The US government and all its citizens recognize veterans on Memorial Day.  The other 364 days of the year, the IRS at the direction of the Congress has multiple special cases for Veterans, people currently serving in the military and disabled veterans.

Members of the US Forces, especially those serving in combat zones, get a number of special tax considerations.  First, Military personnel serve in all the major branches of the military including the US Coast Guard.  The Red Cross and US Merchant Marines are not considered military personnel by the IRS even if they are supporting the military.  The most commonly used provision is a tax extension if serving in combat zones.  But there is also a special first time home owners tax credit, economic stimulus payments for family members of those serving, additional tax breaks and several other special cases which may be retroactive and require an amended tax return.  

Ongoing, most military personnel qualify for free online tax filing, tax assistance and access to additional resources and help.

If you are unsure if you or a serving family member qualify for these special veteran and currently serving tax rulings, contact us and we can help guide you through this labyrinth.  If you want to dive into this yourself, the IRS has specially dedicated web pages to support taxes and the Military.

Who says reading court decisions about IRS deductions isn’t entertaining?  Our clients have given us some head scratching questions about tax deductions..but not one like this:

A taxpayer gave a fire department the right to conduct training exercises and burn down a house and claimed a deduction of $339,504. But the court ruled that no deduction was allowed per Sec. 170(f)(3), which denies deduction for partial interest in land. The taxpayer had only given a license to use  – not a donation of property.   Since the taxpayer did not transfer title to fire department, the deduction was denied.

If you need advice on the accounting impact of your life’s decisions, contact us!  We love a challenge.

Phil Mickelson has apologized for saying that he was considering “drastic changes”  because of tax increases on the wealthy.

“Finances and taxes are a personal matter and I should not have made my opinions on them public,” he said in a statement . “I apologize to those I have upset or insulted and assure you I intend to not let it happen again.”

Mickelson, who lives in San Diego area, had hinted at changes that left people wondering whether he might move to Florida or, perhaps, even consider semi-retirement at 42. He’d promised further details Wednesday, before the Farmers Insurance Open at Torrey Pines. Although he issued the statement recently, it still figures to be a hot topic when he addresses the media. Here’s his full statement:

“I know I have my usual pre-tournament press conference scheduled this week but I felt I needed to address the comments I made following the Humana Challenge now.

“I absolutely love what I do. I love and appreciate the game of golf and the people who surround it. I’m as motivated as I’ve ever been to work on my game, to compete and to win championships.

“Right now, I’m like many Americans who are trying to understand the new tax laws. I’ve been learning a lot over the last few months and talking with people who are trying to help me make intelligent and informed decisions. I certainly don’t have a definitive plan at this time, but like everyone else I want to make decisions that are best for my future and my family.

“Finances and taxes are a personal matter and I should not have made my opinions on them public. I apologize to those I have upset or insulted and assure you I intend to not let it happen again.”

At Foreman & Airhart, we hear a lot of people with the same concerns as Phil.  Let’s face it – you work hard for your money and it is always hard to give it up in taxes to fund programs you may not always believe in.  And while it is hard to feel sorry for a guy who makes his living by golfing on the world’s most beautiful courses, at the heart of it, we would all like to pay as little taxes as we legally have to.  That’s where we come in.  No, we’re not Phil’s accounting firm.  But we do have world-class accountants who know how to find every possible incentive for you to limit your tax liability.  Why not call us – because when you spend less time on your taxes, you can spend more time on the links!

With our phones starting to ring with clients asking how they can reduce their tax liabilities, here is a light-hearted look at Strange BUT TRUE tax deductions.

1) Whaling ship repairs - Yes! you can deduct up to $10,000 for whaling ship repairs according to a 2004 law.  However, everyone except Native Americans are banned from whaling…and we live in Minnesota.

2) Pet Moving Expenses – While most taxpayers know that their moving expenses are deductible when moving for a job, they may not know that the cost of moving your pets can be included in the deduction.

3) Quit Smoking, Lose Weight! -Check with us – and your doctor! The money you spend to drop pounds or quit smoking may be deductible under certain situations. This may even extend to a backyard swimming pool!

4) Guard dogs – If you use a dog to secure your business property, you may be able to deduct the expenses for the dog each year.

5) Childcare – If you are a volunteer for an approved charity, you may be able to deduct childcare expenses while you are volunteering. You may get no pay for volunteering – but you can get a tax write off on your 1040!

We rarely employ these tax “loopholes.”  But don’t you want to work with an accountant that knows ALL of the rules?

Even if it has been a rough year, many businesses will offer some kind of holiday recognition to their employees.  44% will gift food, 13% will gift cash and 37% will provide a retailer gift card.  From an accounting perspective, holiday bonuses or “gifts” are treated as a taxable event subject to both income and payroll tax. Ebeneezer IRS does not see these as “gifts” so much as another payment to an employee.

The only exception? “de minimis” fringe benefits that cannot be easily valued.  Since cash, food  or gift cards can all be easily valued and entered onto the books what is left?  A gift must be of “nominal value” to be excluded from income. The IRS does not define “nominal value,” but it is clear an item with value over $100 is not considered de minimis. However, many experts advise “nominal” is much lower, either $25 or $50.  Think of something like a tote bag,ornament or other gewgaw.

So with that bit of merry cheer, we sign off for our own holiday – and wish you a holiday that would never be described as de minimis.

The Internal Revenue Service has announced the cost-of-living adjustments applicable to dollar limitations for various qualified retirement plans and other amounts for 2013. Many of the pension plan limitations will change for 2013 because the increase in the cost-of-living index met the statutory thresholds that trigger their adjustment. If you are a business and a plan sponsor, verify that your administrative and payroll systems reflect the appropriate limits. Communications that specify benefit plan limits should be reviewed for accuracy before materials are given to participants.

⁽¹⁾ This table has been updated based on IRS Announcement IR-2012-77, October 18, 2012.

⁽²⁾ This applies to the total of all elective deferrals an individual makes for the year to 401(k) plans, 403(b) plans, SARSEPs and SIMPLE plans.  HOwever, deferrals to each SIMPLE plan in which the individual participates are also limited, as shown later in the table.

⁽³⁾Catch up contributions are available each year to individuals who reach age 50 by the end of the year.

As you can see, this is a lot of detail and we never expect our clients to digest this.  That’s what we are here for.  If you have any questions or for more information about the 2013 Cost-Of-Living adjustments for retirement plans, please contact us.  We do more than taxes.

After the election, probably not until December, a lame-duck session of Congress is expected to convene to address a variety of tax issues relating to 2013.  our new “lame duck” congress will need to look at  regular and capital gain tax rates and the extension of some credits like education credits.

One important issue they need to address that concerns 2012 is the so-called alternative minimum tax (AMT) patch. In calculating AMT, there is an income exemption amount that has been annually indexed for inflation since 2000. If no change is made, the exemption for 2012 will drop to 2000 levels, causing millions of taxpayers to start paying AMT for the first time and adding thousands of dollars of additional tax to those that already pay.

The good news is that even though there is much uncertainty as to what will happen in 2013, it is very likely that the patch will be made for 2012.

One tax provision that will be expiring at the end of the year is the 2% reduction in the amount of Social Security tax withholding. This began in 2011 and was extended earlier this year to cover 2012 also. There does not seem to be much interest by either party to extend this to 2013. If the rates do revert to the previous level (6.2% compared to 4.2% currently), this would mean up to $2,200 more Social Security withholding (and self-employment tax, if applicable) for individuals next year.

In my earlier blog Why it Matters when Choosing LLC versus S-Corp Status, I recommended that smart business people should consider creating S-Corporations instead of LLC’s because it is easier to sell the entity if that is your exit strategy and for the tax advantages it can provide its owners.  Another compelling reason is that the S Corporation has the ability to treat a portion of its payments to shareholders as being return on invested capital not subject to employment taxes.

But as with all things, there are those who push the boundary too far.  There are many S Corporations that are being so aggressive on this front that they assert all of their profit is return on investment and none of it is compensation.  Needless to say the IRS is focusing on this and as you might expect, the IRS always wins these battles.

We can help advise companies about where to draw the line.  Reasonable compensation is a test that typically includes looking at the training and experience of the shareholder/employee, their duties and responsibilities and the time devoted to the business.  The IRS will usually also include the history of the company’s dividend payments, payments to non-sharholder employees and capital invested into the company.  If the business is primarily a service business with the services performed by the principal shareholder, the IRS would tend to expect that the majority of the earnings of the company be treated as compensation.  As a service company, the business would have relatively less capital and less need to accumulate capital for expansion.  A service S corporation with large dividend payouts compared to the amount treated as compensation could be a potential candidate for an IRS audit.   This is the #1 issue facing S Corpoartions and the comparison between W-2 compensation and K-1 dividend is a relatively easy one for the IRS to make.

One of our key responsibilities for our clients is to help them understand how to balance their returns from their capital and their hard work fairly so that they maximize their returns while minimizing their exposure for IRS audits.  Want to learn more?  Call us.  We do more than taxes.

It’s a mistake to believe that employees cannot have work-related deductions. The IRS allows some work-related deductions even for W-2 employees. It is most common for people in a sales role, but there are many employee positions which may qualify.

Let’s imagine there is a sales person who has a home-based office and must travel and spend money on taking customers to lunch or coffee, as well as occasional hotel rooms, AV rental, taxis, offsite laundry and business calls outside his standard cellular plan. Many companies do not reimburse these expenses because their policy is that sales commissions and salaries adequately cover these out of pocket expenses for their employees.  Following the IRS guidelines in publication 511 – Business Travel Guidelines, these expenses would be tax deductible. Our advice is that employees monitor and track these expenses using a simple file folder and T-ledger to move the amounts easily into Form 2106.

Other expenses to consider are some commuting expenses.  Although commuting costs are not deductible, some local transportation expenses are.  Deductible local transportation expenses include the ordinary and necessary expenses of going from one workplace (away from the residence) to another.  If you have an office in your home that you use as your principal place of business for your employer, you may deduct the cost of traveling between your home office and work places associated with your employment.  Refer to Topic 509 for more information on home offices.

While expense deductions may seem like a great boon, there is a definite disadvantage to the employee when expenses are taken on his or her personal income tax return if the employee is subject to the AMT (Alternative Minimum Tax.)  In that situation, the expenses may not be deductible if the expenses are less than 2% of the employee’s adjusted gross income.

Working through the optimal solution during tax preparation and when planning for the year ahead is confusing.  To get professional advice and the confidence that comes with it, contact Foreman & Airhart for informed tax guidance.

If like many people, you changed jobs in 2011 you may be eligible for several deductions for costs to find a new position. Here are seven things the IRS wants you to know about deducting costs related to your job search:

1. To qualify for a deduction, the expenses must be spent on a job search in your current occupation. You may not deduct expenses you incur while looking for a job in a new occupation.
2. You can deduct employment and outplacement agency fees you pay while looking for a job in your present occupation. If your employer pays you back in a later year for employment agency fees, you must include the amount you receive in your gross income, up to the amount of your tax benefit in the earlier year.
3. You can deduct amounts you spend for preparing and mailing copies of your résumé to prospective employers as long as you are looking for a new job in your present occupation.  That means paper, envelopes, postage and printing. Keep those receipts!!
4. If you travel to an area to look for a new job in your present occupation, you may be able to deduct travel expenses to and from the area. You can only deduct the travel expenses if the trip is primarily to look for a new job. The amount of time you spend on personal activity compared to the amount of time you spend looking for work is important in determining whether the trip is primarily personal or is primarily to look for a new job.
5. You cannot deduct job search expenses if there was a substantial break between the end of your last job and the time you begin looking for a new one.
6. You cannot deduct job search expenses if you are looking for a job for the first time.
7. The amount of job search expenses that you can claim on your tax return is limited. You can claim the amount that is more than 2 percent of your adjusted gross income.  The deduction occurs on Schedule A.

For more information about job-related deductions, contact Foreman & Airhart today.