funds loss and the new fund keeps you in the market if things keep going up without additional sales charges.

You can deduct $3,000 of capital loses on your federal tax return every year above and beyond other capital gains; Wisconsin only allows a $500 per year deduction. It still makes sense to harvest loses. If you realize a $20,000 loss from the first mutual fund, you can use that loss to reduce other capital gains now and in future years, plus the additional $3,000 until the loss is used up.

Careful planning can cut your tax burden in this tax increasing environment. Don’t waste the opportunity.

Getting Smart with Education Credits

The education credits have a new friend, the American Opportunity Credit. Let’s review the old and new education credits.

The Hope credit has been replaced by the American Opportunity credit, but is still available in the Midwest Disaster Area where the credit is double the regular credit. There are several notable differences between the Hope and American Opportunity credit: maximum credit, phase-out, eligibility, qualifying costs, and refundability. Review the list below:

• Maximum credit: American Opportunity credit (AOC): $2,500 (100% of first $2,000 plus 25% of next $2,000)per student; Hope credit (Midwest Disaster Area only): $3,600 (100% of the first $2,400 plus 50% of the next $2,400) per student; Lifetime Learning Credit (LLC): $2,000 (20% up to $10,000) per return.
• 2009 modified adjusted gross income phase out range: AOC: $80,000-$90,000 ($160,000-$180,000 MFJ); Hope and LLC: $50,000-$60,000 ($100,000-$120,000 MFJ)
• Eligibility: AOC: enrolled at least half-time for first 4 years; Hope: Enrolled at least half-time for first 2 years; LLC: Enrolled in any qualifying course.
• Refundable: AOC: 40%, max: $1,000; Hope and LLC: No.
• Qualifying Costs: AOC: Tuition, required fees, and course materials; Hope: Tuition, required fees, books, supplies, equipment, plus room and board if at least half-time; LLC: Tuition and required fees only (Midwest Disaster Area includes more).

For most people, the phase out will determine which credit to apply. As always, check with your friendly accountant for your personal tax situation.

Tax Tip

I will be in continuing education classes Monday and Tuesday. Between class and working late to keep up on regular work, I will post late over the next few days.

Today, I'll whet your appetite with a small tax tip for today's economic environment. The first $2,400 of unemployment insurance compensation is tax-free for 2009. Wisconsin is not following federal on this and is a Schedule I adjustment. Use the worksheet to determine the amount of your unemployment that is taxable. For other states, check your state taxing authority.

Forms

A non-client business owner stopped in today for forms. I sent him to the local IRS office.

He was surprised we don't carry forms. Well, we don't; haven't for years. Everything we file is on the computer and filed electronically.

Regular clients allow me to plug the data into my computer and print clean copy. I don't have time to waste printing forms for non-clients.

Do not consider me rude. Time is money and I get about 200 requests per year. The IRS will provide forms online or at a local office for free. The government has the resources to hand out free forms, I don't.

The businessman went on to inform me he is currently working through an audit on his own and the IRS just opened several more years of returns. I told him he really needs a tax pro. He thought differently. I was a nice guy, however. As he explained the audit, I told him he will need to file an appeal to get the assessed tax reduced.

He smiled. I know he has no clue on how to file an appeal. The IRS will help reduce the tax burden for the rest of us on his dime. Too bad. He seemed like a nice guy. The IRS is taking him for a ride. I forgot to ask which auditor he has. I have a pretty good idea, anyway. Twenty-six years on the job and I have a pretty good feel for the way each auditor works.

The moral of the story: Spending a few bucks with your friendly accountant can save serious coin with the IRS. Oh, and you can order free forms from the IRS here, employers here, and state forms here.

Home-Buyer credit Extended, Expanded

All that is left is for the President to sign the bill and the $8000 new home-buyers credit is extended to April 30, 2010. The credit is expanded to include a $6,500 credit for those owning thier home for at least five years.

Plan accordingly.

Tax Tip: Standard Deduction Increasers

It’s that time of year to get serious about tax planning. With nine weeks before year-end, time is running short to reduce your tax burden for 2009. I’ll rapid fire tax tips over the next few weeks, so check in often.

Today, we will discuss the additions to the standard deduction.

There are three things that will increase your standard deduction for 2009. 1.) Property taxes up to $500, $1,000 for married filing joint returns. 2.) Casualty loses in a federal disaster area. 3.) Sales tax on a new vehicle purchased after February 16, 2009 up to a $49,500 purchase price. Multiple vehicles qualify. Phase-out begins at $125,000 for singles, $250,000 for joint filers.

Issues to keep in mind: Alternative Minimum Tax and phase-outs. Normal tax planning goes out the window if you pay AMT. I’ll cover AMT in another post. Your deduction gets reduced (phased-out) after your AGI exceeds a certain level. Note: The personal exemption and itemized deduction phase-outs disappear in 2010, something to consider when building your tax plan.

Contributions to charity, elective medical and state taxes can be planned to take full advantage of the new rules, allowing for maximum tax savings between the standard deduction and itemization. By bunching deductions every other year, it is possible to itemize some years, taking the standard deduction in alternate years.

Any tax plan must consider future tax years. Keep 2010 taxes in mind when planning.

With all the new tax changes this year, I recommend you sit down with your friendly accountant and plan your tax strategy. The tax savings should be well worth your time.

New Clients

New clients always get me excited. I get the largest tax reductions when a client comes in the first time. Below is a list of some things I need to see on your first visit (for businesses):

• Previous two years tax returns.
• Do you work out of your home? Have a shop? Office?
• Are you a sole prop, partnership, corporation, LLC?
• Future plans for business.

There are so many ways to reduce taxes for business. Individuals can save, too, but it is more difficult.

I set a goal to bring in 100 new business clients by the end of 2010. I have 6 since setting the goal. It isn’t hard or unusual to save $3000 - $5000 for a new business client. If I use the low end number, my new business clients will save $300,000 in taxes over the first year. Not bad.

Regular clients can save, as well. I send out letters each year inviting clients to review their tax situation. A handful of individuals and a quarter of my businesses take me up on the offer. That is too bad, since only those that take my offer reap the benefits.

Here is the offer I make my clients: I’ll charge $100 for the consultation. It will take 1-2 hours. If I can’t save you money, the consult is on me. If you don’t like my ideas, the consult is on me. The cost is low to start and if you feel you gained nothing, you owe me nothing. I think that is fair.

New client get their first consult free regardless. I need to know my client before I invoice for services. What do you think of my on-going offer?

Tax Tip

It’s Friday night and I don’t want to write a long post. The tax tip below will outline a concept, no phase out numbers or anything like that. If the idea has merit for you, call your friendly accountant to facilitate the strategy.

The tax code has a juicy nugget available for 2010-11. Anyone, regardless of income, can convert a traditional IRA to a Roth IRA. If you don’t know, the Roth IRA grows tax free and doesn’t require distributions at 70 ½.

Here is my tax tip: If your income is too high to make a Roth IRA contribution for 2009, put the money in a non-deductible traditional IRA instead. Convert this IRA to a Roth in 2010. This allows you to get additional money into a Roth for tax-free growth. The original money is not taxed on the conversion.

How about a two-fer Friday? Consider converting all traditional IRAs in 2010-11. If the value of your IRA is down, you are converting at a discount. You also lock in today’s tax rates. My crystal ball says tax rates are going up over the next years to pay for additional government programs and to balance a budget $1.5 trillion in the red.

Chew on it over the weekend and then decide. See you Monday.