Borgida CPAs

3 Reasons to Fund a 529 College Savings Plan

Thomas F. Scanlon — Sun, 19 May 2013 06:00:25 +0000

1) College is Expensive

According to the College Board the average tuition for a 4 year private education is $39,518 per year. The average cost of a 4 year in- state public education is $17,860. Either way, it’s a lot of money.

Looking at these numbers many parents get discouraged and do nothing. This is a big mistake. Start where you are. Put away some money for college. Have it taken out of your checking account automatically every month. If you don’t see it, you won’t miss it.

Many commentators are questioning the value of college now. After spending all of this money, it’s difficult for many graduates to get a job. Some statistics seem to support this. However, as the economy improves and unemployment declines this situation will change. In order to compete in this marketplace people will need to have marketable skills. This could be a 4 year degree, a 2 year degree or perhaps graduating from a technical school. Without some formal education after high school it appears to be very difficult job market.

2) Prepay 5 Years

An individual can gift up to $14,000 per year to an unlimited number of people without having to file a gift tax return or pay a gift tax. With the 529 plan however there is an additional option. With the 529 Plan you can fund 5 years of annual gifts, $70,000 ($14,000 X 5) in one year. A spouse could fund the same amount making the gift $140,000. For these gifts to stay out of the donor’s estate, they would need to live the succeeding 5 years. Getting these assets out of their estate earlier however allows these funds to appreciate longer for college.

3) Keep Control of the Assets

When a 529 Plan is opened there is what is known as the account holder. This is typically the parent or grandparent that is funding the account. There is also what is known as the successor account holder. This is the person who would assume all the rights of the original owner if something happens to that owner. The final party on the account is the beneficiary. This is typically the child (or grandchild). The account holder has complete control over the account. No distributions can be made from the 529 plan without the account holder authorizing it.

Will you open a 529 College Savings Plan?

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Happy Tax Freedom Day 2013 to Connecticut Taxpayers

Thomas F. Scanlon — Sun, 12 May 2013 06:00:22 +0000

Tax Freedom Day for the country was on April 18, 2013. This is the day when, on average, taxpayers have paid all of their taxes for the year and now begin to keep what they earn. Tax Freedom Day in 2013 was 5 days later than last year. This is partially due to the American Taxpayer Relief Act passed in late December 2012.

Tax Freedom Day

The Tax Foundation calculates Tax Freedom Day. The State of Mississippi is the winner here. They get to celebrate Tax Freedom Day on March 29th. According to the Tax Foundation, “Americans will spend more in taxes in 2013 than they will spend on food, clothing and housing combined.” Think about that for a minute. Tax Freedom Day does not include the current federal deficit. If this was included Tax Freedom Day would be extended to May 9th. This would add another 21 days.

Here is a breakdown of the type of taxes and number of days:

* Federal Income Tax                                       32 Days
* Federal Social Security Tax                             24 Days
* Property Tax                                                 12 Days
* Sales / Excise Tax                                          12 Days
* State Insurance Tax                                         3 Days
* Miscellaneous Tax                                            5 Days

To put this in perspective, Tax Freedom Day in 1900 was January 22nd. In 2000 it was May 1st.

Connecticut Taxpayers

For Connecticut taxpayers Tax Freedom Day is May 13th. This is extended from May 5th in 2012. Connecticut comes in first, or last…depending on how you look at it. Connecticut comes in first with the highest tax obligation of all of the states. Therefore we get to celebrate this day last. Said differently, Connecticut taxpayers will have to work 133 days to pay their taxes. Compare this with the national average of 108 days or with the lowest, Mississippi mentioned above at only 88 days.

Where Do We Go From Here?

Enjoy Tax Freedom Day. You deserve it. More importantly Connecticut taxpayers need to be vigilant here. This is NOT the contest you want to “win.” Meet with your CPA to discuss your tax planning. Here are Fifty Shades of Tax Deductions. Pick out the ones that would be appropriate for you.
Happy Tax Freedom Tax Connecticut Taxpayers!

Anyone want to go to Happy Hour?

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5 Lessons Learned From Tax Season

Thomas F. Scanlon — Sun, 05 May 2013 06:00:45 +0000

Lessons Learned

Another Tax Season has come and gone. Here are the 5 Lessons Learned from this Tax Season.

1) Don’t Pass Tax Legislation on December 31

Congress passed the American Taxpayer Relief Act on December 31, 2012. It’s clear that no one voting on it read it, much less understood it. The timing of this legislation was not good. Due to the late passage of this bill the IRS was delayed with approving the tax forms. This naturally delayed the filing of many tax returns.

2) Do Return Your E- File Signature Authorization Form 8879

With few exceptions individual income tax returns need to filed electronically. For a CPA to do this they will need their clients written approval. This is done on IRS Form 8879. The return cannot be filed until this signed form is received by the CPA.

3) Don’t be Surprised When You Show Up Late That You Are Put On Extension

As you know, individual income tax returns are due on April 15th. If you can’t get your return completed by this day you will need to file for an extension. The extension will extend the time to file the return until October 15th. It will not extend the time to pay the tax.

4) Don’t Buy Limited Partnership Interests If You Don’t Know What You Are Buying

This past year purchasing limited partnership interests were attractive to many due to the yield. That’s fine. It’s quite clear however that many people are unaware of the tax reporting on these partnerships. A partners profit or loss is reported on Form 1065 K-1. Believe it or not, these are not due to be filed until April 15th. Right, that’s the same day as the personal income tax return. Therefore if you are going to purchase a partnership with K-1 reporting, be prepared for delays in receiving your tax documents.

5) Be Prepared To Pay Higher Taxes In The Future

It appears that many taxpayers are frustrated with the income taxes they are paying. For the upper income taxpayers we tell them to get prepared for higher taxes in the future. The American Taxpayer Relief Act raised taxes on these taxpayers. Additionally, the Affordable Care Act also known as Obamacare also increased income taxes on these taxpayers.

What did you learn from this past Tax Season?

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3 Reasons I Encouraged My Son to Open a Roth IRA

Thomas F. Scanlon — Sun, 28 Apr 2013 04:00:26 +0000

I recently suggested to my son that he open a Roth IRA. Here are the 3 reasons why.

1) He’s Young

The Roth IRA offers a huge advantage over a regular IRA. This is particularly so for younger people. With the IRA you are (generally) allowed a tax deduction for this. The IRA grows tax deferred. You can begin to take distributions after age 59 1/2 without penalty. You must begin taking distributions after age 70 1/2. This is called the Required Minimum Distribution (“RMD”). Distributions from the IRA are taxed.

With a Roth IRA there is no income tax deduction. However all of the distributions are tax-free assuming the account has been opened for at least 5 years and you are over age 59 1/2. The compounding of tax-free accounts over many years is huge. Unlike the IRA, the Roth IRA has no RMD requirements for the account holder or their surviving spouse.

2) He Had Earned Income

To be eligible for a Roth IRA you need to have earned income. This can be from wages working as an employee or net income from self-employment. My son had worked the local golf course last year which made him eligible. The maximum someone under age 50 can put in is currently $5,500 per year. He was unable to do that amount. He was able to put some money away however and get started. This is perhaps the most important point, getting started.

3) He Is Financially On His Own

OK, for now he’s not totally on his own. He’s still (partially) “on my payroll.” I’m working very hard however to get him fully off my payroll as soon as possible. Long term however he is totally on his own.

In the past, many people were able to rely on these three big institutions:

The Union

Their Employer

The Government

Back in the ‘old days’ someone would go to work for their employer and spend their entire career there. When they retired, they would be eligible for a pension. With a pension and social security they could have reasonably comfortable retirement.

Do you think young people can rely on these institutions going forward? Not likely. Do you expect to see any 20 year old ever collect a dime of social security from the government? I wouldn’t count on it. Depending on which projection you read (and believe) the social security system should be bankrupt around 2035.

Most employers have terminated their pension plans. These have been substituted with a 401(k) plan. Employees need to sign up for their employer 401(k) plan to help fund their retirement.

For my son simply put, he needs to financially take care of himself.

Have you encouraged your son or daughter to open a Roth IRA?

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How to Get an IRS Tax Penalty Waived

Thomas F. Scanlon — Sun, 21 Apr 2013 04:00:18 +0000

The Internal Revenue Service (“IRS”) has many tax penalties for taxpayers that fail to meet certain requirements.

Some of these penalties are:

* Failure to File

* Failure to File on Time

* Failure to Pay

* Penalty on Underpayment of Estimated Tax

Why Should The Penalty Be Waived?

It’s possible an IRS penalty can be waived. Possible being the key word. Just be sure to think about this before you attempt to get a penalty abated. The primary reason that the IRS will consider abating the penalty is due to reasonable cause. Don’t bother attempting to have a penalty waived if you don’t have a leg to stand on. You’re just wasting your time. Some penalties may be too small to fight over. Others will be large enough you’ll want to Get an IRS Civil Penalty Waived and Keep Your Small Business.

Reasonable cause could be death or serious illness to you or your family members. If this is the case, get as much documentation as you can to support your case. Other possible reasons for reasonable cause could be erroneous advice from either the IRS personnel or your tax adviser. Additionally, the IRS was very flexible waiving penalties with Hurricane Sandy.

One of the best ways to support your reasonable cause claim is to have a long history of timely filing and timely paying your taxes.

The facts and circumstance of each case will dictate the outcome of the request. As an attorney once told me, “there is nothing like a good set of facts to support your case.” Well said.

How to Get the Penalty Waived

To potentially get the penalty abated, complete IRS Form 843, Claim for Refund and Request for Abatement. Alternatively, a letter detailing the facts and circumstances of the case could be sent. It is recommended to send this request certified mail return receipt requested.

We have used both the IRS Form 843 or just sent a letter detailing all of the facts. Either way, be prepared to follow up. Sending in the Form 843 or a letter may not get the job done. Be prepared to follow up if need be.

State Considerations

In addition to the IRS, states will also assess penalties for failure to meet certain requirements. Like the IRS, some of these penalties may be able to be abated if you can prove reasonable cause. In Connecticut to get try and get a civil penalty abated, compete Form DRS-PW.

Have you had IRS penalties in the past?

If so, were you successful in getting them abated?

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How to Save $267,892 of Income Tax, Penalties and Interest

Thomas F. Scanlon — Sun, 14 Apr 2013 04:00:10 +0000

A new client came to us late last summer.

She dropped off a notice from the Internal Revenue Service (“IRS”). It indicated her and her husband owed $267,892 of back taxes, penalties and interest. I don’t know about you, but that’s a lot of money to me.

As we reviewed the paperwork she provided, it quickly became apparent she did not declare the sale of her primary residence. For a married couple filing a joint return, they can exclude the gain from the sale of their primary residence up to $500,000. Single taxpayers are allowed one-half this amount or $250,000.

Sale of Primary Residence

For the year in question this couple sold their primary residence for $652,000. At the closing the law firm handling the transaction gathered the necessary information to file IRS Form 1099-S. They filed this with the IRS and gave a copy to the taxpayer. The taxpayer failed to report this sale on their income tax return. The IRS picked up the gross proceeds reported on the 1099-S and billed the taxpayer.

Our Response

The first thing we need to do was get a Power of Attorney on IRS Form 2848. This allowed us to represent the taxpayer in front of the IRS.

The taxpayer went back and calculated their cost basis on this home. The cost basis includes what they paid for the property and the improvements they made over the years. Unfortunately they lost money on this home. Losses on the sale of your primary residence are not tax deductible.

Then we had to prepare an amended return on Form 1040-X for the taxpayer to file. With this filing we disclosed the sale, but were not entitled to any tax loss.

It took two subsequent letters and five months but we have finally resolved this matter. No change to the taxpayer, the taxes, penalties and interest all went away.

Lessons Learned

While many taxpayers need to disclose the sale of their primary residence, it is very important to keep careful track of the cost basis of your home. Additionally, it’s important to reply promptly to any IRS notice. If you are in over your head (by owing $267,892) engage a CPA or other tax professional to represent you.

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4 Easy Steps to File Your Income Tax Extension

Thomas F. Scanlon — Sun, 07 Apr 2013 04:00:00 +0000

Your 2012 income tax return is due on April 15, 2013. What if you can’t get it done on time? Here are 4 easy steps to file your income tax extension.

1) Prepare a Tax Projection

To file an accurate extension, you will need to prepare a tax projection. This will be a rough draft of what you expect the tax return to look like. This doesn’t need to be perfect, just a working draft to determine if you owe any tax. Take into account all sources of income including W-2′s, self-employed income, pensions, social security, interest, dividends and capital gains.

2) Pay the Tax

If you owe tax it will need to be paid with the extension. The extension extends the time to file the return, it does not extend the time to pay the tax. Failure to pay the tax with the extension will result in penalty and interest being assessed.

3) File the Extension

The extension (and check enclosed to pay the tax if needed) must be postmarked by the due date. The extension is done on IRS Form 4868, Application for Automatic Extension of Time to file U.S. Individual Income Tax Return. This will extend the time to file the return until October 15, 2013. It is recommended that this be sent certified mail, return receipt requested to document proof of mailing. If you owe tax and don’t file the extension an additional failure to file penalty will be assessed. So even if you don’t have enough money to fully pay the tax, file the extension to avoid the failure to file penalty.

4) File the State Extension

Most states will also require an extension to be filed and taxes paid if due if a federal extension is filed. In Connecticut this is filed on Form CT-1040-EXT.

Final Thoughts

If you are eligible and want to fund an IRA or a Roth IRA this will need to be done by April 15th. Self-employed people who want to fund a Simplified Employee Pension (“SEP”) have until the due date, including extensions to fund this plan. So filing an extension will allow them until October 15, 2013 to fund their SEP Plan.

Taxpayers that are paying quarterly estimated tax payments need to be cautious. The first quarter estimated tax payment for 2013 is also due on April 15th. These taxes will also need to be paid timely. Failure to do so will result in an estimated tax penalty. 3 proven reasons a small business owner should consider a SEP retirement plan.

Will you use these 4 easy steps to file your extension?

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Why I Work for the Top 1%

Thomas F. Scanlon — Sun, 31 Mar 2013 04:00:39 +0000

Recently there has been a lot of noise about the top 1%. They certainly have taken a beating.

This was highlighted by the Occupy Wall Street Movement last year.

It has received significant attention during the Election.

There are several different ways to define the top 1%. In the interest of simplicity, we are saying its income over $400,000 per year.

Self-Made

Most of the people we work with are self-made. No trust fund baby’s here. Many of these folks started businesses. Through a lot of hard work and some breaks going their way, they have become very financially successful. We’ve watched (and helped) them grow, hire employees and serve their markets. The key common traits among these folks are:

Honest
Hard Working
Smart
Entrepreneurial

Many of them are very generous to their favorite charities. Oh, and they pay taxes too by the way.

Having clients like this to work with is really cool.

Target the Top 1%

Why has the top 1% suddenly become a target? I’m not sure. Envy perhaps? Maybe that they supposedly don’t pay their ‘fair share’ (whatever that is). Should they pay a higher capital gains tax rate after everyone reviewed Mitt Romney’s return? Sure. With the passage of the American Taxpayers Relief Act of 2012 the higher income earners face the hat trick of higher taxes.

For married couples filing jointly earning over $450,000 and singles earning over $400,000 they will be hit with (at least) three tax increases. The first is their ordinary income tax rate will increase from 35% to 39.6%. The second is their long-term capital gain tax will increase from 15% to 20%. Finally, their qualified dividends tax will also increase from 15% to 20%.

In addition to the capital gains tax increase and the ordinary income tax increase there are other tax increases scheduled.

The Affordable Care Act instituted a surtax of 3.8% on passive income above $250,000. So for the higher income earners they could be paying 23.8% (20% + 3.8%) on their long-term capital gains and qualified dividends.

I know the government needs the money. The deficits are a simple function of spending more than they are taking in. The government has shown absolutely no restraint when it comes to cutting spending.

It is estimated per IRS statistics that the top 1% declared about 20% of the taxable income and paid 37% of the taxes paid.

Do you work for the top 1%?

If so, what has been your experience?

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How to Explain a Roth IRA to Your 25 Year Old

Thomas F. Scanlon — Sun, 24 Mar 2013 04:00:04 +0000

Roth IRA Eligibility

To be eligible for a Roth IRA you need to have earned income. This is typically from wages earned as an employee. Earnings from self-employment also qualify. The annual contribution is the lesser of your earned income or $5,000. The contribution can be made at any time during the year and up to April 15th following the year.

The Roth IRA Benefit

Unlike the IRA, there is no tax deduction with the Roth IRA. However if the account is open at least 5 years and the distributions are made after age 59 1/2, then all of the distributions are tax-free. Most 20 year olds pay little to no income tax. They don’t need the tax deduction of an IRA. They do need to save for retirement however.

Additionally, unlike an IRA, the Roth IRA is not subject to the Required Minimum Distribution (“RMD”) rules. These rules force IRA owners to start withdrawing from their IRA after age 70 1/2. This means the account holder or their surviving spouse never has to take money out of a Roth. This makes the Roth IRA a great wealth transfer tool. It’s only non-spouse beneficiaries like children or grandchildren that must take an RMD.

Back Up Plan

The Roth IRA offers some flexibility. You can always withdraw your contributions at any time tax-free. As there is no tax deduction with the contribution, this can be withdrawn without paying income taxes. If someone needed some funds to buy a car or make a down payment on a house, they could access the Roth IRA if needed. This certainly is not recommended, but it is an option.

The Conversation

Knowing they likely have a short attention span, you’ll need to get to the point. Most people, particularly younger people just starting out can’t ‘save up’ $5,000 and then write a check to their IRA. It’s better to try and make it as painless as possible. Assuming they have some monthly income, have the contributions made monthly by having them directly deducted from their checking account.

You’ll need to convey to them how they are truly on their own. They can’t reply on their employer, the union or the government for their retirement. They need to rely on themselves.

Will you use these points to discuss the benefits of a Roth IRA to your 25 year old?

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How to Form an LLC and Protect Your Assets

Thomas F. Scanlon — Sun, 17 Mar 2013 04:00:01 +0000

A Sole-Proprietorship

Many self-employed people will run their business as a sole-proprietorship. They are very easy to set up and cost very little to form.

First, decide on a name. For example, John Jones D/B/A (Doing Business As) Prime Time Painters. Then register your name with Town Hall. Get some business cards, letterhead and stationary. You are now well on your way.

If you have employees you will need to get a federal tax identification number. There will also be registration required with the state. In Connecticut you will need to register with the Department of Revenue Services and with the Department of Labor. Additionally you will need to obtain workers compensation insurance on your employees.

The issue with a sole-proprietorship is that all of the proprietors’ assets are potentially subject to claims from creditors.

The Story

A potential client called us recently and told me his story.

He was a self-employed sole-proprietorship that did home remodeling. On this job he subcontracted out the roofing. He accepted a certificate of insurance from the roofing subcontractor. Unfortunately he didn’t notice that the insurance had expired 14 days ago.

The roofer starts working. Then the roofer brings on to the jobsite a worker that is not his employee, he is a subcontractor. This individual however does not have insurance and proceeds to get hurt on the job.

The injured laborer files for workers compensation. The Connecticut Workers Compensation Commission hears the case and rules that the injured worker is owed $69,000.

Could This Have Been Avoided?

Probably not. Accepting an expired insurance certificate was likely the beginning of the end in this case.

However for many small businesses forming a Limited Liability Company (“LLC”) goes a long way to protecting your assets.

Contact an Attorney to register your LLC with the State. An LLC should minimize the claims of creditors.

Forming an LLC is one thing.

Acting like an LLC is another thing.

How do you act like an LLC?

* Have an operating agreement (this is similar to a partnership agreement)

* Obtain a federal tax identification number

* Open and use a bank account exclusively for business

* If you have employees, obtain workers compensation insurance

* Have your business cards, stationary, contracts and invoices all say “LLC” on them

By taking these steps, you are documenting that you are in fact holding yourself out as an LLC.

Be cautious when forming an LLC. When a partnership is formed the parties participating are called partners. In an LLC these are called members. Many years ago you needed to have at least two members to form an LLC. This is no longer the case. A person can have their own LLC called a single member LLC. Depending on the state you are located in and the potential claims made against your business, a multi member LLC may offer more protection than a single member LLC.

Consult your legal counsel as we are not rendering legal advice.

Have you formed an LLC for your business?