Our Taxing Times

Dropbox

A few days ago, I blogged about losing my internet and mused about how dependent I had become on being able to use the web when ever I wanted. Well, my minor tech nightmare continued. I knew the internet issue could be laid at the feet of either the router or modem. But when I tried to isolate the culprit, they kept pointing fingers at the other. I took the router off the system and hooked the PC up directly and the DSL light was back! But when I re-connected the router, the modem power light went out. So, I replaced both of them.
Actually the replacement went well and took less time than the trip to the store to buy the modem/router combination. Actually, it went well until I discovered that I couldn't print to the network printer. After several hours of my time, I broke down and called the printer tech support. It wasn't a hard problem but it wasn't one that I could be talked through. But it meant that I couldn't print most of Monday.
That is where Dropbox came in so handy. When I needed to print something, I put the document into my Dropbox folder. Then I could print it from the MacBook's printer. If I had to make changes to the doc before printing, the new version was updated to my PC automatically.
I find that I am using Dropbox more and more. I have a crazy network of computers. There is a PC, the MacBook, the virtual Windows on the Mac, and the iPad that travels between the office and home. Dropbox means that I don't have to have copies of documents on all the computers and worry about keeping them synced.
Dropbox starts with a secure, backed up web interface. Once you sign up, you get 2GB free. If you need more space, you can buy more. The next step is to download the desktop client for your computers and start adding your documents. I find it especially handy for manuals and reading materials that I might want to access from any computer I am at.
There is a lot more to Dropbox and you can check out their website at www.dropbox.com. But I do know that it made a downed printer a workable situation and keeps reference and support info available wherever I am.
- Posted using BlogPress from my iPad

More Than One State

The past week, I’ve fielded 3 calls about how the taxes work when you live in one state and work in another. (The interest is due to one of the OK casinos having added a hotel which has been hiring.)

The easy part of the answer is there is no change to your Federal return. All of your income, no matter the source or type is reported on a single 1040 (or A/EZ). Information from that return is used by the state to calculate what they will take in taxes from you.

Before I get started on the state info, I have to stress that each state is different and must be reviewed before a tax return is prepared. For any state but Kansas or Okalahoma, I’ll pull out the instructions or my TaxBook States Edition. And I still may check something for KS or OK if it is not a situation I handle a lot.

Most states give you a choice of 3 residency statuses; resident, non-resident and part year resident. Generally, your resident state is where you live, non-resident is a state where you work but don't live and part year is for years where you move from one state to another during the year. BUT-how a state actually defines "resident" can vary and affect a taxpayer's tax. If a taxpayer moves to Kansas during the year, they could have the option of filing as a Kansas resident or as a part year resident. The effect of residency could make a big difference on the tax a taxpayer would pay.

The actual process of preparing a state return depends on the residency status. If a client lived and worked in Kansas for the whole year, I would complete the Kansas return based on information from their Federal return. If they lived in Kansas and worked in Oklahoma (something I see a lot), I would complete the Federal return then the Oklahoma non-resident return.  Each state is different but all non-resident returns have you allocate income based on residency. OK figures their tax based on the Federal income +/- special modifications allowed by OK law. From this is subtracted the deductions and exemptions. This is the taxable income and used to calculate the tax. But this can be further reduced by a percentage based on OK income to total income. This percentage is used to figure how much tax is actually due to OK.  So, if you lived all year in Kansas but worked in Oklahoma and your only income is from the OK job, your percentage is 100%. But if your spouse works in Kansas or you have other non-OK income, the percent will be lower. Once you have your OK tax, it is offset by withholding leaving a refund or balance due.

Once the non-resident state is completed (in this example OK), the Kansas resident return is done as usual until the credits section is reached. Kansas (and most states) will give you a credit for the income taxes you paid the other state (OK). The methods vary, but your state tax will be reduced. The remaining tax is then offset with withholdings creating a refund or balance due. If the taxpayer worked in more than one state, each state gets their own calculation and their credit is added to the credit(s) from the other states and subtracted from the resident state's tax.

What happens if a taxpayer lived in more than one state during the year? In Kansas, you have 2 options. First, they can file as a part year resident and allocate income to each state and pay tax on that income. Or the taxpayer could file as a resident with the other state(s) treated as a non-resident (the above example). This can be a good tax savings strategy. When I have a client in this position, I figure it both ways to see which is best. Why? If a client moved to Kansas from state with low or no income tax, filing them as a part year resident is much better since the Credit For Taxes Paid Another State will be low or nothing. Each state varies so you have to check their rules.

The other issue, and it is a big issue right now, is what income a non-resident state is allowed to tax. A resident state taxes all the taxpayer’s income and then gives them a credit for the other state taxes. The non-resident state can only tax income earned by the taxpayer in that state. Wages and self-employment income are taxed in state they were earned. Income generated from property in a non-resident state is taxable to that state. That could mean rents and royalties or gain from the sale of that property. But the interest from a bank account is not taxed in the non-resident state, no matter where the bank is actually located. States are beginning to look at part year residents and how they allocate resident income to make sure they are receiving the tax on their share of income received while the taxpayer was a resident.

Having to report income from more than one state can confuse a taxpayer. If they choose not to use a tax professional, they need to read the rules for all states involved. Not just the residency rules but the actual line instructions for the forms. Besides calculating the tax differently, each state has different credits and programs the taxpayer might qualify for which need to be researched.

A Musing: No Internet!

While I was almost done writing a post on state tax returns this afternoon, my DSL died. I don't know for sure if the actual DSL is down or that I need a new modem. I do know that it brought home to me how much I depend on the Internet for business. Yes, I have gone through a little bit of a withdrawal not being able to get to Facebook, e-mail and the WWW. But the first frustration was not not being able to post the piece I was writing at the time. I was able to save the text to Word but it was stuck on my PC. I could save the doc to an USB drive and put on my MacBook but it's on the same DSL connection as the PC. I could have done that and taken the laptop home or to someplace with public WiFi. But that seemed a lot of work for a post that most people won't read until Monday. The easier way would be to upload the post to my Dropbox account and use the iPad from home(cable)to upload the post. But with no DSL, no access to Dropbox. Without the Internet, I can still prepare taxes but it becomes more difficult. Besides not being able to e-file, I can't get updates to most of my software. Researching tax subjects beyond the basics is all web based. Client contact becomes limited to the phone. My computer back up is web based and needs the Internet. Since I use cable at home and DSL at the office, I could do some things at home but not the backups and updates. I am lucky. If the DSL is still out in the morning, I'll call SBC and I bet I just need a new modem. No clients inconvenienced or major changes to procedures. But it really brings home how quickly something can become essential. I can live without TV but not without Internet.

Unreported Tip Income - Employers

Generally, when I think about unreported tip income, I think of the employee who doesn't report to their employer the full amount of their tips so that they don't have to pay tax on them. But the truth is that many employers only allow their help to report a set amount or none at all. That way they don't have to pay the FICA on the tips. But employees are required to report tip income on their tax return  that were not reported to their employer. This is done through Form 4137. The tips are added to the taxpayers other income and they paid their share of Social Security and Medicare in the payment section of the 1040. Besides honesty, they are practical reasons to report all your tips such as qualifying for a higher EIC or additional Child Tax Credit or putting more money into your Social Security calculations.

The IRS announced in a recent webinar on tips that they will begin coming after the employer for the matching Social Seciurity and Medicare on tips reported on Form 4137 (the taxpayers have been required to list the employer and their EIN and  the amount of tips they didn't report). The IRS will be using that information to send employers two forms. The first, Form 4520P will give the employer plenty of time to review records and respond if their records don't match. If they can't make the deadline included with the notice, they can request more time.  If the 4520P doesn't solve the problem, a 4520 will be sent demanding payment of the missing FICA taxes. The program should be beginning in the next 6 months and the IRS will have a dedicated phone number for the 4520P notices and a web site to cover the tip program.

Another List

Between the holidays, my show opening and closing and Congress ignoring tax issues, I haven't had much to post lately. There are only so many posts I can write about the new preparer rules or RALs until there is actually new info. So it's nice to post something, even if it's just making someone else's tax blog list.

I just received notice that Our Taxing Times was included in Taxation Masters' Top 50 Blogs for Tax Tips and Advice. Taxation Masters is a web site that complies information about advance degrees in Taxation and Accounting. I appreciate the shout out.

Now off to catch up reading the journals that have come while I have been super busy with The Foreigner.

Again, thanks to Taxation Masters.

 

 

1040X-Revised Again

In January of 2010, the IRS started using a new 1040X form. Gone was the 3 column comparison. In its place was a single column showing the corrected (current) info being reported. Instead of a dedicated 1040X for each year, the new model had check boxes for the year being amended. It also used check boxes to identify the source of the refundable credits being taken.

The big change, at least for me, was the lost of the 3 column comparison. I used the comparison as a check that I had the amended return doing what I wanted it to do and make sure I had documented all the changes. I did not like the change. So, it was with great pleasure that I learned at an update school that the 1040X has been revised again. The basic form is the same but the 3 column comparison is back.

The old form is stil showing on the IRS website. In fact, the new form is carrying a December 2010 revision date but a scan of the copy I was given is here.

My Blog

When I started this blog in 2004, there weren't many tax blogs around. In fact, the only one I had found soon disappeared. So I tried to cover the facts; due date and law changes. I wasn't good at expressing my opinion then. But as I became more comfortable with the medium, I became more comfortable expressing my opinion and the focus of the blog changed from just facts to a mix of tax facts, running a tax business, taxpayer education and how I felt about it all. I write for people like my clients, other preparers and for me.

Given my focus, it is really nice when Our Taxing Times is recognised for being a good source for tax information. Rasmussen College School of Business has included Our Taxing Times on their top 20 Blogs Accounting Students Will Love list. I hope that I can give the students an insight into the real world of the tax business. Thank you so much for the inclusion.

 

 

Not Going To Happen

All over the tax blogs today has been coverage of the President's Debt Reform Panel's Tax Reform Panel options for cleaning up the American Tax Code. It looks well thought out and I intend to give it much more study over the next couple of days. But it doesn't matter what the options suggest, it won't happen. Pieces here and there might be adopted but a much needed overhaul of the tax code won't happen. We don't have the politicians who can pull it off right now. Congress is full of men and women who are more interested in grandstanding and partisanship than solving the country's problems.

Im 1988, Jeffrey H. Birnbaum and Alan S. Murray published their book on The Tax Reform Act of 1986; Showdown at Gucci Gulch. This wasn't an analysis of the new rules but coverage how the law came to be. And it illustrates why tax reform won't happen now.

In 1986, tax reform was the passion of President Ronald Reagan and Senator Bill Bradley. They represented different parties but both had been burnt by taxes in their previous careers. Reagan, the actor, and Bradley, the basketball player, found themselves turning down opportunities because the taxes would almost be more than the job paid. They both vowed to fix the tax system. In 1986, they did just that. They didn't work alone. They had a talented group of politicians who could work the system and did. With the talents of the Treasury Secretary James Baker (former Reagan Chief of staff), Sen. Robert Packwood, Rep. Dan Rostenkowski and Rep. Tip O'Neill, Reagan and Bradley saw major tax reform

Today, I don't see anyone in power with the passion for reform. The Tea Party people just want to pay less themselves, to get the credits like "the others" get. The truth is current tax rates are reasonable. But to lower them, something has to be given up like tax credits or services. We can't assume that eliminating "waste in government" will generate enough revenue to make a big dent in the tax rates. And even if there were highly passionate leadership support for tax reform, it would take a group of equally determined legislators to make it happen. We would need old school politicians who understand compromise not officials who are more interested in making points for their party than helping all Americans.

I hope I am wrong. I hope a group of legislators step forward and take up the challenge to convince their colleagues to work together on true tax reform. But, I'm afraid we won't see that happen.

Please Ask Me Before...

...you make decisions that might effect your taxes.

I am sure, that somewhere in all the blog posts I have written, that I have covered this before but the subject is worth repeating.

If there is one thing I stress to my clients is to come see me when they decide to retire, pull from an IRA or 401(k), make a major charitable contribution, in short anything that will effect (or they think will effect) their income taxes. Too often, I have had to give clients bad new about a loss of a credit or big balance due at tax time because they didn't talk to me and get all their options before they acted. Sometimes the knowledge wouldn't effect their actions but it would give them an idea what to expect. Other times, however, it gives them a chance to alter their plans and save some tax money.

Too much of the info a taxpayer can find on their own is very generic. When they are making tax decisions, the taxpayer need more specific info that takes into consideration their actual income and situation. For example, the Social Security Administration can give lots of info about drawing SS and how much you can make while working but seldom to they mention that SS can be taxable. I can give you an idea how that will effect your return and help you set up estimates or withholding to cover any tax increase. The Real Estate Agent can tell you about deducting mortgage interest and taxes but I'll tell you if they will really save you tax money. An exception mentioned in the information an IRA or pension gives you when you request a withdrawal may not really apply to you. Or, I can tell you about an exception that will apply. Finally, I can make sure you know to get the proper documentation for a major charitable contribution when you make it.

In short, please see me (or your tax professional) before you do something that will effect your taxes. If you're not sure if there will be an effect, please call and ask.