Tax Tips For NewlyWeds

If you’ve recently updated your status from single to married, you’re not alone – late spring and summertime is a popular period for weddings. Marriage also brings about some changes with your taxes. Here are several tips for newlyweds from the IRS.

• Notify the Social Security Administration  It’s important that your name and Social Security number match on your next tax return, so if you’ve taken on a new name, report the change to the Social Security Administration. File Form SS-5, Application for a Social Security Card. The form is available on SSA’s website at www.ssa.gov, by calling 800-772-1213, or visiting a local SSA office.
  
  
• Notify the IRS if you move  IRS Form 8822, Change of Address, is the official way to update the IRS of your address change. Download Form 8822 from IRS.gov or order it by calling 800-TAX-FORM (800-829-3676).
  
  
• Notify the U.S. Postal Service  To ensure your mail – including mail from the IRS – is forwarded to your new address, you’ll need to notify the U.S. Postal Service. Submit a forwarding request online at www.usps.com or visit your local post office.
  
  
• Notify your employer  Report your name and/or address change to your employer(s) to make sure you receive your Form W-2, Wage and Tax Statement, after the end of the year.
  
  
• Check your withholding  If you both work, keep in mind that you and your spouse’s combined income may move you into a higher tax bracket. You can use Publication 505, Tax Withholding and Estimated Tax, to help determine the correct amount of withholding for your marital status, and it will also help you complete a new Form W-4, Employee's Withholding Allowance Certificate. Fill out and print Form W-4 online and give it to your employer(s) so the correct amount will be withheld from your pay.
  
  
• Select the right tax form  Choose your individual income tax form wisely because it can help save you money. Newlywed taxpayers may find that they now have enough deductions to itemize on their tax returns rather than taking the standard deduction. Itemized deductions must be claimed on a Form 1040, not a 1040A or 1040EZ.
  
  
• Choose the best filing status  A person’s marital status on Dec. 31 determines whether the person is considered married for that year for tax purposes. Tax law generally allows married couples to choose to file their federal income tax return either jointly or separately in any given year. Figuring the tax both ways can determine which filing status will result in the lowest tax, but filing jointly is usually more beneficial.

Bottom line: planning for your wedding may be over, but don’t forget about planning for the tax-related changes that marriage brings. Contact us for more information about changing your name, address and income tax withholding.

K.R. Hoffman & Co., LLC, counsels Entrepreneurs, Professionals and Select Individuals in taking control of their taxes, and businesses. Discover how we can help you overcome your tax and business challenges. For more information or to become a client, call Kenneth Hoffman at (954) 591-8290 Monday - Friday from 8:30 a.m. to 1:00 p.m. for a no cost consultation, or drop me a note.

I truly value your business and I appreciate your referrals. Refer your family, friends, acquaintances, and business colleagues to KR Hoffman & Co., LLC. If your referral retains our services, we will send you a $25 gift card and your referral will receive a $25 discount on their first invoice.

Follow us on Twitter at @TaxReturnCoach, and let us know how we're doing.

Living the Tax-Free Life

As the 2012 election draws near, and taxes take center stage in that election, politicians and pundits are weighing in on Republican nominee Mitt Romney's personal taxes. Will he release any of his returns for years before 2010? Did he really not pay any tax at all in some of those years? Is there something in those returns that he fears might jeopardize his campaign?

But Mitt Romney isn't the only candidate enjoying tax-advantaged income. President Barack Obama, like Presidents before him, enjoys tax-free benefits that would make most corporate CEOs drool with envy. And it's not a scandal -- it's all out in the open for any voter to see.

Let's start with the basics. The President earns a $400,000 annual salary -- barely enough, by itself, to put him in the much-vaunted "1%." He also gets a $50,000 annual entertainment allowance, which helps support those State Dinners.

But salary and allowance are just the tip of the President's compensation iceberg. For starters, there's a 55,000 square-foot house on 18 prime acres of Washington real estate that Zillow.com estimates would rent for $1,752,296 per month. (The tax alone on the value of that rent is $7.36 million per year.) There's also a rustic cottage just outside DC, staffed by the U.S. Navy and Marine Corps, that he uses as a vacation retreat.

Next, there's security. Plenty of CEOs and celebrities hire bodyguards to ward off real or imagined threats. And that security may be tax-deductible. (Hard for the IRS to collect tax on your income if you're not alive to earn it.) But the President's Secret Service protection is tax-free, and his guards are the best of the best. While the exact value of the President's protection is a closely-guarded secret, the House of Representatives voted $113 million in funding for the 2012 campaign.

Those of you travel often will probably agree that the President's most valuable perk is the ability to fly without the usual TSA "perp walk." CEOs typically fly Gulfstreams, Bombardiers, and similar aircraft, with barely enough headroom to stand up straight. The President, on the other hand, enjoys not one, but two fully-loaded 747-200Bs, both equipped with executive stateroom, office, conference room, and state-of-the-art navigation and communications systems that let him conduct business in the air, even if the country is under attack. (The term "Air Force One" doesn't refer to a specific plane -- it's the official air traffic control signal for any aircraft carrying the President.)

Corporate jets typically carry a dozen passengers and cost $3,000 to $6,000 per hour to operate, while Air Force One carries 102 passengers and crew and costs a whopping $181,000 per hour.

Then there are the "little" perks that ease the stress of leading the free world. The fawning staff. The private chefs. The first-run movies, delivered straight to your own "media room." Fully tax-free, of course . . . who can even figure out how to tax them?

The perks won't stop when the President leaves office. As with all former Presidents, he'll enjoy a pension equal to a Cabinet-level salary (currently $199,700). He'll enjoy continued Secret Service protection, for himself and his family, for 10 years from the date he leaves office. He'll get reimbursed for staff, travel, and office expenses. And he'll be able to earn a small fortune writing memoirs and giving speeches -- although that fortune will be fully taxable.

Most of us would agree that any President earns every dime we pay him, whether that income takes the form of salary or benefits. But you don't have to be President of the United States to profit from tax-free perks and benefits. Helping you make the most of those opportunities for your business is a big part of our business. Call us for a plan that makes the most of your opportunities!

K.R. Hoffman & Co., LLC, counsels Entrepreneurs, Professionals and Select Individuals in taking control of their taxes, and businesses. Discover how we can help you overcome your tax and business challenges. For more information or to become a client, call Kenneth Hoffman at (954) 591-8290 Monday - Friday from 8:30 a.m. to 1:00 p.m. for a no cost consultation, or drop me a note.

I truly value your business and I appreciate your referrals. Refer your family, friends, acquaintances, and business colleagues to KR Hoffman & Co., LLC. If your referral retains our services, we will send you a $25 gift card and your referral will receive a $25 discount on their first invoice.

Follow us on Twitter at @TaxReturnCoach, and let us know how we're doing.

Generating Income In More Than One State

The rules for multiple state taxation are very complicated, including when your business is subject to income tax or required to collect sales tax. In California, a business can elect to base its California franchise (income) tax on only a sales factor, or on a three-factor (property, payroll and sales) formula. For service-based businesses with the single (sales) factor formula, income is sourced to the state where the customer benefits from the services. If the three-factor formula is elected, income is sourced where the cost is incurred. Obviously, there can be radically different results under the two elections.

You might have heard that internet businesses can be required to collect California sales tax if they have “affiliates” to whom they pay commissions for referral links to their web sites. The chief target of this rule is Amazon.com.

If you are selling goods or services in several states, you really should be discussing these issues with your tax advisor. To discuss your sales tax concerns, call Kenneth Hoffman at (954) 591-8290 Monday - Friday from 8:30 a.m. to 1:00 p.m. for a no cost consultation, or drop me a note.

K.R. Hoffman & Co., LLC, counsels Entrepreneurs, Professionals and Select Individuals in taking control of their taxes, and businesses. Discover how we can help you overcome your tax and business challenges. For more information or to become a client, call Kenneth Hoffman at (954) 591-8290 Monday - Friday from 8:30 a.m. to 1:00 p.m. for a no cost consultation, or drop me a note.

I truly value your business and I appreciate your referrals. Refer your family, friends, acquaintances, and business colleagues to KR Hoffman & Co., LLC. If your referral retains our services, we will send you a $25 gift card and your referral will receive a $25 discount on their first invoice.

Follow us on Twitter at @TaxReturnCoach, and let us know how we're doing.

It Pays To Seek Tax and Business Advice

Get good advice before jumping in. An hour discussing what you want to do with a tax and business expert could save you a substantial amount.

In one case two individuals started a delivery business. They didn't realize they'd have to file as a partnership. They then decided to incorporate and elect S status. Because of the timing they filed a partnership for the last few months of one year and as an S corporation the next year.

Because of the switch in entities, they couldn't take the Section 179 expense deduction. Moreover, a transfer of equipment from the partnership to the S corporation was delayed and they had to pay sales tax a second time. Add to that the extra accounting and legal fees and the mistake cost them over $5,000, a substantial amount considering the size of the business.

At KR Hoffman & Co., LLC, we want to help you turn your idea into your ideal business. Start your company the right way and get a head start on success. Call us at 954-591-8290 to discuss any tax and business concerns you may have.

K.R. Hoffman & Co., LLC, counsels Entrepreneurs, Professionals and Select Individuals in taking control of their taxes, and businesses. Discover how we can help you overcome your tax and business challenges. For more information or to become a client, call Kenneth Hoffman at (954) 591-8290 Monday - Friday from 8:30 a.m. to 1:00 p.m. for a no cost consultation, or drop me a note.

I truly value your business and I appreciate your referrals. Refer your family, friends, acquaintances, and business colleagues to KR Hoffman & Co., LLC. If your referral retains our services, we will send you a $25 gift card and your referral will receive a $25 discount on their first invoice.

Follow us on Twitter at @TaxReturnCoach, and let us know how we're doing.

Tax Court Says To Seek Help

In Robert L. Bernard et ux. (T.C. Memo. 2012-221) instead of correctly reporting the IRA distributions on their tax return, the taxpayers mischaracterized $99,334.82 of the distributions as proceeds of sale, claimed a combined basis of $49,054, and reported $50,280.82 as long-term capital gains and agreed they failed to report certain additional distributions.

When the 2007 return was prepared, the taxpayer had misfiled or misplaced the information returns reporting their income. The taxpayers had received notice that the IRS was challenging their treatment of IRA distributions on tax returns for earlier years. The taxpayers obtained an extension of time to file the 2007 return because he was suffering from depression, confusion, and memory loss. He was hospitalized in May 2008 during the period of extension for filing the 2007 return.

The taxpayers prepared the return themselves using commercial software. They advanced several arguments as to why they shouldn't be taxed on the full amount of the distributions, but Court rejected the arguments. The IRS also claimed the taxpayers were liable for the accuracy-related penalty. The taxpayers relied on his health problems as an excuse for the numerous errors on the return.

The Court noted that the taxpayers confused authorities describing a serious medical condition as an excuse for late filing of a return with those describing reasonable cause sufficient to avoid a penalty under Section 6662(a). The Court viewed the taxpayers' failure to seek competent help in preparing the return as negligence and allowed the penalty.(emphasis mine)

It pays to consult with a tax and business experts. K.R. Hoffman & Co., LLC is your tax and business expert. Please call me at 94-591-8290 with any questions or concerns you may have.

K.R. Hoffman & Co., LLC, counsels Entrepreneurs, Professionals and Select Individuals in taking control of their taxes, and businesses. Discover how we can help you overcome your tax and business challenges. For more information or to become a client, call Kenneth Hoffman at (954) 591-8290 Monday - Friday from 8:30 a.m. to 1:00 p.m. for a no cost consultation, or drop me a note.

Follow us on Twitter at @TaxReturnCoach, and let us know how we're doing.

How Not To Run A Business

In Leon Solomon Verrett III et ux. (T.C. Memo. 2012-223) the taxpayer's activity was small construction jobs. The construction activity has not generated a profit for any of the 17 years it has operated.

The taxpayer managed his construction activity from a home office. It had a listing in the local telephone directory, but no business plan, dedicated bank account or Internet presence. The taxpayer did not use computer software to track finances although he had done so as a purchasing manager. He was not licensed as a general contractor. The construction activity consequently generated limited income without the license because he could not lawfully undertake larger construction jobs. He owned a tractor, four trailers, various power tools and other machinery that he used in his construction activity. He charged lower rates than did other local contractors. The taxpayer did not follow the industry practice of applying a 20% overhead charge to the cost of materials. Rather, he directed his clients to purchase the materials from a home improvement store. Most of the taxpayer's construction services during the years at issue involved uncompensated projects for his family and his church. The taxpayer used the same tools and equipment for these endeavors that he used when providing paid construction services.

The taxpayers claimed construction activity income of $3,400, $4,000 and $13,395 and expenses of $31,757, $36,152 and $30,174 for the years at issue. The Court looked at the none factors reviewed in determining whether an activity is engaged in with a profit motive and found the taxpayer was not engaged in the activity for profit. The Court noted the taxpayer's decisions regarding pricing, the general contractor's license and unpaid projects, however, show that he was not primarily motivated by profit. It was significant that the construction activity never generated a profit. A for-profit enterprise would not repeatedly and consistently generate losses without changing its practices. The Court also cited that the losses offset his wife's wage income.

In reading the Court's decision, I find the following passage interesting:

B. The Expertise of the Taxpayers or Advisers: The second factor is whether petitioner developed his own expertise and sought guidance from industry experts. See sec. 1.183-2(b)(2), Income Tax Regs. Petitioner acknowledged his practices made the construction activity consistently unprofitable. He testified that he came from a family of construction workers, yet nothing in the record established his relatives were experts or that he consulted with them. We find that petitioner did not demonstrate any business expertise or consult with any experts. This factor weighs against petitioner.

If you are a new entrepreneur or a seasoned veteran, it pays in the long run to consult with a tax and business advisor.  I am available to discuss with you any questions you may have regarding tax implications of a business decision or general business questions. Feel free to call me at 954-591-8290 or email me with your questions. I am available to answer that one-time question or my firm can be retained as an ongoing, on-call advisor.

K.R. Hoffman & Co., LLC, counsels Entrepreneurs, Professionals and Select Individuals in taking control of their taxes, and businesses. Discover how we can help you overcome your tax and business challenges. For more information or to become a client, call Kenneth Hoffman at (954) 591-8290 Monday - Friday from 8:30 a.m. to 1:00 p.m. for a no cost consultation, or drop me a note.

Follow us on Twitter at @TaxReturnCoach, and let us know how we're doing.

Tax Code Runs Deep

American capitalism has produced generations of great brand names, and Chevrolet is one of the most iconic. Swiss race car driver Louis Chevrolet founded his car company in 1911, then sold it to his partner just four years later. General Motors acquired the company in 1918, and positioned Chevrolet as an everyman's car to compete with Ford's Model T. The company prospered through the 1950s and 60s, producing the legendary Corvette among other models. More recently, Chevy was caught in the economic downturn of 2007-2010, leading to General Motors bankruptcy reorganization. But GM and Chevy rebounded quickly, and now actually are in one of the strongest periods in their history.

Right now, Chevrolet is running a truly bold marketing campaign for our era of skeptical consumers. Their "Love It or Return It" campaign lets you buy any new Chevy through September 4 -- and, as the name implies, if you don't love it, you can actually return it. There's fine print, of course. You have just 60 days to decide, and you can't drive it more than 4,000 miles. Oh, and -- you knew the tax angle was coming, right -- "you may be subject to federal, state, or local tax on any benefit paid."

Huh? Tax on a benefit? What "benefit" is there in returning a car you decide you don't like?

Well, as so often happens with a question like this, the answer is, "it depends." Let's say you take delivery of a new Corvette. (Red, of course.) The manufacturer's suggested retail price on a base coupe is $49,600. You drive it off the lot, confident you're behind the wheel of your dreams. But soon you get tired of the 430-horsepower V-8, the 4.2-second 0-60 acceleration, or the standard leather 6-way power seats. So after 60 days and 3,999 miles, you take it back.

You've always heard that cars lose half their value the minute you drive them off the lot, right? Well, that's an exaggeration -- but "your" Corvette is still probably worth $8,000 less than than what you paid for it. So if you get a full refund, have you just realized $8,000 in income? And if you used the car for business, do you have to recapture anything you depreciated?

Let's take another example. You're an environmentally responsible driver, but you can't afford the sexy new Tesla Model S. So you settle for a $40,000 Chevy Volt. You gleefully claim the $7,500 plug-in motor vehicle credit. And again, after 60 days and 3,999 miles (but only a couple of tankfuls of gas), you return it and get your $40,000 back. Now what? First off, have you even kept the car long enough to claim the credit? And as with the 'Vette, if you owe tax on the "benefit"... what is that benefit? That credit reduces your "basis" in the car to $32,500, so how much tax you owe on the difference depends both on what the car is worth and whether you get to keep the credit! (Oy!)

Washington knows how important the auto industry is to our economy, so the tax code is full of incentives to drive sales. This credit is just one example. Business owners have long known of another one -- which is that buying a truck in December can make for some nice year-end planning. Then there was 2009, when we saw a limited-time above-the-line deduction for state and local sales and excise taxes on new car sales. And in that same year, the much-mocked "Cash for Clunkers" program generated $2.877 billion in rebates on 690,114 vehicles, too. So don't be surprised if the IRS really does pay attention to these sorts of questions!

We want you to enjoy the freedom of the open road -- especially if it means a sweet convertible with the wind in your hair. But -- especially if you use your vehicle for business -- we want you to make smart choices. So call us before you trade in your old ride, and let us help you get the most out of your wheels!

K.R. Hoffman & Co., LLC, counsels Entrepreneurs, Professionals and Select Individuals in taking control of their taxes, and businesses. Discover how we can help you overcome your tax and business challenges. For more information or to become a client, call Kenneth Hoffman at (954) 591-8290 Monday - Friday from 8:30 a.m. to 1:00 p.m. for a no cost consultation, or drop me a note.

Follow us on Twitter at @TaxReturnCoach, and let us know how we're doing.

Importance of Proper Record Keeping

It is not difficult to find professionals who advise, whether in person, on web sites, or otherwise, that tax records should be retained for three years. Some advisors suggest that tax returns should be kept for longer periods or even indefinitely, but that receipts and other supporting evidence can be shredded or trashed after three years. Too infrequently does the advice include a warning that receipts connected with basis determinations need to be kept for at least as long as the property is owned.

A recent Tax Court decision, Roberts v. Comr., T.C. Memo 2012-197, demonstrates the pitfalls of not retaining basis-related records. The taxpayer purchased a property in 1980 and sold it in 2005. The taxpayer testified that he paid $63,500 for the property and the IRS accepted this claim. The taxpayer also testified that he expended $75,000 for improvements to the property but offered no evidence other than what the court characterized as “vague self-serving testimony.” It’s very possible that the taxpayer made improvements of some amount, but because of the failure to retain and produce evidence, the taxpayer was taxed on gain that perhaps did not exist.

One of the interesting aspects of this case is that the taxpayer was an appellate lawyer. Worse, the taxpayer failed to file federal income tax returns for 2004 through 2007. Presumably the taxpayer attended law school. Perhaps the taxpayer took a basic tax course. Somewhere along the line the taxpayer should have learned about record retention, not only for tax purposes, but for other purposes as well.

K.R. Hoffman & Co., LLC, counsels Entrepreneurs, Professionals and Select Individuals in taking control of their taxes, and businesses. Discover how we can help you overcome your tax and business challenges. For more information or to become a client, call me at (954) 591-8290 TODAY or drop me a note.

Follow us on Twitter at @TaxReturnCoach, and let us know how we're doing.

Cancellation of Debt Is Taxable - Maybe

Generally, if you satisfy a debt for less than the face amount, you have cancellation of debt (COD) income and COD income is taxable. There are several exceptions to this rule.

One is if you're insolvent at the time you receive the income. The term insolvent means the excess of liabilities over the fair market value of assets. In Bernard R. Shepherd et ux. (T.C. Memo. 2012-212) the taxpayers settled a credit card debt for $4,412 less than the amount due and received a Form 1099-C, Cancellation of Debt for that amount. The taxpayers claimed they were insolvent at the time the debt was canceled.

The IRS only disputed the fair market value claimed for the taxpayers' principal residence and their beach house. The taxpayers entered into a settlement with the city regarding the value of the beach house for property tax purposes and cited that as a basis, along with comparable sales the taxpayers had assembled in grieving the valuation. The Court noted that the comparable sales were at least two years after the discharge of the debt, and were not backed up by details and valuation methodology. As to the settlement with the city, the Court noted that it has previously that a value placed upon property for the purpose of local taxation, unsupported by other evidence, cannot be accepted as determinative of fair market value for Federal income tax purposes in the absence of evidence of the method used in arriving at that valuation. The Court found the taxpayers also failed to show the fair market value of their principal residence.

The Tax Court found the evidence the taxpayers provided for the FMV of the two residences did not meet the required burden of proof. Sec. 108(d)(3) requires the FMV of the taxpayer’s assets to be determined “immediately before discharge.” The taxpayers provided a stipulated settlement of the value of the vacation home for local real estate tax purposes of $380,000 for 2010, two years after the discharge. Besides not being a value contemporaneous with the discharge, the Tax Court noted that values for real estate tax purposes are not persuasive without other evidence corroborating them.

An "appraisal" by a bank the taxpayers cited was as of 2011, some three years after the discharge of the debt. The Court also discounted the value of the assessment of the property for the tax bill. The Court held the taxpayers did not meet their burden of proof in showing they were insolvent at the time of the discharge of the debt.

A timely appraisal would have caused the canceled debt to be non-taxable.

K.R. Hoffman & Co., LLC, counsels Entrepreneurs, Professionals and Select Individuals in taking control of their taxes, and businesses. Discover how we can help you overcome your tax and business challenges. For more information or to become a client, call me at (954) 591-8290 TODAY or drop me a note.

Bringing Home the Gold

Friday marked the Opening Ceremonies of the Games of the XXX Olympiad. Britain's Queen Elizabeth, along with her Corgis, made their film debut parachuting into the stadium with superspy James Bond. The world's eyes are waiting to see who takes home the gold -- and whenever someone takes home "the gold," you know the IRS will be there to help them count it!

How excited do our friends at the IRS get when the Olympics roll around? Well, believe it or not, there's an argument to be made that the medals themselves are taxable. Way back in 1969, the Ninth Circuit Court of Appeals ruled that shortstop Maury Wills owed tax on the $10,000 value of the Hickock Belt he received for being named Athlete of the Year. But the IRS isn't taxing Olympiads on their medals -- at least, not yet. (Would that mean a Gold medal is just a Silver, after taxes?)

The United States Olympic Committee -- the nonprofit organization that coordinates U.S. Olympic efforts -- awards its own cash prizes to U.S. medalists. Those prizes are $25,000 for each Gold medal, $15,000 for each Silver, and $10,000 for each Bronze. That income is obviously taxable.

But the IRS knows the real payoff doesn't come from the medal itself. The real payoff comes from endorsement deals the stars make. Take swimmer Ryan Lochte, for example. On Saturday, he dethroned Michael Phelps as king of the mens' 400 meter individual medley. Lochte had already appeared in commercials for Nissan, AT&T, Gatorade, and Gillette, before the games had even begun. Fortune magazine estimates he'll make $2.3 million this year, before any bonuses for, you know, actually bringing home an Olympic medal. Forbes estimates that if Lochte picks up more gold in London, his endorsements might actually top those of Phelps. And Bloomberg BusinessWeek guesses that Phelps made $6 million in 2010. With possibilities like that, you can be sure the IRS will have their fingers crossed for Thursday's 200 meter individual medley!

Some athletes do well in competition and do well in endorsements, but still manage to disappoint the IRS. In 2010, skiier Lyndsey Vonn took home the gold in womens' downhill, which led to endorsement deals with Under Armour, Red Bull, Rolex, and Kohl's. Earlier this year, the IRS slapped her with a lien for $1.7 million in tax. (Lyndsey promptly settled her debt, blamed it on a nasty divorce from her husband and trainer, and apologized on her Facebook page.)

Olympic fame and fortune can pay financial dividends for decades to come. Thirty-six years ago, a determined American athlete named Bruce Jenner became a national hero, setting a new Olympic record while winning the gold in the decathlon. Three decades later, he's making headlines again as stepfather to those krazy Kardashian sisters. Is it paranoid to start wondering now which of today's Olympic champions will preside over a reality-TV trainwreck in 2042?

We realize that few of you are reading these words from Olympic Village in London's East End. But it's important to plan ahead for any sort of special prizes or windfalls you enjoy. Whether you're bringing home a medal, or you just want to keep more of the gold you've already got, we're here for you, and for your family, friends, and colleagues, too.

K.R. Hoffman & Co., LLC, counsels Entrepreneurs, Professionals and Select Individuals in taking control of their taxes, and businesses. Discover how we can help you overcome your tax and business challenges. For more information or to become a client, call me at (954) 591-8290 TODAY or drop me a note.