June 2014 Letter

With the end of tax filing and the start of summer why not focus on new beginnings? Included in this month's newsletter are some ideas to help find summer employment and some suggestions on the benefits of creating a good accounting system for your small businesses. Wonder what the IRS has in store for audits? Consider reviewing the article on audit statistics and a new area of focus within the agency on alimony reporting compliance. Should you know of someone who may benefit from this information please feel free to forward this newsletter to them.

The Chances of Being Audited 2013 audit statistics show changes What are the chances? Every year the IRS publishes the statistics of tax returns they are examining. Provided here are the last three years of published information and a look back to 2008 to see any trends: Audit Rate Statistics for INDIVIDUALS Fiscal Year Year 2013 2012 2011 2008 All Individual Tax Returns 0.96% 1.03% 1.11% 1.00 % No Income (AGI) 6.04% 2.67% 3.42% 2.15% Income under $25,000 1.00% 1.05% 1.22% .90% $25,000 - 50,000 .62% .70% .73% .72% $50,000 - 75,000 .60% .64% .83% .69% $75,000 - 100,000 .58% .64% .82% .69% $100,000 - 200,000 .77% .85% 1.00% .98% $200,000 - 500,000 2.06% 1.96% 2.66% 1.92% $500,000 - $1 million 3.79% 3.57% 5.38% 2.98% $1 million - $5 million 9.02% 8.90% 11.80% 4.02% $5 million - 10 million 15.98% 17.94% 20.75% 6.47% $10 million and over 24.16% 27.37% 29.93% 9.77% Note: These audit rates are stated as a percent of total tax returns in each Adjusted Gross Income (AGI) class as claimed on individual tax returns. In general the examinations are for tax returns filed in the previous calendar year. Source: IRS Data Books Observations: Overall audit rates in 2013 have now fallen below the levels in 2008. Much of this is due to budget cuts from sequestration per the IRS. These lower audit rates did not impact those with no AGI or negative income. This group saw a dramatic increase in audits during 2013. Taxpayers with AGI between $200,000 and $5 million also saw their returns reviewed at a higher rate than last year. Having good records Always retain your tax records and support documents for as long as they may be needed to substantiate your tax return. This is usually three years after the filing due date or when the tax return was actually filed (whichever is later). Include any state record retention requirements as you evaluate when it is safe to destroy old records. Remember some records need to be retained indefinitely. This includes, at minimum, copies of original tax returns, legal documents, confirmation of asset purchases, asset sales and real estate transactions.

Alimony in the Spotlight If you either pay alimony or receive alimony, you will want to know what is happening at the IRS. In a recent audit of the IRS by the Treasury Department, it was found that 47% of the tax returns that claimed an income reduction due to alimony payments did not have a matching tax return that claimed the alimony income. The audit found that the IRS did not have an effective way to match tax returns between those paying the alimony and those that should theoretically be claiming the alimony income. To make matters worse, very few penalties were being assessed for failing to correctly identify the taxpayer receiving the alimony payments. What you need to know Beginning immediately, the IRS will be assessing penalties on tax returns that do not identify the correct Social Security Number or Tax Identification Number of the taxpayer receiving the alimony payments. There will be an alimony-matching program to identify those returns that pay alimony with those that receive it. If you pay or receive alimony or taxable spousal support payments it is worth checking to ensure your figures match those of your ex-spouse. If they do not, you might just be hearing from the IRS.

Setting up Your Business Accounting System You've done the hard work. You have a new business idea or you've found an existing business to purchase. Want to help ensure your business success? Pay attention to correctly setting up your business' accounting system. Why it matters Honoring cash flow. Often success or failure of your business is predicated on whether you have enough cash to pay your bills. Determining your cash needs means understanding the cash situation of your business. To do this requires a good set of records. This includes recording your current situation on a timely basis and establishing a forecast of cash needs throughout the year. Fortress balance sheet. Banks love a strong balance sheet. If you think your business may need money for expansion, you will want to focus on developing a strong balance sheet that is low in debt and high in liquid assets like cash and accounts receivable. The irony here is that it is easy to borrow money when your records show you don't need it and it is hard to borrow money when your business records show you need the funds. Understanding financial pressure points. Every business has a few financial items that drive profitability. Do you know yours? It might be payroll in a labor-intensive business. It might be rent in a retail establishment. Perhaps your margins are low because of heavy promotional costs. A strong accounting system will help you stay focused on the more important financial elements of your business. Understanding seasonality. By setting up a good accounting system AND forecasting performance over a twelve-month period, you will understand the true needs of your business. This is especially important if your business is seasonal in nature.     Things to consider Separate books. If starting a business from scratch, remember to set up separate bank accounts and recordkeeping. IRS auditors are quick to disallow expenses when your business expenses are mingled together with personal expenses. The same is true with credit cards. Use a separate credit card for your business transactions. Consider business entity. Choosing the right legal and tax entity for your business is important. Consult experts to discuss your options. On the tax side, sole proprietors use a Form 1040 Schedule C to report their activity, while other business entities "flow-through" profits to your individual tax return through a Schedule K-1. Still others like C-Corporations require separate tax returns without flow-through of profits onto your personal tax return. Cash versus accrual. There are different approved methods of accounting. You will need to determine which is best for you. Sometimes your business dictates a required method, but not always. The basic difference lies in when you can book revenue and expense. One method (cash) is based upon when you actually receive or make payment. While the accrual method allows capturing this same information when there is an established obligation. Sub-ledgers. Well-run businesses understand the need to organize elements of their business into accounting categories. These categories often use their own reporting system called sub-ledgers. Common areas are sales, accounts receivable, accounts payable, fixed assets, and inventory. Remember, by spending time setting up the accounting system that is right for you, you are increasing your business' chance for success. As a final thought, if recordkeeping and accounting is not a strength of yours, ask for help.

Looking for a Summer Job With summer upon us, you may have a teen looking for summer employment. Here are some ideas to help find a summer job. Things to consider When trying to land a job, remember you need to stand out from the pack. What can you do to help yourself be the one hired? Create a resume. Even if you do not have solid work experience, a quick and simple recap of who you are and what things you believe you are good at could help set you apart from other summer job seekers. Dress the part. Dress neatly and cleanly. Do not over dress for the job, but make sure you look like you belong. Not sure what this means? Scout the place you wish to work and notice what people are wearing. Then dress the part. Be confident, even if you are not. Speak clearly. Look the person in the eye. Ask for the job. Have a firm handshake. All these little things add up in the eye of the employer. Be ready for no. Someone once said looking for a job can be summed up in one sentence: NO, NO, NO, NO, NO, YES. If you are turned down for a job, politely thank the manager for their time, reiterate how you would like to be considered for future openings and leave your contact information. Leverage your network. Many summer jobs are landed because employers rely on current workers to help find qualified new workers. So pass the word you are looking for work. You never know what opportunities might develop. Follow up. If you really want to work somewhere, be persistent. Follow up an interview with a thank you note. Then periodically check back. Some things to avoid. Being late or not showing for an interview Being meek or timid Having spelling errors on any correspondence Showing up with a friend or parent. This is your job not theirs. Not having a way to get to and from a job. Plan this out ahead of time. Ideas for summer work Not sure where to look? Here are some ideas. Grocery store Seasonal areas; garden stores, landscape, summer camps, vacation areas, resorts, festivals and fairs, construction Restaurants. Especially in areas with heavy summer traffic Nanny/child care. With school out, many homes are looking for summer help with their kids versus sending them to full-time daycare. Craft fairs and conventions. Summer is the time for many community events. All of them need help. Light manufacturing. Many workers are looking to take some vacation. Summer help can step-in and fill-in while current employees take a well-deserved break. Often the difference between landing the dream summer job and not having one is simply taking action. To win the game, you must be on the playing field. So go out there and get your job.

As always, should you have any questions or concerns regarding your situation please feel free to call.

May 2014 Letter

With the 2013 Tax filing season behind us, the 2014 tax planning season is just beginning. Included this month are two areas where advanced planning can reduce your tax bill. There is also an update from the IRS on the tax treatment of virtual currencies like Bitcoin for those of you using or contemplating their use. A checklist of ideas on how to improve security of your identity rounds out this month's newsletter.
Should you know of someone who may benefit from this information please feel free to forward this newsletter to them.

Planning: Leverage Kiddie Tax Rules

Now is the time to take action on reducing next year's tax bill. One area to help reduce your tax obligation is leveraging your kids to the fullest by understanding the "kiddie tax" rules.

Background

The term "kiddie tax" was introduced by the Tax Reform Act of 1986. The rules are intended to keep parents from shifting their investment income to their children to have it taxed at their child's lower tax rate. In 2014 the law requires a child's unearned income (generally dividends, interest, and capital gains) above $2,000 be taxed at their parent's tax rate.

Applies to

	Children under the age of 19
	Full-time students under the age of 24 and providing less than half of their own financial support
	Children with unearned incomes above $2,000

Who/What it does NOT apply to

	Earned income (wages and self-employed income from things like babysitting or paper routes)
	Children that are over age 18 and have earnings providing more than half of their support
	Older children married and filing jointly
	Children over age 19 that are not full-time students
	Gifts received by your child during the year

How it works

	The first $1,000 of unearned income is generally tax-free
	The next $1,000 of unearned income is taxed at the child's (usually lower) tax rate
	The excess over $2,000 is taxed at the parent's rate either on the parent's tax return (Form 8814) or on the child's tax return (Form 8615)

Planning thoughts

So while your child's unearned income above $2,000 is a problem, you will still want to leverage the tax advantage up to this amount. Here are some ideas:

	Maximize your lower tax investment options. Look for gains in your child's investment accounts to maximize the use of your child's kiddie tax threshold each year. You could consider selling stocks to capture your child's investment gains and then buy the stock back later to establish a higher cost basis.
	Be careful where you report a child's unearned income. Don't automatically add your child's unearned income to your tax return. It might inadvertently raise your taxes in surprising ways by exposing more income to the Alternative Minimum Tax or reducing your tax benefits in other programs like the American Opportunity Credit.
	Leverage gifts. If your children are not maximizing tax-free investment income each year consider gifting funds to allow for unearned income up to the kiddie tax thresholds. Just be careful, as these assets can have an impact on a child's financial aid when approaching college age years.

Properly managed, the "kiddie tax" rules can be used to your advantage. But if not properly managed, this part of the tax code can create an unwelcome surprise at tax time.

Planning: Leverage Kiddie Tax Rules

Now is the time to take action on reducing next year's tax bill. One area to help reduce your tax obligation is leveraging your kids to the fullest by understanding the "kiddie tax" rules.

Read full article

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2015 Health Care Savings (HSA) Account Limits Announced

The savings limits for the ever-popular Health Savings Accounts (HSA) are now set for 2015. The new limits are outlined here with current year amounts noted for comparison purposes.

What is an HSA?

An HSA is a tax advantaged savings account to pay for qualified health care costs. The account consists of wages contributed on a pre-tax basis. There is no tax on the funds contributed or investment earnings as long as the funds are used to pay for qualified medical, dental and vision expenses. To qualify for this tax-advantaged account you must be enrolled in a "high deductible" health insurance program as defined by HSA rules.

The limits

Health Savings Account (HSA) Limits		2014	NEW! 2015	Change
Maximum Annual Contribution	Self	$3,300	$3,350	+$50
	Family	$6,550	$6,650	+$100
	Add: 55+ catch up contribution	$1,000	$1,000	nc
Health Insurance Requirements
Minimum Deductible	Self coverage	$1,250	$1,300	+$50
	Family coverage	$2,500	$2,600	+$100
Out-of-pocket Maximum	Self coverage	$6,350	$6,450	+$100
	Family coverage	$12,700	$12,900	+$200

Note: HSAs require a qualified High Deductible Health Plan (HDHP). To qualify, a health insurance plan must meet minimum deductible requirements that are typically higher than traditional health insurance. In addition, your coverage must have reasonable out-of-pocket payment limits as set by the above noted maximums.
Not sure what an HSA is all about? Check with your employer. If they offer this option in their health care benefits, they will have information discussing the program and its potential tax benefits.

2015 Health Care Savings (HSA) Account Limits Announced

The savings limits for the ever-popular Health Savings Accounts (HSA) are now set for 2015. The new limits are outlined here with current year amounts noted for comparison purposes.

Read full article

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Virtual Currency is Property per IRS

In recent Internal Revenue Service Notice 2014-21, virtual currencies like Bitcoin have been classified as property. The IRS is aware of the growing popularity of this medium of exchange and that it is not considered legal tender by any government. The IRS notice hopes to clarify how you must treat your use of this new technology. The outcome for users is not good. Here is what you need to know;

	As property. Property is subject to gains and losses. So if you use a virtual currency like Bitcoin, you must keep track of the original cost of the coin and its value when you use it. As a capital asset you must also know whether your gain or loss on use of the virtual currency is short-term or long-term.
	As income. Wages paid in virtual currency are taxable to the employee, must be reported on a W-2, and are subject to employment taxes. Virtual currency income received as an independent contractor has self-employment tax rules applied and must follow Form 1099 reporting requirements.
	A currency? Per the IRS, no. Businesses have the ability to calculate foreign currency gains and losses on their financial statements. This foreign currency gain or loss calculation is not available for virtual currencies like Bitcoin.
	Determining value. If you purchase or sell something using a virtual currency, you need to determine the fair market value of the transaction using a valid virtual currency exchange and translating it into U.S. dollars.
	Miners have income. Miners are those who receive Bitcoins and other virtual currencies by validating transactions and maintaining public Bitcoin ledgers. If you are someone who "mines" virtual currency, you create income upon receipt of the currency. This is a taxable event.

As the technology of alternative methods to exchange goods and services evolves, so will your need to understand it. Should someone offer to provide you with Bitcoins for products and services, you will now know there are tax implications to saying yes.

Virtual Currency is Property per IRS

In recent Internal Revenue Service Notice 2014-21, virtual currencies like Bitcoin have been classified as property. The IRS is aware of the growing popularity of this medium of exchange and that it is not considered legal tender by any government. The IRS notice hopes to clarify how you must treat your use of this new technology. The outcome for users is not good. Here is what you need to know.

Read full article

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Check your Credit

...Change your Passwords

As consumers in the digital age we have repeatedly had our confidence in the security of our identity and financial information tested. First it was the dramatic increase in identity theft at the IRS. Then the major data breach at companies like Target, Neiman Marcus, Yahoo and others. Now we hear that a bug called Heartbleed has made secure web sites anything but secure. Here is a checklist of things to consider;

Change your user ids every three to six months Change your passwords every three to six months Close potentially compromised accounts Replace compromised debit and credit cards Understand your risks of theft (for instance your financial risk on credit theft is different than debit card fraud) Consider a credit monitoring service Monitor your social media footprint Update your computer security software Review your credit reports Correct any errors on your credit reports Review your children's accounts and credit reports Report suspicious activity in your accounts

	Shred confidential information before tossing it
	Do not share logins and passwords
	Create separate credit card and banking accounts for internet transactions
	Consider using a PO Box for mail

Other resources

	FREE credit report. Each year you are entitled to receive a FREE credit report from the major credit report companies. To receive yours go to: AnnualCreditReport.com
	IRS Identity Theft: Tips for taxpayers
	Federal Trade Commission: Identity theft help

Check your Credit

...Change your Passwords

As consumers in the digital age we have repeatedly had our confidence in the security of our identity and financial information tested. First it was the dramatic increase in identity theft at the IRS. Then the major data breach at companies like Target, Neiman Marcus, Yahoo and others. Now we hear that a bug called Heartbleed has made secure web sites anything but secure. Here is a checklist of th

Read full article

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As always, should you have any questions or concerns regarding your situation please feel free to call.