Our Taxing Times

Child Tax Credit Delays

It seems the IRS has delayed some returns with the Form 8812 Child Tax Credit due to the taxpayers incorrectly filling out Part I.

Part I is completed only when there are children on the return with ITINs (Individual Taxpayer Identification Number). The IRS is finding that some taxpayers are filling out Part I when their dependents have SSNs not ITINs. Returns are also being delayed when Part I is not being completed when there are dependents with ITINs.

Part I on Form 8812 asks that the taxpayer verify that each child with an ITIN meets the “substantial presence test.” Basically that they are not a non-resident alien. To meet the substantial presence test, a child identified with an ITIN generally must be physically present in the United States on at least: 31 days during 2012, and 183 days during the 3-year period that includes 2012, 2011, and 2010, counting:

• All the days your child was present in 2012, and
• 1/3 of the days your child was present in 2011, and
• 1/6 of the days your child was present in 2010.

Bottom-line, if your dependents have valid social security numbers do not fill out Part I on form 8812. If they have ITINs, you must complete Part I. Get it reversed and your return will be delayed while the IRS checks out your return more closely.

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Low Cost Tax Preparation Options

Don’t want or can’t pay a tax pro to do your tax return? You have some options.

There are a stack of commercial programs and online sites to choose from that will help you prepare your income taxes. Most walk you through the process with questions to get the info needed to file your return. And if your income is under $57,000 for 2012 you might be able to use the IRS Free File. The Free File Alliance was started years ago to help lower income taxpayers prepare and file their federal taxes. The IRS has convinced a bunch of tax software companies and online tax service companies to offer free tax preparation and return filing for Federal returns for households under $57,000 in income. You access Free File through the IRS website. The free part of free file actually only applies to the Federal return. You could be charged for any state returns you need completed. Check the fine print.

If you are a tax do-it-yourselfer and want to electronically file your return, the IRS has fillable tax forms. These forms act like a paper form and you fill in the blanks. They will do limited mathematical calculations and can be e-filed when you have the return finished. There are also complete instructions for the program. As for state returns, check on your state’s website for online filing options. Many states, like Kansas, give taxpayers the ability to file their state return online for free.

If the idea of preparing your own taxes causes you to panic but you really can’t afford to pay a preparer, there is volunteer tax help available to you. The IRS certified programs are VITA (Volunteer Income Tax Assistance) and TCE (Tax Counseling for the Elderly).  Vita will help households with less than $51,000 in income and TCE is for taxpayers who are 60 or older. Besides tax preparation, the programs can e-file your returns. There are also specialized services for the military and their family. To find a location near you, the IRS has a search program and more info about the program.

There are a bunch of options available for taxpayers who need some help preparing their tax returns but don’t want to pay a tax pro. Check what options they offer and what hours they are open. One of these programs might work for you.

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Kansas Withholding Cut

The word is out that most people can expect a little less in their paychecks now because the lower FICA rate (4.2%) was not extended with all of the other fiscal cliff tax breaks. The rate has gone back to 6.2%. Because of that, taxpayers working in Kansas might have missed their new lower state withholding.

The Kansas legislature passed a major tax package this summer. Besides ending tax on business income, they cut the tax rates to 3 and 4.9%. This tax cut is what is showing up on paychecks now.

The amount of the cut will of course depend on the wages. A taxpayer who is paid $1000 every 2 weeks and has their KW-4 set for single and 1 will see their KS withholding drop from $35 to $28. If their KW-4 is Married and 2, the drop is from $22 to $18.

The new tax rates are:

• Married – 3% for income under $30,000. 4.9% for any income above that.
• Everyone else – 3% for income under $15,000. Above that the rate is 4.9%.

So, if you’re working in Kansas, check and make sure that you KS withholding went down from last year. It won’t totally offset the hike in FICA but it does help some.

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Property Tax on Long Gone Homes.

On April 14^th this year, a tornado hit the southwest part of Wichita destroying homes and businesses including a trailer home park. Most of those homes weren’t repairable and are now in landfill. So you can imagine the surprise of those whose homes were destroyed when they received their tax bill for the property tax on those homes.

The bills were not a mistake. Under current Kansas law, the appraisal value is set on January 1^st each year. This valuation is used to determine the tax billed in November. Even if the property is no more, the taxpayer is still on the hook for the tax. (This is not the case for vehicles just property.)

This procedure was set up in 1982 and has not had a major change since then despite other tornados which did more damage. An attempt to change the procedure was made 13 years ago after Haysville was hit by a tornado. That got nowhere because budgets are created based on the January appraisals. Any change after that could negatively impact an area that needs the tax revenue. If the homes destroyed by the Wichita tornado could be removed from the tax rolls, Sedgwick County would collect less tax money than it has budgeted. This would happen at the same time that the county is also recovering from the tornado and needs all the revenue it can get.

Rep. Elect Joe Edwards is determined to get the procedure changed. (His brother lost his home in the April tornado.) And State Senator President-elect Susan Wagle has said she will have the Legislative Research Department to look at the issue and see if there is a way to improve on it. It might be a tough sale since Governor Brownback has said that he wants to hold the line on property taxes and revenue forecasts based on the income tax changes made last year are projecting a $327 million shortfall for 2014.

It’s kinda like the Kansas version of the Alternative Minimum Tax. Everyone knows that it needs to be fixed but no one wants to find the revenue to replace the program.

Wichita Eagle Article

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Bye Bye NOLs - Kansas

Kansas has made a change to how they treat a net operating loss (NOL).

According to IRS’s Pub. 536, “If your deductions for the year are more than your income for the year, you may have a net operating loss (NOL). An NOL year is the year in which an NOL occurs. You can use an NOL by deducting it from your income in another year or years.” For individuals, if your line 41 is a negative number, you might have a NOL. Basically, you need to have a business loss that is large enough to offset any other income. On the Federal level, the loss could be carried back or forward to offset income in other years. (A very simplified explanation.) Kansas has always required a separate calculation and will only allow the NOL to be carried forward for up to 10 years. The Federal NOL is added to the AGI from the taxpayer’s Federal return and the Kansas NOL is subtracted to create the Kansas Adjusted Gross Income.

Beginning with 2013, Kansas will no longer have NOLs for individuals. In a way it makes sense since Kansas will no longer be taxing business income. Qualified Federal business income will be subtracted from the Federal Adjusted Gross Income to create the Kansas Adjusted Gross Income. A business loss is added back to KAGI.("Business" could be from Sch C, Sch F or Sch E.)

What about NOLs from prior years? They’re gone too. A taxpayer carrying forward a NOL from 2011 will lose any deduction that is not used in 2012. The Federal NOL will still have to be added back to figure Kansas income.

Part of me is happy with the decision because the separate calculation and tracking of the Kansas NOL is a pain but that means that lots of taxpayers lost a major deduction and will be getting a surprise in 2013.

 FYI - Corporations can still have KS NOLs.

Taxing Business Losses

Worse Tax Bill Ever

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Kansas Taxing Business Losses

The Kansas Department of Revenue has issued some clarification about how the new tax law on business income will be handled on the tax returns. The law goes into effect on January 1, 2013 and exempts business income from Kansas income tax. It doesn’t matter if the income is reported as a sole proprietor, pass through from an S-Corp or partnership or as a corporation, business income isn’t taxed.

For individuals, the amount of the subtraction will be calculated based on the income reported on the federal return (from Sch. C, F or E) adjusted by gains on the sale of business assets, the SE Tax adjustment, and contributions to a self-employed retirement plan. Interest, dividend and capital gains could also figure in the calculation. Revenue Ruling 19-2012-02 has the details.

But, what if the taxpayer is showing a loss on their Sch. C, F or E? That loss has to be added back into their income before their Kansas tax is calculated. Notice 12-11 specifically states that business losses reported on a Federal return must be added to Kansas income. So some taxpayers with a business loss could be paying more Kansas tax on their 2013 return.

I really hope that the guys at the KDOR come up with a worksheet to help us calculate the addition or deduction or this could get very confusing.

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Chicken or Egg Tax Cut

This weekend I heard someone go on and on about how cutting the income tax on business income in Kansas was so wonderful and how much money the person was going to save. If you haven’t hear, Kansas will no longer tax the income from a business, either a corporation, pass through income from a S-Corp or partnership or even a sole-proprietorship. Business income as the Kansas legislature has defined it included rental income.

The rationale behind these cuts is that business owners will use the money they are saving to hire more people and make up for the loss in revenue with taxes on the new wages. Let’s look at that for a minute. Joe is a sole proprietor and his tax on his 2011 business income in Kansas was $3000. As a good citizen, Joe spends that money on a new hire. The problem is that his $3000 will only pay for 400 hours at $7.50 an hour or ten weeks. (And that doesn’t include FICA matching and unemployment which would reduce the number of hours available.) If his new hire is taxed on all the $3000 he earned at the lowest tax rate, the tax will be $90. The state lost $3000 in tax and only received $90 as a replacement.

This whole process is based on a business owner using the tax savings to hire new employees. But what if they don’t need a new employee? They’re not going to hire one. I’ll admit that I will benefit from the new tax law but I don’t need another employee (or pay my part timer more or for a few weeks longer). The tax money I save just goes into my pocket and not into wages as designed. For me to need more help, I need more clients. That means either a competitor quitting the business or more taxpayers (potential clients) come into the area. To get to the point that I need my receptionist full season, I would have to increase my clients by 20%. A competitor quitting might do that but I don’t see an increase in population that would generate that many new clients anytime soon.

It’s a chicken/egg issue. The Legislature assumes that a business owner will put the money they save in income taxes into hiring. But for most of us, hiring won’t come until our business improves. I’ve said before we shouldn’t be making tax decisions on assumption (hopes) on how businesses and individuals will behave. But the state did that with this new tax law and I hope this optimism doesn’t get Kansas into trouble.

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Birther and Frivolous Argument

It’s hard being a Kansan. There are all the Dorothy and Toto jokes, tornados and severe thunderstorms. And the whole state is not flat no matter what you have been told. Misconceptions aside, I love Kansas. The people, history, landscape, and the nature, it’s really a good place to live. But sometimes our elected officials do some really questionable stuff. Like the State Board of Education requiring creationism be taught in schools and the Governor shutting down the Kansas Arts Commission.

It was brought to my attention by Kay Bell that the State Objections Board headed by the Kansas Secretary of State, Kris Kobach is considering removing President Obama from the ballot in Kansas. Despite a long and short version of the President’s birth certificate, and contemporary newspaper announcements of his birth, Kobach wants more proof that the President is a U.S. citizen. The Objections Board is looking into the issue at the request of a taxpayer who has since withdrawn his request. The Board will meet on Monday to consider the withdrawal request and their next step.

The Birther issue is just another frivolous legal argument. At least it will make explaining frivolous tax arguments easier to explain to clients. And it's a sad example of our tax dollars at work.

UPDATE: The Objections Board has voted to allow President Obama on the November ballot.

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Don't Become a S-Corp!

If you are a solo proprietor who has been thinking about changing you business entity to an S-Corp, this might not be a good time to do it. That is if the business is in Kansas.

The recent tax bill signed by Gov. Brownback, excludes from Kansas income profits from a business. If you are a sole proprietor, all of your Sch C or F income is Kansas and will be tax free. But if you change to an S-Corp, you are required to pay yourself a salary and issue a W-2. That income will be taxed in Kansas while the pass through income from the S-Corp isn't.  This brings up the issue of reasonable compensation. If you set your wages at a level acceptable to the IRS, you might find your overall income tax bill go up over if you had stayed a sole proprietor.

There are a lot of issues to consider in changing your business and taxes are just one of them. But you will need to weigh the overall tax savings of paying SE tax and not paying Kansas tax. The change doesn't go into effect until 2013 so don't make a mistake you could be paying in the future.

Worse Tax Bill

“Worse tax bill ever” is how one Kansas legislator described the tax reform bill signed by Gov. Brownback on Tuesday May 22, 2012. While not exactly all that he proposed in his State of the State address, the new law will cut taxes $3.7 billion dollars in 5 years. In true Kansas fashion, getting the bill to the Governor was not without controversy. Both the Kansas House and Senate passed their version of the bill which went to a conference committee. But then, both chambers raced to pass the other chamber’s version of the bill. The House won, passing the Senate version and sending the bill to the Governor to be signed.

The bill reduces Kansas individual income tax rates, increases some standard deductions and cuts many tax credits. Tax rates have been reduced from 3.5%, 6.25% and 6.45% to 3% and 4.9%. The standard deductions for Married Filing Joint and Head of Household have increased to $9000. But, from my reading, it looks like the single deduction stays the same. Gone are the adoption credit, child care credit and food sales tax refund. And the Homestead Refund is now limited to property owners. It looks like the Kansas Earned Income Credit is still alive (at least I found no mention in the bill or articles about the bill.) These changes will take effect January 1, 2013.

There are major changes to corporate returns too. The bill’s supporters argue that the tax reductions will create an additional 20,000 jobs annually (over regular job growth) in Kansas and draw new businesses to the state. One of most questionable changes is that exempts 191,000 businesses from income taxes by ending taxes on their profits. Starting in 2013, I won’t be paying any KS income taxes since almost all my income is from business profits (a sole proprietor) and what other income I have will be reduced by my standard deduction and exemption to $0.00.

This is a Tea Party bill. Their supporters have pushed the bill over the objections of moderate Republicans, Democrats and social activists. It’s a bill that increases the tax burden on lower and working class taxpayers while helping higher income taxpayers. Too much of the bill depends on the creation of jobs and new businesses that will bring in new income. If that doesn’t happen, projections indicate a $2.7 million dollar budget shortfall by 2017. Not good!

 

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