Our Taxing Times

IRS.gov Redecorates

Last year, September 27^th to be exact, I wrote about the redesign to the home page of the IRS website. Today, the new design went live for the whole site. It doesn’t look too bad. Nice and clean with lots of white and a light gray. Yes, they kept the orange and blue colors but they’re just used for highlights, dividers and links.

The first difference I saw was the change to the navigation bar. Yesterday it listed the different groups the IRS services; individuals, business, tax exempts, tax pros… Today the navigation bar highlights actions like filing, refunds, news and events… To find the other groups, the visitor uses the “Information For” dropdown in the top right corner. Except for Tax Pros. We are still in the nav bar.

It will take a little time to get used to all the changes and finding all my lost bookmarks. (I’ve lost about half of what I checked.) But so far I’m okay with the changes. But what I like best is the under the “Visit other sites” menu on the bottom right of the new pages; a link to “Help Improve IRS Search.” Since search results have been a big complaint of mine for years, I may be using this a lot.

So don’t be surprised the next time you go to IRS.gov and do expect to spend a little more time to find what you’re looking for. Is it better? I’ll let you know after I get through the learning curve.

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Taxing Social Security

As we listen to the candidates’ tax plans there is one tax reform idea that I am sure we won’t hear about; taxing Social Security. That is, doing something to reduce the tax on Social Security. A little honesty here; this is a pet peeve of mine. I understand the idea behind the taxability but it bothers me that Congress set up the rules without regard for the future. The longer I practice the greater percentage of clients I see getting taxed on their Social Security.

Calculating taxable Social Security isn’t straight forward. The amount a taxpayer is taxed on depends of the income on the return. Basically, if half of the Social Security received and all the rest of the income on the return is less than $32,000 for a couple filing jointly, $25,000 for everyone else (one exception), then the Social Security is not taxable. Above that, taxability phases in up to a maximum of 85% taxability. Since this is the tax code we’re talking about, the actual calculations are not as simple as it sounds. There is some excluded income that has to be added into the calculation. And if the taxpayer is filing Married Filing Separate but lived even one day with their spouse, they go to 85% taxability and skip the phase in. You get the picture.

There are some special problems with taxability of Social Security benefits. The first is that they can be taxed on more than was actually received. The taxable amount is figured on the total amount credited to the taxpayer and that includes attorney fees and Workman’s’ Comp pay back. I have also seen where gambling winnings have triggered taxable Social Security. While the client may have losses to offset gambling income, they are still stuck paying taxes on the Social Security. Also, if you receive a lump sum that includes back years benefits, there are some special calculations that might reduce the taxability. Please talk to your tax preparer. There is also a “marriage penalty” aspect to this process. As mentioned above, a single taxpayer won’t pay tax on their Social Security until half their benefits and all the rest of their income is over $25,000. But a married couple only gets an extra $7000 in income before they start paying on their Social Security.  A second taxpayer receiving Social Security could trigger taxability for a couple.

However, my biggest problem with taxing Social Security is there has never been an adjustment for inflation. When I started preparing taxes in 1988, I seldom saw taxable Social Security. Benefits were much lower and few retirees worked or had large pensions to trigger taxability. Now, it is rare to not have taxable Social Security. I’d like to see the thresholds tied to inflation but with the deficit and other tax issues, I don’t see this happening.

If it looks as if you will have taxable Social Security, you might want to set up withholding from SSA, up the withholding from another source or make estimate payments to keep from an underpayment of estimated tax penalty. Yes, you can have Social Security withhold for Federal. It’s a set percentage; 7%, 10% or 15%, your choice. It may not cover all the tax but it’s a start.

The good news is that many states don’t tax Social Security benefits. In Kansas, if the Federal Adjusted Gross Income is less than $75,000, the taxable Social Security is subtracted from the Federal income. Unfortunately, if the income is above $75,000, there is no deduction. Oklahoma, however, allows taxpayers to deduct all the taxable Social Security no matter how much income is involved. Check with your state for their policy.

Retirement should be a time of relaxation and not stress about taxes. The best idea is to check with your tax professional about what you can do to protect yourself from tax surprises. And make sure that they are taking taxable Social Security into consideration. Just don’t expect it to be an issue in the election or tax reform. It brings in too much money.

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Disaster Preparedness and Response

If you are in path of Hurricane Isaac, you should not be reading this! You should be getting to safety. The blog will be here when you are safe.

With any luck, you, your family and all your possessions will come through undamaged. If you do suffer property damage from Isaac or from another natural disaster, I suggest you order or download Pub 2194 from the IRS. This is a comprehensive book that answers most taxpayers’ question about lost records, filing returns and Form 4684 for casualty and theft losses. Included in the publication is not only info from all the publications dealing with casualty losses, the special rules if the loss happens in a Federally declared disaster area, but worksheets that will help you track your losses. If you’re still recovering from a prior disaster, you might want to grab a copy of this publication also. It’s a really good resource at a very bad time. There used to be separate versions; one for personal losses and one for business losses but no more. The same publication is used no matter what type of loss you have. I would, however, use separate copies if you suffered both a personal and a business loss.

Also, keep an ear open to hear what areas are declared Federal Disaster Areas. The rules in a Federal Disaster Area change and taxpayers have a little more flexibility about when they can report the loss. Check with your tax preparer or call the special IRS Disaster Hotline at 1-866-562-5227 for questions about your specific loss.

For those of us not in Isaac’s path, this is the time to think about disaster preparedness. The IRS has a page dedicated to preparing for a disaster which includes a video and a lot of good advice. FEMA also has lot of info on disaster preparedness at ready.gov. Hurricane season is just starting and tornado and fire season are still going strong so this is a good time for planning for something we never hope will happen.

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Oklahoma Intangibles

Taxes will be a big part of the November election. Not just in the campaigns of those running for office but in tax issues up for a vote. Oklahoma has a doozy of one they will be voting on. State Question 766 will ask voters to expand the exemption from taxation to include more intangible assets.

A quick explanation; all assets can be broken down into 2 basic categories. The first is the tangible property you can touch and see. Intangible properties are assets that are not physical (and that is a little simplistic.) In my office, I have a lot of tangible assets. They include the desks, computers and all the furniture and equipment. But I also have intangible assets such as my client list and the goodwill my business has built up in almost 10 years. The intangible assets won’t come into play until I sell the business. Then they become a factor in negotiating the sale price. If I buy a business with intangible assets, those assets are amortized just like the tangible assets I buy are depreciated. For most businesses, amortization is the only tax treatment you have to worry about for intangibles. But not in Oklahoma.

Intangible assets are subject to property tax (ad valorem tax) in Oklahoma. In 1968, a constitutional amendment specifically exempted some intangibles from the property tax. That list includes cash, gold/silver, bank drafts/checks/accounts, receivables, stocks/bonds and brokerage accounts. It didn’t include intangibles like customer lists, goodwill, patents, trademarks, and a wide variety of other assets. Since then, AT&T has been fighting the issue. The way they interpreted the rules, more assets actually fell under the exempted intangible assets listing and shouldn’t be taxed. In 2009, the Oklahoma Supreme Court ruled against AT&T. Since then, the company has been working Oklahoma lawmakers to change the law.

Here’s the twist, the law hasn’t really been enforced. But if the list of intangible assets isn’t expanded, county assessors will have to start valuing, and taxing, intangibles. They will have to decide what intangibles each business has and how much it’s worth

Estimates are if State Question 766 passes, it will cost Oklahoma up to $50 million in 2013. Most of this money would come out of monies targeted for county governments and schools. Wait! How can that be?  After all, if those intangibles aren’t being taxed now, how can the state lose tax money? Well in the case of public service companies like AT&T and the Oklahoma Gas and Electric Co, intangibles are taxed. The property taxes for these companies are based on the unit value of the company. That valuation includes intangible assets which other businesses aren’t paying tax on, yet. So, if the bill passes, they can exclude assets from their valuation and pay less ad valorem tax.

So if State Question 766 passes in November the state will lose a lot of tax money from a few businesses. If it fails, local assessors will have to enforce the law and most other businesses will have to pay more taxes. It’s really a no win situation.

 NewOK

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Scams - Tax and Energy

My e-mail trash is full of phishing spam. Much saying it’s from the Internal Revenue Service. Nothing new there. The current spam tells me that my tax deposit/transfer has been rejected. Someone is always trying to scam taxpayers with bogus tax related e-mails. This specific type of phishing will be around for a while and then it will fade out for a while to be replaced by another tax scam. The bottom line is that the IRS doesn’t use e-mail to make primary contact with taxpayers. Unless you are working with the IRS on a specific issue and trading e-mails with a specific individual or department, IRS e-mails are probably phishing and should be trashed with extreme prejudice. If you want to report the phishing to the IRS, they have a special page on their website set up to do that.

While I’m talking scams, I received an e-mail from Alex Bishoff today. He publishes an energy website.  The impression I got was that he wanted to comment on a post and mention energy scams but I close comments after several months (due to comment spam) and he was unable to comment. Instead, he sent me an e-mail linking to his website; open4energy. In the left sidebar are links to 3 collections of energy scams. They debunk devices or programs which are supposed to save energy directly or indirectly. I would check it out if you are considering an energy saving/monitoring device.

The internet has made it easier to scam people. It doesn’t matter what the hook; taxes or energy. But it also makes it easier for us to check out what we find in our inboxes. It’s up to you.

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It's Time to Get Your EFIN

A few years ago, Congress mandated e-filing of all 1040 and 1041 by tax return preparers. The rule includes anyone who prepares at least 11 returns in the year.

Currently, an application to e-File can be made by filing Form 8633 or online through e-Services. Once processed, the applicant will be issued an EFIN (Electronic Filing Identification Number) which will allow them to e-file the returns they applied to file. But the IRS is changing the application process beginning October 1^st. At that time, all applications to e-file must be made online through e-Services.

e-Services is an IRS program that allows tax pros to provide to and receive information from the IRS. A preparer’s e-File application has long been online and available to update information such as the preparer’s address, phone and types of returns they want electronically file. (But even better, e-Services allows tax pros to easily get info for clients or file Form 2848 (Power of Attorney) but that’s another post.)

After September 30^th, preparers will have to set up an e-Service account before they can apply to e-file. The IRS warns that this alone can take several weeks to do. Once the e-Services account is set up, the preparer can complete the e-File application. Since that includes suitability checks, the IRS estimates the process to take 6 weeks.

If you are new to the tax business or newly out on your own, this is the time when you want to think about getting your EFIN. You don’t want to wait until the last minute and find that you can’t electronically file returns when the filing season opens for 2012 returns because you don’t have your EFIN yet.

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IRS Computer Down Time

It looks like some of the IRS computer techs will be working Labor Day. The IRS will have at least three computer systems down for schedule maintenance.

The Modernized e-File system will be down for regular maintenance Labor Day weekend. Don’t try to file a return or pick up an acknowledgment from 3pm Eastern on Friday August 31^st until Tuesday September 4^th at 12pm.

The Electronic Management System (EMS) in Martinsburg West Virginia will be down from Wednesday August 27^th at 11am Eastern time until Sept 4^th at 12pm. They are also getting some new power lines on top of the checkup. (This is all the rest of the electronic file system.)

Finally, the online EIN application program will be down from 1am Eastern on Thursday August 30^th to Tuesday September 4^th at 12pm ET.

So, if you tax pros need an excuse not to work over Labor Day weekend, you can blame it on the IRS and their computers being down.

Since I first posted this, I've learned that e-Services will also be down as will the online payment agreement system.

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Williams Leaving RPO

I haven’t written about licensing for a while so an update is in order.

Both the weekly e-newsletters from NATP and NAEA are reporting that David Williams is leaving the Return Preparer Office. Mr. Williams has been the director of the RPO since it was created three years ago. He will be replaced by a 20 year veteran of the IRS, Carol Campbell. Ms. Campbell is Commissioner Shulman’s Deputy Chief of Staff and has also worked in the chief counsel office and the Taxpayer’s Advocate office.

The IRS is doing a lot of renovation of their web site and that include the PTIN system. The site has been updated and behind the scenes, the IRS is working to streamline the interface and make it more user-friendly. All the changes are expected to be completed by the time PTIN renewals open in October.

US tax pros who haven’t taken the RTRP exam yet will be receiving an e-mail from the IRS. The service is very concerned about the number of preparers who haven’t taken the test yet. 10,000 tax pros have passed the test and can now call themselves RTRPs. The IRS estimated that 330,000 still need to take the test in the next 16 months. If they haven’t passed the test by then, they will lose their provisional PTIN and be unable to prepare tax returns. After January 1, 2014, those who want to prepare taxes will have to pass the RTRP exam before they will be issued the required PTIN. The exam is being administered by Prometric at their test sites around the US. Besides the RTRP and SEE (EA exam), Prometric administers a wide variety of tests for other organizations. There is a real concern that tax pros will find that they can’t get a test time if they wait too long. The IRS has repeatedly maintained that they won’t extend the deadline.

According to Face the Facts USA, there are more tax preparers in the US than law enforcement officers and firefighters combined. Face the Facts cites 1.2 million tax preparers compared to 765,000 law enforcements officers and 310,400 firefighters. Actually, I think their tax pro number is out of date. 1.2 million was the IRS estimate of tax preparers when the tax preparer registration began. The last I heard was that the IRS has issued under 800,000 PTINs.

Finally, not really licensing but in IRS news, the IRS website will be updating their look on August 30^th. Actually, they are taking the front page redesign and applying it to their whole site.  While the IRS expects that we shouldn't have problems with bookmarks/favorites, they suggest checking them after the conversion to be sure.

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Pro Bono

According to Wikipedia, pro bono comes from the Latin phrase pro bono publico and means “for the public good.”  In practice, it is providing a service for a reduced fee or for free for people and organizations that can’t pay for those services.

I get requests all the time from people who request special consideration when I figure my fees. If the conditions warrant it, I will reduce fees for them. But I don’t consider that pro bono. My pro bono is generally done for organizations that need my help but don’t have funds to pay me. As a member of a charity board, I know how hard it can be to keep an organization afloat with funding cutbacks. If I have the time, and believe in what the organization is doing, I will see what I can do pro bono.

I might do more, if more of the organizations behaved themselves better. It’s frustrating to start work on a project to find that you’ve been lied to, can’t get the info you need, and the organization won’t make the necessary deadlines. When there are problems, the group tends to make me the scapegoat. They tell everyone about their problems but I can’t respond because of confidentiality rules. Very Frustrating!

So here is my rant-

Dear organization that wants my services free,

I will be glad to discuss doing work for you for free or at a reduced rate. But before you ask, remember that I will be seeing your financial information and I will know what you could really pay me. Be fair and honest with me and I will fairly price my services. If I find out that you lied to me, this is the only work I will ever do for you.

I know that you want to get this process completed and that is why deadlines were set. But in order for me to meet those deadlines, you have to get the info to me in time so that I can do the work to meet that deadline. 4pm on the due date is too late.

Waiting for the IRS or state tax department to respond is frustrating, but calling me every 2 days to see if I’ve heard anything is not going to get a response faster. And remember, sometimes the answer is “No”.

I need information from you. In some cases, I need a lot of information and some of it seems to have nothing to do with your issue. But I need it all the same. I shouldn’t have to hound you to get that info. If I tell you I need the name, position and address of the organization’s board, I need the name, address and position. And all that info should be going through just one person. Don’t tell me to call so-and-so and ask them.

Look, I like helping an organization that wants to make the world better. And I’ll consider reducing or cutting fees. But you have to do your part and get me all the info I need when I need it. And if you wondered why so many professional people avoid pro bono work, it’s because we have been burnt by organizations that forget that the money they are saving means they will need to do a little more and be more organized. No one likes being taken advantage of by someone they are helping.

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Use Your Tax Info for Election Analysis

I saw a headline this morning saying that (fill in your candidate of choice) was planning on raising the marginal tax rates.  It’s the crazy election season. When everyone seems to play loose with the truth and headlines don’t have any relationship to the story that follows.

Let’s talk tax rates for a minute. I am asked by clients a lot; “What is my tax rate?” Well, it depends-which rate? First is the marginal rate. This is the top rate you are paying tax on and the one most people think about when talking taxes. A single taxpayer with $60,000 in W-2 income and no adjustments will pay tax on $50,650 after her single deduction and exemption are subtracted (taxable income). Of that $50,650, $8,375 will be taxed at 10%, the next $25,625 will be taxed at 15%, and the remaining$16,650 will be taxed at 25%. Her highest tax rate equals her marginal rate so her marginal rate is 25%. The effective tax rate is the actual percentage of tax. In our example, the taxpayer is paying $8845 in tax. Divide the tax by the taxable income ($50,650) and you get an effective tax rate of 17.46%. The effective tax rate is always lower than the marginal rates.

Right now we technically have 6 marginal tax rates. They are 10%, 15%, 25%, 28%, 33% and 35%. These are part of the so called Bush tax cuts. When they went into effect in 2001 and were not permanent changes. They were only short term changes and Congress has had to “extend” them on a regular basis. If When Congress gets back to work, one of the more urgent issues they will have to do is decide if these tax cuts will be extended again. They are set to expire at the end of the year. If nothing is done, we will revert to 15%, 28%, 31%, 36%, and 39.6% marginal tax rates.

Neither party has to “raise” the tax rates; it’s automatic if there is no tax cut extension. And both parties have said they are for continuing the current lower rates for most taxpayers. There is a difference of opinion over increasing the higher rates. But for most taxpayers, there should be no change in their taxes if Congress extends most of the Bush tax rate cuts. No promises in the future if Congress tackles real tax reform.

With the influence of the Tea Party and the fate of the Bush tax cuts to be decided, taxes will be a major issue of this election. So take a moment to figure your marginal and effective tax rates. Start with your taxable income (1040 Line 43, 1040A Line 27 or 1040EZ line 6). Next look at the tax rate table ( Download 2011 Tax Rate Table)  for your filing status (single, married filing joint…). Which bracket does your taxable income fit into? That is your marginal rate. (A little confused? Use the example above for a guide.) To get your effective tax rate, divide your tax (1040 line 44, 1040A line 28 and 1040EZ line 10) by your taxable income.

As you read and hear about the different tax proposals during the election season, keep your taxable income, marginal tax rate and effective tax rate handy to compare what the proposals will really mean to your taxes.

And please read the comments because Paul makes a good point.

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