TOPICS OF INTEREST
Provisions Individuals Need to Know
All Employers Must Use New Form I-9
Form 8822-B for Business
Should I Store in a Safe Depost Box?
Mortgage Interest - Schedule A Deduction
Will You send 1099s
Got It All?
Time To Plan
Stock Market Losses May Provide Tax Relief
Tips For You
to File or Pay Penalties: Eight Facts
Audit Manual Record Keeping Requirements
Provisions Individuals Need to Know
Employers must Use a New Form I-9
The U.S. Citizenship and Immigration Services (USCIS) will no longer accept
versions of Form I-9, Employment Eligibility Verification. Effective May
7, 2013, employers
must use the revised Form I-9 (Revision 3/8/2013) for all new hires and
All employers are required to complete and retain a Form I-9 to document
of the identity and employment authorization of each new employee (both
noncitizen) hired after November 6, 1986, to work in the United States.
(PDF version of article)
Link to IRS.gov for more information:
Form 8822-B for Businesses
Beginning January 1, 2014, any entity with
an EIN must file Form 8822-B.
Change of Address or Responsible Party - Business, to notofy the IRS of
a cnange in business mailing address, location or the identity of a responsible
party. Form 8822-B must be filed within 60 days of the change, if
the change in the identity of the responsible party occurred before 2014,
file Form 8822-B before March 1, 2014, reporting only the most recent
change. Generally, it takes 4 to 6 weeks to process an addess or responsible
Should I Store in a Safe Deposit Box?
List of what to keep in a Safe-Depost Box and what not to keep.
version of article)
Interest - Schedule A Deduction Alert
To fully deduct the
home mortgage interest, the interest must be acquisition or equity debt.
1. Any mortgage that
was taken out on or before 10/13/87; or
2. A mortgage that
was taken out after 10/13/87 to buy, build or improve the home AND the
total debt was $1 million or less
Acquisition debt is
based on the balance on the original mortgage and cannot be increased
unless the taxpayer uses the proceeds for additional acquisition or improvement
debt is ANY mortgage taken out after 10./13/87 for purposes OTHER THAN
to buy, build or improve the home; AND
1. The mortgage totals
$100,000 or less; and
2. The mortgage does
not exceed the equity in the home.
Both the IRS and
the FTB are putting increased auditing resources into examining mortgage
interest. Be Aware!
Many tax records show up in your January mail. Usually IRS gets a copy
too. Don't miss any of these!
W-2s. Read them carefully. Contact your employer
if there is a problem. If one is missing after January, contact your employer.
If you can't locate the employer, you'll need to collect your pay stubs.
1099s. There should be a 1099-INT or 1099-DIV
for each account which pays interest or dividends. Even tax-exempt interest
must be listed on your return.
Other 1099s. If you sold real estate, look
for 1099-S. For stock sales it's 1099-B. Pensions show up on 1099-R. There
are several others. If you sell or transfer mutual funds and reinvest
dividends, I need a complete history of your activity. Bring all year-end
Form 1098. This is your mortgage interest. Commercial lenders
use this form. If you have a private loan, your need your payment book,
or a statement from the lender to verify the amount.
Other income. Look for other reports of income. You may see
forms for state tax refunds, unemployment income, prizes, gambling wins,
or rents you collect. Read each of these carefully.
Your Records. Check your own records carefully
for both income and deductions. Review your calendar and your check register.
Look back over the year in your mind. I'd prefer that you have receipts
for all expenses, but if you recall paying a deductible expense it should
Start compiling the information right away. Don't wait until the day before
you give the information to me. Make careful lists of missing items. Write
down any questions you might have for me.
Take a few minutes each week to review your information. Short reviews
will help you remember items you might miss. It's your money-- protect
You Send 1099s?
You may need to send Form 1099 to someone else.
"Nominee" amounts. If you are named as receiving
income, but part of the income belongs to another, you are nominee.
You must issue Form 1099 to the other party by January 31. IRS wants a
copy by February 28. There are penalties for not sending them!
Business/Rental. If you paid $600 or more to anyone during
the year you may need to issue the form. Look at "business"
expenses only. Expenses in your personal life are not reported. Nor are
payments to a corporation.
If any part of the payment was for services, report the total amount on
Form 1099. Paying for merchandise alone doesn't count. Rent you pay to
an agent instead of to a landlord are excepted. Look for repairs, painters,
consultants, builders and the like.
You need name, address, and Tax I.D. Number for these people. Call them
or send a Form W-9 to request the information. If someone uses their own
name, they should give you their Social Security Number (like 555-55-5555).
If they give a business name, you should see an Employer I.D. Number (like
Nominees. Limits are lower. If you pay $10 or more to another,
you may be liable for the form. You file the same type of 1099 as you
received, but you are filing as a "middle man."
Getting the Forms. We can prepare these forms for you, or
you can get forms from IRS. If you need my help, please call early! My
tax season is hectic and the deadline comes quickly. Get forms from IRS
at 1-800-829-3676. Or download them at www.irs.gov. You need Form 1099-MISC
and Form 1096.
Here's a list of items frequently missed. Check it against your list.
Refinances. I need to see the settlement statement. Maybe it's
best to bring all the paperwork.
Child Care Expenses. I need full name, address, telephone, and
I.D. number of care providers.
Estimated Tax Payments. If you paid estimates, I need dates and amounts
for all payments. Look in your check register near April 15, June 15,
and September 15 and January 15.
Sales of Property. The most important thing is the settlement statement.
Bring all the paperwork.
Student Loans. Form 1098-E reports your interest. I need this plus
information about the nature of the loan.
College Tuition. Form 1098-T lists college tuition paid. I need
the form and full details on who took the courses. This may help you get
valuable tax credits or deductions.
Sales of Stock. Brokers send Form 1099-B to show sale price. I
need the original purchase price and date. Can you find the "buy"
Business Records. Please separate purchases of major equipment
from other supplies.
Contributions. Be sure you have the proper receipts. We don't attach
them to the return, but you must keep them.
Employer Reimbursements. If your employer reimburses any of your
expenses we need records to insure we claim only the excess.
Partnership Information. Schedule K-1 from a partnership will likely
be the last piece of tax data you receive. They always seem to be late.
Don't worry. We can do everything else, then, be ready to go when the
K-1 shows up.
Social Security Benefits. Be sure you have the actual Form 1099-SSA.
We must declare the GROSS amount you were paid, not your net monthly benefit.
As always, if you should hear from IRS, don't respond. Call me first
and get me the paperwork. I am familiar with procedures and can help avoid
Time to Plan
Now is normally an ideal time to take a look at your tax position. There
will be no surprises in February or March if you do a little bit of work
Income. You should be able to make a good estimate of the year's
income. Look at wages. interest, dividends, pensions and other items.
The total number is less important than how the number compares to last
year's income. Will your income be up? Or will it be down?
Deductions. Do the same thing to estimate your deductions. Again,
it's more important to compare with your last year's return than to calculate
the actual number.
The Doubling Effect. Income tax doesn't follow a simple progression.
Change your income by 10% and your tax bill changes nearly 20%. That's
why it's important to check the numbers during the year.
Why does this happen? A quick way to see this on your own return is to
compare your actual income with your "taxable" income. Drag
out your last return. Your total income is on the line called "Adjusted
Gross Income". That's the bottom line on page I of Form 1040. "Taxable
Income" is a few lines later (Line 43 on Form 1040). It will be smaller
than your actual income. Now you can see that a 10% change in your actual
income causes a larger change in your taxable income.
Tax brackets can magnify the difference. Imagine that your taxable income
was just below the point where the 15% tax bracket changes to 27%. Your
last $1,000 of taxable income cost you $150. The next $1,000 of taxable
income will cost $270. Quite a difference!
Large Income Change
Income swings of 20% or more are harder to understand by "feel".
If there is a large change in your income, please call me.
If you depend on withholding to pay your tax bill, we might need to change
your W-4. There's no need to wait until we calculate your next return.
If you pay quarterly estimated taxes, we may need to change the amount
of the last payment or two.
How Can Planning Help
We want to change the future. This doesn't involve magic. It involves
decisions. Decisions about when you do certain things.
You pay taxes on an annual basis. We'd like to control the timing of financial
events. We don't want to change the events themselves, simply their timing.
Ideally we want to tax your income when your brackets are low, and claim
your deductions when tax brackets are high.
Timing Tax Payments. Some of you prefer to overpay and collect refunds.
This may not be the wisest way to manage your money. but it is certainly
understandable. Others prefer to "break even." A few of you
like to hold the Government's money as long as possible without incurring
penalties. This choice is yours. My job is to help you have a reasonable
expectation of the total bill.
Timing Deductions. You cannot control all your deductible expenses.
Some items, however, are flexible. Near the end of the year there are
several. Will you write the check in December? Will you wait a few days
for January? Sometimes you have control over business expenses. Do you
need that new piece of equipment now, or can it wait a few months? Is
it time to stock up on business supplies? Should you give that old furniture
to charity during this year, or should you wait until January?
Timing Income. It is more rare to be able to control the timing
of your income. Businesses have some control over the timing of billings.
Employees may have some leeway in when to receive a bonus. Savings Bonds
pay interest when they are cashed. Is it time to cash some of these? You
can decide whether or not to sell a stock.
No Silver Bullet. There is no magical solution to make your taxes
disappear or even cut them in half. Careful planning, however, may save
a few hundred dollars. I'd like to see you keep as much of your money
as possible. Right now we may find some ways to save. Once January comes
all I can do is calculate the bill. It's your money--protect it.
Losses May Provide Tax Relief
BEAR MARKET. We don't like the term, but it's beginning to look like
an accurate name. This year more investors than ever will be showing losses.
Perhaps you can at least salvage something by making the most of the tax
I won't try to tell you whether to buy or sell. Your investment decisions
are far more important than their tax impact. To sell a stock which is
down in value may or may not be a wise investment decision. The loss may
or may not reduce your tax bill. Knowing the difference may help in your
It's been quite a while since many folks have had to cope with losses.
It might help to start with the basics:
Q: What is a capital loss?
A: It is a realized loss from selling
a stock, bond, or mutual fund that is not held in a retirement account.
For example, if you bought 10 shares of GettingRich.com at $50, then sold
them at $10, you realized a loss of $400. You probably paid commissions
on both transactions. The commissions are used to increase your loss.
All sales for the year must be calculated. Some might result in gains.
You must include gains from mutual funds which declare "distributions"
during the year. Gains and losses for the year are netted to a single
total. If the total is a net gain, it will be taxed. But if the net is
a loss, you may deduct no more than $3,000 of net loss on your tax return.
Any excess loss, or "carryover", is pushed into the following
year. The net loss acts like a deduction. It can offset income from other
Q: Is there any way to avoid this $3,000
A: There is a narrow exception for stock
in certain small companies called section 1244 companies. They are companies
with less than $1 million of equity when the stock was issued. The company
will know if it qualifies. To promote investment in small companies, the
law allows you to deduct up to $50,000 in annual stock losses from this
special stock. Couples may deduct up to $100,000 of such loss. There are
no other exceptions.
Q: What if I have a capital loss within my retirement
A: Unfortunately the loss can't help you. Just as
you were not taxed on the gains when the fund was growing, these losses
are not recognized.
Q: How are capital gains and losses taxed?
A: Whew! That's a tough question. I won't
try to describe it all. All losses are handled pretty much alike. It's
the gains that cause confusion. Gains are taxed at different rates depending
upon how long you held the investment. Anything held for a year or less
is taxed at normal rates. Gains from assets you held more than a year
can never be taxed at more than 20%. That's a far cry from your wages
or interest income. They can face tax rates as high as 38.6%. Assets held
more than 5 years can have even lower rates.
Q: Should I sell stocks that I'm holding at a
A: Perhaps. First you must decide whether
the stock is worth holding for its investment potential. Don't let your
income tax position make the decision! If you've already decided the stock
is not worth holding, look at your net gain/loss position for the year.
If you have a net gain, this loss can be used as an offset.
As a simple example, suppose you already sold ABC stock and made a $3,500
gain. You also hold XYL stock that is down in value by $2,000. If you
keep the XYZ you will pay tax on the ABC gain. If you sell the XYZ, you
can net the transactions and pay tax on only the net $1,500 gain. Don
forget, if you like XYZ as a long-term investment, you'll regret your
decision if XYZ rebounds later.
Q: Why can't I sell stocks that are down and simply
buy them back?
A: Because the IRS has a trap for you. They
call this a "wash sale". If you buy the same stock or a "substantially
identical" security within 30 days of your sale IRS will disallow
the loss and tack it on to your eventual sale of the stock you just bought.
That's 30 days before or after the sale!
Q: What if, instead of buying the stock back,
I simply buy an option to purchase the stock in the future?
A: It's still a "wash sale". IRS will
use the "substantially identical" rule to stop this one. You
simply must wait until the 31st day.
Q : Would this happen if I sold a growth mutual
fund and immediately bought another growth fund?
A: Usually not. Check with the broker. To
be "substantially identical" the funds would have to have the
same manager, fee structure, and other factors.
Q: I know I pay tax on "distributions"
from mutual funds. Can they distribute losses as well?
A: No. The distributions
are your share of gains made from selling parts of the portfolio. Losses
are reflected only in the share price of the fund.
Speaking of mutual funds - be sure to keep good records of all purchases,
dividends, and distributions. Why? Imagine a fund based on growth alone.
Even if it never paid dividends, you are forced to declare the distributions
and pay tax on them. When you finally sell the fund it is possible there
is little or no gain. You already paid tax on most of the gains as they
were distributed. Similarly, if you reinvest your dividends, you are continually
buying more of the fund, which reduces your final gain. The records are
crucial to help avoid declaring too much gain. Generally there is an annual
summary showing all your activity for the year. Be sure to keep these.
If yon have large gains or losses this year. please give me a call. I'd
like to help you anticipate your tax bill. Maybe I can help you save some
Deductible Meals. Meals in connection with a business activity
are generally 50% deductible.
Charitable - 100%. Meals connected with a charitable function are
different. For instance, meals at a fundraising event, golf tourney, or
other affair. The meals are 100% deductible if: (1) Primary purpose of
the event is to benefit a charity. (2) The sponsoring agent contributes
100% of the net proceeds to the charity. (3) Volunteers are used to perform
substantially all the work of carrying out the event.
Donating Your Discards. We have all donated clothing and other
items to one charity or another. What is their value? IRS says you may
claim the "fair market value" of the items. But how does one
find this value? I recommend a visit to a local thrift store. They are
in business full-time, and deal with the public regularly. Best of all,
most donors are surprised by the values. The average taxpayer claims only
about 30%-50% of the amounts actually charged for such items in these
stores. Don't be afraid to maximize your deduction!
Large Gifts. I get many questions about occasional large gifts.
Most often these are family issues. A parent may help a child buy a home
or start a business. What are the tax issues for the recipient and for
Recipient. There is no tax issue at the time of receiving a gift.
If the gift is an asset rather than cash (real estate, for instance, or
stock) there may be an issue for the future. You receive the asset exactly
as the giver owned it. If you receive stock the giver bought for $10 per
share, you treat $10 as your cost even if it was trading at $50 at the
time of the gift.
Giver. If the gift's value is more than $14,000 (2013 amount) in
any year, the giver is required to file a gift tax return. Any value beyond
$14,000 uses up some of the giver's lifetime gift and estate tax exemption.
The exemption is currently $1,000,000. If the giver uses up the exemption,
giver will pay a gift tax on each subsequent gift above the $14,000 annual
to File or Pay Penalties: Eight Facts
IRS Tax Tip 2012-74,
April 17, 2012
The number of electronic
filing and payment options increases every year, which helps reduce your
burden and also improves the timeliness and accuracy of tax returns. When
it comes to filing your tax return, however, the law provides that the
IRS can assess a penalty if you fail to file, fail to pay or both.
Here are eight important
points about the two different penalties you may face if you file or pay
1. If you do not file
by the deadline, you might face a failure-to-file penalty. If you do not
pay by the due date, you could face a failure-to-pay penalty.
2. The failure-to-file penalty is generally more than the failure-to-pay
penalty. So if you cannot pay all the taxes you owe, you should still
file your tax return on time and pay as much as you can, then explore
other payment options. The IRS will work with you.
3. The penalty for filing late is usually 5 percent of the unpaid taxes
for each month or part of a month that a return is late. This penalty
will not exceed 25 percent of your unpaid taxes.
4. If you file your return more than 60 days after the due date or extended
due date, the minimum penalty is the smaller of $135 or 100 percent of
the unpaid tax.
5. If you do not pay your taxes by the due date, you will generally have
to pay a failure-to-pay penalty of ½ of 1 percent of your unpaid
taxes for each month or part of a month after the due date that the taxes
are not paid. This penalty can be as much as 25 percent of your unpaid
6. If you request an extension of time to file by the tax deadline and
you paid at least 90 percent of your actual tax liability by the original
due date, you will not face a failure-to-pay penalty if the remaining
balance is paid by the extended due date.
7. If both the failure-to-file penalty and the failure-to-pay penalty
apply in any month, the 5 percent failure-to-file penalty is reduced by
the failure-to-pay penalty. However, if you file your return more than
60 days after the due date or extended due date, the minimum penalty is
the smaller of $135 or 100 percent of the unpaid tax.
8. You will not have to pay a failure-to-file or failure-to-pay penalty
if you can show that you failed to file or pay on time because of reasonable
cause and not because of willful neglect.
Audit Manual Record Keeping Requirements
The documentation listed below is taken verbatim from a recent Information
Document Request (IDR) directed at a client of mine.
If you have a small business
and are audited, it will be by the SB/SE (Small Business & Self Employed)
Division of the IRS. They do not mess around! Their standard IDR requirements
are listed below:
1. Provide copy for Form 1040 for the tax year(s) requested
with all attached schedules.
2. Provide general
ledger, profit and loss statement, income statement and any and all work
papers used in the preparation of your Schedule C. This would include
worksheets, log books, notebooks, or any written documentation that shows
3. Provide all bank
statements (both business and personal, savings and checking, money markets,
CD's. etc.) for the specified period.
4. Provide information
on nontaxable income received, such as gifts, inheritances, insurance
proceeds, loans, credit advances and transfers between back accounts.
Provide source documents for non-taxable income received.
5. Provide all books,
journals, ledgers and work papers used in determining gross receipts.
Legal and Professional
Expense - Schedule C1
1. Accounting records detailing the expense deducted
2. Cancelled checks, invoices and/or receipts to verify the expense claimed
3. Brief description of expense incurred and the business purpose
4. Statement from the attorney of the services provided.
Office Expenses - Schedule C2
1. Cancelled checks, bills, or receipts to verify office expenses claimed
on the return.
Travel Expense - Schedule
C1, Schedule C2
1. Verification of the number of nights away from home
overnight for business purposes. Include receipts or credit card statements
for meals and actual lodging
2. A log or diary
for travel costs incurred while away from home on business. This information
should include transportation tickets, receipts, and cancelled checks.
Note: Cancelled checks written to MasterCard, VISA, American Express,
Discover, etc. are not sufficient to establish a business expense, even
if they are business cards. You must keep the actual receipts or the monthly
credit card statements showing each expense in detail.
3. Itinerary of business
trips away from home (e.g. conventions, training, etc.)
4. Documentation to establish
business purpose of travel expenses.
Outlined below is
the exact wording from a recent Information Document Request (IDR) directed
at a client of mine. Please note that this kind of demand for information
is not at all unusual!!
IRS Income Inquiry
A preliminary review of your return indicates that your claimed expenses
may exceed your income. Please come to your appointment to discuss this
issue. Please see the item(s) below.
1. Please provide an explanation of all taxable and non-taxable income
received during the year. Example of non-taxable income are gifts, inheritances,
personal loans, credit card advances, and some types of disability income.
If applicable, please bring all necessary documentation to support the
non-taxable nature of your income.
2. Please provide copies of
all bank statements, for all accounts, personal and business, for period
3. Please be prepared to discuss
your annual estimated personal and family expenses. Information regarding
the Bureau of Labor Statistics national averages can be found at www.BLS.gov.
Malcolm can be reached by
3 Ocean Parkway
Bolinas, CA 94924
FedEx & UPS:
470 Cedar Rd .
Bolinas, CA 94924
Tel (415) 868-1854
Fax (415) 868-1855