Friday, December 3, 2010

White House’s Deficit Commission issues Moment of Truth

The White House's deficit-reduction commission has issued its report. To read a copy of the published report, click one of the links below.

Here are two summaries of the report.
The Tax Foundation:
Texas Society of CPAs Federal Tax Policy Blog:

Sunday, November 28, 2010

Is tax deferred saving a bad idea?

The concept is appealing. Save money using pre-tax dollars in a special account. You can use the tax savings to put more money to work. The earnings in the account will not be taxed, and you will have bigger balance years from now than if you had saved after tax dollars in a taxable account. You will pay taxes on your withdrawals, but you may be subject to lower tax rates. You will be much better off than if you save after tax dollars in a taxable account. It sounds too good to be true.

I cannot tell you whether tax deferred accounts make sense for you. That decision should be based on your particular situation. However, before you automatically assume that it is a good idea to put money into tax deferred plan such as an IRA, SEP, 401(k), 403(b), or 457 plan, it makes sense to examine three basic assumptions.

Tax savings means a bigger balance
This may is true. However the tradeoff is that withdrawals will be taxable. Whether deferring tax will give you more after tax income is dependent on current and future tax rates. The biggest reason that balances are larger is that if a person was going to save $100, then he or she would have to earn $139 at a 28 percent tax rate to have $100 to save. The assumption is that people who would save $100 after tax dollars will save $139 pretax dollars. That assumption is not always true.

Tax deferred plans reduce your tax
This may also be true; however the statement is based on several assumptions. If the assumptions are false, which is possible, then tax deferred plans may not reduce your tax bill. They may even increase it. The blanket statement that tax deferred plans will reduce tax burdens is based on an assumption that tax rates will be lower when funds are withdrawn than when the income is deferred. There are several reasons that this might not be true.

One reason is that lifetime earnings follow a predictable pattern. People at the beginning of their careers tend to make less than people later in their careers. A healthy portion of the balance from a tax deferred savings plan is likely to have been set aside when income was relatively low. With progressive tax rates, lower income taxpayers pay tax at lower marginal rates. Of course the argument is that the money will be withdrawn at retirement and income will be necessarily lower. That argument is contrary to the reasons that people save for retirement. The income withdrawn from tax deferred plans will be taxable. If the taxable income is lower, then the plan did not accomplish the objective of accumulating a large enough balance to provide a replacement income.

Another reason that tax deferred plans may not reduce your tax is actually a collection of reasons under one heading: Tax is too complex a subject to make blanket assumptions. Here are just a few of the issues:
  • Future tax rates are unpredictable.
  • Social Security taxation is tied to other taxable income.
  • AMT is usually difficult to plan around.
  • If you experience a windfall, then you are likely to have higher income later, and that may mean higher tax rates.
  • If you save a lot, then you may have higher income later.
  • You may be living in a state with an income tax and plan to retire to a state without an income tax.
  • Tax deferred account earnings are taxed as ordinary income at withdrawal. This is true even if the earnings are the result of long-term capital gains or qualified dividends which may be taxed at lower rates.
  • Tax rate comparisons assume that alternative investments are taxable investments. This ignores tax-free investments. 
A question of control
In addition to the two assumptions explored above, there is also the question of control. The implicit assumption whenever a person uses a tax deferred vehicle is that he or she remains in control of the investment. This is true even though nearly all people know about age limits for penalty free withdrawals. The withdrawal limitations are a reasonable tradeoff for the tax deferral.

Control of funds in tax deferred accounts is actually a much bigger question than withdrawal limitations. There are two. The first is related to age. Tax deferred plans typically have some sort of required minimum distribution. This means that you will be required to withdraw some portion of your account regardless of your need for funds, and you will be required to pay income tax on the amount you withdraw. This is a huge amount of control to cede in exchange for tax deferral, and it is much more significant than having to reach a minimum age.

The second control question relates to how tax deferred accounts fit into your estate planning. This is a complex topic well beyond the scope of this article. However, the time to find out that tax deferred accounts may not be the best instruments for your estate plan is before you start putting a lot of money into them.

Is tax deferred saving a bad idea?
The answer to this question is dependent on a variety of factors. Tax deferred plans are neither good nor bad. Instead, they are tools that work well in some situations and not so well in other situations. If you are contemplating a tax deferred plan, ask yourself some question such as these:
  • What do you anticipate your income will be over your lifetime?
  • When do you expect to earn more or earn less?
  • What are your expectations about your future tax rates?
  • What does your expectation about your earnings and tax rates mean to you?
  • How important is it to you to be able to control your withdrawals in the future?
  • Do you have estate planning concerns? 
What should you do?
 The first thing you should do is to consider your situation. Ask yourself what you are trying to accomplish. If your objective is to shift income and defer tax, then use a tax deferred plan. If your objective is simply to save for some purpose, explore all of your alternatives and weigh the pros and cons of each. If a tax deferred plan is your best option, the use it. You may find that investing after tax income in a taxable account is your best option. It is likely that you will determine that you need some combination of tax deferred and taxable accounts.

If you are not sure what to do, seek advice from a professional. A CPA or financial planner should be able to explain your options and help you decide. If you have estate planning questions, then be certain that you seek advice from an attorney skilled in that area. If your situation is complex, you may want to involve several advisors with different skill sets.

Sunday, November 21, 2010

Have you prepared your 2010 taxes yet?

Even though there is more than a month left in 2010 and tax deadlines are well in the future, it is not too soon to get started cleaning up your books and preparing to file your taxes. Getting started now can help you by reducing the amount that you spend on bookkeeping, accounting, and tax services, and it could reduce the size of your tax bill. If you begin reviewing your tax situation now, you will also have some time for last minute tax planning for 2010.

Getting started
The first thing you need to do is to get your books in order. Whether you have a full-time bookkeeper or simply save everything in a shoebox for your CPA, a little organizing can go a long way. If you need more guidance than this brief article provides, contact your bookkeeper or CPA. They will be happy to tell you how to improve the way you organize your records. What you pay for an hour or two of consulting will be more than offset by the money that you can save by being organized. Your CPA or bookkeeper might even provide the consultation for free. You may even decide that working more closely with your professional accountant will give you more time to spend on the rest of your business.

Separate business and personal
Make sure that your personal and business lives are separate. This seems obvious, but every year small business owners or employees with unreimbursed expenses turn over business records comingled with personal records. It may be too late for 2010, however you should make sure that you have different bank accounts and credit cards for your business and personal lives. You may not need special business accounts, but you should make certain that they are separate.

Get your books in order
There are a couple of important parts to this step. The first step is to organize your records the way that CPAs and bookkeepers do. Figure out all of your sources of income and group them into logical categories. Then organize all of your expense. Business owners tend to focus on expenses because they worry about cash flow. However most people used to working with money are accustomed to seeing revenue, then expense, then net income. It is not a bad idea for you to think in that order also. If you think about it, the success of your business depends on money coming in the door, not just your ability to control expenses. Income and expense groupings are not just for business. If you organize your personal records this way, you will find your personal record keeping easier. An added bonus to organizing your records this way is that bankers also expect to see your financial statements in this order. If you ever need to complete a credit application, it will be easier for you to find the information that you need.

Once you have grouped your records into the two large categories of income and expense, further categorize the records by type. How you do this will depend on the type of business you own. If you have W-2 income then keep that apart from business income. You will want to group business income by whether it was for services or goods. A quick note about employee business expenses is in order at this point. If you are organizing your records because you have employee business expenses, you will want to sort out any payments that you received for expenses by whether they were taxable or nontaxable. Your employer should be able to tell you this.

After you have categorized your income, do the same with your expenses. If you already have a bookkeeping system with a set of accounts, then simply use those accounts. This is a good time to review your chart of accounts for completeness and accuracy. If you do not already have a way to categorize your expenses, take a look at your previous tax returns and see how your CPA divided up your expenses. Your CPA may even have a tax organizer that you can use. Depending on the arrangement that you have with your bookkeeper of CPA, this process could be as simple as organizing your receipts and statements, or it could include entering the expenses into your bookkeeping system. If all of this is getting unwieldy for you, then this is a good time to talk to your CPA or bookkeeper about how they can help you manage your books.

What about records that you do not yet have?
You will not receive some statements or reports until the end of the year or even until January or February. No problem. Set up folders for the statements or reports that you expect to receive later. Then when you receive them, simply add them to the appropriate folder.

How this helps
This may seem like a lot of work that could just as easily wait until later. However, by beginning now, you will be more likely to have everything you need later when you take your files to your CPA. In addition, having complete and well organized records makes your CPA’s task easier so that he or she can work faster. That will save you money. In addition, complete and well organized records will make it less likely that your CPA will miss something, and in the event that your return is selected to be audited, good documentation will make the audit much easier for you.

Friday, October 29, 2010

IRS Consumer ALert

The IRS does not send taxpayers unsolicited e-mails about their tax accounts, tax situations or personal tax issues. If you receive such an e-mail, most likely it's a scam. IRS impersonation schemes flourish during filing season. These schemes may take place via phone, fax, Internet sites, social networking sites and particularly e-mail.

Many impersonations are identity theft scams that try to trick victims into revealing personal and financial information that can be used to access their financial accounts. Some e-mail scams contain attachments or links that, when clicked, download malicious code (virus) that infects your computer or direct you to a bogus form or site posing as a genuine IRS form or Web site.

Some impersonations may be commercial Internet sites that consumers unknowingly visit, thinking they're accessing the genuine IRS Web site, However, such sites have no connection to the IRS.

For more information on scams and what to do if you're subject to one, see our Problem Alerts page, Online Scams that Impersonate the IRS, Suspicious e-Mails and Identity Theft and How to Report and Identify Phishing, E-mail Scams and Bogus IRS Web Sites.

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Thursday, July 29, 2010

AICPA Supports Repeal of Burdensome Tax Information Reporting Measure

AICPA Supports Repeal of Burdensome Tax Information Reporting Measure
The American Institute of Certified Public Accountants told members of Congress recently they should repeal the section of the new health care law that requires businesses to report to the Internal Revenue Service any purchase from a vendor of goods or services worth $600 or more during the calendar year.

The AICPA said it will be burdensome and costly for small businesses to compile the data and prepare the Form 1099-MISC information return. Furthermore, the AICPA said the information collected on the 1099 forms will not be very helpful to the IRS in collecting any unpaid taxes that should have been paid by the vendor because it will be difficult to reconcile payments reported on the forms and income reported by the vendor.

The reporting requirement is included in the Patient Protection and Affordable Care Act and is effective for purchases made in 2012 that will be reported on 1099 forms filed in 2013.

A copy of the AICPA’s letter to members of the U.S. Senate is pasted below. An identical letter was sent to members of the U.S. House of Representatives.

If you would like to speak to someone about the AICPA’s letter, please contact Shirley Twillman, AICPA senior manager for media relations, at 202-434-9220 or

To read the entire article and a copy of the letter, please click the link above.

Monday, July 12, 2010

IRS help with Gulf oil spill issues

The IRS has created a Gulf Oil Spill Information Center, and set up a Dedicated Phone Line for Gulf Oil Spill Victims, 866-562-5227.

The IRS is also planning a Special Assistance Day, July 17th in four states:

  1. Alabama: Mobile.
  2. Florida: Panama City and Pensacola.
  3. Louisiana: New Orleans, Houma and Baton Rouge.
  4. Mississippi: Gulfport.

 According to the IRS,
The IRS continues to have a number of ways to help taxpayers dealing with oil spill issues or other economic hardship issues, including:
  • Assistance of the Taxpayer Advocate Service for those taxpayers experiencing economic harm, who are seeking help resolving tax problems that have not been resolved through normal channels.
  • Postponement of collection actions in certain hardship cases.
  • Added flexibility for missed payments on installment agreements and offers in compromise for previously compliant individuals having difficulty paying.
  • IRS employees will be permitted to consider a taxpayer’s current income and potential for future income when negotiating an offer in compromise.
  • Accelerated levy releases for taxpayers facing economic hardship.

Sunday, July 11, 2010

Repost from CNN/ IRS starts mopping up Congress's tax-reporting mess

IRS starts mopping up Congress's tax-reporting mess
By Neil deMause, contributing writerJuly 9, 2010: 11:18 AM ET

NEW YORK ( -- With a new mandate looming that will require business owners to file millions more tax forms, the Internal Revenue Service has begun the daunting process of figuring out how to turn the law's sweeping demands into actual rules for taxpayers.

To read the rest of the article click here. IRS starts mopping up Congress's tax-reporting mess