Published August 23rd, 2013 by

 

 

This bizarre tax has evolved from one that attempted to tax millionaires who were sheltering their income with tax shelters, decades ago, to one that is grabbing more and more taxpayers every year.

The alternative minimum tax is a second way that your taxes are computed. It works by taking the regular taxable income, and adjusting it for certain deductions that are not allowed under the second method.

The most prominent of those deductions that are adjusted out are dependency exemptions, employee business expenses, and other miscellaneous itemized deductions, such as investment advisory fees.

The resulting alternative minimum taxable income is then taxed at 26 or 28%. The resulting tax is compared to the regular income tax, and the higher of the two is paid

When a client is in the “alternative minimum tax range” the effect of this is that those deductions are not deductible. Congratulations!

Bizarre!

Published August 9th, 2013 by

 

 

How bad is it to go into the next tax bracket?        

This is a commonly misunderstood concept. Although it’s never good to pay more taxes of course, going into the next bracket is not as costly as most people think.

Let me explain.

Let’s assume that a client’s income is one dollar below the next bracket. Then they remember that they won a two dollar bet on the golf course, which of course has to be added into their income, pushing them into the next bracket by one dollar! Before that gamble, they were in a 15% bracket, but have been moved into the 25% bracket by virtue of having made a putt! Should they have missed the putt?

We find that most clients believe that if they move up into the next tax bracket, all of their income gets pulled up into that bracket and would be taxed, in this case, at 25%, costing them a bundle. That is simply not the case! In this example, only the $1 that moved into the 25% bracket is taxed at that rate.

So, do your best to make that putt. It will cost you only a quarter, which is in your pocket being used as a ball-marker.

Published August 2nd, 2013 by

My Daughter
A lot of my clients ask this questions when their children are getting ready to graduate from high school.

I added this picture of my daughter because shes 4 going on 18

It’s pretty black and white as far as the IRS is concerned. I say as far as the IRS is concerned because we all know that just because our kids are 18 doesn’t mean they are no longer our dependents. We will support them until we are no longer able to or they can support themselves. Let’s hope the latter of the two happens first.

The law states that your child is your dependent until the age of 18, at the end of the year. So if your child is 18 on December 31st they are your dependent, if they are 19 on December 20 they are not your dependent.

However, if your child is 19 but under the age of 24  at the end of the year and is in school for at least 5 months out of the year they may also still be your dependent. I say, may be your dependent, because they still need to meet the other requirements of a dependent.

The one that most people fail is the support test. You must have provided at least half of their support. A quick and easy way to determine whether you provided more than half of their support, is to divide your income by your number of dependents and if it’s more than the amount they earned for the year, excluding the amount they saved in a savings account, you most likely passed the support test.

For more information on dependents go to www.irs.gov/publications/p501/ar02.html

Published July 24th, 2013 by

A Section 105 medical reimbursement plan is an employee benefit plan that reimburses qualifying employees for their out-of-pocket medical expenses.

This type of plan is used infrequently, and is compared and contrasted to the flexible spending account.

A flexible spending account works by using the employee’s money that has been set aside from each paycheck, and reimbursing them when they have out-of-pocket expenses. In other words, it’s the employee’s money.  Taxes are saved by reducing taxable gross pay.

In contrast, a medical reimbursement plan is all provided by the employer. No employee money is used. The reimbursement is tax-free and is deductible by the business, similar to the way health insurance works.

The medical reimbursement plan works particularly well in the situation where the business is a sole proprietorship, and it is operated by a husband and wife. One of the spouses is the sole proprietor and the other is the employee. That employee must be a bona fide employee, receive a W-2, and be able to document the validity of their employment with time records etc.

With a medical reimbursement plan in place, out-of-pocket medical expenses incurred by the employee or by his or her spouse or dependents, can be reimbursed by the business, and a full business deduction is taken on schedule C, reducing both income tax and self-employment tax.

If the taxpayer is Single, this type of plan works when the business is a C-Corporation.

It’s way cool!!

Published July 19th, 2013 by


Michigan Income Tax Changes for Retirement Benefits

The changes went into effect January 1st 2012.

 

I have clients ask me all of the time what were the changes, and my answer is well let me pull out my cheat sheet. The changes depend on when you were born, or when your spouse was born if you are married filing joint and your spouse is older than you.

 

Below I have created a chart that makes it a little easier to understand.

 

Taxpayers born before 1946

 

No changes in current law.

 

  • Social Security is exempt.
  • Senior citizen subtraction for interest, dividends, and capital gains is unchanged.
  • Public pensions are exempt.
  • For 2012 Private pensions subtract up to $47,309 for single filers and $94,618 for joint filers.

    

 

Taxpayers born 1946 to 1952

 

Before the taxpayer reaches age 67

 

  • Social Security is exempt.
  • Railroad pensions are exempt.
  • Military pensions are exempt.
  • Not eligible for the senior citizen subtraction for interest, dividends and capital gains.
  • Public and private pension limited subtraction of $20,000 for single filers or $40,000 for joint filers.

 

After the taxpayer reaches age 67

{Which will first occur in 2013}

 

  • Social Security is exempt.
  • Railroad pension is exempt (but see below).
  • Military pension is exempt (but see below).
  • Not eligible for senior citizen subtraction for interest, dividends and capital gains.
  • Subtraction against all income of $20,000 for single filers and $40,000 for joint filers.

Not eligible for this income subtraction if choosing to claim a military or tier 2 railroad pension    exemption.                                               

 

Taxpayers born after 1952

 

Before the taxpayer reaches age 67

 

  • Social Security is exempt.
  • Railroad pension are exempt.
  • Military pension are exempt.
  • Not eligible for the senior citizen subtraction for interest, dividends and capital gains.
  • Not eligible for public or private pension subtraction.

 

After the taxpayer reaches age 67

{Which will first occur in 2020}

 

  • Not eligible for senior citizen subtraction for interest, dividends, and capital gains.
  • Not eligible for public or private pension subtraction.
  • Income exemption election
  • ELECT exemption against all income of $20,000 for single filers or $40,000 for joint      filers.
  • No exemption for Social     Security, military or              Railroad retirement.
  • No personal exemptions.

         OR           

      
ELECT to exempt Social Security,
Military and railroad pension.

 
May claim personal exemptions.

 

 

So as you can see a cheat sheet comes in handy.

 

As always when you have a question call your tax accountant.

Published June 21st, 2013 by

Home Office Deduction

 

Many people avoid the home office deduction because they think it’s a red flag. But the truth is that it’s a completely legitimate deduction.

 

The home office deduction is more useful when you have a profit. However it can be carried forward and used in a year you are profitable. So even if you have a bad year still claim the deduction.

 

Some of the expenses you are able to deduct for the home office are your mortgage interest, property taxes, insurance, repairs and maintenance, utilities and deprecation.

 

You only deduct the percentage of your home that is used for business. Usually these spaces are office, storage for business supplies, materials storage tools storage etc….

 

It is important to know that when you sell your home you may have to recapture the deprecation taken or that could have been taken.

 

In the old days we would take the home office deduction and not take the deprecation so that when you sold your house you wouldn’t have to recapture the deprecation. However the IRS put a stop to that by changing the wording to deprecation that was allowed or allowable.

 

If you have been taking the home office deduction, but did not take the depreciation, the rules allow you to deduct, in the current year, all of the accumulated depreciation you failed to take over the years. This creates a very nice tax benefit in the current year.

 

Home office deductions can be tricky so make sure to consult with a tax accountant.

Published December 11th, 2012 by

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